1933 Act Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE24
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [ ] Post-Effective
Amendment No. Amendment No.
EVERGREEN EQUITY TRUST
[Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
Approximate date of proposed public offering: As soon as possible after
the effective date of this Registration Statement.
The Registrant has registered an indefinite amount of securities under
the Securities Act of 1933 pursuant to Section 24(f) under the Investment
Company Act of 1940 (File No. 333- 37453); accordingly, no fee is payable
herewith. Registrant is filing as an exhibit to this Registration Statement a
copy of an earlier declaration under Rule 24f-2. Pursuant to Rule 429, this
Registration Statement relates to the aforementioned registration on Form N-1A.
A Rule 24f-2 Notice for the Registrant's fiscal year ending March 31, 1998 will
be filed with the Commission on or about May 30, 1998.
<PAGE>
It is proposed that this filing will become effective on November 10,
1997 pursuant to Rule 488 of the Securities Act of 1933.
<PAGE>
EVERGREEN EQUITY TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form Statement
N-14
1. Beginning of Cross Reference Sheet; Cover
Registration Page
Statement and
Outside Front Cover
Page of Prospectus
2. Beginning and Table of Contents
Outside Back Cover
Page of Prospectus
3. Fee Table, Synopsis Comparison of Fees and
and Risk Factors Expenses; Summary;
Comparison of Investment
Objectives and Policies;
Risks
4. Information About Summary; Reasons for the
the Transaction Reorganizations; Comparative
Information on Shareholders'
Rights; Exhibits A-1 and A-2
(Agreements and Plans of
Reorganization)
5. Information about Cover Page; Summary; Risks;
the Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
Location in Prospectus/Proxy
Item of Part A of Form Statement
N-14
6. Information about Cover Page; Summary; Risks;
the Company Being Comparison of Investment
Acquired Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
7. Voting Information Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Inapplicable
Information
Required for
Reoffering by
Persons Deemed to
be Underwriters
Item of Part B of Form
N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Statement of Additional
Information About Information of the Evergreen
the Registrant Equity Trust - Evergreen
Balanced Fund dated November
10, 1997
<PAGE>
Location in Prospectus/Proxy
Item of Part A of Form Statement
N-14
13. Additional Statement of Additional
Information about Information of Evergreen
the Company Being Balanced Fund dated April 1,
Acquired 1997, as supplemented;
Statement of Additional
Information of Keystone
Balanced Fund (K-1) dated
September 2, 1997, as
supplemented
14. Financial Financial Statements dated
Statements March 31, 1997 of Evergreen
Balanced Fund; Financial
Statements of Keystone
Balanced Fund (K-1) dated
June 30, 1997; Pro Forma
Financial Statements
Item of Part C of Form
N-14
15. Indemnification Incorporated by Reference to
Part A Caption -
"Comparative Information on
Shareholders' Rights -
Liability and
Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
EVERGREEN BALANCED FUND
KEYSTONE BALANCED FUND (K-1)
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
November 14, 1997
Dear Shareholder,
I am writing to shareholders of the Evergreen Balanced Fund and the Keystone
Balanced Fund (K-1) to inform you of a Special Shareholders' meeting to be held
on January 6, 1998. Before that meeting, I would like your vote on the important
issues affecting your fund as described in the attached Prospectus/Proxy
Statement.
The Prospectus/Proxy Statement includes the proposed reorganization of the
Evergreen Balanced Fund and the Keystone Balanced Fund (K-1). All of the assets
of both funds would be acquired by a new fund, also called Evergreen Balanced
Fund. Details about the new fund's investment objective, portfolio management
team, performance, etc. are contained in the attached Prospectus/Proxy
Statement.
The Boards of Trustees have unanimously approved the proposal and recommend that
you vote FOR this proposal.
You will receive shares of the new fund in the same class, with the same letter
designation, the same fees and the same contingent deferred sales charges as the
shares you held prior to the reorganization. This is a non-taxable event for
shareholders.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposal presented and sign and return your proxy card(s) in the enclosed
postage-paid envelope today. You may receive more than one proxy card if you own
shares in more than one fund. Please sign and return each card you receive.
If we do not receive your completed proxy card(s) after several weeks, you may
be contacted by our proxy solicitor, Shareholder Communications Corporation.
They will remind you to vote your shares or will record your vote over the phone
if you choose to vote in that manner. You may also call Shareholder
Communications Corporation directly at 800-733- 8481 ext.404 and vote by phone.
<PAGE>
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
William M. Ennis
Managing Director
Evergreen Funds
<PAGE>
November 1997
IMPORTANT NEWS
FOR EVERGREEN SHAREHOLDERS
We encourage you to read the attached Prospectus/Proxy Statement in Statement in
full; however, the following questions and answers represent some typical
concerns that shareholders might have regarding this document.
Q: WHY IS EVERGREEN SENDING ME THIS PROSPECTUS/PROXY
STATEMENT?
Mutual funds are required to get shareholders' votes for certain types of
changes. As a shareholder, you have a right to vote on major policy decisions,
such as those included here.
Q: WHAT ARE THE ISSUES CONTAINED IN THIS PROSPECTUS/PROXY
STATEMENT?
You are being asked to vote to approve a proposal to reorganize the Evergreen
Balanced Fund and the Keystone Balanced Fund (K-1) into a new fund, also called
Evergreen Balanced Fund. The new fund's investment objective is substantially
the same as that of the former funds.
Q: HOW WILL THIS CHANGE AFFECT ME AS A FUND SHAREHOLDER?
The reorganization of these funds into the Evergreen Balanced Fund means that
the Keystone Balanced Fund (K-1) and the former Evergreen Balanced Fund would no
longer exist after January 23, 1998. Shareholders would receive shares of the
new Evergreen Balanced Fund in the same class, with the same letter designation,
the same fees and the same contingent deferred sales charges as the shares held
prior to the reorganization. This is a non-taxable event for shareholders.
<PAGE>
Q: WHY IS EVERGREEN PROPOSING THIS CHANGE?
This proposal represents one of the final steps we are undertaking to unify the
Evergreen and Keystone fund families. Shareholders can anticipate the following
benefits:
A comprehensive fund family with a common risk/reward spectrum
The elimination of any overlap or gaps in fund offerings
Reduced confusion surrounding privileges associated with each fund,
specifically regarding exchangeability, letter of intent, and rights of
accumulation.
A user-friendly product line for both shareholders and investment
professionals
A single location for fund information, whether you're looking up funds
in the newspaper or locating a Morningstar report on the Internet.
Q: HOW DO THE BOARD MEMBERS OF MY FUND RECOMMEND THAT I VOTE?
The Board members of each fund recommend that you vote in favor or FOR the
proposal on the enclosed proxy card.
Q: WHOM DO I CALL FOR MORE INFORMATION OR TO PLACE MY VOTE?
Please call Shareholder Communications at 800-733-8481 ext.
404 for additional information. You can vote one of three
ways:
Use the enclosed proxy card to record your vote either FOR, AGAINST or
ABSTAIN, then return the card in the postpaid envelope provided.
or
Complete the enclosed proxy card and FAX to 800-733- 1885.
Call 800-733-8481 ext. 404 and record your vote by
telephone.
Q: WHY ARE MULTIPLE CARDS ENCLOSED?
<PAGE>
If you own shares of more than one fund, you will receive a proxy card
for each fund you own. Please sign, date and return each proxy card you
receive.
<PAGE>
[SUBJECT TO COMPLETION, OCTOBER 10, 1997 PRELIMINARY COPY]
EVERGREEN BALANCED FUND
KEYSTONE BALANCED FUND (K-1)
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 6, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of each of Evergreen Balanced Fund and Keystone Balanced Fund (K-1)
(each a "Fund"), will be held at the offices of the Evergreen Keystone Funds,
200 Berkeley Street, Boston, Massachusetts 02116 on January 6, 1998 at 3:00 p.m.
for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of September 30, 1997, providing for the acquisition of
all of the assets of the Fund by the Evergreen Balanced Fund, a series of
Evergreen Equity Trust, in exchange for shares of Evergreen Balanced Fund and
the assumption by Evergreen Balanced Fund of certain identified liabilities of
the Fund. The Plan also provides for distribution of such shares of Evergreen
Balanced Fund to shareholders of the Fund in liquidation and subsequent
termination of the Fund. A vote in favor of the Plan is a vote in favor of the
liquidation and dissolution of the Fund.
2. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of Evergreen Investment Trust and the Trustees of Keystone
Balanced (K-1) have fixed the close of business on November 10, 1997 as the
record date for the determination of shareholders of each respective Fund
entitled to notice of and to vote at the Meeting or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO
NOT EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE
ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Boards of Trustees
<PAGE>
George O. Martinez
Secretary
November 14, 1997
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign you name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name
of the party signing should conform exactly to a name shown in
the Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Jr. John B. Smith, Jr.,
Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED NOVEMBER 14, 1997
Acquisition of Assets of
EVERGREEN BALANCED FUND
a Series of
Evergreen Investment Trust
200 Berkeley Street
Boston, Massachusetts 02116
and
KEYSTONE BALANCED FUND (K-1)
200 Berkeley Street
Boston, Massachusetts 02116
By and in Exchange for Shares of
EVERGREEN BALANCED FUND
a series of
Evergreen Equity Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
Evergreen Balanced Fund ("Evergreen Balanced") and Keystone Balanced Fund (K-1)
("Keystone Balanced") in connection with a proposed Agreement and Plan of
Reorganization (the "Plan") to be submitted to shareholders of each of Evergreen
Balanced and Keystone Balanced for consideration at a Special Meeting of
Shareholders to be held on January 6, 1998 at 3:00 p.m. at the offices of the
Evergreen Keystone Funds, 200 Berkeley Street, Boston, MA 02116, and any
adjournments thereof (the "Meeting"). Each Plan provides for all of the assets
of Evergreen Balanced and Keystone Balanced, respectively, to be acquired by
Evergreen Balanced Fund in exchange for shares of Evergreen Balanced Fund and
the assumption by Evergreen Balanced Fund of certain identified liabilities of
Evergreen Balanced and Keystone Balanced, respectively (hereinafter referred to
individually as the "Reorganization" or collectively as the "Reorganizations").
Evergreen Balanced Fund, Evergreen Balanced and Keystone Balanced are sometimes
hereinafter referred to individually as the "Fund" and collectively as the
"Funds." Following the Reorganizations, shares of Evergreen Balanced Fund will
be distributed to shareholders of Evergreen Balanced and Keystone Balanced in
liquidation of Evergreen Balanced and Keystone Balanced and such Funds will be
terminated. Holders of shares of Evergreen Balanced will receive shares of the
class of Evergreen Balanced Fund (the
<PAGE>
"Corresponding Shares") having the same letter designation and the same
distribution-related fees, shareholder servicing- related fees and contingent
deferred sales charges ("CDSCs"), if any as the shares of the class of Evergreen
Balanced held by them prior to the Reorganization. Holders of shares of Keystone
Balanced will receive shares of Evergreen Balanced Fund having the same
distribution-related fees, shareholder servicing-related fees and CDSCs as the
shares of Keystone Balanced held by them prior to the Reorganization. As a
result of the proposed Reorganizations, shareholders of Evergreen Balanced will
receive that number of full and fractional Corresponding Shares of Evergreen
Balanced, and shareholders of Keystone Balanced will receive that number of full
and fractional shares of Evergreen Balanced Fund having an aggregate net asset
value equal to the aggregate net asset value of such shareholder's shares of
Evergreen Balanced and Keystone Balanced. Each Reorganization is being
structured as a tax-free reorganization for federal income tax purposes.
Evergreen Balanced Fund is a separate series of Evergreen Equity Trust,
an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The investment objective of
Evergreen Balanced Fund is to provide shareholders with current income. Such
investment objective is identical to that of Keystone Balanced. The investment
objective of Evergreen Balanced is to produce long-term total return through
capital appreciation, dividend and interest income.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen Balanced Fund
that shareholders of Evergreen Balanced and Keystone Balanced should know before
voting on the Reorganizations. Certain relevant documents listed below, which
have been filed with the Securities and Exchange Commission ("SEC"), are
incorporated in whole or in part by reference. A Statement of Additional
Information dated November 14, 1997, relating to this Prospectus/Proxy Statement
and the Reorganizations incorporating by reference the financial statements of
Evergreen Balanced dated March 31, 1997 and Keystone Balanced dated June 30,
1997, has been filed with the SEC and is incorporated by reference in its
entirety into this Prospectus/Proxy Statement. Evergreen Balanced Fund is a
newly created series of Evergreen Equity Trust and has had no operations to
date. Consequently, there are no current financial statements of Evergreen
Balanced Fund. A copy of such Statement of Additional Information is available
upon request and without charge by writing to Evergreen Balanced Fund at 200
Berkeley Street, Boston, Massachusetts 02116 or by calling toll-free
1-800-343-2898.
<PAGE>
The two Prospectuses of Evergreen Balanced Fund dated November 10, 1997
are incorporated herein by reference in their entirety. The Prospectuses, which
pertain (i) to Class Y shares and (ii) to Class A, Class B and Class C shares,
differ only insofar as they describe the separate distribution and shareholder
servicing arrangements applicable to the classes. Shareholders of Evergreen
Balanced and Keystone Balanced will receive, with this Prospectus/Proxy
Statement, copies of the Prospectus pertaining to the class of shares of
Evergreen Balanced Fund that they will receive as a result of the consummation
of each Reorganization. Additional information about Evergreen Balanced Fund is
contained in its Statement of Additional Information of the same date which has
been filed with the SEC and which is available upon request and without charge
by writing to or calling Evergreen Balanced Fund at the address or telephone
number listed in the preceding paragraph.
The Prospectuses of Evergreen Balanced dated July 1, 1997, as
supplemented, and the Prospectus of Keystone Balanced dated September 2, 1997,
as supplemented, are incorporated herein in their entirety by reference. Copies
of the Prospectuses and related Statements of Additional Information dated the
same respective dates are available upon request without charge by writing or
calling the Fund of which you are a shareholder at the address listed in the
second preceding paragraph.
Included as Exhibits A-1 and A-2 to this Prospectus/Proxy Statement are
copies of each Plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk,
including possible loss of capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES................................... 5
SUMMARY........................................................... 11
Proposed Plans of Reorganization......................... 11
Tax Consequences......................................... 12
Investment Objectives and Policies
of the Funds........................................... 13
Comparative Performance Information
For Each Fund.......................................... 14
Management of the Funds.................................. 14
Investment Advisers ..................................... 15
Portfolio Management..................................... 16
Distribution of Shares................................... 16
Purchase and Redemption Procedures....................... 19
Exchange Privileges...................................... 20
Dividend Policy.......................................... 20
Risks.................................................... 21
REASONS FOR THE REORGANIZATIONS................................... 23
Agreements and Plans of Reorganization................... 27
Federal Income Tax Consequences.......................... 29
Pro-forma Capitalization................................. 31
Shareholder Information.................................. 32
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES.................. 34
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS................... 37
Forms of Organization.................................... 37
Capitalization........................................... 37
Shareholder Liability.................................... 38
Shareholder Meetings and Voting Rights................... 39
Liquidation or Dissolution............................... 40
Liability and Indemnification of Trustees................ 40
ADDITIONAL INFORMATION............................................ 41
VOTING INFORMATION CONCERNING THE MEETINGS........................ 42
FINANCIAL STATEMENTS AND EXPERTS.................................. 45
LEGAL MATTERS..................................................... 46
OTHER BUSINESS.................................................... 46
<PAGE>
COMPARISON OF FEES AND EXPENSES
It is anticipated that on or about January 9, 1998 Keystone Balanced
will become a multiple class fund. As of that date the Fund will offer Class A,
Class B and Class C shares, each of which Class of shares will be similar in all
respects to the Class A, Class B and Class C shares of Evergreen Balanced Fund.
It is further anticipated that at that time current outstanding shares of
Keystone Balanced will become Class B shares of the Fund. On or about January
16, 1998, it is anticipated that any Class B shares of Keystone Balanced
purchased prior to January 1, 1994 will be converted to Class A shares of the
Fund. Should these events occur, shareholders of Keystone Balanced will receive
on the date of the Reorganization the same Class of shares of Evergreen Balanced
Fund held by them in the Fund after January 16, 1998. It is also anticipated
that prior to November 30, 1997, a majority of the Class Y shares of Evergreen
Balanced will be redeemed.
The amounts for Class Y, Class A, Class B and Class C shares of
Evergreen Balanced set forth in the following tables and in the examples are
based on the expenses for Evergreen Balanced for the fiscal year ended March 31,
1997. The amounts for shares of Keystone Balanced set forth in the following
tables and in the examples are based on the expenses for Keystone Balanced's
fiscal year ended June 30, 1997. The pro forma amounts for Class Y, class A,
Class B and Class C shares of Evergreen Balanced Fund are based on the estimated
expenses of Evergreen Balanced Fund for the fiscal year ending March 31, 1998.
The pro forma numbers reflect the events described in the first paragraph of
this section.
The following tables show for Evergreen Balanced, Keystone Balanced and
Evergreen Balanced Fund pro forma the shareholder transaction expenses and
annual fund operating expenses associated with an investment in the shares of
each Fund.
Comparison of Shares of Evergreen Balanced Fund
With Shares of Evergreen Balanced
and Keystone Balanced
Evergreen Balanced
------------------
Shareholder Class Y Class A Class B Class C
Transaction ------- ------- ------- -------
Expenses
<PAGE>
Maximum Sales
Load Imposed on None 4.75% None None
Purchases (as a
percentage of
offering price)
Maximum Sales None None None None
Load Imposed on
Reinvested
Dividends (as a
percentage of
offering price)
Contingent None None 5.00% in 1.00% in
Deferred Sales the first the first
Charge (as a year, year and
percentage of declining 0.00%
original to 1.00% in thereafter
purchase price the sixth
or redemption year and
proceeds, 0.00%
whichever is thereafter
lower)
Exchange Fee None None None None
Annual Fund
Operating
Expenses (as a
percentage of
average daily
net assets)
Management Fee 0.50% 0.50% 0.50% 0.50%
12b-1 Fees (1) None 0.25% 1.00% 1.00%
Other Expenses 0.18% 0.18% 0.18% 0.18%
----- ----- ----- -----
Annual Fund 0.68% 0.93% 1.68% 1.68%
Operating ----- ----- ----- -----
Expenses (3) ----- ----- ----- -----
Keystone Balanced
-----------------
Shareholder
Transaction Expenses
<PAGE>
Contingent Deferred
Sales Charge (as a 4.00% in the
percentage of original first year,
purchase price or declining to
redemption proceeds, 1.00% in the
whichever is lower) fourth year and
0.00%
thereafter
Exchange Fee None
Annual Fund Operating
Expenses (as a
percentage of average
daily net assets)
Management Fee 0.44%
12b-1 Fees (1) 1.00
Other Expenses 0.26%
-----
Annual Fund Operating 1.70%
Expenses(3) -----
--------
Evergreen Balanced Fund Pro Forma
Shareholder
Transaction Class Y Class A Class B Class C
Expenses ------- ------- ------- -------
Maximum Sales None 4.75% None None
Load Imposed
on Purchases
(as a
percentage of
offering price
Maximum Sales None None None None
Load Imposed
on Reinvested
Dividends (as
a percentage
of offering
price)
<PAGE>
Contingent
Deferred Sales None None 5.00% in 1.00% in
Charge (as a the first the first
percentage of year, year and
original declining 0.00%
purchase price to 1.00% thereafter
or redemption in the
proceeds, sixth year
whichever is and 0.00%
lower) thereafter
(2)
Exchange Fee None None None None
Annual Fund
Operating
Expenses (as a
percentage of
average daily
net assets)
Management Fee 0.45% 0.45% 0.45% 0.45%
12b-1 Fees (1) None 0.25% 1.00% 1.00%
Other Expenses 0.27% 0.27% 0.27% 0.27%
------- ------- ---------- ----------
Annual Fund
Operating 0.72% 0.97% 1.72% 1.72%
Expenses ------- ------- ---------- ----------
(3) ------- ------- ---------- ----------
- ---------------
(1) Class A Shares of Evergreen Balanced Fund and Evergreen Balanced can pay up
to 0.75% of average net daily assets as a 12b-1 fee. For the foreseeable
future, the Class A 12b-1 fees will be limited to 0.25% of average daily
net assets. For shares of Keystone Balanced and for Class B and Class C
shares of Evergreen Balanced Fund and Evergreen Balanced, a portion of the
12b-1 fees equivalent to 0.25% of average daily net assets will be
shareholder servicing-related. Distribution-related 12b- 1 fees will be
limited to 0.75% of average daily net assets as permitted under the rules
of the National Association of Securities Dealers, Inc.
(2) The contingent deferred sales charge, if any, applicable to shares of
Evergreen Balanced and Keystone Balanced prior to the date of the
Reorganizations will carry over
<PAGE>
to the shares of Evergreen Balanced Fund received in the
Reorganizations.
(3) Expense ratios include indirectly paid expenses.
Examples. The following tables show for Evergreen Balanced and Keystone
Balanced, and for Evergreen Balanced Fund pro forma, assuming consummation of
the Reorganizations, examples of the cumulative effect of shareholder
transaction expenses and annual fund operating expenses indicated above on a
$1,000 investment in each class of shares for the periods specified, assuming
(i) a 5% annual return, and (ii) redemption at the end of such period, and
additionally for Class B and Class C shares of Evergreen Balanced Fund and
Evergreen Balanced and shares of Keystone Balanced, no redemption at the end of
each period.
Evergreen Balanced
------------------
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
Class Y $7 $22 $38 $85
Class A $57 $76 $97 $156
Class B $67 $83 $111 $169
(Assuming
redemption
at end of
period)
Class B $17 $53 $91 $169
(Assuming no
redemption
at end of
period)
Class C $27 $53 $91 $199
(Assuming
redemption
at end of
period)
<PAGE>
Class C $17 $53 $91 $199
(Assuming no
redemption
at end of
period)
Keystone Balanced
-----------------
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
(Assuming $57 $74 $92 $201
redemption
at end of
period)
(Assuming $17 $54 $92 $201
no
redemption
at end of
period)
Evergreen Balanced Fund - Pro Forma
------------------------------------
One Three Five Ten
Year Years Years Years
----- ----- ----- -----
Class Y $7 $23 $40 $89
Class A $57 $77 $99 $161
Class B $67 $84 $113 $173
(Assuming
redemption
at end of
period)
<PAGE>
Class B
(Assuming $17 $54 $93 $173
no
redemption
at end of
period)
Class C $27 $54 $93 $203
(Assuming
redemption
at end of
period)
Class C $17 $54 $93 $203
(Assuming
no
redemption
at end of
period)
The purpose of the foregoing examples is to assist Evergreen Balanced
and Keystone Balanced shareholders in understanding the various costs and
expenses that an investor in Evergreen Balanced Fund as a result of the
Reorganizations would bear directly and indirectly, as compared with the various
direct and indirect expenses currently borne by a shareholder in each Fund.
These examples should not be considered a representation of past or future
expenses or annual return. Actual expenses may be greater or less than those
shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement,
and, to the extent not inconsistent with such additional information, the
Prospectuses of Evergreen Balanced Fund dated November 10, 1997 and the
Prospectuses of Evergreen Balanced dated July 1, 1997, as supplemented, and the
Prospectus of Keystone Balanced dated September 2, 1997, as supplemented, (which
are incorporated herein by reference), and the Plans, forms of which are
attached to this Prospectus/Proxy Statement as Exhibits A-1 and A-2.
Proposed Plans of Reorganization
The Plans provide for the transfer of all of the assets
of Evergreen Balanced and Keystone Balanced, as applicable, in
<PAGE>
exchange for shares of Evergreen Balanced Fund and the assumption by Evergreen
Balanced Fund of certain identified liabilities of each Fund. The Plans also
call for the distribution of shares of Evergreen Balanced Fund to Evergreen
Balanced and Keystone Balanced shareholders in liquidation of those Funds as
part of the Reorganizations. As a result of the Reorganizations, the
shareholders of Evergreen Balanced will become owners of that number of full and
fractional Corresponding Shares of Evergreen Balanced Fund and the shareholders
of Keystone Balanced will become the owners of that number of full and
fractional shares of Evergreen Balanced Fund having an aggregate net asset value
equal to the aggregate net asset value of the shareholder's respective class of
shares of Evergreen Balanced and Keystone Balanced, as of the close of business
immediately prior to the date that such Fund's assets are exchanged for shares
of Evergreen Balanced Fund. See "Reasons for the Reorganizations Agreements and
Plans of Reorganization."
The Trustees of Evergreen Investment Trust and the Trustees of Keystone
Balanced, including the Trustees who are not "interested persons," (the
"Trustees") as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganizations would be in the best
interests of shareholders of Evergreen Balanced and Keystone Balanced,
respectively, and that the interests of the shareholders of Evergreen Balanced
and Keystone Balanced, respectively, will not be diluted as a result of the
transactions contemplated by the Reorganizations. Accordingly, the Trustees have
submitted the Plans for the approval of Evergreen Balanced and Keystone Balanced
shareholders.
THE BOARD OF TRUSTEES OF EVERGREEN INVESTMENT TRUST
RECOMMENDS APPROVAL BY SHAREHOLDERS OF EVERGREEN
BALANCED OF THE PLAN EFFECTING
THE REORGANIZATION.
THE BOARD OF TRUSTEES OF KEYSTONE BALANCED RECOMMENDS
APPROVAL BY SHAREHOLDERS OF KEYSTONE BALANCED
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Equity Trust have also approved
the Plans, and accordingly, Evergreen Balanced Fund's
participation in the Reorganizations.
Approval of a Reorganization on the part of Evergreen Balanced and
Keystone Balanced will require the affirmative vote, for Keystone Balanced, of a
majority of the Fund's shares present and entitled to vote, and, for Evergreen
<PAGE>
Balanced, the affirmative vote of a majority of the shares entitled to vote,
with all classes voting together as a single class at Meetings at which a quorum
of each Fund's shares is present. A majority of the outstanding shares entitled
to vote of Keystone Balanced and 25% of the outstanding shares entitled to vote
of Evergreen Balanced, represented in person or by proxy, is required to
constitute a quorum at the Meetings. See "Voting Information Concerning the
Meetings."
The Reorganizations are scheduled to take place on or about January 23,
1998.
If the shareholders of Evergreen Balanced or Keystone Balanced do not
vote to approve the Reorganizations, the Trustees will consider other possible
courses of action in the best interests of shareholders.
Tax Consequences
Prior to or at the completion of a Reorganization, Evergreen Balanced
and Keystone Balanced will each have received an opinion of counsel that the
Reorganization has been structured so that no gain or loss will be recognized by
the Fund or its shareholders for federal income tax purposes as a result of the
receipt of shares of Evergreen Balanced Fund in the Reorganization. The holding
period and aggregate tax basis of shares of Evergreen Balanced Fund that are
received by each Fund's shareholders will be the same as the holding period and
aggregate tax basis of shares of the Fund previously held by such shareholders,
provided that shares of the Fund are held as capital assets. In addition, the
holding period and tax basis of the assets of each Fund in the hands of
Evergreen Balanced Fund as a result of the Reorganization will be the same as in
the hands of each Fund immediately prior to the Reorganization, and no gain or
loss will be recognized by Evergreen Balanced Fund upon the receipt of the
assets of each Fund in exchange for shares of Evergreen Balanced Fund and the
assumption by Evergreen Balanced Fund certain identified liabilities.
Investment Objectives and Policies of the Funds
The investment objectives and policies of each of Evergreen Balanced
Fund, Evergreen Balanced and Keystone Balanced are similar. Evergreen Balanced
Fund and Keystone Balanced each seek to provide shareholders with current
income. Under normal circumstances, each Fund invests in a combination of equity
and debt securities chosen primarily for their potential for current income and
secondarily, to the extent consistent with the Fund's investment objective, for
<PAGE>
their potential for capital appreciation. Under normal circumstances, each Fund
maintains at least 25% of its total assets in fixed income senior securities.
Each Fund may invest up to 25% in debt securities rated below investment grade,
up to 25% of its assets in foreign securities and may engage in certain
derivative transactions, including futures and options.
The investment objective of Evergreen Balanced is to achieve a
long-term total return through capital appreciation, dividends and interest
income. The Fund invests in common and preferred stocks for growth and fixed
income securities to provide a stable cash flow. Under normal circumstances, the
Fund's asset allocation will range between 40-75% in common and preferred
stocks, 25-50% in fixed income securities (including some convertible
securities) and 0-25% in cash equivalents. The fixed income portion of the
Fund's portfolio must be rated within the three highest categories by a
nationally recognized statistical rating organization ("NRSRO"). The Fund may
engage in certain derivative transactions including options and futures and may
purchase the securities of foreign issuers.
Comparative Performance Information For Each Fund
Discussions of the manner of calculation of total return are contained
in the respective Prospectuses and Statements of Additional Information of the
Funds. Evergreen Balanced Fund, as of the date of this Prospectus/Proxy
Statement, had not commenced operations. The total return of Evergreen Balanced
for the one and five year periods ended August 31, 1997, the total return of
Keystone Balanced for the one, five and ten year periods ended August 31, 1997
and for both Funds for the periods from inception through August 31, 1997 are
set forth in the table below. The calculations of total return assume the
reinvestment of all dividends and capital gains distributions on the
reinvestment date and the deduction of all recurring expenses (including sales
charges) that were charged to shareholders' accounts.
Average Annual Total Return
1 Year 5 Years 10 Years From
Ended Ended Ended Inception
August August August To August Inception
31, 1997 31, 1997 31, 1997 31, 1997 Date
------- ------- -------- --------- ---------
Evergreen
Balanced
<PAGE>
Class A
shares 18.31% 11.39% N/A 11.92% 6/10/91
Class B 18.34% N/A N/A 11.24% 1/26/93
shares
Class C 22.58% N/A N/A 14.64% 9/2/94
shares
Class Y 24.65% 12.78% N/A 12.69% 4/1/91
shares
Keystone 20.98% 12.35% 9.66% 8.41% 9/11/35
Balanced
- --------------
Management of the Funds
The overall management of Evergreen Balanced Fund, of Evergreen
Balanced and of Keystone Balanced is the responsibility of, and is supervised
by, the Board of Trustees of Evergreen Equity Trust, Evergreen Investment Trust
and
Keystone Balanced, respectively.
Investment Advisers
The investment adviser to Evergreen Balanced Fund and Keystone Balanced
is Keystone Investment Management Company ("Keystone"). Keystone has provided
investment advisory and management services to investment companies and private
accounts since 1932. Keystone is an indirect wholly-owned subsidiary of First
Union National Bank ("FUNB"). Keystone is located at 200 Berkeley Street,
Boston, Massachusetts 02116- 5034.
FUNB is a subsidiary of First Union Corporation, the sixth largest bank
holding company in the U.S. based on total assets as of June 30, 1997.
Evergreen Balanced Fund and Keystone Balanced each pay Keystone a fee
for its services at the annual rate below:
Aggregate Net Asset
Value of the Shares
Management Fee of the Fund
1.5% of Gross Dividend
and Interest Income Plus
0.60% of the first $100,000,000, plus
0.55% of the next $100,000,000, plus
<PAGE>
0.50% of the next $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $500,000,000, plus
0.30% of amounts
over $1,000,000,000.
Keystone's fee is computed as of the close of business each business
day and payable monthly.
The Capital Management Group ("CMG") of FUNB serves as investment
adviser to Evergreen Balanced. CMG manages investments and supervises the daily
business affairs of the Fund and, as compensation therefore is entitled to
receive an annual fee equal to 0.50% of the Fund's average daily net assets.
Each investment adviser may, at its discretion, also reduce or waive
its fee or reimburse a Fund for certain of its other expenses in order to reduce
its expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Portfolio Management
The portfolio manager of both Evergreen Balanced Fund and
Keystone Balanced is Walter McCormick. Mr. McCormick is a
Keystone Senior Vice President and Senior Portfolio Manager
and has managed Keystone Balanced since 1984.
Distribution of Shares
Evergreen Keystone Distributor, Inc. ("EKD"), an affiliate of BISYS
Fund Services, acts as underwriter of Evergreen Balanced Fund, Evergreen
Balanced and Keystone Balanced shares. EKD distributes each Fund's shares
directly or through broker-dealers, banks (including FUNB), or other financial
intermediaries. Evergreen Balanced Fund and Evergreen Balanced both offer four
classes of shares: Class A, Class B, Class C and Class Y. Keystone Balanced
currently offers only one class of shares. However, it is anticipated that on or
about January 9, 1998, Keystone Balanced will offer three classes of shares,
Class A, Class B and Class C. Each class has separate distribution arrangements.
(See "Distribution-Related and Shareholder Servicing-Related Expenses" below.)
No class bears the distribution expenses relating to the shares of any other
class.
In the proposed Reorganizations, shareholders of
Evergreen Balanced will receive the corresponding class of
<PAGE>
shares of Evergreen Balanced Fund, which they currently hold. The Class A, Class
B, Class C and Class Y shares of Evergreen Balanced Fund have substantially
identical arrangements with respect to the imposition of initial sales charges,
CDSCs and distribution and service fees as the comparable classes of shares of
Evergreen Balanced. Holders of shares of Keystone Balanced will receive Class A
and/or Class B shares of Evergreen Balanced Fund. As of January 9, 1998, it is
anticipated that each Class of shares of Evergreen Balanced, Keystone Balanced
and Evergreen Balanced Fund will have identical arrangements with respect to
CDSCs and distribution and service fees. Because the Reorganizations will be
effected at net asset value without the imposition of a sales charge, Evergreen
Balanced Fund shares acquired by shareholders of Evergreen Balanced and Keystone
Balanced pursuant to the proposed Reorganizations would not be subject to any
initial sales charge or CDSC as a result of the Reorganizations. However, shares
acquired as a result of the Reorganizations would continue to be subject to a
CDSC upon subsequent redemption to the same extent as if shareholders had
continued to hold their shares of Evergreen Balanced and Keystone Balanced. The
CDSC applicable to a class of shares received in the Reorganizations will be the
CDSC schedule in effect at the time shares of Evergreen Balanced or Keystone
Balanced were originally purchased.
The following is a summary description of charges and fees for each of
the different classes of shares. More detailed descriptions of the distribution
arrangements applicable to the classes of shares are contained in the respective
Evergreen Balanced Fund Prospectuses, the Evergreen Balanced Prospectuses, the
Keystone Balanced Prospectus and in each Fund's respective Statement of
Additional Information.
Currently, Keystone Balanced offers only one class of shares. Shares
are sold without any front-end sales charges, but are subject to a CDSC which
ranges from 4% to 1% if shares are redeemed during the first four calendar years
after purchase. In addition, shares are subject to distribution- related and
shareholder servicing-related fees are described below. It is anticipated that
Keystone Balanced will become a multiple class fund on or about January 9, 1998.
Should this occur, the Fund will offer three classes of shares identical to the
Class A, Class B and Class C shares of Evergreen Balanced Fund and hereafter
described, including identical distribution-related and shareholder
servicing-related expenses.
Class Y Shares. Class Y shares are sold at net asset
value without any initial sales charge and are not subject to
<PAGE>
distribution-related fees. Class Y shares are only available to certain classes
of investors as is more fully described in the Prospectuses for Evergreen
Balanced Fund and Evergreen Balanced.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees.
Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a CDSC, which ranges from 5% to 1%, if shares are redeemed
during the first six years after the month of purchase. In addition, Class B
shares are subject to distribution-related fees and shareholder
servicing-related fees as described below. Class B shares issued in the
Reorganizations will automatically convert to Class A shares in accordance with
the conversion schedule of Evergreen Balanced Fund in effect at the time of the
Reorganizations. For purposes of determining when Class B shares issued in the
Reorganizations to shareholders of Evergreen Balanced and Keystone Balanced will
convert to Class A shares, such shares will be deemed to have been purchased as
of the date the shares of Evergreen Balanced and Keystone Balanced were
originally purchased.
Class B shares are subject to higher distribution-related fees than the
corresponding Class A shares on which a front-end sales charge is imposed (until
they convert to Class A shares). The higher fees mean a higher expense ratio, so
Class B shares pay correspondingly lower dividends and may have a lower net
asset value than Class A shares of the Fund.
Class C Shares. Class C shares are sold without an initial sales charge
but, as indicated below, are subject to distribution and shareholder
servicing-related fees. Class C shares are subject to a 1% CDSC if such shares
are redeemed during the month of purchase and the 12-month period following the
month of purchase. No CDSC is imposed on amounts redeemed thereafter. Class C
shares incur higher distribution and shareholder servicing-related fees than
Class A shares but, unlike Class B shares, do not convert to any other class of
shares.
The amount of the CDSC applicable to redemptions of shares of Keystone
Balanced, Evergreen Balanced Fund and Evergreen Balanced is charged as a
percentage of the lesser of the then current net asset value or original cost.
The CDSC is deducted from the amount of the redemption and is paid to the Fund's
distributor or its predecessor, as the case may be. Shares of each Fund acquired
through dividend or distribution
<PAGE>
reinvestment are not subject to a CDSC. For purposes of determining the schedule
of CDSCs, and the time of conversion to Class A shares, applicable to shares of
Evergreen Balanced Fund received by Evergreen Balanced's or Keystone Balanced's
shareholders in the Reorganizations, Evergreen Balanced Fund will treat such
shares as having been sold on the date the shares of Evergreen Balanced or
Keystone Balanced were originally purchased by such Fund's shareholder.
Additional information regarding the Classes of shares of each Fund is included
in their respective Prospectus and Statement of Additional Information.
Distribution-Related and Shareholder Servicing-Related Expenses.
Evergreen Balanced Fund and Evergreen Balanced have each adopted a Rule 12b-1
plan with respect to its Class A shares under which the class may pay for
distribution-related expenses at an annual rate which may not exceed 0.75% of
average daily net assets attributable to the Class. Payments with respect to
Class A shares of Evergreen Balanced Fund and Evergreen Balanced are currently
limited to 0.25% of average daily net assets attributable to the Class, which
amount may be increased to the full plan rate for such Fund by the Trustees
without shareholder approval.
Evergreen Balanced Fund and Evergreen Balanced have each also adopted a
Rule 12b-1 plan with respect to its Class B and Class C shares under which each
Class may pay for distribution-related and shareholder servicing-related
expenses at an annual rate which may not exceed 1.00% (0.75% for Evergreen
Balanced) Evergreen Balanced has also adopted, with respect to its Class B
shares, a shareholder service plan which provides for payments in respect of
"shareholder services" at an annual rate not to exceed 0.25% of average daily
net assets attributable to the Class.
The Class B and Class C Rule 12b-1 plans provide that of the total
1.00% 12b-1 fees, up to 0.25% may be for payment in respect of "shareholder
services." Consistent with the requirements of Rule 12b-1 and the applicable
rules of the National Association of Securities Dealers, Inc. ("NASD"),
following the Reorganizations Evergreen Balanced Fund may make
distribution-related and shareholder servicing-related payments with respect to
Evergreen Balanced and Keystone Balanced shares sold prior to the
Reorganizations, including payments to Keystone Balanced's former underwriter.
Keystone Balanced has adopted a Rule 12b-1 plan with respect to its
shares pursuant to which the Fund may pay for distribution-related and
shareholder servicing-related expenses at an annual rate that may not exceed
1.25% of
<PAGE>
average daily net assets. The NASD limits the amount that the Fund may pay
annually in distribution costs for the sale of its shares and shareholder
service fees. The NASD currently limits such annual expenditures to 1.00% of the
aggregate average daily net asset value of its shares, of which 0.75% may be
used to pay distribution costs and 0.25% may be used to pay shareholder service
fees.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectus and Statement of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges, distribution-related
fees and shareholder servicing-related fees are described above. Investments in
the Funds are not insured. The minimum initial purchase requirement for each
Fund is $1,000. There is no minimum for subsequent purchases of shares of any
Fund. Each Fund provides for telephone, mail or wire redemption of shares at net
asset value, less any CDSC, as next determined after receipt of a redemption
request on each day the New York Stock Exchange ("NYSE") is open for trading.
Additional information concerning purchases and redemptions of shares, including
how each Fund's net asset value is determined, is contained in the respective
Prospectus for each Fund. Each Fund may involuntarily redeem shareholders'
accounts that have less than $1,000 of invested funds. All funds invested in
each Fund are invested in full and fractional shares. The Funds reserve the
right to reject any purchase order.
Exchange Privileges
Shares of Evergreen Balanced may be exchanged for shares of a similar
class of any other fund in the Evergreen Keystone fund family other than any
fund in the Keystone Classic fund family. Exchanges of shares of Keystone
Balanced are limited to the funds in the Keystone Classic fund family and Class
K shares of Evergreen Money Market Fund. Shares of Evergreen Balanced Fund may
be exchanged for shares of a similar class of any fund in the Evergreen Keystone
fund family other than shares of any Keystone Classic fund. No sales charge is
imposed on an exchange. An exchange which represents an initial investment in
another fund must amount to at least $1,000. The current exchange privileges,
and the requirements and limitations attendant thereto, are described in each
Fund's respective Prospectus and Statement of Additional Information.
<PAGE>
Dividend Policy
Each Fund distributes its investment company taxable income quarterly
and net realized gains at least annually. Shareholders begin to earn dividends
on the first business day after shares are purchased unless shares were not paid
for, in which case dividends are not earned until the next business day after
payment is received. Dividends and distributions are reinvested in additional
shares of the same class of the respective Fund, or paid in cash, as a
shareholder has elected. See the respective Prospectus of each Fund for further
information concerning dividends and distributions.
After the Reorganizations, shareholders of Evergreen Balanced and
Keystone Balanced who have elected to have their dividends and/or distributions
reinvested will have dividends and/or distributions received from Evergreen
Balanced Fund reinvested in shares of Evergreen Balanced Fund. Shareholders of
Evergreen Balanced and Keystone Balanced who have elected to receive dividends
and/or distributions in cash will receive dividends and/or distributions from
Evergreen Balanced Fund in cash after the Reorganizations, although they may,
after the Reorganizations, elect to have such dividends and/or distributions
reinvested in additional shares of Evergreen Balanced Fund.
Each of Evergreen Balanced and Keystone Balanced has qualified and
intends to continue to qualify, and Evergreen Balanced Fund intends to qualify,
to be treated as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"). While so qualified, so long as each Fund
distributes all of its investment company taxable income and any net realized
gains to shareholders, it is expected that a Fund will not be required to pay
any federal income taxes on the amounts so distributed. A 4% nondeductible
excise tax will be imposed on amounts not distributed if a Fund does not meet
certain distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements.
Risks
Since the investment objectives and policies of each Fund are
comparable, the risks involved in investing in each Fund's shares are similar
except that Evergreen Balanced Fund and Keystone Balanced invest in debt
securities rated within the four highest grades by a NRSRO and Evergreen
Balanced's purchases of debt securities are limited to those debt securities
rated within the three highest grades by a NRSRO. Bonds rated in the fourth
highest grade, although considered
<PAGE>
investment grade, have speculative characteristics. In addition, Evergreen
Balanced Fund and Keystone Balanced may invest up to 25% of their assets in
below-investment grade securities. Evergreen Balanced may not purchase high
yield, high risk bonds. High yield, high risk bonds generally involve greater
volatility of price and risk of principal and income than bonds in the higher
rating categories and are, on balance, considered predominantly speculative.
Securities rated below-investment grade are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. The lower ratings of certain securities held by the Fund
reflect a greater possibility that adverse changes in the financial condition of
the issuer or in general economic conditions, or both, or an unanticipated rise
in interest rates may impair the ability of the issuer to make payments of
interest and principal, especially if the issuer is highly leveraged. Such
issuer's ability to meet its debt obligations may also be adversely affected by
specific corporate developments, the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
Also, an economic downturn or an increase in interest rates may increase the
potential for default by the issuers of these securities.
Values of such securities are more sensitive to real or perceived
adverse economic, company or industry conditions and publicity than is the case
for higher quality securities.
Their values, like those of other fixed income securities, fluctuate in
response to changes in interest rates; generally rising when interest rates
decline and falling when interest rates rise. For example, if interest rates
increase after a fixed income security is purchased, the security, if sold prior
to maturity, may return less than its cost. The prices of below-investment grade
bonds, however, are generally less sensitive to interest rate changes than the
prices of higher-rated bonds.
Each Fund stresses earning income by investing in fixed income
securities, which are generally considered to be interest rate sensitive. This
means that their market values (and the Fund's share prices) will tend to vary
inversely with changes in interest rates (i.e., decreasing when interest rates
rise and increasing when interest rates fall). For example, if interest rates
increase after a security is purchased, the security, if sold prior to maturity,
may return less than its cost. Shorter term bonds are less sensitive to
<PAGE>
interest rate changes, but longer term bonds generally offer higher yields.
In addition, to the extent that investments are made in debt securities
(other than U.S. government securities), derivatives or structured securities,
such investments despite favorable credit ratings, are subject to some risk of
default.
Each Fund may invest in derivatives. The market values of derivatives
or structured securities may vary depending upon the manner in which the
investments have been structured and may fluctuate much more rapidly and to a
much greater extent. As a result, the values of such investments may change at
rates in excess of the rates at which traditional fixed income securities change
and, depending on the structure of a derivative, would change in a manner
opposite to the change in the market value of a traditional fixed income
security. See each Fund's Prospectus and Statement of Additional Information for
further discussion of the risks inherent in the use of derivatives.
Each Fund may invest in foreign securities. Investing in securities of
foreign issuers generally involves greater risk than investing in securities of
domestic issuers for the following reasons: publicly available information on
issuers and securities may be scarce; many foreign countries do not follow the
same accounting, auditing, and financial reporting standards as are used in the
U.S.; market trading volumes may be smaller, resulting in less liquidity and
more price volatility compared to U.S. securities of comparable quality; there
may be less regulation of securities trading and its participants; the
possibility may exist for expropriation, confiscatory taxation, nationalization,
establishment of exchange controls, political or social instability or negative
diplomatic developments; and dividend or interest withholding may be imposed at
the source.
Fluctuations in foreign exchange rates impose an additional level of
risk, possibly affecting the value of a Fund's foreign investments and earnings,
gains and losses realized through trades, and the unrealized appreciation or
depreciation of investments. Each Fund may also incur costs when it shifts
assets from one country to another.
Investing in securities of issuers in emerging markets countries
involves exposure to economic systems that are generally less mature and
political systems that are generally less stable than those of developed
countries. In addition, investing in companies in emerging markets countries may
also involve exposure to national policies that may restrict
<PAGE>
investment by foreigners and undeveloped legal systems governing private and
foreign investments and private property. The typically small size of the
markets for securities issued by companies in emerging market countries and the
possibility of a low or nonexistent volume of trading in those securities may
also result in a lack of liquidity and in price volatility of those securities.
REASONS FOR THE REORGANIZATIONS
At a regular meeting held on September 16, 1997, the Board of Trustees
of Evergreen Investment Trust considered and approved the Reorganization as in
the best interests of Evergreen Balanced shareholders and determined that the
interests of existing shareholders of Evergreen Balanced will not be diluted as
a result of the transactions contemplated by the Reorganization.
At a regular meeting held on September 17, 1997, the Board of Trustees
of Keystone Balanced considered and approved the Reorganization as in the best
interests of shareholders and determined that the interests of existing
shareholders of Keystone Balanced will not be diluted as a result of the
transactions contemplated by the Reorganization.
In approving each Plan, the Trustees reviewed various factors about the
respective Funds and the proposed Reorganizations. The Reorganizations are part
of an overall plan to convert the Evergreen Keystone funds into series of
Delaware business trusts and, to the extent practicable, simplify and make
consistent various investment restrictions and policies. Holders of shares of
beneficial interest in a Massachusetts business trust or a Pennsylvania common
law trust may, under certain circumstances, be held personally liable as
partners for their obligations of the trust. Although provisions of the
Declaration of Trust and other legal documents pertaining to each Fund's affairs
seek to minimize the potential for such liability, some degree of exposure,
however unlikely, continues to exist with respect to the Funds as long as they
are governed by Massachusetts or Pennsylvania law, as applicable. Substantially
all written agreements, obligations, instruments, or undertakings made by
Evergreen Balanced or Keystone Balanced must contain a provision limiting the
obligations created by that transaction to the Fund to which the transaction
relates, as well as related provisions to the effect that the shareholders of
the Fund and Trustees of the Trust under which the Fund operates are not
personally liable thereunder. Although the Declarations of Trust of Evergreen
Investment Trust and Keystone Balanced provide for indemnification out of the
<PAGE>
Funds' property of any shareholder held personally liable for the obligations of
a Fund solely by reason of his or her being or having been a shareholder, a
shareholder could conceivably incur financial loss exceeding any amounts
indemnified on account of shareholder liability if the circumstances were such
that the Fund had insufficient assets or would otherwise be unable to meet its
obligations.
As a Delaware business trust, the Evergreen Equity Trust's operations
will be governed by applicable Delaware law rather than by applicable
Massachusetts or Pennsylvania law. The Delaware Business Trust Act (the
"Delaware Act") provides that a shareholder of a Delaware business trust shall
be entitled to the same limitation of personal liability extended to
stockholders of Delaware corporations. Shareholders of Delaware corporations do
not have personal liability for obligations of the corporation.
Delaware has obtained a favorable national reputation for its business
laws and business environment. The Delaware courts, which may be called upon to
interpret the Delaware Act, are among the nation's most highly respected and
have an expertise in corporate matters which in part grew out of the fact that
Delaware corporate legal issues are concentrated in the Court of Chancery where
there are no juries and where judges issue written opinions explaining their
decisions. Thus, there is a well established body of precedent which may be
relevant in deciding issues pertaining to a Delaware business trust.
There are other advantages that may be afforded by a Delaware business
trust. Under Delaware law, the Evergreen Equity Trust will have the flexibility
to respond to future business contingencies. For example, the Trustees will have
the power to change the Evergreen Equity Trust to a corporation, to merge or
consolidate it with another entity, to cause each series to become a separate
trust, and to change the Evergreen Equity Trust's domicile without a shareholder
vote. This flexibility could help to assure that the Evergreen Equity Trust
operates under the most advanced form of organization and could reduce the
expense and frequency of future shareholder meetings for non-investment related
issues.
In addition, although it is proposed that Evergreen Balanced and
Keystone Balanced each sell all of its assets to Evergreen Balanced Fund, a
newly established series of Evergreen Equity Trust, an important part of the
Reorganizations is that Evergreen Balanced, for all practical purposes, will be
combined with Keystone Balanced. For tax purposes, the Reorganizations are
structured so that Evergreen
<PAGE>
Balanced would be deemed the surviving fund. However, the investment objective
and policies of Evergreen Balanced Fund are identical to those of Keystone
Balanced and similar to those of Evergreen Balanced. Consequently, in
considering the Reorganizations, each Fund's Trustees reviewed the
Reorganization in the context of Evergreen Balanced being combined with Keystone
Balanced.
Evergreen Balanced and Keystone Balanced have similar investment
objectives and policies and comparable risk profiles. See "Comparison of
Investment Objectives and Policies" below. At the same time, the Boards of
Trustees of Evergreen Balanced and Keystone Balanced evaluated the potential
economies of scale associated with larger mutual funds and concluded that
operational efficiencies may be achieved upon the combination of Evergreen
Balanced with another Evergreen Keystone fund with a greater level of assets. As
of August 31, 1997, Keystone Balanced's net assets were approximately $1,607
million and Evergreen Balanced's net assets were approximately $961 million.
In addition, assuming that an alternative to the Reorganizations would
be to propose that Evergreen Balanced and Keystone Balanced continue their
existences as separate series of Evergreen Equity Trust, Evergreen Balanced
would be offered through common distribution channels with the substantially
identical Keystone Balanced. Evergreen Balanced would also have to bear the cost
of maintaining its separate existence. FUNB and Keystone believe that the
prospect of dividing the resources of the Evergreen Keystone mutual fund
organization between two substantially similar funds could result in each Fund
being disadvantaged due to an inability to achieve optimum size, performance
levels and the greatest possible economies of scale. Accordingly, for the
reasons noted above and recognizing that there can be no assurance that any
economies of scale or other benefits will be realized, FUNB and Keystone believe
that the proposed Reorganizations would be in the best interests of each Fund
and its shareholders.
The Board of Trustees of Evergreen Investment Trust and the Board of
Trustees of Keystone Balanced met and considered the recommendations of FUNB and
Keystone, and, in addition, considered among other things, (i) the disadvantages
which apply to operating each Fund as a series of a Massachusetts business trust
or a Pennsylvania common law trust, respectively; (ii) the advantages which
apply to each Fund operating as a series of a Delaware business trust; (iii) the
terms and conditions of the Reorganization; (iv) whether the Reorganization
would result in the dilution of shareholders'
<PAGE>
interests; (v) expense ratios, fees and expenses of Evergreen Balanced and
Keystone Balanced; (vi) the comparative performance records of each of the
Funds; (vii) compatibility of their investment objectives and policies; (viii)
the investment experience, expertise and resources of Keystone; (ix) service
features available to shareholders of the respective Funds and Evergreen
Balanced Fund; (x) the fact that FUNB will bear the expenses incurred by
Evergreen Balanced and Keystone Balanced in connection with the Reorganizations;
(xi) the fact that Evergreen Balanced Fund will assume certain identified
liabilities of Evergreen Balanced and Keystone Balanced; and (xii) the expected
federal income tax consequences of the Reorganizations.
The Trustees of Evergreen Investment Trust also considered the benefits
to be derived by shareholders of Evergreen Balanced from its combination, for
all practical purposes, with Keystone Balanced. In this regard, the Trustees
considered the potential benefits of being associated with a larger entity and
the economies of scale that could be realized by the participation by
shareholders of Evergreen Balanced.
In addition, the Trustees of Evergreen Investment Trust and Keystone
Balanced considered that there are alternatives available to shareholders of
Evergreen Balanced and Keystone Balanced, including the ability to redeem their
shares, as well as the option to vote against the Reorganizations.
During their consideration of the Reorganizations the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Equity Trust on behalf of Evergreen Balanced
Fund also approved at a meeting on September 17, 1997 the proposed
Reorganizations.
THE TRUSTEES OF EVERGREEN INVESTMENT TRUST RECOMMEND
THAT THE SHAREHOLDERS OF EVERGREEN BALANCED
APPROVE THE PROPOSED REORGANIZATION.
THE TRUSTEES OF KEYSTONE BALANCED
RECOMMEND THAT SHAREHOLDERS APPROVE THE
PROPOSED REORGANIZATION.
Agreements and Plans of Reorganization
The following summary is qualified in its entirety by reference to the
Plans (Exhibits A-1 and A-2 hereto).
<PAGE>
Each Plan provides that Evergreen Balanced Fund will acquire all of the
assets of Evergreen Balanced and Keystone Balanced in exchange for shares of
Evergreen Balanced Fund and the assumption by Evergreen Balanced Fund of certain
identified liabilities of Evergreen Balanced and Keystone Balanced on or about
January 23, 1998 or such other date as may be agreed upon by the parties (the
"Closing Date"). Prior to the Closing Date, Evergreen Balanced and Keystone
Balanced will endeavor to discharge all of their known liabilities and
obligations. Evergreen Balanced Funds will not assume any liabilities or
obligations of Evergreen Balanced and Keystone Balanced other than those
reflected in an unaudited statement of assets and liabilities of Evergreen
Balanced and Keystone Balanced prepared as of the close of regular trading on
the NYSE, currently 4:00 p.m. Eastern time, on the business day immediately
prior to the Closing Date. Evergreen Balanced Fund will provide the Trustees of
Keystone Balanced with certain indemnifications as set forth in the Plan. The
number of full and fractional shares of Evergreen Balanced Fund to be received
by the shareholders of Evergreen Balanced and Keystone Balanced will be as
follows: Shareholders of Keystone Balanced will receive the number of shares of
each class of Evergreen Balanced Fund equal to the number of shares of each
corresponding class as they currently hold of Keystone Balanced. Shareholders of
Evergreen Balanced will receive the number of shares of Evergreen Balanced Fund
determined by multiplying the respective outstanding class of shares of
Evergreen Balanced by a factor which shall be computed by dividing the net asset
value per share of the respective class of Evergreen Balanced by the net asset
value per share of the respective class of Evergreen Balanced Fund. Such
computations will take place as of the close of regular trading on the NYSE on
the business day immediately prior to the Closing Date. The net asset value per
share of each class will be determined by dividing assets, less liabilities, in
each case attributable to the respective class, by the total number of
outstanding shares.
State Street Bank and Trust Company, the custodian for the Funds, will
compute the value of Evergreen Balanced's and Keystone Balanced's respective
portfolio securities. The method of valuation employed will be consistent with
the procedures set forth in the Prospectus and Statement of Additional
Information of Evergreen Balanced Fund, Rule 22c-1 under the 1940 Act, and with
the interpretations of such Rule by the SEC's Division of Investment Management.
At or prior to the Closing Date, Evergreen Balanced may (although for
tax purposes it is not required to do so) and Keystone Balanced will have
declared a dividend or dividends
<PAGE>
and distribution or distributions which, together with all previous dividends
and distributions, shall have the effect of distributing to each Fund's
shareholders (in shares of each Fund, or in cash, as the shareholder has
previously elected) all of each Fund's investment company taxable income for the
taxable period ending on the Closing Date (computed without regard to any
deduction for dividends paid) and all of its net capital gains realized in all
taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
As soon after the Closing Date as conveniently practicable, Evergreen
Balanced and Keystone Balanced will liquidate and distribute pro rata to
shareholders of record as of the close of business on the Closing Date the full
and fractional shares of Evergreen Balanced Fund received by each Fund. Such
liquidation and distribution will be accomplished by the establishment of
accounts in the names of each Fund's shareholders on the share records of
Evergreen Balanced Fund's transfer agent. Each account will represent the
respective pro rata number of full and fractional shares of Evergreen Balanced
Fund due to each Fund's shareholders. All issued and outstanding shares of each
Fund, including those represented by certificates, will be canceled. The shares
of Evergreen Balanced Fund to be issued will have no preemptive or conversion
rights. After such distributions and the winding up of its affairs, each of
Evergreen Balanced and Keystone Balanced will be terminated. In connection with
such terminations, Evergreen Balanced and Keystone Balanced will file with the
SEC applications for termination as registered investment companies.
The consummation of each Reorganization is subject to the conditions
set forth in the Plan for Evergreen Balanced and the Plan for Keystone Balanced,
including approval by each Fund's shareholders, accuracy of various
representations and warranties and receipt of opinions of counsel, including
opinions with respect to those matters referred to in "Federal Income Tax
Consequences" below. Notwithstanding approval of each Fund's shareholders, each
Plan may be terminated (a) by the mutual agreement of the Fund and Evergreen
Balanced Fund; or (b) at or prior to the Closing Date by either party (i)
because of a breach by the other party of any representation, warranty, or
agreement contained therein to be performed at or prior to the Closing Date if
not cured within 30 days, or (ii) because a condition to the obligation of the
terminating party has not been met and it reasonably appears that it cannot be
met.
<PAGE>
The expenses of Evergreen Balanced and Keystone Balanced in connection
with the Reorganizations (including the cost of any proxy soliciting agent) will
be borne by FUNB whether or not the Reorganizations are consummated.
If the Reorganization is not approved by shareholders of a Fund, the
Board of Trustees of Evergreen Investment Trust and Keystone Balanced, as
applicable, will consider other possible courses of action in the best interests
of shareholders.
Federal Income Tax Consequences
Each Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of a Reorganization, Evergreen Balanced and Keystone
Balanced will each receive an opinion of counsel to the effect that, on the
basis of the existing provisions of the Code, U.S. Treasury regulations issued
thereunder, current administrative rules, pronouncements and court decisions,
for federal income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of the Fund solely in exchange
for shares of Evergreen Balanced Fund and the assumption by Evergreen Balanced
Fund of certain identified liabilities, followed by the distribution of
Evergreen Balanced Fund's shares by the Fund in dissolution and liquidation of
the Fund, will constitute a "reorganization" within the meaning of section
368(a)(1)(F) (with respect to Evergreen Balanced and 368(a)(1)(D) with respect
to Keystone Balanced) of the Code, and Evergreen Balanced Fund and the Fund will
each be a "party to a reorganization" within the meaning of section 368(b) of
the Code;
(2) No gain or loss will be recognized by the Fund on the transfer of
all of its assets to Evergreen Balanced Fund solely in exchange for Evergreen
Balanced Fund's shares and the assumption by Evergreen Balanced Fund of certain
identified liabilities of the Fund or upon the distribution of Evergreen
Balanced Fund's shares to the Fund's shareholders in exchange for their shares
of the Fund;
(3) The tax basis of the assets transferred will be the same to
Evergreen Balanced Fund as the tax basis of such assets to the Fund immediately
prior to the Reorganization, and the holding period of such assets in the hands
of Evergreen Balanced Fund will include the period during which the assets were
held by the Fund;
<PAGE>
(4) No gain or loss will be recognized by Evergreen Balanced Fund upon
the receipt of the assets from the Fund solely in exchange for the shares of
Evergreen Balanced Fund and the assumption by Evergreen Balanced Fund of certain
identified liabilities of the Fund;
(5) No gain or loss will be recognized by the Fund's shareholders upon
the issuance of the shares of Evergreen Balanced Fund to them, provided they
receive solely such shares (including fractional shares) in exchange for their
shares of the Fund; and
(6) The aggregate tax basis of the shares of Evergreen Balanced Fund,
including any fractional shares, received by each of the shareholders of the
Fund pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of the Fund held by such shareholder immediately prior to the
Reorganization, and the holding period of the shares of Evergreen Balanced Fund,
including fractional shares, received by each such shareholder will include the
period during which the shares of the Fund exchanged therefor were held by such
shareholder (provided that the shares of the Fund were held as a capital asset
on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If a Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, shareholders of Evergreen Balanced and
Keystone Balanced would recognize a taxable gain or loss equal to the difference
between his or her tax basis in his or her Fund shares and the fair market value
of Evergreen Balanced Fund shares he or she received. Shareholders of Evergreen
Balanced and Keystone Balanced should consult their tax advisers regarding the
effect, if any, of the proposed Reorganization in light of their individual
circumstances. It is not anticipated that the securities of the combined
portfolio will be sold in significant amounts in order to comply with the
policies and investment practices of Evergreen Balanced Fund. Since the
foregoing discussion relates only to the federal income tax consequences of the
Reorganization, shareholders of Evergreen Balanced and Keystone Balanced should
also consult their tax advisers as to the state and local tax consequences, if
any, of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen
Balanced and Keystone Balanced as of August 31, 1997 and the capitalization of
Evergreen Balanced Fund on a pro
<PAGE>
forma basis as of that date, giving effect to the proposed acquisitions of
assets at net asset value, the conversion of certain Keystone Balanced shares
and the redemption of certain Evergreen Balanced Class Y shares. As a newly
created series of Evergreen Equity Trust, Evergreen Balanced Fund, immediately
preceding the Closing Date, will have nominal assets and liabilities. The pro
forma data reflects an exchange ratio of approximately 1.04, 1.04, 1.04, and
1.04 Class A, Class B, Class C and Class Y shares, respectively, of Evergreen
Balanced Fund issued for each Class A, Class B, Class C and Class Y share,
respectively, of Evergreen Balanced and an exchange ratio of approximately 1.00
Class B share of Evergreen Balanced Fund issued for each share of Keystone
Balanced.
Capitalization of Evergreen Balanced
Keystone Balanced and Evergreen
Balanced Fund (Pro Forma)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Evergreen
Balanced Fund
(After
Evergreen Keystone Reorgani-
Balanced Balanced zations)
------------ -------- ------------
Net Assets
Class A.... $45,830,601 N/A $1,149,542,084
Class B.... $116,536,530 $1,607,034,755 $619,859,822
Class C.... $463,417 N/A $463,417
Class Y.... $798,019,003 N/A $1,360,258
Net Asset
Value Per
Share
Class A.... $13.58 NA $13.01
Class B.... $13.57 $13.01 $13.01
Class C.... $13.50 NA $13.01
Class Y.... $13.59 NA $13.01
Shares
Outstanding
Class A.... 3,374,242 NA 88,371,441
Class B.... 8,586,333 123,543,047 47,649,604
Class C.... 34,335 NA 35,628
Class Y.... 58,736,955 NA 104,555
All 70,731,865 123,543,047 136,161,228
Classes.
</TABLE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganizations; the actual number of
shares to be received
<PAGE>
will depend upon the net asset value and number of shares outstanding of each
Fund at the time of the Reorganizations.
Shareholder Information
As of November 10, 1997 (the "Record Date"), there were shares of
Keystone Balanced outstanding and Class A,
Class B, Class C and Class Y shares (a total of shares) of Evergreen Balanced
outstanding.
As of September 30, 1997, the officers and Trustees of Evergreen
Investment Trust beneficially owned as a group less than 1% of the outstanding
shares of Evergreen Balanced. To Evergreen Balanced's knowledge, the following
persons owned beneficially or of record more than 5% of Evergreen Balanced's
total outstanding shares as of September 30, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Percen-
Percen- tage of
tage of Shares of
Shares of Class
Class Outstand-
Before ing After
No. of Reorgani- Reorgani-
Name and Address Class Shares zations zations
- ---------------- ----- ------ --------- ---------
First Union Y 32,313,744 54.78 0
National Bank
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-151
301 S. Tryon
Street
Charlotte, NC
28288-0002
First Union Y 26,455,704 44.85 0
National Bank
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-
1151
301 S. Tryon
Street
Charlotte, NC
28288-0002
<PAGE>
Merrill Lynch C 10,251 27.86 27.86
Pierce Fenner &
Smith
for the sole
benefit of its
customers
Attn: Fund
Administration
4800 Deer Lake
Drive
E. 3rd Floor
Jacksonville, FL
32246-6484
Donaldson Lufkin C 4,260 11.58 11.58
Jenrette
Securities
Corporation
P.O. Box 2052
Jersey City, NJ
07303-2052
C 3,941 10.71 10.71
FUBS & Co. FEBO
FUNB NC FBO
Goldston S. Bldg.
Supply Loan Acct
Attn: Frank Pierce
Loan Officer
P.O. Box 3008
8th Floor
Raleigh, NC 27602-
3008
FUBS & Co. FEBO C 2,366 6.43 6.43
First Union
National Bank - FL
FBO
Leroy Selby Jr.
Loan Acct.
Attn: Carol
Moening
HWY 50 Office
Titusville, FL
32780
</TABLE>
As of September 30, 1997, the officers and Trustees of Keystone
Balanced beneficially owned as a group less than 1%
<PAGE>
of the outstanding shares of Keystone Balanced. To Keystone Balanced's
knowledge, no person owned beneficially or of record more than 5% of Keystone
Balanced's total outstanding shares as of September 30, 1997.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectuses and Statements of
Additional Information of the Funds. The investment objective, policies and
restrictions of Evergreen Balanced Fund can be found in the Prospectuses of
Evergreen Balanced Fund under the caption "Investment Objective and Policies".
The investment objectives, policies and restrictions of Evergreen Balanced and
Keystone Balanced can be found in the respective Prospectus of each Fund under
the caption "Investment Objective and Policies."
The investment objective and policies of Evergreen Balanced Fund and
Keystone Balanced are identical. Each Fund seeks to provide shareholders with
current income. Unlike Evergreen Balanced Fund, the investment objective of
Keystone Balanced cannot be changed without shareholder approval.
The following discussion of Evergreen Balanced Fund's investment
policies and restrictions applies equally to Keystone Balanced. Under normal
circumstances, Evergreen Balanced Fund invests in a combination of equity and
debt securities chosen primarily for their potential for current income and
secondarily, to the extent consistent with the Fund's investment objective, for
their potential for capital appreciation. The Fund normally emphasizes
securities having a liberal current yield consistent with investment quality on
which the interest or dividend payments are considered reasonably secure. Under
normal circumstances, the Fund maintains at least 25% of its total assets in
fixed income senior securities. The Fund may invest in any type of security,
including bonds, debentures and income obligations as well as common and
preferred stocks.
Debt securities, which include both secured and unsecured obligations
will, at the time of investment, be rated within the four highest categories by
Standard & Poor's Ratings Group ("S&P") (AAA, AA, A and BBB), by Fitch Investors
Services, L.P. ("Fitch") (AAA, AA, A, BBB) or by Moody's Investors Service
("Moody's") (Aaa, Aa, A and Baa), or if not rated or rated under a different
system, are of comparable quality to obligations so rated, as determined by its
investment adviser.
<PAGE>
For a description of such ratings, see Evergreen Balanced Fund's Statement of
Additional Information.
Evergreen Balanced Fund may also invest in limited partnerships,
including master limited partnerships, and in foreign securities (up to 25% of
its assets). The Fund may also invest up to 25% of its assets in
below-investment grade securities issued by U.S. and foreign issuers having a
rating range of BB to CCC by S&P or Fitch, and/or Ba to Caa by Moody's, or if
unrated or rated under a different system, believed by the Fund's investment
adviser to be of comparable quality. Evergreen Balanced Fund's debt securities
may include zero coupon bonds and payment-in-kind securities.
The Fund also may invest, for temporary defensive purposes, up to 100%
of its assets in short-term obligations. Such obligations may include master
demand notes, commercial paper and notes, bank deposits and other financial
institution obligations.
Evergreen Balanced Fund may also invest in certain other types of
derivative instruments, including options, futures and
<PAGE>
mortgage-related securities, such as collateralized mortgage obligations and
enter into interest rate transactions such as swaps, caps and floors.
The investment objective of the Evergreen Balanced, which cannot be
changed without shareholder approval, is to achieve a long-term total return
through capital appreciation, dividends and interest income. The Fund invests in
common and preferred stocks for growth and fixed income securities to provide a
stable income flow.
The percentage of the Evergreen Balanced's assets invested in common
and preferred stocks will vary from time to time in accordance with changing
economic and market conditions. It is anticipated that over the long term the
Fund's portfolio will average 60% in common and preferred stocks and 40% in
bonds. However, normally the Fund's asset allocation will range between 40-75%
in common and preferred stocks, 25-50% fixed income securities (including some
convertible securities) and 0-25% cash equivalents. Moderate shifts between
types of assets are made in an attempt to maximize returns or reduce risk.
Evergreen Balanced invests in common, preferred and convertible
preferred stocks and bonds of U.S. companies with a minimum of $100 million in
market capitalization and which are listed on major stock exchanges or traded
over-the-counter. The Fund may also invest in American Depositary Receipts of
foreign companies which are traded on the New York or American Stock Exchanges
or the over-the-counter market.
The fixed income portion of Evergreen Balanced's portfolio may be
invested in corporate bonds (including convertible bonds) rated, at the time of
purchase, within the three highest grades (A or better) by S&P or Moody's or, if
unrated, determined to be of comparable quality by its investment adviser.
Short-term or defensive investments in which Evergreen Balanced may
invest, are similar to those investments of Evergreen Balanced Fund. In
addition, Evergreen Balanced may engage in options and futures transactions.
Evergreen Balanced does not engage in certain derivative transactions permitted
for Evergreen Balanced Fund such as swaps, caps and floors.
The principal differences between Evergreen Balanced Fund and Keystone
Balanced on the one hand, and Evergreen Balanced on the other, relate to the
minimum credit quality of the Funds' investments (BBB or better for Evergreen
Balanced Fund
<PAGE>
and Keystone Balanced and A or better for Evergreen Balanced) and Evergreen
Balanced Fund's and Keystone Balanced Fund's ability to invest in high yield,
high risk debt securities.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectus and Statement of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectus and Statement of Additional Information of each
Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Equity Trust, Evergreen Investment Trust and Keystone
Balanced are open-end management investment companies registered with the SEC
under the 1940 Act, which continuously offer shares to the public. Evergreen
Investment Trust and Keystone Balanced are organized as a Massachusetts business
trust and a Pennsylvania common law trust, respectively. Evergreen Equity Trust
is organized as a Delaware business trust. Each Trust is governed by a
Declaration of Trust, ByLaws and a Board of Trustees. Each Trust is also
governed by applicable Delaware, Massachusetts, Pennsylvania and federal law.
Evergreen Balanced Fund is a series of Evergreen Equity Trust and Evergreen
Balanced is a series of Evergreen Investment Trust.
Capitalization
The beneficial interests in Evergreen Balanced Fund are represented by
an unlimited number of transferable shares of beneficial interest without par
value. The beneficial interests in Evergreen Balanced and Keystone Balanced are
represented by an unlimited number of transferable shares of beneficial interest
with a $.0001 and $1.00 par value per share, respectively. The respective
Declaration of Trust under which each Fund has been established permits the
Trustees to allocate shares into an unlimited number of series, and classes
thereof, with rights determined by the Trustees, all without shareholder
approval. Fractional shares may be issued. Except with respect to Evergreen
Balanced Fund, where each share of the Fund is entitled to one vote for each
dollar of net asset value applicable to such share, each Fund's shares have
equal voting rights with respect to matters affecting shareholders of all
classes of each Fund and represent equal proportionate interests in the assets
belonging to each class of shares of the Funds. Shareholders of each Fund are
entitled to receive dividends and other
<PAGE>
amounts as determined by the Trustees. Shareholders of each Fund vote
separately, by class, as to matters, such as approval of or amendments to Rule
12b-1 distribution plans, that affect only their particular class and by series
as to matters, such as approval of or amendments to investment advisory
agreements or proposed organizations, that affect only their particular series.
Shareholder Liability
Under Massachusetts and Pennsylvania law, shareholders of a business or
common law trust could, under certain circumstances, be held personally liable
for the obligations of the trust. However, the respective Declaration of Trust
under which Evergreen Balanced and Keystone Balanced was established disclaims
shareholder liability for acts or obligations of the series and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Fund or the Trustees. Each Declaration of Trust
provides for indemnification out of the series property for all losses and
expenses of any shareholder held personally liable for the obligations of the
series. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which a disclaimer is inoperative and the series or the Trust itself would be
unable to meet its obligations. A substantial number of mutual funds in the
United States are organized as Massachusetts business trusts.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Equity Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of a Delaware trust to liability. To guard
against this risk, the Declaration of Trust of Evergreen Equity Trust: (a)
provides that any written obligation of the Trust may contain a statement that
such obligation may only be enforced against the assets of the Trust or the
particular series in question and the obligation is not binding upon the
shareholders of the Trust; however, the omission of such a disclaimer will not
operate to create personal liability for any shareholder; and (b) provides for
indemnification out of Trust property of any shareholder held personally liable
for the obligations of Evergreen Equity Trust. Accordingly, the risk of a
shareholder of the Trust incurring financial loss
<PAGE>
beyond that shareholder's investment because of shareholder liability is limited
to circumstances in which: (i) the court refuses to apply Delaware law; (ii) no
contractual limitation of liability was in effect; and (iii) the Trust itself
would be unable to meet its obligations. In light of Delaware law, the nature of
the Trust's business, and the nature of its assets, the risk of personal
liability to a shareholder of Evergreen Equity Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Equity Trust on behalf of Evergreen Balanced Fund,
Evergreen Investment Trust on behalf of Evergreen Balanced nor Keystone Balanced
is required to hold annual meetings of shareholders. However, a meeting of
shareholders for the purpose of voting upon the question of removal of a Trustee
must be called when requested in writing by the holders of at least 25% or 10%
of the outstanding shares of Evergreen Investment Trust or Keystone Balanced,
respectively. In addition, each is required to call a meeting of shareholders
for the purpose of electing Trustees if, at any time, less than a majority of
the Trustees then holding office were elected by shareholders. Each Trust
currently does not intend to hold regular shareholder meetings. Each Trust does
not permit cumulative voting. Except when a larger quorum is required by
applicable law, for Evergreen Balanced Fund and Evergreen Balanced , twenty-five
percent (25%) of the outstanding shares entitled to vote, and, for Keystone
Balanced, a majority of the outstanding shares entitled to vote on a matter,
constitutes a quorum for consideration of such matter. For Evergreen Balanced
Fund, a majority of the shares voted, for Evergreen Balanced, a majority of the
shares entitled to vote and for Keystone Balanced, a majority of the shares
present and entitled to vote is sufficient to act on a matter (unless otherwise
specifically required by the applicable governing documents or other law,
including the 1940 Act).
Under the Declaration of Trust of Evergreen Equity Trust, each share of
Evergreen Balanced Fund is entitled to one vote for each dollar of net asset
value applicable to each share. Under the current voting provisions governing
Evergreen Balanced and Keystone Balanced, each share is entitled to one vote.
Over time, the net asset values of the Funds have changed in relation to one
another and are expected to continue to do so in the future. Because of the
divergence in net asset values, a given dollar investment in a Fund with a lower
net asset value will purchase more shares, and under the Funds' current voting
provisions, have more votes, than the same investment in a Fund with a higher
net asset value. Under the Declaration of Trust of Evergreen Equity Trust,
<PAGE>
voting power is related to the dollar value of the shareholders' investment
rather than to the number of shares held.
Liquidation or Dissolution
In the event of the liquidation of Evergreen Balanced Fund, Evergreen
Balanced and Keystone Balanced the shareholders are entitled to receive, when,
and as declared by the Trustees, the excess of the assets belonging to such Fund
or attributable to the class over the liabilities belonging to the Fund or
attributable to the class. In either case, the assets so distributable to
shareholders of the Fund will be distributed among the shareholders in
proportion to the number of shares of a class of the Fund held by them and
recorded on the books of the Fund.
Liability and Indemnification of Trustees
Each of the Declaration of Trust of Evergreen Investment Trust and of
Keystone Balanced provides that a Trustee shall be liable only for his own
willful defaults and that no Trustee shall be protected against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. Each Declaration of Trust provides that a present or former Trustee
or officer is entitled to indemnification against liabilities and expenses with
respect to claims related to his or her position with the Fund, unless such
Trustee or officer shall have been adjudicated not to have acted in good faith
in the reasonable belief that his or her action was in the best interest of the
Fund, or unless such Trustee or officer is otherwise subject to liability to the
Fund or its shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. In the event of settlement, no such indemnification shall be provided
unless there has been a determination that such Trustee or officer appears to
have acted in good faith in the reasonable belief that his action was in the
best interests of the Fund and that such indemnification would not protect such
person against any liability to the Fund to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen Equity Trust, a Trustee is
liable to the Trust and its shareholders only for such Trustee's own willful
misfeasance, bad faith, gross
<PAGE>
negligence, or reckless disregard of the duties involved in the conduct of the
office of Trustee or the discharge of such Trustee's functions. As provided in
the Declaration of Trust, each Trustee of the Trust is entitled to be
indemnified against all liabilities against him or her, including the costs of
litigation, unless it is determined that the Trustee (i) did not act in good
faith in the reasonable belief that such Trustee's action was in or not opposed
to the best interests of the Trust; (ii) had acted with willful misfeasance, bad
faith, gross negligence or reckless disregard of such Trustee's duties; and
(iii) in a criminal proceeding, had reasonable cause to believe that such
Trustee's conduct was unlawful (collectively, "disabling conduct"). A
determination that the Trustee did not engage in disabling conduct and is,
therefore, entitled to indemnification may be based upon the outcome of a court
action or administrative proceeding or by (a) a vote of a majority of those
Trustees who are neither "interested persons" within the meaning of the 1940 Act
nor parties to the proceeding or (b) an independent legal counsel in a written
opinion. The Trust may also advance money for such litigation expenses provided
that the Trustee undertakes to repay the Trust if his or her conduct is later
determined to preclude indemnification and certain other conditions are met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware, Massachusetts and
Pennsylvania law and is not a complete description of those documents or law.
Shareholders should refer to the provisions of such Declarations of Trust,
By-Laws, Delaware, Massachusetts and Pennsylvania law directly for more complete
information.
ADDITIONAL INFORMATION
Evergreen Balanced Fund. Information concerning the operation and
management of the Evergreen Balanced Fund is incorporated herein by reference
from the Prospectuses dated November 10, 1997, copies of which are enclosed, and
Statement of Additional Information dated November 10, 1997. A copy of such
Statement of Additional Information is available upon request and without charge
by writing to Evergreen Balanced Fund at the address listed on the cover page of
this Prospectus/Proxy Statement or by calling toll-free 1-800-343- 2898.
Evergreen Balanced. Information about the Fund is
included in its current Prospectuses dated July 1, 1997, as
supplemented, and in the Statement of Additional Information
of the same date that have been filed with the SEC, all of
<PAGE>
which are incorporated herein by reference. A copy of the Prospectus and
Statement of Additional Information are available upon request and without
charge by writing to the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
Keystone Balanced. Information about the Fund is included in its
current Prospectus dated September 2, 1997, as supplemented, and in the
Statement of Additional Information of the same date that has been filed with
the SEC, all of which are incorporated herein by reference. A copy of the
Prospectus and Statement of Additional Information are available upon request
and without charge by writing to the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
Evergreen Balanced Fund and Keystone Balanced are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information including
proxy material, and charter documents with the SEC. These items can be inspected
and copies obtained at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices located at Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York, New York
10048.
VOTING INFORMATION CONCERNING THE MEETINGS
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of Evergreen Investment Trust and
Keystone Balanced to be used at each Special Meeting of Shareholders to be held
at 3:00 p.m., January 6, 1998, at the offices of the Evergreen Keystone Funds,
200 Berkeley Street, Boston, MA 02116 and at any adjournments thereof. This
Prospectus/Proxy Statement, along with a Notice of the meeting and a proxy card,
is first being mailed to shareholders of Evergreen Balanced and Keystone
Balanced on or about November 18, 1997. Only shareholders of record as of the
close of business on the Record Date will be entitled to notice of, and to vote
at, the Meeting or any adjournment thereof. The holders of a majority of the
outstanding shares entitled to vote of Keystone Balanced, and with respect to
Evergreen Balanced, the holders of 25% of the outstanding shares entitled to
vote, at the close of business on the Record Date present in person or
represented by proxy will constitute a quorum for the Meeting. If the enclosed
form of proxy is properly executed and returned in time to be voted at the
Meeting, the proxies named therein will vote the
<PAGE>
shares represented by the proxy in accordance with the instructions marked
thereon. Unmarked proxies will be voted FOR the proposed Reorganization and FOR
any other matters deemed appropriate. Proxies that reflect abstentions and
"broker non-votes" (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or the persons
entitled to vote or (ii) the broker or nominee does not have discretionary
voting power on a particular matter) will be counted as shares that are present
and entitled to vote for purposes of determining the presence of a quorum. Such
proxies will have the effect of being counted as votes against the Plan since
the vote required is either a majority of the shares present and entitled to
vote or a majority of the shares entitled to vote. A proxy may be revoked at any
time on or before the Meeting by written notice to the Secretary of Evergreen
Investment Trust or Keystone Balanced, as applicable, 200 Berkeley Street,
Boston, Massachusetts 02116. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby.
Approval of each Plan will require the affirmative vote, for Keystone
Balanced, of a majority of the shares present and entitled to vote, and, for
Evergreen Balanced, the affirmative vote of a majority of the shares entitled to
vote, with all Classes voting together as a single class at Meetings at which a
quorum of each Fund's shares is present. Each full share outstanding is entitled
to one vote and each fractional share outstanding is entitled to a proportionate
share of one vote.
Proxy solicitations will be made primarily by mail, but proxy
solicitations may also be made by telephone, telegraph or personal solicitations
conducted by officers and employees of FUNB, its affiliates or other
representatives of Evergreen Balanced and Keystone Balanced (who will not be
paid for their soliciting activities). Shareholders Communications Corp. ("SCC")
has been engaged by Evergreen Balanced and Keystone Balanced to assist in
soliciting proxies, and may contact certain shareholders of the Funds over the
telephone. Shareholders who are contacted by SCC may be asked to cast their vote
by telephonic proxy. Such proxies will be recorded in accordance with the
procedures set forth below. Each Fund believes these procedures are reasonably
designed to ensure that the identity of the shareholder casting the vote is
accurately determined and that the voting instructions of the shareholder are
accurately reflected. Each Fund has received an opinion of counsel that
addresses the validity, under the applicable law of The Commonwealth of
Massachusetts, of a
<PAGE>
proxy given orally. The opinion concludes that a Massachusetts court would find
that there is no Massachusetts law or Massachusetts public policy against the
acceptance of proxies signed by an orally-authorized agent.
In all cases where a telephonic proxy is solicited, the SCC
representative will ask you for your full name, address, social security or
employer identification number, title (if you are authorized to act on behalf of
an entity, such as a corporation), and number of shares owned. If the
information solicited agrees with the information provided to SCC by each Fund's
transfer agent, then the SCC representative will explain the process, read the
proposals listed on the proxy card and ask for your instructions on each
proposal. The SCC representative, although he or she will answer questions about
the process, will not recommend to the shareholder how he or she should vote,
other than to read any recommendations set forth in the proxy statement. Within
72 hours, SCC will send you a letter or mailgram to confirm your vote and asking
you to call immediately if your instructions are not correctly reflected in the
confirmation.
If you wish to participate in the Meeting, but do not wish to give your
proxy by telephone, you may still submit the proxy card included with this
Prospectus/Proxy Statement or attend in person. Any proxy given by you, whether
in writing or by telephone, is revocable.
In the event that sufficient votes to approve a Reorganization are not
received by January 6, 1998, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to a proposed Reorganization will not be
entitled under either Massachusetts or Pennsylvania law or the Declaration of
Trust of Evergreen Investment Trust or Keystone Balanced, as applicable, to
demand payment for, or an appraisal of, his or her shares. However, shareholders
should be aware that the Reorganizations
<PAGE>
as proposed are not expected to result in recognition of gain or loss to
shareholders for federal income tax purposes and that, if the Reorganizations
are consummated, shareholders will be free to redeem the shares of Evergreen
Balanced Fund which they receive in the transaction at their then-current net
asset value. Shares of Evergreen Balanced and Keystone Balanced may be redeemed
at any time prior to the consummation of the Reorganizations. Shareholders of
Evergreen Balanced and Keystone Balanced may wish to consult their tax advisers
as to any differing consequences of redeeming Fund shares prior to the
Reorganizations or exchanging such shares in the Reorganizations.
Evergreen Balanced and Keystone Balanced do not hold annual shareholder
meetings. If a Reorganization is not approved, shareholders wishing to submit
proposals for consideration for inclusion in a proxy statement for a subsequent
shareholder meeting should send their written proposals to the Secretary of
Evergreen Investment Trust or Keystone Balanced, as applicable, at the address
set forth on the cover of this Prospectus/Proxy Statement such that they will be
received by the Funds in a reasonable period of time prior to any such meeting.
The votes of the shareholders of Evergreen Balanced Fund are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the Reorganizations.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Evergreen Balanced and Keystone Balanced whether other persons are
beneficial owners of shares for which proxies are being solicited and, if so,
the number of copies of this Prospectus/Proxy Statement needed to supply copies
to the beneficial owners of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Evergreen Balanced as of March 31, 1997,
and the financial statements and financial highlights for the periods indicated
therein, have been incorporated by reference herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Keystone Balanced as of June 30, 1997, and
the financial statements and financial highlights for the periods indicated
therein, have been incorporated by reference herein and in the Registration
<PAGE>
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Balanced Fund will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
The Trustees of Evergreen Investment Trust and Keystone Balanced do not
intend to present any other business at the Meeting. If, however, any other
matters are properly brought before the Meeting, the persons named in the
accompanying form of proxy will vote thereon in accordance with their judgment.
THE RESPECTIVE TRUSTEES OF EVERGREEN INVESTMENT TRUST AND KEYSTONE
BALANCED RECOMMEND THEIR APPROVAL OF EACH RESPECTIVE PLAN AND ANY UNMARKED
PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL
OF THE PLANS.
November 14, 1997
<PAGE>
EXHIBIT A-1
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 30th day of September, 1997, by and between the Evergreen Equity Trust,
a Delaware business trust, with its principal place of business at 200 Berkeley
Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its Evergreen
Balanced Fund series (the "Acquiring Fund"), and Evergreen Investment Trust, a
Massachusetts business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 ("Evergreen Trust") with respect to
its Evergreen Balanced Fund series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(F) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class Y, Class A, Class B
and Class C shares of beneficial interest, without par value, of the Acquiring
Fund (the "Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of
certain identified liabilities of the Selling Fund; and (iii) the distribution,
after the Closing Date hereinafter referred to, of the Acquiring Fund Shares to
the shareholders of the Selling Fund in liquidation of the Selling Fund as
provided herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type, respectively, and the Selling Fund owns securities that
generally are assets of the character in which the Acquiring Fund is permitted
to invest;
WHEREAS, both Funds are authorized to issue their shares
of beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
<PAGE>
WHEREAS, the Trustees of Evergreen Trust have determined that the
Selling Fund should exchange all of its assets and certain identified
liabilities for Acquiring Fund Shares and that the interests of the existing
shareholders of the Selling Fund will not be diluted as a result of the
transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and futures interests and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its
<PAGE>
business in connection with the purchase and sale of securities and the payment
of its normal operating expenses. The Selling Fund reserves the right to sell
any of such securities, but will not, without the prior written approval of the
Acquiring Fund, acquire any additional securities other than securities of the
type in which the Acquiring Fund is permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a statement of the Acquiring Fund's
investment objectives, policies, and restrictions and a list of the securities,
if any, on the Selling Fund's list referred to in the second sentence of this
paragraph that do not conform to the Acquiring Fund's investment objectives,
policies, and restrictions. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund will dispose
of such securities prior to the Closing Date. In addition, if it is determined
that the Selling Fund and the Acquiring Fund portfolios, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Selling Fund if requested
by the Acquiring Fund will dispose of a sufficient amount of such investments as
may be necessary to avoid violating such limitations as of the Closing Date.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume the liabilities, expenses, costs, charges
and reserves reflected on a Statement of Assets and Liabilities of the Selling
Fund prepared on behalf of the Selling Fund, as of the Valuation Date (as
defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount permitted to be charged to the Acquiring Fund
under the National Association of Securities Dealers, Inc. Conduct Rule 2830,
minus the amount of the sales charges paid or accrued (including asset based
sales charge), plus permitted interest ("Aggregate NASD Cap"), the Acquiring
Fund will add to its Aggregate NASD Cap
<PAGE>
immediately prior to the Reorganization the Aggregate NASD Cap of the Selling
Fund immediately prior to the Reorganization.
1.4 LIQUIDATION AND DISTRIBUTION. On or soon after the Closing Date as
is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Valuation Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1; and (b) the Selling Fund will thereupon proceed to dissolve as
set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund to open accounts
on the share records of the Acquiring Fund in the names of the Selling Fund
Shareholders and representing the respective pro rata number of the Acquiring
Fund Shares due such shareholders. All issued and outstanding shares of the
Selling Fund will simultaneously be canceled on the books of the Selling Fund.
The Acquiring Fund shall not issue certificates representing the Acquiring Fund
Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
<PAGE>
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about January 23, 1998 or such other date as the parties may agree to in writing
(the "Closing Date"). All acts taking place at the Closing shall be deemed to
take place simultaneously immediately prior to the opening of business on the
Closing Date unless otherwise provided. The Closing shall be held as of 9:00
a.m. at the offices of the Evergreen Keystone Funds, 200 Berkeley Street,
Boston, MA 02116, or at such other time and/or place as the parties may agree.
<PAGE>
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as
custodian for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets shall have been delivered in
proper form to the Acquiring Fund on the Closing Date; and (b) all necessary
taxes including all applicable federal and state stock transfer stamps, if any,
shall have been paid, or provision for payment shall have been made, in
conjunction with the delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Keystone Service Company,
as transfer agent for the Selling Fund as of the Closing Date ("EKSC"), shall
deliver at the Closing a certificate of an authorized officer stating that its
records contain the names and addresses of the Selling Fund Shareholders and the
number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue and
deliver or cause EKSC, its transfer agent as of the Closing Date, to issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited on
the Closing Date to the Secretary of Evergreen Trust or provide evidence
satisfactory to the Selling Fund that such Acquiring Fund Shares have been
credited to the Selling Fund's account on the books of the Acquiring Fund. At
the Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts and other documents as such
other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling
Fund represents and warrants to the Acquiring Fund as follows:
<PAGE>
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
registered investment company classified as a management company of the open-end
type, and its registration with the Securities and Exchange Commission (the
"Commission") as an investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"), is in full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Evergreen Trust's Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely
<PAGE>
affects its business or its ability to consummate the
transactions herein contemplated.
(g) The financial statements of the Selling Fund at March 31,
1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since March 31, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor
<PAGE>
is there outstanding any security convertible into any of the
Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring
Fund represents and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment
series of a Delaware business trust duly organized, validly
<PAGE>
existing and in good standing under the laws of the State of
Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any
<PAGE>
incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(j) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(k) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(l) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
<PAGE>
(m) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(n) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. Evergreen Trust will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
<PAGE>
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by its independent
auditors and certified by the Selling Fund's President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund
will provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form
<PAGE>
reasonably satisfactory to the Selling Fund, covering the
following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution and delivery of this Agreement by the Selling Fund, is
a valid and binding obligation of the Acquiring Fund enforceable against the
Acquiring Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium, and other laws relating to
or affecting creditors' rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VII
<PAGE>
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Evergreen Trust's
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Evergreen Trust.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of Sullivan & Worcester LLP, counsel to the Selling Fund, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement
<PAGE>
comply with the 1933 Act, the 1934 Act, and the 1940 Act and the rules and
regulations thereunder and, assuming due authorization, execution, and delivery
of this Agreement by the Acquiring Fund, is a valid and binding obligation of
the Selling Fund enforceable against the Selling Fund in accordance with its
terms, subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights generally
and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Evergreen Trust's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
<PAGE>
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund may (although for tax purposes it is not required
to do so) have declared a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing to the Selling
Fund Shareholders all of the Selling Fund's investment company taxable income
for all taxable periods ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all taxable periods ending on the Closing Date (after reduction for any capital
loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(F) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the
<PAGE>
assumption by the Acquiring Fund of certain stated liabilities
of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
<PAGE>
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of appropriate
officials of the Selling Fund responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that such unaudited
pro forma financial statements do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and Prospectus and
Proxy Statement were prepared based on the valuation of the Selling Fund's
assets in accordance with the Trust's Declaration of Trust and the Acquiring
Fund's then current prospectus and statement of additional information pursuant
to procedures customarily utilized by the Acquiring Fund in valuing its own
assets; and
(e) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or to written estimates by Selling Fund's management
and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing
<PAGE>
standards), the calculation of net asset value per share of the Selling Fund as
of the Valuation Date was determined in accordance with generally accepted
accounting practices and the portfolio valuation practices of the Acquiring
Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration Statement
and Prospectus and Proxy Statement, and inquiries of appropriate officials of
the Trust responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that such unaudited pro forma
financial statements do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(d) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received
from KPMG Peat Marwick LLP a letter addressed to the Acquiring Fund and the
Selling Fund, dated on the Closing Date in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the
<PAGE>
related impact, if any, of the proposed transfer of all of the assets of the
Selling Fund to the Acquiring Fund and the ultimate dissolution of the Selling
Fund, upon the shareholders of the Selling Fund.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual
agreement of the Acquiring Fund and the Selling Fund. In
<PAGE>
addition, either the Acquiring Fund or the Selling Fund may at its option
terminate this Agreement at or prior to the Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Evergreen Trust, the respective
Trustees or officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
This Agreement may be amended, modified, or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of the
Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of Evergreen Trust,
<PAGE>
shall be governed and construed in accordance with the laws of The Commonwealth
of Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm, or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or employees of Evergreen Trust personally, but bind only the
trust property of the Selling Fund, as provided in the Declaration of Trust of
Evergreen Trust. The execution and delivery of this Agreement have been
authorized by the Trustees of Evergreen Trust on behalf of the Selling Fund and
signed by authorized officers of Evergreen Trust, acting as such, and neither
such authorization by such Trustees nor such execution and delivery by such
officers shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
property of the Selling Fund as provided in the Declaration of Trust of
Evergreen Trust.
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN EQUITY TRUST
ON BEHALF OF EVERGREEN
BALANCED FUND
By:
Name:
Title:
EVERGREEN INVESTMENT TRUST
ON BEHALF OF EVERGREEN
BALANCED FUND
By:
<PAGE>
Name:
Title:
<PAGE>
EXHIBIT A-2
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 30th day of September, 1997, by and between the Evergreen Equity Trust,
a Delaware business trust, with its principal place of business at 200 Berkeley
Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its Evergreen
Balanced Fund series (the "Acquiring Fund"), and Keystone Balanced Fund (K-1), a
Pennsylvania common law trust ("Keystone Trust"), with its principal place of
business at 200 Berkeley Street, Boston, Massachusetts 02116 with respect to its
Keystone Balanced Fund (K-1) series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(D) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for shares of beneficial
interest, without par value, of the Acquiring Fund (the "Acquiring Fund
Shares"); (ii) the assumption by the Acquiring Fund of certain identified
liabilities of the Selling Fund; and (iii) the distribution, after the Closing
Date hereinafter referred to, of the Acquiring Fund Shares to the shareholders
of the Selling Fund in liquidation of the Selling Fund as provided herein, all
upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are a registered
open-end investment company and a separate investment series of an open-end,
registered investment company of the management type, respectively, and the
Selling Fund owns securities that generally are assets of the character in which
the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares
of beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
<PAGE>
WHEREAS, the Trustees of Keystone Trust have determined that the
Selling Fund should exchange all of its assets and certain identified
liabilities for Acquiring Fund Shares and that the interests of the existing
shareholders of the Selling Fund will not be diluted as a result of the
transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and futures interests and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its
<PAGE>
business in connection with the purchase and sale of securities and the payment
of its normal operating expenses. The Selling Fund reserves the right to sell
any of such securities, but will not, without the prior written approval of the
Acquiring Fund, acquire any additional securities other than securities of the
type in which the Acquiring Fund is permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a statement of the Acquiring Fund's
investment objectives, policies, and restrictions and a list of the securities,
if any, on the Selling Fund's list referred to in the second sentence of this
paragraph that do not conform to the Acquiring Fund's investment objectives,
policies, and restrictions. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund will dispose
of such securities prior to the Closing Date. In addition, if it is determined
that the Selling Fund and the Acquiring Fund portfolios, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Selling Fund if requested
by the Acquiring Fund will dispose of a sufficient amount of such investments as
may be necessary to avoid violating such limitations as of the Closing Date.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. Except as specifically provided in this paragraph 1.3, the Acquiring Fund
shall assume only those liabilities, expenses, costs, charges and reserves
reflected on a Statement of Assets and Liabilities of the Selling Fund prepared
on behalf of the Selling Fund, as of the Valuation Date (as defined in paragraph
2.1), in accordance with generally accepted accounting principles consistently
applied from the prior audited period. The Acquiring Fund shall assume only
those liabilities of the Selling Fund reflected in such Statement of Assets and
Liabilities and shall not except as specifically provided in this paragraph 1.3
assume any other liabilities, whether absolute or contingent, known or unknown,
accrued or unaccrued, all of which shall remain the obligation of the Selling
Fund. The Acquiring Fund hereby agrees with Keystone Trust and each Trustee of
Keystone Trust: (i) to indemnify each Trustee of Keystone Trust against all
liabilities and expenses referred to in the indemnification provisions of
Keystone Trust's Declaration of Trust and By-Laws, to the extent provided
therein, incurred by any Trustee of Keystone Trust; and (ii) in addition to the
indemnification provided in (i) above, to indemnify each Trustee of Keystone
Trust against
<PAGE>
all liabilities and expenses and pay the same as they arise and become due,
without any exception, limitation or requirement of approval by any person, and
without any right to require repayment thereof by any such Trustee (unless such
Trustee has had the same repaid to him or her) based upon any subsequent or
final disposition or findings made in connection therewith or otherwise, if such
action, suit or other proceeding involves such Trustee's participation in
authorizing or permitting or acquiescing in, directly or indirectly, by action
or inaction, the making of any distribution in any manner of all or any assets
of the Selling Fund without making provision for the payment of any liabilities
of any kind, fixed or contingent, of the Selling Fund, which liabilities were
not actually and consciously personally known to such Trustee to exist at the
time of such Trustee's participation in so authorizing or permitting or
acquiescing in the making of any such distribution.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount permitted to be charged to the Acquiring Fund
under the National Association of Securities Dealers, Inc. Conduct Rule 2830,
minus the amount of the sales charges paid or accrued (including asset based
sales charge), plus permitted interest ("Aggregate NASD Cap"), the Acquiring
Fund will add to its Aggregate NASD Cap immediately prior to the Reorganization
the Aggregate NASD Cap of the Selling Fund immediately prior to the
Reorganization.
1.4 LIQUIDATION AND DISTRIBUTION. On or soon after the Closing Date as
is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Valuation Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1; and (b) the Selling Fund will thereupon proceed to dissolve as
set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund to open accounts
on the share records of the Acquiring Fund in the names of the Selling Fund
Shareholders and representing the respective pro rata number of the Acquiring
Fund Shares due such shareholders. All issued and outstanding shares of the
Selling Fund will simultaneously be canceled on the books of the Selling Fund.
The Acquiring Fund shall not issue certificates representing the Acquiring Fund
Shares in connection with such exchange.
<PAGE>
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring
Fund Shares of each class to be issued (including fractional
shares, if any) in exchange for the Selling Fund's assets
<PAGE>
shall be determined by multiplying the shares outstanding of each class of the
Selling Fund by the ratio computed by dividing the net asset value per share of
the Selling Fund attributable to each of its classes by the net asset value per
share of the respective classes of the Acquiring Fund determined in accordance
with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about January 23, 1998 or such other date as the parties may agree to in writing
(the "Closing Date"). All acts taking place at the Closing shall be deemed to
take place simultaneously immediately prior to the opening of business on the
Closing Date unless otherwise provided. The Closing shall be held as of 9:30
a.m. at the offices of the Evergreen Keystone Funds, 200 Berkeley Street,
Boston, MA 02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as
custodian for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets shall have been delivered in
proper form to the Acquiring Fund on the Closing Date; and (b) all necessary
taxes including all applicable federal and state stock transfer stamps, if any,
shall have been paid, or provision for payment shall have been made, in
conjunction with the delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
<PAGE>
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Keystone Service Company,
as transfer agent for the Selling Fund as of the Closing Date ("EKSC"), shall
deliver at the Closing a certificate of an authorized officer stating that its
records contain the names and addresses of the Selling Fund Shareholders and the
number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue and
deliver or cause EKSC, its transfer agent as of the Closing Date, to issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited on
the Closing Date to the Secretary of Keystone Trust or provide evidence
satisfactory to the Selling Fund that such Acquiring Fund Shares have been
credited to the Selling Fund's account on the books of the Acquiring Fund. At
the Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts and other documents as such
other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling
Fund represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is the sole investment series of a
Pennsylvania common law trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is the sole investment series of a
Pennsylvania common law trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectus and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
<PAGE>
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Keystone Trust's Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The financial statements of the Selling Fund at June 30,
1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since June 30, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax
returns and reports of the Selling Fund required by law to
<PAGE>
have been filed by such dates shall have been filed, and all federal and other
taxes shown due on said returns and reports shall have been paid, or provision
shall have been made for the payment thereof. To the best of the Selling Fund's
knowledge, no such return is currently under audit, and no assessment has been
asserted with respect to such returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Pennsylvania
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
<PAGE>
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring
Fund represents and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
<PAGE>
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(j) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement
<PAGE>
constitutes a valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(k) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(l) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
(m) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(n) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
<PAGE>
5.2 APPROVAL OF SHAREHOLDERS. Keystone Trust will call a meeting of the
Selling Fund Shareholders to consider and act upon this Agreement and to take
all other action necessary to obtain approval of the transactions contemplated
herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by its independent
auditors and certified by the Selling Fund's President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund
will provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
ARTICLE VI
<PAGE>
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution and delivery of this Agreement by the Selling Fund, is
a valid and binding obligation of the Acquiring Fund enforceable against the
Acquiring Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium, and other
<PAGE>
laws relating to or affecting creditors' rights generally and
to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Keystone Trust's
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
<PAGE>
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Keystone Trust.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of Sullivan & Worcester LLP, counsel to the Selling Fund, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is the sole investment series of a
Pennsylvania common law trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Pennsylvania and has the power to
own all of its properties and assets and to carry on its business as presently
conducted.
(b) The Selling Fund is the sole investment series of a
Pennsylvania common law trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution, and delivery of this Agreement by the Acquiring Fund,
is a valid and binding obligation of the Selling Fund enforceable against the
Selling Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Pennsylvania is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall,
<PAGE>
at its option, not be required to consummate the transactions
contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Keystone Trust's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's investment company
taxable income for all taxable periods ending on the Closing Date (computed
without regard to any deduction for dividends
<PAGE>
paid) and all of its net capital gains realized in all taxable periods ending on
the Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(D) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
<PAGE>
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of appropriate
officials of Keystone Trust responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that such unaudited
pro forma financial statements do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and Prospectus and
Proxy Statement were prepared based on the valuation of the
<PAGE>
Selling Fund's assets in accordance with the Trust's Declaration of Trust and
the Acquiring Fund's then current prospectus and statement of additional
information pursuant to procedures customarily utilized by the Acquiring Fund in
valuing its own assets; and
(e) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or to written estimates by Selling Fund's management
and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration Statement
and Prospectus and Proxy Statement, and inquiries of appropriate officials of
the Trust responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that such unaudited pro forma
financial statements do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder;
<PAGE>
(c) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(d) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received
from KPMG Peat Marwick LLP a letter addressed to the Acquiring Fund and the
Selling Fund, dated on the Closing Date in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation costs of the transaction.
<PAGE>
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, Keystone Trust, the Trust, the respective
Trustees or officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
This Agreement may be amended, modified, or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of the
Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant
<PAGE>
to paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of Keystone Trust, shall
be governed and construed in accordance with the laws of The Commonwealth of
Pennsylvania, without giving effect to the conflicts of laws provisions thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm, or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or employees of Keystone Trust personally, but bind only the
trust property of the Selling Fund, as provided in the Declaration of Trust of
Keystone Trust. The execution and delivery of this Agreement have been
authorized by the Trustees of Keystone Trust and signed by authorized officers
of Keystone Trust, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officers shall be deemed to
have been made by any of them individually or to impose any liability on any of
them
<PAGE>
personally, but shall bind only the trust property of the Selling Fund as
provided in the Declaration of Trust of Keystone Trust.
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN EQUITY TRUST
ON BEHALF OF EVERGREEN
BALANCED FUND
By:
Name:
Title:
KEYSTONE BALANCED FUND (K-1)
By:
Name:
Title:
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
EVERGREEN BALANCED FUND
a Series of
EVERGREEN INVESTMENT TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
and
KEYSTONE BALANCED FUND (K-1)
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
By and In Exchange For Shares of
EVERGREEN BALANCED FUND
a Series of
EVERGREEN EQUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Evergreen Balanced Fund
("Evergreen Balanced"), a series of Evergreen Investment Trust, and Keystone
Balanced Fund ("Keystone Balanced"), to Evergreen Balanced Fund, a series of the
Evergreen Equity Trust in exchange, as applicable, for Class Y, Class A, Class B
and Class C shares of beneficial interest, no par value, of Evergreen Balanced
Fund, consists of this cover page and the following described documents, each of
which is attached hereto and incorporated by reference herein:
(1) The Statement of Additional Information of Evergreen
Balanced dated April 1, 1997 as supplemented;
(2) The Statement of Additional Information of Keystone
Balanced dated September 2, 1997;
<PAGE>
(3) Annual Report of Evergreen Balanced for the fiscal
period ended March 31, 1997;
(4) Annual Report of Keystone Balanced for the year
ended June 30, 1997; and
(5) Pro-Forma Combining Financial Statements (unaudited) dated
June 30, 1997.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Balanced Fund, Evergreen Balanced and Keystone Balanced
dated November 14, 1997. A copy of the Prospectus/Proxy Statement may be
obtained without charge by calling or writing to Evergreen Balanced Fund,
Evergreen Balanced or Keystone Balanced at the telephone numbers or addresses
set forth above.
The date of this Statement of Additional Information is November 14,
1997.
<PAGE>
EVERGREEN BALANCED FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
EVERGREEN KEYSTONE GROWTH AND INCOME AND BALANCED FUNDS
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1997
AS AMENDED JULY 1, 1997
Growth and Income Funds
Evergreen Growth and Income Fund ("Growth and Income")
Evergreen Income and Growth Fund (formerly Evergreen Total Return Fund)
("Income and Growth")
Evergreen Small Cap Equity Income Fund ("Small Cap")
Evergreen Utility Fund ("Utility")
Evergreen Value Fund ("Value")
Keystone Fund for Total Return ("Total Return")
Balanced Funds
Evergreen Foundation Fund ("Foundation")
Evergreen Tax Strategic Foundation Fund ("Tax Strategic")
Evergreen American Retirement Fund ("American Retirement")
Evergreen Balanced Fund ("Balanced")
This Statement of Additional Information pertains to all classes of
shares of the Funds listed above. It is not a prospectus and should be read in
conjunction with the Prospectus dated April 1, 1997 for the Growth and Income
Funds and July 1, 1997 for the Balanced Funds, for the specific Fund in which
you are making orcontemplating an investment. The Evergreen Keystone Growth and
Income and Balanced Funds are offered through four separate prospectuses: one
offering Class A, Class B and Class C shares and a separate prospectus offering
Class Y shares of Growth and Income, Income and Growth, Small Cap, Utility,
Value and Total Return; and one offering Class A, Class B and Class C shares and
a separate prospectus offering Class Y shares of Foundation, Tax Strategic,
American Retirement and Balanced.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Investment Objectives and Policies.......................................3
Investment Restrictions..................................................7
Non-Fundamental Operating Policies......................................15
Certain Risk Considerations.............................................15
Management..............................................................16
Trustees ...............................................................16
Investment Advisers.....................................................28
Distribution Plans......................................................33
Allocation of Brokerage.................................................37
Additional Tax Information..............................................40
Net Asset Value.........................................................43
Purchase of Shares......................................................44
General Information about the Funds.....................................55
Performance Information.................................................56
General ...............................................................62
Financial Statements....................................................62
Appendix "A"............................................................64
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
(SEE ALSO "DESCRIPTION OF THE FUNDS - INVESTMENT OBJECTIVES
AND POLICIES" IN EACH FUND'S PROSPECTUS)
- --------------------------------------------------------------------------------
The investment objective(s) of each Fund and a description of the
securities in which each Fund may invest is set forth under "Description of the
Funds-Investment Objectives and Policies" in the relevant Prospectus. The
investment objectives are fundamental and cannot be changed without the approval
of shareholders. The following expands upon the discussion in the Prospectus
regarding certain investments of each Fund.
U.S. Government Securities (All Funds)
The types of U.S. government securities in which the Funds may invest
generally include direct obligations of the U.S. Treasury such as U. S. Treasury
bills, notes and bonds and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by:
(i) the full faith and credit of the U.S. Treasury;
(ii) the issuer's right to borrow from the U.S. Treasury;
(iii) the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
(iv) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive
financial support from the U.S. government are:
(i) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association.
Restricted and Illiquid Securities (All Funds)
Each Fund may invest in restricted and illiquid securities. The ability of
the Board of Trustees ("Trustees") to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange Commission
("SEC") Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for sale under the
Rule. The Funds which invest in Rule 144A securities believe that the Staff of
the SEC has left the question of determining the liquidity of all restricted
securities (eligible for resale under the Rule) for determination by the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
(i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace trades.
Restricted securities would generally be acquired either from institutional
investors who originally acquired the securities in private placements or
directly from the issuers of the securities in private placements. Restricted
securities and securities that are not readily marketable may sell at a discount
from the price they would bring if freely marketable.
When-Issued and Delayed Delivery Securities (Balanced, Tax Strategic,
Utility, Value and Total Return)
Securities purchased on a when-issued or delayed delivery basis are made to
secure what is considered to be an advantageous price or yield for a Fund. No
fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of a Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the transaction has
been settled. Balanced, Utility and Value do not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of their assets and Tax
Strategic's commitment to purchase when-issued securities will not exceed 25% of
the Fund's total assets. Total Return does not intend to invest more than 5% of
its net assets in when-issued or delayed delivery transactions.
Lending of Portfolio Securities (All Funds)
Each Fund may lend its portfolio securities to generate income and to
offset expenses. The collateral received when a Fund lends portfolio securities
must be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the lending Fund.
During the time portfolio securities are on loan, the borrower pays the Fund any
dividends or interest paid on such securities. Loans are subject to termination
at the option of the Fund or the borrower. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent collateral
to the borrower or placing broker. A Fund does not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote if
that were considered important with respect to the investment.
Reverse Repurchase Agreements (Small Cap, Utility, Value, Tax Strategic,
Balanced and Total Return)
Reverse repurchase agreements are similar to borrowing cash. In a
reverse repurchase agreement, a Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Options and Futures Transactions (All Funds except Balanced, American
Retirement and Tax Strategic)
Options which Balanced, Utility and Value trade must be listed on
national securities exchanges.
Purchasing Put and Call Options on Financial Futures Contracts
Balanced, Utility, Value and Total Return may purchase put and call
options on financial futures contracts (in the case of Utility and Value limited
to options on financial futures contracts for U.S. government securities).
Unlike entering directly into a futures contract, which requires the purchaser
to buy a financial instrument on a set date at an undetermined price, the
purchase of a put option on a futures contract entitles (but does not obligate)
its purchaser to decide on or before a future date whether to assume a short
position at the specified price.
A Fund may purchase put and call options on futures to protect
portfolio securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related futures contracts
will also decrease in value and the put option will increase in value. In such
an event, a Fund will normally close out its option by selling an identical put
option. If the hedge is successful, the proceeds received by the Fund upon the
sale of the put option plus the realized gain offsets the decrease in value of
the hedged securities.
Alternately, a Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an option,
the option will expire on the date provided in the option contract, and only the
premium paid for the contract will be lost.
Purchasing Options
Balanced, Utility, Value and Total Return may purchase both put and
call options on their portfolio securities. These options will be used as a
hedge to attempt to protect securities which a Fund holds or will be purchasing
against decreases or increases in value. A Fund may purchase put and call
options for the purpose of offsetting previously written put and call options of
the same series. If the Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, the Fund will not be able to
sell the underlying securities or dispose of assets held in a segregated account
until the options expire or are exercised.
Balanced, Utility, Value and Total Return intend to purchase put and
call options on currency and other financial futures contracts for hedging
purposes. A put option purchased by a Fund would give it the right to assume a
position as the seller of a futures contract. A call option purchased by the
Fund would give it the right to assume a position as the purchaser of a futures
contract. The purchase of an option on a futures contract requires the Fund to
pay a premium. In exchange for the premium, the Fund becomes entitled to
exercise the benefits, if any, provided by the futures contract, but is not
required to take any action under the contract. If the option cannot be
exercised profitably before it expires, the Fund's loss will be limited to the
amount of the premium and any transaction costs.
Utility and Value currently do not intend to invest more than 5% of
their net assets in options transactions. Total Return will not purchase a put
option if, as a result of such purchase, more than 10% of its total assets would
be invested in premiums for such option.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, a Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve the
borrowing of funds by a Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, a Fund
will mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
Balanced will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss on
those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, the Fund will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
Income and Growth and Growth and Income may write covered call options
to a limited extent on their portfolio securities ("covered options") in an
attempt to earn additional income. A Fund will write only covered call option
contracts and will receive premium income from the writing of such contracts.
Income and Growth and Growth and Income may purchase call options to close out a
previously written call option. In order to do so, the Fund will make a "closing
purchase transaction" -- the purchase of a call option on the same security with
the same exercise price and expiration date as the call option which it has
previously written. A Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. If an option is exercised, a Fund
realizes a long-term or short-term gain or loss from the sale of the underlying
security and the proceeds of the sale are increased by the premium originally
received.
Junk Bonds (Growth and Income and Total Return)
Consistent with its strategy of investing in "undervalued" securities,
Growth and Income and Total Return may invest in lower medium and low-quality
bonds also known as "junk bonds" and may also purchase bonds in default if, in
the opinion of the Fund's investment adviser, there is significant potential for
capital appreciation. Total Return may invest without limit in debt securities
which are rated below investment grade. Growth and Income, however, will not
invest more than 5% of its total assets in debt securities which are rated below
investment grade. These bonds are regarded as speculative with respect to the
issuer's continuing ability to meet principal and interest payments. High yield
bonds may be more susceptible to real or perceived adverse economic and
competitive industry conditions than investment grade bonds. A projection of an
economic downturn, or higher interest rates, for example, could cause a decline
in high yield bond prices because such events could lessen the ability of highly
leveraged companies to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high yield bonds may
be less liquid than the market for higher grade bonds, which can adversely
affect the ability to dispose of such securities.
Variable and Floating Rate Securities (Foundation and Tax Strategic)
The terms of variable and floating rate instruments provide for the
interest rate to be adjusted according to a formula on certain predetermined
dates. Variable and floating rate instruments that are repayable on demand at a
future date are deemed to have a maturity equal to the time remaining until the
principal will be received on the assumption that the demand feature is
exercised on the earliest possible date. For the purposes of evaluating the
interest-rate sensitivity of a Fund, variable and floating rate instruments are
deemed to have a maturity equal to the period remaining until the next
interest-rate readjustment. For the purposes of evaluating the credit risks of
variable and floating rate instruments, these instruments are deemed to have a
maturity equal to the time remaining until the earliest date the Fund is
entitled to demand repayment of principal. Foundation may invest no more than 5%
of its total assets, at the time of the investment in question, in variable and
floating rate securities. Tax Strategic will limit the value of its investments
in any floating or variable rate securities which are not readily marketable and
in all other not readily marketable securities to 5% or less of its net assets.
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INVESTMENT RESTRICTIONS
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FUNDAMENTAL INVESTMENT RESTRICTIONS
Except as noted, the investment restrictions set forth below are
fundamental and may not be changed with respect to each Fund without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
Where an asterisk (*) appears after a Fund's name, the relevant policy is
non-fundamental with respect to that Fund and may be changed by the Fund's
investment adviser without shareholder approval, subject to review and approval
by the Trustees. As used in this Statement of Additional Information and in the
Prospectus, "a majority of the outstanding voting securities of the Fund" means
the lesser of (1) the holders of more than 50% of the outstanding shares of
beneficial interest of the Fund or (2) 67% of the shares present if more than
50% of the shares are present at a meeting in person or by proxy.
1. CONCENTRATION OF ASSETS IN ANY ONE ISSUER
Neither Growth and Income nor Income and Growth may invest more than 5% of
their net assets, at the time of the investment in question, in the securities
of any one issuer other than the U.S. government and its agencies or
instrumentalities.
American Retirement may not invest more than 5% of its total assets, at the
time of the investment in question, in the securities of any one issuer other
than the U.S. government and its agencies or instrumentalities.
None of Balanced, Foundation, Small Cap, Utility, Value or Total Return may
invest more than 5% of its total assets, at the time of the investment in
question, in the securities of any one issuer other than the U.S. government and
its agencies or instrumentalities, except that up to 25% of the value of a
Fund's total assets may be invested without regard to such 5% limitation.
Tax Strategic may not invest more than 5% of its total assets, at the
time of the investment in question, in the securities of any one issuer other
than the U.S. government and its agencies or instrumentalities, except that up
to 25% of the value of the Fund's total assets may be invested without regard to
such 5% limitation. For this purpose each political subdivision, agency, or
instrumentality and each multi-state agency of which a state is a member, and
each public authority which issues industrial development bonds on behalf of a
private entity, will be regarded as a separate issuer for determining the
diversification of the Fund's portfolio.
2. TEN PERCENT LIMITATION ON SECURITIES OF ANY ONE ISSUER
None of American Retirement, Foundation, Small Cap, Growth and Income
or Income and Growth may purchase more than 10% of any class of securities of
any one issuer other than the U.S.
government and its agencies or instrumentalities.
Neither Value nor Utility may purchase more than 10% of the outstanding
voting securities of any one issuer.
Neither Tax Strategic nor Total Return may purchase more than 10% of
the voting securities of any one issuer other than the U.S. government and its
agencies or instrumentalities.
3. INVESTMENT FOR PURPOSES OF CONTROL OR MANAGEMENT
None of American Retirement, Foundation, Growth and Income, Small Cap*,
Tax Strategic*, Income and Growth, Utility*, Value or Total Return may invest in
companies for the purpose of exercising control or management.
4. PURCHASE OF SECURITIES ON MARGIN
None of American Retirement, Balanced, Foundation, Growth and Income,
Small Cap*, Tax Strategic*, Income and Growth, Utility, Value or Total Return
may purchase securities on margin, except that each Fund may obtain such
short-term credits as may be necessary for the clearance of transactions. A
deposit or payment by a Fund of initial or variation margin in connection with
financial futures contracts or related options transactions is not considered
the purchase of a security on margin.
5. UNSEASONED ISSUERS
Neither American Retirement nor Foundation may invest in the securities
of unseasoned issuers that have been in continuous operation for less than three
years, including operating periods of their predecessors.
None of Income and Growth, Value*, Utility* or Total Return may invest
more than 5% of its total assets in securities of unseasoned issuers that have
been in continuous operation for less than three years, including operating
periods of their predecessors.
None of Growth and Income, Small Cap* and Tax Strategic* may invest
more than 15% of its total assets (10% of total net assets in the case of Growth
and Income) in securities of unseasoned issuers that have been in continuous
operation for less than three years, including operating periods of their
predecessors.
6. UNDERWRITING
American Retirement, Foundation, Growth and Income, Small Cap, Tax
Strategic, Income and Growth, Balanced, Utility, Value and Total Return will not
underwrite any issue of securities except as they may be deemed an underwriter
under the Securities Act of 1933 in connection with the sale of securities in
accordance with their investment objectives, policies and limitations.
7. INTERESTS IN OIL, GAS OR OTHER MINERAL EXPLORATION OR DEVELOPMENT
PROGRAMS.
None of American Retirement, Foundation, Growth and Income, Small Cap, Tax
Strategic or Income and Growth may purchase, sell or invest in interests in oil,
gas or other mineral exploration or development programs.
Neither Balanced* nor Utility* will purchase interests in oil, gas or
other mineral exploration or development programs or leases, although each Fund
may purchase the securities of other issuers which invest in or sponsor such
programs.
Value will not purchase interests in oil, gas or other mineral
exploration or development programs or leases, although it may purchase the
publicly traded securities of companies engaged in such activities.
8. CONCENTRATION IN ANY ONE INDUSTRY
Neither Growth and Income nor Income and Growth may concentrate its
investments in any one industry, except that each Fund may invest up to 25% of
its total net assets in any one industry.
None of American Retirement, Foundation, Small Cap and Tax Strategic
may invest 25% or more of its total assets in the securities of issuers
conducting their principal business activities in any one industry; provided,
that this limitation shall not apply (i) with respect to each Fund, to
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities, or (ii) with respect to Tax Strategic, to municipal
securities. For purposes of this restriction, utility companies, gas, electric,
water and telephone companies will be considered separate industries.
Balanced and Value will not invest 25% or more of the value of their
total assets in any one industry except Balanced may invest more than 25% and
Value may invest 25% or more of its total assets in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
Utility will not invest more than 25% of its total assets (valued at
the time of investment) in securities of companies engaged principally in any
one industry other than the utilities industry, except that this restriction
does not apply to cash or cash items and securities issued or guaranteed by the
U.S.
government, its agencies or instrumentalities.
Total Return will not purchase any security (other than U.S. government
securities) of any issuer if as a result more than 25% of its total assets would
be invested in a single industry; except that (i) there is no restriction with
respect to obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities; (ii) wholly-owned finance companies will be considered to
be in the industries of their parents if their activities are primarily related
to financing the activities of the parents; (iii) the industry classification of
utilities will be determined according to their services (for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry); and (iv) the industry classification of medically related industries
will be determined according to their services (for example, management,
hospital supply, medical equipment and pharmaceuticals will each be considered a
separate industry).
9. WARRANTS
None of American Retirement, Growth and Income, Income and Growth, Small
Cap*, Foundation or Tax Strategic* may invest more than 5% of its net assets in
warrants and, of this amount, no more than 2% of each Fund's net assets may be
invested in warrants that are listed on neither the New York nor the American
Stock Exchange.
Utility* and Value* will not invest more than 5% of their net assets in
warrants, including those acquired in units or attached to other securities. For
purposes of this restriction, warrants acquired by the Funds in units or
attached to securities may be deemed to be without value.
10. OWNERSHIP BY TRUSTEES/OFFICERS
None of American Retirement, Balanced*, Foundation, Growth and Income,
Small Cap*, Tax Strategic*, Income and Growth, Utility* or Value* may purchase
or retain the securities of any issuer if (i) one or more officers or Trustees
of a Fund or its investment adviser individually owns or would own, directly or
beneficially, more than 1/2 of 1% of the securities of such issuer, and (ii) in
the aggregate, such persons own or would own, directly or beneficially, more
than 5% of such securities.
Portfolio securities of any Fund may not be purchased from or sold or
loaned to its adviser or any affiliate thereof, or any of their directors,
officers or employees.
11. SHORT SALES
Neither American Retirement nor Foundation may make short sales of
securities unless, at the time of each such sale and thereafter while a short
position exists, each Fund owns the securities sold or securities convertible
into or carrying rights to acquire such securities.
None of Growth and Income, Tax Strategic* and Income and Growth may
make short sales of securities unless, at the time of each such sale and
thereafter while a short position exists, each Fund owns an equal amount of
securities of the same issue or owns securities which, without payment by the
Fund of any consideration, are convertible into, or are exchangeable for, an
equal amount of securities of the same issue.
Small Cap,* may not make short sales of securities unless, at the time
of each such sale and thereafter while a short position exists, each Fund owns
an equal amount of securities of the same issue or owns securities which,
without payment by the Fund of any consideration, are convertible into, or are
exchangeable for, an equal amount of securities of the same issue (and provided
that transactions in futures contracts and options are not deemed to constitute
selling securities short).
Neither Balanced nor Total Return will make short sales of securities
or maintain a short position, unless at all times when a short position is open
it owns an equal amount of such securities or of securities which, without
payment of any further consideration are convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the securities sold
short. With respect to Balanced, the use of short sales will allow the Fund to
retain certain bonds in its portfolio longer than it would without such sales.
To the extent that the Fund receives the current income produced by such bonds
for a longer period than it might otherwise, the Fund's investment objective is
furthered.
Utility and Value will not sell any securities short.
12. LENDING OF FUNDS AND SECURITIES
Neither Small Cap nor Tax Strategic may lend its funds to other
persons, except through the purchase of a portion of an issue of debt securities
publicly distributed or the entering into of repurchase agreements.
None of American Retirement, Foundation, Growth and Income and Income and
Growth may lend its funds to other persons, except through the purchase of a
portion of an issue of debt securities publicly distributed.
None of Foundation, Small Cap or Tax Strategic, may lend its portfolio
securities, unless the borrower is a broker, dealer or financial institution
that pledges and maintains collateral with the Fund consisting of cash or
securities issued or guaranteed by the U.S. government having a value at all
times not less than 100% of the current market value of the loaned securities,
including accrued interest, provided that the aggregate amount of such loans
shall not exceed 30% of the Fund's total assets.
Neither American Retirement or Growth and Income may lend its portfolio
securities, unless the borrower is a broker, dealer or financial institution
that pledges and maintains collateral with the Fund consisting of cash or
securities issued or guaranteed by the U.S. government having a value at all
times not less than 100% of the value of the loaned securities (100% of the
current market value for American Retirement), provided that the aggregate
amount of such loans shall not exceed 30% of the Fund's net assets.
Income and Growth may not lend its portfolio securities, unless the
borrower is a broker, dealer or financial institution that pledges and maintains
collateral with the Fund consisting of cash, letters of credit or securities
issued or guaranteed by the U.S. government having a value at all times not less
than 100% of the current market value of the loaned securities (100% of the
value of the loaned securities for Income and Growth), including accrued
interest, provided that the aggregate amount of such loans shall not exceed 30%
of the Fund's net assets.
Balanced will not lend any of its assets except portfolio securities
in accordance with its investment objective, policies and limitations.
Utility will not lend any of its assets, except portfolio securities up
to 15% of the value of its total assets. This does not prevent the Fund from
purchasing or holding corporate or government bonds, debentures, notes,
certificates of indebtedness or other debt securities of an issuer, repurchase
agreements, or other transactions which are permitted by the Fund's investment
objectives and policies or the Declaration of Trust governing the Fund.
Value will not lend any of its assets except that it may purchase or
hold corporate or government bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, repurchase agreements or
other transactions which are permitted by the Fund's investment objectives and
policies or the Declaration of Trust by which the Fund is governed or lend
portfolio securities valued at not more than 5% of its total assets to
broker-dealers.
Total Return will not make loans, except that the Fund may purchase or
hold debt securities consistent with its investment objective, lend portfolio
securities valued at not more than 15% of its total assets to broker-dealers and
enter into repurchase agreements.
13. COMMODITIES
Tax Strategic may not purchase, sell or invest in commodities, commodity
contracts or financial futures contracts.
Small Cap may not purchase, sell or invest in physical commodities unless
acquired as a result of ownership of securities or other instruments (but this
shall not prevent the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities).
None of American Retirement, Foundation, Growth and Income, Income and
Growth may purchase, sell or invest in commodities or commodity contracts.
None of Balanced, Utility, Value or Total Return will purchase or sell
commodities or commodity contracts; however, each Fund may enter into futures
contracts on financial instruments or currency and sell or buy options on such
contracts.
14. REAL ESTATE
Small Cap may not purchase or invest in real estate or interests in
real estate (but this shall not prevent the Fund from investing in marketable
securities issued by companies such as real estate investment trusts which deal
in real estate or interests therein).
None of American Retirement, Foundation, Growth and Income, Tax
Strategic or Income and Growth may purchase, sell or invest in real estate or
interests in real estate, except that (i) each Fund may purchase, sell or invest
in marketable securities of companies holding real estate or interests in real
estate, including real estate investment trusts, and (ii) Tax Strategic may
purchase, sell or invest in municipal securities or other debt securities
secured by real estate or interests therein.
None of Balanced, Utility or Value will buy or sell real estate
although each Fund may invest in securities of companies whose business involves
the purchase or sale of real estate or in securities which are secured by real
estate or interests in real estate. Neither Utility nor Value will invest in
limited partnership interests in real estate.
Total Return will not purchase or sell real estate, except that it may
purchase and sell securities secured by real estate and securities of companies
which invest in real estate.
15. BORROWING, SENIOR SECURITIES, REPURCHASE AGREEMENTS AND REVERSE
REPURCHASE AGREEMENTS
None of American Retirement, Foundation or Income and Growth may borrow
money except from banks as a temporary measure to facilitate redemption requests
which might otherwise require the untimely disposition of portfolio investments
and for extraordinary or emergency purposes (and, with respect to American
Retirement only, for leverage), provided that the aggregate amount of such
borrowings shall not exceed 5% of the value of the Fund's total net assets (5%
of total assets for American Retirement and Foundation) at the time of any such
borrowing, or mortgage, pledge or hypothecate its assets, except in an amount
sufficient to secure any such borrowing. Neither American Retirement nor
Foundation may issue senior securities, except as permitted by the Investment
Company Act of 1940. Neither Foundation nor American Retirement may enter into
repurchase agreements or reverse repurchase agreements.
Neither Small Cap nor Tax Strategic may borrow money, issue senior
securities or enter into reverse repurchase agreements, except for temporary or
emergency purposes, and not for leveraging, and then in amounts not in excess of
10% of the value of each Fund's total assets at the time of such borrowing; or
mortgage, pledge or hypothecate any assets except in connection with any such
borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of each Fund's total assets at the time of such
borrowing, provided that each of Small Cap, Tax Strategic will not purchase any
securities at any time when borrowings, including reverse repurchase agreements,
exceed 5% of the value of its total assets. Neither Fund will enter into reverse
repurchase agreements exceeding 5% of the value of its total assets.
Growth and Income may not borrow money except from banks as a temporary
measure for extraordinary or emergency purposes, provided that the aggregate
amount of such borrowings shall not exceed 5% of the value of the Fund's total
assets at the time of such borrowing; or mortgage, pledge or hypothecate its
assets, except in an amount not exceeding 15% of its assets taken at cost to
secure such borrowing. Growth and Income may not issue senior securities, as
defined in the Investment Company Act of 1940, except that this restriction
shall not be deemed to prohibit the Fund from (i) making any permitted
borrowings, mortgages or pledges, (ii) lending its portfolio securities, or
(iii) entering into permitted repurchase transactions.
Balanced and Utility will not issue senior securities except that each
Fund may borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts borrowed
and except to the extent a Fund may enter into futures contracts. The Funds will
not borrow money or engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary or emergency measure to
facilitate management of their portfolios by enabling them to, for example, meet
redemption requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. Balanced will not purchase any securities while
any borrowings are outstanding. Utility will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding. Neither Balanced
nor Utility will mortgage, pledge or hypothecate any assets except to secure
permitted borrowings. In these cases, Balanced and Utility may pledge assets
having a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets at the time of borrowing. Margin deposits for
the purchase and sale of financial futures contracts and related options and
segregation or collateral arrangements made in connection with options
activities are not deemed to be a pledge.
Value will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements as a temporary measure
for extraordinary or emergency purposes and then only in amounts not in excess
of 10% of the value of its total assets; provided that while borrowings exceed
5% of the Fund's total assets, any such borrowings will be repaid before
additional investments are made. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of its total assets are outstanding. The
Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage purposes. The Fund will not mortgage, pledge or hypothecate
any assets except to secure permitted borrowings. In these cases, the Fund may
pledge assets having a market value not exceeding the lesser of the dollar
amounts borrowed or 10% of the value of total assets at the time of borrowing.
Margin deposits for the purchase and sale of financial futures contracts and
related options and segregation or collateral arrangements made in connection
with options activities are not deemed to be a pledge.
Total Return will not borrow money or enter into reverse repurchase
agreements, except that the Fund may enter into reverse repurchase agreements or
borrow money from banks for temporary or emergency purposes in aggregate amounts
up to one-third of the value of the Fund's net assets; provided that while
borrowings from banks (not including reverse repurchase agreements) exceed 5% of
the Fund's net assets, any such borrowings will be repaid before additional
investments are made. The Fund will not pledge more than 15% of its net assets
to secure indebtedness; the purchase or sale of securities on a "when issued"
basis or collateral arrangement with respect to the writing of options on
securities are not deemed to be a pledge of assets. The Fund will not issue
senior securities; the purchase or sale of securities on a "when issued" basis
or collateral arrangement with respect to the writing of options on securities
are not deemed to be the issuance of a senior security.
16. JOINT TRADING
None of American Retirement, Foundation, Growth and Income, Small Cap,*
Tax Strategic,* or Income and Growth may participate on a joint or joint and
several basis in any trading account in any securities. (The "bunching of orders
or the purchase or sale of portfolio securities with its investment adviser or
accounts under its management to reduce brokerage commissions, to average prices
among them or to facilitate such transactions is not considered a trading
account in securities for purposes of this restriction).
17. OPTIONS
Foundation and Tax Strategic* may not write, purchase or sell put or
call options, or combinations thereof.
Neither Growth and Income nor Income and Growth may write, purchase or
sell put or call options, or combinations thereof, except that each Fund is
authorized to write covered call options on portfolio securities and to purchase
call options in closing purchase transactions, provided that (i) such options
are listed on a national securities exchange, (ii) the aggregate market value of
the underlying securities does not exceed 25% of the Fund's net assets, taken at
current market value on the date of any such writing, and (iii) the Fund retains
the underlying securities for so long as call options written against them make
the shares subject to transfer upon the exercise of any options.
American Retirement may not write, purchase or sell put or call
options, or combinations thereof, except that the Fund is authorized (i) to
write call options traded on a national securities exchange against no more than
15% of the value of the equity securities (including securities convertible into
equity securities) held in its portfolio, provided that the Fund owns the
optioned securities or securities convertible into or carrying rights to acquire
the optioned securities and (ii) to purchase call options in closing purchase
transactions.
Utility* will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of the Fund's
total assets would be invested in premiums on open put options. Utility* will
not write call options on securities unless securities are held in the Fund's
portfolio or unless the Fund is entitled to them in deliverable form without
further payment or after segregating cash in the amount of any further payment.
18. INVESTMENT IN EQUITY SECURITIES
American Retirement may not invest more than 75% of the value of its
total assets in equity securities (including securities convertible into equity
securities).
19. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Balanced*, Utility and Value will purchase securities of investment
companies only in open-market transactions involving customary broker's
commissions. However, these limitations are not applicable if the securities are
acquired in a merger, consolidation or acquisition of assets. It should be noted
that investment companies incur certain expenses such as management fees, and,
therefore, any investment by a Fund in shares of another investment company
would be subject to such duplicate expenses.
Total Return may not purchase securities of other investment companies,
except as part of a merger, consolidation, purchase or assets or similar
transaction.
Each other Fund may purchase the securities of other investment
companies, except to the extent such purchases are not permitted by applicable
law.
20. RESTRICTED SECURITIES
Balanced and Value will not invest more than 10% of their net assets in
securities subject to restrictions on resale under the Securities Act of 1933
(except for, in the case of Balanced, certain restricted securities which meet
criteria for liquidity established by the Trustees).
Utility* will not invest more than 10% of the value of its net assets
in securities subject to restrictions on resale under the Securities Act of
1933, except for commercial paper issued under Section 4(2) of the Securities
Act of 1933 and certain other restricted securities which meet the criteria for
liquidity as established by the Trustees.
- --------------------------------------------------------------------------------
NON-FUNDAMENTAL OPERATING POLICIES
- --------------------------------------------------------------------------------
Certain Funds have adopted additional non-fundamental operating
policies. Operating policies may be changed by the Board of Trustees without a
shareholder vote.
1. FUTURES AND OPTIONS TRANSACTIONS
Small Cap will not: (i) sell futures contracts, purchase put options or
write call options if, as a result, more than 30% of the Fund's total assets
would be hedged with futures and options under normal conditions; (ii) purchase
futures contracts or write put options if, as a result, the Fund's total
obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 30% of its total assets; or (iii) purchase call
options if, as a result, the current value of option premiums for options
purchased by the Fund would exceed 5% of the Fund's total assets. These
limitations do not apply to options attached to, or acquired or traded together
with their underlying securities, and do not apply to securities that
incorporate features similar to options.
2. ILLIQUID SECURITIES
None of American Retirement, Foundation, Growth and Income, Small Cap,
Tax Strategic or Income and Growth may invest more than 15% of its net assets in
illiquid securities and other securities which are not readily marketable,
including repurchase agreements which have a maturity of longer than seven days,
but excluding securities eligible for resale under Rule 144A of the Securities
Act of 1933, as amended, which the Trustees have determined to be liquid.
Balanced and Utility will not invest more than 10% (in the case of
Balanced) or 15% (in the case of Utility) of its net assets in illiquid
securities, including repurchase agreements providing for settlement in more
than seven days after notice and certain securities determined by the Trustees
not to be liquid and, in the case of Utility, in non-negotiable time deposits.
Except with respect to borrowing money (and with respect to Total
Return, including borrowing money), if a percentage limitation is adhered to at
the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
- --------------------------------------------------------------------------------
CERTAIN RISK CONSIDERATIONS
- --------------------------------------------------------------------------------
There can be no assurance that a Fund will achieve its investment
objective(s) and an investment in the Fund involves certain risks which are
described under "Description of the Funds - Investment Objectives and Policies"
in each Fund's Prospectus.
In addition, the ability of Tax Strategic to achieve its investment
objective is dependent on the continuing ability of the issuers of Municipal
Securities in which the Fund invests -- and of banks issuing letters of credit
backing such securities -- to meet their obligations with respect to the payment
of interest and principal when due. The ratings of Moody's Investors Service,
Standard & Poor's Ratings Service, a division of McGraw Hill Companies, Inc.,
and other nationally recognized rating organizations represent their opinions as
to the quality of Municipal Securities which they undertake to rate. Ratings are
not absolute standards of quality; consequently, Municipal Securities with the
same maturity, coupon, and rating may have different yields. There are
variations in Municipal Securities, both within a particular classification and
between classifications, resulting from numerous factors.
Unlike other types of investments, Municipal Securities have
traditionally not been subject to regulation by, or registration with, the SEC,
although there have been proposals which would provide for regulation in the
future.
The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in the rights of
holders of their obligations. In addition, there have been lawsuits challenging
the issuance of pollution control revenue bonds or the validity of their
issuance under state or federal law which could ultimately affect the validity
of those Municipal Securities or the tax-free nature of the interest thereon.
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
The Evergreen Keystone Funds consist of seventy-three mutual funds. Each
mutual fund is, or is a series of, a registered, open-end management company.
The Trustees and executive officers of each mutual fund, their ages,
addresses and principal occupations during the past five years are set forth
below:
- --------------------------------------------------------------------------------
TRUSTEES
- --------------------------------------------------------------------------------
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of the
Evergreen Keystone group of mutual funds and Trustee. Retired Vice President of
Lance Inc. (food manufacturing); Chairman of the Distribution Comm. Foundation
for the Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park, Charlotte,
NC -Trustee. Medical Director, U.S. Healthcare of Charlotte, North Carolina
since 1996; President, Primary Physician Care from 1990 to 1996.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street Suite 980, Charlotte,
NC-Trustee. Attorney, Law Offices of Michael S. Scofield since 1969.
Messrs. Howell, Salton and Scofield are Trustees of all seventy-three
investment companies.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC -Trustee. Sales
Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
THOMAS L. McVERRY (58), 4419 Parkview Drive, Charlotte, NC-Trustee.
Director of Carolina Cooperative Federal Credit Union since 1990 and Rexham
Corporation from 1988 to 1990; Vice President of Rexham Industries, Inc.
(diversified manufacturer) from 1989 to 1990; Vice President-Finance and
Resources, Rexham Corporation from 1979 to 1990.
WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NCTrustee. Partner in the law firm Holcomb and Pettit, P.A.
since
1990.
Messrs. McDonnell, McVerry and Pettit are Trustees of forty-three of the
investment companies (excluded are those established within the Evergreen
Variable Trust).
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL- Trustee.
Real estate developer and construction consultant since 1980; President of
Centrum Equities since 1987 and Centrum Properties, Inc. since 1980.
FOSTER BAM (70), Greenwich Plaza, Greenwich, CT- Trustee. Partner in the
law firm of Cummings and Lockwood since 1968.
Messrs. Ashkin and Bam are Trustees of forty-two of the investment
companies (excluded are those established within the Evergreen Variable Trust
and Evergreen Investment Trust).
FREDERICK AMLING (69) Trustee. Professor, Finance Department, George
Washington University; President, Amling & Company (investment advice); Member,
Board of Advisers, Credito Emilano (banking); and former Economics and Financial
Consultant, Riggs National Bank.
CHARLES A. AUSTIN III (61) Trustee. Investment Counselor to Appleton
Partners, Inc.; former Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment advice).
GEORGE S. BISSELL* (67) Chairman of the Keystone group of mutual funds, and
Trustee. Chairman of the Board and Trustee of Anatolia College; Trustee of
University Hospital (and Chairman of its Investment Committee); former Director
and Chairman of the Board of Hartwell Keystone; and former Chairman of the Board
and Chief Executive Officer of Keystone Investments, Inc..
EDWIN D. CAMPBELL (69) Trustee. Director and former Executive Vice President,
National Alliance of Business; former Vice President, Educational Testing
Services; former Dean, School of Business, Adelphi University; and former
Executive Director, Coalition of Essential Schools, Brown University.
CHARLES F. CHAPIN (67) Trustee. Former Group Vice President, Textron Corp.;
and former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and Executive
Vice President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund, and
The Phoenix Big Edge Series Fund; and former President, Morehouse College.
F. RAY KEYSER, JR. (69) Trustee and Advisor to the Boards of Trustees of
the Evergreen group of mutual funds. Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and Hitchcock Clinic;
Director, Vermont Yankee Nuclear Power Corporation, Vermont Electric Power
Company, Inc., Grand Trunk Corporation, Central Vermont Railway, Inc., S.K.I.
Ltd., Sherburne Corporation, Union Mutual Fire Insurance Company, New England
Guaranty Insurance Company, Inc., and the Investment Company Institute; former
Governor of Vermont.
DAVID M. RICHARDSON (55) Trustee. Executive Vice President, DHR
International, Inc. (executive recruitment); former Senior Vice President,
Boyden International Inc. (executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of the
Evergreen group of mutual funds. Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Trust Company of Connecticut, Hartford
Hospital, Old State House Association, and Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-
Oxford School and Greater Hartford YMCA; former Director, Executive Vice
President, and Vice Chairman of The Travelers Corporation.
ANDREW J. SIMONS (57) Trustee. Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; former President, Nassau County Bar Association;
former Associate Dean and Professor of Law, St. John's University School of Law.
Messrs. Amling, Austin, Bissell, Campbell, Chapin, Gifford, Keith, Keyser,
Richardson, Shima and Simons are Trustees or Directors of the thirty-one funds
in the Keystone group of mutual funds. Their addresses are 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
ROBERT J. JEFFRIES (74), 2118 New Bedford Drive, Sun City Center, Fl
Trustee Emeritus. Corporate consultant since 1967.
Mr. Jeffries has been serving as a Trustee Emeritus of eleven of the investment
companies since January 1, 1996 (excluded are Evergreen Variable Trust,
Evergreen Investment Trust, as well as the Keystone group of mutual funds).
EXECUTIVE OFFICERS
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY- President
and Treasurer. Consultant to BISYS Fund Services since 1996. Senior Managing
Director, Furman Selz LLC since 1992, Managing Director from 1984 to 1992.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH-Secretary. Senior Vice
President/Director of Administration and Regulatory Services, BISYS Fund
Services since April 1995. Vice President/Assistant General Counsel, Alliance
Capital Management from 1988 to 1995.
- --------
* Messrs. Pettit and Bissell may each be deemed to be an "interested person"
within the meaning of the Investment Company Act of 1940, as amended (the "1940
Act").
The officers of the Trusts are all officers and/or employees of The BISYS Group,
Inc. ("BISYS"), except for Mr. Pileggi, who is a consultant to BISYS. BISYS is
an affiliate of Evergreen Keystone Distributor, Inc., the distributor of each
Class of shares of each Fund.
The Funds do not pay any direct remuneration to any officer or Trustee who
is an "affiliated person" of either First Union National Bank, Evergreen Asset
Management Corp., Keystone Investment Management Company or their affiliates.
See "Investment Advisers". Currently, none of the Trustees is an "affiliated
person" as defined in the 1940 Act. The Trusts pay each Trustee who is not an
"affiliated person" an annual retainer and a fee per meeting attended, plus
expenses, as follows:
NAME OF TRUST/FUND ANNUAL RETAINER MEETING FEE
Income and Growth $ 5,500 $ 300
Growth and Income 500 100
The Evergreen American
Retirement Trust 1,000 100
American Retirement
Small Cap
Evergreen Foundation Trust
Foundation 500 100
Tax Strategic 100
Evergreen Investment Trust* 15,500 2,000
Balanced
Utility
Value
Keystone Total Return**
* The annual retainer and meeting fee paid by Evergreen Investment Trust to each
Trustee are allocated among its fourteen series based on assets.
** See Item No. 7 below.
In addition:
(1) The Chairman of the Board of the Evergreen group of mutual funds is paid an
annual retainer of $5,000, and the Chairman of the Audit Committee is paid an
annual retainer of $2,000. These retainers are allocated among all the funds in
the Evergreen group of mutual funds, based upon assets.
(2) Each member of the Audit Committee of the Evergreen group of mutual funds is
paid an annual retainer of $500.
(3) Each non-affiliated Trustee of the Evergreen group of mutual funds is paid a
fee of $500 for each special telephonic meeting in which he participates,
regardless of the number of Funds for which the meeting is called.
(4) Each non-affiliated Trustee of the Keystone group of mutual funds is paid a
fee of $300 for each special telephonic meeting in which he participates,
regardless of the number of Funds for which the meeting is called.
(5) Each non-affiliated Trustee of the Evergreen group of mutual funds is paid a
fee of $250 for each special Committee of the Board telephone conference call
meeting of one or more Funds in which he participates.
(6) The members of the Advisory Committee to the Boards of Trustees of the
Evergreen group of mutual funds are paid an annual retainer of $17,500 and a fee
of $2,200 for each meeting of the Boards of Directors or Trustees of the
Evergreen group of mutual funds attended.
(7) Each non-affiliated Trustee of the Keystone group of mutual funds is paid an
annual retainer of $30,000, and a fee of $1,200 for each meeting attended, which
fees are charged to the Funds as follows:
Annual Meeting
Retainer Fee
Keystone Global Opportunities Fund $ 500 $ 20
Keystone Global Resources and Development Fund $ 2,000 $ 80
Keystone Omega Fund $ 2,000 $ 80
Keystone Small Company Growth Fund II $ 500 $ 20
Keystone Strategic Income Fund $ 2,000 $ 80
Keystone Tax Free Income Fund $ 500 $ 20
Keystone Quality Bond Fund (B-1) $ 2,000 $ 80
Keystone Diversified Bond Fund (B-2) $ 2,500 $ 100
Keystone High Income Bond Fund (B-4) $ 2,500 $ 100
Keystone Balanced Fund (K-1) $ 3,000 $ 120
Keystone Strategic Growth Fund (K-2) $ 2,000 $ 80
Keystone Growth and Income Fund (S-1) $ 500 $ 20
Keystone Mid-Cap Growth Fund (S-3) $ 500 $ 20
Keystone Small Company Growth Fund (S-4) $ 3,000 $ 120
Keystone International Fund Inc. $ 500 $ 20
Keystone Precious Metals Holdings, Inc. $ 500 $ 20
Keystone Tax Free Fund $ 5,500 $ 220
(8) Each non-affiliated Trustee of the Keystone group of mutual funds is paid a
fee of $600 for attendance at each Committee meeting held on the same day as a
regular meeting.
(9) Each non-affiliated Trustee of the Keystone group of mutual funds is paid a
fee of $1,200 for attendance at each Committee meeting held on a non-meeting
day.
(10) Any individual who has been appointed as a Trustee Emeritus of one or more
funds in the Evergreen group of mutual funds is paid one-half of the annual
retainer fees that are payable to regular Trustees, and one-half of the meeting
fees for each meeting attended.
Set forth below for each of the Trustees is the aggregate compensation
(and expenses) paid to such Trustees by each Trust for the fiscal year ended
March 31, 1997 (fiscal year ended November 30, 1996 for Total Return and January
31, 1997 for Income and Growth).
Aggregate Compensation From Each Trust
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Name of Evergreen Evergreen Evergreen Evergreen Evergreen Keystone
Trustee Income Growth American Foundation Investment Fund for
and and Retirement Trust Trust Total
Growth Income Trust Return
Fund Fund
L.B.Ashkin $7,249 $1,108 $2,016 $1,764 $ 0 $0
F. Bam 6,949 1,021 1,816 1,564 0 0
R.J. Jeffries 3,239 409 800 550 0 0
J.S. Howell 7,410 1,187 2,032 2,034 26,007 0
Name of Evergreen Evergreen Evergreen Evergreen Evergreen Keystone
Trustee Income Growth American Foundation Investment Fund for
and and Retirement Trust Trust Total
Growth Income Trust Return
Fund Fund
G.M. 6,834 966 1,809 1,446 22,355 0
McDonnell
T.L. McVerry 7,238 1,111 2,017 1,790 24,902 0
W.W. Pettit 7,071 1,029 2,003 1,548 23,504 0
R.A. Salton 7,071 1,029 2,003 1,548 23,504 0
M.S. Scofield 7,071 1,029 2,003 1,548 23,504 0
F. Amling 0 0 0 0 0 0
C.A. Austin 0 0 0 0 0 0
G.S. Bissell 0 0 0 0 0 0
E.D. Campbell 0 0 0 0 0 0
C.F. Chapin 0 0 0 0 0 0
K.D. Gifford 0 0 0 0 0 0
L. Keith 0 0 0 0 0 0
F.R. Keyser 0 0 47 0 0 0
D.M. 0 0 0 0 0 0
Richardson
R.J. Shima 0 0 47 0 0 0
A.J. Simons 0 0 0 0 0 0
-------------------------------------
</TABLE>
Total Compensation From Trusts
and Fund Complex Paid To Trustees
J.S. Howell $77,400
R.A. Salton 71,200
M.S. Scofield 71,200
As of the date of this Statement of Additional Information, the officers
and Trustees of the Trusts owned as a group less than 1% of the outstanding
Class A, Class B, Class C or Class Y shares of any of the Funds.
Set forth below is information with respect to each person, who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of
each Fund's total outstanding shares and their aggregate ownership of the Fund's
total outstanding shares as of June 1, 1997.
<TABLE>
<CAPTION>
Name of % of
Name and Address Fund/Class No. of Shares Class
- ---------------- ---------- ------------- ------------
<S> <C> <C> <C>
MLPF&S for the sole benefit Balanced/C 7,441 24.29%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
A.G. Edwards & Sons Inc C/F Balanced/C 3,982 13.00%
Lottie Helen O'Leary
IRA Account
1139 Via Doble
Concord, CA 94521-4713
Fubs & Co. Febo Balanced/C 3,273 10.68%
FUNB NC F B O Goldston S. Bldg.
Supply Loan Acct.
Attn: Frank Pierce Loan Ofcr
PO Box 3008, 6th Floor
Raleigh, NC 27602-3008
Fubs & Co. Febo Balanced/C 2,194 7.16%
First Union National Bank-FL F/B/O
Leroy Selby, Jr. Loan Account
Attn: Carol Moening
Hwy 50 Orrice
Titusville, FL 32780
First Union National Bank Balanced/Y 30,977,338 54.21%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
First Union National Bank Balanced/Y 26,083,390 45.64%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
2
301 S. Tryon Street
Charlotte, NC 28288-0002
First Union Natl. Bank-FL C/F Income and 2,381 6.12%
Fred W. Cookson IRA Growth/C
6704 Willow Lane Braden Woods
Bradenton, FL 34202-9632
Fubs & Co. Febo Income and 2,570 6.61%
Last Stop Inc. Growth/C
8661 Colesville Rd #D149
Silver Spring, MD 20910-3933
MLPF&S for the sole benefit Growth and 172,906 22.97%
of its customers Income/C
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
First Union National Bank/EB/INT Growth and 4,296,089 19.69%
Cash Account Income/Y
Attn. Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG 1151
Charlotte, NC 29202-1911
First Union National Bank/EB/INT Growth and 11,712,074 53.69%
Reinvest Account Income/Y
Attn. Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG 1151
Charlotte, NC 29202-1911
First Union Natl Bank-VA C/F American Retirement/C 7,467 6.11%
Vincent A. Megna IRA
7017 Capitol View Dr.
McLean, VA 22101-2616
Charles Schwab & Co. Inc. American Retirement/Y 487,073 18.44%
Special Custody Account for the
Exclusive Benefit of Customers
Reinvest Account Mut Funds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
First Union National Bank/EB/INT American Retirement/Y 224,830 8.51%
Reinvest Account
Attn. Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG 1151
Charlotte, NC 29202-1911
MLPF&S for the sole benefit Small Cap/A 10,025 9.06%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Small Cap/A 6,037 5.46%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Small Cap/B 17,778 7.95%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Small Cap/C 11,918 5.33%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville FL 32246-6484
Nola Maddox Falcone Small Cap/Y 133,937 5.68%
70 Drake Road
Scarsdale, NY 10583-6447
Stephen A. Lieber Small Cap/Y 123,357 5.23%
1210 Greacen Point Rd.
Mamaroneck, NY 10543-4693
First Union National Bank/EB/INT Small Cap/Y 990,500 42.00%
Cash Account
Attn: Trust Operations Fund Group
401 S. Tryon Street
3rd Floor CMG 1151
Charlotte, NC 28202-1911
First Union National Bank/EB/INT Small Cap/Y 406,529 17.24%
Reinvest Account
Attn: Trust Operations Fund Group
401 S. Tryon Street
3rd Floor CMG 1151
Charlotte, NC 28202-1911
Citibank NA Small Cap/Y 375,596 15.93%
Delta Airlines Master Trust
308235
Joe Villella Citicorp Services
1410 N. Westshore Blvd. F15
Tampa, FL 33607-4519
Charles Schwab & Co. Inc. Foundation/A 1,065,330 7.71%
Special Custody Account For the
Exclusive Benefit of Customers
Reinvest Account Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
MLPF&S for the sole benefit Foundation/C 389,470 22.97%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville FL 32246-6484
Charles Schwab & Co. Inc. Foundation/Y 3,409,898 6.86%
Special Custody Account for
the Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104-4122
First Union National Bank/EB/INT Foundation/Y 4,589,976 9.23%
Cash Account
Attn: Trust Operations Fund Group
401 S. Tryon Street
3rd Floor CMG 1151
Charlotte, NC 29202-1911
First Union National Bank/EB/INT Foundation/Y 16,323,890 32.84%
Reinvest Account
Attn: Trust Operations Fund Group
401 S. Tryon Street
3rd Floor CMG 1151
Charlotte, NC 29202-1911
Mac & Co. Foundation/Y 6,561,937 13.20%
Aetna Retirement Services
Central Valuation Unit
Attn: Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
Fubs & Co. Febo Tax Strategic /A 78,331 5.35%
Ray D. Russenberger
PO Box 12063
Pensacola, FL 32590-2063
MLPF&S for the sole benefit Tax Strategic /C 150,045 40.70%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville FL 32246-6484
Fubs & Co. Febo Tax Strategic /C 21,749 5.90%
Hossein Golabachi and
Margot R. Golabachi
4848 Old Belair Lane
Grovetown, GA 30813-9729
Fubs & Co. Febo Tax Strategic /C 46,040 12.49%
Brenda Dykgraaf
9710 Wildoak Drive
Windermere, FL 34786-8335
Nola Maddox Falcone Tax Strategic /Y 102,130 9.01%
70 Drake Rd.
Scarsdale, NY 10583-6447
Constance E. Lieber Tax Strategic /Y 59,814 5.28%
1210 Greacen Point Rd
Mamaroneck, NY 10543-4613
Stephen A. Lieber Tax Strategic/Y 518,329 45.72%
1210 Greacen Point Rd
Mamaroneck, NY 10543-4613
Fubs & Co. Febo Utility/C 6,315 19.31%
Elsie B. Strom
Lewis F. Strom
906 Wells Street
Bennettsville, SC 29512-3240
Fubs & Co. Febo Utility/C 3,816 11.67%
Laura Alyce Hulbert
Ronald F. Hulbert
7900 Latchington Court
Charlotte, NC 28227-3190
Fubs & Co. Febo Utility/C 1,772 5.42%
Evelyn L. Smith
Creg Smith
3294 Myrtle Street
Hapeville, GA 30354-1418
Fubs & Co. Febo Utility/C 2,056 6.29%
Max Ray and
Jeralyne Ray
Route 2 Box 111
Greenmountain, NC 28740-9618
Fubs & Co. Febo Utility/C 2,156 6.59%
Thomas McKinney and
Lottie McKinney
170 Scott Blvd.
Tyrone, GA 30290-9767
Khalid Iqbal C/F Utility/Y 7,156 5.31%
Fatima Khalid Iqbal
Unif Gift Min Act KY
401 Bogle St.
Somerset, KY 42503-2870
First Union National Bank Utility/Y 47,610 35.33%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
First Union National Bank Utility/Y 72,869% 54.08%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
First Union National Bank-FL C/F Value/C 16,393 16.87%
Irving Decter IRA
418 Mariner Dr.
Jupiter, FL 33447
FUBS & Co. FEBO Value/C 6,253 6.44%
Clara Caudill
812 N. Ocean Blvd. #402
Pompano Beach, FL 33062-4014
First Union National Bank Value/Y 786,882 33.24%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
First Union National Bank Value/Y 112,241 65.51%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
MLPF&S for the sole benefit Key Tot Return/A 136,080 5.91%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Key Tot Return/B 438,214 10.14%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
SSN/TIN: 866168037 Key Tot Return/C 134,649 12.89%
Lavedna Ellingson
Douglas Ellingson TTEES
Lavedna Ellingson Marital Trust
U/A DTD 5-1-86
8510 McClintock
Tempe, AZ 85284-2527
MLPF&S for the sole benefit Key Tot Return/C 129,186 12.36%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Key Tot Return/C 132,989 5.31%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
- - ---------------------------------
</TABLE>
First Union National Bank ("FUNB") and its affiliates act in various
capacities for numerous accounts. As a result of its ownership on June 1, 1997
of 50.11% the shares of Small Cap, 35.17% of Growth and Income, 83.15% of
Balanced and 63.10% of Value, FUNB may be deemed to "control" these Funds as
that term is defined in the 1940 Act.
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
(SEE ALSO "MANAGEMENT OF THE FUND" IN EACH FUND'S PROSPECTUS)
- --------------------------------------------------------------------------------
The investment adviser of Income and Growth, Growth and Income,
American Retirement, Small Cap, Foundation and Tax Strategic is Evergreen Asset
Management Corp., a New York corporation, with offices at 2500 Westchester
Avenue, Purchase, New York ("Evergreen Asset" or the "Adviser"). Evergreen Asset
is owned by FUNB (the"Adviser") which, in turn, is a subsidiary of First Union
Corporation ("First Union"), a bank holding company headquartered in Charlotte,
North Carolina.
The investment adviser of Balanced, Utility and Value is FUNB which
provides investment advisory services through its Capital Management Group.
The investment adviser of Total Return is Keystone Investment Management
Company ("Keystone" or the "Adviser"), a Delaware corporation, with offices at
200 Berkeley Street, Boston, Massachusetts. Keystone is an indirectly owned
subsidiary of FUNB.
The Directors of Evergreen Asset are Richard K. Wagoner and Barbara I.
Colvin. The executive officers of Evergreen Asset are Stephen A. Lieber,
Chairman and Co-Chief Executive Officer, Nola Maddox Falcone, President and
Co-Chief Executive Officer, and Theodore J. Israel, Jr., Executive Vice
President. The Directors of Keystone are Donald McMullen, William M. Ennis, II
and Barbara I. Colvin. The executive officers of Keystone are Edward F. Godfrey,
Senior Vice President, Chief Financial Officer and Treasurer, and Rosemary D.
Van Antwerp, Senior Vice President, General
Counsel and Secretary.
On June 30, 1994, Evergreen Asset and Lieber & Company ("Lieber"), were
acquired by First Union through certain of its subsidiaries. Contemporaneously
with the acquisition, Income and Growth, Growth and Income, American Retirement,
Small Cap, Foundation and Tax Strategic entered into new investment advisory
agreements with Evergreen Asset and into distribution agreements with Evergreen
Keystone Distributor, Inc. (formerly known as Evergreen Funds Distributor, Inc.
(the "Distributor")), an affiliate of BISYS Fund Services. At that time,
Evergreen Asset also entered into new sub-advisory agreements with Lieber
pursuant to which Lieber provides certain services to Evergreen Asset in
connection with its duties as investment adviser. The new advisory and
sub-advisory agreements were approved by the shareholders of Income and Growth,
Growth and Income, American Retirement, Small Cap, Foundation and Tax Strategic
at their meetings held on June 23, 1994, and became effective on June 30, 1994.
On September 6, 1996, First Union and FUNB entered into an Agreement
and Plan of Acquisition and Merger (the "Merger") with Keystone Investments,
Inc. ("Keystone Investments"), the corporate parent of Keystone, which provided,
among other things, for the merger of Keystone Investments with and into a
wholly-owned subsidiary of FUNB. The Merger was consummated on December 11,
1996. Keystone continues to provide investment advisory services to the Keystone
Family of Funds. Contemporaneously with the Merger, Total Return entered into a
new investment advisory agreement with Keystone and into a principal
underwriting agreement with the Distributor.
Under the Investment Advisory Agreement with each Fund, each Adviser
has agreed to furnish reports, statistical and research services and
recommendations with respect to each Fund's portfolio of investments. In
addition, each Adviser provides office facilities to the Funds and performs a
variety of administrative services. Each Fund pays the cost of all of its other
expenses and liabilities, including expenses and liabilities incurred in
connection with maintaining their registrations under the Securities Act of
1933, as amended, and the 1940 Act, printing prospectuses (for existing
shareholders) as they are updated, state qualifications, mailings, brokerage,
custodian and stock transfer charges, printing, legal and auditing expenses,
expenses of shareholder meetings and reports to shareholders. Notwithstanding
the foregoing, each Adviser will pay the costs of printing and distributing
prospectuses used for prospective shareholders.
The method of computing the investment advisory fee for each Fund is
described in such Fund's Prospectus. The advisory fees paid by each Fund for the
three most recent fiscal periods reflected in its registration statement are set
forth below:
<TABLE>
<CAPTION>
BALANCED Three Months Year Ended Year Ended Year Ended
Ended 3/31/97 12/31/96 12/31/95 12/31/94
<S> <C> <C> <C> <C>
Advisory Fee $1,170,691 $4,765,912 $4,870,748 $4,621,512
========== ========== ============ =========
INCOME Year Ended Year Ended Year Ended
AND GROWTH 1/31/97 1/31/96 1/31/95
Advisory Fee $8,823,541 $9,343,195 $8,542,289
=========== ========== ==========
INCOME Year Ended Year Ended Year Ended
AND GROWTH 1/31/97 1/31/96 1/31/95
Expense $ 0 $ 53,576
Reimbursement
FOUNDATION Three Months Year Ended Year Ended Year Ended
Ended 3/31/97 12/31/96 12/31/95 12/31/94
Advisory Fee $3,246,270 $11,140,780 $5,387,186 $2,551,768
========= ========= ========= =========
Expense
Reimbursement $ 0 $ 0 $ 11,064
========= ========= =========
SMALL CAP Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $ 63,333 $ 45,397 $29,075
Waiver ($ 63,333) ($ 45,397) ($29,075)
------------ ------------- ------------
Net Advisory Fee $ 0 $ 0 $ 0
========= ======== ========
Expense
Reimbursement $133,406 $164,584 $63,704
-------------- --------------- ------------
UTILITY Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $725,733 $456,021 $153,458
Waiver ($396,483) ($299,028) ($152,038)
-------------- -------------- --------------
Net Advisory Fee $329,300 $156,993 $ 1,420
======== ======== ========
Expense
Reimbursement $ 0 $ 51,894 $106,957
---------------- --------------- ---------------
GROWTH AND INCOME Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $5,287,338 $1,332,685 $684,891
========= ========= =======
GROWTH AND INCOME Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Expense
Reimbursement $ 5,000 $ 38,106
----------------- ----------------
AMERICAN Three Months Year ended Year Ended Year Ended
RETIREMENT Ended 3/31/97 12/31/96 12/31/95 12/31/94
Advisory Fee $255,438 $549,949 $297,242 $292,628
Waiver $ 0 ($ 24,841)
------------- --------------
Net Advisory Fee $225,438 $525,108
========
Expense
Reimbursement $ 90,000 $ 3,400 $ 76,464
------------- --------------- -------------
TAX STRATEGIC Three Months Year Ended Year Ended Year Ended
Ended 3/31/97 12/31/96 12/31/95 12/31/94
Advisory Fee $143,945 $354,958 $140,386 $65,915
Waiver $ 0 ($ 90,551) ($96,975) ($65,915)
------------- ------------- ------------ -------------
Net Advisory Fee $143,945 $264,407 $43,411 $ 0
======= ======== ======= ========
Expense
Reimbursement $ 0 $ 11,339 $85,543 $ 3,777
------------ ----------- ------------
VALUE Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $6,950,730 $5,120,579 $3,850,673
TOTAL RETURN Year Ended Year Ended Year Ended
11/30/96 11/30/95 11/30/94
Advisory Fee $448,266 $300,290 $242,315
</TABLE>
Utility commenced operations on January 4, 1994 and, therefore, the
first year's figures set forth in the table above reflect for Utility investment
advisory fees paid for the period from commencement of operations through
December 31, 1994.
Expense Limitations
Evergreen Asset has voluntarily agreed to reimburse Small Cap to the
extent that any of the Fund's aggregate operating expenses (including the
Adviser's fee but excluding interest, taxes, brokerage commissions, Rule 12b-1
distribution fees and shareholder servicing fees and extraordinary expenses)
exceed 1.50% of its average net assets until such time as said Fund's net assets
reach $15 million.
Keystone has voluntarily agreed to limit Total Return's Class A expenses to
1.50% of the average daily net assets of Class A shares, such expense limitation
to be reevaluated on a calendar month basis and to be modified or eliminated in
the future at the discretion of Keystone.
The Investment Advisory Agreements are terminable, without the payment
of any penalty, on sixty days' written notice, by a vote of the holders of a
majority of each Fund's outstanding shares, or by a vote of a majority of each
Trust's Trustees or by the respective Adviser. The Investment Advisory
Agreements will automatically terminate in the event of their assignments. Each
Investment Advisory Agreement provides in substance that the Adviser shall not
be liable for any action or failure to act in accordance with its duties
thereunder in the absence of willful misfeasance, bad faith or gross negligence
on the part of the Adviser or of reckless disregard of its obligations
thereunder.
The Investment Advisory Agreements with respect to Income and Growth,
Growth and Income, American Retirement, Small Cap, Foundation and Tax Strategic
were approved by each Fund's shareholders on June 23, 1994, became effective on
June 30, 1994, and were last approved by the Trustees of each Trust on June 17,
1997.
The Investment Advisory Agreement with respect to Balanced, Utility and
Value dated February 28, 1985, and amended from time to time thereafter, was
last approved by the Trustees of Evergreen Investment Trust on June 17, 1997.
The Investment Advisory Agreement with respect to Total Return was
approved by the Fund's shareholders on December 9, 1996, and became effective on
December 11, 1996.
Each Investment Advisory Agreement will continue in effect from year to
year provided that its continuance is approved annually by a vote of a majority
of the Trustees of each Trust including a majority of those Trustees who are not
parties thereto or "interested persons" (as defined in the 1940 Act) of any such
party (the "Independent Trustees"), cast in person at a meeting duly called for
the purpose of voting on such approval or a majority of the outstanding voting
shares of each Fund.
Certain other clients of each Adviser may have investment objectives
and policies similar to those of the Funds. Each Adviser (including the
sub-adviser) may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients simultaneously
with a Fund. If transactions on behalf of more than one client during the same
period increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price or quantity. It
is the policy of each Adviser to allocate advisory recommendations and the
placing of orders in a manner which is deemed equitable by the Adviser to the
accounts involved, including the Funds. When two or more of the clients of the
Adviser (including one or more of the Funds) are purchasing or selling the same
security on a given day from the same broker-dealer, such transactions may be
averaged as to price.
Although the investment objectives of the Funds are not the same, and their
investmentdecisions are made independently of each other, they rely upon the
same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, each
Adviser attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to
permit purchase and sales transactions to be effected between each Fund and the
other registered investment companies for which Evergreen Asset, FUNB or
Keystone act as investment adviser or between the Fund and any advisory clients
of Evergreen Asset, FUNB, Keystone or Lieber. Each Fund may from time to time
engage in such transactions but only in accordance with these procedures and if
they are equitable to each participant and consistent with each participant's
investment objectives.
Prior to July 7, 1995, Federated Administrative Services, a subsidiary
of Federated Investors, provided legal, accounting and other administrative
personnel and support services to each of the portfolios of Evergreen Investment
Trust. The Trust paid a fee for such services at the following annual rate: .15%
on the first $250 million average daily net assets of the Trust; .125% on the
next $250 million; .10% on the next $250 million and .075% on assets in excess
of $250 million. For the period ended July 7, 1995, and the fiscal years ended
December 31, 1994 and 1993 Balanced incurred $392,991, $779,584 and $597,752,
respectively, in administrative service costs. For the period ended July 7,
1995, and the period from January 4, 1994 (commencement of operations) to
December 31, 1994, Utility incurred $10,384 and $16,382, respectively, in
administrative service costs, all of which were voluntarily waived. For the
period ended July 7, 1995, and for the fiscal years ended December 31, 1994 and
1993, Value incurred $374,216, $649,487, and $526,836, respectively, in
administrative service costs.
Since July 8, 1995, Evergreen Asset provided administrative services to
each of the portfolios of Evergreen Investment Trust for a fee based on the
average daily net assets of each fund administered by Evergreen Asset for which
Evergreen Asset or FUNB also served as investment adviser, calculated daily and
payable monthly at the following annual rates: .050% on the first $7 billion;
.035% on the next $3 billion; .030% on the next $5 billion; .020% on the next
$10 billion; .015% on the next $5 billion; and .010% on assets in excess of $30
billion. For the period from July 8, 1995 through December 31, 1995, and the
fiscal year ended December 31, 1996 (and for the three month period ended March
31, 1997 for Balanced), Balanced, Utility and Value incurred the following
administration costs: Balanced $283,139, $459,486, and $91,488, respectively;
Utility $39,330 and $70,215, respectively; and Value $323,050 and $670,060,
respectively.
BISYS Fund Services, an affiliate of the Distributor, serves as
sub-administrator to each Fund and is entitled to receive a fee from each Fund
calculated daily and payable monthly at an annual rate based on the aggregate
average daily net assets of the mutual funds administered by EKIS for which
FUNB, Evergreen Asset, or any affiliate of First Union National Bank also serves
as investment adviser, calculated in accordance with the following schedule:
.0100% on the first $7 billion; .0075% on the next $3 billion; .0050% on the
next $15 billion; and .0040% on assets in excess of $25 billion. The total
assets of the mutual funds administered by EKIS for which Evergreen Asset, FUNB
or Keystone serve as investment adviser were approximately $29 billion as of
March 31, 1997. Effective March 11, 1997, Evergreen Keystone Investment
Services, Inc. ("EKIS") began providing administrative services to each of the
portfolios of Evergreen Investment Trust at the same rates as described above.
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS AND AGREEMENTS
- --------------------------------------------------------------------------------
Reference is made to "Management of the Funds - Distribution Plans and
Agreements" in the Prospectus of each Fund for additional disclosure regarding
the Funds' distribution arrangements. Distribution fees are accrued daily and
paid monthly on the Class A, Class B Class and Class C shares and are charged as
class expenses, as accrued. The distribution fees attributable to the Class B
shares and Class C shares are designed to permit an investor to purchase such
shares through broker-dealers without the assessment of a front-end sales
charge, and, in the case of Class C shares, without the assessment of a
contingent deferred sales charge after the first year following the month of
purchase, while at the same time permitting the Distributor to compensate
broker-dealers in connection with the sale of such shares. In this regard, the
purpose and function of the combined contingent deferred sales charge and
distribution services fee on the Class B shares and the Class C shares are the
same as those of the front-end sales charge and distribution fee with respect to
the Class A shares in that in each case the sales charge and/or distribution fee
provide for the financing of the distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its Class A, Class B and Class C shares (each a
"Plan" and collectively, the "Plans"), the Treasurer of each Fund reports the
amounts expended under the Plans and the purposes for which such expenditures
were made to the Trustees of each Trust for their review on a quarterly basis.
Also, each Plan provides that the selection and nomination of the disinterested
Trustees are committed to the discretion of such disinterested Trustees then in
office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of each Trust or by vote
of the holders of a majority of the outstanding voting securities of that Class
and, in either case, by a majority of the Independent Trustees of the Trust who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related thereto.
The Plans permit the payment of fees to brokers and others for distribution
and shareholder-related administrative services and to broker-dealers,
depository institutions, financial intermediaries and administrators for
administrative services as to Class A, Class B and Class C shares. The Plans are
designed to (i) stimulate brokers to provide distribution and administrative
support services to each Fund and holders of Class A, Class B and Class C shares
and (ii) stimulate administrators to render administrative support services to
the Fund and holders of Class A, Class B and Class C shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to
providing office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding Class A, Class B and
Class C shares; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A, Class B and Class C shares.
In addition to the Plans, Balanced, Utility and Value have each adopted
a Shareholder Services Plan whereby shareholder servicing agents may receive
fees from the Fund for providing services which include, but are not limited to,
distributing prospectuses and other information, providing shareholder
assistance, and communicating or facilitating purchases and redemptions of Class
B and Class C shares of the Fund.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of a Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. With respect to Balanced,
Utility, and Value, amendments to the Shareholder Services Plan require a
majority vote of the disinterested Trustees but do not require a shareholders
vote. Any Plan, Shareholder Services Plan or Distribution Agreement may be
terminated (i) by a Fund without penalty at any time by a majority vote of the
holders of the outstanding voting securities of the Fund, voting separately by
Class or by a majority vote of the disinterested Trustees, or (ii) by the
Distributor. To terminate any Distribution Agreement, any party must give the
other parties 60 days' written notice; to terminate a Plan only, the Fund need
give no notice to the Distributor. Any Distribution Agreement will terminate
automatically in the event of its assignment.
Income and Growth, Growth and Income, American Retirement, Small Cap,
Foundation, Tax Strategic and Total Return incurred the following Distribution
Plans and Shareholder Services Plan fees:
Distribution Fees:
INCOME AND GROWTH. For the fiscal period from January 3, 1995 (commencement
of class operations) through January 31, 1995, the fiscal years ended January
31, 1996 and 1997, $7, $4,915 and $18,106 on behalf of its Class A shares, $126,
$46,636 and $189,323, respectively on behalf of its Class B shares, and $7,
$1,516 and $6,382, respectively on behalf of its Class C shares.
GROWTH AND INCOME. For the fiscal period from January 3, 1995 (commencement
of class operations) through December 31, 1995 and the fiscal year ended
December 31, 1996, $22,055 and $122,222, respectively, on behalf of its Class A
shares, $159,114 and $934,314, respectively, on behalf of its Class B shares,
and $6,902 and $36,055, respectively, on behalf of its Class C shares.
AMERICAN RETIREMENT. For the fiscal period from January 3, 1995
(commencement of class operations) through December 31, 1995, the fiscal year
ended December 31, 1996 and the three month period ended March 31, 1997, $659,
$14,426 and $7,950, respectively, on behalf of its Class A shares; $9,137,
$199,829 and $124,370, respectively, on behalf of its Class B shares; and $187,
$5,713 and $2,995, respectively, on behalf of its Class C shares.
SMALL CAP. For the fiscal period from January 3, 1995 (commencement of
class operations) through December 31, 1995 and the fiscal year ended December
31, 1996, $340 and $618, respectively, on behalf of its Class A shares, $1,298
and $3,199, respectively, on behalf of its Class B shares, and $111 and $267,
respectively, on behalf of its Class C shares.
FOUNDATION. For the fiscal period from January 3, 1995 (commencement of
class operations) through December 31, 1995, the fiscal year ended December 31,
1996 and the three month period ended March 31, 1997, $116,677, $414,289 and
$135,502, respectively on behalf of its Class A shares; $972,541, $3,487,899 and
$1,113,659, respectively, on behalf of its Class B shares; and $37,823, $152,488
and $51,839, respectively, on behalf of its Class C shares.
TAX STRATEGIC. For the fiscal period from January 3, 1995 (commencement of
class operations) through December 31, 1995, the fiscal year ended December 31,
1996 and the three month period ended March 31, 1997, $2,582, $16,426 and
$8,004, respectively, on behalf of its Class A shares; $21,725, $131,282 and
$62,195, respectively, on behalf of its Class B shares; and $1,292, $16,493 and
$8,824, respectively, on behalf of its Class C shares.
TOTAL RETURN. For the fiscal years ended November 30, 1994, 1995 and 1996,
$44,889, $101,222 and $195,178, respectively, on behalf of its Class B shares,
and $36,580, $60,201 and $84,812, respectively, on behalf of its Class C shares.
Shareholder Services Fees:
INCOME AND GROWTH. For the fiscal period from January 3, 1995 (commencement
of class operations) through January 31, 1995, the fiscal years ended January
31, 1996 and 1997, shareholder services fees on behalf of $42, $15,546 and
$63,108, respectively, on behalf of its Class B shares, and $3, $505 and $2,127,
respectively, on behalf of its Class C shares.
GROWTH AND INCOME. For the fiscal period from January 3, 1995 (commencement
of class operations) through December 31, 1995 and the fiscal year ended
December 31, 1996, shareholder services fees of $53,139 and $311,235 on behalf
of its Class B shares, and $2,301 and $12,018, respectively, on behalf of its
Class C shares.
AMERICAN RETIREMENT. For the fiscal period from January 3, 1995
(commencement of class operations) through December 31, 1995, the fiscal year
ended December 31, 1996 and the three month period ended March 31, 1997, $3,045,
$66,610 and $41,457, respectively, on behalf of its Class B shares; and $62,
$1,904 and $998, respectively, on behalf of its Class C shares.
SMALL CAP. For the fiscal period from January 3, 1995 (commencement of
class operations) through December 31, 1995 and the fiscal year ended December
31, 1996, $433 and $1,066, respectively, on behalf of its Class B shares, and
$37 and $89, respectively, on behalf of its Class C shares.
FOUNDATION. For the fiscal period from January 3, 1995 (commencement of
class operations) through December 31, 1995, the fiscal year ended December 31,
1996 and the three month period ended March 31, 1997, $324,180, $1,162,633 and
$371,220, respectively, on behalf of its Class B shares; and $12,608, $50,829
and $17,280, respectively, on behalf of its Class C shares.
TAX STRATEGIC. For the fiscal period from January 3, 1995 (commencement of
class operations)through December 31, 1995, the fiscal year ended December 31,
1996 and the three month period ended March 31, 1997 , $7,242, $43,761 and
$20,732, respectively, on behalf of its Class B shares, and $431, $5,498 and
$2,941, respectively, on behalf of its Class C shares.
TOTAL RETURN. For the fiscal years ended November 30, 1994, 1995 and 1996,
$61,955, $61,454 and $75,270, respectively, on behalf of its Class A shares,
$14,587, $33,741, and $65,059, respectively, on behalf of Class B shares; and
$20,893, $20,066, and $28,183, respectively, on behalf of its Class C shares.
Balanced, Value and Utility incurred the following Distribution Services
Plans and Shareholder Services Plans fees:
Distribution Fees:
BALANCED. For the fiscal years ended December 31, 1994, 1995 and 1996 and
the three month period ended March 31, 1997, $102,621, $102,400, $107,023 and
$26,750, respectively, on behalf of Class A shares; and $670,202, $784,084,
$810,803 and $205,485, respectively, on behalf of Class B shares; for the period
from September 2, 1994 (commencement of operations) to December 31, 1994, and
the fiscal years ended December 31, 1995 and 1996 and the three month period
ended March 31, 1997, $310, $1,811, $1,883 and $710, respectively, on behalf of
Class C shares.
VALUE. For the fiscal years ended December 31, 1994, 1995 and 1996, $473,347,
$603,896 and $767,254, respectively, on behalf of Class A shares, and $621,330,
$916,221 and $1,255,600, respectively, on behalf of Class B shares; for the
period from September 2, 1994 (commencement of operations) to December 31, 1994,
and the fiscal years ended December 31, 1995 and 1996, $716, $4,798 and $8,706,
respectively, on behalf of Class C shares.
UTILITY. For the fiscal years ended December 31, 1994, 1995 and 1996, $9,658,
$133,582 and $252,753, respectively, on behalf of Class A shares, and $169,007,
$234,357 and $283,875, respectively, on behalf of Class B shares; for the period
from September 2, 1994 (commencement of operations) to December 31, 1994, and
the fiscal years ended December 31, 1995 and 1996, $232, $1,271 and $2,843,
respectively, on behalf of Class C shares.
Shareholder Services Plans fees:
BALANCED. For the fiscal years ended December 31, 1994, 1995 and 1996 and the
three month period ended March 31, 1997, $83,641, $261,361, $270,267 and
$68,495, respectively, on behalf of Class B shares, and $103, $604, $628 and
$237, respectively, on behalf of Class C shares.
VALUE. For the fiscal years ended December 31, 1994, 1995 and 1996, $83,225,
$305,407 and $418,533, respectively, on behalf of Class B shares; and $239,
$1,599 and $2,902, respectively, on behalf of Class C shares.
UTILITY. For the fiscal years ended December 31, 1994, 1995 and 1996, $24,141,
$78,119 and $94,625, respectively, on behalf of Class B shares; and $77, $424
and $948, respectively, on behalf of Class C shares.
- --------------------------------------------------------------------------------
ALLOCATION OF BROKERAGE
- --------------------------------------------------------------------------------
Decisions regarding each Fund's portfolio are made by its Adviser, subject
to the supervision and control of the Trustees. Orders for the purchase and sale
of securities and other investments are placed by employees of each Fund's
Adviser. In general, the same individuals perform the same functions for the
other funds managed by each Adviser. A Fund will not effect any brokerage
transactions with any broker or dealer affiliated directly or indirectly with
the Adviser unless such transactions are fair and reasonable, under the
circumstances, to the Fund's shareholders. Circumstances that may indicate that
such transactions are fair or reasonable include the frequency of such
transactions, the selection process and the commissions payable in connection
with such transactions.
A substantial portion of the transactions in equity securities for each
Fund will occur on domestic stock exchanges. Transactions on stock exchanges
involve the payment of brokerage commissions. In transactions on stock exchanges
in the United States, these commissions are negotiated, whereas on many foreign
stock exchanges these commissions are fixed. In the case of securities traded in
the foreign and domestic over-the-counter markets, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup.
Over-the-counter transactions will generally be placed directly with a principal
market maker, although the Fund may place an over-the-counter order with a
broker-dealer if a better price (including commission) and execution are
available.
It is anticipated that most purchase and sale transactions involving
fixed income securities will be with the issuer or an underwriter or with major
dealers in such securities acting as principals. Such transactions are normally
on a net basis and generally do not involve payment of brokerage commissions.
However, the cost of securities purchased from an underwriter usually includes a
commission paid by the issuer to the underwriter. Purchases or sales from
dealers will normally reflect the spread between bid and ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Fund shall be prompt execution at the most favorable
price. Each Adviser will also consider such factors as the price of the
securities and the size and difficulty of execution of the order. If these
objectives may be met with more than one firm, the Adviser will also consider
the availability of statistical and investment data and economic facts and
opinions helpful to the Fund. To the extent that receipt of these services for
which the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
Under Section 11(a) of the Securities Exchange Act of 1934, as amended,
and the rules adopted thereunder by the SEC, Lieber may be compensated for
effecting transactions in portfolio securities for a Fund on a national
securities exchange provided the conditions of the rules are met. Each Fund
advised by Evergreen Asset has entered into an agreement with Lieber authorizing
Lieber to retain compensation for brokerage services. In accordance with such
agreement, it is contemplated that Lieber, a member of the New York and American
Stock Exchanges, will, to the extent practicable, provide brokerage services to
Growth and Income, Income and Growth, American Retirement, Small Cap, Foundation
and Tax Strategic with respect to substantially all securities transactions
effected on the New York and American Stock Exchanges. In such transactions, the
Adviser will seek the best execution at the most favorable price while paying a
commission rate no higher than that offered to other clients of Lieber or that
which can be reasonably expected to be offered by an unaffiliated broker-dealer
having comparable execution capability in a similar transaction. However, no
Fund will engage in transactions in which Lieber would be a principal. While no
Fund advised by Evergreen Asset contemplates any ongoing arrangements with other
brokerage firms, brokerage business may be given from time to time to other
firms. In addition, the Trustees have adopted procedures pursuant to Rule 17e-1
under the 1940 Act to ensure that all brokerage transactions with Lieber, as an
affiliated broker-dealer, are fair and reasonable.
The Fund's Board of Trustees has determined that the Fund may consider
sales of Fund shares as a factor in the selection of brokers to execute
portfolio transactions, subject to the requirements of best execution described
above. The Fund expects that purchases and sales of securities will usually be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark-up or reflect a dealer's mark-down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable. Under its Investment
Advisory Agreement, Keystone is permitted to pay higher brokerage commissions
for brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone follows such a practice,
it will do so on a basis that is fair and equitable to the Total Return Fund.
Any profits from brokerage commissions accruing to Lieber as a result
of portfolio transactions for Growth and Income, Income and Growth, American
Retirement, Small Cap, Foundation and Tax Strategic will accrue to FUNB and to
its ultimate parent, First Union. The Investment Advisory Agreements do not
provide for a reduction of the Adviser's fee with respect to any Fund by the
amount of any profits earned by Lieber from brokerage commissions generated by
portfolio transactions of the Fund.
The following chart shows: (i) the brokerage commissions paid by each
Fund advised by Evergreen Asset during their last three fiscal years; (ii) the
amount and percentage thereof paid to Lieber; and (iii) the percentage of the
total dollar amount of all portfolio transactions with respect to which
commissions have been paid which were effected by Lieber:
<TABLE>
<CAPTION>
INCOME AND GROWTH Year Ended Year Ended Year Ended
1/31/97 1/31/96 1/31/95
<S> <C> <C> <C>
Total Brokerage $3,529,313 $3,255,068 $3,755,606
Commissions
Dollar Amount and % $2,835,293 $2,982,640 $3,465,900
paid to Lieber 80% 92% 92%
% of Transactions
Effected by Lieber 47% 90% 97%
FOUNDATION Three Months Year Ended Year Ended Year Ended
Ended 3/31/97 12/31/96 12/31/95 12/31/97
Total Brokerage $83,153 $689,724 $393,121 $282,250
Commissions
Dollar Amount and % $81,365 $680,252 $380,226 $ 276,985
paid to Lieber 98% 99% 98% 98%
% of Transactions
Effected by Lieber 97% 96% 97% 98%
SMALL CAP Year Ended Year Ended Period Ended
12/31/96 12/31/95 12/31/94
Total Brokerage $14,647 $5,968 $ 3,998
Commissions
Dollar Amount and % $13,246 $4,863 $ 3,618
paid to Lieber 90% 81% 90%
% of Transactions
Effected by Lieber 87% 77% 90%
GROWTH AND INCOME Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Total Brokerage $519,064 $210,923 $80,871
Commissions
Dollar Amount and % $429,888 $160,659 $71,721
paid to Lieber 83% 76% 89%
% of Transactions 78% 74% 88%
AMERICAN RETIREMENT Three Months Year Ended Year Ended Year Ended
Ended 3/31/97 12/31/96 12/31/95 12/31/94
Total Brokerage $14,54 $55,581 $57,216 $203,922
Commissions
Dollar Amount and % $11,925 $51,579 $53,276 $202,838
paid to Lieber 82% 93% 93% 99%
% of Transactions
Effected by Lieber 68% 89% 82% 99%
TAX STRATEGIC Three Months Year Ended Year Ended Period Ended
Ended 3/31/97 12/31/96 12/31/9 12/31/94
Total Brokerage $11,34 $51,273 $37,374 $24,872
Commissions
Dollar Amount and % $10,75 $50,033 $35,954 $24,072
paid to Lieber 95% 98% 96% 97%
% of Transactions
Effected by Lieber 97% 97% 94% 98%
</TABLE>
Income and Growth changed its fiscal year end from March 31 to January
31 during the first period covered by the foregoing table. Accordingly, the
commissions reported in the foregoing table reflect for Income and Growth the
period from April 1, 1994 to January 31, 1995.
American Retirement, Balanced, Foundation and Tax Strategic have
changed their fiscal year ends to March 31 from December 31, effective March 31,
1997.
Balanced, Value, Utility and Total Return did not pay any commissions
to Lieber. For the three month period ended March 31, 1997 and the fiscal years
ended December 31, 1996, 1995 and 1994, Balanced paid $256,092, $522,227,
$615,041 and $450,569, respectively, in commissions on brokerage transactions.
For the fiscal year ended December 31, 1996 and 1995, and for the period from
January 4, 1994 (commencement of operations) to December 31, 1994, Utility paid
$323,978, $272,806 and $66,294, respectively, in commissions on brokerage
transactions. For the fiscal years ended December 31, 1996, 1995 and 1994, Value
paid $3,164,292, $1,644,077 and $1,437,338, respectively, in commissions on
brokerage transactions. For the fiscal years ended November 30, 1996, 1995 and
1994, Total Return paid $227,013, $92,665 and $65,514, respectively, in
commissions on brokerage transactions.
- --------------------------------------------------------------------------------
ADDITIONAL TAX INFORMATION
(SEE ALSO "OTHER INFORMATION - DIVIDENDS,
DISTRIBUTIONS AND TAXES" IN EACH FUND'S PROSPECTUS)
- --------------------------------------------------------------------------------
Each Fund has qualified and intends to continue to qualify for and
elect the tax treatment applicable to regulated investment companies ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). (Such qualification does not involve supervision of management or
investment practices or policies by the Internal Revenue Service.) In order to
qualify as a regulated investment company, a Fund must, among other things, (i)
derive at least 90% of its gross income from dividends, interest, payments with
respect to proceeds from securities loans, gains from the sale or other
disposition of securities or foreign currencies and other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in such securities; (ii) derive less than 30% of its gross
income from the sale or other disposition of securities, options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the RIC's principal business of investing in securities (or
options and futures with respect thereto) held for less than three months; and
(iii) diversify its holdings so that, at the end of each quarter of its taxable
year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash, U.S. government securities and other securities limited in
respect of any one issuer, to an amount not greater than 5% of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. government securities and securities of other
regulated investment companies). By so qualifying, a Fund is not subject to
federal income tax if it timely distributes its investment company taxable
income and any net realized capital gains. A 4% nondeductible excise tax will be
imposed on a Fund to the extent it does not meet certain distribution
requirements by the end of each calendar year. Each Fund anticipates meeting
such distribution requirements.
Dividends paid by a Fund from investment company taxable income
generally will be taxed to the shareholders as ordinary income. Investment
company taxable income includes net investment income and net realized
short-term gains (if any). Any dividends received by a Fund from domestic
corporations will constitute a portion of the Fund's gross investment income. It
is anticipated that this portion of the dividends paid by a Fund (other than
distributions of securities profits) will qualify for the 70% dividends-received
deduction for corporations. Shareholders will be informed of the amounts of
dividends which so qualify.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders (who are not exempt from
tax) as long-term capital gain, regardless of the length of time the shares of a
Fund have been held by such shareholders. Short-term capital gains distributions
are taxable to shareholders who are not exempt from tax as ordinary income. Such
distributions are not eligible for the dividends-received deduction. Any loss
recognized upon the sale of shares of a Fund held by a shareholder for six
months or less will be treated as a long-term capital loss to the extent that
the shareholder received a long-term capital gain distribution with respect to
such shares.
Distributions will be taxable as described above to shareholders (who
are not exempt from tax), whether made in shares or in cash. Shareholders
electing to receive distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each share so received equal to
the net asset value of a share of a Fund on the reinvestment date.
Distributions by each Fund result in a reduction in the net asset value
of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, such distribution nevertheless would be taxable as ordinary income or
capital gain as described above to shareholders (who are not exempt from tax),
even though, from an investment standpoint, it may constitute a return of
capital. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a distribution. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will then receive what is in
effect a return of capital upon the distribution which will nevertheless be
taxable to shareholders subject to taxes.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gains or loss
will be treated as a capital gain or loss if the shares are capital assets in
the investor's hands and will be a long-term capital gain or loss if the shares
have been held for more than one year. Generally, any loss realized on a sale or
exchange will be disallowed to the extent shares disposed of are replaced within
a period of sixty-one days beginning thirty days before and ending thirty days
after the shares are disposed of. Any loss realized by a shareholder on the sale
of shares of the Fund held by the shareholder for six months or less will be
disallowed to the extent of any exempt interest dividends received by the
shareholder with respect to such shares, and will be treated for tax purposes as
a long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her Federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisers about the applicability of the backup withholding provisions.
If more than 50% of the value of a Fund's total assets at the end of a
fiscal year is represented by securities of foreign corporations and a Fund
elects to make foreign tax credits available to its shareholders, a shareholder
will be required to include in his gross income both cash dividends and the
amount a Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on a Fund's investments.
The shareholder will be entitled, however, to take the amount of such foreign
taxes withheld as a credit against his U.S. income tax, or to treat the foreign
tax withheld as an itemized deduction from his gross income, if that should be
to his advantage. In substance, this policy enables the shareholder to benefit
from the same foreign tax credit or deduction that he would have received if he
had been the individual owner of foreign securities and had paid foreign income
tax on the income therefrom. As in the case of individuals receiving income
directly from foreign sources, the above-described tax credit and deductions are
subject to certain limitations.
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisers regarding specific questions relating to federal,
state and local tax consequences of investing in shares of a Fund. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 31% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
Special Tax Considerations for Tax Strategic
With respect to Tax Strategic, to the extent that the Fund distributes
exempt interest dividends to a shareholder, interest on indebtedness incurred or
continued by such shareholder to purchase or carry shares of the Fund is not
deductible. Furthermore, entities or persons who are "substantial users" (or
related persons) of facilities financed by "private activity" bonds (some of
which were formerly referred to as "industrial development" bonds) should
consult their tax advisers before purchasing shares of the Fund. "Substantial
user" is defined generally as including a "non-exempt person" who regularly uses
in its trade or business a part of a facility financed from the proceeds of
industrial development bonds.
The percentage of the total dividends paid by the Fund with respect to
any taxable year that qualifies as exempt interest dividends will be the same
for all shareholders of the Fund receiving dividends with respect to such year.
If a shareholder receives an exempt interest dividend with respect to any share
and such share has been held for six months or less, any loss on the sale or
exchange of such share will be disallowed to the extent of the exempt interest
dividend amount.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
The following information supplements that set forth in each Fund's
Prospectus under the subheading "How to Buy Shares - How the Funds Value Their
Shares" in the Section entitled "Purchase and Redemption of Shares."
The public offering price of shares of a Fund is its net asset value
plus, in the case of Class A shares, a sales charge which will vary depending
upon the purchase alternative chosen by the investor, as more fully described in
the Prospectus. See "Purchase of Shares - Class A Shares - Front-End Sales
Charge Alternative." On each Fund business day on which a purchase or redemption
order is received by a Fund and trading in the types of securities in which a
Fund invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Declaration of
Trust and By-Laws governing each Fund as of the next close of regular trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time)
by dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any weekday,
exclusive of national holidays on which the Exchange is closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic
or foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked prices and portfolio bonds are presently valued by
a recognized pricing service when such prices are believed to reflect the fair
value of the security. Over-the-counter securities not included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one or more brokers. If accurate quotations are not available,
securities will be valued at fair value determined in good faith by the Board of
Trustees.
The respective per share net asset values of the Class A, Class B, Class C
and Class Y shares are expected to be substantially the same. Under certain
circumstances, however, the per share net asset values of the Class B and Class
C shares may be lower than the per share net asset value of the Class A shares
(and, in turn, that of Class A shares may be lower than Class Y shares) as a
result of the greater daily expense accruals, relative to Class A and Class Y
shares, of Class B and Class C shares relating to distribution services fees
(and, with respect to Balanced, Utility and Value, Shareholder Service Plan fee)
and, to the extent applicable, transfer agency fees and the fact that Class Y
shares bear no additional distribution, shareholder service or transfer agency
related fees. While it is expected that, in the event each Class of shares of a
Fund realizes net investment income or does not realize a net operating loss for
a period, the per share net asset values of the four Classes will tend to
converge immediately after the payment of dividends, which dividends will differ
by approximately the amount of the expense accrual differential among the
Classes, there is no assurance that this will be the case. In the event one or
more Classes of a Fund experiences a net operating loss for any fiscal period,
the net asset value per share of such Class or Classes will remain lower than
that of Classes that incurred lower expenses for the period.
To the extent that any Fund invests in non-U.S. dollar denominated
securities, the value of all assets and liabilities will be translated into
United States dollars at the mean between the buying and selling rates of the
currency in which such a security is denominated against United States dollars
last quoted by any major bank. If such quotations are not available, the rate of
exchange will be determined in accordance with policies established by the Fund.
The Trustees will monitor, on an ongoing basis, a Fund's method of valuation.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York. In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York.
Furthermore, trading takes place in various foreign markets on days
which are not business days in New York and on which the Fund's net asset value
is not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the Exchange
will not be reflected in a Fund's calculation of net asset value unless the
Trustees deem that the particular event would materially affect net asset value,
in which case an adjustment will be made. Securities transactions are accounted
for on the trade date, the date the order to buy or sell is executed. Dividend
income and other distributions are recorded on the ex-dividend date, except
certain dividends and distributions from foreign securities which are recorded
as soon as the Fund is informed after the ex-dividend date.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
The following information supplements that set forth in each Fund's
Prospectus under the heading "Purchase and Redemption of Shares - How To Buy
Shares."
General
Shares of each Fund will be offered on a continuous basis at a price equal
to their net asset value plus an initial sales charge at the time of purchase
(the "front-end sales charge alternative"), with a contingent deferred sales
charge (the deferred sales charge alternative"), or without any front-end sales
charge, but with a contingent deferred sales charge imposed only during the
first year after the month of purchase (the "level-load alternative"), as
described below. Class Y shares which, as described below, are not offered to
the general public, are offered without any front-end or contingent sales
charges. Shares of each Fund are offered on a continuous basis through (i)
investment dealers that are members of the National Association of Securities
Dealers, Inc. and have entered into selected dealer agreements with the
Distributor ("selected dealers"), (ii) depository institutions and other
financial intermediaries or their affiliates, that have entered into selected
agent agreements with the Distributor ("selected agents"), or (iii) the
Distributor. The minimum for initial investment is $1,000; there is no minimum
for subsequent investments. The subscriber may use the Application available
from the Distributor for his or her initial investment. Sales personnel of
selected dealers and agents distributing a Fund's shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Investors may purchase shares of a Fund in the United States either
through selected dealers or agents or directly through the Distributor. A Fund
reserves the right to suspend the sale of its shares to the public in response
to conditions in the securities markets or for other reasons.
Each Fund will accept unconditional orders for its shares to be
executed at the public offering price equal to the net asset value next
determined (plus for Class A shares, the applicable sales charges), as described
below. Orders received by the Distributor prior to the close of regular trading
on the Exchange on each day the Exchange is open for trading are priced at the
net asset value computed as of the close of regular trading on the Exchange on
that day (plus for Class A shares the sales charges). In the case of orders for
purchase of shares placed through selected dealers or agents, the applicable
public offering price will be the net asset value as so determined, but only if
the selected dealer or agent receives the order prior to the close of regular
trading on the Exchange and transmits it to the Distributor prior to its close
of business that same day (normally 5:00 p.m. Eastern time). The selected dealer
or agent is responsible for transmitting such orders by 5:00 p.m. If the
selected dealer or agent fails to do so, the investor's right to that day's
closing price must be settled between the investor and the selected dealer or
agent. If the selected dealer or agent receives the order after the close of
regular trading on the Exchange, the price will be based on the net asset value
determined as of the close of regular trading on the Exchange on the next day it
is open for trading.
Following the initial purchase of shares of a Fund, a shareholder may
place orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Application. Payment for shares
purchased by telephone can be made only by Electronic Funds Transfer from a bank
account maintained by the shareholder at a bank that is a member of the National
Automated Clearing House Association ("ACH"). If a shareholder's telephone
purchase request is received before 3:00 p.m. Eastern time on a Fund business
day, the order to purchase shares is automatically placed the same Fund business
day for non-money market funds, and two days following the day the order is
received for money market funds, and the applicable public offering price will
be the public offering price determined as of the close of business on such
business day. Full and fractional shares are credited to a subscriber's account
in the amount of his or her subscription. As a convenience to the subscriber,
and to avoid unnecessary expense to a Fund, stock certificates representing
shares of a Fund are not issued. This facilitates later redemption and relieves
the shareholder of the responsibility for and inconvenience of lost or stolen
certificates.
Alternative Purchase Arrangements
Each Fund issues four classes of shares: (i) Class A shares, which are sold
to investors choosing the front-end sales charge alternative; (ii) Class B
shares, which are sold to investors choosing the deferred sales charge
alternative; (iii) Class C shares, which are sold to investors choosing the
level-load sales charge alternative; and (iv) Class Y shares, which are offered
only to (a) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (b) certain investment advisory clients
of the Advisers and their affiliates, and (c) institutional investors. The four
Classes of shares each represent an interest in the same portfolio of
investments of the Fund, have the same rights and are identical in all respects,
except that (i) only Class A, Class B and Class C shares are subject to a Rule
12b-1 distribution fee, (ii) Class B and Class C shares of Balanced, Utility and
Value are subject to a Shareholder Service Plan fee, (iii) Class A shares bear
the expense of the front-end sales charge and Class B and Class C shares bear
the expense of the deferred sales charge, (iv) Class B shares and Class C shares
each bear the expense of a higher Rule 12b-1 distribution services fee and
shareholder service fee than Class A shares and, in the case of Class B shares,
higher transfer agency costs, (v) with the exception of Class Y shares, each
Class of each Fund has exclusive voting rights with respect to provisions of the
Rule 12b-1 Plan pursuant to which its distribution services (and, to the extent
applicable, Shareholder Service Plan fee) is paid which relates to a specific
Class and other matters for which separate Class voting is appropriate under
applicable law, provided that, if the Fund submits to a simultaneous vote of
Class A, Class B and Class C shareholders an amendment to the Rule 12b-1 Plan
that would materially increase the amount to be paid thereunder with respect to
the Class A shares, the Class A shareholders and the Class B and Class C
shareholders will vote separately by Class, and (vi) only the Class B shares are
subject to a conversion feature. Each Class has different exchange privileges
and certain different shareholder service options available.
The alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the accumulated distribution services (and, to the
extent applicable, Shareholder Service Plan) fee and contingent deferred sales
charges on Class B shares prior to conversion, or the accumulated distribution
services (and, to the extent applicable, shareholder service) fee on Class C
shares, would be less than the front-end sales charge and accumulated
distribution services fee on Class A shares purchased at the same time, and to
what extent such differential would be offset by the higher return of Class A
shares. Class B and Class C shares will normally not be suitable for the
investor who qualifies to purchase Class A shares at the lowest applicable sales
charge. For this reason, the Distributor will reject any order (except orders
for Class B shares from certain retirement plans) for more than $250,000 for
Class B shares or $500,000 for Class C shares.
Class A shares are subject to a lower distribution services fee and no
Shareholder Service Plan fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares. However, because
front-end sales charges are deducted at the time of purchase, investors
purchasing Class A shares would not have all their funds invested initially and,
therefore, would initially own fewer shares. Investors not qualifying for
reduced front-end sales charges who expect to maintain their investment for an
extended period of time might consider purchasing Class A shares because the
accumulated continuing distribution (and, to the extent applicable, Shareholder
Service Plan) charges on Class B shares or Class C shares may exceed the
front-end sales charge on Class A shares during the life of the investment.
Again, however, such investors must weigh this consideration against the fact
that, because of such front-end sales charges, not all their funds will be
invested initially.
Other investors might determine, however, that it would be more
advantageous to purchase Class B shares or Class C shares in order to have all
their funds invested initially, although remaining subject to higher continuing
distribution services (and, to the extent applicable, Shareholder Service Plan)
fees and, in the case of Class B shares, being subject to a contingent deferred
sales charge for a six-year period. For example, based on current fees and
expenses, an investor subject to the 4.75% front-end sales charge imposed on
Class A shares of the Funds would have to hold his or her investment
approximately seven years for the Class B and Class C distribution services
(and, to the extent applicable, Shareholders Service Plan) fees, to exceed the
front-end sales charge plus the accumulated distribution services fee of Class A
shares. In this example, an investor intending to maintain his or her investment
for a longer period might consider purchasing Class A shares. This example does
not take into account the time value of money, which further reduces the impact
of the Class B and Class C distribution services (and, to the extent applicable,
shareholder service) fees on the investment, fluctuations in net asset value or
the effect of different performance assumptions.
Those investors who prefer to have all of their funds invested
initially but may not wish to retain Fund shares for the six year period during
which Class B shares are subject to a contingent deferred sales charge may find
it more advantageous to purchase Class C shares.
With respect to each Fund, the Trustees have determined that currently
no conflict of interest exists between or among the Class A, Class B, Class C
and Class Y shares. On an ongoing basis, the Trustees, pursuant to their
fiduciary duties under the 1940 Act and state laws, will seek to ensure that no
such conflict arises.
Front-End Sales Charge Alternative--Class A Shares
The public offering price of Class A shares for purchasers choosing
the front-end sales charge alternative is the net asset value plus a sales
charge as set forth in the Prospectus for each Fund.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are not subject to any sales charges.
The Fund receives the entire net asset value of its Class A shares sold to
investors. The Distributor's commission is the sales charge set forth in the
Prospectus for each Fund, less any applicable discount or commission "reallowed"
to selected dealers and agents. The Distributor will reallow discounts to
selected dealers and agents in the amounts indicated in the table in the
Prospectus. In this regard, the Distributor may elect to reallow the entire
sales charge to selected dealers and agents for all sales with respect to which
orders are placed with the Distributor.
Set forth below is an example of the method of computing the offering
price of the Class A shares of each Fund. The example assumes a purchase of
Class A shares of a Fund aggregating less than $100,000 subject to the schedule
of sales charges set forth in the Prospectus at a price based upon the net asset
value of Class A shares of each Fund at the end of each Fund's latest fiscal
year.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Date Net Asset Per Share Offering Price
Value Sales Charge Per Share
Balanced 3/31/97 $12.87 $0.64 $13.51
Growth and Income 12/31/96 $22.53 $1.12 $23.65
Income and Growth 1/31/97 $21.79 $1.09 $22.88
American Retirement 3/31/97 $13.74 $0.69 $14.43
Small Cap 12/31/96 $13.10 $0.65 $13.75
Date Net Asset Per Share Offering Price
Value Sales Charge Per Share
Foundation 3/31/97 $16.00 $0.80 $16.80
Tax Strategic 3/31/97 $13.57 $0.68 $14.25
Utility 12/31/96 $10.57 $0.53 $11.10
Value 12/31/96 $20.57 $1.03 $21.60
Total Return 11/30/96 $17.33 $1.06 $18.39
</TABLE>
Prior to January 3, 1995, shares of Growth and Income, Income and
Growth, American Retirement, Small Cap, Foundation and Tax Strategic were
offered exclusively on a no-load basis and, accordingly, no underwriting
commissions were paid in respect of sales of shares of these Funds or retained
by the Distributor. In addition, since Class B and Class C shares were not
offered by Growth and Income, Income and Growth, American Retirement, Small Cap,
Foundation or Tax Strategic prior to January 3, 1995, contingent deferred sales
charges have been paid to the Distributor with respect to Class B or Class C
shares only since January 3, 1995.
With respect to Balanced, Utility and Value, the following commissions
were paid to and amounts were retained by Federated Securities Corp. through
July 7, 1995, which until such date was the principal underwriter of portfolios
of Evergreen Investment Trust. For the period from July 8 through December 31,
1995, commissions were paid to and amounts were retained by the current
Distributor as noted below:
<TABLE>
<CAPTION>
Three Months Year Ended Period From Period From
Ended 3/31/97 12/31/96 7/8/95 1/1/95
to 12/31/95 to 7/7/95
<S> <C> <C> <C> <C>
BALANCED
Commissions $25,829 $77,026 $15,844 $11,841
Received
Commissions $3,100 $9,150 $1,731 $1,303
Retained
VALUE
Commissions $522,573 $58,797 $56,058
Received
Commissions $ 56,609 $ 6,615 $ 6,001
Retained
UTILITY
Three Months Year Ended Period From Period From
Ended 3/31/97 12/31/96 7/8/95 1/1/95
to 12/31/95 to 7/7/95
Commissions $ 74,988 $ 15,692 $ 20,958
Received
Commissions $ 7,857 $ 1,727 $ 2,228
Retained
With respect to Income and Growth, Growth and Income, American
Retirement, Small Cap, Foundation and Tax Strategic, the following commissions
were paid to and amounts were retained by the Distributor for the periods
indicated:
Three Months Year Ended Year Ended Period from 1/3/95
Ended 3/31/97 1/31/97 1/31/96 to 1/31/95
INCOME AND GROWTH
Commissions Received $ 187,403 $ 98,890 $ 4,585
Commissions Retained $ 20,208 $ 10,733 ---
Year Ended Year Ended
12/31/96 12/31/95
GROWTH AND INCOME
Commissions Received $ 1,473,258 $ 326,249
Commissions Retained $ 158,858 $ 37,300
AMERICAN RETIREMENT
Commissions Received $121,810 $ 317,718 $ 42,447
Commissions Retained $12,910 $ 20,024
$ 7,397
SMALL CAP
Commissions Received $ 3,568 $ 778
Commissions Retained $ 340 $ 284
FOUNDATION
Three Months Year Ended Year Ended Period from 1/3/95
Ended 3/31/97 1/31/97 1/31/96 to 1/31/95
Commissions Received $ 495,558 $ 2,418,388 $1,604,275
Commissions Retained $ 53,267 $ 57,736 $ 178,885
TAX STRATEGIC
Commissions Received $ 141,912 $ 199,131 $ 28,976
Commissions Retained $ 16,111 $ 25,078 $ 3,266
With respect to Total Return, the following commissions were paid to and
amounts were retained by Keystone Investment Distributors Company, which prior
to December 1, 1996, was the distributor for Total Return.
Three Months Year Ended Year Ended Year Ended
Ended 3/31/97 11/30/96 11/30/95 11/30/94
TOTAL RETURN
Commissions Received $355,043 $190,327 $106,144
Commissions Retained ($595,877) ($243,621) ($ 90,031)
</TABLE>
Investors choosing the front-end sales charge alternative may under
certain circumstances be entitled to pay reduced sales charges. The
circumstances under which such investors may pay reduced sales charges are
described below.
Combined Purchase Privilege. Certain persons may qualify for the sales
charge reductions by combining purchases of shares of one or more Evergreen
Keystone Funds (other than the money market funds) into a single "purchase," if
the resulting "purchase" totals at least $100,000. The term "purchase" refers
to: (i) a single purchase by an individual, or to concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an individual,
his or her spouse and their children under the age of 21 years purchasing shares
for his, her or their own account(s); (ii) a single purchase by a trustee or
other fiduciary purchasing shares for a single trust, estate or single fiduciary
account although more than one beneficiary is involved; or (iii) a single
purchase by an organization exempt from federal income tax under Section 501
(c)(3) or (13) of the Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Code. The term "purchase"
also includes purchases by any "company," as the term is defined in the 1940
Act, but does not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other than the
purchase of shares of a Fund or shares of other registered investment companies
at a discount. The term "purchase" does not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit card holders of a company, policy holders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
A "purchase" may also include shares, purchased at the same time through a
single selected dealer or agent, of any Evergreen Keystone Fund.
Cumulative Quantity Discount (Right of Accumulation). An investor's
purchase of additional Class A shares of a Fund may qualify for a Cumulative
Quantity Discount. The applicable sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the previous day) of
(a) all Class A shares of the Fund held by the investor and (b) all such shares
of any other Evergreen Keystone Fund held by the investor; and
(iii) the net asset value of all shares described in paragraph; and
(iv) owned by another shareholder eligible to combine his or her purchase
with that of the investor into a single "purchase" (see above).
For example, if an investor owned Class A, B or C shares of an
Evergreen Keystone Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of a Fund worth an additional
$100,000, the sales charge for the $100,000 purchase, in the case of the Funds,
would be at the 2.50% rate applicable to a single $300,000 purchase of shares of
the Fund, rather than the 3.75% rate.
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through a selected dealer or agent,
the investor or selected dealer or agent must provide the Distributor with
sufficient information to verify that each purchase qualifies for the privilege
or discount.
Letter of Intent. Class A investors may also obtain the reduced sales
charges shown in the Prospectus by means of a written Letter of Intent, which
expresses the investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares of the Fund or any other Evergreen
Keystone Fund. Each purchase of shares under a Letter of Intent will be made at
the public offering price or prices applicable at the time of such purchase to a
single transaction of the dollar amount indicated in the Letter of Intent. At
the investor's option, a Statement of Intention may include purchases of Class A
shares of the Fund or any other Evergreen Keystone Fund made not more than 90
days prior to the date that the investor signs a Statement of Intention;
however, the 13-month period during which the Letter of Intent is in effect will
begin on the date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege described
above may purchase shares of the Evergreen Keystone Funds under a single Letter
of Intent. For example, if at the time an investor signs a Statement of
Intention to invest at least $100,000 in Class A shares of the Fund, the
investor and the investor's spouse each purchase shares of the Fund worth
$20,000 (for a total of $40,000), it will only be necessary to invest a total of
$60,000 during the following 13 months in Class A shares of the Fund or any
other Evergreen Keystone Fund, to qualify for the 3.75% sales charge applicable
to purchases in any Evergreen Keystone Equity or Long-Term Bond Fund on the
total amount being invested (the sales charge applicable to an investment of
$100,000).
The Statement of Intention is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge applicable to the
shares actually purchased if the full amount indicated is not purchased, and
such escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow. When the full
amount indicated has been purchased, the escrow will be released. To the extent
that an investor purchases more than the dollar amount indicated on the Letter
of Intent and qualifies for a further reduced sales charge, the sales charge
will be adjusted for the entire amount purchased at the end of the 13-month
period. The difference in sales charge will be used to purchase additional
shares of the Fund subject to the rate of sales charge applicable to the actual
amount of the aggregate purchases.
Investors wishing to enter into a Letter of Intent in conjunction with
their initial investment in Class A shares of a Fund should complete the
appropriate portion of the Application while current Class A shareholders
desiring to do so can obtain a form of Letter of Intent by contacting a Fund at
the address or telephone number shown on the cover of this Statement of
Additional Information.
Investments Through Employee Benefit and Savings Plans. Certain qualified
and non-qualified benefit and savings plans may make shares of the Evergreen
Keystone Funds available to their participants. Investments made by such
employee benefit plans may be exempt from any applicable front-end sales charges
if they meet the criteria set forth in the Prospectus under "Class A
Shares-Front End Sales Charge Alternative." The Advisers may provide
compensation to organizations providing administrative and recordkeeping
services to plans which make shares of the Evergreen Keystone Funds available to
their participants.
Reinstatement Privilege. A Class A shareholder who has caused any or
all of his or her shares of the Fund to be redeemed or repurchased may reinvest
all or any portion of the redemption or repurchase proceeds in Class A shares of
the Fund at net asset value without any sales charge, provided that such
reinvestment is made within 30 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net asset value next
determined as described above. A reinstatement pursuant to this privilege will
not cancel the redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for federal income tax purposes except that no
loss will be recognized to the extent that the proceeds are reinvested in shares
of the Fund. The reinstatement privilege may be used by the shareholder only
once, irrespective of the number of shares redeemed or repurchased, except that
the privilege may be used without limit in connection with transactions whose
sole purpose is to transfer a shareholder's interest in the Fund to his or her
individual retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written request sent to
the Fund at the address shown on the cover of this Statement of Additional
Information.
Sales at Net Asset Value. In addition to the categories of investors set
forth in the Prospectus, each Fund may sell its Class A shares at net asset
value, i.e., without any sales charge, to: (i) certain investment advisory
clients of the Advisers or their affiliates; (ii) officers and present or former
Trustees of the Trusts; present or former trustees of other investment companies
managed by the Advisers; officers, directors and present or retired full-time
employees of the Advisers, the Distributor, and their affiliates; officers,
directors and present and full-time employees of selected dealers or agents; or
the spouse, sibling, direct ancestor or direct descendant (collectively
"relatives") of any such person; or any trust, individual retirement account or
retirement plan account for the benefit of any such person or relative; or the
estate of any such person or relative, if such shares are purchased for
investment purposes (such shares may not be resold except to the Fund); (iii)
certain employee benefit plans for employees of the Advisers, the Distributor
and their affiliates; (iv) persons participating in a fee-based program,
sponsored and maintained by a registered broker-dealer and approved by the
Distributor, pursuant to which such persons pay an asset-based fee to such
broker-dealer, or its affiliate or agent, for service in the nature of
investment advisory or administrative services. These provisions are intended to
provide additional job-related incentives to persons who serve the Funds or work
for companies associated with the Funds and selected dealers and agents of the
Funds. Since these persons are in a position to have a basic understanding of
the nature of an investment company as well as a general familiarity with the
Fund, sales to these persons, as compared to sales in the normal channels of
distribution, require substantially less sales effort. Similarly, these
provisions extend the privilege of purchasing shares at net asset value to
certain classes of institutional investors who, because of their investment
sophistication, can be expected to require significantly less than normal sales
effort on the part of the Funds and the Distributor.
Deferred Sales Charge Alternatives--Class B and Class C Shares
Investors choosing the deferred sales charge alternative purchase Class
B shares at the public offering price equal to the net asset value per share of
the Class B shares on the date of purchase without the imposition of a sales
charge at the time of purchase. The Class B shares are sold without a front-end
sales charge so that the full amount of the investor's purchase payment is
invested in the Fund initially.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used by the Distributor to defray the expenses of the
Distributor related to providing distribution-related services to the Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to selected dealers and agents for selling Class B shares. The
combination of the contingent deferred sales charge and the distribution
services fee (and, with respect to Balanced, Utility and Value, the Shareholder
Service Plan fee) enables the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. The higher distribution services
fee (and, with respect to Balanced, Utility and Value, the Shareholder Service
Plan fee) incurred by Class B shares will cause such shares to have a higher
expense ratio and to pay lower dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within six years of purchase will be subject to a contingent deferred sales
charge at the rates set forth in the Prospectus charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal to
the lesser of the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be imposed on
increases in net asset value above the initial purchase price. In addition, no
contingent deferred sales charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The amount of the
contingent deferred sales charge, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares.
In determining the contingent deferred sales charge applicable to a
redemption, it will be assumed that the redemption is first of any Class A
shares or Class C shares in the shareholder's Fund account, second of Class B
shares held for over six years or Class B shares acquired pursuant to
reinvestment of dividends or distributions and third of Class B shares held
longest during the six-year period.
To illustrate, assume that an investor purchased 100 Class B shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B shares upon dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 Class B shares, 10 Class B
shares will not be subject to charge because of dividend reinvestment. With
respect to the remaining 40 Class B shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net asset value of $2
per share. Therefore, of the $600 of the shares redeemed $400 of the redemption
proceeds (40 shares x $10 original purchase price) will be charged at a rate of
4.0% (the applicable rate in the second year after purchase for a contingent
deferred sales charge of $16).
The contingent deferred sales charge is waived on redemptions of shares
(I) following the death or disability, as defined in the Code, of a shareholder,
or (ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Conversion Feature. At the end of the period ending seven years after the
end of the calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A shares and will
no longer be subject to a higher distribution services fee (and, with respect to
Balanced, Utility and Value, the Shareholder Service Plan fee) imposed on Class
B shares. Such conversion will be on the basis of the relative net asset values
of the two classes, without the imposition of any sales load, fee or other
charge. The purpose of the conversion feature is to reduce the distribution
services fee paid by holders of Class B shares that have been outstanding long
enough for the Distributor to have been compensated for the expenses associated
with the sale of such shares.
For purposes of conversion to Class A, Class B shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the sub-account) convert to Class A, an equal pro-rata portion of
the Class B shares in the sub-account will also convert to Class A.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of an opinion of counsel to the effect that (I) the
assessment of the higher distribution services fee (and, with respect to
Balanced, Utility and Value, Shareholder Service Plan fee) and transfer agency
costs with respect to Class B shares does not result in the dividends or
distributions payable with respect to other Classes of a Fund's shares being
deemed "preferential dividends" under the Code, and (ii) the conversion of Class
B shares to Class A shares does not constitute a taxable event under Federal
income tax law. The conversion of Class B shares to Class A shares may be
suspended if such an opinion is no longer available at the time such conversion
is to occur. In that event, no further conversions of Class B shares would
occur, and shares might continue to be subject to the higher distribution
services fee (and, with respect to Balanced, Utility and Value, the Shareholder
Service Plan fee) for an indefinite period which may extend beyond the period
ending seven years after the end of the calendar month in which the
shareholder's purchase order was accepted.
Level-Load Alternative--Class C Shares
Investors choosing the level load sales charge alternative purchase Class C
shares at the public offering price equal to the net asset value per share of
the Class C shares on the date of purchase without the imposition of a front-end
sales charge. However, you will pay a 1.0% contingent deferred sales charge if
you redeem shares during the first year after the month of purchase. No charge
is imposed in connection with redemptions made more than one year after the
month of purchase. Class C shares are sold without a front-end sales charge so
that the Fund will receive the full amount of the investor's purchase payment
and after the first year without a contingent deferred sales charge so that the
investor will receive as proceeds upon redemption the entire net asset value of
his or her Class C shares. The Class C distribution services fee (and, with
respect to Balanced, Utility and Value, Shareholder Service Plan fee) enables
the Fund to sell Class C of shares without either a front-end or contingent
deferred sales charge. However, unlike Class B shares, Class C shares do not
convert to any other Class shares of the Fund. Class C shares incur higher
distribution services fees (and, with respect to Balanced, Utility and Value,
Shareholder Service Plan fee) than Class A shares, and will thus have a higher
expense ratio and pay correspondingly lower dividends than Class A shares.
Class Y Shares
Class Y shares are not offered to the general public and are available
only to (i) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (ii) certain investment advisory clients
of the Advisers and their affiliates, and (iii) institutional investors. Class Y
shares do not bear any Rule 12b-1 distribution expenses and are not subject to
any front-end or contingent deferred sales charges.
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUNDS
(SEE ALSO "OTHER INFORMATION - GENERAL INFORMATION"
IN EACH FUND'S PROSPECTUS)
- --------------------------------------------------------------------------------
Capitalization and Organization
Each of the Evergreen Growth and Income Fund and Evergreen Income and
Growth Fund is a Massachusetts business trust. Evergreen American Retirement
Fund and Evergreen Small Cap Equity Income Fund are each separate series of The
Evergreen American Retirement Trust, a Massachusetts business trust. The
Evergreen Foundation Fund and Evergreen Tax Strategic Foundation Fund are each
separate series of the Evergreen Foundation Trust, a Massachusetts business
trust. The Evergreen Balanced Fund, Evergreen Utility Fund and Evergreen Value
Fund, which prior to July 7, 1995 were known as the First Union Balanced
Portfolio, First Union Utility Portfolio and First Union Value Portfolio,
respectively, are each separate series of Evergreen Investment Trust, a
Massachusetts business trust. Keystone Fund for Total Return (formerly Keystone
America Fund for Total Return) is a Massachusetts business trust. On July 7,
1995, First Union Funds changed its name to Evergreen Investment Trust. The
above-named Trusts are individually referred to in this Statement of Additional
Information as the "Trust" and collectively as the "Trusts." Each Trust is
governed by a Board of Trustees. Unless otherwise stated, references to the
"Board of Trustees" or "Trustees" in this Statement of Additional Information
refer to the Trustees of all the Trusts.
Income and Growth and Growth and Income may issue an unlimited number
of shares of beneficial interest with a $0.001 par value. American Retirement,
Small Cap, Foundation, Tax Strategic, Balanced, Value and Utility may issue an
unlimited number of shares of beneficial interest with a $0.0001 par value.
Total Return may issue an unlimited number of shares of beneficial interest with
a no par value. All shares of these Funds have equal rights and privileges. Each
share is entitled to one vote, to participate equally in dividends and
distributions declared by the Funds and on liquidation to their proportionate
share of the assets remaining after satisfaction of outstanding liabilities.
Shares of these Funds are fully paid, nonassessable and fully transferable when
issued and have no pre-emptive, conversion or exchange rights.
Fractional shares have proportionally the same rights, including voting rights,
as are provided for a full share.
Under each Trust's Declaration of Trust, each Trustee will continue in
office until the termination of the Trust or his or her earlier death,
incapacity, resignation or removal. Shareholders can remove a Trustee upon a
vote of two-thirds of the outstanding shares of beneficial interest of the
Trust. Vacancies will be filled by a majority of the remaining Trustees, subject
to the 1940 Act. As a result, normally no annual or regular meetings of
shareholders will be held, unless otherwise required by the Declaration of Trust
of each Trust or the 1940 Act.
Shares have noncumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of Trustees can elect
100% of the Trustees if they choose to do so and in such event the holders of
the remaining shares so voting will not be able to elect any Trustees.
The Trustees of each Trust are authorized to reclassify and issue any
unissued shares to any number of additional series without shareholder approval.
Accordingly, in the future, for reasons such as the desire to establish one or
more additional portfolios of a Trust with different investment objectives,
policies or restrictions, additional series of shares may be created by one or
more of the Trusts. Any issuance of shares of another series or class would be
governed by the 1940 Act and the law of the Commonwealth of Massachusetts. If
shares of another series of a Trust were issued in connection with the creation
of additional investment portfolios, each share of the newly created portfolio
would normally be entitled to one vote for all purposes. Generally, shares of
all portfolios would vote as a single series on matters, such as the election of
Trustees, that affected all portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of the Investment
Advisory Agreement and changes in investment policy, shares of each portfolio
would vote separately.
In addition any Fund may, in the future, create additional classes of
shares which represent an interest in the same investment portfolio. Except for
the different distribution related and other specific costs borne by such
additional classes, they will have the same voting and other rights described
for the existing classes of each Fund.
Procedures for calling a shareholders' meeting for the removal of the
Trustees of each Trust, similar to those set forth in Section 16(c) of the 1940
Act, will be available to shareholders of each Fund. The rights of the holders
of shares of a series of a Fund may not be modified except by the vote of a
majority of the outstanding shares of such series.
Distributor
Evergreen Keystone Distributor, Inc. (formerly known as Evergreen Funds
Distributor, Inc. (the "Distributor")), 125 W. 55th Street, New York, New York
10019, serves as each Fund's principal underwriter, and as such may solicit
orders from the public to purchase shares of any Fund. The Distributor is not
obligated to sell any specific amount of shares and will purchase shares for
resale only against orders for shares. Under the Distribution Agreement between
each Fund and the Distributor, the Fund has agreed to indemnify the Distributor,
in the absence of its willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations thereunder, against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
Counsel
Sullivan & Worcester LLP, Washington, D.C. serves as counsel to the Funds.
Independent Auditors
Price Waterhouse LLP has been selected to be the independent auditors
of Income and Growth.
KPMG Peat Marwick LLP has been selected to be the independent auditors of
Growth and Income, American Retirement, Small Cap, Balanced, Utility, Value,
Total Return, Foundation and Tax Strategic.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Total Return
From time to time a Fund may advertise its "total return." Computed
separately for each class, the Fund's "total return" is its average annual
compounded total return for the most recent one, five, and ten-year periods (or
the period since the Fund's inception). The Fund's total return for such a
period is computed by finding, through the use of a formula prescribed by the
SEC, the average annual compounded rate of return over the period that would
equate an assumed initial amount invested to the value of such investment at the
end of the period. For purposes of computing total return, income dividends and
capital gains distributions paid on shares of the Fund are assumed to have been
reinvested when paid, and the maximum sales charge applicable to purchases of
Fund shares is assumed to have been paid. The Fund will include performance data
for Class A, Class B, Class C and Class Y shares in any advertisement or
information including performance data of the Fund.
With respect to Income and Growth, Growth and Income, American
Retirement, Small Cap, Foundation and Tax Strategic, the shares of each Fund
outstanding prior to January 3, 1995 have been reclassified as Class Y shares.
The average annual compounded total return for each Class of shares offered by
the Funds for the most recently completed one, five and ten year fiscal periods
(if applicable) and for the three months ended March 31, 1997 for American
Retirement, Foundation, Tax Strategic, and Balanced is set forth in the table
below.
<TABLE>
<CAPTION>
INCOME AND 1 Year Ended 5 Years 10 Years Ended
GROWTH 1/31/97 Ended 1/31/97 1/31/97
<S> <C> <C> <C>
Class A 8.4% 9.5% 7.7%
Class B 8.0% 10.0% 8.1%
Class C 11.9% 10.3% 8.1%
Class Y 14.1% 10.7% 8.3
GROWTH AND 1 Year Ended 5 Y ears Ended 10 Years
INCOME 12/31/96 12/31/96 Ended 12/31/96
Class A 17.6% 15.6% 14.0%
Class B 17.6% 16.2% 14.4%
Class C 21.6% 16.5% 14.4%
Class Y 23.8% 16.9% 14.6%
AMERICAN 3 Months Ended 1 Year Ended 5 Years Ended From inception*****
RETIREMENT 3/31/97 3/31/97 3/31/97 to 3/31/97
Class A (4.8%) 3.8% --- 13.89%
Class B (5.3%) 3.0% --- 14.37%
Class C (1.3%) 7.0% --- 15.52%
Class Y 0.0% 9.1% --- 10.53%
SMALL CAP 1 Year Ended From 10/1/93
12/31/96 (inception) to
12/31/96
Class A 16.2% 13.8%
Class B 16.1% 14.3%
Class C 20.1% 15.0%
Class Y 22.4% 15.7%
FOUNDATION 3 Months Ended 1 Year Ended 5 Years From inception
3/31/97 3/31/97 Ended ****** to
3/31/97 3/31/97
Class A (4.9%) 7.5% - 15.2%
Class B (5.3%) 7.0% - 15.7%
Class C (1.3%) 11.0% - 16.7%
Class Y 0.0% 13.2% 13.6% 15.7%
TAX STRATEGIC 3 Months Ended 1 Year Ended From inception
3/31/97 3/31/97 To 3/31/97
Class A (3.8%) 10.3% 15.9%
Class B (4.2%) 10.0% 17.1%
TAX STRATEGIC 3 Months Ended 1 Year Ended From inception
3/31/97 3/31/97 To 3/31/97
Class C (0.2%) 13.8% 17.5%
Class Y (1.0%) 16.1% 14.7%
BALANCED 3 Months 1 Year 5 Years From inception*
Ended Ended Ended to 3/31/97
3/31/97 3/31/97 3/31/97
Class A (4.5%) 4.4% 9.9% 10.5%
Class B (4.9%) 4.0% - 9.2%
Class C (0.9%) 7.4% - 11.8%
Class Y 0.3% 9.9% 11.2% 11.3%
UTILITY 1 Year Ended From inception***to
12/31/96 12/31/96
Class A -.6% 7.1%
Class B -1.3% 7.2%
Class C 2.5% 12.4%
Class Y 4.5% 11.2%
VALUE 1 Year Ended 5 Years Ended From inception***to
12/31/96 12/31/96 12/31/96
Class A 13.3% 12.4% 13.4%
Class B 13.1% -- 14.1%
Class C 17.1% -- 18.8%
Class Y 19.2% 13.8% 15.7%
TOTAL RETURN 1 Year Ended 5 Years Ended From inception****
11/30/96 11/30/96 to 11/30/96
Class A 22.4% 13.8% 11.4%
Class B 24.7% __ 13.7%
Class C 28.7% __ 14.3%
</TABLE>
Total Return commenced offering Class Y shares effective December 15, 1996.
* Inception date: Class A - June 6, 1991; Class B - January 26, 1993; Class C -
September 2, 1994; Class Y - April 1, 1991.
** Inception date: Class A - January 4, 1994; Class B - January 4, 1994; Class C
- - September 2, 1994; Class Y - February 28, 1994.
*** Inception date: Class A - April 12, 1985; Class B - January 25, 1993; Class
C - September 2, 1994; Class Y - December 31, 1990.
****Inception date: Class A - February 13, 1987; Class B and Class C- February
1, 1993.
***** Inception date: Class A, B and C - January 3, 1995; Class Y - March
14, 1988.
****** Inception date: Class A, B and C - January 3, 1995; Class Y- January 2,
1990.
******* Inception date: Class A - January 17, 1995; Class B - January 6, 1995;
Class C - March 3, 1995; Class Y - November 2, 1993
The performance numbers for Income and Growth, Growth and Income,
American Retirement, Small Cap, Foundation and Tax Strategic for the Class A,
Class B and Class C shares are hypothetical numbers based on the performance for
Class Y shares as adjusted for any applicable front-end sales charge or
contingent deferred sales charge through January 3, 1995 (commencement of class
operations) and the actual performance of each class subsequent to January 3,
1995. The performance data calculated prior to January 3, 1995, does not reflect
any Rule 12b-1 fees. If such fees were reflected the returns would be lower.
A Fund's total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and quality of the
securities in a Fund's portfolio and its expenses. Total return information is
useful in reviewing a Fund's performance but such information may not provide a
basis for comparison with bank deposits or other investments which pay a fixed
yield for a stated period of time. An investor's principal investment in a Fund
is not fixed and will fluctuate in response to prevailing market conditions.
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other communications to shareholders. Yield quotations are expressed
in annualized terms and may be quoted on a compounded basis. Yields are computed
by dividing the Fund's interest income (as defined in the SEC yield formula) for
a given 30-day or one month period, net of expenses, by the average number of
shares entitled to receive distributions during the period, dividing this figure
by the Fund's net asset value per share at the end of the period and annualizing
the result (assuming compounding of income) in order to arrive at an annual
percentage rate. The formula for calculating yield is as follows:
YIELD = [2[(a-b/cd)+ 1]6-1]
Where a = Interest earned during the period
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of shares outstanding during the
period that were entitled to receive dividends
d = The maximum offering price per share on the last day of the period
Income is calculated for purposes of yield quotations in accordance with
standardized methods applicable to all stock and bond funds. Gains and losses
generally are excluded from the calculation. Income calculated for purposes of
determining a Fund's yield differs from income as determined for other
accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yields quoted for
a Fund may differ from the rates of distributions a Fund paid over the same
period, or the net investment income reported in a Fund's financial statements.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Funds'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of the Fund's investments, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite can be expected to occur.
The yield of American Retirement, Foundation, Tax Strategic and
Balanced, except Total Return, for the thirty-day period ended March 31, 1997
(January 31, 1997 with respect to Income and Growth and December 31, 1996 with
respect to Growth and Income, Small Cap, Utility and Value) for each Class of
shares offered by the Funds is set forth in the table below:
Income and Growth Tax Strategic
Class A 3.32% 2.49%
Class B 2.76% 1.89%
Class C 2.76% 1.82%
Class Y 3.73% 2.88%
Growth and Income Balanced
Class A .54% 3.49%
Class B -.17% 2.89%
Class C -.17% 2.92%
Class Y .81% 3.93%
American Retirement Utility
Class A 3.10% 3.70%
Class B 2.49% 3.13%
Class C 2.49% 3.13%
Class Y 3.52% 4.14%
Small Cap Value
Class A 2.13% 1.43%
Class B 1.50% .66%
Class C 1.51% .66%
Class Y 2.48% 1.78%
Foundation
Class A 3.79%
Class B 3.19%
Class C 3.19%
Class Y 4.24%
Non-Standardized Performance
In addition to the performance information described above, a Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
- --------------------------------------------------------------------------------
GENERAL
- --------------------------------------------------------------------------------
From time to time, a Fund may quote its performance in advertising and
other types of literature as compared to the performance of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average,
Russell 2000 Index, or any other commonly quoted index of common stock prices.
The Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average and the Russell 2000 Index are unmanaged indices of selected common
stock prices. A Fund's performance may also be compared to those of other mutual
funds having similar objectives. This comparative performance would be expressed
as a ranking prepared by Lipper Analytical Services, Inc. or similar independent
services monitoring mutual fund performance. A Fund's performance will be
calculated by assuming, to the extent applicable, reinvestment of all capital
gains distributions and income dividends paid. Any such comparisons may be
useful to investors who wish to compare a Fund's past performance with that of
its competitors. Of course, past performance cannot be a guarantee of future
results.
Additional Information
Any shareholder inquiries may be directed to the shareholder's broker
or to each Adviser at the address or telephone number shown on the front cover
of this Statement of Additional Information. This Statement of Additional
Information does not contain all the information set forth in the Registration
Statements filed by the Trusts with the SEC under the Securities Act of 1933.
Copies of the Registration Statements may be obtained at a reasonable charge
from the SEC or may be examined, without charge, at the offices of the SEC in
Washington, D.C.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Each Fund's financial statements appearing in their most current fiscal
year Annual Report to shareholders and the report thereon of the independent
auditors appearing therein, namely Price Waterhouse LLP (in the case of Income
and Growth) or KPMG Peat Marwick LLP (in the case of Growth and Income, American
Retirement, Small Cap, Balanced, Utility, Foundation, Tax Strategic, Value, and
Total Return) are incorporated by reference into this Statement of Additional
Information. The Annual Reports to Shareholders for each Fund, which contain the
referenced statements, are available upon request and without charge.
<PAGE>
APPENDIX "A"
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Service. A Standard & Poor's corporate or
municipal bond rating is a current assessment of the credit worthiness of an
obligor with respect to a specific obligation. This assessment of credit
worthiness may take into consideration obligors such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or their arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay interest and
repay any principal.
AA - Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest and repay principal is very strong and in the majority
of instances they differ from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate and municipal issues. The ratings
measure the credit worthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service. A brief description of the applicable Moody's
rating symbols and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. NOTE:
Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible risk
factors; AA -- high credit quality, with strong protection factors and modest
risk, which may vary very slightly from time to time because of economic
conditions; A--average credit quality with adequate protection factors, but with
greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating categories.
Fitch Investors Service L.P.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high credit quality, with very strong ability to pay interest and repay
principal; A -- high credit quality, considered strong as regards principal and
interest protection, but may be more vulnerable to adverse changes in economic
conditions and circumstances. The indicators "+" and "-" to the AA, A and BBB
categories indicate the relative position of credit within those rating
categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule (the larger the final maturity relative to
other maturities the more likely it will be treated as a note).
o Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.) Note rating
symbols are as follows:
o SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
o SP-2 Satisfactory capacity to pay principal and interest.
o SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for state and
municipal short-term obligations will be designated Moody's Investment Grade
(MIG). This distinction is in recognition of the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the borrower
are uppermost in importance in short-term borrowing, while various factors of
major importance in bond risk are of lesser importance over the short run.
Rating symbols and their meanings follow:
o MIG 1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
o MIG 2 - This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
o MIG 3 - This designation denotes favorable quality. All security
elements are accounted for but this is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
o MIG 4 - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.: Commercial paper rated "Prime" carries the
smallest degree of investment risk. The modifiers 1, 2, and 3 are used to denote
relative strength within this highest classification.
Standard & Poor's Ratings Service: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service L.P.: F-1+ -- denotes exceptionally strong
credit quality given to issues regarded as having strongest degree of assurance
for timely payment; F-1 -- very strong, with only slightly less degree of
assurance for timely payment than F-1+; F-2 -- good credit quality, carrying a
satisfactory degree of assurance for timely payment.
<PAGE>
KEYSTONE BALANCED FUND (K-1)
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE BALANCED FUND (K-1)
SEPTEMBER 2, 1997
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Balanced Fund (K-1) (the "Fund") dated September 2, 1997. You may obtain a copy
of the prospectus from the Fund's principal underwriter, Evergreen Keystone
Distributor, Inc., or your broker-dealer.
TABLE OF CONTENTS
Page
The Fund.............................................................. 2
Service Providers.......................................................2
Investment Restrictions................................................ 3
Special Considerations................................................ 4
Distributions and Taxes............................................... 5
Valuation of Securities............................................... 6
Brokerage...............................................................7
Sales Charge.......................................................... 8
Distribution Plan..................................................... 10
Trustees and Officers..................................................11
The Trust Agreement................................................... 15
Investment Adviser.....................................................16
Principal Underwriter................................................. 18
Sub-administrator......................................................18
Expenses...............................................................19
Standardized Total Return
and Yield Quotations................................................ 20
Financial Statements...................................................20
Additional Information................................................ 21
Appendix..............................................................A-1
16547
<PAGE>
2
THE FUND
The Fund is an open-end, diversified management investment company,
commonly known as a mutual fund. The Fund's investment objective is to provide
shareholders with current income. Under normal circumstances, the Fund invests
in a combination of equity and debt securities chosen primarily for their
potential for current income and secondarily, to the extent consistent with the
Fund's investment objective, for their potential for capital appreciation. Under
normal circumstances, the Fund also maintains at least 25% of its total assets
in fixed income senior securities. In its search for income, the Fund may invest
in any type of security, including bonds, debentures, and income obligations, as
well as common and preferred stocks. The Fund normally emphasizes, however,
securities having a liberal current yield consistent with investment quality on
which the interest or dividend payments are considered reasonably secure.
Keystone Investment Management Company ("Keystone") serves as the Fund's
investment adviser.
Certain information about the Fund is contained in its prospectus. This
statement of additional information ("SAI") provides additional information
about the Fund that may be of interest to some investors.
- --------------------------------------------------------------------------------
SERVICE PROVIDERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Service Provider
- ---------------------------------------------------------------------------------------------------
<S> <C>
Investment adviser (referred to Keystone Investment Management Company, 200 Berkeley
in this SAI as "Keystone") Street, Boston, Massachusetts 02116 (Keystone is a wholly-
owned subsidiary of First Union Keystone, Inc. ("First
Union Keystone"), also located at 200 Berkeley Street,
Boston, Massachusetts 02116)
Principal underwriter (referred Evergreen Keystone Distributor, Inc. (formerly Evergreen
to in this SAI as "EKD") Funds Distributor, Inc.), 125 W. 55th Street, New York,
New York 10019
Predecessor to EKD (referred to Evergreen Keystone Investment Services, Inc. (formerly
in this SAI as "EKIS") Keystone Investment Distributors Company), 200 Berkeley
Street, Boston, Massachusetts 02116
Sub-administrator (referred to in BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio
this SAI as "BISYS") 43219
Transfer and dividend disbursing Evergreen Keystone Service Company (formerly Keystone
agent (referred to in this SAI as "EKSC") Investor Resource Center, Inc.), 200 Berkeley Street,
Boston, Massachusetts 02116 (EKSC is a wholly-owned
subsidiary of Keystone)
<PAGE>
3
Independent auditors KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, Certified Public Accountants
Custodian State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without a vote of the majority of the Fund's
outstanding voting shares (as defined in the Investment Company Act of 1940 (the
"1940 Act")). Unless otherwise stated, all references to Fund assets are in
terms of current market value.
The Fund may not do any of the following:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets, determined at market or other fair value at the time
of purchase, in the securities of any one issuer, or invest in more than 10% of
the outstanding voting securities of any one issuer, all as determined
immediately after such investment; provided that these limitations do not apply
to investments in securities issued or guaranteed by the United States ("U.S.")
government or its agencies or instrumentalities;
(2) invest more than 5% of the value of its total assets in companies
which have been in operation for less than three years;
(3) borrow money, except that the Fund may (a) borrow money from banks
for temporary or emergency purposes in aggregate amounts up to 10% of the value
of the Fund's net assets (computed at cost); or (b) enter into reverse
repurchase agreements (bank borrowings and reverse repurchase agreements, in
aggregate, shall not exceed 10% of the value of the Fund's net assets);
(4) underwrite securities, except that the Fund may purchase securities
from issuers thereof or others and dispose of such securities in a manner
consistent with its other investment policies; in the disposition of restricted
securities the Fund may be deemed to be an underwriter, as defined in the
Securities Act of 1933 (the "1933 Act");
(5) purchase or sell real estate or interests in real estate, except
that it may purchase and sell securities secured by real estate and securities
of companies which invest in real estate, and will not purchase or sell
commodities or commodity contracts, except that the Fund may engage in currency
or other financial futures contracts and related options transactions;
(6) invest for the primary purpose of exercising control over or
management of any issuer;
(7) make margin purchases or short sales of securities;
<PAGE>
4
(8) make loans, except that the Fund may purchase money market
securities, enter into repurchase agreements, buy publicly and privately
distributed debt securities and lend limited amounts of its portfolio securities
to broker-dealers; all such investments must be consistent with the Fund's
investment objectives and policies;
(9) invest more than 25% of its assets in the securities of issuers in
any single industry, other than securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities; and
(10) purchase the securities of any other investment company except in
the open market and at customary brokerage rates and in no event more than 3% of
the voting securities of any investment company.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in the value of
a security or a decrease in Fund assets is not a violation of the limit. With
respect to borrowing, applicable law may require the Fund to reduce the amount
of borrowing.
The Fund has no current intention of attempting to increase its net income
by borrowing and intends to repay any borrowings made in accordance with the
third investment restriction enumerated above before it makes any additional
investments.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
Additional restrictions adopted by the Fund, which may be changed by
the Fund's Board of Trustees, stipulate that the Fund may not purchase or retain
securities of an issuer if, to the knowledge of the Fund, any officer, Trustee,
or Director of the Fund or Keystone Investment Management Company "Keystone"),
each owning beneficially more than 1/2 of 1% of the securities of such issuer,
own, in the aggregate, more than 5% of the securities of such issuer, or such
persons or management personnel of the Fund or Keystone have a substantial
beneficial interest in the securities of such issuer. Portfolio securities of
the Fund may not be purchased from or sold or loaned to Keystone or any
affiliate thereof, or any of their Directors, officers or employees.
- --------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS
- --------------------------------------------------------------------------------
The Fund may invest in below investment grade securities. The Fund
currently expects, however, that less than 5% of its total assets will be
invested in such securities.
Such aggressive investing involves risks that are greater than the
risks of investing in higher quality debt securities. These risks are discussed
in greater detail below and include risks from (1) interest rate fluctuations;
(2) changes in credit status, including weaker overall credit condition of
issuers and risks of default; (3) industry, market and economic risks; (4)
volatility of price resulting from broad and rapid changes in the value of
underlying securities; and (5) greater price variability and credit risks of
certain high yield securities such as zero coupon bonds and payment-in-kind
("PIK") securities.
These risks provide the opportunity for maximizing return over time,
but may result in greater upward and downward movement of the net asset value
per share of the Fund. As a result, they should be carefully considered by
investors.
<PAGE>
5
While providing opportunities to maximize return over time, investors
should be aware of market, economic, and credit factors influencing below
investment grade, high yield securities: (1) securities rated BB or lower by
Standard & Poor's Ratings Group ("S&P") or Ba or lower by Moody's Investors
Service ("Moody's") are considered predominantly speculative with respect to the
ability of the issuer to meet principal and interest payments; (2) the value of
high yield securities may be more susceptible to real or perceived adverse
economic, company, or industry conditions than is the case for higher quality
securities; (3) adverse market, credit, or economic conditions could make it
difficult at certain times to sell certain high yield securities held by the
Fund; (4) the secondary market for high yield securities may be less liquid than
the secondary market for higher quality securities, which may affect the value
of certain high yield securities held by the Fund at certain times; and (5) zero
coupon and PIK high yield securities may be subject to greater changes in value
due to market conditions, the absence of a cash interest payment, and the
tendency of issuers of such securities to have weaker overall credit conditions
than other below investment grade, high yield securities. These characteristics
of below investment grade, high yield securities make them generally more
appropriate for long-term investment.
Part of the income sought by the Fund may be associated with securities
in the lower rating categories of the recognized rating agencies or with
securities that are unrated. Such high yield securities are generally rated BB
or lower by S&P or Ba or lower by Moody's. The Fund may invest in securities
that are rated as low as CCC by S&P and Caa by Moody's. Appendix A to this
statement of additional information describes these rating categories. The Fund
may also invest in unrated securities that, in the judgment of Keystone, the
Fund's investment adviser, offer comparable yields and risks as securities that
are rated, as well as in below investment quality zero coupon and PIK
securities.
Since the Fund may take an aggressive approach to investing a portion
of its assets, Keystone tries to maximize the return by controlling risk through
diversification, credit analysis, review of sector and industry trends, interest
rate forecasts and economic analysis. Keystone's analysis of securities focuses
on values based on factors such as interest or dividend coverage, asset values,
earnings prospects and the quality of management of the company. In making
investment recommendations, Keystone also considers current income, potential
for capital appreciation, maturity structure, quality guidelines, coupon
structure, average yield, percentage of zeros and PIKs, percentage of
nonaccruing items and yield to maturity. Keystone also considers the ratings of
Moody's and S&P assigned to various securities, but does not rely solely on
ratings assigned by Moody's and S&P because (1) Moody's and S&P assigned ratings
are based largely on historical financial data and may not accurately reflect
the current financial outlook of companies, and (2) there can be large
differences among the current financial conditions of issuers within the same
rating category.
Income and yields on high yield securities, as on all securities, will
fluctuate over time.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund will make distributions to its shareholders of dividends from
net investment income quarterly and net realized capital gains, if any, annually
in shares or, at the option of the shareholder, in cash. (Distributions of
ordinary income may be eligible in whole or in part for the corporate 70%
dividends received deduction.) Distributions are taxable whether received in
cash or additional shares. Shareholders who have not opted, prior to the record
date for any distribution, to receive cash will have the number of distributed
shares determined on the basis of the Fund's net asset value per share computed
at the end of the day on the record date after adjustment for the distribution.
Net asset value
<PAGE>
6
is used in computing the number of shares in both gains and income distribution
reinvestments. Account statements and/or checks, as appropriate, will be mailed
to shareholders by the 6th of the appropriate month. Unless the Fund receives
instructions to the contrary from a shareholder before the record date, it will
assume that the shareholder wishes to receive that distribution and future gains
and income distributions in shares. Instructions continue in effect until
changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder regardless of the period of time Fund shares have been held by the
shareholder. However, if such shares are held less than six months and redeemed
at a loss, the shareholder will recognize a long-term capital loss on such
shares to the extent of the long-term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution, it intends to distribute only its
net capital gains and such income as has been predetermined to the best of the
Fund's ability to be taxable as ordinary income. Shareholders of the Fund will
be advised annually of the federal income tax status of distributions.
- --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current value for the Fund's portfolio securities is determined as
follows:
(1) securities traded on an established exchange are valued on the
basis of the last sales price on the exchange where the securities are primarily
traded prior to the time of the valuation;
(2) securities traded in the over-the-counter market, for which
complete quotations are readily available, are valued at the mean of the bid and
asked prices at the time of valuation;
(3) short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which, when combined with accrued interest,
approximates market;
(4) short-term investments maturing in more than sixty days are valued
at market value;
(5) short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; and
(6) the Fund's Board of Trustees values the following securities at
prices it deems in good faith to be fair: (a) securities, including restricted
securities, for which complete quotations are not readily available; (b) listed
securities if, in the Board's opinion, the last sales price does not reflect a
current market value or if no sale occurred; and (c) other assets. While market
quotations may be readily available for certain long-term corporate bonds and
notes, such investments are stated at fair
<PAGE>
7
value on the basis of valuations furnished by a pricing service, approved by the
Board of Trustees, which determines valuations for normal, institutional-size
trading units of such securities using methods based on market transactions for
comparable securities and various relationships between securities that are
generally recognized by institutional traders.
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BROKERAGE
- --------------------------------------------------------------------------------
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund,
2. the efficiency with which the transaction is effected,
3. the broker's ability to effect the transaction where a large
block is involved,
4. the broker's readiness to execute potentially difficult
transactions in the future,
5. the financial strength and stability of the broker,
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information
("research services"), and
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research services from a broker,
the Fund would consider such services to be in addition to, and not in lieu of,
the services Keystone is required to perform under the Advisory Agreement (as
defined below). Keystone believes that the cost, value and specific application
of such information are generally indeterminable and cannot be practically
allocated between the Fund and its other clients who may indirectly benefit from
the availability of such information. Similarly, the Fund may indirectly benefit
from information made available as a result of transactions effected for
Keystone's other clients. Under the Advisory Agreement, Keystone is permitted to
pay higher brokerage commissions for brokerage and research services in
accordance with Section 28(e) of the Securities Exchange Act of 1934. In the
event Keystone follows such a practice, it will do so on a basis that is fair
and equitable to the Fund.
The Fund's Board of Trustees has determined that the Fund may consider
sales of Fund shares as a factor when selecting brokers to execute portfolio
transactions, subject to the requirements of best execution described above.
<PAGE>
8
BROKERAGE COMMISSIONS
Generally, the Fund expects to purchase and sell its securities through
brokerage transactions for which commissions are payable. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers, unless
more favorable prices are otherwise obtainable.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, EKD, or any of their affiliated persons, as defined in
the 1940 Act.
The Board of Trustees will, from time to time, review the Fund's
brokerage policy. In the event of further regulatory developments affecting the
securities exchanges and brokerage practices generally, the Board of Trustees
may change, modify or eliminate any of the foregoing practices.
- --------------------------------------------------------------------------------
SALES CHARGE
- --------------------------------------------------------------------------------
The Fund may charge a contingent deferred sales charge (a "CDSC") when
you redeem certain of its shares within four calendar years of purchase. The
Fund charges a CDSC as reimbursement for certain expenses, such as commissions
or shareholder servicing fees, that it has incurred in connection with the sale
of its shares (see "Distribution Plan"). If imposed, the Fund deducts the CDSC
from the redemption proceeds you would otherwise receive. CDSCs attributable to
your shares are, to the extent permitted by the National Association of
Securities Dealers, Inc. ("NASD"), paid to EKD or its predecessor.
CALCULATING THE CDSC
The CDSC is a declining percentage of the lesser of (1) the net asset
value of the shares you redeemed, or (2) the net asset value at time of purchase
of such shares. The CDSC is calculated according to the following schedule:
<PAGE>
9
REDEMPTION TIMING CDSC
During the calendar year of purchase......................4.00%
During the first calendar year after the
year of purchase........................................3.00%
During the second calendar
year after the year of purchase.........................2.00%
During the third calendar year
after the year of purchase..............................1.00%
Thereafter................................................0.00%
In determining whether a CDSC is payable and, if so, the percentage
charge applicable, the Fund will first redeem shares not subject to a CDSC and
will then redeem shares you have held the longest.
CDSC WAIVERS. The Fund does not impose a CDSC when the amount you are
redeeming represents:
1. an increase in the value of the shares redeemed above the
total cost of such shares due to increases in the net asset
value per share of the Fund;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares you have held for all or part of more than four
consecutive calendar years;
4. shares that are held in the accounts of a shareholder who has
died or become disabled;
5. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
6. automatic withdrawals from the ERISA plan of a shareholder who
is a least 59 1/2 years old;
7. shares in an account that the Fund has closed because the
account has an aggregate net asset value of less than $1,000;
8. automatic withdrawals under a Systematic Withdrawal Plan of up
to 1% per month of your initial account balance;
9. withdrawals consisting of loan proceeds to a retirement plan
participant;
10. financial hardship withdrawals made by a retirement plan
participant;
11. withdrawals consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan;
12. shares purchased by a bank or trust company in a single
account in the name of such bank or trust company as trustee
if the initial investment in shares of the Fund, any other
Keystone Classic Fund and/or any Evergreen Keystone Fund, is
at least $500,000
<PAGE>
10
and any commission paid by the Fund and such other fund at the
time of such purchase is not more than 1% of the amount
invested;
13. shares purchased by certain Directors, Trustees, officers and
employees of the Fund, Keystone and certain of their
affiliates; and
14. shares purchased by registered representatives of firms with
dealer agreements with EKD.
EXCHANGES. The Fund does not charge a CDSC on exchanges of shares
between funds in the Keystone Classic Fund Family that have adopted distribution
plans pursuant to Rule 12b-1 under the 1940 Act. If you do exchange shares of
one such fund for shares of another such fund, the Fund will deem the calendar
year of the exchange, for purposes of any future CDSC, to be the year the shares
tendered for exchange were originally purchased.
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DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear the expenses of distributing their shares if
they comply with various conditions, including the adoption of a distribution
plan containing certain provisions set forth in Rule 12b-1. The Fund bears some
of the costs of selling its shares under a Distribution Plan adopted on June 1,
1983 pursuant to Rule 12b-1 (the "Distribution Plan").
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of the average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. The NASD limits such annual expenditures to 1.0%, of
which 0.75% may be used to pay such distribution costs and 0.25% may be used to
pay shareholder service fees. The NASD also limits the aggregate amount that the
Fund may pay for such distribution costs to 6.25% of gross share sales since the
inception of the Fund's Distribution Plan plus interest at the prime rate plus
1% on unpaid amounts thereof (less any CDSC by shareholders to EKD).
Payments under the Distribution Plan are currently made to EKD which
may reallow all or part to others, such as broker-dealers) (1) as commissions
for Fund shares sold and (2) as shareholder service fees in respect of shares
maintained by the recipient and outstanding on the Fund's books for specific
periods. Amounts paid or accrued to EKD under (1) and (2) in the aggregate may
not exceed the limitation referred to above. EKD generally reallows to
broker-dealers or others a commission equal to 4% of the price paid for each
Fund share sold as well as a shareholder service fee at a rate of 0.25% per
annum of the net asset value of shares maintained by such recipient and
outstanding on the books of the Fund for specified periods.
If the Fund is unable to pay EKD a commission on a new sale because the
annual maximum (0.75% of average daily net assets) has been reached, EKD
intends, but is not obligated, to continue to accept new orders for the purchase
of Fund shares and to pay commissions and service fees to broker-dealers in
excess of the amount it currently receives from the Fund. While the Fund is
under no contractual obligation to pay EKD for advances made by EKD in excess of
the Distribution Plan limitation, EKD intends to seek full payment of such
amounts from the Fund (together with interest at the prime rate plus 1%) at such
time in the future as, and to the extent that, payment thereof by the
<PAGE>
11
Fund would be within permitted limits. If the Fund's disinterested Trustees (as
defined in the 1940 Act) (the "Independent Trustees") authorize such payments,
the effect will be to extend the period of time during which the Fund incurs the
maximum amount of costs allowed by the Distribution Plan. If the Distribution
Plan is terminated, EKD will ask the Independent Trustees to take whatever
action they deem appropriate under the circumstances with respect to payment of
such amounts.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above, and the amounts
and purposes of expenditures under the Distribution Plan must be reported to the
Fund's Independent Trustees quarterly. The Fund's Independent Trustees may
require or approve changes in the implementation or operation of the
Distribution Plan and may require that total expenditures by the Fund under the
Distribution Plan be kept within limits lower than the maximum amount permitted
by the Distribution Plan as stated above. If such costs are not limited by the
Independent Trustees, such costs could, for some period of time, be higher than
such costs permitted by most other plans presently adopted by other investment
companies.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
securities of the Fund.
Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on such amendment.
While the Distribution Plan is in effect, the Fund is required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plan have
benefited the Fund.
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TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and officers of the Fund, their principal occupations and
some of their affiliations over the last five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
FREDERICK AMLING: Trustee of the Fund; Trustee or Trustee of all other funds in the
Keystone Families of Funds; Professor, Finance Department,
George Washington University; President, Amling & Company
(investment advice); and former Member, Board of Advisers, Cre
dito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Trustee or Director of all funds in the Evergreen
Family of Funds other than Evergreen Investment Trust and Evergreen
Variable Trust; real estate developer and construction consultant; and
President of Centrum Equities and Centrum Properties, Inc.
<PAGE>
12
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Principal and Investment Counselor
of Appleton Partners, Inc. (investment advice); Director,
Merrimack Mutual Fire Insurance Company, Cambridge Mutual
Fire Insurance Company, Bay State Insurance Company, Beacon
Diagnostics, Inc. (biotechnology); former Director, Executive Vice
President and Chief Financial Officer, State Street Research &
Management Company (investment advice).
FOSTER BAM: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Trustee or Director of all the funds
in the Evergreen Family of Funds other than Evergreen
Investment Trust and Evergreen Variable Trust; Partner in the
law firm of Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary services); and
former Director, Chartwell Group Ltd. (manufacturer of office
furnishings and accessories), Waste Disposal Equipment
Acquisition Corporation and Rehabilitation Corporation of
America (rehabilitation hospitals).
*GEORGE S. BISSELL: Chief Executive Officer of the Fund and each of the other funds in
the Keystone Families of Funds; Chairman of the Board and
Trustee of the Fund; Chairman of the Board and Trustee or
Director of all other funds in the Keystone Families of Funds;
Chairman of the Board and Trustee of Anatolia College; Trustee
of
University Hospital (and Chairman of its Investment Committee);
former Director and Chairman of the Board of Hartwell Keystone
Advisers, Inc.; and former Chairman of the Board, Director and
Chief Executive Officer of Keystone Investments, Inc..
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Principal, Padanaram Associates,
Inc.; and former Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; and former Director, Peoples Bank
(Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Trustee, Treasurer and Chairman of
the Finance Committee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chairman
and President, Oldways Preservation and Exchange Trust (educa
tion); former Chairman of the Board, Director, and Executive Vice
President, The London Harness Company; former Managing Part
ner, Roscommon Capital Corp.; former Chief Executive Officer,
Gifford Gifts of Fine Foods; former Chairman, Gifford, Drescher
<PAGE>
13
& Associates (environmental consulting); and former Director,
Keystone Investments, Inc. and Keystone.
JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Chairman and Trustee or Director of
all the funds in the Evergreen Family of Funds; former Chairman
of the Distribution Foundation for the Carolinas; and former Vice
President of Lance Inc. (food manufacturing).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Chairman of the Board and Chief
Executive Officer, Carson Products Company; Director of Phoenix
Total Return Fund and Equifax, Inc.; Trustee of Phoenix Series
Fund, Phoenix Multi-Portfolio Fund, and The Phoenix Big Edge
Series Fund; and former President, Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Chairman and Of Counsel, Keyser,
Crowley & Meub, P.C.; Member, Governor's (VT) Council of Eco
nomic Advisers; Chairman of the Board and Director, Central
Vermont Public Service Corporation and Lahey Hitchcock Clinic;
Director, Vermont Yankee Nuclear Power Corporation, Grand
Trunk Corporation, Grand Trunk Western Railroad, Union
Mutual Fire Insurance Company, New England Guaranty
Insurance Company, Inc., and the Investment Company Institute;
former Director and President, Associated Industries of Vermont;
former Director of Keystone, Central Vermont Railway, Inc., S.K.I.
Ltd., and Arrow Financial Corp.; and former Director and
Chairman of the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONNELL: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Trustee or Director of all of the funds in the
Evergreen Family of Funds; and Sales Representative with Nucor-Yamoto, Inc.
(steel producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Trustee or Director of all of the funds
in the Evergreen Family of Funds other than Evergreen Variable
Trust; former Vice President and Director of Rexham Corporation;
and former Director of Carolina Cooperative Federal Credit
Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Families of Funds; Trustee or Director of all the funds
in the Evergreen Family of Funds other than Evergreen Variable Trust; and
Partner in the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Vice Chair and former Executive Vice
President, DHR International, Inc. (executive recruitment);
<PAGE>
14
former Senior Vice President, Boyden International Inc. (executive
recruitment); and Director, Commerce and Industry Association
of New Jersey, 411 International, Inc., and J&M Cumming Paper
Co.
RUSSELL A. SALTON, III MD: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Trustee or Director of all the funds
in the Evergreen Family of Funds; Medical Director, U.S. Health
Care/Aetna Health Services; and former Managed Health Care
Consultant; former President, Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Trustee or Director of all the funds
in the Evergreen Family of Funds; and Attorney, Law Offices of
Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Chairman, Environmental Warranty,
Inc. (insurance agency); Executive Consultant, Drake Beam
Morin, Inc. (executive outplacement); Director of Connecticut
Natural Gas Corporation, Hartford Hospital, Old State House
Association, Middlesex Mutual Assurance Company, and Enhance
Financial Services, Inc.; Chairman, Board of Trustees, Hartford
Graduate Center; Trustee, Greater Hartford YMCA; former
Director, Vice Chairman and Chief Investment Officer, The
Travelers Corporation; former Trustee, Kingswood-Oxford School;
and former Managing Director and Consultant, Russell Miller,
Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other funds in the
Keystone Families of Funds; Partner, Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C.; Adjunct Professor of Law
and former Associate Dean, St. John's University School of Law;
Adjunct Professor of Law, Touro College School of Law; and
former President, Nassau County Bar Association.
JOHN J. PILEGGI: President and Treasurer of The Fund; President and Treasurer of
all other funds in the Evergreen Keystone Family of Funds; Senior
Managing Director, Furman Selz LLC since 1992; Managing Director from
1984 to 1992; Consultant, BISYS Fund Services since 1996; 230 Park Avenue,
Suite 910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds in the
Evergreen Keystone Family of Funds; Senior Vice President and Director of
Administration and Regulatory Services, BISYS Fund Services since
1995; Vice President/Assistant General Counsel, Alliance Capital Management
from 1988 to 1995; 3435 Stelzer Road, Columbus, Ohio.
</TABLE>
<PAGE>
15
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
The Fund does not pay any direct remuneration to any officer or Trustee
who is an "affiliated person" of Keystone or any of its affiliates. See
"Investment Adviser." During the fiscal year ended June 30, 1997, the
unaffiliated Trustees received retainers or fees totaling $61,740 from the Fund.
For the year December 31, 1996, aggregate compensation received by Independent
Trustees on a fund complex wide basis (which includes over 30 mutual funds) was
$411,000. As of July 31, 1997, the Trustees and officers beneficially owned less
than 1.00% of the Fund's then outstanding shares.
Except as set forth above, the address of all of the Fund's Trustees
and the address of the Fund is 200 Berkeley Street, Boston, Massachusetts
02116-5034.
Set forth below for each of the Trustees receiving in excess of $60,000
for the fiscal period of July 1, 1996 through June 30, 1997 is the total
compensation paid to such Trustee by the Evergreen Keystone Funds:
Total
Compensation
From Registrant
and Fund Complex
NAME PD. TO TRUSTEES
James S. Howell $93,800
Gerald M. McDonnell $80,000
Thomas L. McVerry $85,000
William Walt Pettit $82,500
Russell A Salton, III M.D. $87,000
Michael S. Scofield $88,200
- --------------------------------------------------------------------------------
THE TRUST AGREEMENT
- --------------------------------------------------------------------------------
TRUST AGREEMENT
The Fund is a Pennsylvania common law trust established under a Trust
Agreement dated July 15, 1935, as restated and amended (the "Trust Agreement").
The Trust Agreement restructured the Fund so that its operation would be
substantially similar to that of most other mutual funds. The Trust Agreement
provides for a Board of Trustees and enables the Fund to enter into an agreement
with an investment manager and/or adviser to provide the Fund with investment
advisory, management, and administrative services. A copy of the Trust Agreement
is on file as an exhibit to the Fund's Registration Statement, of which this SAI
is a part. This summary is qualified in its entirety by reference to the Trust
Agreement.
<PAGE>
16
DESCRIPTION OF SHARES
The Trust Agreement authorizes the issuance of an unlimited number of
shares of beneficial interest and the creation of additional series and/or
classes of series of Fund shares. Each share represents an equal proportionate
interest in the Fund with each other share of that class. Upon liquidation,
shares are entitled to a pro rata share in the net assets of their class of Fund
shares. Shareholders shall have no preemptive or conversion rights. Shares are
transferable. The Fund currently intends to issue only one class of shares.
SHAREHOLDER LIABILITY
Pursuant to court decisions or other theories of law, shareholders of a
Pennsylvania common law trust could possibly be held personally liable for the
obligations of the trust. The possibility of Fund shareholders incurring
financial loss under such circumstances appears to be remote, however, because
the Trust Agreement (1) contains an express disclaimer of shareholder liability
for obligations of the Fund; (2) requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Trustees; and (3) provides for indemnification out of Fund
property for any shareholder held personally liable for the obligations of the
Fund.
VOTING RIGHTS
Under the terms of the Trust Agreement, the Fund does not hold annual
meetings. At meetings called for the initial election of Trustees or to consider
other matters, shares are entitled to one vote per share. Shares generally vote
together as one class on all matters. No amendment may be made to the Trust
Agreement that adversely affects any class of shares without the approval of a
majority of the shares of that class. There shall be no cumulative voting in the
election of Trustees.
After a meeting as described above, no further meetings of shareholders
for the purpose of electing Trustees will be held, unless required by law, or
until such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time, the Trustees then in office will call a
shareholders' meeting for the election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely unless otherwise required by law and may appoint successor
Trustees. A Trustee may cease to hold office or may be removed from office (as
the case may be) (1) at any time by a two-thirds vote of the remaining Trustees;
(2) when such Trustee becomes mentally or physically incapacitated; or (3) at a
special meeting of shareholders by a two-thirds vote of the outstanding shares.
Any Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Trust Agreement provides that a Trustee shall be liable only for
his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees, or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person; provided, however, that
nothing in the Trust Agreement shall protect a Trustee against any liability for
his willful misfeasance, bad faith, gross negligence, or reckless disregard of
his duties.
The Trustees have absolute and exclusive control over the management
and disposition of all assets of the Fund and may perform such acts as in their
sole judgment and discretion are necessary and
<PAGE>
17
proper for conducting the business and affairs of the Fund or promoting the
interests of the Fund and the shareholders.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Subject to the general supervision of the Fund's Board of Trustees,
Keystone provides investment advice, management and administrative services to
the Fund.
On December 11, 1996, the predecessor corporation to First Union
Keystone, Keystone Investments, Inc. ("Keystone Investments") and indirectly
each subsidiary of Keystone Investments, including Keystone, were acquired (the
"Acquisition") by First Union National Bank ("FUNB"), a wholly-owned subsidiary
of First Union Corporation ("First Union"). Keystone Investments was acquired by
FUNB by merger into a wholly-owned subsidiary of FUNB, which entity then assumed
the First Union Keystone name and succeeded to the business of the predecessor
corporation. Contemporaneously with the Acquisition, the Fund entered into a new
investment advisory agreement with Keystone and into a principal underwriting
agreement with EKD, an indirect wholly-owned subsidiary of BISYS. The new
investment advisory agreement (the "Advisory Agreement") was approved by the
shareholders of the Fund on December 9, 1996, and became effective on December
11, 1996.
First Union Keystone and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $143 billion in consolidated assets as of
June 30, 1997. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, Keystone and Evergreen Asset Management
Corp., a wholly-owned subsidiary of FUNB, manage or otherwise oversee the
investment of over $66 billion in assets as of June 30, 1997 belonging to a wide
range of clients, including the Evergreen Keystone Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to (1) custodian charges and expenses; (2) bookkeeping and auditors' charges and
expenses; (3) transfer agent charges and expenses; (4) fees and expenses of
Independent Trustees; (5) brokerage commissions, brokers' fees and expenses; (6)
issue and transfer taxes; (7) costs and expenses under the Distribution Plan;
(8) taxes and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the Securities and Exchange Commission ("SEC") or
under state or other securities laws; (11) expenses of preparing, printing and
mailing prospectuses, statements of additional information, notices, reports and
proxy materials to shareholders of the Fund; (12) expenses of shareholders' and
Trustees' meetings; (13) charges and expenses of legal counsel for the Fund and
for the Independent Trustees of the Fund on matters relating to the Fund; and
(14) charges and expenses
<PAGE>
18
of filing annual and other reports with the SEC and other authorities, and all
extraordinary charges and expenses of the Fund.
The Fund pays Keystone a fee for its services at the annual rate set
forth below:
Aggregate Net
1.5% of Gross Dividend Asset Value of the
Management Fee and Interest Income plus Shares of the Fund
- ----------------------------------------------------------------------------
0.60% of the first $100,000,000, plus
0.55% of the next $100,000,000, plus
0.50% of the next $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $500,000,000, plus
0.30% of amounts over $1,000,000,000
Keystone's fee is computed as of the close of business each business day and
payable monthly.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its assignment.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") with EKD. EKD, which is not affiliated with First
Union, replaces EKIS as the Fund's principal underwriter. EKIS may no longer
serve as principal underwriter of the Fund due to regulatory restrictions
imposed by the Glass-Steagall Act upon national banks such as FUNB and their
affiliates, that prohibit such entities from acting as the underwriters of
mutual fund shares. While EKIS may no longer serve as principal underwriter of
the Fund as discussed above, EKIS may continue to receive compensation from the
Fund or EKD in respect of underwriting and distribution services performed prior
to the termination of EKIS as principal underwriter. In addition, EKIS may also
be compensated by EKD for the provision of certain marketing support services to
EKD at an annual rate of up to 0.75% of the average daily net assets of the
Fund, subject to certain restrictions.
EKD, as agent, has agreed to use its best efforts to find purchasers
for the shares. EKD may retain and employ representatives to promote
distribution of the shares and may obtain orders from broker-dealers and others,
acting as principals, for sales of shares to them. The Underwriting Agreement
provides that EKD will bear the expense of preparing, printing, and distributing
advertising
<PAGE>
19
and sales literature and prospectuses used by it. In its capacity as principal
underwriter, EKD or EKIS, its predecessor, may receive payments from the Fund
pursuant to the Fund's Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (1) by a vote of a
majority of the Independent Trustees, and (2) by vote of a majority of the
Trustees, in each case, cast in person at a meeting called for that purpose.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its assignment.
From time to time, if, in EKD's judgment, it could benefit the sales of
Fund shares, EKD may provide to selected broker-dealers promotional materials
and selling aids, including, but not limited to, personal computers, related
software, and Fund data files.
- --------------------------------------------------------------------------------
SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
BISYS provides personnel to serve as officers of the Fund, and provides
certain administrative services to the Fund pursuant to a sub-administrator
agreement. For its services under that agreement, BISYS receives from Keystone a
fee based on the aggregate average daily net assets of the Fund at a rate based
on the total assets of all mutual funds administered by BISYS for which FUNB
affiliates also serve as investment adviser. The sub-administrator fee is
calculated in accordance with the following schedule:
Aggregate Average Daily Net Assets Of Mutual Funds
Sub-Administrator Administered By BISYS For Which Any Affiliate Of
Fee FUNB Serves As Investment Adviser
- ---------------------------------------------------------------
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
The total assets of the mutual funds for which FUNB affiliates also
serve as investment advisers were approximately $30.5 billion as of June 30,
1997.
<PAGE>
20
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY FEE
For each of the Fund's last three fiscal years, the table below lists
the total dollar amounts paid by the Fund to Keystone for investment advisory
services rendered. For more information, see "Investment Adviser."
Percent of Fund's Fee Paid to
Average Net Assets Keystone under
represented by the Advisory
Fiscal Year Ended Keystone's Fee Agreement
June 30, 1997 0.44% $6,854,615
June 30, 1996 0.45% $6,447,849
June 30, 1995 0.47% $6,272,956
DISTRIBUTION PLAN EXPENSES
For the fiscal year ended June 30, 1997, the Fund paid $15,437,631 to
EKD or EKIS under its Distribution Plan. For more information, see "Distribution
Plan."
UNDERWRITING COMMISSIONS
For each of the Fund's last three fiscal years, the table below lists
the aggregate dollar amounts of underwriting commissions (distribution fees,
plus CDSCs) paid to EKD or EKIS with respect to the public distribution of the
Fund's shares. The table also indicates the aggregate dollar amount of
underwriting commissions retained by EKD or EKIS. For more information, see
"Principal Underwriter" and "Sales Charges."
Aggregate Dollar Amount of
Aggregate Dollar Amount of Underwriting Commissions
Fiscal Year Ended Underwriting Commissions Paid Retained
June 30, 1997 $12,902,944 $7,306,569
June 30, 1996 $7,306,569 $3,573,051
June 30, 1995 $779,658 $6,917,053
BROKERAGE COMMISSIONS
Fiscal Year Ended Brokerage Commissions Paid
June 30, 1997 $403,548
<PAGE>
21
June 30, 1996 $494,396
June 30, 1995 $727,705
- --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for the Fund as they may appear from time to
time in advertisements are calculated by finding the average annual compounded
rates of return over one, five, and ten year periods on a hypothetical $1,000
investment that would equate the initial amount invested to the ending
redeemable value. To the initial investment all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the one,
five, or ten year periods.
The cumulative total return of the Fund for the one, five, and ten year
periods ended June 30, 1997 was 18.95% (including CDSCs), 78.31%, and 159.65%,
respectively. The compounded average annual rates of return for the one, five,
and ten year periods ended June 30, 1997 were 18.95% (including CDSCs), 12.26%,
and 10.01%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund's current yield for
the thirty-day period ended June 30, 1997 was 2.52%.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the SEC:
Schedule of Investments as of June 30, 1997;
Financial Highlights for each of the years in the ten-year period ended
June 30, 1997;
Statement of Assets and Liabilities as of June 30, 1997;
Statement of Operations for the year ended June 30, 1997;
Statements of Changes in Net Assets for each of the years in the
two-year period ended June 30, 1997;
Notes to Financial Statements; and
Independent Auditors' Report dated August 8, 1997.
<PAGE>
22
A copy of the Fund's Annual Report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, or by calling EKSC toll free at 1-800-343-2898.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
As of July 31, 1997, no shareholder of record owned 5% or more of the
Fund's outstanding shares.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorize payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1.00% of the Fund's net
assets in any 90-day period. Securities delivered in payment of redemptions
would be valued at the same value assigned to them in computing the net asset
value per share and would, to the extent permitted by law, be readily
marketable. Shareholders receiving such securities would incur brokerage costs
upon the sale of securities.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this SAI or in supplemental sales literature issued by the Fund or
EKD, and no person is entitled to rely on any information or representation not
contained therein.
The Fund's prospectus and this SAI omit certain information contained
in the registration statement filed with the SEC, which may be obtained from the
SEC's principal office in Washington, D.C. upon payment of the fee prescribed by
the rules and regulations promulgated by the SEC.
<PAGE>
EVERGREEN
BALANCED FUNDS
(four photos: Statue of Liberty, bonds, column, dam)
(Photo of mountain and tree)
1997 ANNUAL REPORT
Evergreen Keystone
(Logo) FUNDS(SM) (Logo)
<PAGE>
EVERGREEN BALANCED FUNDS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
(Statue of Liberty photo) Economic Overview......................................................... 1
EVERGREEN A Report From Your Portfolio Manager...................................... 3
AMERICAN Results to Date........................................................... 5
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
RETIREMENT Statement of Investments.................................................. 6
FUND Statement of Assets and Liabilities....................................... 12
Statements of Operations.................................................. 13
Statements of Changes in Net Assets....................................... 14
Financial Highlights...................................................... 15
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
(Certificates photo) EVERGREEN A Report From Your Portfolio Manager...................................... 17
BALANCED Results to Date........................................................... 19
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
FUND Statement of Investments.................................................. 20
Statement of Assets and Liabilities....................................... 23
Statements of Operations.................................................. 24
Statements of Changes in Net Assets....................................... 25
Financial Highlights...................................................... 26
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
(Column photo) EVERGREEN A Report From Your Portfolio Manager...................................... 30
FOUNDATION Results to Date........................................................... 32
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
FUND Statement of Investments.................................................. 33
Statement of Assets and Liabilities....................................... 39
Statements of Operations.................................................. 40
Statements of Changes in Net Assets....................................... 41
Financial Highlights...................................................... 42
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
(Dam photo) EVERGREEN TAX A Report From Your Portfolio Managers..................................... 44
STRATEGIC Results to Date........................................................... 46
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
FOUNDATION Statement of Investments.................................................. 47
FUND Statement of Assets and Liabilities....................................... 52
Statements of Operations.................................................. 53
Statements of Changes in Net Assets....................................... 54
Financial Highlights...................................................... 55
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
Combined Notes to Financial Statements.................................... 57
Independent Auditors' Report.............................................. 66
Trustees and Officers...................................... Inside Back Cover
Federal Income Tax Status of Distributions................. Inside Back Cover
</TABLE>
<PAGE>
EVERGREEN BALANCED FUNDS
ECONOMIC OVERVIEW
BY EVERGREEN ASSET MANAGEMENT CHAIRMAN
STEPHEN A. LIEBER
The dynamic United States economy during the first third of 1997 has almost
overwhelmed the expectations (Stephen A. Lieber photo) of the experts. The
achievement of a gross domestic product increase of 5.6% in the first quarter,
together with a core inflation rate of 2.2% and little indicated pressure for
wage inflation, dramatically contrasts with the predictions of economists who
anticipated slower growth and a trend of rising wages as the number of
unemployed shrank as a percentage of the labor force. Even more confounding, is
the contrast with expectations of the business cycle. If the economy were to be
following the pattern evident in most post-war years, it would now be deep in a
recession, not in an impressively sustained expansion. The investor, as well as
the economist, must ask whether this is a significantly different era for the
American economy, suggesting different responses and strategies.
Several major differences from recent experience are evident. Comparatively
stable wage costs are foremost, and are the subject of much debate. Some argue
that U.S. wage costs are held down by international competition, especially as a
result of the rise of the dollar, and the consequent cheapening of imports.
Others hold that the bargaining power of labor has been diminished by the
downsizing of corporations with its emphasis on productivity gains. Another view
is that industry emphasis on cost control and flexibility on relocation has
served to reduce the bargaining power of the work force. Irrespective of which
one of the factors is decisive, the evidence does indicate that wage pressures
have unexpectedly not mirrored the rise in employment. The issue of increased
productivity is also debated as an important factor, but there is very little
agreement on the statistical evidence.
The prospects for increasing productivity are enhanced by sustained capital
spending, up at a rate of 11.9% in the first quarter. Raw materials have also
played a role in reducing cost pressures, especially with the decline in oil and
petroleum products during the first quarter. Seldom have commodity price
pressures been so few during a period of significantly increased demand.
Notwithstanding these favorable trends, the Federal Open Market Committee
chose to make a "pre-emptive" 0.25% increase in the discount rate during March,
with a view toward containing the pressures for too rapid economic growth. In
this environment of favorable trends, it is understandable that consumer
spending has risen to record levels, up 6.4% in the first quarter, that consumer
savings rose to 5.3% in March, and that polls of consumer confidence show a
diminished anticipation of recession.
Investment implications of this economic strength are, as usual, subject to
widespread debate. The most obvious implication is that the strong economy is
producing a broad, sustained growth in corporate profits, which translates into
higher dividends and, to-date, in higher stock prices. It has also brought
higher bond yields and a decline in bond prices as the anticipation of Federal
Reserve growth restraining policies become more widespread. The higher bond
yields, in turn, also tend to put competitive pressures against the higher stock
prices achieved because of rising corporate earnings. The challenge for
investors is, in fact, an unusual one; responding to what many economists and,
perhaps, the Federal Reserve regulators view as a too successful economy. How
does one invest in an economy which appears to be too successful?
The approach to this challenge favored by the Evergreen Keystone Funds is
to concentrate investment on long-term values. Those values include corporations
with strong financial condition, long-term records of outstanding achievement,
effective management which enhances its business franchise with new and improved
products and services, and well-grounded innovators who can create new demand
and, thus, rapidly growing businesses. A cautious and patient approach which
takes into account the volatility of the securities markets generated by this
unexpected strength and "pre-emptive" monetary moves, seems to us the best
long-term approach. Patient accumulation with purchases during periods of market
weakness, 1
<PAGE>
EVERGREEN BALANCED FUNDS
ECONOMIC OVERVIEW -- (CONTINUED)
and judicious sales during those periods so aptly named by Federal Reserve
Chairman, Alan Greenspan, as "irrational exuberance", are the strategies of our
equity management. Important, too, is the use of appropriate balance between
equities and fixed income, with a careful adjustment of the allocation of
assets, including the maturities of obligations in an effort to both minimize
risk and maximize return. International investing presents yet another
opportunity for asset allocation, based on the search for the most comparatively
undervalued and well-grounded long-term growth opportunities. Recognizing the
multiplicity of choices, the complexity of asset allocation, and the necessity
for constant evaluation in order to take advantage of shifting opportunities,
the Evergreen Keystone Funds provide a wide variety of investing options and an
investment management group oriented toward long-term results. 2
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty photo)
A REPORT FROM YOUR
PORTFOLIO MANAGER
IRENE O'NEILL
Evergreen American Retirement Fund's fiscal year-end was changed from
December 31, to March 31. This report will concentrate on the three-month (Irene
O'Neill period ended March 31, photo) 1997. During the three-month period under
review, the broad equity markets rose dramatically before turning down sharply
in mid-March. Although prices in fixed income markets rose early in the year,
they declined from mid-February through the end of the quarter. For the
three-month period ended March 31, 1997, the Fund's total return was unchanged
(Class Y, no-load shares: 0%*, Class A shares at net asset value: -0.1%*), which
was in line with the Lipper Balanced Fund Average of the 335 balanced funds
tracked by Lipper Analytical Services during that time**. (Please see page 5 for
additional performance information.)
Within the equity portfolio, the Fund's best performing industries during
the period under review were energy; building, construction and furnishings; and
banks. The energy industry, representing 8.8% of net assets, includes oil field
services companies and oil and gas producers. This sector extended its strong
performance from 1996, providing a 6.4% return for the period. Although energy
prices subsided as the winter weather waned, the trend toward rising global
demand, especially in emerging nations, remains in place. Oil and gas producers
are increasing their production volumes and stepping up exploration activity to
replace reserves and boost production further. The accelerated pace of
exploration has lifted demand for oil field services, and companies in this
market are raising the prices they charge their customers. This combination is
stimulating earnings growth. The building, construction and furnishings segment,
representing 0.8% of net assets, is composed primarily of cement companies and
provided a 6.3% return during the three-month period. These companies continue
to benefit from strong construction activity which has supported higher selling
prices for cement. Due to the high level of operating leverage in this business,
rising prices are driving strong earnings growth. The banking sector,
representing 9.1% of net assets, provided a return of 3.8% during the period.
These stocks rose on expectations that bank earnings trends will be favorably
affected by share buybacks and productivity gains. Bank stocks are often favored
as defensive investments during volatile periods in the stock market as this
industry trades at a lower valuation than the broad market and is generally
expected to meet earnings estimates, FIGURES REPRESENT PAST PERFORMANCE, WHICH
IS NO GUARANTEE OF FUTURE RESULTS. * -4.8% WAS THE 3-MONTH TOTAL RETURN ENDED
3/31/97, FOR THE FUND'S CLASS A SHARES WITH THE MAXIMUM 4.75% FRONT-END SALES
CHARGE. PERFORMANCE FIGURES INCLUDE REINVESTMENT OF INCOME DIVIDEND AND CAPITAL
GAIN DISTRIBUTIONS, IF ANY. INVESTMENT RETURN, PRINCIPAL VALUE AND YIELD WILL
FLUCTUATE. INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. THE FUND ALSO OFFERS CLASS B SHARES, WHICH ARE SUBJECT TO A
MAXIMUM 5% CONTINGENT DEFERRED SALES CHARGE, AND CLASS C SHARES WHICH ARE
SUBJECT TO A 1% CONTINGENT DEFERRED SALES CHARGE WITHIN THE FIRST YEAR AFTER THE
MONTH OF PURCHASE. THE FUND'S CLASS Y (NO-LOAD) SHARES ARE AVAILABLE TO CERTAIN
INSTITUTIONAL INVESTORS. PLEASE SEE THE PROSPECTUSES FOR ADDITIONAL INFORMATION
REGARDING THESE CLASSES OF SHARES. ** SOURCE: LANA (LIPPER ANALYTICAL NEW
APPLICATIONS) LIPPER ANALYTICAL SERVICES INC., IS AN INDEPENDENT MUTUAL FUNDS
PERFORMANCE MONITOR. LIPPER AVERAGE DOES NOT INCLUDE SALES CHARGES AND IF
INCLUDED, AVERAGE MAY BE LOWER. 3
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty photo)
A REPORT FROM YOUR
PORTFOLIO MANAGER -- (CONTINUED)
The electric utility and transportation industries, representing 5.4% and
0.5%, respectively, of net assets, were the two weakest sectors during the
quarter. Stocks in the electric utility sector declined 9.1% as a result of
concerns about deregulation and rising interest rates. Uncertainty about the
outcome of deregulation proposals floated by utility regulators in various
states has clouded the outlook for the industry. Additionally, the prospect of
rising interest rates as the Federal Reserve attempts to slow the economy put
pressure on electric utility stock prices. The railroad stocks, which comprise
the Fund's transportation industry, declined 9% during the quarter. Severe
winter weather in much of the Western United States delayed rail shipments and
will negatively impact first quarter earnings for these companies. These stocks
were also affected by the prospect of rising interest rates as the railroad
industry is considered economically sensitive.
New equity purchases for the Fund continued to emphasize defensive issues,
especially convertibles, which offer yield considerably higher than the market
average. Among the issues purchased were convertibles in Proffitt's, Inc., a
regional retailer; National Australia Bank, the largest bank in Australia;
Equitable Company, a major insurance insurer; and MCN Corp., a gas distributor
and exploration and production company. Consistent with the Fund's focus on
equities with above market yields, common stocks purchased for the Fund included
First Palm Beach Bancorp, Inc., a Florida bank; Long Island Lighting Company, a
New York utility; and Berry Petroleum, a heavy oil producer. With a rising
interest rate environment likely to produce a period of volatility for the
equity markets, the Fund's focus on equities with high dividend yields should
offer downside protection.
After practically pre-announcing its move, the Federal Open Market
Committee raised the Federal Funds rate .25% at its March 25 meeting. From
nearly all economic reports, the U.S. economy appears to be running too hot.
Consumer demand, which accounts for two-thirds of the Gross Domestic Product, is
strong and will probably grow over 5% in the first quarter. Consumer confidence
is at record highs, the unemployment rate is low, and job creation is strong.
Tight job markets appear to be sparking a pickup in wage growth. Wages rose
about 2.5% per year from 1992 to 1994 and are increasing at 4% annual rate
currently. One or more tightenings are likely to follow by the end of the third
quarter, which could bring the Federal Funds rate to 6%. The heady growth of the
U.S. economy in the first quarter took long-term U.S. Treasury bond yields from
6.64% on December 31, to 7.08% on March 31.
During the second calendar quarter, economic reports are likely to show
signs of some moderation in growth as the economy ebbs and flows. The real issue
will be whether the Federal Reserve moved pre-emptively enough to prevent an
inflationary up-tick in prices. If it has, economic growth should coast to a
lower level through the remainder of 1997 and into 1998. The Fund's fixed income
portfolio remained defensively positioned during the quarter because of our
concern at the beginning of 1997 that economic growth was accelerating and might
prompt an interest rate hike. Purchases for the fixed income portfolio consisted
of five-year notes issued by the Federal Home Loan Bank and Federal Home Loan
Mortgage Corp. Both of these issues carry call features, which give them above
market yields which, in turn, tend to insulate the Fund from rising interest
rates. At quarter-end the Fund's fixed income portfolio had a weighted average
maturity of 4.7 years and a duration of 3.2 years, nearly unchanged from
year-end 1996.
Consistent with its objectives and conservative investment style, Evergreen
American Retirement Fund continues to hold a diversified and balanced portfolio,
emphasizing income-producing securities that are both defensive and have the
potential for capital growth.
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty photo)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN AMERICAN RETIREMENT FUND
The graphs below compare a $10,000 investment in the Evergreen American
Retirement Fund (Class A, Class B, Class C and Class Y Shares) with a similar
investment in the Wilshire 5000 and Lehman Brothers Government/Corporate Bond
Indexes ("Indexes").
(Four chart graphics appear here, values are as follows:)
Class A
1-Year Total Return=3.75%
Average Annual Compound
Return Since Inception=13.89%
(Customer to fill in plot points on 4 graphs below)
Evergreen American Retirement Fund
Wilshire 5000 Index
Lehman Brothers Government/
Corporate Bond Index
1/3/95* 3/95 3/96 9/96 3/97
Class B
1-Year Total Return=3.02%
Average Annual Compound
Return Since Inception=14.37%
Evergreen American Retirement Fund
Wilshire 5000 Index
Lehman Brothers Government/
Corporate Bond Index
1/13/95* 3/95 9/95 3/96 9/96 3/97
Class C
1-Year Total Return=7.07%
Average Annual Compound
Return Since Inception=15.52%
Evergreen American Retirement Fund
Wilshire 5000 Index
Lehman Brothers Government/
Corporate Bond Index
1/3/95* 3/95 9/95 3/96 9/96 3/97
Class Y
1-Year Total
Return=9.09%
Average Annual
Compound Return:
5-Year=11.29%
Since Inception
=10.53%
3/14/88* 12/88 12/89 12/90 12/91 12/92 12/94 12/94 12/96 3/97
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the
initial $10,000 investment in Class A Shares; (b) the maximum applicable
contingent deferred sales charge was deducted from the value of the investment
in Class B and Class C Shares, assuming full redemption on March 31, 1997;
(c) all recurring fees (including investment advisory fees) were deducted; and
(d) all dividends and distributions were reinvested.
The Indexes are unmanaged and include the reinvestment of income, but do
not reflect the payment of transaction costs and advisory fees associated with
an investment in the Fund.
5
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty Photo)
STATEMENT OF INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- 45.1%
AEROSPACE & DEFENSE -- 0.0% (A)
2,800 Newport News Shipbuilding, Inc. $ 40,600
AUTOMOTIVE EQUIPMENT &
MANUFACTURING -- 0.3%
14,700 Federal-Mogul Corp................. 361,988
BANKS -- 7.4%
40,000 Australia & New Zealand Banking.... 1,240,000
20,000 BancorpSouth, Inc.................. 547,500
20,000 Bank of New York Co., Inc. (The)... 735,000
16,000 Cape Cod Bank & Trust Co........... 432,000
13,000 Comerica, Inc...................... 732,875
25,050 Crestar Financial Corp............. 867,356
45,000 First Palm Beach Bancorp, Inc...... 1,248,750
4,000 First Union Corp. **............... 324,500
5,000 Fleet Financial Group, Inc......... 286,250
53,000 Hibernia Corp. Cl. A............... 695,625
25,000 Liberty Bancorp, Inc............... 1,162,500
25,200 Maryland Federal Bancorp, Inc...... 888,300
16,000 Susquehanna Bancshares, Inc........ 526,000
9,686,656
BUILDING, CONSTRUCTION &
FURNISHINGS -- 0.5%
7,937 Hanson Plc......................... 180,567
13,584 Medusa Corp........................ 509,400
689,967
BUSINESS EQUIPMENT &
SERVICES -- 1.8%
5,000* AC Nielson Corp.................... 75,000
15,000 Cognizant Corp..................... 436,875
15,000 Dun & Bradstreet Corp. (The)....... 380,625
817 Lucent Technologies, Inc........... 43,097
157* NCR Corp........................... 5,534
18,000 Pitney Bowes, Inc.................. 1,057,500
16,000 Reynolds & Reynolds Co. (The), Cl.
A.................................. 382,000
2,380,631
CHEMICAL & AGRICULTURAL
PRODUCTS -- 1.9%
2,000 Dow Chemical Co. (The)............. 160,000
8,000 Eastman Chemical Co................ 430,000
11,000 Grace (W.R.) & Co.................. 521,125
17,000 Imperial Chemical Industrial
Plc, ADR........................... 773,500
4,535 Millennium Chemicals Inc........... 85,031
5,000 Praxair, Inc....................... 224,375
SHARES VALUE
</TABLE>
CHEMICAL & AGRICULTURAL
PRODUCTS -- CONTINUED
<TABLE>
<CAPTION>
<C> <S> <C>
15,600 Stepan Chemical Co................. $ 288,600
2,482,631
COMMUNICATION SYSTEMS &
SERVICES -- 0.1%
5,500* AirTouch Communications, Inc....... 126,500
CONSUMER PRODUCTS &
SERVICES -- 1.6%
3,000 Colgate-Palmolive Co............... 298,875
15,875* Imperial Tobacco Group Plc ADR..... 212,328
11,000 International Flavors &
Fragrances, Inc.................... 481,250
30,000 Jostens, Inc....................... 678,750
11,000 Tambrands, Inc..................... 471,625
2,142,828
DIVERSIFIED COMPANIES -- 1.7%
5,000 Harris Corp........................ 384,375
2,000 Minnesota Mining & Manufacturing
Co................................. 169,000
19,000* Tenneco, Inc....................... 741,000
50,000 Tomkins Plc, ADR................... 925,000
2,219,375
ELECTRICAL EQUIPMENT &
SERVICES -- 1.4%
15,000 AMP, Inc........................... 515,625
2,000 Emerson Electric Co................ 90,000
11,656 Hubbell, Inc. Cl.B................. 492,466
16,000 Thomas & Betts Corp................ 684,000
1,782,091
ENERGY -- 5.7%
8,000 Amoco Corp......................... 693,000
4,000 Atlantic Richfield Co.............. 540,000
60,000 Berry Petroleum Co. Cl. A.......... 855,000
1,302 El Paso Natural Gas Co............. 73,726
7,937* Energy Group Plc ADR............... 254,976
7,700 Exxon Corp......................... 829,675
3,000 Kerr-McGee Corp.................... 185,625
5,000 Mobil Corp......................... 653,125
19,250 Northwest Natural Gas Co........... 471,625
4,000 PanEnergy Corp..................... 172,500
10,775 Seitel, Inc........................ 381,165
6,000 Texaco, Inc........................ 657,000
52,928 Union Pacific Resource Group,
Inc................................ 158,574
30,000 Williams Companies., Inc. (The).... 1,335,000
</TABLE>
6
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty Photo)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- CONTINUED
ENERGY -- CONTINUED
<C> <S> <C>
5,000 YPF Sociedad Anonima, Cl.D ADR..... $ 132,500
7,393,491
FINANCE & INSURANCE -- 3.3%
35,000 GCR Holdings, Ltd.................. 800,625
8,000 Hartford Steam Boiler Inspection &
Insurance Co. (The)................ 358,000
10,000 ITT Hartford Group, Inc............ 721,250
20,000 LaSalle Re Holdings, Ltd........... 575,000
30,000 Ohio Casualty Corp................. 1,233,750
1,500 Provident Cos., Inc................ 82,125
3,000 Transamerica Corp.................. 268,500
4,123 Trenwick Group, Inc................ 204,088
4,243,338
FOOD & BEVERAGE PRODUCTS -- 1.2%
18,000 H.J. Heinz Co...................... 711,000
50,000 Lance, Inc......................... 900,000
1,611,000
HEALTHCARE PRODUCTS &
SERVICES -- 2.4%
14,000 Bristol-Myers Squibb Co............ 826,000
14,000 Shared Medical System Corp......... 651,000
5,000 Warner-Lambert Co.................. 432,500
30,000 West Co., Inc. (The)............... 813,750
5,333 Zeneca Group Plc, ADR.............. 454,638
3,177,888
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- 1.6%
60,000 BW/IP Holding, Inc. Cl.A........... 907,500
30,000 Goulds Pumps, Inc.................. 701,250
15,000 Graco, Inc......................... 431,250
2,040,000
METAL PRODUCTS & SERVICES -- 0.8%
42,000 Lindberg Corp...................... 378,000
5,000 Phelps Dodge Corp.................. 365,625
10,000 Quanex Corp........................ 251,250
994,875
LEISURE & TOURISM -- 0.7%
45,000 Gaylord Entertainment Co. Cl. A.... 967,500
PAPER & PACKAGING -- 0.2%
12,000 Westvaco Corp...................... 301,500
PUBLISHING, BROADCASTING &
ENTERTAINMENT -- 1.7%
2,460* Cox Communications, Inc. Cl.A...... 50,737
SHARES VALUE
</TABLE>
PUBLISHING, BROADCASTING &
ENTERTAINMENT -- CONTINUED
<TABLE>
<CAPTION>
<C> <S> <C>
15,625* Evergreen Media Corp. Cl. A........ $ 456,055
8,000 McGraw-Hill Cos., Inc.............. 409,000
30,000 Reader's Digest Assn., Inc. (The)
Cl.A............................... 862,500
5,800 Time Warner, Inc................... 250,850
2,803 Times Mirror Co. Series A.......... 153,114
2,182,256
REAL ESTATE -- 0.6%
10,000 Post Property, Inc................. 381,250
15,000 Prentiss Properties Trust.......... 380,625
761,875
RETAILING & WHOLESALE -- 0.6%
8,000 J. C. Penney Co., Inc.............. 381,000
8,000 Mercantile Stores Co., Inc......... 371,000
752,000
TEXTILE & APPAREL -- 0.6%
3,800 Garan, Inc......................... 68,400
10,000 Oxford Industry, Inc............... 266,250
6,600 V. F. Corp......................... 441,375
776,025
TRANSPORTATION -- 0.5%
3,191 Burlington Northern Santa Fe....... 236,134
7,000 Union Pacific Corp................. 397,250
633,384
UTILITIES -- ELECTRIC -- 5.4%
18,200 Commonwealth Energy System......... 379,925
20,000 Eastern Utilities Assn............. 360,000
30,000 Enova Corp......................... 660,000
30,000 Houston Industries, Inc............ 626,250
10,000 Illinova Corp...................... 228,750
50,000 Long Island Lighting Co............ 1,200,000
37,000 PP&L Resources, Inc................ 749,250
20,000 Public Service Enterprise Group,
Inc................................ 525,000
22,000 Southern Co........................ 464,750
4,000 Southwestern Public Svc. Co........ 143,500
10,000 Texas Utilities Co................. 342,500
55,000 TNP Enterprises, Inc............... 1,175,625
8,000 Unicom Corp........................ 156,000
7,011,550
UTILITIES -- GAS -- 2.3%
15,000 AGL Resource, Inc.................. 275,625
40,500 Chesapeake Utilities Corp.......... 703,688
</TABLE>
7
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty Photo)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- CONTINUED
UTILITIES -- GAS -- CONTINUED
<C> <S> <C>
25,000 CMS Energy Corp. Cl. G............. $ 465,625
22,000 South Jersey Industry, Inc......... 470,250
40,000 Southwest Gas Corp................. 695,000
20,400 Yankee Energy System, Inc.......... 448,800
3,058,988
UTILITIES -- TELEPHONE -- 0.8%
2,521 AT & T Corp........................ 87,605
35,000 Frontier Corp...................... 625,625
10,000 U.S. West, Inc..................... 340,000
1,053,230
TOTAL COMMON STOCKS
(COST $48,623,071)............... 58,872,167
CONVERTIBLE PREFERRED STOCKS -- 11.3%
BANKS -- 1.0%
50,000* National Australia Bank Limited
7.875%, UNIT....................... 1,250,000
BUILDING, CONSTRUCTION &
FURNISHINGS -- 0.3%
7,000 Southdown, Inc.
$2.875, Series D................... 395,500
BUSINESS EQUIPMENT &
SERVICES -- 0.4%
6,000 Microsoft Corp.
$2.196, Series A PERCS............. 486,750
COMMUNICATION SYSTEMS &
SERVICES -- 0.7%
30,000 AirTouch Communications Cl.B
6.00%, 8/16/99..................... 768,750
5,000 Sprint Corp.
8.25%, DECS
(exchangeable for Southern New
England Telecommunications,
Corp. Common Stock)................ 171,875
940,625
CONSUMER PRODUCTS &
SERVICES -- 0.4%
5,000 SCI Finance LLC
$3.125, Series A................... 516,250
ENERGY -- 0.4%
5,000 Nuevo Energy Co.
5.75%, Series A, TECONS............ 240,625
5,000 Valero Energy Corp.
$3.125............................. 336,875
577,500
SHARES VALUE
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS -- CONTINUED
FINANCE & INSURANCE -- 1.5%
20,000 American General Corp.
$3.00, Series A, MIPS.............. $ 1,125,000
15,000 Merrill Lynch & Co., Inc.
7.25%, STRYPES due 6/15/99
(exchangeable for SunAmerica,
Inc. Common Stock)................. 885,000
2,010,000
FOOD & BEVERAGE PRODUCTS -- 0.8%
20,000 Wendy's Financing I
5.00%, Series A, TECONS............ 1,012,500
HEALTHCARE PRODUCTS & SERVICES -- 0.2%
5,000 Pacificare Health Systems
Delaware, $1.00, Series A.......... 166,875
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- 1.0%
80,000 Worthington Industries, Inc.
7.25%, DECS
(exchangeable for Rouge Steel, Co.
Common Stock)...................... 1,280,000
METAL PRODUCTS & SERVICES -- 0.7%
20,000* Timet Capital Trust I 144A
6.625%, BUCS....................... 937,600
PAPER & PACKAGING -- 1.0%
20,000 Crown Cork & Seal Co., Inc.
4.5%, MIPS......................... 985,000
10,000 James River Corp. Virginia
9.00%, Series P, DECS.............. 270,000
1,255,000
PUBLISHING, BROADCASTING &
ENTERTAINMENT -- 1.8%
15,000 AMC Entertainment, Inc.
$1.75.............................. 510,000
10,000* American Radio Systems Corp.
7%, 144A........................... 470,000
10,300 Granite Broadcasting Corp.
$1.938............................. 504,700
20,000 Merrill Lynch & Co., Inc.
6.00%, STRYPES due 6/1/99
(exchangeable for Cox
Communications, Inc)............... 410,000
10,000 TCI Communications, Inc.
$2.125, Series A................... 387,500
1,197 Times Mirror Co.
$1.374, Series B................... 39,800
2,322,000
</TABLE>
8
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty Photo)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS -- CONTINUED
<C> <S> <C>
TEXTILE & APPAREL -- 0.1%
5,000 Designer Financial Trust
6.00%, 12/30/16 TOPRS.............. $ 163,125
UTILITIES -- 1.0%
40,000 MCN Corp.
8.75%, PRIDES...................... 1,070,000
5,000 Philippine Long Distance
Telephone Co., GDS
7.00%, Series III.................. 275,000
1,345,000
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $13,929,232)............... 14,658,725
PRINCIPAL
AMOUNT
<C> <S> <C>
CONVERTIBLE DEBENTURES -- 7.9%
BUSINESS EQUIPMENT &
SERVICES -- 1.6%
$1,000,000 Adaptec, Inc. 144A
4.75%, 2/1/04...................... 981,300
1,000,000 HMT Technology Corp. 144A
5.75%, 1/15/04..................... 850,000
250,000 Platinum Technology, Inc.
6.75%, 11/15/01.................... 280,000
2,111,300
ENERGY -- 0.4%
500,000 Swift Energy Co.
6.25%, 11/15/06.................... 492,500
FINANCE & INSURANCE -- 0.8%
900,000 Equitable Cos., Inc. (The)
6.125%, 12/15/24................... 1,064,250
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- 0.5%
600,000 Robbins & Myers, Inc.
6.50%, 9/1/03...................... 697,500
OIL FIELD SERVICES -- 2.3%
500,000 Key Energy Group, Inc. 144A
7.50%, 7/1/03...................... 740,000
1,000,000 Nabors Industries, Inc.
5.00%, 5/15/06..................... 1,265,000
1,000,000 Offshore Logistics, Inc. 144A
6.00%, 12/15/06.................... 965,000
2,970,000
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CONVERTIBLE DEBENTURES -- CONTINUED
PUBLISHING, BROADCASTING &
ENTERTAINMENT -- 0.4%
$1,000,000 Jacor Communications, Inc.
Zero coupon, 6/12/11............... $ 457,500
RETAILING & WHOLESALE -- 1.5%
500,000 Central Garden & Pet Co. 144A
6.00%, 11/15/03.................... 476,250
1,500,000 Proffitt's Inc.
4.75%, 11/1/03..................... 1,507,500
1,983,750
REAL ESTATE -- 0.4%
1,000,000 Marriot International, Inc.
Zero Coupon, 3/25/11............... 552,500
TOTAL CONVERTIBLE DEBENTURES
(COST $9,816,701)................ 10,329,300
CORPORATE BONDS -- 3.4%
BANKS -- 0.7%
1,000,000 NationsBank Corp.
6.50%, 8/15/03..................... 959,739
CONSUMER PRODUCTS &
SERVICES -- 0.4%
500,000 Pepsico, Inc.
6.875%, 5/15/97.................... 500,682
FINANCE & INSURANCE -- 1.5%
1,000,000 American General Finance Corp.
7.125%, 12/1/99.................... 1,006,602
1,000,000 Ford Motor Credit Co.
5.625%, 12/15/98................... 984,182
1,990,784
TELECOMMUNICATION SERVICES &
EQUIPMENT -- 0.8%
1,000,000 GTE Southwest, Inc. Series A
5.82%, 12/1/99..................... 976,158
TOTAL CORPORATE BONDS
(COST $4,501,740)................ 4,427,363
</TABLE>
9
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty Photo)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & AGENCY
OBLIGATIONS -- 22.0%
<C> <S> <C>
GOVERNMENT AGENCY NOTES &
BONDS -- 20.9%
Federal Agricultural Mortgage
Corp. Medium-Term Note
$ 700,000 7.03%, 5/26/98..................... $ 705,221
Federal Home Loan Bank
2,000,000 5.65%, 12/29/00.................... 1,925,398
2,000,000 6.13%, 12/14/98.................... 1,989,448
1,000,000 6.195%, 2/5/03..................... 958,808
2,000,000 6.455%, 7/8/98..................... 2,002,418
2,000,000 7.26%, 4/3/02...................... 2,000,000
1,000,000 7.29%, 10/18/01.................... 998,323
3,000,000 7.67%, 1/25/07..................... 2,944,962
3,000,000 8.00%, 1/10/12..................... 2,938,479
Federal Home Loan
Mortgage Corp.
1,000,000 6.773%, 1/7/02..................... 986,227
1,000,000 6.91%, 6/20/05..................... 974,361
2,000,000 7.00%, 3/12/02..................... 1,979,808
2,000,000 7.585%, 9/19/06.................... 1,989,144
Federal National Mortgage Assn.
1,000,000 6.25%, 8/12/03..................... 956,791
1,000,000 6.41%, 3/8/06...................... 956,227
2,000,000 6.68%, 12/28/01.................... 1,965,526
Student Loan Marketing Assn.
1,000,000 5.90%, 2/20/01..................... 967,165
27,238,306
TREASURY NOTES & BONDS -- 1.1%
U.S. Treasury Bonds
1,500,000 7.125%, 2/15/23.................... 1,480,781
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(COST $29,184,844)............... 28,719,087
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 8.9%
COMMERCIAL PAPER -- 8.9%
Bell Atlantic Financial
Services, Inc.
$ 900,000 5.30%, 4/16/97..................... $ 898,012
300,000 5.52%, 4/30/97..................... 298,666
550,000 Columbia/HCA Healthcare Corp.
5.52%, 5/9/97...................... 546,795
1,900,000 Federal National Mortgage
Assn. Discount Notes
5.22%, 4/24/97..................... 1,893,663
950,000 Finova Capital Corp.
5.32%, 4/10/97..................... 948,737
450,000 General Electric Capital Corp.
Discount Notes
5.52%, 5/12/97..................... 447,171
600,000 Great Lakes Chemical Corp.
5.32%, 4/25/97..................... 597,872
2,100,000 Holy Cross Health System Corp.
5.35%, 4/16/97..................... 2,095,319
850,000 Norfolk Southern Corp.
5.27%, 4/24/97..................... 847,138
300,000 Pearson, Inc.
5.31%, 4/10/97..................... 299,602
500,000 PHH Corp.
5.32%, 4/7/97...................... 499,557
1,000,000 Riverwoods Funding Corp.
5.60%, 5/5/97...................... 994,711
1,000,000 Tennessee Valley Authority
Discount Notes
5.29%, 4/29/97..................... 995,886
200,000 Transamerica Corp.
5.32%, 4/30/97..................... 199,143
11,562,272
TOTAL SHORT-TERM INVESTMENTS
(COST $11,562,272)............... 11,562,272
TOTAL INVESTMENTS --
(COST $117,617,860)...... 98.6 % 128,568,914
OTHER ASSETS AND
LIABILITIES -- NET....... 1.4 % 1,817,475
NET ASSETS................. 100.0 % $130,386,389
</TABLE>
10
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty Photo)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
* Non-income producing securities.
** At March 31, 1997 and December 31, 1996 the Fund
owned 4,000 shares of common stock of First Union Corp.
at a cost of $106,108. During the three months ended
March 31, 1997 and year ended December 31, 1996 the
fund earned $2,320 and $8,800, respectively, in dividend
income from this investment. These were purchased by the
Fund prior to the acquisition of the investment advisor and
Lieber & Company by First Union.
(a) Less than one tenth of one percent.
The following abbreviations are used in this portfolio:
ADR -- American Depositary Receipts
BUCS -- Beneficial Unsecured Convertible Securities
DECS -- Dividend Enhanced Convertible Stock
GDS -- Global Depositary Shares
MIPS -- Monthly Income Preferred Shares
PERCS -- Preferred Equity Redemption Cumulative
Stock
PRIDES -- Provisionally Redeemable Income Debt
Exchangeable for Stock
STRYPES -- Structured Yield Product Exchangeable for
Stock
TECONS -- Term Convertible Shares
TOPRS -- Trust Originated Preferred Shares
144A -- Rule 144A securities are restricted as to resale to
qualified institutional investors
See accompanying notes to financial statements.
11
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty Photo)
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $117,617,860)........................................................... $128,568,914
Cash.......................................................................................................... 71,136
Receivable for investment securities sold..................................................................... 1,529,094
Receivable for Fund shares sold............................................................................... 1,718,468
Dividends and interest receivable............................................................................. 799,467
Receivable from investment advisor............................................................................ 90,000
Prepaid expenses.............................................................................................. 68,132
Total assets............................................................................................ 132,845,211
LIABILITIES:
Payable for investment securities purchased................................................................... 2,000,900
Payable for Fund shares repurchased........................................................................... 186,529
Distribution fee payable...................................................................................... 94,346
Advisory fee payable.......................................................................................... 81,969
Accrued expenses and other liabilities........................................................................ 95,078
Total liabilities....................................................................................... 2,458,822
NET ASSETS....................................................................................................... $130,386,389
NET ASSETS CONSISTS OF:
Paid-in capital............................................................................................... $119,185,572
Undistributed net investment income........................................................................... 11,347
Undistributed net realized gain on investment transactions.................................................... 238,416
Net unrealized appreciation of investments.................................................................... 10,951,054
Net assets.............................................................................................. $130,386,389
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A shares ($14,590,144 (divided by) 1,062,020 shares of beneficial interest outstanding)................ $13.74
Sales charge -- 4.75% of offering price....................................................................... .69
Maximum offering price.................................................................................. $14.43
Class B shares ($76,790,544 (divided by) 5,617,901 shares of beneficial interest outstanding)................. $13.67
Class C shares ($1,768,772 (divided by) 129,121 shares of beneficial interest outstanding).................... $13.70
Class Y shares ($37,236,929 (divided by) 2,710,150 shares of beneficial interest outstanding)................. $13.74
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty Photo)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $7,812 and $17,809)............................ $ 683,306 $1,791,668
Interest...................................................................................... 746,948 1,705,527
Total investment income................................................................. 1,430,254 3,497,195
EXPENSES:
Advisory fee.................................................................................. 225,438 549,949
Distribution fee -- Class A Shares............................................................ 7,950 14,426
Distribution fee -- Class B Shares............................................................ 124,370 199,829
Shareholder services fee -- Class B Shares.................................................... 41,457 66,610
Distribution fee -- Class C Shares............................................................ 2,995 5,713
Shareholder services fee -- Class C Shares.................................................... 998 1,904
Registration and filing fees.................................................................. 54,250 50,750
Custodian fee................................................................................. 35,808 71,900
Transfer agent fee............................................................................ 57,111 73,721
Professional fees............................................................................. 17,602 18,371
Reports and notices to shareholders........................................................... 24,005 16,745
Insurance..................................................................................... 2,747 1,850
Trustees' fees and expenses................................................................... 3,175 5,335
Miscellaneous................................................................................. 5,784 12,965
Total expenses.......................................................................... 603,690 1,090,068
Less: Fee waivers and expense reimbursements.................................................. (90,000) (28,241)
Net expenses............................................................................... 513,690 1,061,827
Net investment income............................................................................ 916,564 2,435,368
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions.................................................. 274,144 537,906
Net change in unrealized appreciation (depreciation) of investments........................... (1,782,365) 6,223,491
Net realized and unrealized gain (loss) on investments........................................... (1,508,221) 6,761,397
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................. ($ 591,657) $9,196,765
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND
(Statue of Liberty Photo)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................................... $ 916,564 $ 2,435,368 $ 1,556,941
Net realized gain on investment transactions............................ 274,144 537,906 460,019
Net change in unrealized appreciation (depreciation) of investments..... (1,782,365) 6,223,491 6,860,189
Net increase (decrease) in net assets resulting from operations...... (591,657) 9,196,765 8,877,149
DISTRIBUTIONS TO SHAREHOLDERS:
FROM NET INVESTMENT INCOME:
Class A Shares.......................................................... (114,069) (214,502) (15,368)
Class B Shares.......................................................... (485,797) (839,295) (56,118)
Class C Shares.......................................................... (11,029) (22,543) (987)
Class Y Shares.......................................................... (323,235) (1,330,115) (1,498,372)
Total distributions from net investment income....................... (934,130) (2,406,455) (1,570,845)
IN EXCESS OF NET INVESTMENT INCOME:
Class A Shares.......................................................... -- -- (12)
Class B Shares.......................................................... -- -- (44)
Class C Shares.......................................................... -- -- (1)
Class Y Shares.......................................................... -- -- (1,166)
Total distributions in excess of net investment income............... -- -- (1,223)
FROM NET REALIZED GAINS ON INVESTMENTS:
Class A Shares.......................................................... -- (61,826) --
Class B Shares.......................................................... -- (302,689) --
Class C Shares.......................................................... -- (7,483) --
Class Y Shares.......................................................... -- (321,583) --
Total distributions from net realized gains on investments........... -- (693,581) --
IN EXCESS OF NET REALIZED GAINS ON INVESTMENTS:
Class A Shares.......................................................... -- (3,185) --
Class B Shares.......................................................... -- (15,592) --
Class C Shares.......................................................... -- (385) --
Class Y Shares.......................................................... -- (16,566) --
Total distributions in excess of net realized gains on investments... -- (35,728) --
Total distributions to shareholders............................... (934,130) (3,135,764) (1,572,068)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold............................................... 27,711,777 66,932,304 9,254,552
Proceeds from reinvestment of distributions............................. 847,895 2,790,578 1,339,655
Payment for shares redeemed............................................. (8,115,115) (9,928,020) (9,463,471)
Net increase resulting from Fund share transactions.................. 20,444,557 59,794,862 1,130,736
Net increase in net assets........................................ 18,918,770 65,855,863 8,435,817
NET ASSETS:
Beginning of period..................................................... 111,467,619 45,611,756 37,175,939
End of period (including undistributed net investment income of $11,347,
$28,913 and $0, respectively)........................................ $130,386,389 $111,467,619 $45,611,756
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND --
CLASS A AND B SHARES
(Statue of Liberty photo)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B
THREE THREE YEAR
MONTHS MONTHS ENDED
ENDED YEAR ENDED ENDED DECEMBER
MARCH 31, DECEMBER 31 MARCH 31, 31
1997** 1996 1995* 1997** 1996
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period................................ $13.86 $12.82 $10.65 $13.80 $12.80
Income (loss) from investment operations:
Net investment income.............................................. .11 .45 .41 .09 .36
Net realized and unrealized gain (loss) on investments............. (.12) 1.12 2.22 (.13) 1.09
Total from investment operations.................................. (.01) 1.57 2.63 (.04) 1.45
Less distributions to shareholders from:
Net investment income.............................................. (.11) (.42) (.46) (.09) (.34)
Net realized gain on investments................................... -- (.11) -- -- (.11)
Total distributions.............................................. (.11) (.53) (.46) (.09) (.45)
Net asset value, end of period...................................... $13.74 $13.86 $12.82 $13.67 $13.80
TOTAL RETURN+....................................................... (.1%) 12.5% 24.9% (.3%) 11.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......................... $14,590 $11,116 $1,335 $76,791 $57,622
Ratios to average net assets:
Expenses #......................................................... 1.37%++ 1.30% 1.37%++ 2.11%++ 2.06%
Net investment income #............................................ 3.43%++ 3.53% 3.73%++ 2.68%++ 2.79%
Portfolio turnover rate............................................. 9% 16% 49% 9% 16%
Average commission rate paid per share.............................. $.0606 $.0619 N/A $.0606 $.0619
1995*
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period................................ $10.65
Income (loss) from investment operations:
Net investment income.............................................. .35
Net realized and unrealized gain (loss) on investments............. 2.20
Total from investment operations.................................. 2.55
Less distributions to shareholders from:
Net investment income.............................................. (.40)
Net realized gain on investments................................... --
Total distributions.............................................. (.40)
Net asset value, end of period...................................... $12.80
TOTAL RETURN+....................................................... 24.1%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......................... $4,839
Ratios to average net assets:
Expenses #......................................................... 2.12%++
Net investment income #............................................ 2.97%++
Portfolio turnover rate............................................. 49%
Average commission rate paid per share.............................. N/A
</TABLE>
* For the period from January 3, 1995 (commencement of class operations) to
December 31, 1995.
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
++ Annualized.
# Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of operating expenses and net investment income (loss) to average net assets
would have been the following:
<TABLE>
<CAPTION>
CLASS A CLASS B
THREE THREE YEAR
MONTHS MONTHS ENDED
ENDED YEAR ENDED ENDED DECEMBER
MARCH 31, DECEMBER 31, MARCH 31, 31,
1997** 1996 1995* 1997** 1996
<S> <C> <C> <C> <C> <C>
Expenses............................................................ 1.68% 1.33% 10.96% 2.43% 2.09%
Net investment income (loss)........................................ 3.12% 3.50% (5.86% ) 2.36% 2.76%
<CAPTION>
1995*
<S> <C>
Expenses............................................................ 4.20%
Net investment income (loss)........................................ .89%
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
EVERGREEN AMERICAN RETIREMENT FUND --
CLASS C AND Y SHARES
(Statue of Liberty photo)
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS C CLASS Y
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31, YEAR ENDED DECEMBER 31,
1997** 1996 1995* 1997** 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period......... $13.83 $12.81 $10.65 $13.86 $12.83 $10.67 $11.60 $10.95
Income (loss) from investment operations:
Net investment income........................ .09 .36 .36 .14 .48 .47 .60 .56
Net realized and unrealized gain (loss) on
investments................................ (.13) 1.11 2.19 (.14) 1.10 2.16 (.93) .96
Total from investment operations.......... (.04) 1.47 2.55 -- 1.58 2.63 (.33) 1.52
Less distributions to shareholders from:
Net investment income....................... (.09) (.34) (.39) (.12) (.44) (.47) (.60) (.60)
Net realized gain on investments............ -- (.11) -- -- (.11) -- -- (.24)
In excess of net realized gain on
investments................................ -- -- -- -- -- -- -- (.03)
Total distributions....................... (.09) (.45) (.39) (.12) (.55) (.47) (.60) (.87)
Net asset value, end of period............... $13.70 $13.83 $12.81 $13.74 $13.86 $12.83 $10.67 $11.60
TOTAL RETURN+................................ (.3%) 11.6% 24.0% .0% 12.6% 25.1% (2.9%) 14.1%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).... $1,769 $1,487 $110 $37,237 $41,243 $39,327 $37,176 $37,336
Ratios to average net assets:
Expenses.................................... 2.12%#++ 2.05%# 2.10%#++ 1.11%#++ 1.05%# 1.26% 1.28% 1.36%
Net investment income....................... 2.65%#++ 2.80%# 2.96%#++ 3.56%#++ 3.65%# 3.96% 5.40% 5.13%
Portfolio turnover rate...................... 9% 16% 49% 9% 16% 49% 136% 92%
Average commission rate paid per share....... $.0606 $.0619 N/A $.0606 $.0619 N/A N/A N/A
1992
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period......... $10.52
Income (loss) from investment operations:
Net investment income........................ .66
Net realized and unrealized gain (loss) on
investments................................ .55
Total from investment operations.......... 1.21
Less distributions to shareholders from:
Net investment income....................... (.61)
Net realized gain on investments............ (.17)
In excess of net realized gain on
investments................................ --
Total distributions....................... (.78)
Net asset value, end of period............... $10.95
TOTAL RETURN+................................ 11.8%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).... $23,781
Ratios to average net assets:
Expenses.................................... 1.51%#
Net investment income....................... 6.23%#
Portfolio turnover rate...................... 151%
Average commission rate paid per share....... N/A
</TABLE>
* For the period from January 3, 1995 (commencement of class operations) to
December 31, 1995.
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
++ Annualized.
# Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of operating expenses and net investment income (loss) to average net assets
would have been the following:
<TABLE>
<CAPTION>
CLASS Y
CLASS C YEAR
THREE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED ENDED DECEMBER
MARCH 31, DECEMBER 31, MARCH 31, 31,
1997** 1996 1995* 1997** 1996
<S> <C> <C> <C> <C> <C>
Expenses........................................................ 2.43% 2.08% 103.52% 1.38% 1.09%
Net investment income (loss).................................... 2.34% 2.77% (98.46%) 3.29% 3.61%
1992
<S> <C>
Expenses........................................................ 1.59%
Net investment income (loss).................................... 6.15%
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
EVERGREEN BALANCED FUND
(photo of certificates)
A REPORT FROM YOUR
PORTFOLIO MANAGER
DEAN HAWES
Evergreen Balanced Fund's fiscal year-end was changed from
December 31, to March 31. For the twelve-month period ended
March 31, 1997, Evergreen Balanced Fund's total return (Class Y, (Dean Hawes
no-load shares) was 9.9%*. This return was achieved in an photo appears
environment in which bonds, as a result of the rise in interest here)
rates, provided only modest returns. Fortunately, the stock
market continued its rise and rewarded investors with above
average gains. During this twelve-month period, fixed income
exposure remained essentially unchanged while equity exposure
was reduced modestly to 51% from 54%. Despite assuming a more
conservative posture, the relative outperformance in the final
two quarters of the fiscal year allowed Evergreen Balanced Fund,
for the twelve-month period, to exceed the average return of the Lipper Balanced
Fund universe of the 294 balanced funds tracked by Lipper Analytical Services,
Inc., during that time**. The twelve-month total return ended March 31, for the
Fund's Class A shares at net asset value was 9.6%. (Please see page 19 for
additional performance information.)
Within the equity portion of the portfolio, a relative overweighting in the
financial sector, versus that in the S&P 500 Index***, throughout the year
enhanced returns. The outlook in this industry appears strong as consolidation
within the industry continues and banks have begun to focus on increasing
fee-based business. We anticipate remaining overweighted. Conversely, we
remained underweighted in utilities, although we did realign the group by adding
CINergy Corp. and increasing our position of CMS Energy Corp. We began the year
slightly underweighted in information technology, but modestly increased our
position as the year progressed with names such as Microsoft Corp. and Atmel
Corp. Despite a bumpy ride for technology stocks in early 1997, industry
fundamentals remain positive as global competition and the quest for
productivity gains provide a favorable backdrop. Stock selection will be
paramount, but we do look to be at least market weighted. A tactical shift was
made in the energy and oil sectors as we reduced exposure to companies most
directly impacted by fluctuating crude oil prices, and added companies which
emphasize drilling, exploration, and refining and marketing interests.
Accordingly, Exxon Corp. and Atlantic Richfield Co. were sold while we acquired
Reading and Bates, Diamond Offshore Drilling and Ultramar Diamond Shamrock.
Within the consumer non-durable sector we remain modestly underweighted as
healthcare remains our area of preference. Long-term demographic trends are
favorable and short-term earnings visibility is good. Within the healthcare
sector, we added Johnson & Johnson and Pfizer, Inc. These two proven companies
have excellent earnings prospects and we anticipate them to outperform the
overall market averages.
FIGURES REPRESENT PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS.
* 4.4% WAS THE 12-MONTH TOTAL RETURN FOR THE FUND'S CLASS A SHARES WITH THE
MAXIMUM 4.75% FRONT END SALES CHARGE. THE FUND ALSO OFFERS CLASS B SHARES
WHICH ARE SUBJECT TO A MAXIMUM 5% CONTINGENT DEFERRED SALES CHARGE, AND
CLASS C SHARES WHICH ARE SUBJECT TO A 1% CONTINGENT DEFERRED SALES CHARGE
WITHIN THE FIRST YEAR AFTER THE MONTH OF PURCHASE. PERFORMANCE FOR THESE
CLASSES OF SHARES MAY BE DIFFERENT.
PERFORMANCE FIGURES INCLUDE REINVESTMENT OF INCOME DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. INVESTMENT RETURN, PRINCIPAL VALUE AND YIELD WILL
FLUCTUATE. INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST.
** SOURCE: LANA (LIPPER ANALYTICAL NEW APPLICATIONS) LIPPER ANALYTICAL SERVICES
INC., IS AN INDEPENDENT MUTUAL FUNDS PERFORMANCE MONITOR. LIPPER AVERAGE
DOES NOT INCLUDE SALES CHARGES AND IF INCLUDED, AVERAGE MAY BE LOWER.
*** THE S&P 500 IS AN UNMANAGED INDEX OF COMMON STOCKS IN INDUSTRY,
TRANSPORTATION, FINANCE, AND PUBLIC UTILITIES, DENOTING GENERAL MARKET
PERFORMANCE AS MONITORED BY STANDARD & POOR'S CORP. AN INVESTMENT CAN NOT BE
MADE IN AN INDEX.
17
<PAGE>
EVERGREEN BALANCED FUND
(photo of certificates)
A REPORT FROM YOUR
PORTFOLIO MANAGER -- (CONTINUED)
Within the fixed income portion, the portfolio closed the fiscal year at
93.8% of its neutral duration. As of March 31, portfolio duration was 4.65
years. As the year came to an end, we became concerned with the interest rate
outlook and shortened the portfolio duration using Treasuries. This portfolio
adjustment sets the stage for duration extensions should interest rates increase
throughout the remainder of 1997.
We will approach the coming quarters with a degree of caution, noting
increased market volatility and the potential for further interest rate
increases by the Federal Reserve. Stock selection will be critical as the market
punishes those companies which fail to meet earnings expectations. Our current
asset allocation of 51% stocks, 46% bonds and 3% cash should position the Fund
well for the remainder of 1997. Although we remain somewhat cautious, market
corrections will be viewed as an opportunity to utilize our cash reserves to
increase equity exposure. Our focus will remain on attractively priced stocks of
established companies with solid earnings prospects. We anticipate the bond
market to continue its second-half recovery and provide modest returns. The
current portfolio allocation should allow the Fund to take advantage of any
upswing in the financial markets while helping to reduce risk should the markets
retreat.
Thank you for your investment in the Evergreen Balanced Fund.
18
<PAGE>
EVERGREEN BALANCED FUND
(photo of certificates)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN BALANCED FUND
The graphs below compare a $10,000 investment in the Evergreen Balanced
Fund (Class A, Class B, Class C and Class Y Shares) with a similar investment in
the S&P 500 and Lehman Brothers Government/Corporate Bond Indexes ("Indexes").
(four charts appear here, plot points are as follows:)
(customer to fill in plot points below)
Class A
1-Year Total Return=4.41%
Average Annual Compound
Return Since Inception=10.91%
Evergreen Balanced Fund
S&P 500 Index
Lehman Brothers
Government/
Corporate Bond Index
6/10/91* 3/92 3/93 3/94 3/95 3/96 3/97
Class B
1-Year Total Return=3.97%
Average Annual Compound
Return Since Inception=9.22%
Evergreen Balanced Fund
S&P 500 Index
Lehman Brothers
Government/
Corporate Bond Index
6/10/91* 3/93 3/94 3/95 3/96 3/97
Class C
1-Year Total Return=7.44%
Average Annual Compound
Return Since Inception=11.83%
Evergreen Balanced Fund
S&P 500 Index
Lehman Brothers
Government/
Corporate Bond Index
9/2/94* 3/95 3/96 3/97
Class Y
1-Year Total Return=9.91%
Average Annual Compound
Return Since Inception=11.30%
Evergreen Balanced Fund
S&P 500 Index
Lehman Brothers
Government/
Corporate Bond Index
4/1/91* 3/92 3/93 3/94 3/95 3/96 3/97
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
and Class C Shares, assuming full redemption on March 31, 1997; (c) all
recurring fees (including investment advisory fees) were deducted; and (d) all
dividends and distributions were reinvested.
The Indexes are unmanaged and include the reinvestment of income, but do
not reflect the payment of transaction costs and advisory fees associated with
an investment in the Fund.
19
<PAGE>
EVERGREEN BALANCED FUND
(photo of certificates)
STATEMENT OF INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- 50.8%
BANKS -- 6.0%
140,000 Banc One Corp..................... $ 5,565,000
66,800 Bank of Boston Corp............... 4,475,600
100,000 BankAmerica Corp.................. 10,075,000
110,000 Chase Manhattan Corp.............. 10,298,750
190,000 CoreStates Financial Corp......... 9,025,000
125,000 First Chicago NBD Corp............ 6,765,625
180,000 National City Corp................ 8,392,500
54,597,475
BUILDING, CONSTRUCTION &
FURNISHINGS -- 0.9%
100,000 *American Standard Cos., Inc...... 4,500,000
100,000 Masco Corp........................ 3,575,000
8,075,000
BUSINESS EQUIPMENT &
SERVICES -- 0.6%
135,000 *Quantum Corp..................... 5,214,375
CHEMICAL & AGRICULTURAL
PRODUCTS -- 0.6%
50,000 Du Pont (E. I.) De Nemours
& Co.............................. 5,300,000
COMMUNICATION SYSTEMS &
SERVICES -- 0.5%
100,000 *Cisco Systems, Inc............... 4,812,500
CONSUMER PRODUCTS &
SERVICES -- 3.4%
210,000 American Brands, Inc.............. 10,631,250
115,000 General Motors Corp............... 6,368,125
40,000 Gillette Co. (The)................ 2,905,000
100,000 Philip Morris Cos., Inc........... 11,412,500
31,316,875
DIVERSIFIED COMPANIES -- 4.1%
60,000 AlliedSignal Inc.................. 4,275,000
75,000 Fluor Corp........................ 3,937,500
150,000 General Electric Co............... 14,887,500
140,000 Textron Inc....................... 14,700,000
37,800,000
ELECTRICAL EQUIPMENT &
SERVICES -- 0.4%
75,000 Emerson Electric Co............... 3,375,000
ENERGY -- 5.3%
150,000 Chevron Corp...................... 10,443,750
55,000 Mobil Corp........................ 7,184,375
150,000 Sonat, Inc........................ 8,175,000
SHARES VALUE
</TABLE>
ENERGY -- CONTINUED
<TABLE>
<CAPTION>
<C> <S> <C>
140,000 Texaco, Inc....................... $ 15,330,000
200,000 Unocal Corp....................... 7,625,000
48,758,125
FINANCE & INSURANCE -- 1.1%
110,000 Allstate Corp. (The).............. 6,531,250
50,900 UNUM Corp......................... 3,715,700
10,246,950
FOOD & BEVERAGE PRODUCTS -- 2.0%
110,350 American Stores Co................ 4,910,575
235,000 McCormick & Co., Inc.............. 5,757,500
200,000 Sara Lee Corp..................... 8,100,000
18,768,075
HEALTHCARE PRODUCTS &
SERVICES -- 5.4%
220,000 Bristol-Myers Squibb Co........... 12,980,000
125,000 HBO & Co.......................... 5,937,500
200,000 *HEALTHSOUTH Corp................. 3,825,000
125,000 Johnson & Johnson................. 6,609,375
227,000 *Lincare Holdings, Inc............ 9,363,750
130,000 Pfizer, Inc....................... 10,936,250
49,651,875
INDUSTRIAL SPECIALTY PRODUCTS
& SERVICES -- 1.6%
45,000 Aluminum Co. of America........... 3,060,000
250,000 Weyerhaeuser Co................... 11,156,250
14,216,250
INFORMATION SERVICES &
TECHNOLOGY -- 3.1%
150,000 *Atmel Corp....................... 3,590,625
80,000 *Compaq Computer Corp............. 6,130,000
77,000 Intel Corp........................ 10,712,625
90,000 *Microsoft Corp................... 8,251,875
28,685,125
MANUFACTURING -- DISTRIBUTING
-- 0.8%
150,000 Case Corp......................... 7,612,500
METAL PRODUCTS & SERVICES -- 0.4%
75,000 Crown Cork & Seal Inc............. 3,871,875
OFFICE EQUIPMENT &
SUPPLIES -- 0.8%
130,000 Pitney Bowes, Inc................. 7,637,500
</TABLE>
20
<PAGE>
EVERGREEN BALANCED FUND
(photo of certificates)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- CONTINUED
<C> <S> <C>
OIL -- 2.2%
150,000 Ashland Inc....................... $ 6,037,500
50,000 *Diamond Offshore Drilling Inc.... 3,425,000
175,000 *Reading & Bates Corp............. 3,959,375
150,000 Ultramar Diamond Shamrock Corp.... 4,762,500
50,000 Williams Companies., Inc. (The)... 2,225,000
20,409,375
PAPER & PACKAGING -- 1.0%
230,000 International Paper Co............ 8,941,250
REAL ESTATE -- 1.2%
280,000 Healthcare Realty Trust, Inc...... 7,665,000
100,500 Highwoods Properties, Inc......... 3,366,750
11,031,750
RETAILING & WHOLESALE -- 1.3%
100,000 Dayton Hudson Corp................ 4,175,000
150,000 Sears, Roebuck & Co............... 7,537,500
11,712,500
TRANSPORTATION -- 2.2%
100,342 Conrail, Inc...................... 11,313,561
100,000 Norfolk Southern Corp............. 8,525,000
19,838,561
UTILITIES -- TELEPHONE -- 1.0%
148,000 Bell Atlantic Corp................ 9,009,500
UTILITIES -- 4.9%
200,000 Carolina Power & Light Co......... 7,250,000
150,000 CINergy Corp...................... 5,118,750
75,000 CMS Energy Corp................... 2,465,625
260,000 GTE Corp.......................... 12,122,500
160,000 SBC Communications, Inc........... 8,420,000
450,000 Southern Co....................... 9,506,250
44,883,125
TOTAL COMMON STOCKS
(COST $361,353,728).......... 465,765,561
PRINCIPAL
AMOUNT
<C> <S> <C>
CORPORATE BONDS -- 11.3%
BANKS -- 2.0%
$ 3,000,000 Boatmen's Bancshares, Inc.
6.75%, 3/15/03.................... 2,925,579
5,000,000 First Chicago Corp.,
9.875%, 8/15/00................... 5,419,630
PRINCIPAL
AMOUNT VALUE
</TABLE>
CORPORATE BONDS -- CONTINUED
BANKS -- CONTINUED
<TABLE>
<CAPTION>
<C> <S> <C>
$10,000,000 NationsBank Corp.
7.625%, 4/15/05................... $ 10,109,680
18,454,889
CHEMICAL & AGRICULTURAL
PRODUCTS -- 0.6%
5,000,000 Dow Chemical Co.
8.625%, 4/1/06.................... 5,406,290
CONSUMER PRODUCTS &
SERVICES -- 0.5%
5,000,000 Philip Morris Cos., Inc.
8.65%, 5/15/98.................... 5,105,780
ENERGY -- 0.5%
4,000,000 Atlantic Richfield Co.,
9.00%, 4/1/21..................... 4,538,644
FINANCE & INSURANCE -- 2.6%
5,500,000 Dean Witter, Discover & Co.
6.75%, 10/15/13................... 4,957,414
5,500,000 General Electric Capital Corp.,
8.75%, 3/14/03.................... 5,917,164
2,750,000 International Bank For
Reconstruction &
Development,
7.95%, 5/15/16.................... 2,883,287
5,000,000 Merrill Lynch, Pierce,
Fenner & Smith Inc.,
7.00%, 4/27/08.................... 4,822,755
5,000,000 Smith Barney Holdings, Inc.,
5.50%, 1/15/99.................... 4,897,885
23,478,505
FOOD & BEVERAGE PRODUCTS -- 1.1%
5,000,000 General Mills, Inc.,
9.00%, 12/20/02................... 5,412,310
4,250,000 PepsiCo, Inc.,
7.625%, 11/1/98................... 4,317,860
9,730,170
HEALTHCARE PRODUCTS &
SERVICES -- 0.5%
5,000,000 Baxter International
7.25%, 2/15/08.................... 4,936,775
INDUSTRIAL SPECIALTY PRODUCTS
& SERVICES -- 2.0%
7,000,000 Jet Equiptment Trust, 144A
9.41%, 6/15/10.................... 7,832,720
10,000,000 Loews Corp.
6.75%, 12/15/06................... 9,422,470
</TABLE>
21
<PAGE>
EVERGREEN BALANCED FUND
(photo of certificates)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
INDUSTRIAL SPECIALTY PRODUCTS
-- CONTINUED
<C> <S> <C>
$ 1,400,000 Waste Management Inc.
8.75%, 5/1/18..................... $ 1,511,229
18,766,419
MANUFACTURING --
DISTRIBUTING -- 0.5%
4,300,000 Stanley Works,
7.375%, 12/15/02.................. 4,348,052
MORTGAGE BACKED SECURITIES --
0.0%(B)
322,947 Fleet Financial Home
Equity Trust Class A,
Series 1990
6.70%, 1/16/06.................... 323,571
SOVEREIGN GOVERNMENT -- 0.6%
5,000,000 Ontario Province Canada,
7.75%, 6/4/02..................... 5,153,900
UTILITIES -- 0.4%
3,600,000 Union Electric Co.,
8.00%, 12/15/22................... 3,555,871
TOTAL CORPORATE BONDS
(COST $102,043,342).......... 103,798,866
U.S. GOVERNMENT & AGENCY
OBLIGATIONS -- 34.2%
GOVERNMENT AGENCY NOTES &
BONDS -- 1.8%
Government National
Mortgage Assn.
3,021,454 8.50%, 5/15/21.................... 3,102,656
1,975,747 8.50%, 7/15/21.................... 2,028,845
1,981,940 9.00%, 9/15/21.................... 2,077,321
3,434,969 9.00%, 10/15/21................... 3,600,276
1,768,337 9.50%, 2/15/21.................... 1,902,068
3,697,121 8.50%, 6/15/22.................... 3,796,481
16,507,647
TREASURY NOTES & BONDS -- 32.4%
U.S. Treasury Bonds
20,000,000 7.625%, 2/15/07................... 20,525,000
24,100,000 8.75%, 11/15/08................... 26,269,000
PRINCIPAL
AMOUNT VALUE
</TABLE>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS -- CONTINUED
TREASURY NOTES & BONDS -- CONTINUED
<TABLE>
<CAPTION>
<C> <S> <C>
$20,000,000 8.75%, 5/15/17.................... $ 23,193,740
15,000,000 8.75%, 5/15/20.................... 17,517,180
17,000,000 8.875%, 8/15/17................... 19,948,429
17,500,000 9.125%, 5/15/18................... 21,054,688
U.S. Treasury Notes
10,000,000 5.50%, 11/15/98................... 9,868,750
20,990,000 5.875%, 2/28/99................... 20,793,219
65,000,000 6.375%, 6/30/97................... 65,142,220
8,000,000 6.375%, 7/15/99................... 7,985,000
10,000,000 6.50%, 4/30/99.................... 10,012,500
10,000,000 7.125%, 2/29/00................... 10,134,370
10,000,000 7.75%, 11/30/99................... 10,284,370
10,000,000 7.75%, 2/15/01.................... 10,353,120
10,000,000 8.00%, 8/15/99.................... 10,321,870
10,000,000 8.125%, 2/15/98................... 10,168,750
3,500,000 8.875%, 11/15/98.................. 3,633,437
297,205,643
TOTAL U.S. GOVERNMENT
& AGENCY OBLIGATIONS
(COST $318,053,006).......... 313,713,290
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
REPURCHASE AGREEMENT -- 2.5%
22,381,460 Donaldson, Lufkin & Jenrette
Securities Corp., (cost,
$22,381,460) (a).................. 22,381,460
TOTAL INVESTMENTS --
(COST $803,831,536).... 98.8% 905,659,177
OTHER ASSETS AND
LIABILITIES -- NET..... 1.2 11,217,026
NET ASSETS............... 100.0% $916,876,203
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. Government
obligations based on market prices at March 31, 1997.
(b) Less than one tenth of one percent.
* Non-income producing securities.
144A -- Rule 144A securities are restricted as to resale to qualified
institutional investors.
See accompanying notes to financial statements.
22
<PAGE>
EVERGREEN BALANCED FUND
(photo of certificates)
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $803,831,536)........................................................... $905,659,177
Receivable for investment securities sold..................................................................... 3,926,869
Receivable for Fund shares sold............................................................................... 3,556,865
Dividends and interest receivable............................................................................. 8,872,702
Prepaid expenses.............................................................................................. 47,547
Total assets............................................................................................ 922,063,160
LIABILITIES:
Payable for investment securities purchased................................................................... 2,659,900
Payable for Fund shares repurchased........................................................................... 1,852,984
Advisory fee payable.......................................................................................... 403,540
Distribution fee payable...................................................................................... 21,979
Accrued expenses.............................................................................................. 248,554
Total liabilities....................................................................................... 5,186,957
NET ASSETS....................................................................................................... $916,876,203
NET ASSETS CONSISTS OF:
Paid-in capital............................................................................................... $757,904,605
Undistributed net investment income........................................................................... 246,535
Undistributed net realized gain on investment transactions.................................................... 56,897,422
Net unrealized appreciation of investments.................................................................... 101,827,641
Net assets.............................................................................................. $916,876,203
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A shares ($41,429,056 (divided by) 3,218,879 shares of beneficial interest outstanding).................... $ 12.87
Sales charge -- 4.75% of offering price.......................................................................... .64
Maximum offering price........................................................................................ $ 13.51
Class B shares ($107,347,482 (divided by) 8,334,838 shares of beneficial interest outstanding)................... $ 12.88
Class C shares ($353,161 (divided by) 27,591 shares of beneficial interest outstanding).......................... $ 12.80
Class Y shares ($767,746,504 (divided by) 59,654,900 shares of beneficial interest outstanding).................. $ 12.87
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
EVERGREEN BALANCED FUND
(photo of certificates)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
<S> <C> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding tax of $0 and $45,707)........................ $ 3,035,556 $ 14,642,260
Interest............................................................................ 7,615,522 31,431,682
Total investment income....................................................... 10,651,078 46,073,942
EXPENSES:
Advisory fee........................................................................ $ 1,170,691 $ 4,765,912
Administrative personnel and service fees........................................... 91,488 459,486
Distribution fee -- Class A Shares.................................................. 26,750 107,023
Distribution fee -- Class B Shares.................................................. 205,485 810,803
Shareholder services fee -- Class B Shares.......................................... 68,495 270,267
Distribution fee -- Class C Shares.................................................. 710 1,883
Shareholder services fee -- Class C Shares.......................................... 237 628
Transfer agent fee.................................................................. 126,528 324,216
Custodian fee....................................................................... 73,451 229,946
Reports and notices to shareholders................................................. 46,954 128,217
Registration and filing fees........................................................ 41,318 114,972
Professional fees................................................................... 21,993 39,953
Insurance........................................................................... 9,754 10,253
Trustees' fees and expenses......................................................... 9,664 25,829
Miscellaneous....................................................................... 6,456 15,779
Total expenses................................................................ 1,899,974 7,305,167
Net investment income.................................................................. 8,751,104 38,768,775
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions........................................ 56,839,210 74,563,015
Net change in unrealized appreciation (depreciation) of investments................. (62,291,441) (8,122,510)
Net realized and unrealized gain (loss) on investments................................. (5,452,231) 66,440,505
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 3,298,873 $105,209,280
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
EVERGREEN BALANCED FUND
(photo of certificates)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.......................................... $ 8,751,104 $ 38,768,775 $ 40,717,357
Net realized gain on investment transactions................... 56,839,210 74,563,015 33,813,027
Net change in unrealized appreciation (depreciation) of
investments................................................. (62,291,441) (8,122,510) 154,935,970
Net increase in net assets resulting from operations..... 3,298,873 105,209,280 229,466,354
DISTRIBUTIONS TO SHAREHOLDERS:
FROM NET INVESTMENT INCOME:
Class A Shares................................................. (369,566) (1,699,709) (1,620,476)
Class B Shares................................................. (786,903) (3,505,791) (3,381,480)
Class C Shares................................................. (2,467) (9,398) (8,000)
Class Y Shares................................................. (7,410,252) (33,878,986) (35,087,211)
Total distributions from net investment
income................................................... (8,569,188) (39,093,884) (40,097,167)
FROM NET REALIZED GAINS ON INVESTMENTS:
Class A Shares................................................. -- (3,402,462) (1,423,252)
Class B Shares................................................. -- (8,639,808) (3,696,589)
Class C Shares................................................. -- (28,096) (10,158)
Class Y Shares................................................. -- (62,657,565) (28,740,172)
Total distributions from net realized gains on
investments.............................................. -- (74,727,931) (33,870,171)
Total distributions to shareholders...................... (8,569,188) (113,821,815) (73,967,338)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold...................................... 52,946,906 234,680,222 170,978,316
Proceeds from reinvestment of distributions.................... 4,394,304 64,783,444 66,166,480
Payment for shares redeemed.................................... (66,950,959) (328,365,114) (343,286,923)
Net decrease resulting from Fund share transactions......... (9,609,749) (28,901,448) (106,142,127)
Net increase (decrease) in net assets.................... (14,880,064) (37,513,983) 49,356,889
NET ASSETS:
Beginning of period............................................ 931,756,267 969,270,250 919,913,361
End of period (including undistributed net investment income of
$246,535, $115,118 and $612,856, respectively.)............. $916,876,203 $ 931,756,267 $ 969,270,250
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
EVERGREEN BALANCED FUND -- CLASS A SHARES
(photo of certificates)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
1997** 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................. $12.95 $13.12 $11.17 $12.07 $11.41
Income (loss) from investment operations:
Net investment income............................................... .12 .54 .51 .43 .42
Net realized and unrealized gain (loss) on investments.............. (.08) .94 2.40 (.71) .75
Total from investment operations................................ .04 1.48 2.91 (.28) 1.17
Less distributions to shareholders from:
Net investment income............................................... (.12) (.54) (.50) (.43) (.42)
Net realized gain on investments.................................... -- (1.11) (.46) (.19) (.09)
Total distributions (.12) (1.65) (.96) (.62) (.51)
Net asset value, end of period $12.87 $12.95 $13.12 $11.17 $12.07
TOTAL RETURN+......................................................... .3% 11.4% 26.5% (2.4%) 10.4%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................. $41,429 $43,169 $41,849 $41,010 $35,032
Ratios to average net assets:
Expenses............................................................ .93%++ 0.89% 0.88% .89% 0.91%
Net investment income............................................... 3.62%++ 3.95% 4.05% 3.69% 3.61%
Portfolio turnover rate............................................... 28% 34% 37% 35% 19%
Average commission rate paid per share................................ $.0595 $.0593 N/A N/A N/A
<CAPTION>
1992
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................. $11.02
Income (loss) from investment operations:
Net investment income............................................... .42
Net realized and unrealized gain (loss) on investments.............. .43
Total from investment operations................................ .85
Less distributions to shareholders from:
Net investment income............................................... (.42)
Net realized gain on investments.................................... (.04)
Total distributions (.46)
Net asset value, end of period $11.41
TOTAL RETURN+......................................................... 7.9%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................. $17,408
Ratios to average net assets:
Expenses............................................................ 0.91%
Net investment income............................................... 3.93%
Portfolio turnover rate............................................... 12%
Average commission rate paid per share................................ N/A
</TABLE>
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
++ Annualized.
See accompanying notes to financial statements.
26
<PAGE>
EVERGREEN BALANCED FUND -- CLASS B SHARES
(photo of certificates)
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
1997** 1996 1995 1994
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............................................ $12.96 $13.13 $11.18 $12.08
Income (loss) from investment operations:
Net investment income......................................................... .10 .43 .42 .36
Net realized and unrealized gain (loss) on investments........................ (.08) .95 2.40 (.71)
Total from investment operations.......................................... .02 1.38 2.82 (.35)
Less distributions to shareholders from:
Net investment income......................................................... (.10) (.44) (.41) (.36)
Net realized gain on investments.............................................. -- (1.11) (.46) (.19)
In excess of net investment income............................................ -- -- -- --
Total distributions....................................................... (.10) (1.55) (.87) (.55)
Net asset value, end of period................................................ $12.88 $12.96 $13.13 $11.18
TOTAL RETURN+................................................................... .1% 10.6% 25.6% (3.0%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................................... $107,347 $109,591 $108,983 $100,052
Ratios to average net assets:
Expenses...................................................................... 1.68%++ 1.64% 1.62% 1.48%
Net investment income......................................................... 2.87%++ 3.19% 3.30% 3.12%
Portfolio turnover rate......................................................... 28% 34% 37% 35%
Average commission rate paid per share.......................................... $ .0595 $ .0593 N/A N/A
<CAPTION>
1993*
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............................................ $11.54
Income (loss) from investment operations:
Net investment income......................................................... .34
Net realized and unrealized gain (loss) on investments........................ .65
Total from investment operations.......................................... .99
Less distributions to shareholders from:
Net investment income......................................................... (.34)
Net realized gain on investments.............................................. (.09)
In excess of net investment income............................................ (.02)
Total distributions....................................................... (.45)
Net asset value, end of period................................................ $12.08
TOTAL RETURN+................................................................... 8.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................................... $65,475
Ratios to average net assets:
Expenses...................................................................... 1.41%++
Net investment income......................................................... 3.09%++
Portfolio turnover rate......................................................... 19%
Average commission rate paid per share.......................................... N/A
</TABLE>
* For the period from January 26, 1993 (commencement of class operations) to
December 31, 1993.
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
++ Annualized.
See accompanying notes to financial statements.
27
<PAGE>
EVERGREEN BALANCED FUND -- CLASS C SHARES
(photo of certificates)
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997** 1996 1995
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period...................................................... $12.88 $13.11 $11.17
Income (loss) from investment operations:
Net investment income................................................................... .10 .40 .41
Net realized and unrealized gain (loss) on investments.................................. (.09) .93 2.40
Total from investment operations.................................................... .01 1.33 2.81
Less distributions to shareholders from:
Net investment income................................................................... (.09) (.45) (.41)
Net realized gain on investments........................................................ -- (1.11) (.46)
Total distributions................................................................. (.09) (1.56) (.87)
Net asset value, end of period............................................................ $12.80 $12.88 $13.11
TOTAL RETURN+............................................................................. .1% 10.2% 25.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................................................. $353 $355 $300
Ratios to average net assets:
Expenses................................................................................ 1.68%++ 1.65% 1.62%
Net investment income................................................................... 2.92%++ 3.19% 3.31%
Portfolio turnover rate................................................................... 28% 34% 37%
Average commission rate paid per share.................................................... $.0595 $.0593 N/A
<CAPTION>
1994*
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period...................................................... $12.00
Income (loss) from investment operations:
Net investment income................................................................... .18
Net realized and unrealized gain (loss) on investments.................................. (.61)
Total from investment operations.................................................... (.43)
Less distributions to shareholders from:
Net investment income................................................................... (.21)
Net realized gain on investments........................................................ (.19)
Total distributions................................................................. (.40)
Net asset value, end of period............................................................ $11.17
TOTAL RETURN+............................................................................. (3.6%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................................................. $195
Ratios to average net assets:
Expenses................................................................................ 1.64%++
Net investment income................................................................... 3.23%++
Portfolio turnover rate................................................................... 35%
Average commission rate paid per share.................................................... N/A
</TABLE>
* For the period from September 2, 1994 (commencement of class operations) to
December 31, 1994.
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
++ Annualized.
See accompanying notes to financial statements.
28
<PAGE>
EVERGREEN BALANCED FUND -- CLASS Y SHARES
(photo of certificates)
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
1997** 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period................................. $12.95 $13.12 $11.17 $12.07 $11.41
Income (loss) from investment operations:
Net investment income.............................................. .13 .57 .54 .46 .45
Net realized and unrealized gain (loss) on investments............. (.08) .95 2.40 (.71) .75
Total from investment operations .05....... 1.52 2.94 (.25) 1.20
Less distributions to shareholders from:
Net investment income.............................................. (.13) (.58) (.53) (.46) (.45)
Net realized gain on investments................................... -- (1.11) (.46) (.19) (.09)
Total distributions............................................ (.13) (1.69) (.99) (.65) (.54)
Net asset value, end of period....................................... $12.87 $12.95 $13.12 $11.17 $12.07
TOTAL RETURN+........................................................ .3% 11.7% 26.8% (2.2)% 10.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................ $767,747 $778,641 $818,137 $778,657 $760,147
Ratios to average net assets:
Expenses........................................................... .68%++ .64% .62% .64% .66%
Net investment income.............................................. 3.87%++ 4.19% 4.30% 3.93% 3.86%
Portfolio turnover rate.............................................. 28% 34% 37% 35% 19%
Average commission rate paid per share............................... $.0595 $.0593 N/A N/A N/A
<CAPTION>
1992
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period................................. $11.02
Income (loss) from investment operations:
Net investment income.............................................. .46
Net realized and unrealized gain (loss) on investments............. .42
Total from investment operations 0.88
Less distributions to shareholders from:
Net investment income.............................................. (.45)
Net realized gain on investments................................... (.04)
Total distributions............................................ (.49)
Net asset value, end of period....................................... $11.41
TOTAL RETURN+........................................................ 8.2%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................ $520,232
Ratios to average net assets:
Expenses........................................................... .66%
Net investment income.............................................. 4.20%
Portfolio turnover rate.............................................. 12%
Average commission rate paid per share............................... N/A
</TABLE>
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
++ Annualized.
See accompanying notes to financial statements.
29
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
A REPORT FROM YOUR
PORTFOLIO MANAGER
STEPHEN A. LIEBER
Evergreen Foundation Fund's fiscal year-end was changed from
December 31, to March 31. In the quarter ended March 31, 1997, (photo of Stephen
Evergreen Foundation Fund (Class Y, no-load shares) provided a A. Lieber)
negative return of 0.02%*. The Fund (Class Y shares) has
provided a 15.7% average annual total return for the period
since its inception on January 2, 1990, through March 31, 1997.
The asset allocation shifted during this time to 57.1% in
equities, 33.1% in long-term bonds, and 9.2% in short-term cash
equivalents, from 56.2% in equities, 35.3% in long-term bonds,
and 8.5% in short-term cash equivalents at December 31, 1996.
The total returns for the Fund's Class A shares
for the three-month and twelve-month periods ended March 31,
were -4.9% and 7.5%, respectively. The average annual total return for the
Fund's Class A shares for the period since their inception on January 3, 1995,
thorough March 31, 1997, was 15.2%. (Please see page 32 for additional
performance information.)
This period started strongly, with the Fund's net asset value rising 5.8%
through the middle of February. But, the growth sectors of the market
experienced a reversal at the end of February and through March, while the bond
market suffered a moderate reversal as interest rates again began to rise. Thus,
by the end of March, the equity portfolio had provided a return of 2.1%, while
the Fund's fixed income portfolio, comprised mostly of long-term U.S. Treasury
bonds, had a net decline of 3.1% The bond decline and the stock reversal was
somewhat cushioned by a continuing short-term cash equivalent position.
Notwithstanding the overall volatility of the market, and the particularly
negative performance of interest-sensitive equities toward the end, the Fund had
a number of companies which provided exceptional increases in value.
The top ten equity performers during the quarter were Caliber System, Inc.,
+37.4%; Living Centers of America, Inc., +28.9%; Cape Cod Bank & Trust Co.,
+19.8%; CB Bancshares, Inc., +19.2%; Warner-Lambert Co., +18.8%; Timken Co.,
+17.0%; Ohio Casualty Corp., +15.6%; Barnett Banks, Inc., +15.4%; Fingerhut
Companies, Inc., +14.4%; and Conrail, Inc., +14.4%. Our strongest holdings, once
again, reflected a variety of industries and different kinds of investment
opportunities. Some were distinguished by market recognition of the potentials
for new products, as in Warner-Lambert Co., others by business recovery after an
interruption of historical growth trends, as in Caliber System, Inc., and
Fingerhut Companies, Inc., and others as beneficiaries of mergers and
acquisitions, as in the case of Conrail, Inc.
FIGURES REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS.
* PERFORMANCE FIGURES INCLUDE REINVESTMENT OF INCOME DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. INVESTMENT RETURN, PRINCIPAL VALUE AND YIELD WILL
FLUCTUATE. INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST.
THE FUND ALSO OFFERS CLASS B SHARES WHICH ARE SUBJECT TO A MAXIMUM 5%
CONTINGENT DEFERRED SALES CHARGE AND CLASS C SHARES WHICH ARE SUBJECT TO A 1%
CONTINGENT DEFERRED SALES CHARGE WITHIN THE FIRST YEAR AFTER THE MONTH OF
PURCHASE. PERFORMANCE FOR THESE CLASSES OF SHARES MAY BE DIFFERENT.
30
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
A REPORT FROM YOUR
PORTFOLIO MANAGER -- (CONTINUED)
During the quarter, major new commitments utilizing cash-equivalent positions
were entered into during periods of general market weakness, or when specific
issues were judged to be out of line with their growth potential. The largest
commitments were additions to positions already held in E.I. Du Pont de Nemours
& Co., Inc., Marsh & McLennan Companies, Inc., and Timken Co. Each of these was
seen as representing significant undervaluation of growth potential. E.I. Du
Pont de Nemours & Co., Inc., is viewed as a company in the process of corporate
restructuring to place emphasis on its major growth sectors, Marsh & McLennan
Companies, Inc. as a participant in the major growth opportunity of the mutual
fund business which had, to some extent, been obscured by a mature, major
insurance agency business, and Timken Co. as a financially undervalued specialty
steel company showing growth far above its traditional roller bearing business.
Purchases were also made of mid-sized companies with high quality business
franchises and innovative policies which we regarded as being undervalued by the
markets.
Sales were made predominantly when issues in the portfolio were regarded as
having attained full pricing in the present environment. Many of these were
reductions of positions rather than total liquidations, including MGIC
Investment Corp., with a 260% gain in four and one-half years, Pfizer, Inc.,
with a 218% gain in three and one-half years, First Chicago NBD Corp., with a
137% gain in two years and one-quarter, Barnett Banks, Inc., with a 125% gain in
under four years, Warner-Lambert Co., with a 100% gain in one and one-half
years, and Procter & Gamble Co., with a 92% gain in two years. The equity
strategy was to buy issues we considered undervalued, and to sell those which we
considered fully valued.
The fixed income sector of the Fund was not added to during the quarter.
Increases were made in the short-term cash equivalent holdings.
Recent market volatility illustrates an increasingly selective trend in the
markets, with a recognition that many issues had become fully valued, some
overvalued, while others are ignored. The intensity of our search for
undervalued growth opportunities should continue to produce significant gains
notwithstanding a volatile and often uncertain market. The power of valuable
corporate franchises, strong financials, vigorous research and marketing
programs, and, above all, able managements, is evident in a great many companies
which we regularly analyze and visit. We expect this research intensive effort
to be rewarding in the months ahead with further likelihood of gains from
re-valued growth trends, mergers and acquisitions, and profits generated through
innovative leadership. We have carefully maintained sizable cash reserves to be
able to buy shares on weakness, and have done so during each period of stock
market uncertainty. The Fund's fixed income position continues to be
concentrated in U.S. Government or Agency obligations which, we believe, will
benefit when the present period of anxiety over inflation potentials is past.
The real returns of long-term Treasury bonds above the inflation rate are at
historical levels, currently approximately 5%. We anticipate that when the
Federal Reserve has made amply evident its program to slow the growth of the
economy in order to reduce the risk of inflation, that inflation premium will
decline and the Fund's primarily long-term bond position will rise in value. Our
goal is capital growth with a minimization of risk, and we will continue to
shape the Evergreen Foundation Fund's strategy to these purposes. We thank our
many existing shareholders and welcome the many new shareholders who have joined
us in this year.
31
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN FOUNDATION FUND
The graphs below compare a $10,000 investment in the Evergreen Foundation
Fund (Class A, Class B, Class C and Class Y Shares) with a similar investment in
the S&P 500 Index and Lipper Balanced Funds Average.
(four graphs appear below, plot points are as follows:)
(customer to fill in plot points)
Class A
1-Year Total Return=7.47%
Average Annual Compound
Return Since Inception=15.16%
Evergreen Foundation Fund
S&P 500 Index
Lipper Balanced Funds Average
1/3/95* 3/95 9/95 3/96 9/96 3/97
Class B
1-Year Total Return=7.02%
Average Annual Compound
Return Since Inception=15.69%
Evergreen Foundation Fund
S&P 500 Index
Lipper Balanced Funds Average
1/3/95* 3/95 9/95 3/96 9/96 3/97
Class C
1-Year Total Return=11.03%
Average Annual Compound
Return Since Inception=16.73%
Evergreen Foundation Fund
S&P 500 Index
Lipper Balanced Funds Average
1/3/95* 3/95 9/95 3/96 9/96 3/97
Class Y
1-Year total Return=13.18%
Average Annual Compound Return:
5-Year=13.58%
Since Inception=15.74%
Evergreen Foundation Fund
S&P 500 Index
Lipper Balanced Funds Average
1/2/90* 3/90 3/91 3/92 3/93 3/94 3/95 3/96 3/97
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
and Class C Shares, assuming full redemption on March 31, 1997; (c) all
recurring fees (including investment advisory fees net of fee waiver) were
deducted; and (d) all dividends and distributions were reinvested.
The S&P 500 Index is unmanaged and includes the reinvestment of income, but
does not reflect the payment of transaction costs and advisory fees associated
with an investment in the Fund.
32
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
STATEMENT OF INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- 56.1%
AEROSPACE & DEFENSE -- 0.4%
63,000 Boeing Co....................... $ 6,213,375
AUTOMOTIVE EQUIPMENT &
MANUFACTURING -- 1.0%
561,500 Chrysler Corp................... 16,845,000
BANKS -- 5.0%
16,600 AmSouth Bancorp................. 800,950
50,000 Bancfirst Corp.................. 1,462,500
390,700 Bank of Boston Corp............. 26,176,900
110,000 Barnett Banks, Inc.............. 5,115,000
93,375 BSB Bancorp, Inc................ 2,836,266
62,000 Cape Cod Bank & Trust Co........ 1,674,000
27,000 CB Bancshares, Inc.............. 958,500
92,500 Central Fidelity Banks, Inc..... 2,566,875
97,000 Crestar Financial Corp.......... 3,358,625
80,138 First Chicago NBD Corp.......... 4,337,469
3,600 First Empire State Corp......... 1,152,000
196,800 First of America Bank Corp...... 11,758,800
7,500 First Security Corp............. 240,938
58,500 First Union Corp. **............ 4,745,812
70,801 Hibernia Corp. Cl. A............ 929,263
25,000 Mississippi Valley Bancshares,
Inc............................. 1,062,500
66,150 Peoples Heritage Financial
Group........................... 2,034,112
102,000 Seacoast Banking Corp.
of Florida Cl. A................ 2,881,500
114,100 Standard Federal
Bancorporation.................. 6,617,800
65,000 U.S. Trust Corp................. 2,730,000
83,439,810
BANKS & THRIFTS -- 0.2%
80,000 Webster Financial Corp.......... 2,810,000
BUILDING, CONSTRUCTION &
FURNISHINGS -- 0.8%
122,800 Armstrong World Industries,
Inc............................. 7,951,300
149,300 Continental Homes Holding
Corp............................ 2,482,113
20,000* M/I Schottenstein Homes, Inc.... 205,000
264,000* Pacific Greystone Corp.......... 3,300,000
13,938,413
BUSINESS EQUIPMENT & SERVICES --
0.9%
82,000 International Business Machines
Corp............................ 11,264,750
50,000 Lucent Technologies, Inc........ 2,637,500
<CAPTION>
SHARES VALUE
<C> <S> <C>
</TABLE>
BUSINESS EQUIPMENT & SERVICES -- CONTINUED
<TABLE>
<C> <S> <C>
10,000* Policy Management Systems
Corp............................ $ 436,250
25,200 Wackenhut Corp. (The)
Series B........................ 359,100
14,697,600
CHEMICAL & AGRICULTURAL
PRODUCTS -- 3.7%
90,000 A. Schulman, Inc................ 1,710,000
30,000 Air Products & Chemicals, Inc... 2,036,250
283,000 Du Pont (E. I.) De Nemours...... 29,998,000
70,000 Grace (W.R.) & Co............... 3,316,250
40,000 H.B. Fuller Co.................. 1,950,000
201,500 Monsanto Co..................... 7,707,375
170,000 Morton International............ 7,182,500
75,000 Nalco Chemical Co............... 2,803,125
58,000 Pioneer Hi-Bred International,
Inc............................. 3,646,750
20,000 Praxair, Inc.................... 897,500
61,247,750
COMMUNICATION SYSTEMS &
SERVICES -- 0.2%
70,000* Cisco Systems, Inc.............. 3,368,750
CONSUMER PRODUCTS & SERVICES --
3.4%
40,000 American Greetings Corp.
Cl. A........................... 1,277,500
95,000 Black & Decker Corp............. 3,051,875
20,000* Broderbund Software, Inc........ 437,500
25,642* Consolidated Products, Inc...... 400,656
120,000 CPC International, Inc.......... 9,840,000
75,000 General Motors Corp............. 4,153,125
148,800 Goodyear Tire & Rubber Co.
(The)........................... 7,774,800
95,000 H. & R. Block, Inc.............. 2,790,625
178,800 International Flavors &
Fragrances, Inc................. 7,822,500
50,000 Kimberly-Clark Corp............. 4,968,750
50,100* Nautica Enterprises, Inc........ 1,258,763
85,400 Procter & Gamble Co. (The)...... 9,821,000
78,500 Tupperware Corp................. 2,629,750
56,226,844
DIVERSIFIED COMPANIES -- 1.8%
8,000 Cooper Industries, Inc.......... 347,000
222,400 General Electric Co............. 22,073,200
</TABLE>
33
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- CONTINUED
DIVERSIFIED COMPANIES -- CONTINUED
<C> <S> <C>
120,800 PPG Industries, Inc............. $ 6,523,200
30,000 Western Atlas Incorporated...... 1,818,750
30,762,150
ELECTRICAL EQUIPMENT &
SERVICES -- 0.4%
173,400 AMP, Inc........................ 5,960,625
10,000* KLA Instruments Corp............ 365,000
6,325,625
ENERGY -- 1.6%
35,000 Amoco Corp...................... 3,031,875
22,000 Consolidated Natural Gas Co..... 1,108,250
282,400 Equitable Resources, Inc........ 8,648,500
50,500 Exxon Corp...................... 5,441,375
45,300 Mobil Corp...................... 5,917,312
43,103 Seitel, Inc..................... 1,524,769
33,877 Union Pacific Resource Group,
Inc............................. 906,210
26,578,291
FINANCE & INSURANCE -- 8.6%
10,668 Aetna, Inc...................... 916,115
120,000 Allstate Corp. (The)............ 7,125,000
55,300 AMBAC, Inc...................... 3,566,850
93,450 American International Group,
Inc............................. 10,968,694
169,000 Beneficial Corp................. 10,921,625
148,350 Countrywide Credit Industries,
Inc............................. 3,671,662
95,000* Degeorge Financial Corp......... 123,203
20,000 FBL Financial Group, Inc........ 520,000
40,000 Federal Home Loan Mortgage
Corp............................ 1,090,000
788,000 Federal National Mortgage
Association..................... 28,466,500
38,600 Hartford Steam Boiler Inspection
& Insurance Co. (The)........... 1,727,350
70,000 John Alden Financial Corp....... 1,172,500
130,000 John Nuveen Co. (The), Cl. A.... 3,851,250
195,700 Marsh & McLennan Co., Inc....... 22,163,025
100,700 Merrill Lynch & Co., Inc........ 8,647,612
165,100 MGIC Investment Corp............ 11,680,825
155,000 NAC RE Corp..................... 5,521,875
100,000* Nationwide Financial Services
Incorporated.................... 2,575,000
235,000 North American Mortgage Co...... 4,788,125
35,000 Ohio Casualty Corp.............. 1,439,375
80,300 Raymond James Financial, Inc.... 2,539,488
<CAPTION>
SHARES VALUE
<C> <S> <C>
</TABLE>
FINANCE & INSURANCE -- CONTINUED
<TABLE>
<C> <S> <C>
203,300 Wilmington Trust Corp........... $ 8,640,250
142,116,324
FOOD & BEVERAGE PRODUCTS -- 0.1%
30,000 Pepsico, Inc.................... 978,750
FOREST PRODUCTS -- 0.4%
88,000 Union Camp Corp................. 4,147,000
50,000 Willamette Industries, Inc...... 3,125,000
7,272,000
HEALTHCARE PRODUCTS &
SERVICES -- 6.2%
185,700 Abbott Laboratories............. 10,422,412
54,000 Alza Corp....................... 1,485,000
1,750* Alza Corp. Warrants $65.00
Expiring 12/31/1999............. 273
140,000 American Home Products Corp..... 8,400,000
100,000 Bristol-Myers Squibb Co......... 5,900,000
180,900 Columbia / HCA Healthcare
Corp............................ 6,082,763
23,000* Covance, Inc.................... 370,875
34,275 Guidant Corp.................... 2,107,913
102,800 Johnson & Johnson............... 5,435,550
221,262 Lilly (Eli) & Co................ 18,198,799
65,000* Lincare Holdings, Inc........... 2,681,250
100,000* Living Centers of America,
Inc............................. 3,450,000
80,000 McKesson Corp................... 5,120,000
151,750* MedPartners, Inc................ 3,224,688
60,800 Medtronic, Inc.................. 3,784,800
167,758 Merck & Co., Inc................ 14,133,611
47,000 Pfizer, Inc..................... 3,953,875
11,500* Quest Diagnostics, Inc.......... 171,063
66,000 Schering-Plough Corp............ 4,801,500
9,200 Shared Medical System Corp...... 427,800
44,900 Superior Surgical Manufacturing
Co., Inc........................ 583,700
1,750* Therapeutic Discovery Corp...... 19,250
15,000 Warner-Lambert Co............... 1,297,500
102,052,622
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- 2.6%
65,000 Applied Power, Inc.............. 2,730,000
10,000 Bemis, Inc...................... 400,000
107,000 Corning, Inc.................... 4,748,125
200,000 Deere & Co...................... 8,700,000
</TABLE>
34
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- CONTINUED
INDUSTRIAL SPECIALTY PRODUCTS & SERVICES -- CONTINUED
<C> <S> <C>
20,000 Genuine Parts Company........... $ 932,500
20,000 Parker Hannifair Corp........... 855,000
110,700 PHH Corp........................ 5,106,037
172,000 Snap-on, Inc.................... 6,665,000
6,000* Strattec Security Corp.......... 105,000
183,900 Timken Co. (The)................ 9,838,650
50,000 Trinity Industries, Inc......... 1,518,750
30,000* UCAR International, Inc......... 1,188,750
42,787,812
INFORMATION SERVICES &
TECHNOLOGY -- 6.2%
25,000 Computer Associates
International, Inc.............. 971,875
450,800 Hewlett-Packard Co.............. 24,005,100
340,800 Intel Corp...................... 47,413,800
70,000* Intel Corp. warrants
$41.75-expiring 3/14/98......... 6,938,750
183,800* Microsoft Corp.................. 16,852,162
224,000* Sun Microsystems, Inc........... 6,468,000
102,649,687
OTHER -- 0.0% (A)
10,000 Premark International, Inc...... 198,750
PUBLISHING, BROADCASTING &
ENTERTAINMENT -- 0.6%
30,000 Belo (A.H.) Corp., Series A..... 1,110,000
20,000* Cox Communications, Inc., Class
A............................... 412,500
50,993 Disney Walt Co. (The)........... 3,722,489
20,000 Gaylord Entertainment Co.
Cl.A............................ 430,000
2,500* Lin Television Corp............. 90,625
65,000 Time Warner, Inc................ 2,811,250
3,000 Washington Post Co. (The)....... 1,032,000
9,608,864
REAL ESTATE -- 5.6%
30,000* Alexander's, Inc................ 2,077,500
23,400 Arbor Property Trust REIT....... 160,875
50,000 Bay Apartment Communities, Inc.
REIT............................ 1,793,750
50,009 Bradley Real Estate, Inc. REIT.. 956,422
125,000 Cali Realty Corp. REIT.......... 4,000,000
270,400* Capstead Mortgage Corp. REIT.... 5,509,400
111,900 CarrAmerica Realty Corp. REIT... 3,440,925
40,000 Chelsea GCA Realty, Inc. REIT... 1,435,000
<CAPTION>
SHARES VALUE
<C> <S> <C>
</TABLE>
REAL ESTATE -- CONTINUED
<TABLE>
<C> <S> <C>
184,900 Columbus Realty Trust REIT...... $ 3,721,112
280,000 Crescent Real Estate Equities,
Inc. REIT....................... 7,490,000
305,300 Crown American Realty Trust
REIT............................ 2,366,075
50,300 CWM Mortgage Holdings, Inc...... 974,563
105,200 Essex Property Trust, Inc.
REIT............................ 3,142,850
83,000 Evans Withycombe Residential,
Inc. REIT....................... 1,711,875
165,000 FAC Realty, Inc................. 948,750
90,000 FelCor Suite Hotels, Inc. REIT.. 3,307,500
100,200 Gables Residential Trust REIT... 2,555,100
174,000 Glimcher Realty Trust REIT...... 3,327,750
28,000 Highwoods Properties, Inc.
REIT............................ 938,000
14,076* Homestead Village Properties,
Inc............................. 237,532
9,443* Homestead Village Properties,
Inc. Warrants $10.00
Expiring 10/29/97............... 68,462
363,216 Horizon Group, Inc. REIT........ 4,676,406
142,000 Kranzco Realty Trust REIT....... 2,254,250
15,000 Liberty Property Trust REIT..... 367,500
72,000 Marriott International, Inc..... 3,582,000
38,100 Oasis Residential, Inc. REIT.... 857,250
40,000 Patriot American Hospitality,
Inc. REIT....................... 970,000
130,000 Post Property, Inc. REIT........ 4,956,250
100,000 Prentiss Properties Trust REIT.. 2,537,500
90,000 Public Storage, Inc. REIT....... 2,610,000
70,416 Security Capital Industrial
Trust REIT...................... 1,469,934
111,992 Security Capital Pacific Trust
REIT............................ 2,729,805
100,000 Sovran Self Storage, Inc........ 3,075,000
70,000 Spieker Properties, Inc. REIT... 2,730,000
147,750 Starwood Lodging Trust REIT..... 5,762,250
22,700 Storage USA, Inc. REIT.......... 837,063
45,000 Sunstone Hotel Investors, Inc.
REIT............................ 590,625
57,900 Tanger Factory Outlet Centers,
Inc. REIT....................... 1,519,875
25,000 Urban Shopping Centers, Inc.
REIT............................ 750,000
92,439,149
</TABLE>
35
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- CONTINUED
<C> <S> <C>
RETAILING & WHOLESALE -- 2.0%
216,511 Avnet, Inc...................... $ 12,205,808
30,000 Fingerhut Companies, Inc........ 420,000
50,000 Home Depot, Inc. (The).......... 2,675,000
25,000 J. C. Penney Co., Inc........... 1,190,625
133,000 Lowe's Companies., Inc.......... 4,970,875
195,600 Mercantile Stores Co., Inc...... 9,070,950
70,000 Wyle Electronics................ 2,353,750
32,887,008
TEXTILE & APPAREL -- 0.1%
20,000 V. F. Corp...................... 1,337,500
TRANSPORTATION -- 1.0%
35,000 Burlington Northern Santa Fe.... 2,590,000
34,000 Caliber System, Inc............. 901,000
61,172 Conrail, Inc.................... 6,897,143
20,000 KLM Royal Dutch Air Lines....... 572,500
30,000 Pittston Brink's Group.......... 757,500
17,000 Roadway Express, Inc............ 329,375
80,000 Union Pacific Corp.............. 4,540,000
16,587,518
UTILITIES -- ELECTRIC -- 0.4%
20,000 Central Hudson Gas & Electric
Corp............................ 657,500
100,000 Long Island Lighting Co......... 2,400,000
40,000 PP&L Resources, Inc............. 810,000
100,000 Public Service Enterprise Group,
Inc............................. 2,625,000
32,000 TNP Enterprises, Inc............ 684,000
7,176,500
UTILITIES -- TELEPHONE -- 2.9%
98,333* 360 Communications Co........... 1,696,244
30,000* AirTouch Communications......... 690,000
10,000 AT&T Corp....................... 347,500
150,000 Bell Atlantic Corp.............. 9,131,250
323,800 Frontier Corp................... 5,787,925
325,000 GTE Corp........................ 15,153,125
30,000 NYNEX Corp...................... 1,368,750
301,000 Sprint Corp..................... 13,695,500
47,870,294
TOTAL COMMON STOCKS
(COST $711,979,391)........ 928,416,386
<CAPTION>
SHARES VALUE
<C> <S> <C>
PREFERRED STOCKS -- 0.3%
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- 0.3%
50,000 Qualcomm Financial Trust I,
144A............................ $ 2,487,500
115,000* Worthington Industries, Inc..... 1,840,000
4,327,500
TOTAL PREFERRED STOCKS
(COST $4,282,500).......... 4,327,500
CONVERTIBLE PREFERRED STOCKS -- 0.7%
ELECTRICAL EQUIPMENT &
SERVICES -- 0.1%
100,000 Westinghouse Electric Corp.,
144A, $1.30, Series C, PEPS..... 1,638,000
FINANCE & INSURANCE -- 0.0% (A)
3,557 Aetna, Inc.
6.25%, Class A.................. 292,563
METAL PRODUCTS & SERVICES --
0.3%
100,000 Timet Capital Trust I, 144A
6.625%, BUCS.................... 4,688,000
REAL ESTATE -- 0.3%
115,000 First Union Real Estate Equity &
Mortgage Investments
Series A........................ 5,117,500
TOTAL CONVERTIBLE PREFERRED
STOCKS
(COST $9,480,605).......... 11,736,063
<CAPTION>
PRINCIPAL
AMOUNT
<C> <S> <C>
CONVERTIBLE DEBENTURES -- 0.3%
BUILDING, CONSTRUCTION &
FURNISHINGS -- 0.1%
$ 500,000 Engle Homes, Inc.
7.00%, 3/1/03................... 457,500
500,000 Home Depot, Inc. (The)
3.25%, 10/1/01.................. 500,000
957,500
HEALTHCARE PRODUCTS & SERVICES--
0.0% (A)
750,000 Maxxim Medical, Inc.
6.75%, 3/1/03................... 757,500
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- 0.1%
2,000,000 Robbins & Myers, Inc.
6.50%, 9/1/03................... 2,325,000
</TABLE>
36
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE DEBENTURES -- CONTINUED
<C> <S> <C>
NATURAL GAS -- 0.1%
$ 1,328,000 Consolidated Natural Gas Co.
7.25%, 12/15/15................. $ 1,371,160
TOTAL CONVERTIBLE DEBENTURES
(COST $5,284,665).......... 5,411,160
U.S. GOVERNMENT & AGENCY
OBLIGATIONS -- 32.8%
GOVERNMENT AGENCY NOTES &
BONDS -- 1.1%
1,000,000 Federal National Mortgage Assn.
8.10%, 8/12/19.................. 1,067,378
Tennessee Valley Authority
8,000,000 7.25%, 7/15/43.................. 7,502,520
10,000,000 7.85%, 6/15/44, Series A........ 9,829,650
18,399,548
TREASURY BONDS & NOTES -- 31.7%
U.S. Treasury Bonds
30,000,000 8.375%, 8/15/08................. 32,259,360
7,000,000 10.00%, 5/15/10................. 8,262,184
1,000,000 10.625%, 8/15/15................ 1,346,562
49,000,000 7.25%, 5/15/16.................. 49,183,750
50,000,000 8.125%, 8/15/19................. 54,843,750
10,000,000 8.50%, 2/15/20.................. 11,390,620
25,000,000 8.125%, 5/15/21................. 27,484,375
10,000,000 8.00%, 11/15/21................. 10,859,370
7,000,000 7.625%, 11/15/22................ 7,312,809
125,000,000 7.125%, 2/15/23................. 123,398,375
150,000,000 6.25%, 8/15/23.................. 132,843,750
U.S. Treasury Notes
30,000,000 5.75%, 8/15/03.................. 28,312,500
13,000,000 7.25%, 5/15/04.................. 13,260,000
8,000,000 7.25%, 8/15/04.................. 8,157,496
15,000,000 6.50%, 8/15/05.................. 14,582,805
523,497,706
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(COST $578,814,301)............. 541,897,254
SHORT-TERM INVESTMENTS -- 9.2%
COMMERCIAL PAPER -- 9.2%
250,000 American Home Products, Inc.
5.27%, 4/4/97................... 249,890
2,000,000 B.I. Funding, Inc.
5.28%, 4/16/97.................. 1,995,600
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
COMMERCIAL PAPER -- CONTINUED
<TABLE>
<C> <S> <C>
Bell Atlantic Financial
Services, Inc.
$ 3,200,000 5.30%, 4/16/97.................. $ 3,192,933
1,900,000 5.52%, 4/30/97.................. 1,891,552
5,000,000 Columbia/HCA
Healthcare Corp.
5.52%, 5/9/97................... 4,970,867
5,200,000 Corporate Asset Funding
5.26%, 4/2/97................... 5,199,240
21,700,000 Federal Home Loan Bank
Consolidated Discount Note
5.48%, 5/7/97................... 21,581,084
20,800,000 Federal National Mortgage
Association
5.20%, 4/10/97.................. 20,772,960
5,400,000 Finova Capital Corp.
5.32%, 4/10/97.................. 5,392,818
7,000,000 Frigate Funding Corporation
5.29%, 4/15/97.................. 6,985,599
3,100,000 Great Lakes Chemical Corp.
5.32%, 4/25/97.................. 3,089,005
10,000,000 Guardian Industries Corp.
5.38%, 5/15/97.................. 9,934,244
1,000,000 Hercules, Inc.
5.39%, 4/11/97.................. 998,503
10,800,000 International Lease
Finance Corp.
5.26%, 4/8/97................... 10,788,954
National Rural Utilities
Cooperative Finance Corp.
1,900,000 5.33%, 4/22/97.................. 1,894,093
20,000,000 5.51%, 5/16/97.................. 19,862,250
3,350,000 Norfolk Southern Corp.
5.27%, 4/24/97.................. 3,338,721
350,000 PHH Corp.
5.32%, 4/7/97................... 349,690
1,200,000 Transamerica Corp.
5.32%, 4/30/97.................. 1,194,857
16,250,000 Transamerica Finance Corporation
Discount Notes
5.40%, 5/8/97................... 16,159,813
9,150,000 Virginia Electric & Power Co.
5.36%, 5/7/97................... 9,100,956
3,750,000 Xerox Credit Corp.
5.30%, 4/21/97.................. 3,738,958
152,682,587
</TABLE>
37
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
VALUE
SHORT-TERM INVESTMENTS -- CONTINUED
<C> <S> <C>
TOTAL SHORT-TERM INVESTMENTS
(COST $152,682,587)........ $ 152,682,587
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS --
(COST
$1,462,524,049)........ 99.4% 1,644,470,950
OTHER ASSETS AND
LIABILITIES -- NET..... 0.6 10,219,897
NET ASSETS............. 100.0% $1,654,690,847
</TABLE>
(a) Less than one tenth of one percent.
* Non-income producing securities.
** At March 31, 1997 and December 31, 1996 the Fund owned 58,500 shares of
common stock of First Union Corp. at a cost of $2,358,441. During the period
ended March 31, 1997 and year ended December 31, 1996 the Fund earned $33,930
and $128,700, respectively, in dividend income from this investment. These
shares were acquired by the Fund prior to the acquisition of the investment
adviser and Lieber & Company by First Union.
BUCS -- Beneficial Unsecured Convertible Securities
REIT -- Real Estate Investment Trust
PEPS -- Participating Equity Preferred Shares
144A -- Rule 144A Securities are restricted as to resale to qualified
institutional investors
See accompanying notes to financial statements.
38
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $1,462,524,049)....................................................... $1,644,470,950
Cash........................................................................................................ 258,004
Receivable for investment securities sold................................................................... 1,489,561
Receivable for Fund shares sold............................................................................. 5,879,723
Dividends and interest receivable........................................................................... 9,125,885
Prepaid expenses............................................................................................ 73,163
Total assets............................................................................................. 1,661,297,286
LIABILITIES:
Payable for investment securities purchased................................................................. 1,795,121
Payable for Fund shares repurchased......................................................................... 2,099,542
Advisory fee payable........................................................................................ 1,131,671
Distribution fee payable.................................................................................... 889,118
Accrued expenses............................................................................................ 690,987
Total liabilities........................................................................................ 6,606,439
NET ASSETS..................................................................................................... $1,654,690,847
NET ASSETS CONSISTS OF:
Paid-in capital............................................................................................. $1,455,322,214
Undistributed net investment income......................................................................... 441,087
Accumulated net realized gain on investment transactions.................................................... 16,980,645
Net unrealized appreciation of investments.................................................................. 181,946,901
Net assets............................................................................................... $1,654,690,847
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A shares ($219,562,289 (divided by) 13,720,729 shares of beneficial interest outstanding)............. $ 16.00
Sales charge -- 4.75% of offering price..................................................................... .80
Maximum offering price................................................................................... $ 16.80
Class B shares ($605,654,063 (divided by) 37,994,888 shares of beneficial interest outstanding)............. $ 15.94
Class C shares ($27,831,125 (divided by) 1,746,457 shares of beneficial interest outstanding)............... $ 15.94
Class Y shares ($801,643,370 (divided by) 50,044,581 shares of beneficial interest outstanding)............. $ 16.02
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
<S> <C> <C>
INVESTMENT INCOME:
Dividends.................................................................................. $ 5,372,277 $ 15,724,373
Interest................................................................................... 11,448,392 48,429,872
Total investment income................................................................. 16,820,669 64,154,245
EXPENSES:
Advisory fee............................................................................... $ 3,246,270 $ 11,140,780
Distribution fee -- Class A Shares......................................................... 135,502 414,289
Distribution fee -- Class B Shares......................................................... 1,113,659 3,487,899
Shareholder services fee -- Class B Shares................................................. 371,220 1,162,633
Distribution fee -- Class C Shares......................................................... 51,839 152,488
Shareholder services fee -- Class C Shares................................................. 17,280 50,829
Registration and filing fees............................................................... 106,200 408,920
Custodian fee.............................................................................. 96,558 365,915
Transfer agent fee......................................................................... 424,194 1,331,778
Professional fees.......................................................................... 21,182 81,041
Reports and notices to shareholders........................................................ 220,700 294,100
Insurance.................................................................................. 4,832 41,820
Trustees' fees and expenses................................................................ 3,240 7,176
Miscellaneous.............................................................................. 12,582 21,600
Total expenses.......................................................................... 5,825,258 18,961,268
Net investment income......................................................................... 10,995,411 45,192,977
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions............................................... 7,808,618 21,629,530
Net change in unrealized appreciation (depreciation) of investments........................ (22,555,700) 96,176,448
Net realized and unrealized gain (loss) on investments........................................ (14,747,082) 117,805,978
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ (3,751,671) $162,998,955
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
EVERGREEN FOUNDATION FUND
(photo of column)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, 1997 1996 1995
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 10,995,411 $ 45,192,977 $ 22,897,807
Net realized gain on investment transactions................ 7,808,618 21,629,530 9,385,074
Net change in unrealized appreciation (depreciation) of
investments.............................................. (22,555,700) 96,176,448 121,111,375
Net increase (decrease) in net assets resulting from
operations......................................... (3,751,671) 162,998,955 153,394,256
DISTRIBUTIONS TO SHAREHOLDERS:
FROM NET INVESTMENT INCOME:
Class A Shares.............................................. (1,460,563) (5,718,718) (1,908,188)
Class B Shares.............................................. (3,012,553) (12,786,120) (4,488,521)
Class C Shares.............................................. (138,668) (568,120) (170,820)
Class Y Shares.............................................. (5,968,305) (26,366,104) (16,164,235)
Total distributions from net investment income........ (10,580,089) (45,439,062) (22,731,764)
FROM NET REALIZED GAINS ON INVESTMENTS:
Class A Shares.............................................. -- (1,819,496) (993,303)
Class B Shares.............................................. -- (5,077,907) (2,824,116)
Class C Shares.............................................. -- (231,947) (113,415)
Class Y Shares.............................................. -- (7,335,097) (7,827,124)
Total distributions from net realized gains on
investments........................................... -- (14,464,447) (11,757,958)
Total distributions to shareholders................... (10,580,089) (59,903,509) (34,489,722)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold................................... 124,109,877 717,070,601 652,779,207
Proceeds from reinvestment of distributions................. 9,578,914 55,523,207 32,843,419
Payment for shares redeemed................................. (76,822,274) (301,222,020) (98,358,101)
Net increase resulting from Fund share transactions...... 56,866,517 471,371,788 587,264,525
Net increase in net assets............................ 42,534,757 574,467,234 706,169,059
NET ASSETS:
Beginning of period......................................... 1,612,156,090 1,037,688,856 331,519,797
End of period (including undistributed net investment income
of $441,087, $25,764, and $271,849, respectively)........ $1,654,690,847 $1,612,156,090 $1,037,688,856
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
EVERGREEN FOUNDATION FUND --
CLASS A AND B SHARES
(photo of column)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B
THREE THREE YEAR
MONTHS MONTHS ENDED
ENDED YEAR ENDED ENDED DECEMBER
MARCH 31, DECEMBER 31, MARCH 31, 31,
1997** 1996 1995* 1997** 1996
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period..................................... $16.13 $15.12 $12.24 $16.07 $15.07
Income (loss) from investment operations:
Net investment income................................................... .12 .50 .44 .09 .40
Net realized and unrealized gain (loss) on investments.................. (.13) 1.16 3.14 (.13) 1.15
Total from investment operations..................................... (.01) 1.66 3.58 (.04) 1.55
Less distributions to shareholders from:
Net investment income................................................... (.12) (.50) (.47) (.09) (.40)
Net realized gain on investments........................................ -- (.15) (.23) -- (.15)
Total distributions.................................................. (.12) (.65) (.70) (.09) (.55)
Net asset value, end of period........................................... $16.00 $16.13 $15.12 $15.94 $16.07
TOTAL RETURN+............................................................ (.2%) 11.3% 29.7% (.3%) 10.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (in millions)................................. $220 $206 $107 $606 $570
Ratios to average net assets:
Expenses................................................................ 1.25%++ 1.24% 1.33%#++ 2.00%++ 1.99%
Net investment income................................................... 2.83%++ 3.39% 3.73%#++ 2.07%++ 2.64%
Portfolio turnover rate.................................................. 2% 10% 28% 2% 10%
Average commission rate paid per share................................... $.0670 $.0649 N/A $.0670 $.0649
<CAPTION>
1995*
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period..................................... $12.24
Income (loss) from investment operations:
Net investment income................................................... .36
Net realized and unrealized gain (loss) on investments.................. 3.09
Total from investment operations..................................... 3.45
Less distributions to shareholders from:
Net investment income................................................... (.39)
Net realized gain on investments........................................ (.23)
Total distributions.................................................. (.62)
Net asset value, end of period........................................... $15.07
TOTAL RETURN+............................................................ 28.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (in millions)................................. $296
Ratios to average net assets:
Expenses................................................................ 2.07%++
Net investment income................................................... 2.99%++
Portfolio turnover rate.................................................. 28%
Average commission rate paid per share................................... N/A
</TABLE>
* For the period from January 3, 1995 (commencement of class operations) to
December 31, 1995.
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
++ Annualized.
# Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of operating expenses and net investment income to average net assets would
have been the following:
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED
DECEMBER 31,
1995*
<S> <C>
Expenses................................................................ 1.34%
Net investment income................................................... 3.72%
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
EVERGREEN FOUNDATION FUND --
CLASS C AND Y SHARES
(photo of column)
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS C CLASS Y
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31, YEAR ENDED DECEMBER 31,
1997** 1996 1995* 1997** 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............ $16.06 $15.07 $12.24 $16.14 $15.13 $12.27 $13.12 $11.98
Income (loss) from investment operations:
Net investment income......................... .09 .40 .34 .13 .54 .51 .42 .31
Net realized and unrealized gain (loss) on
investments................................. (.13) 1.14 3.09 (.13) 1.16 3.07 (.57) 1.55
Total from investment operations............ (.04) 1.54 3.43 -- 1.70 3.58 (.15) 1.86
Less distributions to shareholders from:
Net investment income......................... (.08) (.40) (.37) (.12) (.54) (.49) (.42) (.31)
Net realized gain on investments.............. -- (.15) (.23) -- (.15) (.23) (.28) (.41)
Total distributions......................... (.08) (.55) (.60) (.12) (.69) (.72) (.70) (.72)
Net asset value, end of period.................. $15.94 $16.06 $15.07 $16.02 $16.14 $15.13 $12.27 $13.12
TOTAL RETURN+................................... (.3%) 10.4% 28.5% 0.0% 11.5% 29.7% (1.1)% 15.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (in millions)....... $28 $27 $11 $802 $809 $623 $332 $240
Ratios to average net assets:
Expenses...................................... 2.00%++ 1.99% 2.23%#++ 1.00%+ 0.99% 1.07% 1.14% 1.20%
Net investment income......................... 2.07%++ 2.64% 2.83%#++ 3.07%+ 3.64% 3.89% 3.51% 2.81%
Portfolio turnover rate......................... 2% 10% 28% 2% 10% 28% 33% 60%
Average commission rate paid per share.......... $.0670 $.0649 N/A $.0670 $.0649 N/A N/A N/A
<CAPTION>
1992
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............ $10.75
Income (loss) from investment operations:
Net investment income......................... .27
Net realized and unrealized gain (loss) on
investments................................. 1.83
Total from investment operations............ 2.10
Less distributions to shareholders from:
Net investment income......................... (.24)
Net realized gain on investments.............. (.63)
Total distributions......................... (.87)
Net asset value, end of period.................. $11.98
TOTAL RETURN+................................... 20.0%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (in millions)....... $64
Ratios to average net assets:
Expenses...................................... 1.40%#
Net investment income......................... 2.93%#
Portfolio turnover rate......................... 127%
Average commission rate paid per share.......... N/A
</TABLE>
* For the period from January 3, 1995 (commencement of class operations) to
December 31, 1995.
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
++ Annualized.
# Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of operating expenses and net investment income to average net assets would
have been the following:
<TABLE>
<CAPTION>
CLASS C CLASS Y
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995* DECEMBER 31, 1992
<S> <C> <C>
Expenses......................................... 2.37% 1.43%
Net investment income............................ 2.69% 2.90%
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
A REPORT FROM YOUR
PORTFOLIO MANAGERS
STEPHEN A. LIEBER
JAMES T. COLBY, III
Evergreen Tax Strategic Foundation Fund's fiscal year-end
was changed from December 31, to March 31. Evergreen Tax
Strategic Foundation Fund (Class Y, no-load shares) provided a (photo of Stephen
total return of 1.0%* for the three months ended March 31, A. Lieber)
1997. The Fund's twelve-month total return ended March 31, was
16.1%. Since its inception on November 2, 1993, the Fund (photo of James
(Class Y shares) has provided a 14.7% average annual total T. Colby, III)
return through March 31. The Fund retained its focus on
tax-efficiency. For each $10,000 invested in the Fund (Class Y
shares) on December 31, 1995, the overall return for calendar
1996 was $1,577, and the tax liability would be $94** for
investors in the 36% ordinary income tax bracket and the 28%
capital gains tax bracket (without reference to any possible
state tax payments). This small tax liability reflected both
the tax exempt bond investments*** of the portfolio, and the
concentration on strategies to reduce tax liability in the
half of the portfolio in equities. These strategies include
investment in companies with sizable share buy-back programs
in lieu of dividends, tax-deferred dividend payments, and
transactions entered into to offset realized capital gains.
The three-month and twelve-month total returns ended March 31,
for the Fund's Class A shares were -3.8% and 10.3%, respectively.
For the period since their inception on January 17, 1995, through
March 31, 1997, the Fund's Class A shares have provided an average
annual total return of 15.9%. For each $10,000 invested in the
Fund's Class A shares on December 31, 1995, the overall return
for calendar 1996 was $991 and the tax liability would be $88** for investors in
the 36% ordinary income tax bracket and the 28% capital gains tax bracket
(without reference to any possible state tax payments). (Please see page 46 for
additional performance information.)
The equity portfolio continued to power the Fund's performance despite the
sharp down-turn in equity markets at the end of the quarter. During the quarter,
equities provided a 2.7% return (exceeding the Standard & Poor's 500 Index+),
while the fixed income sector resulted in a 0.6% loss.
The top ten equity performers in the quarter ended March 31, were Kysor
Industrial Corp., +40%; Chemfab Corp., +29.4%; adidas AG++, +28.8%; FPIC
Insurance Group, Inc., +26.8%; Interchange Financial
FIGURES REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS.
* PERFORMANCE FIGURES INCLUDE REINVESTMENT OF INCOME DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. INVESTMENT RETURN, PRINCIPAL VALUE AND YIELD WILL
FLUCTUATE. INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST.
THE FUND ALSO OFFERS CLASS B SHARES WHICH ARE SUBJECT TO A MAXIMUM 5%
CONTINGENT DEFERRED SALES CHARGE, CLASS C SHARES WHICH ARE SUBJECT TO A 1%
CONTINGENT DEFERRED SALES CHARGE WITHIN THE FIRST YEAR AFTER THE MONTH OF
PURCHASE. PERFORMANCE FOR THESE CLASSES OF SHARES MAY BE DIFFERENT.
** TAX LIABILITY WOULD BE LOWER FOR INVESTORS IN LOWER TAX BRACKETS AND HIGHER
FOR INVESTORS IN HIGHER TAX BRACKETS.
*** THIS INCOME MAY BE SUBJECT TO STATE AND LOCAL TAXES. SOME OF THIS INCOME MAY
BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM TAX FOR CERTAIN INVESTORS.
+ THE S&P 500 IS AN UNMANAGED INDEX OF COMMON STOCKS IN INDUSTRY,
TRANSPORTATION, FINANCE, AND PUBLIC UTILITIES, DENOTING GENERAL MARKET
PERFORMANCE AS MONITORED BY STANDARD & POOR'S CORP. AN INVESTMENT CAN NOT BE
MADE IN AN INDEX.
++ INTERNATIONAL INVESTING MAY INVOLVE ADDITIONAL RISKS.
44
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
A REPORT FROM YOUR
PORTFOLIO MANAGERS -- (CONTINUED)
Services Corp., +23.7%; Williams Companies, Inc., +18.6%; Timken Co., +18.3%;
WestPoint Stevens, Inc., +15.5%; Payless ShoeSource, Inc., +15.3%, and Marsh &
McLennan Companies, Inc., +14.6%.
Merger and acquisition events continued to provide significant gains in
issues which were purchased as undervalued. The leader in this period was the
aforementioned Kysor Industrial Corp., whose acquisition was completed on March
10. The benefits of broad-ranging investment research into undervalued companies
were evident in the positive performance of the Fund's equity portfolio. The
largest equity positions purchased during the quarter were in the shares of
Westpoint Stevens, Inc., Amoco Corp., Nationwide Financial Services, Eli Lilly &
Co., and Merrill Lynch & Co., Inc. With our active portfolio management policy,
the Merrill Lynch & Co., Inc. shares were sold with a 25% gain during the
quarter, and the Eli Lilly & Co. shares were repurchased during market weakness
at the end of the quarter.
The tax exempt portfolio consisted of insured or triple A rated bonds+++,
generally of long duration, and short-term tax exempts used as cash equivalent
investments. At the end of the quarter, 4.3% of the Fund's net assets were in
tax exempt cash equivalents. The equity percentage of the portfolio continued
substantially as at the beginning of the year, 43% of the Fund's net assets.
Our anticipations are that the Fund will continue to benefit by our program
of purchasing and holding undervalued small-to-medium size capitalization
companies, and larger companies which either fall into temporary disfavor, or
are engaged in programs to enhance their earnings power. Our bond market
expectations are that rates will settle down at levels close to recent ones
after Federal Reserve policy becomes clearer, with a reasonable probability of
interest rate declines later in the year.
Recent market volatility illustrates an increasingly selective trend in the
markets, with a recognition that many issues had become fully valued, some
overvalued, while others are ignored. The intensity of our search for
undervalued growth opportunities should continue to produce significant gains
notwithstanding a volatile and often uncertain market. The power of valuable
corporate franchises, strong financials, vigorous research and marketing
programs, and, above all, able managements, is evident in a great many companies
which we regularly analyze and visit. We expect this research intensive effort
to be rewarding in the months ahead with further likelihood of gains from
re-valued growth trends, mergers and acquisitions, and profits generated through
innovative leadership. We have carefully maintained sizable cash reserves to be
able to buy shares on weakness, and have done so during each period of stock
market uncertainty. The Fund's fixed income position continues to be
concentrated in insured AAA rated tax exempt obligations which, we believe, will
be benefited when the present period of anxiety over inflation potentials is
past. The real returns of long-term Treasury bonds are currently approximately
5%, and we anticipate that when the Federal Reserve has made amply evident its
program to slow the growth of the economy in order to reduce the risk of
inflation, that inflation premium will decline and the Fund's primarily
long-term bond position will rise in value. Our goal is capital growth and
capital protection with a minimization of risk. We will continue to shape the
Evergreen Tax Strategic Foundation Fund's strategy to these purposes. We thank
our many existing shareholders and welcome the many new shareholders who have
joined us in this year.
+++ INSURED AS TO PAYMENT OF PRINCIPAL AND INTEREST. THE FUND ITSELF IS NOT
INSURED, NOR IS THE VALUE OF ITS SHARES GUARANTEED.
45
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN TAX STRATEGIC FOUNDATION FUND
The graphs below compare a $10,000 investment in the Evergreen Tax
Strategic Foundation Fund (Class A, Class B, Class C and Class Y Shares) with a
similar investment in the S&P 500 and the Lehman Municipal Bond Indexes
("Indexes").
(four graphs appear here, plot points are as follows:)
(customer to provide plot points)
Class A
1-Year Total Return=10.25%
Average Annual Compound
Return Since Inception=15.92%
Evergreen Tax Strategic Foundation Fund
S&P 500 Index
Lehman Brothers Municipal Bond Index
1/27/95* 3/95 9/95 3/96 9/96 3/97
Class B
1-Year Total Return=10.02%
Average Annual Compound
Return Since Inception=17.07%
Evergreen Tax Strategic Foundation Fund
S&P 500 Index
Lehman Brothers Municipal Bond Index
1/8/95* 3/95 9/95 3/96 9/96 3/97
Class C
1-Year Total Return=13.82%
Average Annual Compound
Return Since Inception=17.49%
Evergreen Tax Strategic Foundation Fund
S&P 500 Index
Lehman Brothers Municipal Bond Index
3/3/95* 9/95 3/96 9/96 3/97
Class Y
1-Year Total Return=16.14%
Average Annual Compound
Return Since Inception=14.65%
Evergreen Tax Strategic Foundation Fund
S&P 500 Index
Lehman Brothers Municipal Bond Index
11/2/93* 3/94 3/95 3/96 3/97
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
and Class C Shares, assuming full redemption on March 31, 1997; (c) all
recurring fees (including investment advisory fees) net of fee waivers and
reimbursements were deducted; and (d) all dividends and distributions were
reinvested.
The Indexes are unmanaged and include the reinvestment of income, but do
not reflect the payment of transaction costs and advisory fees associated with
an investment in the Fund.
46
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
STATEMENT OF INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCK -- 42.7%
BANKS -- 7.9%
19,500 Bank of Boston Corp.................. $ 1,306,500
10,000 Barnett Banks, Inc................... 465,000
26,250 Beverly Bancorporation, Inc.......... 498,750
7,000 Cape Cod Bank & Trust Co............. 189,000
5,000 Comerica, Inc........................ 281,875
2,400 First Empire State Corp.............. 768,000
11,000 First of America Bank Corp........... 657,250
1,500 First Union Corp. **................. 121,687
1,100 Interchange Financial
Services Corp........................ 33,550
20,000* Nationwide Financial
Services, Inc........................ 515,000
10,000 Seacoast Banking Corp. of
Florida Cl. A........................ 282,500
4,837 SouthTrust Corp...................... 174,737
10,100 Standard Federal Bank Corp........... 585,800
5,879,649
BUILDING, CONSTRUCTION &
FURNISHINGS -- 1.1%
25,000 Clayton Homes, Inc................... 318,750
10,700 La-Z-Boy Inc......................... 366,475
15,000* Southern Energy Homes, Inc........... 155,625
840,850
BUSINESS EQUIPMENT & SERVICES -- .9%
3,000* Cisco Systems, Inc................... 144,375
2,000 International Business
Machines Corp........................ 274,750
5,000 Lucent Technologies, Inc............. 263,750
682,875
CHEMICALS & AGRICULTURAL
PRODUCTS -- 1.0%
2,000 Du Pont (E. I.) De Nemours........... 212,000
2,000 MacDermid, Inc....................... 69,500
11,000 Morton International, Inc............ 464,750
746,250
CONSUMER PRODUCTS & SERVICES -- 2.6%
10,000 adidas AG ADS, 144A.................. 551,250
5,000 General Motors Corp.................. 276,875
8,000 International Flavors &
Fragrances, Inc...................... 350,000
2,000* National Processing, Inc............. 16,000
10,500 Toro Co. (The)....................... 357,000
6,000 V. F. Corp........................... 401,250
1,952,375
<CAPTION>
SHARES VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<C> <S> <C>
DIVERSIFIED COMPANIES -- .8%
11,000 Dover Corp........................... $ 577,500
ELECTRICAL EQUIPMENT
& ELECTRONICS -- 5.6%
6,000 AMP, Inc............................. 206,250
6,000 Baldor Electric Co................... 150,750
5,000* Gateway 2000, Inc.................... 256,250
20,000 Harman International
Industries, Inc...................... 670,000
18,000 Hewlett-Packard Co................... 958,500
12,000 Intel Corp........................... 1,669,500
11,800 Park Electrochemical Corp............ 269,925
4,181,175
ENERGY -- 1.5%
5,000 Amoco Corp........................... 433,125
10,000 Equitable Resources, Inc............. 306,250
7,500 Williams Company, Inc. (The)......... 333,750
1,073,125
FINANCE & INSURANCE -- 4.4%
10,000 Countrywide Credit
Industries, Inc...................... 247,500
3,000 Enhance Financial Services
Group, Inc........................... 118,500
10,000 FBL Financial Group, Inc............. 260,000
12,000 Federal National Mortgage
Association.......................... 433,500
20,000* FPIC Insurance Group, Inc............ 342,500
5,000 Legg Mason, Inc...................... 211,250
3,000 Marsh & McLennan Co., Inc............ 339,750
13,000 North American Mortgage Co........... 264,875
13,000 PHH Corp............................. 599,625
10,000 Wilmington Trust Corp................ 425,000
3,242,500
HEALTHCARE PRODUCTS &
SERVICES -- 2.6%
7,000 Abbott Laboratories.................. 392,875
4,000 American Home Products Corp.......... 240,000
2,000 Beckman Instruments, Inc............. 84,000
8,250* Bio-Rad Laboratories, Inc.
Cl. A................................ 210,375
5,000 Lilly (Eli) & Co..................... 411,250
5,000* Lincare Holdings, Inc................ 206,250
3,000 Medtronic, Inc....................... 186,750
5,000 Shared Medical System Corp........... 232,500
1,964,000
</TABLE>
47
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCK -- CONTINUED
<C> <S> <C>
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- 2.9%
3,300 Applied Power, Inc. Class A.......... $ 138,600
5,000 Cadmus Communications Corp........... 70,625
7,500* Chemfab Corp......................... 135,938
8,000 Fisher Scientific
International, Inc................... 353,000
10,000 Furon Co............................. 212,500
9,900 Snap-on, Inc......................... 383,625
8,000 Timken Co. (The)..................... 428,000
10,000* UCAR International, Inc.............. 396,250
2,118,538
PUBLISHING, BROADCASTING &
ENTERTAINMENT -- .5%
10,000 Belo (A.H.) Corp..................... 370,000
REAL ESTATE -- 5.3%
1,500* Alexander's, Inc..................... 103,875
20,000 Brandywine Realty Trust REIT......... 405,000
12,000 Capstead Mortgage Corp. REIT......... 244,500
21,400 Continental Homes Holding
Corp................................. 355,775
40,000 CWM Mortgage Holdings, Inc. REIT..... 775,000
13,300 Gables Residential Trust REIT........ 344,250
438* Homestead Village Properties,
Inc.................................. 7,391
293* Homestead Village Properties,
Inc. Warrants, $10 expiring
10/29/97............................. 2,124
15,000* Interstate Hotels Co................. 423,750
2,000* John Q. Hammons Hotels, Inc. Class
A.................................... 18,000
14,000 Patriot American Hospitality,
Inc. REIT............................ 339,500
20,000 Prentiss Properties Trust REIT....... 507,500
3,485 Security Capital Pacific Trust REIT.. 84,947
25,000 Sunstone Hotel Investors, Inc. REIT.. 328,125
3,939,737
RETAILING & WHOLESALE -- 2.5%
8,000 Avnet, Inc........................... 451,000
11,000 Lowe's Companies, Inc................ 411,125
8,200 Mercantile Stores Co., Inc........... 380,275
10,000* Payless Shoesource, Inc.............. 418,750
20,000* Southern Electronics Corp............ 172,500
1,833,650
TEXTILE & APPAREL -- .8%
15,000 WestPoint Stevens, Inc............... 571,875
<CAPTION>
SHARES VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<C> <S> <C>
THRIFT INSTITUTIONS -- .9%
18,000 Bank United Corp..................... $ 531,000
15,000 BankUnited Financial Corp............ 157,500
688,500
UTILITIES -- ELECTRIC -- .3%
9,900 TNP Enterprises, Inc................. 211,613
UTILITIES -- TELEPHONE -- 1.1%
10,000* 360 Communications Co................ 172,500
15,000 Frontier Corp........................ 268,125
8,000 GTE Corp............................. 373,000
813,625
TOTAL COMMON STOCK
(COST $25,474,204)................... 31,687,837
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<C> <S> <C>
MUNICIPAL OBLIGATIONS -- 54.9%
LONG TERM -- 50.6%
ALASKA -- 1.3%
$1,000,000 Alaska Hsg. Fin. Corp. Mtge. RB, 1996
Ser. A 6.05%, 12/1/17 (MBIA).......... 992,910
ARIZONA -- .7%
500,000 City of Tucson GO Refunding Bonds,
Ser. 1995 5.70%, 7/1/08 (FGIC)........ 516,815
CALIFORNIA -- 4.4%
500,000 California Edl. Facs. Auth. RB
(Carnegie Institution of Washington),
Ser. A 5.60%, 10/1/23................. 474,260
1,000,000 Los Angeles Cnty. Metropolitan
Transportation Authority Refunding,
Ser. A 5.00%, 7/1/21 (FGIC)........... 874,130
1,000,000 San Francisco City & Cnty
International Airport Revenue 5.70%,
5/1/26 (MBIA)......................... 957,580
1,000,000 State of California Various Purpose GO
5.90%, 4/1/23 (FGIC).................. 996,050
3,302,020
COLORADO -- 3.6%
500,000 Arapahoe Cnty. Pub. Hwy. Auth. Capital
Imp. Trust Fund Hwy. RB (E-470 Proj.)
6.15%, 8/31/26 (MBIA)................. 513,175
1,475,000 Colorado Health Facilities Authority
Revenue 6.88%, 2/15/23................ 1,642,191
</TABLE>
48
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL OBLIGATIONS -- CONTINUED
COLORADO -- CONTINUED
<C> <S> <C>
$ 500,000 School Dist. No. 1 in the City & Cnty.
of Denver GO Refunding Bonds, Ser.
1994A 6.50%, 6/1/10 (MBIA)............ $ 553,800
2,709,166
DELAWARE -- 1.5%
1,000,000 Delaware Econ. Dev. Auth. Hosp. RB
(The Osteopathic Hosp. Assoc. of
Delaware/Riverside Hosp.), Escrowed to
Maturity, Ser. A 6.50%, 1/1/08........ 1,104,970
FLORIDA -- 4.1%
300,000 Dade Cnty. Aviation RRB, Ser. 1995A
6.10%, 10/1/11 (AMBAC)................ 313,725
2,000,000 Florida St. Board Of Education Capital
Outlay Series C
6.63%, 6/1/22......................... 2,182,200
500,000 Orange Cnty. Hlth. Facs. Auth. Hosp.
RB (Orlando Regional Healthcare Sys.),
Ser. 1996B 6.25%, 10/1/16 (MBIA)...... 535,795
3,031,720
GEORGIA -- 1.4%
1,000,000 Dalton Utilities RRB 6.00%, 1/1/08
(MBIA)................................ 1,062,610
ILLINOIS -- .7%
500,000 Forest Preserve Dist. of Cook Cnty. GO
Ltd. Tax Bonds, Ser. 1996 5.80%,
11/1/16 (MBIA)........................ 489,555
MASSACHUSETTS -- 3.6%
250,000 Massachusetts Hsg. Fin. Agcy. Hsg.
Proj. RRB, 1993 Ser. A 5.95%, 10/1/08
(AMBAC)............................... 256,878
250,000 Massachusetts Bay Trans. Auth. General
Trans. Sys. Bonds, Ser. 1994A 7.00%,
3/1/08................................ 286,662
2,000,000 Massachusetts St Prerefunded @ $101 GO
(Collaterialized in US Treasuries)
6.50%, 6/1/13......................... 2,167,520
2,711,060
MICHIGAN -- 2.0%
1,000,000 Detroit Michigan Series A
6.80%, 4/1/15......................... 1,124,790
300,000 Michigan Muni. Bond Auth. Local Govt.
Loan Prog. RB, Ser 1994G 6.55%,
11/1/08 (AMBAC)....................... 326,400
1,451,190
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<C> <S> <C>
MISSOURI -- 2.7%
$ 500,000 Missouri Hsg. Dev. Commission Single
Family Mtge. RB (Homeownership Loan
Prog.), 1996 Ser. D 6.00%, 9/1/17
(Collaterialized by GNMA or FNMA
Certificates)......................... $ 495,325
1,000,000 Missouri Hsg. Dev. Commission Single
Family Mtge. RB (Homeownership Loan
Prog.), 1996 Ser. B 6.25%, 9/1/15
(Collaterialized by GNMA or FNMA
Certificates)......................... 1,011,320
500,000 St. Louis Muni. Fin. Corp. Leasehold
Revenue Imp. Bonds, Ser. 1996A 5.95%,
2/15/16 (AMBAC)....................... 507,155
2,013,800
NEVADA -- 1.4%
1,000,000 Clark Cnty. Las Vegas McCarran Int'l
Arpt. Passenger Fac. Charge RB, 1992
Ser. A 6.00%, 7/1/22 (AMBAC).......... 1,002,800
NEW HAMPSHIRE -- 1.6%
1,230,000 New Hampshire Higher Educational &
Health Crotched Mountain Rehab Center
5.88%, 1/1/20......................... 1,206,433
NEW YORK -- 7.0%
1,245,000 Metro Transportation Authority
Transport Facility Ser. L 6.63%,
7/1/14................................ 1,367,134
245,000 New York St. Med. Care Facs. Fin.
Agcy. Mental Hlth. Svcs. Facs. Imp.
RB, 1992 Ser. B 6.25%, 8/15/10
(AMBAC)............................... 254,952
500,000 New York St. Med. Care Facs. Fin.
Agcy. Mental Hlth. Svcs. Facs. Imp.
RB, 1995 Ser. A 6.00%, 2/15/25
(MBIA)................................ 494,620
500,000 New York St. Mortgage Agency Revenue
Amt Homeowner Mortgage Series 63
5.60%, 4/1/10 (AMT)................... 492,930
1,000,000 New York St. Thruway Auth. General RB,
Ser. C 6.00%, 1/1/25 (FGIC)........... 1,003,550
250,000 Port Auth. of New York and New Jersey
Consolidated Bonds, Ninety-Seventh
Ser. Second Installment (AMT) 7.00%,
7/15/05 (FGIC)........................ 284,110
250,000 State of New York Mtge. Agcy.
Homeowner Mtge. RB, Ser. 44 (AMT)
6.60%, 4/1/03......................... 260,553
</TABLE>
49
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL OBLIGATIONS -- CONTINUED
NEW YORK -- CONTINUED
<C> <S> <C>
$1,000,000 State of New York Mtge. Agcy.
Homeowner Mtge. RB, Ser. 56 (AMT)
5.88%, 10/1/19........................ $1,008,500
5,166,349
NORTH CAROLINA -- .6%
500,000 North Carolina St. Univ. Raleigh
Centennial Campus B 5.13%, 12/15/16
(AMBAC)............................... 462,950
NORTH DAKOTA -- 1.4%
1,000,000 Mercer Cnty. Poll. Ctrl. RRB (Basin
Elec. Pwr. Cooperative-Antelope Valley
Unit 1 & Common Facs.), Second 1995
Ser. 6.05%, 1/1/19 (AMBAC)............ 1,012,370
OHIO -- 1.0%
700,000 Board of Ed. Beavercreek Local Sch.
Dist. (Cnty. of Greene) Sch. Imp.
Bonds (Unltd. Tax GO), Ser. 1996
6.60%, 12/1/15 (FGIC)................. 779,135
PENNSYLVANIA -- 5.1%
1,965,000 Pennsylvania Intragovernmental
Cooperative Authority Special Tax
Revenue 6.80%, 6/15/12................ 2,143,009
1,450,000 Pennsylvania Intragovernmental
Cooperative Philadelphia Funding
Program 7.00%, 6/15/14................ 1,643,097
3,786,106
TENNESSEE -- .5%
300,000 The Hlth. & Edl. Facs. Board of the
City of Bristol Hosp. RRB (Bristol
Mem. Hosp.), Ser. 1993 6.75%, 9/1/07
(FGIC)................................ 337,020
TEXAS -- 2.2%
1,000,000 City of Houston Wtr. Conveyance Sys.
Contract COP, Ser. 1993J 6.13%,
12/15/09 (AMBAC)...................... 1,069,740
500,000 City of Houston Wtr. Conveyance Sys.
Contract COP, Ser. 1993H 7.50%,
12/15/10 (AMBAC)...................... 593,720
1,663,460
UTAH -- .7%
500,000 Salt Lake City Hosp. RB (IHC
Hospitals, Inc.) 6.30%, 2/15/15....... 520,175
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<C> <S> <C>
WEST VIRGINIA -- 1.3%
$1,000,000 West Virginia St. Hsg. Dev. Fund Hsg.
Fin. (Ser. A) 6.05%, 5/1/27........... $ 990,360
WISCONSIN -- 1.1%
800,000 Southeast Wi Pro Baseball Park 5.80%,
12/15/26.............................. 786,568
PUERTO RICO -- .7%
500,000 Puerto Rico Hsg. Bank & Fin. Agcy.
Affordable Hsg. Mtge. Subsidy Prog.
Single Family Mtge. RB, Portfolio I
(AMT) 5.85%, 4/1/09 (Collaterialized
by GNMA, FNMA & FHLMC Certificates)... 500,750
TOTAL LONG TERM
(COST $37,663,408).................... 37,600,292
Short Term -- 4.3%
GEORGIA -- 1.5%
1,100,000 Hapeville Dev. Auth. Indl. Dev. RB
(Hapeville Hotel Ltd. Partnership
Proj.), Ser. 1985 4.00% -- VRDN (LOC:
Swiss Bank Corp.)..................... 1,100,000
NEW YORK -- 1.7%
800,000 City of New York Ser B1 Subser B7, GO,
Fiscal 1995 Ser. B Sub-Ser. B-4
4.00% -- VRDN (MBIA).................. 800,000
500,000 New York City Municipal Water Finance
Authority Water And Sewer Series C
Mandatory Tender Upon Exp/Term Of
Liquidity 4.00% 6/15/23 -- VRDN
(FGIC)................................ 500,000
1,300,000
PENNSYLVANIA -- .4%
300,000 Schuylkill Cnty. Industrial
Development Dates Westwood Energy
Property Project 4.00%
11/1/09 -- VRDN....................... 300,000
WYOMING -- 0.7%
500,000 Lincoln Cnty. Poll. Ctrl. RB Exxon
Corp., Ser. 1984B 3.90% 11/1/14 --
VRDN.................................. 500,000
TOTAL SHORT TERM
(COST $3,200,000)..................... 3,200,000
TOTAL MUNICIPAL OBLIGATIONS
(COST $40,863,408).................... 40,800,292
</TABLE>
50
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
STATEMENT OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
MUTUAL FUND SHARES -- 0.0% (A)
20,000 Federated Tax Free Obligations
Fund (at net asset value)
(COST $20,000)...................... $ 20,000
TOTAL INVESTMENTS --
(COST $66,357,612)......... 97.6 % 72,508,129
OTHER ASSETS AND
LIABILITIES -- NET......... 2.4 1,766,520
NET ASSETS --................ 100 % $74,274,649
</TABLE>
* Non-income producing security.
** At March 31, 1997 and December 31, 1996 the Fund owned 1,500 shares of common
stock of First Union Corp. at a cost of $57,890. During the three months
ended March 31, 1997 and year ended December 31, 1996 the Fund earned $870
and $3,300, respectively, in dividend income from this investment. These
shares were purchased by the Fund prior to the aquistion of the investment
adviser and Lieber & Company by First Union.
(a) Less than one tenth of one percent.
The following abbreviations are used in this portfolio:
ADS -- American Depositary Shares
AMT -- Subject to Alternative Minimum Tax
COP -- Certificate of Participation
FHLMC -- Federal Home Loan Mortgage Corp.
FNMA -- Federal National Mortgage Corp.
GO -- General Obligations
GNMA -- Government National Mortgage Corp.
LOC -- Letter of Credit
RB -- Revenue Bonds
REIT -- Real Estate Investment Trust
RRB -- Refunding Revenue Bonds
VRDN -- Variable Rate Demand Notes are payable on demand at par on no more than
seven calendar days' notice given by the Fund to the issuer or other parties not
affiliated with the issuer. These notes normally incorporate an irrevocable
letter of credit or line of credit from a major bank. Interest rates presented
for these securities are those in effect as of March 31, 1997.
Municipal bond insurance companies:
AMBAC -- American Municipal Bond Assurance Corp.
FGIC -- Financial Guarantee Insurance Corp.
MBIA -- Municipal Bond Insurance Association
144A -- Rule 144A securites are restricted as to resale to
qualified institutional investors.
See accompanying notes to financial statements.
51
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $66,357,612)............................................................. $72,508,129
Cash........................................................................................................... 3,196
Receivable for Fund shares sold................................................................................ 1,239,344
Dividends and interest receivable.............................................................................. 699,167
Unamortized organization expense............................................................................... 12,848
Prepaid expenses............................................................................................... 48,891
Total assets............................................................................................. 74,511,575
LIABILITIES:
Payable for Fund shares purchased.............................................................................. 55,810
Accrued advisory fee........................................................................................... 53,951
Distribution fee payable....................................................................................... 54,937
Accrued expenses............................................................................................... 72,228
Total liabilities........................................................................................ 236,926
NET ASSETS........................................................................................................ $74,274,649
NET ASSETS CONSISTS OF:
Paid-in capital................................................................................................ $67,230,732
Undistributed net investment income............................................................................ 30,456
Accumulated undistributed net realized gains on investment transactions........................................ 862,944
Net unrealized appreciation of investments..................................................................... 6,150,517
Net assets............................................................................................... $74,274,649
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A shares ($15,039,475 (divided by) 1,108,365 shares of beneficial interest outstanding).................. $13.57
Sales charge -- 4.75% of offering price........................................................................ 0.68
Maximum offering price...................................................................................... $14.25
Class B shares ($38,838,228 (divided by) 2,864,713 shares of beneficial interest outstanding).................. $13.56
Class C shares ($5,085,504 (divided by) 375,744 shares of beneficial interest outstanding)..................... $13.53
Class Y shares ($15,311,442 (divided by) 1,124,861 shares of beneficial interest outstanding).................. $13.61
</TABLE>
See accompanying notes to financial statements.
52
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED
MARCH DECEMBER
31, 1997 31, 1996
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest......................................................................................... $456,048 $ 1,156,135
Dividends (Net of foreign withholding taxes of $0 and $68)....................................... 149,560 434,437
Total investment income....................................................................... 605,608 1,590,572
EXPENSES:
Advisory fee..................................................................................... $143,945 $ 354,958
Distribution fee -- Class A Shares............................................................... 8,004 16,426
Distribution fee -- Class B Shares............................................................... 62,195 131,282
Shareholder services fee -- Class B Shares....................................................... 20,732 43,761
Distribution fee -- Class C Shares............................................................... 8,824 16,493
Shareholder services fee -- Class C Shares....................................................... 2,941 5,498
Professional fees................................................................................ 14,036 9,263
Custodian fee.................................................................................... 6,750 79,350
Reports and notices to shareholders.............................................................. 5,642 36,507
Registration and filing fees..................................................................... 5,575 59,282
Transfer agent fee............................................................................... 5,540 56,591
Amortization of organization expenses............................................................ 1,964 7,986
Insurance........................................................................................ 1,367 7,789
Trustees' fees and expenses...................................................................... 1,113 5,179
Miscellaneous.................................................................................... 412 3,643
Total expenses............................................................................. 289,040 834,008
Less: Fee waivers and expense reimbursements..................................................... -- (101,890)
Net expenses............................................................................... 289,040 732,118
Net investment income............................................................................... 316,568 858,454
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions..................................................... 865,777 1,133,442
Net change in unrealized appreciation (depreciation) of investments.............................. (916,721) 4,531,613
Net realized and unrealized gain (loss) on investments........................................... (50,944) 5,665,055
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................. $265,624 $ 6,523,509
</TABLE>
See accompanying notes to financial statements.
53
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND
(photo of dam)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 1997 1996 1995
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................................... $ 316,568 $ 858,454 $ 456,792
Net realized gain on investments transactions....................... 865,777 1,133,442 671,486
Net change in unrealized appreciation (depreciation) of
investments...................................................... (916,721) 4,531,613 2,607,309
Net increase in net assets resulting from operations............. 265,624 6,523,509 3,735,587
DISTRIBUTIONS TO SHAREHOLDERS:
FROM NET INVESTMENT INCOME:
Class A Shares...................................................... (69,706) (163,381) (34,215)
Class B Shares...................................................... (123,210) (306,929) (72,776)
Class C Shares...................................................... (16,785) (42,461) (4,715)
Class Y Shares...................................................... (78,613) (342,618) (346,086)
Total distributions from net investment income................... (288,314) (855,389) (457,792)
IN EXCESS OF NET INVESTMENT INCOME:
Class A Shares...................................................... -- (121) (162)
Class B Shares...................................................... -- (226) (345)
Class C Shares...................................................... -- (31) (22)
Class Y Shares...................................................... -- (253) (1,644)
Total distributions in excess of net investment income........... -- (631) (2,173)
FROM NET REALIZED GAINS ON INVESTMENTS:
Class A Shares...................................................... -- (209,265) (77,951)
Class B Shares...................................................... -- (555,359) (199,612)
Class C Shares...................................................... -- (82,045) (14,445)
Class Y Shares...................................................... -- (303,414) (490,453)
Total distributions from net realized gains on investments....... -- (1,150,083) (782,461)
Total distributions to shareholders.............................. (288,314) (2,006,103) (1,242,426)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold........................................... 17,462,938 32,091,878 10,412,208
Proceeds from reinvestment of distributions......................... 211,565 1,574,099 1,158,751
Payment for shares redeemed......................................... (1,659,842) (3,143,238) (1,396,543)
Net increase resulting from Fund share transactions.............. 16,014,661 30,522,739 10,174,416
Net increase in net assets....................................... 15,991,971 35,040,145 12,667,577
NET ASSETS:
Beginning of period................................................. 58,282,678 23,242,533 10,574,956
End of period (including undistributed (distributions in excess of)
net investment income of $30,456, ($631) and $0, respectively)... $ 74,274,649 $58,282,678 $23,242,533
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND --
CLASS A AND B SHARES
(photo of dam)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS B
YEAR
CLASS A ENDED
YEAR ENDED DECEMBER
THREE MONTHS ENDED DECEMBER 31, THREE MONTHS ENDED 31,
MARCH 31, 1997++ 1996 1995* MARCH 31, 1997++ 1996
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period........................ $13.50 $12.20 $10.44 $13.49 $12.19
Income from investment operations:
Net investment income..................................... .07 .27 .29 .05 .19
Net realized and unrealized gain on investments........... .06+++ 1.59 2.24 .06+++ 1.59
Total from investment operations........................ .13 1.86 2.53 .11 1.78
Less distributions to shareholders from:
Net investment income..................................... (.06) (.28) (.31) (.04) (.20)
Net realized gains on investments......................... -- (.28) (.46) -- (.28)
Total distributions..................................... (.06) (.56) (.77) (.04) (.48)
Net asset value, end of period.............................. $13.57 $13.50 $12.20 $13.56 $13.49
TOTAL RETURN**.............................................. 1.0% 15.4% 24.8% 0.8% 14.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................... $ 15,039 $11,166 $2,702 $ 38,838 $28,007
Ratios to average net assets:
Expenses.................................................. 1.38%+ 1.52%# 1.75%#+ 2.14%+ 2.27%#
Net investment income..................................... 2.30%+ 2.39%# 2.79%#+ 1.55%+ 1.64%#
Portfolio turnover rate..................................... 29% 88% 110% 29% 88%
Average commission rate paid per share...................... $.0656 $.0648 N/A $.0656 $.0648
<CAPTION>
1995*
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period........................ $10.31
Income from investment operations:
Net investment income..................................... .22
Net realized and unrealized gain on investments........... 2.37
Total from investment operations........................ 2.59
Less distributions to shareholders from:
Net investment income..................................... (.25)
Net realized gains on investments......................... (.46)
Total distributions..................................... (.71)
Net asset value, end of period.............................. $12.19
TOTAL RETURN**.............................................. 25.6%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................... $6,559
Ratios to average net assets:
Expenses.................................................. 2.50%#+
Net investment income..................................... 2.03%#+
Portfolio turnover rate..................................... 110%
Average commission rate paid per share...................... N/A
</TABLE>
* For the period from January 17, 1995 and January 6, 1995 (commencement of
class A and class B operations, respectively) to December 31, 1995.
** Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
+ Annualized.
++ The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+++ The per share amount is not in accord with the net realized and unrealized
gain (loss) for the period due to the timing of the sales of fund shares and
the amount of per share realized and unrealized gains and losses at such
time.
# Net of expense waivers and reimbursements. If the Fund had borne all
expenses that were assumed or waived by the investment adviser, the
annualized ratios of expenses and net investment income (loss) to average
net assets would have been the following:
<TABLE>
<CAPTION>
CLASS A CLASS B
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995* 1996 1995*
<S> <C> <C> <C> <C>
Expenses.......................................................... 1.76% 5.02% 2.51% 3.65%
Net investment income (loss)...................................... 2.15% (.48%) 1.40% .88%
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
EVERGREEN TAX STRATEGIC FOUNDATION FUND --
CLASS C AND Y SHARES
(photo of dam)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C CLASS Y
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, THREE MONTHS ENDED DECEMBER 31,
1997++ 1996 1995* MARCH 31, 1997++ 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period........ $13.47 $12.19 $10.69 $13.54 $12.22 $10.27
Income from investment operations:
Net investment income....................... .06 .18 .22 .09 .34 .35
Net realized and unrealized gain on
investments............................... .05+++ 1.58 1.99 .05+++ 1.56 2.39
Total from investment operations.......... .11 1.76 2.21 .14 1.90 2.74
Less distributions to shareholders from:
Net investment income....................... (.05) (.20) (.25) (.07) (.30) (.33)
Net realized gains on investments........... -- (.28) (.46) -- (.28) (.46)
Total distributions....................... (.05) (.48) (.71) (.07) (.58) (.79)
Net asset value, end of period.............. $13.53 $13.47 $12.19 $13.61 $13.54 $12.22
TOTAL RETURN**.............................. 0.8% 14.5% 21.2% 1.0% 15.8% 27.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)... $5,086 $4,108 $496 $ 15,311 $15,002 $13,485
Ratios to average net assets:
Expenses.................................. 2.13%+ 2.25%# 2.50%#+ 1.13%+ 1.30%# 1.50%#
Net investment income..................... 1.55%+ 1.64%# 2.07%#+ 2.54%+ 2.63%# 3.06%#
Portfolio turnover rate..................... 29% 88% 110% 29% 88% 110%
Average commission rate paid per share...... $.0656 $.0648 N/A $.0656 $.0648 N/A
<CAPTION>
1994 1993*
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period........ $10.31 $10.00
Income from investment operations:
Net investment income....................... .27 .05
Net realized and unrealized gain on
investments............................... .08 .31
Total from investment operations.......... .35 .36
Less distributions to shareholders from:
Net investment income....................... (.27) (.05)
Net realized gains on investments........... (.12) --
Total distributions....................... (.39) (.05)
Net asset value, end of period.............. $10.27 $10.31
TOTAL RETURN**.............................. 3.4% 3.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)... $10,575 $5,424
Ratios to average net assets:
Expenses.................................. 1.49%# .00%#+
Net investment income..................... 2.87%# 3.65%#+
Portfolio turnover rate..................... 245% 25%
Average commission rate paid per share...... N/A N/A
</TABLE>
* For the period from March 3, 1995, to December 31, 1995 and November 2, 1993
to December 31, 1993 (commencement of class C and class Y operations,
respectively).
** Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
+ Annualized.
++ The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
+++ The per share amount is not in accord with the net realized and unrealized
gain (loss) for the period due to the timing of sales of fund shares and the
amount of per share realized and unrealized gains and losses at such time.
# Net of expense waivers and reimbursements. If the Fund had borne all
expenses that were assumed or waived by the investment adviser, the
annualized ratios of expenses and net investment income (loss) to average
net assets, exclusive of any applicable state expense limitations would have
been the following:
<TABLE>
<CAPTION>
CLASS C
CLASS Y
YEAR ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1995* 1996 1995 1994 1993*
<S> <C> <C> <C> <C> <C> <C>
Expenses................................................................ 2.48% 18.91% 1.56% 2.23% 2.41% 3.10%
Net investment income (loss)............................................ 1.41% (14.34%) 2.37% 2.33% 1.95% .54%
</TABLE>
See accompanying notes to financial statements.
56
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
The Evergreen Balanced Funds (the "Funds") are separate series of open-end
management investment companies registered under the Investment Company Act of
1940, as amended (the "Act"). The Balanced Funds consist of Evergreen American
Retirement Fund ("American Retirement"), Evergreen Balanced Fund ("Balanced"),
Evergreen Foundation Fund ("Foundation") and Evergreen Tax Strategic Foundation
Fund ("Tax Strategic") known collectively as the Funds.
American Retirement's investment objectives, in order of priority, are
conservation of capital, reasonable income and capital growth. Balanced's
investment objective is to achieve long-term total return through capital
appreciation, dividends and interest income. Foundation's investment objectives,
in order of priority, are reasonable income, conservation of capital and capital
appreciation. Tax Strategic's investment objective is to maximize the after-tax
total return on its portfolio of investments by investing in equities as well as
municipal securities, which are exempt from Federal income tax.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements. These policies are
in conformity with generally accepted accounting principles.
SECURITY VALUATIONS -- Investments in securities traded on a national
securities exchange or included on the NASDAQ National Market System ("NMS") are
valued at the last reported sales price. Securities traded on an exchange or NMS
for which there has been no sale and other securities traded in the
over-the-counter market are valued at the mean between the last reported bid and
asked price. Unlisted securities for which market quotations are not readily
available are valued at a price quoted by one or more brokers. Debt securities
(other than short-term obligations) are valued on the basis of valuations
provided by a pricing service. Securities for which market quotations are not
readily available are valued at their respective fair value as determined in
good faith following procedures approved by the Board of Trustees. Short-term
investments are valued at amortized cost, which approximates market value.
SECURITY TRANSACTIONS -- Security transactions are accounted for on the
date purchased or sold. Net realized gains or losses are determined on the
identified cost basis.
INVESTMENT INCOME AND EXPENSES -- Dividend income is recorded on the
ex-dividend date. Interest income and expenses are accrued daily.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by the Federal Reserve Bank and are designated as being held
on each Fund's behalf by its custodian under a book-entry system. Each Fund
monitors the adequacy of the collateral on a daily basis and can require the
seller to provide additional collateral in the event the market value of the
securities pledged falls below the carrying value of the repurchase agreement,
including accrued interest. Each Fund will only enter into repurchase agreements
with banks and other financial institutions which are deemed by the investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income
are distributed quarterly for each of the Funds. Distributions from net realized
capital gains on investments, if any, will be distributed at least annually.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from amounts available under generally accepted
accounting principles. These differences are primarily due to differing
treatments for certain short-term losses and distributions received from real
estate investment trusts. To the extent these differences are permanent in
nature, such amounts are reclassified within the components of net assets.
57
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- continued
As of March 31, 1997, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to paid-in
capital.
<TABLE>
<CAPTION>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT REALIZED GAIN
INCOME ON INVESTMENTS
<S> <C> <C>
Balanced............... $(50,499) $ 50,499
Tax Strategic.......... 2,833 (2,833)
</TABLE>
INCOME TAXES -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable net income and net realized capital
gains to its shareholders. Accordingly, no provisions for Federal income or
excise taxes are necessary. To the extent that realized capital gains can be
offset by capital loss carryforwards, it is each Fund's policy not to distribute
such gains.
ALLOCATION OF EXPENSES -- Expenses specifically identifiable to a class of
shares are charged to that class. Expenses common to a Trust as a whole are
allocated to the funds in that Trust. Investment income, net of expenses (other
than class specific expenses) and realized and unrealized gains and losses are
allocated daily to each class of shares based upon the relative proportion of
net assets of each class.
UNAMORTIZED ORGANIZATION EXPENSES -- The expenses of Tax Strategic incurred
in connection with its organization are being deferred and amortized over a
period of benefit not to exceed 60 months from the date it commenced operations.
USE OF ESTIMATES -- The preparation of the financial statements is in
accordance with generally accepted accounting principles which requires
management to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AGREEMENTS -- First Union National Bank of North
Carolina ("First Union"), Balanced's investment adviser, is entitled to an
annual fee of .50 of 1% of Balanced's average daily net assets pursuant to the
Fund's investment advisory agreement.
Pursuant to an agreement with American Retirement's, Foundation's and Tax
Strategic's investment adviser, Evergreen Asset Management Corp. ("Evergreen
Asset"), a wholly owned subsidiary of First Union, Evergreen Asset is entitled
to an annual fee based on each of American Retirement's, Foundation's and Tax
Strategic's average daily net assets, respectively, in accordance with the
following schedules:
<TABLE>
<CAPTION>
FOUNDATION AND AMERICAN
TAX STRATEGIC RETIREMENT
<S> <C> <C> <C>
First $750 million 0.875% First $750 million 0.75%
Next $250 million 0.750% Over $750 million 0.70%
Over $1 billion 0.700%
</TABLE>
During the three months ended March 31, 1997, for American Retirement,
Evergreen Asset voluntarily reimbursed other expenses amounting to $90,000.
During the year ended December 31, 1996, for American Retirement and Tax
Strategic, Evergreen Asset voluntarily waived advisory fees of $24,841 and
$90,551, respectively, and voluntarily reimbursed other expenses amounting to
$3,400 and $11,339, respectively. Evergreen Asset can modify or terminate
voluntary waivers and reimbursements at any time.
58
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
Lieber & Company, an affiliate of First Union, is the investment
sub-adviser to American Retirement, Foundation and Tax Strategic and also
provides brokerage services with respect to substantially all security
transactions of these Funds effected on the New York or American Stock
Exchanges. For the three months ended March 31, 1997, American Retirement,
Foundation and Tax Strategic incurred brokerage commissions of $11,925, $81,365
and $10,758 with Lieber & Company. For the year ended December 31, 1996,
American Retirement, Foundation and Tax Strategic incurred brokerage commissions
of $51,579, $680,252 and $50,033 with Lieber & Company. Lieber & Company is
reimbursed by Evergreen Asset, at no additional expense to these Funds, for its
cost of providing investment advisory services.
ADMINISTRATION AGREEMENT -- For the period through March 10, 1997,
Evergreen Asset furnished American Retirement, Foundation and Tax Strategic with
administrative services as part of their advisory agreements and accordingly,
these Funds did not pay a separate administration fee. Effective March 11, 1997,
Evergreen Keystone Investment Services (EKIS), a subsidiary of First Union,
began providing administrative services to the Funds. For the period through
December 31, 1996, Furman Selz LLC ("Furman Selz") was each of the Funds'
sub-administrator. As sub-administrator, Furman Selz provided the officers of
the Funds. Effective January 1, 1997, The BISYS Group, Inc. ("BISYS") acquired
Furman Selz' mutual fund unit and accordingly, BISYS Fund Services became
sub-administrator. For American Retirement, Foundation and Tax Strategic, Furman
Selz' or BISYS fee was paid by Evergreen Asset or EKIS and is not a fund
expense.
From January 1, 1997 to March 10, 1997, Evergreen Asset and from March 11,
1997, EKIS were Balanced's administrator and for the period from January 1, 1997
to March 31, 1997 BISYS was sub-administrator. Evergreen Asset and Furman Selz
were Balanced's administrator and sub-administrator, respectively, for the year
ended December 31, 1996. Evergreen Asset's/EKIS's and Furman Selz'/BISYS fees
for Balanced are based on the average daily net assets of all the funds
administered by Evergreen Asset or EKIS for which First Union, or its investment
advisory subsidiaries, is also investment adviser. These fees were calculated at
the following annual rates:
<TABLE>
<CAPTION>
ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<C> <S>
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% in excess of $30 billion
<CAPTION>
SUB-ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<C> <S>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% in excess of $25 billion
</TABLE>
At March 31, 1997, assets for which EKIS was the administrator for which
First Union, or its investment advisory subsidiaries, was investment adviser
totalled approximately $29 billion. At December 31, 1996, assets for which
Evergreen Asset was the administrator for which either Evergreen Asset or First
Union was investment adviser totalled approximately $17.0 billion.
PLANS OF DISTRIBUTION -- The Funds have adopted for their Class A, Class B,
and Class C shares, Distribution Plans (the "Plans") pursuant to Rule 12b-1
under the Act. Under the terms of the Plans, the Funds may incur
distribution-related and shareholder servicing expenses which may not exceed an
annual fee of .75 of 1% for Class A and an annual fee of 1% for Class B and
Class C Shares. For each of the Funds, the payments for Class A were voluntarily
limited to .25 of 1% of average daily net assets.
59
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
In connection with their Plans, American Retirement, Foundation and Tax
Strategic have entered into distribution agreements with Evergreen Keystone
Distributor, Inc. ("EKD") (formerly Evergreen Funds Distributor, Inc.), a
subsidiary of BISYS, whereby American Retirement, Foundation and Tax Strategic
will compensate EKD for its services at a rate which may not exceed an annual
fee of .25 of 1% of Class A Shares' average daily net assets and an annual fee
of 1% of Class B and Class C Shares' average daily net assets. A portion of the
payments for Class B and C Shares, up to .25 of 1% may constitute a shareholder
services fee. EKD has entered into a Shareholder Services Agreement with First
Union Brokerage Services ("FUBS"), an affiliate of First Union, whereby they
will compensate FUBS for certain services provided to shareholders and/or
maintenance of shareholder accounts relating to each of the Fund's Class B and
Class C Shares.
In connection with its plan, Balanced entered into a distribution agreement
with EKD whereby it will compensate EKD for its services at a rate which may not
exceed an annual fee of .25 of 1% of Class A average daily net assets and an
annual fee of .75 of 1% of Class B and Class C average daily net assets for
certain services provided to Class A, B and C shareholders. Balanced has entered
into a shareholder services agreement with FUBS, and will pay FUBS, an annual
fee of up to .25 of 1% of the average net assets of its Class B and Class C
shares. This fee is designed to obtain certain services for shareholders and to
maintain shareholder accounts.
SALES CHARGES -- EKD has advised the Funds that it has retained the
following amounts from front-end sales charges resulting from sales of Class A
Shares during the three months ended March 31, 1997 and year ended December 31,
1996:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
American Retirement $ 12,910 $20,024
Balanced 3,100 9,150
Foundation 53,267 57,736
Tax Strategic 16,111 25,078
</TABLE>
OTHER SERVICES WITH AFFILIATES -- State Street Bank & Trust Company ("State
Street") is the transfer agent, dividend disbursing agent and shareholder
servicing agent for the Funds. For certain accounts in American Retirement,
Balanced and Foundation, First Union has been sub-contracted by State Street to
maintain shareholder sub-account records, take fund purchase and redemption
orders and answer inquiries. For each account, First Union is entitled to a
monthly fee which totaled $4,276, $102,025 and $83,760 for American Retirement,
Balanced and Foundation, respectively, for the three months ended March 31, 1997
and which totaled $5,560, $187,538 and $151,484 for American Retirement,
Balanced and Foundation, respectively, for the year ended December 31, 1996.
NOTE 4 -- SHARES OF BENEFICIAL INTEREST
The Funds have an unlimited number of $0.0001 par value shares of
beneficial interest authorized. The shares are divided into classes which are
designated Class A, Class B, Class C and Class Y shares. Class A shares are sold
with a front-end sales charge of up to 4.75%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class B shares will automatically convert to
Class A shares seven years after the date of purchase. Class C shares are sold
with a contingent deferred sales charge of 1% for shares redeemed during the
first year after the month of purchase. Class Y shares are sold without a sales
charge and are available only to investment advisory clients of First Union and
its affiliates, certain institutional investors or Class Y shareholders of
record of certain other funds managed by First Union and its affiliates as of
December 30, 1994. The classes have identical voting, dividend, liquidation and
other rights, except that Class A, Class B and Class C shares bear distribution
expenses (see Note 3) and have exclusive voting rights with respect to their
distribution plans.
60
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
YEAR
ENDED*
THREE MONTHS ENDED YEAR ENDED DECEMBER
MARCH 31, 1997** DECEMBER 31, 1996 31, 1995
AMERICAN RETIREMENT SHARES AMOUNT SHARES AMOUNT SHARES
<S> <C> <C> <C> <C> <C>
CLASS A
Shares sold............................................. 326,820 $ 4,608,875 762,980 $10,140,786 103,126
Shares issued on reinvestment of distributions.......... 7,652 106,973 19,559 264,707 1,195
Shares redeemed......................................... (74,356) (1,044,019) (84,770) (1,127,903) (186)
Net increase............................................ 260,116 3,671,829 697,769 9,277,590 104,135
CLASS B
Shares sold............................................. 1,531,877 21,511,234 3,892,133 51,648,645 380,412
Shares issued on reinvestment of distributions.......... 33,372 464,195 81,733 1,103,810 4,314
Shares redeemed......................................... (124,007) (1,740,809) (175,385) (2,331,018) (6,548)
Net increase............................................ 1,441,242 20,234,620 3,798,481 50,421,437 378,178
CLASS C
Shares sold............................................. 25,543 360,283 100,739 1,334,965 8,507
Shares issued on reinvestment of distributions.......... 755 10,535 2,161 29,233 70
Shares redeemed......................................... (4,726) (66,693) (3,928) (53,590) --
Net increase............................................ 21,572 304,125 98,972 1,310,608 8,577
CLASS Y
Shares sold............................................. 87,120 1,231,385 287,843 3,807,908 280,323
Shares issued on reinvestment of distributions.......... 19,041 266,192 103,943 1,392,828 106,983
Shares redeemed......................................... (370,659) (5,263,594) (481,537) (6,415,509) (808,529)
Net decrease............................................ (264,498) (3,766,017) (89,751) (1,214,773) (421,223)
Total net increase resulting from Fund share
transactions.......................................... 1,458,432 $20,444,557 4,505,471 $59,794,862 69,667
<CAPTION>
AMERICAN RETIREMENT AMOUNT
<S> <C>
CLASS A
Shares sold............................................. $1,278,749
Shares issued on reinvestment of distributions.......... 14,909
Shares redeemed......................................... (2,372)
Net increase............................................ 1,291,286
CLASS B
Shares sold............................................. 4,651,965
Shares issued on reinvestment of distributions.......... 53,311
Shares redeemed......................................... (80,579)
Net increase............................................ 4,624,697
CLASS C
Shares sold............................................. 104,262
Shares issued on reinvestment of distributions.......... 878
Shares redeemed......................................... --
Net increase............................................ 105,140
CLASS Y
Shares sold............................................. 3,219,576
Shares issued on reinvestment of distributions.......... 1,270,557
Shares redeemed......................................... (9,380,520)
Net decrease............................................ (4,890,387)
Total net increase resulting from Fund share
transactions.......................................... $1,130,736
</TABLE>
* The Fund share activity for Class A, Class B and Class C shares reflects the
period from January 3, 1995 (commencement of class operations) through
December 31, 1995.
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
61
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR ENDED*
THREE MONTHS ENDED YEAR ENDED DECEMBER
BALANCED MARCH 31, 1997** DECEMBER 31, 1996 31, 1995
CLASS A SHARES AMOUNT SHARES AMOUNT SHARES
<S> <C> <C> <C> <C> <C>
Shares sold.................................. 82,428 $ 1,093,429 450,824 $ 5,988,616 174,514
Shares issued on reinvestment of
distributions.............................. 26,899 354,264 372,747 4,905,076 228,390
Shares redeemed.............................. (223,885) (2,966,293) (680,925) (9,159,435) (883,230)
Net increase (decrease)...................... (114,558) (1,518,600) 142,646 1,734,257 (480,326)
CLASS B
Shares sold.................................. 165,348 2,196,560 529,783 7,095,087 331,882
Shares issued on reinvestment of
distributions.............................. 56,925 750,275 883,591 11,640,482 528,256
Shares redeemed.............................. (341,159) (4,533,333) (1,260,613) (16,901,766) (1,507,091)
Net increase (decrease)...................... (118,886) (1,586,498) 152,761 1,833,803 (646,953)
CLASS C
Shares sold.................................. 3,813 50,440 19,191 256,143 6,207
Shares issued on reinvestment of
distributions.............................. 128 1,683 2,215 28,991 1,346
Shares redeemed.............................. (3,891) (51,872) (16,775) (220,556) (2,122)
Net increase................................. 50 251 4,631 64,578 5,431
CLASS Y
Shares sold.................................. 3,764,660 49,606,477 16,615,288 221,340,376 13,282,634
Shares issued on reinvestment of
distributions.............................. 249,854 3,288,082 3,659,774 48,208,895 4,419,582
Shares redeemed.............................. (4,480,218) (59,399,461) (22,526,104) (302,083,357) (25,032,555)
Net decrease................................. (465,704) (6,504,902) (2,251,042) (32,534,086) (7,330,339)
Total net decrease resulting from Fund share
transactions............................... (699,098) ($9,609,749) (1,951,004) ($28,901,448) (8,452,187)
<CAPTION>
BALANCED
CLASS A AMOUNT
<S> <C>
Shares sold.................................. $ 2,180,996
Shares issued on reinvestment of
distributions.............................. 2,924,585
Shares redeemed.............................. (10,834,925)
Net increase (decrease)...................... (5,729,344)
CLASS B
Shares sold.................................. 4,113,278
Shares issued on reinvestment of
distributions.............................. 6,788,533
Shares redeemed.............................. (18,590,977)
Net increase (decrease)...................... (7,689,166)
CLASS C
Shares sold.................................. 78,623
Shares issued on reinvestment of
distributions.............................. 17,328
Shares redeemed.............................. (27,063)
Net increase................................. 68,888
CLASS Y
Shares sold.................................. 164,605,419
Shares issued on reinvestment of
distributions.............................. 56,436,034
Shares redeemed.............................. (313,833,958)
Net decrease................................. (92,792,505)
Total net decrease resulting from Fund share
transactions............................... ($106,142,127)
</TABLE>
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
62
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR
ENDED*
THREE MONTHS ENDED YEAR ENDED DECEMBER
FOUNDATION MARCH 31, 1997** DECEMBER 31, 1996 31, 1995
CLASS A SHARES AMOUNT SHARES AMOUNT SHARES
<S> <C> <C> <C> <C> <C>
Shares sold..................................... 1,573,527 $26,044,624 8,413,021 $126,479,881 7,433,192
Shares issued on reinvestment of
distributions................................. 85,926 1,413,485 474,763 7,335,750 194,159
Shares redeemed................................. (734,487) (12,146,536) (3,177,106) (47,846,922) (542,266)
Net increase.................................... 924,966 15,311,573 5,710,678 85,968,709 7,085,085
CLASS B
Shares sold..................................... 3,519,353 58,129,934 18,909,215 282,822,448 19,717,460
Shares issued on reinvestment of
distributions................................. 175,001 2,868,253 1,109,399 17,095,215 487,710
Shares redeemed................................. (1,205,547) (19,871,723) (4,174,149) (62,881,641) (543,554)
Net increase.................................... 2,488,807 41,126,464 15,844,465 237,036,022 19,661,616
CLASS C
Shares sold..................................... 176,251 2,897,772 1,165,822 17,413,787 761,087
Shares issued on reinvestment of
distributions................................. 6,429 105,303 43,393 668,629 19,172
Shares redeemed................................. (91,055) (1,506,028) (308,109) (4,629,756) (26,533)
Net increase.................................... 91,625 1,497,047 901,106 13,452,660 753,726
CLASS Y
Shares sold..................................... 2,229,198 37,037,547 19,300,331 290,354,485 18,505,940
Shares issued on reinvestment of
distributions................................. 315,233 5,191,873 1,977,198 30,423,613 1,558,776
Shares redeemed................................. (2,606,400) (43,297,987) (12,328,011) (185,863,701) (5,965,644)
Net increase (decrease)......................... (61,969) (1,068,567) 8,949,518 134,914,397 14,099,072
Total net increase resulting from Fund share
transactions.................................. 3,443,429 $56,866,517 31,405,767 $471,371,788 41,599,499
<CAPTION>
FOUNDATION
CLASS A AMOUNT
<S> <C>
Shares sold..................................... $103,904,500
Shares issued on reinvestment of
distributions................................. 2,828,216
Shares redeemed................................. (7,709,611)
Net increase.................................... 99,023,105
CLASS B
Shares sold..................................... 275,013,438
Shares issued on reinvestment of
distributions................................. 7,076,078
Shares redeemed................................. (7,846,692)
Net increase.................................... 274,242,824
CLASS C
Shares sold..................................... 10,573,728
Shares issued on reinvestment of
distributions................................. 277,286
Shares redeemed................................. (379,480)
Net increase.................................... 10,471,534
CLASS Y
Shares sold..................................... 263,287,541
Shares issued on reinvestment of
distributions................................. 22,661,839
Shares redeemed................................. (82,422,318)
Net increase (decrease)......................... 203,527,062
Total net increase resulting from Fund share
transactions.................................. $587,264,525
</TABLE>
* The Fund share activity for Class A, Class B and Class C shares reflect the
period from January 3, 1995 (commencement of class operations) through
December 31, 1995.
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
63
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR
ENDED*
THREE MONTHS ENDED YEAR ENDED DECEMBER
TAX STRATEGIC MARCH 31, 1997** DECEMBER 31, 1996 31, 1995
CLASS A SHARES AMOUNT SHARES AMOUNT SHARES
<S> <C> <C> <C> <C> <C>
Shares sold............................................ 315,408 $ 4,371,432 652,149 $ 8,273,511 215,649
Shares issued on reinvestment of distributions......... 4,842 66,689 26,949 357,306 8,759
Shares redeemed........................................ (38,895) (539,727) (73,546) (929,252) (2,950)
Net increase........................................... 281,355 3,898,394 605,552 7,701,565 221,458
CLASS B
Shares sold............................................ 816,857 11,299,403 1,563,566 19,725,070 550,703
Shares issued on reinvestment of distributions......... 8,114 111,726 59,693 793,572 21,721
Shares redeemed........................................ (36,136) (499,992) (85,378) (1,087,302) (34,427)
Net increase........................................... 788,835 10,911,137 1,537,881 19,431,340 537,997
CLASS C
Shares sold............................................ 102,016 1,405,348 263,684 3,324,801 39,093
Shares issued on reinvestment of distributions......... 745 10,250 6,172 81,908 1,561
Shares redeemed........................................ (31,923) (445,521) (5,604) (70,810) --
Net increase........................................... 70,838 970,077 264,252 3,335,899 40,654
CLASS Y
Shares sold............................................ 27,768 386,755 63,086 768,496 92,229
Shares issued on reinvestment of distributions......... 1,657 22,900 26,475 341,313 66,375
Shares redeemed........................................ (12,744) (174,602) (84,857) (1,055,874) (84,665)
Net increase........................................... 16,681 235,053 4,704 53,935 73,939
Total net increase resulting from Fund share
transactions......................................... 1,157,709 $16,014,661 2,412,389 $30,522,739 874,048
<CAPTION>
TAX STRATEGIC
CLASS A AMOUNT
<S> <C>
Shares sold............................................ $ 2,527,734
Shares issued on reinvestment of distributions......... 105,291
Shares redeemed........................................ (36,239)
Net increase........................................... 2,596,786
CLASS B
Shares sold............................................ 6,364,106
Shares issued on reinvestment of distributions......... 260,033
Shares redeemed........................................ (407,693)
Net increase........................................... 6,216,446
CLASS C
Shares sold............................................ 457,822
Shares issued on reinvestment of distributions......... 18,761
Shares redeemed........................................ --
Net increase........................................... 476,583
CLASS Y
Shares sold............................................ 1,062,541
Shares issued on reinvestment of distributions......... 774,666
Shares redeemed........................................ (952,606)
Net increase........................................... 884,601
Total net increase resulting from Fund share
transactions......................................... $10,174,416
</TABLE>
* For Class A, Class B, and Class C shares, the Fund share transaction activity
reflects the period January 17, 1995, January 6, 1995, and March 3, 1995,
respectively (commencement of class operations) through December 31, 1995.
** The Fund changed its fiscal year end from December 31 to March 31, effective
March 31, 1997.
NOTE 5 -- INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from sales of investments, excluding
short-term securities for the three months ended March 31, 1997 and year ended
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
American Retirement.... $ 25,839,480 $ 9,477,392 $ 61,282,970 $ 10,474,200
Balanced............... 246,036,067 247,581,271 301,410,563 419,093,895
Foundation............. 62,412,840 24,762,245 435,891,619 116,921,520
Tax Strategic.......... 34,192,321 17,289,466 59,793,904 34,152,600
</TABLE>
On March 31, 1997, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost for federal
tax purposes was as follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION NET TAX COST
<S> <C> <C> <C> <C>
American Retirement.... $ 13,902,963 $ 3,014,733 $ 10,888,230 $ 117,680,684
Balanced............... 121,310,893 19,483,252 101,827,641 803,831,536
Foundation............. 238,227,950 56,382,716 181,845,234 1,462,625,716
Tax Strategic.......... 7,242,856 1,092,339 6,150,517 66,357,612
</TABLE>
64
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 6 -- CONCENTRATION OF CREDIT RISK
Tax Strategic invests the municipal bond portion of its portfolio in
obligations issued by states, territories and possessions of the United States
and by their political subdivisions and duly constituted authorities. The
issuers' abilities to meet their obligations may be affected by economic and
political developments in a specific state or region. Certain debt obligations
held in the Fund's municipal portfolio may be entitled to the benefit of standby
letters of credit or other guarantees of banks or other financial institutions.
NOTE 7 -- FINANCING AGREEMENT
Effective July 3, 1996, a financing agreement was put in place between all
of the Evergreen Funds and State Street. Under this agreement, State Street
provided an unsecured line of credit facility, in the aggregate amount of $100
million ($50 million committed and $50 million uncommitted), to be accessed by
the Funds for temporary or emergency purposes only and is subject to each
participating Fund's borrowing restrictions.
Effective October 31, 1996, a new financing agreement was put in place
between all of the Evergreen Funds and State Street, Societe Generale and ABN
AMRO Bank N.V. (collectively, the "Banks"). Under this agreement, the Banks
provide an unsecured line of credit facility in the aggregate amount of $225
million ($112.5 million committed and $112.5 million uncommitted) allocated
evenly between the Banks. Borrowings under these facilities bear interest at
.75% per annum above the Federal Funds rate. A commitment fee of .10% per annum
will be incurred on the unused portion of the committed facility which would be
allocated to all participating funds.
The Funds had no borrowings under the financing agreements during the three
months ended March 31, 1997 or the year ended December 31, 1996.
NOTE 8 -- DEFERRED TRUSTEE'S FEES
Each Trustee may defer any or all compensation related to performance of
duties as a Trustee of the Funds. Each Trustee's deferred balances are allocated
to deferral accounts which are included in the accrued expenses for each Fund.
The investment performance of the deferral accounts are based on the investment
performance of certain Evergreen Funds. Any gains earned or losses incurred in
the deferral accounts are reported in each Fund's Trustee's fees and expenses.
Trustees will be paid either in one lump sum or in quarterly installments for up
to ten years at their election, not earlier than either the year in which the
Trustee ceases to be a member of the Board of Trustees or January 1, 2000. As of
March 31, 1997, the value of the Trustees deferral accounts was $10,325,
$27,360, $8,650 and $3,583 for American Retirement, Balanced, Foundation and Tax
Strategic, respectively.
NOTE 9 -- CHANGE IN FISCAL YEAR
American Retirement, Balanced, Foundation and Tax Strategic have changed
their fiscal year end to March 31 from December 31, effective March 31, 1997.
NOTE 10 -- SUBSEQUENT EVENTS
Effective May 5, 1997, Evergreen Keystone Service Company, an affiliate of
First Union, became the Funds' transfer agent, dividend disbursement agent and
shareholder servicing agent.
65
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND SHAREHOLDERS OF
THE EVERGREEN AMERICAN RETIREMENT TRUST
EVERGREEN INVESTMENT TRUST
EVERGREEN FOUNDATION TRUST
We have audited the accompanying statements of assets and liabilities,
including the statements of investments of the Evergreen Balanced Funds listed
below as of March 31, 1997, and the related statements of operations, statements
of changes in net assets, and financial highlights for each of the years or
periods presented below:
EVERGREEN AMERICAN RETIREMENT FUND (ONE OF THE PORTFOLIOS CONSTITUTING THE
EVERGREEN AMERICAN RETIREMENT TRUST) -- statements of operations, changes in
net assets, and financial highlights for the three months ended March 31,
1997 and the year ended December 31, 1996. The statement of changes in net
assets for the year ended December 31, 1995 and the financial highlights for
each of the years or periods in the four-year period ended December 31, 1995
were audited by other auditors whose report dated February 15, 1996
expressed an unqualified opinion thereon.
EVERGREEN BALANCED FUND (ONE OF THE PORTFOLIOS CONSTITUTING EVERGREEN
INVESTMENT TRUST) -- statements of operations for the three months ended
March 31, 1997 and the year ended December 31, 1996, statements of changes
in net assets for the three months ended March 31, 1997 and each of the
years in the two-year period ended December 31, 1996, and financial
highlights for the three months ended March 31, 1997 and each of the years
in the five-year period ended December 31, 1996.
EVERGREEN FOUNDATION FUND (ONE OF THE PORTFOLIOS CONSTITUTING EVERGREEN
FOUNDATION TRUST) -- statements of operations, changes in net assets, and
financial highlights for the three months ended March 31, 1997 and the year
ended December 31, 1996. The statement of changes in net assets for the year
ended December 31, 1995 and the financial highlights for each of the years
or periods in the four-year period ended December 31, 1995 were audited by
other auditors whose report dated February 15, 1996 expressed an unqualified
opinion thereon.
EVERGREEN TAX STRATEGIC FOUNDATION FUND (ONE OF THE PORTFOLIOS CONSTITUTING
EVERGREEN FOUNDATION TRUST) -- statements of operations, changes in net
assets, and financial highlights for the three months ended March 31, 1997
and the year ended December 31, 1996. The statement of changes in net assets
for the year ended December 31, 1995 and the financial highlights for each
of the years or periods in the two-year period ended December 31, 1995 and
the period from November 2, 1993 (commencement of operations) through
December 31, 1993 were audited by other auditors whose report dated February
15, 1996 expressed an unqualified opinion thereon.
These financial statements and financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Evergreen American Retirement Fund, Evergreen Balanced Fund, Evergreen
Foundation Fund, and Evergreen Tax Strategic Foundation Fund as of March 31,
1997, the results of their operations for three months ended March 31, 1997, the
changes in their net assets for the three months ended March 31, 1997 and for
the year ended December 31, 1996, and the financial highlights for each of the
years or periods specified in the first paragraph above in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
May 2, 1997
66
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
TRUSTEES AND OFFICERS
TRUSTEES:
Laurence B. Ashkin*
Foster Bam*
James S. Howell, Chairman
Robert J. Jeffries*+
Gerald M. McDonnell
Thomas L. McVerry
William W. Pettit
Russell A. Salton, III M.D.
Michael S. Scofield
OFFICERS:
John J. Pileggi
President and Treasurer
George O. Martinez
Secretary
Sheryl Hirschfeld
Assistant Secretary
Stephen W. St. Clair
Assistant Treasurer
* These individuals are not trustees for Balanced.
+ Trustee Emeritus
FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS
(UNAUDITED)
During the fiscal period ended March 31, 1997, 79.13% of total dividends from
net investment income paid by Tax Strategic were from tax-exempt interest
income.
For the corporate taxpayers, 57.39%, 37.48%, 42.49% and 48.23% of the ordinary
income distributions paid during the fiscal period ended March 31, 1997 by
American Retirement, Balanced, Foundation and Tax Strategic, respectively,
qualified for the corporate dividends received deduction.
<PAGE>
This report was prepared primarily for the information of fund shareholders. It
is authorized for distribution if preceded or accompanied by the fund's current
prospectus. The prospectus contains important information about the fund,
including fees and expenses. Read it carefully before you invest or send
money. For a free prospectus on other Evergreen Keystone Funds, contact your
financial adviser or call Evergreen Keystone.
NOT May lose value
FDIC No bank guarantee
INSURED
Evergreen Keystone Distributor, Inc.
Evergreen Keystone(SM) is a Service Mark of Evergreen Keystone Investment
Services, Inc. Copyright 1997.
<PAGE>
PAGE 1
KEYSTONE BALANCED FUND (K-1)
SEEKS CURRENT INCOME FROM A QUALITY SELECTION OF STOCKS AND BONDS.
Dear Shareholders:
We are pleased to report on Keystone Balanced Fund (K-1) for the 12-month period
which ended June 30, 1997. Following this letter, the fund's portfolio manager
will discuss specific issues of portfolio strategy.
PERFORMANCE
Your Fund returned 22.0% for the 12-month period which ended June 30, 1997. For
the same period, the Standard & Poor's 500, a broad-based index of common
stocks, returned 31.0%.
We believe your Fund performed very well. During a year in which both the
stock and bond markets experienced significant short-term volatility and
longer-term positive trends, we believe your Fund's consistent, conservative
strategy resulted in very strong performance.
ENVIRONMENT
The 12-month fiscal period was marked by successive waves of changing sentiment
in the markets: first of investor confidence; then of concerns caused by rising
interest rates and fears of excessive growth; and finally of renewed investor
confidence as economic growth appeared to moderate and inflation remained under
control.
The first six months of the fiscal year, from July through December 1996, were
characterized by an environment of strong corporate earnings and healthy
economic growth. In this environment, the prices of stocks, especially the
quality, dividend-paying, blue-chip stocks which your fund traditionally
emphasizes, soared to new records. This environment carried over into early
1997, with the stock market continuing to rise. This rally, however, sputtered
and paused in February as the stock market became worried about the bond market.
Market interest rates started rising as bond traders worried that growth might
be getting out of control and could generate a new burst of inflation. In fact,
the rates of growth were increasing. Gross Domestic Product (GDP) grew by an
inflation-adjusted 4.7% annualized rate in the last quarter of 1996 and by an
even higher 5.6% in the first quarter of 1997. The Federal Reserve Board took
notice, and hiked short-term rates by one-quarter of one percent in late March.
The fears of inflation combined with the actions and expected future actions
of the Federal Reserve Board caused a sharp correction in the bond and stock
markets in late March and April. At the end of April, however, a succession of
new economic reports indicated that economic growth was moderating and that
inflation was not increasing. In response, interest rates again began falling
and the bond market rallied. The stock market then resumed its rally, posting
extremely strong performance numbers for the second quarter of 1997, the final
quarter of your Fund's fiscal year.
STRATEGY
During the year, your Fund remained true to its long-term strategy, investing in
larger capitalization, dividend-paying stocks and higher-rated bonds. At the end
of the fiscal year, your Fund's allocation to stocks was 62.6% of net assets,
close to the 62% allocation at the end of 1996. Your Fund's allocation to bonds,
36.7%, was modestly above the 34% allocation on December 31, 1996. Cash was
relatively low, less than 1% of net assets. These allocations reflected
decisions made in early May that the relative values of stocks were attractive,
after the corrections of March and April, and that the reports of moderating
economic growth could fuel a market rally.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE BALANCED FUND (K-1)
Within the stock portion of the portfolio, the Fund concentrated on seasoned
companies with stable earnings growth and reasonable price/earnings ratios,
relative to the overall market. These stocks tended to be the better quality,
highly liquid stocks which have led the rally. Within sectors, the Fund has been
emphasizing the financial, chemicals and pharmaceutical industries, all of which
performed very strongly in the rally in the latter part of the fiscal year.
Within the bond portion of the portfolio, the Fund continued to focus on high
quality corporate bonds, which tended to do very well in a period of moderate
economic growth and low inflation. Average credit quality of portfolio bonds at
the end of the fiscal year was AA, and the average maturity was 11.5 years.
OUTLOOK
Despite the lofty levels of stock prices at the conclusion of the fiscal year,
we believe the environment continues to be healthy for both stocks and bonds in
the foreseeable future. Gross Domestic Product continues to grow at a more
moderate rate than it had experienced earlier in 1997, and there are still
relatively few signs of inflationary pressure that could prompt the Federal
Reserve Board to push short-term interest rates up significantly. To be sure,
further market corrections, similar to that of March and April, would not be
surprising.
Despite our cautious optimism, it is important to remember that the financial
markets move in cycles. We currently are well into our third year of strong,
above-average returns from the stock markets. It seems reasonable to expect that
the markets cannot indefinitely sustain their recent performance, and we
recommend investors moderate their expectations about the level of returns they
are likely to enjoy.
With this outlook, we will continue to manage the Keystone Balanced Fund (K-1)
with a conservative strategy, emphasizing the higher quality, dividend-paying
securities that have helped the fund deliver consistent performance over the
long term.
Thank you for your support of Keystone Balanced Fund (K-1).
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
CHAIRMAN
KEYSTONE INVESTMENT MANAGEMENT COMPANY
/s/ George S. Bissell
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
(Photo of Albert H. Elfner, III) (Photo of George S. Bissell)
ALBERT H. ELFNER, III GEORGE S. BISSELL
August 1997
<PAGE>
PAGE 3
A Discussion With
Your Fund Manager
(Photo of Walter T. McCormick)
WALTER T. MCCORMICK IS SENIOR VICE PRESIDENT AND CHIEF INVESTMENT OFFICER,
GROWTH AND INCOME, AT KEYSTONE INVESTMENT MANAGEMENT COMPANY. HE IS ALSO
SENIOR PORTFOLIO MANAGER OF YOUR FUND. A CHARTERED FINANCIAL ANALYST WITH
MORE THAN 25 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE, MR. MCCORMICK
HOLDS AN MBA FROM RUTGERS UNIVERSITY. THE GROWTH & INCOME TEAM AT KEYSTONE
ALSO INCLUDES PORTFOLIO MANAGERS MAUREEN CULLINANE, JUDITH WARNERS AND A
TEAM OF EQUITY ANALYSTS. THE FIXED INCOME PORTION OF THE PORTFOLIO IS
MANAGED BY CHRISTOPHER P. CONKEY, SENIOR VICE PRESIDENT AND CHIEF
INVESTMENT OFFICER, FIXED INCOME.
Q HOW DO YOU MANAGE THE FUND, AND IN WHAT KINDS OF SECURITIES DO YOU INVEST?
A The Fund is managed as a conservative-oriented vehicle that will provide
long-term performance without taking too much risk. It is a balanced fund, and
typically we will have from 60-to-65% of the portfolio in stocks, from 30-to-35%
in bonds, with the remainder in cash. We manage the Fund to give the shareholder
the opportunity to participate in the upside of the stock market, to have
regular income coming into the portfolio to limit downside risk, and to be as
consistent as possible.
The stocks in which we invest tend to be the stocks of seasoned companies that
pay regular quarterly dividends. They usually are large-cap companies, the type
you find in the S&P 500 Index. Many of the stocks in the fund are household
names with which the average person would be familiar. For example, on June 30,
the top five stock holdings were DuPont, General Electric, Johnson & Johnson,
BankAmerica, and Monsanto.
The bonds in which we invest tend to be higher quality bonds. They are there
to provide regular income and limit the fund's volatility. Typically, the
average credit quality of the bond portfolio will be AAA or AA. We normally do
not emphasize higher-yielding, "junk" bonds.
Q WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE PAST YEAR, AND HOW DID IT
AFFECT STRATEGY?
A In the broadest terms, you would have to say we had a terrific environment.
Unfortunately, it wasn't that simple. The fiscal year, which began in July 1996,
started out very strong with a stable bond market, moderate to increasing
economic growth, and rising corporate profits. The Keystone Balanced Fund (K-1)
participated fully in this market, which was led by the larger-company stocks
which the Fund emphasizes.
The markets worry though, and early in 1997 there began to be growing concern
that growth might become excessive, that the stock market was being fueled by
speculation, and that we could have a resurgence of inflation that could upset
the entire economy. That's when the Federal Reserve Board stepped in-- first in
words in late December when Chairman Alan Greenspan warned of "irrational
exuberance." The markets started cooling after reaching highs in February. In
March, the Federal Reserve Board did raise short-term rates by one-quarter of
one percent. There followed a sell-off that lasted for several weeks. During
this FED-induced
<PAGE>
PAGE 4
KEYSTONE BALANCED FUND (K-1)
TOP FIVE EQUITY INDUSTRY ALLOCATIONS
JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
INDUSTRY NET ASSETS
<S> <C>
Healthcare Products & Services 9.2%
Oil 6.7%
Chemical & Agricultural Products 6.3%
Banks 5.4%
Finance & Insurance 4.4%
</TABLE>
correction, the S&P 500, which represents the largest stocks, fell by more than
10% and the broader NASDAQ Index, which includes some small company stocks, fell
by more than 15%. At the time, we believed it would take two-to-three rate
increases by the Federal Reserve Board to cool the economy down. During this
period, we viewed the correction as an opportunity for long-term investors who
were looking for value. In this rising interest rate environment, we managed the
portfolio conservatively, lowering the price/earnings ratio of portfolio
holdings, increasing the cash reserves, and investing in defensive areas, such
as Real Estate Investment Trusts (REITS).
In early May, it became apparent that the pace of economic growth was
moderating and it was less certain that the Federal Reserve Board would raise
rates one or two times more. The markets then began to recover. When the Federal
Reserve Board did not raise rates at its May 20 meeting, the markets took off.
Our strategy then was to reduce cash reserves, reduce REIT exposure, and
increase holdings in some sectors, such as pharmaceuticals. We also
re-established positions in some companies that we had sold when we had been
concerned earlier in the year that their prices may have peaked. After the
corrections of the spring, some of these stocks began to look attractive.
Q HOW IS THE BOND PORTFOLIO OF THE FUND MANAGED?
A We work closely with Keystone's fixed income department. In fact, Christopher
Conkey, a Senior Vice President and Chief Investment Officer for Fixed Income,
manages the bond portion of the portfolio.
The emphasis in the bond portion of the portfolio continues to be on higher
credit quality issues. Over the past several months, we have placed a greater
emphasis on corporate bonds, which have done particularly well because of the
generally favorable environment of moderate economic growth and low inflation.
Since December 31, 1996, the percentage of corporate, industrial bonds in the
overall portfolio has increased from about 4% to about 15%, while government
bonds have been reduced from 6% of the entire portfolio to about 3%.
As of June 30, 1997, the average credit quality of the portfolio was AA, the
average maturity was 11.5 years, and the duration was 5.5 years.
Q A MAJOR CONCENTRATION OF STOCKS IN THE PORTFOLIO AT THE END OF THE PERIOD WAS
IN HEALTHCARE. WHY DID YOU HAVE THIS EMPHASIS?
A Drug company stocks were hurt by the February correction in the market.
However, after that correction, they began to look very attractive and we
increased our emphasis there as the sector came back strongly. We like companies
with strong product pipelines. By that, I mean they have the capability to
develop and introduce new products over time. We like companies with stable
earnings.
Demographics tend to favor this industry. As the general population ages,
there is likely to be a greater need for the drugs produced by the
pharmaceutical industry.
Major portfolio holdings from the pharmaceutical industry at the end of the
fiscal year included American Home Products, Johnson & Johnson, and
Bristol-Myers.
<PAGE>
PAGE 5
TOP 10 EQUITY HOLDINGS
JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
STOCK INDUSTRY NET ASSETS
<S> <C> <C>
Du Pont (E.I.) Chemical &
De Nemours & Co. Agricultural
Products 3.3%
General Electric Co. Capital Goods 3.2%
Johnson & Johnson Healthcare
Products &
Services 2.8%
BankAmerica Corp. Banks 2.7%
Monsanto Co. Chemical &
Agricultural
Products 1.6%
American Home Products Corp. Healthcare
Products &
Services 1.4%
Merck & Co., Inc. Healthcare
Products &
Services 1.4%
Mobil Corp. Oil 1.3%
Boeing Co. Aerospace &
Defense 1.3%
Sonat, Inc. Natural Gas 1.3%
</TABLE>
Q FINANCE, INCLUDING BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
INSTITUTIONS, WAS ANOTHER MAJOR SECTOR IN THE FUND. WHY?
A Financial companies have played a leadership role in the stock market for the
past two years, and their fundamentals still look good. The price/earnings
ratios of this sector are still below the markets, and yet we believe the growth
rates and prospects are above average.
We have invested chiefly in banks, insurance companies, and government
mortgage agencies such as the Federal Home Loan Mortgage Corporation (Freddie
Mac) and Federal National Mortgage Association (Fannie Mae). The banks in which
we have invested tend to have strong operating fundamentals that should help
them thrive in the current environment of stable-to-declining interest rates. We
have good positions in BankAmerica, BankBoston and Chase Manhattan.
Q THE THIRD LARGEST SECTOR WAS THE CHEMICAL INDUSTRY. WHY DID YOU INVEST THERE?
A We are not enthusiastic about the commodity chemical business, but we do like
some companies in this industry.
One is Du Pont, which is restructuring and refocusing its business on the
fastest growing areas, such as agriculture and healthcare.
Another is Monsanto, which probably is best positioned in the agricultural
chemicals, which is a very important leader. It is a market leader with products
such as Roundup, a weedkiller marketed to both farmers and homeowners.
Q WHAT IS YOUR OUTLOOK?
A The current investing environment is good. We have good growth, low inflation
and strong corporate profits. Right now, I see no reason for this environment to
end, although eventually there will be something down the road that will change
things.
We are enjoying an environment that is favorable to the stocks of the quality,
seasoned companies in which we invest. But the environment also help the quality
corporate bonds in which the Fund invests.
As long as these relatively benign conditions persist, we do not anticipate
major corrections.
It is important to remember though that this is a fund that does not take
excessive risk. When corrections do come, we believe we are prepared to
outperform more aggressive investment strategies.
(Diamond)
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400,
CHARLOTTE, N.C. 28288-1195
<PAGE>
PAGE 6
KEYSTONE BALANCED FUND (K-1)
Your Fund's Performance
Growth of an investment in
Keystone Balanced Fund (K-1)
(Line graph appears here with the following plot points.)
<TABLE>
<CAPTION>
In Thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6/87 6/88 6/89 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97
Dividend Reinvestment (CUSTOMER: PLEASE FILL IN)
Initial Investment
</TABLE>
Total value: $25,965
A $10,000 investment in Keystone Balanced Fund (K-1) made on June 30, 1987
with all distributions reinvested was worth $25,965 on June 30, 1997. Past
performance is no guarantee of future results.
Comparisons of change in value of a $10,000 investment in Keystone
Balanced Fund (K-1), the Standard & Poors 500 Index and the Consumer Price
Index.
(Line graph appears here with the following plot points.)
<TABLE>
<CAPTION>
In Thousands June 30, 1987 through June 30, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6/87 6/88 6/89 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97
The Fund (CUSTOMER: PLEASE FILL IN)
CPI
S&P 500
</TABLE>
Past performance is no guarantee of future results. The Standard & Poors 500
Index is an unmanaged market index. This index does not include transaction
costs associated with buying and selling securities nor any management fees.
The Consumer Price Index, a measure of inflation, is through June 30, 1997.
The cumulative and average annual total returns with sales charge calculations
reflect the deduction of the 3% contingent deferred sales charge (CDSC) for
those investors who sold Fund shares after one calendar year. Investors who
retained their investment earned the returns in the without sales charge lines.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone Classic fund by phone or in
writing. The Fund reserves the right to change or terminate the exchange offer.
<TABLE>
<CAPTION>
HISTORICAL RECORD
<S> <C>
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C>
1 year w/o sales charge 21.95%
1 year w/sales charge 18.95%
Five years 78.31%
Ten years 159.65%
AVERAGE ANNUAL TOTAL RETURN
1 year w/o sales charge 21.95%
1 year w/sales charge 18.95%
5 years 12.26%
10 years 10.01%
</TABLE>
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- 59.4%
<S> <C> <C>
ADVERTISING & RELATED SERVICES-- 0.3%
46,800 Gannett Inc.................. $ 4,621,500
AEROSPACE & DEFENSE-- 2.0%
400,000 Boeing Co. (The)............. 21,225,000
49,600 Honeywell, Inc............... 3,763,400
50,000 Rockwell International
Corp....................... 2,950,000
62,200 United Technologies Corp..... 5,162,600
33,101,000
AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 1.3%
250,000 Ford Motor Co................ 9,437,500
150,000 General Motors Corp.......... 8,353,125
93,038 Genuine Parts Co............. 3,151,645
20,942,270
BANKS-- 5.4%
673,920 BankAmerica Corp............. 43,509,960
250,000 BankBoston Corp.............. 18,015,625
159,747 Chase Manhattan Corp......... 15,505,443
42,000 Morgan (J.P.) & Co., Inc..... 4,383,750
24,200 Wells Fargo & Co............. 6,521,900
87,936,678
BUSINESS EQUIPMENT & SERVICES-- 0.3%
62,769 Xerox Corp................... 4,950,905
CAPITAL GOODS-- 3.6%
60,000 Deere & Co................... 3,292,500
792,000 General Electric Co.......... 51,777,000
50,500 Ingersoll Rand Co............ 3,118,375
58,187,875
CHEMICAL & AGRICULTURAL PRODUCTS-- 6.3%
28,000 Air Products & Chemicals,
Inc........................ 2,275,000
133,200 Dow Chemical Co.............. 11,605,050
862,000 Du Pont (E.I.) De Nemours &
Co......................... 54,198,250
600,000 Monsanto Co.................. 25,837,500
136,000 PPG Industries, Inc.......... 7,905,000
101,820,800
CONSUMER PRODUCTS & SERVICES-- 2.3%
32,600 Avon Products, Inc........... 2,300,338
150,000 Gillette Co. (The)........... 14,212,500
100,000 International Flavours &
Fragrances, Inc............ 5,050,000
110,000 Procter & Gamble Co. (The)... 15,537,500
37,100,338
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C>
DIVERSIFIED COMPANIES-- 0.9%
71,300 Allied-Signal Inc............ $ 5,989,200
80,000 Minnesota Mining &
Manufacturing Co........... 8,160,000
14,149,200
ELECTRICAL EQUIPMENT & SERVICES-- 1.2%
50,000 AMP, Inc..................... 2,087,500
200,000 Motorola, Inc................ 15,200,000
40,000 Thomas & Betts Corp.......... 2,102,500
19,390,000
FINANCE & INSURANCE-- 3.2%
30,000 Aetna, Inc................... 3,071,250
64,892 Allstate Corp. (The)......... 4,737,116
20,000 CIGNA Corp................... 3,550,000
414,400 Federal Home Loan Mortgage
Corp....................... 14,245,000
200,000 Federal National Mortgage
Assn....................... 8,725,000
15,000 General Reinsurance Corp..... 2,730,000
25,200 Hartford Life, Inc. Cl. A.... 945,000
53,600 PMI Group, Inc. (The)........ 3,343,300
68,200 SAFECO Corp.................. 3,186,219
40,000 St. Paul Companies, Inc...... 3,050,000
100,000 Travelers Property Casualty
Corp. Cl. A................ 3,987,500
51,570,385
FOOD & BEVERAGE PRODUCTS-- 2.8%
324,000 Anheuser-Busch Companies.,
Inc........................ 13,587,750
46,800 CPC International, Inc....... 4,320,225
30,000 General Mills, Inc........... 1,953,750
79,200 H.J. Heinz Co................ 3,653,100
44,000 Kellogg Co................... 3,767,500
339,300 Philip Morris Companies,
Inc........................ 15,056,437
86,000 Sara Lee Corp................ 3,579,750
45,918,512
</TABLE>
<PAGE>
PAGE 8
KEYSTONE BALANCED FUND (K-1)
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C>
HEALTHCARE PRODUCTS & SERVICES-- 9.2%
300,000 American Home Products
Corp....................... $ 22,950,000
47,400 Baxter International, Inc.... 2,476,650
110,000 Bristol-Myers Squibb Co...... 8,910,000
710,400 Johnson & Johnson............ 45,732,000
47,626 Lilly (Eli) & Co............. 5,206,117
213,000 Merck & Co., Inc............. 22,045,500
145,200 Pfizer, Inc.................. 17,351,400
204,800 Schering-Plough Corp......... 9,804,800
57,200 SmithKline Beecham plc, ADR.. 5,240,950
84,000 Warner-Lambert Co............ 10,437,000
150,154,417
METAL PRODUCTS & SERVICES-- 0.5%
40,000 Aluminum Company of
America.................... 3,015,000
56,138 Freeport McMoran Copper &
Gold Class B............... 1,747,295
22,000 Phelps Dodge Corp............ 1,874,125
24,400 Reynolds Metals Co........... 1,738,500
8,374,920
NATURAL GAS-- 1.4%
54,000 Enron Corp................... 2,203,875
407,000 Sonat, Inc................... 20,858,750
23,062,625
OFFICE EQUIPMENT & SUPPLIES-- 1.8%
200,000 Hewlett-Packard Co........... 11,200,000
348,028 Ikon Office Solutions, Inc... 8,678,948
100,000 International Business
Machines Corp.............. 9,018,750
28,897,698
OIL-- 6.7%
96,600 Amoco Corp................... 8,398,162
289,000 Atlantic Richfield Co........ 20,374,500
263,600 Chevron Corp................. 19,489,925
127,000 Exxon Corp................... 7,810,500
310,800 Mobil Corp................... 21,717,150
157,000 Occidental Petroleum Corp.... 3,934,813
280,400 Royal Dutch Petroleum Co..... 15,246,750
294,400 Unocal Corp.................. 11,426,400
108,398,200
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C>
OIL FIELD SERVICES-- 0.5%
45,200 Halliburton Co............... $ 3,582,100
31,100 Schlumberger Ltd............. 3,887,500
7,469,600
PAPER & PACKAGING-- 1.9%
30,800 Georgia-Pacific Corp......... 2,629,550
57,000 International Paper Co....... 2,768,063
69,600 Kimberly-Clark Corp.......... 3,462,600
174,014 Unisource Worldwide, Inc..... 2,784,224
370,350 Weyerhaeuser Co.............. 19,258,200
30,902,637
REAL ESTATE-- 2.8%
119,500 Arden Realty, Inc.
(R.E.I.T).................. 3,107,000
500,000 Beacon Properties Corp.
(R.E.I.T.)................. 16,687,500
50,000 Boston Properties, Inc.
(R.E.I.T.)................. 1,375,000
70,000 First Industrial Realty
Trust, Inc. (R.E.I.T.)..... 2,047,500
200,000 Patriot American Hospitality,
Inc. (R.E.I.T.)............ 5,100,000
50,000 Prentiss Properties Trust
(R.EI.T.).................. 1,281,250
294,112 Rouse Co..................... 8,676,304
100,000 Spieker Properties, Inc.
(R.E.I.T.)................. 3,518,750
100,000 TriNet Corporate Realty
Trust, Inc. (R.E.I.T.)..... 3,306,250
45,099,554
RETAILING & WHOLESALE-- 0.4%
60,000 May Department Stores Co..... 2,835,000
70,000 Sears Roebuck & Co........... 3,762,500
6,597,500
TELECOMMUNICATION SERVICES & EQUIPMENT-- 3.0%
124,000 Ameritech Corp............... 8,424,250
90,000 Bell Atlantic Corp........... 6,828,750
162,000 GTE Corp..................... 7,107,750
200,000 Northern Telecom Ltd......... 18,200,000
88,088 NYNEX Corp................... 5,076,071
75,480 Sprint Corp.................. 3,972,135
49,608,956
</TABLE>
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C>
TRANSPORTATION-- 0.4%
40,000 Norfolk Southern Corp........ $ 4,030,000
46,800 Union Pacific Corp........... 3,299,400
7,329,400
UTILITIES-- 1.2%
39,500 American Electric Power Co.,
Inc........................ 1,659,000
74,000 Consolidated Edison Co. of
New York, Inc.............. 2,178,375
31,050 Dominion Resources, Inc...... 1,137,206
42,000 Duke Power Co................ 2,013,375
108,000 Emerson Electric Co.......... 5,946,750
71,400 Florida Progress Corp........ 2,235,712
27,000 FPL Group, Inc............... 1,243,688
86,800 Houston Industries., Inc..... 1,860,775
44,105 Texas Utilities Co........... 1,518,866
19,793,747
TOTAL COMMON STOCKS
(COST $458,795,114)........................... 965,378,717
<CAPTION>
CONVERTIBLE PREFERRED-- 2.1%
<S> <C> <C>
FINANCE & INSURANCE-- 1.2%
64,200 Allstate Corp. (The)
6.76%, Exchangeable Notes
Due 4/15/98................ 3,338,400
63,500 Conseco, Inc.
7.00%, PRIDES.............. 8,239,125
200,000 SunAmerica, Inc.
$3.188, PERCS.............. 8,725,000
20,302,525
OFFICE EQUIPMENT & SUPPLIES-- 0.2%
55,000 Ikon Office Solutions, Inc.
$5.04, 10/01/1998.......... 3,540,625
RETAILING & WHOLESALE-- 0.7%
200,000 Kmart Financing I
7.75%...................... 10,975,000
TOTAL CONVERTIBLE PREFERRED
(COST $28,714,617)............................ 34,818,150
<CAPTION>
CONVERTIBLE DEBENTURES-- 1.1%
<S> <C> <C>
BUSINESS EQUIPMENT & SERVICES-- 0.2%
2,000,000 US Filter Corp.
6.00%, 9/15/05 144A........ 3,100,000
<CAPTION>
SHARES VALUE
CONVERTIBLE DEBENTURES-- CONTINUED
<S> <C> <C>
ELECTRICAL EQUIPMENT & SERVICES-- 0.2%
3,000,000 Solectron Corp.
6.00%, 3/1/06 144A......... $ 3,723,750
ENVIRONMENTAL SERVICES-- 0.3%
4,900,000 USA Waste Services, Inc.
4.00%, 2/1/02.............. 5,344,087
RETAILING & WHOLESALE-- 0.4%
5,250,000 Staples, Inc.
4.50%, 10/1/00 144A........ 6,339,375
TOTAL CONVERTIBLE DEBENTURES
(COST $15,150,000)............................ 18,507,212
<CAPTION>
CORPORATE BONDS-- 15.4%
<S> <C> <C>
AEROSPACE & DEFENSE-- 0.5%
3,000,000 Boeing Co.
7.88%, 4/15/43............. 3,165,060
3,650,000 McDonnell Douglas Corp.
9.25%, 4/1/02.............. 4,013,321
7,178,381
AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 1.0%
3,000,000 Ford Motor Co.
7.70%, 5/15/97............. 3,023,520
5,600,000 General Motors Corp.
9.63%, 12/1/00............. 6,094,200
7,500,000 Hertz Corp.
7.00%, 5/1/02.............. 7,528,125
16,645,845
BANKS-- 1.0%
6,500,000 ABN Amro Bank NV Chicago
Branch
7.30%, 12/1/26............. 6,119,360
4,500,000 Amsouth Bancorp.
6.75%, 11/1/25............. 4,399,875
4,500,000 Export Import Bank Korea
7.10%, 3/15/07............. 4,541,130
1,000,000 Wachovia Corp.
6.61%, 10/1/25............. 985,460
16,045,825
ELECTRICAL EQUIPMENT & SERVICES-- 0.1%
2,250,000 Korea Electric Power Corp.
7.00%, 2/1/27.............. 2,205,923
</TABLE>
<PAGE>
PAGE 10
KEYSTONE BALANCED FUND (K-1)
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
CORPORATE BONDS-- CONTINUED
<S> <C> <C>
FINANCE & INSURANCE-- 4.5%
8,000,000 Ambac, Inc.
9.38%, 8/1/11.............. $ 9,512,800
6,550,000 Associates Corp. North
America
8.63%, 11/15/04............ 7,159,805
5,250,000 CCC Putable Asset Trust
6.45%, 10/18/99 144A....... 5,233,725
4,500,000 CIT Group Holdings, Inc.
9.25%, 3/15/01............. 4,875,660
5,050,000 Fleet Mortgage Group, Inc.
6.50%, 6/15/00............. 5,035,305
5,400,000 Ford Credit Auto Owner Trust
6.30%, 1/15/01............. 5,389,848
4,750,000 Ford Motor Credit
6.90%, 6/5/00.............. 4,784,865
6,400,000 General Motors Acceptance
Corp.
7.13%, 5/1/01.............. 6,476,992
5,000,000 International Lease Finance
Corp.
6.38%, 2/15/02............. 4,912,300
3,000,000 Mellon Capital II
7.99%, 1/15/27............. 2,996,400
5,750,000 Michigan Bell Telephone Co.
5.88%, 9/15/99............. 5,684,852
2,200,000 Prudential Funding
7.13%, 7/1/07.............. 2,195,600
5,500,000 Sun Life Canada Us Cakp
Trust I
8.53%, 5/29/49 144A........ 5,678,750
3,500,000 Travelers Capital III
7.75%, 12/1/36............. 3,395,140
73,332,042
FOOD & BEVERAGE PRODUCTS-- 0.3%
5,000,000 Philip Morris Companies, Inc.
7.20%, 2/1/07.............. 4,933,800
INDUSTRIAL SPECIALTY PRODUCTS & SERVICES--
0.6%
7,000,000 GTE Corp.
8.75%, 11/1/21............. 7,906,430
1,100,000 Textron, Inc. Series C
10.01%, 2/1/00............. 1,188,962
9,095,392
<CAPTION>
SHARES VALUE
CORPORATE BONDS-- CONTINUED
<S> <C> <C>
MACHINERY-- DIVERSIFIED-- 0.1%
2,000,000 Caterpillar, Inc.
9.38%, 7/15/01............. $ 2,176,320
NATURAL GAS-- 0.4%
6,575,000 Tennessee Gas Pipeline Co.
7.50%, 4/1/17.............. 6,549,818
OIL-- 1.8%
4,300,000 Occidental Petroleum Corp.
10.13%, 9/15/09............ 5,245,312
5,286,572 Oslo Seismic
8.28%, 6/1/11 144A......... 5,573,422
10,000,000 Sun, Inc.
8.13%, 11/1/99............. 10,346,300
7,500,000 Transocean Offshore, Inc.
8.00%, 4/15/27............. 7,752,075
28,917,109
OIL FIELD SERVICES-- 0.6%
10,000,000 Baker Hughes Inc.
7.63%, 2/15/99............. 10,195,000
PAPER & PACKAGING-- 0.5%
8,000,000 James River Corp. of Virginia
6.75%, 10/1/99............. 8,051,040
PUBLISHING, BROADCASTING & ENTERTAINMENT--
1.8%
5,500,000 Belo (A.H.) Corp.
7.13%, 6/1/07.............. 5,452,947
11,338,000 Continental Cablevision, Inc.
9.00%, 9/1/08.............. 12,674,977
10,000,000 Time Warner, Inc.
9.15%, 2/1/23.............. 11,044,900
29,172,824
REAL ESTATE-- 0.2%
3,500,000 Simon Debartolo Group, Inc.
6.88%, 11/15/06............ 3,386,950
RETAILING & WHOLESALE-- 0.3%
5,250,000 Mattel, Inc.
6.75%, 5/15/00............. 5,269,215
</TABLE>
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
CORPORATE BONDS-- CONTINUED
<S> <C> <C>
TRANSPORTATION-- 0.5%
3,000,000 Golden State Petroleum
Transport Corp.
8.04%, 2/1/19 144A......... $ 2,997,656
5,500,000 Norfolk Southern Corp.
7.05%, 5/1/37.............. 5,582,170
8,579,826
UTILITIES-- 1.2%
5,000,000 Central Illinois Public
Service Co.
7.61%, 6/1/17.............. 5,081,250
4,000,000 Citizens Utilities Co.
7.05%, 10/1/46............. 3,755,880
5,000,000 Georgia Power Co.
6.13%, 9/1/99.............. 4,970,100
4,000,000 Rural Electric Cooperative
8.67%, 9/15/18............. 4,399,360
568,000 System Energy Resources, Inc.
11.38%, 9/1/16............. 606,596
18,813,186
TOTAL CORPORATE BONDS
(COST $250,445,805)........................... 250,548,496
<CAPTION>
FOREIGN BONDS (U.S. DOLLARS)--
0.3%
<S> <C> <C>
5,000,000 Bayer Corp.
7.13%, 10/1/15 144A........ 4,806,450
TOTAL FOREIGN BONDS (U.S. DOLLARS)
(COST $5,164,250)............................. 4,806,450
<CAPTION>
FOREIGN BONDS (NON U.S. DOLLARS)-- 2.7%
<S> <C> <C>
18,500,000 Canada Government
8.75%, 12/1/05............. 15,570,839
86,299,000 Denmark Kingdom
7.00%, 11/15/07............ 13,653,383
21,850,000 Germany (Republic of)
6.88%, 5/12/05............. 13,680,523
424,000 Nykredit
6.00%, 10/1/26............. 58,014
42,962,759
TOTAL FOREIGN BONDS (NON U.S.
DOLLARS) (COST $45,039,690)................... 42,962,759
<CAPTION>
SHARES VALUE
ASSET-BACKED SECURITIES-- 2.7%
<S> <C> <C>
2,500,000 Contimortgage Home Equity
Loan, Series 1996-4, Class
A9,
6.88%, 1/15/28............. $ 2,477,325
6,150,000 Correstates Home Equity Loan,
Series 1996-1, Class A4,
7.00%, 6/15/12............. 6,105,797
Green Tree Financial Corp.
6,000,000 Series 1993-4, Class A3,
6.25%, 1/15/19............. 5,968,080
6,000,000 Series 1997-3, Class A5,
7.14%, 7/15/28............. 6,068,437
5,000,000 Olympic Automobile
Receivables,
Series 1996-C, Class A4,
6.80%, 3/15/02............. 5,029,400
7,500,000 Southern Pacific Secured
Assets Corp.,
Series 1996-3A, Class A4,
7.60%, 10/25/27............ 7,514,062
1,185,000 University Support Services
Inc., Series 1992-D,
9.07%, 11/1/07............. 1,184,259
3,000,000 Western Financial Owner
Trust, Series 1996-D,
6.40%, 4/20/03............. 2,984,063
6,650,000 World Omni Automobile Lease,
Series 1997-A, Class A4,
6.90%, 6/25/03............. 6,706,060
44,037,483
TOTAL ASSET-BACKED SECURITIES
(COST $43,609,424)............................ 44,037,483
<CAPTION>
MORTGAGE-BACKED SECURITIES--
12.4%
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS-- 8.4%
Asset Securitization Corp.
3,300,000 Series 1996-D3, Class A3,
7.69%, 10/13/26............ 3,400,031
4,000,000 Series 1997-D4, Class A2,
7.41%, 4/14/27............. 4,128,750
4,450,000 Bankamerica Mortgage
Services, Series 1997-1,
Class M,
7.50%, 10/15/25............ 4,446,507
</TABLE>
<PAGE>
PAGE 12
KEYSTONE BALANCED FUND (K-1)
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
MORTGAGE-BACKED SECURITIES-- CONTINUED
<S> <C> <C>
2,200,000 Chase Commercial
Mortgage Securities Corp.,
Series 1997-1, Class B,
7.37%, 6/19/29............. $ 2,236,438
4,818,686 Chase Mortgage Finance
Corp., Series 1994-D, Class
M,
6.75%, 2/25/25............. 4,501,327
1,774,203 Criimi Mae Financial Corp.,
Series 1A,
7.00%, 1/1/33.............. 1,735,946
1,250,000 FFCA Secured Lending
Corp., Series 1997-1, Class
B1,
7.74%, 6/15/13............. 1,271,875
FHLMC
7,148,000 Series 117, Class G,
8.50%, 1/15/21............. 7,631,848
5,500,000 Series 1701, Class PH,
6.50%, 3/15/09............. 5,391,100
6,500,000 Series 1996-17, Class A,
6.00%, 8/25/04............. 6,268,925
5,542,694 Financial Asset
Securitization,
Series 1997-NAM 1, Class
FXA2,
7.75%, 4/25/27............. 5,631,655
FNMA
5,000,000 Remic Trust 1993-156, Class
B,
6.50%, 4/25/18............. 4,812,500
1,250,000 Remic Trust 1993-248, Class
SA,
3.26%, 8/25/23............. 947,656
3,454,305 G E Capital Mortgage Services
Inc.,
Series 1994-10, Class A14,
6.50%, 3/25/24............. 3,310,736
4,450,000 GS Mortgage Security Corp.,
Series 1996-PL, Class A2,
7.41%, 2/15/27............. 4,338,055
6,450,556 Headlands Mortgage
Securities, Inc.,
Series 1997-2, Class AI10,
7.75%, 5/25/27............. 6,517,077
7,974,017 Independent National Mortgage
Corp., Series 1997-A, Class
A,
7.85%, 12/26/26 144A....... 8,003,301
<CAPTION>
SHARES VALUE
MORTGAGE-BACKED SECURITIES-- CONTINUED
<S> <C> <C>
1,273,516 KS Mortgage Capital,
L. P., Series 1995-1, Class
A1,
7.06%, 4/20/02 144A........ $ 1,277,496
Merrill Lynch Mortgage
Investors, Inc.
5,000,000 Series 1991-D, Class B,
9.85%, 7/15/11............. 5,276,550
1,823,926 Series 1992-B, Class B,
8.50%, 4/15/12............. 1,867,810
2,110,236 Series 1992-D, Class B,
8.50%, 6/15/17............. 2,198,824
2,299,000 Series 1996-C2, Class B,
6.96%, 11/21/28............ 2,263,437
5,000,000 Series 1997-C1, Class A3,
7.12%, 6/18/29............. 5,012,500
5,870,000 Merrill Lynch Trust
XXXV, Class G,
8.45%, 11/1/18............. 6,163,500
2,000,000 Mid State Trust,
Series 6, Class A3,
7.54%, 7/1/35.............. 2,011,250
7,000,000 Morgan Stanley Capital 1
Inc.,
Series 1997-WF1, Class A2,
7.22%, 5/15/07 144A........ 7,089,687
1,131,031 Paine Webber Mortgage
Acceptance Corp. IV, Series
1993-5, Class A3,
6.88%, 6/25/08............. 1,131,384
7,000,000 PNC Mortgage Securities
Corp., Series 1997-4, Class
2PP1,
7.50%, 7/25/27............. 7,060,641
6,538,000 Residential Accredit Loans
Inc., Series 1996-QS4,
Class AI 10,
7.90%, 8/25/26............. 6,621,768
9,961,608 Residential Funding Mortgage
Secs I Inc., Series
1997-S7, Class A4,
7.50%, 5/25/27............. 10,123,484
3,317,712 Ryland Acceptance Corp.,
Series 1988, Class E,
7.95%, 1/1/19.............. 3,368,507
136,040,565
</TABLE>
<PAGE>
PAGE 13
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
MORTGAGE-BACKED SECURITIES-- CONTINUED
<S> <C> <C>
MORTGAGE PASS-THROUGH CERTIFICATES-- 4.0%
3,090,436 Federal Home Loan Mortgage
Corp.
7.84%, 4/1/22.............. $ 3,255,589
Federal National Mortgage
Assn.
1,413,898 7.68%, 11/1/17............... 1,470,454
1,507,450 7.65%, 1/1/31................ 1,589,426
5,626,647 7.00%, 5/1/24................ 5,544,048
26,258,111 6.50%, 12/1/08............... 25,918,856
8,822,456 5.75%, 2/1/27................ 9,138,124
19,803,326 5.50%, 7/1/09................ 18,776,028
288,721 Government National Mortgage
Assn.
7.00%, 5/15/24............. 284,662
65,977,187
TOTAL MORTGAGE-BACKED
SECURITIES (COST $201,190,752)................ 202,017,752
<CAPTION>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS-- 3.2%
<S> <C> <C>
U.S. TREASURY-- 3.2%
8,555,000 U.S. Treasury Bonds
6.50%, 11/15/26............ 8,204,758
U.S. Treasury Notes
39,300,000 6.63%, 3/31/02............... 39,656,058
2,250,000 6.38%, 9/30/01............... 2,250,360
1,500,000 6.25%, 2/15/07............... 1,467,660
51,578,836
<CAPTION>
SHARES VALUE
<S> <C> <C>
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (COST $51,092,262)................ $ 51,578,836
<CAPTION>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT-- 0.8%
<S> <C> <C>
$12,664,000 Keystone Joint Repurchase Agreement,
Investments in repurchase
agreements, in a joint
trading account, purchased
6/30/97, 6.039%, maturing
7/1/97 (maturity value
$12,666,124) (a)........... 12,664,000
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS--
(COST $1,111,865,914) 100.1% 1,627,319,855
OTHER ASSETS AND
LIABILITIES-- NET (0.1) (1,924,512)
NET ASSETS 100.0% $1,625,395,343
</TABLE>
144A-- Securities that may be resold to "qualified institutional buyers" under
Rule 144A of the Securities Act of 1933. These securities have been
determined to be liquid under guidelines established by the Board of
Trustees.
(a) The repurchase agreements are fully collateralized by U.S. Government
and/or agency obligations based on market prices at June 30, 1997.
LEGEND OF PORTFOLIO ABBREVIATIONS
ADR-- American Depository Receipt
FHLMC-- Federal Home Loan Mortgage Corporation
FNMA-- Federal National Mortgage Association
GNMA-- Government National Mortgage Association
PERCS-- Preferred Equity Redemption Cumulative Stock
PRIDES-- Provisionally Redeemable Income Debt Exchangeable for Stock
R.E.I.T.-- Real Estate Investment Trust
<PAGE>
PAGE 14
KEYSTONE BALANCED FUND (K-1)
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
NET UNREALIZED
SETTLEMENT U.S. VALUE AT IN EXCHANGE APPRECIATION/
DATE JUNE 30, 1997 FOR U.S. $ (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Contracts to Sell:
08/12/97 39,638,000 German Deutsche Marks $ 22,798,817 $23,218,135 $ 419,318
08/20/97 94,311,000 Danish Krone 14,245,563 14,632,296 386,733
08/27/97 21,302,750 Canadian Dollars 15,481,425 15,619,570 138,145
Unrealized appreciation on forward foreign currency contracts $ 944,196
Forward Foreign Currency Contracts to Buy:
08/12/97 16,000,000 German Deutsche Marks $ 9,202,812 $9,457,942 $ (255,130)
Net unrealized appreciation on forward foreign currency contracts $ 689,066
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 15
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $11.33 $10.09 $9.26 $10.10 $9.77 $9.16 $9.10 $9.12 $8.37
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.30 0.29 0.31 0.28 0.31 0.32 0.45 0.50 0.46
Net realized and unrealized gain
(loss) on investment and foreign
currency related transactions 2.07 1.42 0.96 (0.37) 0.66 0.75 0.18 0.20 0.83
Total from investment operations 2.37 1.71 1.27 (0.09) 0.97 1.07 0.63 0.70 1.29
LESS DISTRIBUTIONS FROM:
Net investment income (0.30) (0.24) (0.31) (0.28) (0.31) (0.32) (0.50) (0.50) (0.54)
In excess of net investment income 0 (0.03) (0.02) (0.07) (0.09) (0.14) (0.04) (0.04) 0
Tax basis return of capital 0 0 0 (0.02) 0 0 0 0 0
Net realized gain on investments (0.45) (0.20) (0.02) (0.25) (0.24) 0 (0.03) (0.18) 0
In excess of net realized gain on
investments 0 0 (0.09) (0.13) 0 0 0 0 0
Total distributions (0.75) (0.47) (0.44) (0.75) (0.64) (0.46) (0.57) (0.72) (0.54)
NET ASSET VALUE END OF PERIOD $12.95 $11.33 $10.09 $9.26 $10.10 $9.77 $9.16 $9.10 $9.12
TOTAL RETURN(A) 21.95% 17.35% 14.20% (1.16%) 10.39% 11.86% 7.49% 7.99% 16.07%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.70% 1.72% 1.77% 1.71% 1.93% 1.97% 1.88% 1.99% 1.96%
Total expenses, excluding
indirectly paid expenses 1.69% 1.71% N/A N/A N/A N/A N/A N/A N/A
Net investment income 2.50% 2.71% 3.33% 2.81% 3.07% 3.25% 4.56% 4.94% 5.48%
PORTFOLIO TURNOVER RATE 89% 96% 88% 88% 74% 52% 60% 35% 49%
AVERAGE COMMISSION RATE PAID $0.0400 $0.0031 N/A N/A N/A N/A N/A N/A N/A
NET ASSETS END OF YEAR (MILLIONS) $1,625 $1,481 $1,345 $1,390 $1,464 $1,184 $902 $827 $712
<CAPTION>
1988
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR $9.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.47
Net realized and unrealized gain
(loss) on investment and foreign
currency related transactions (0.82)
Total from investment operations (0.35)
LESS DISTRIBUTIONS FROM:
Net investment income (0.60)
In excess of net investment income 0
Tax basis return of capital 0
Net realized gain on investments (0.42)
In excess of net realized gain on
investments 0
Total distributions (1.02)
NET ASSET VALUE END OF PERIOD $8.37
TOTAL RETURN(A) (3.37%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.91%
Total expenses, excluding
indirectly paid expenses N/A
Net investment income 5.34%
PORTFOLIO TURNOVER RATE 64%
AVERAGE COMMISSION RATE PAID N/A
NET ASSETS END OF YEAR (MILLIONS) $685
</TABLE>
(a) Excluding applicable sales charge.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 16
KEYSTONE BALANCED FUND (K-1)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value
(identified cost, $1,111,865,914) $1,627,319,855
Foreign currency, at value
(identified cost, $8,980) 9,192
Unrealized appreciation on forward foreign
currency contracts 944,196
Dividends and interest receivable 9,470,139
Receivable for investments sold 4,131,827
Receivable for Fund shares sold 1,477,963
Prepaid expenses and other assets 161,753
Total assets 1,643,514,925
LIABILITIES:
Unrealized depreciation on forward foreign
currency contracts 255,130
Payable for investments purchased 14,732,214
Payable for Fund shares redeemed 2,080,054
Distribution fee payable 934,761
Accrued expenses and other liabilities 117,423
Total liabilities 18,119,582
NET ASSETS $1,625,395,343
NET ASSETS REPRESENTED BY:
Paid-in capital $1,013,621,008
Accumulated undistributed net investment
income 3,239,562
Accumulated net realized gain on
investments and foreign currency related
transactions 92,401,815
Net unrealized appreciation on investments
and foreign currency related transactions 516,132,958
Total net assets 1,625,395,343
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST OUTSTANDING
Net assets of $1,625,395,343 (divided by) 125,534,120
shares outstanding $ 12.95
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest $ 40,204,287
Dividends (net of foreign
withholding taxes of $91,085) 24,547,062
Total income 64,751,349
EXPENSES
Management fee $ 6,854,615
Distribution Plan expenses 15,437,631
Transfer agent fees 2,979,483
Accounting expenses 101,818
Custodian fees 596,802
Trustees' fees and expenses 55,886
Miscellaneous 193,248
Total expenses 26,219,483
Less: Expenses paid indirectly (146,111)
Net expenses 26,073,372
Net investment income 38,677,977
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FOREIGN
CURRENCY RELATED TRANSACTIONS
Net realized gain on:
Investments 116,423,636
Foreign currency related
transactions 4,563,646
Net realized gain 120,987,282
Net change in unrealized
appreciation on:
Investments 145,989,829
Foreign currency related
transactions 578,207
Net change in unrealized
appreciation 146,568,036
Net realized and unrealized gain
on investments and foreign
currency related transactions 267,555,318
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $306,233,295
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 17
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
<S> <C> <C>
OPERATIONS
Net investment income $ 38,677,977 $ 38,649,314
Net realized gain on investment and foreign currency related transactions 120,987,282 54,917,152
Net change in unrealized appreciation 146,568,036 132,899,484
Net increase in net assets resulting from operations 306,233,295 226,465,950
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (38,660,044) (38,649,314)
In excess of net investment income 0 (4,413,251)
Net realized gain on investments (57,571,132) (18,717,526)
Total distributions to shareholders (96,231,176) (61,780,091)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 200,987,044 227,626,268
Payments for shares redeemed (351,020,484) (308,498,436)
Net asset value of shares issued in reinvestment of distributions 84,249,628 52,483,524
Net decrease in net assets resulting from capital share transactions (65,783,812) (28,388,644)
Total increase in net assets 144,218,307 136,297,215
NET ASSETS
Beginning of year 1,481,177,036 1,344,879,821
End of year, including undistributed net investment income of $3,239,562
and $138,085, respectively $1,625,395,343 $ 1,481,177,036
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 18
KEYSTONE BALANCED FUND (K-1)
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Balanced Fund (K-1) (the "Fund") is a Pennsylvania common law trust for
which Keystone Investment Management Company ("Keystone") is the Investment
Advisor and Manager. Keystone was formerly a wholly owned subsidiary of Keystone
Investments, Inc ("KII") and is currently a subsidiary of First Union
Corporation ("First Union").
The Fund is registered under the Investment Company Act of 1940, as amended
(the "1940 Act") as an open-end, diversified management investment company. The
Fund's investment objective is to provide shareholders with current income. The
Fund seeks to meet its objective principally through investment in a combination
of equity and debt securities chosen primarily for their potential for current
income and secondarily, to the extent consistent with the Fund's objective, for
their potential capital appreciation.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. VALUATION OF SECURITIES
The Fund values securities traded on a national securities exchange or included
on the NASDAQ National Market System ("NMS") at the last reported sales price on
the exchange where primarily traded. The Fund values securities traded on an
exchange or NMS for which there has been no sale and other securities traded in
the over-the-counter market at the mean between the last reported bid and asked
price.
U.S. government obligations held by the Fund are valued at the mean between
the over-the-counter bid and asked prices. Corporate bonds, other fixed-income
securities, and mortgage and other asset-backed securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and analysis of various
relationships between similar securities which are generally recognized by
institutional traders.
Securities for which valuations are not available from an independent pricing
service, including restricted securities, are valued at fair value as determined
in good faith according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other funds managed by Keystone, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized by
U.S. Treasury and/or federal agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. REVERSE REPURCHASE AGREEMENTS
To obtain short-term financing, the Fund may enter into reverse repurchase
agreements with qualified third-party broker-dealers. Interest on the value of
reverse repurchase agreements is based upon competitive market rates at the time
of issuance. At the time the Fund enters into a reverse repurchase agreement, it
will establish and maintain a segregated account with the custodian containing
qualifying assets having a value not less than the repurchase price, including
accrued interest. If the
<PAGE>
PAGE 19
counterparty to the transaction is rendered insolvent, the ultimate realization
of the securities to be repurchased by the Fund may be delayed or limited.
D. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States ("U.S.")
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amount actually received. The portion of foreign currency gains and
losses related to fluctuations in exchange rates between the initial purchase
trade date and subsequent sale trade date is included in realized gain (loss) on
investment transactions.
E. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated in
a foreign currency and to hedge certain foreign currency assets or liabilities.
Forward contracts are recorded at the forward rate and are marked-to-market
daily. Realized gains and losses arising from such transactions are included in
net realized gain (loss) on foreign currency related transactions. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract and is subject to the credit risk that the other
party will not fulfill their obligations under the contract. Forward contracts
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
F. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Dividend income is recorded on the ex-dividend date. Interest income is
recorded on the accrual basis and includes amortization of discounts and
premiums.
G. FEDERAL INCOME TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund intends to avoid any excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income or excise tax is required.
H. DISTRIBUTIONS
The Fund distributes net investment income quarterly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the close
of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatment for net realized gains from foreign currency related transactions.
<PAGE>
PAGE 20
KEYSTONE BALANCED FUND (K-1)
2. CAPITAL SHARE TRANSACTIONS
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with a par value of $1.00. Transactions in
shares of the Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
<S> <C> <C>
Shares sold 16,959,452 20,948,679
Shares redeemed (29,517,723) (28,542,355)
Shares issued in reinvestment
of distributions 7,405,182 4,948,269
Net decrease (5,153,089) (2,645,407)
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term securities, for the year ended June 30, 1997 were $1,335,545,818 and
$1,442,119,831, respectively.
The average daily balance of reverse repurchase agreements outstanding for the
Fund during the year ended June 30, 1997 was approximately $14,403,239 at a
weighted average interest rate of 4.415%. The maximum amount outstanding under
reverse repurchase agreements during the year ended June 30, 1997 for the Fund
was $19,557,472 (including accrued interest). There were no reverse repurchase
agreements outstanding at June 30, 1997.
On June 30, 1997, the cost of investments for federal income tax purposes was
$1,111,455,155, gross unrealized appreciation of investments was $522,900,444
and gross unrealized depreciation of investments was $7,035,744, resulting in
net unrealized appreciation of $515,864,700 for federal income tax purposes.
4. DISTRIBUTION PLAN
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. ("BISYS") has served as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of
Keystone, served as the Fund's principal underwriter.
The Fund has adopted a Distribution Plan as allowed by Rule 12b-1 of the 1940
Act. The Distribution plan permits the fund to reimburse its principal
underwriter for costs related to selling shares of the fund and for various
other services. These costs, which consist primarily of commissions and services
fees to broker-dealers who sell shares of the fund, are paid by shareholders
through expenses called "Distribution Plan expenses." The Fund pays a service
fee equal to 0.25% of its average daily net assets and a distribution fee equal
to 0.75% of its average daily net assets. Distribution Plan expenses are
calculated daily and paid monthly.
With respect to the Fund's shares, the principal underwriter may incur
distribution costs greater than the allowable annual amounts the Fund is
permitted to pay. The Fund may reimburse the principal underwriter for such
excess amounts in later years with annual interest at the prime rate plus 1.00%.
The Plan may be terminated at any time by vote of the Independent Trustees or
by vote of a majority of the outstanding voting shares of the Fund. However,
after the termination of the Plan, and subject to the discretion of the
Independent Trustees, payments to EKD and/or EKIS may continue as compensation
for services which had been earned while the Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits.
Contingent deferred sales charges paid by redeeming shareholders may be paid
to EKD or its predecessor.
<PAGE>
PAGE 21
5. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under the terms of the investment advisory agreement dated December 11, 1996,
Keystone serves as the investment adviser and manager to the Fund. As such,
Keystone manages the Fund's investments, provides certain administrative
services and supervises the Funds daily business affairs. In return, Keystone is
paid a management fee, computed daily and paid monthly calculated at a rate of
1.50% of the Fund's gross investment income plus an amount which is determined
by applying percentage rates starting at 0.60% and declining as net assets
increase to 0.30% per annum, to the average daily net asset value of the Fund.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a wholly owned
subsidiary of Keystone, served as investment manager to the Fund and provided
investment management and administrative services. Under an investment advisory
agreement between KMI and Keystone, Keystone served as investment adviser and
provided investment advisory and management services to the Fund. In return for
its services, Keystone received an annual fee equal to 85% of the management fee
received by KMI.
During the year ended June 30, 1997, the Fund paid or accrued $101,818 to
Keystone for certain accounting services. Additionally, Evergreen Keystone
Services Company ("EKSC") (formerly Keystone Investor Resource Center, Inc.), a
wholly-owned subsidiary of Keystone, serves as the Fund's transfer and dividend
disbursing agent.
Effective January 1, 1997, BISYS Fund Services, Inc. ("BISYS"), an affiliate
of EKD, began serving as the Fund's sub-administrator. As sub-administrator,
BISYS provides the officers of the Fund. For this service, BISYS is paid a fee
by Keystone, which is not a Fund expense.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
<PAGE>
PAGE 22
KEYSTONE BALANCED FUND (K-1)
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
KEYSTONE BALANCED FUND (K-1)
We have audited the accompanying statement of assets and liabilities of Keystone
Balanced Fund (K-1), including the schedule of investments, as of June 30, 1997,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of years in the ten-year period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Balanced Fund (K-1) as of June 30, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the years in
the two-year period then ended and the financial highlights for each of the
years in the ten-year period then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
August 8, 1997
<PAGE>
PAGE 23
FEDERAL TAX STATUS-- FISCAL 1997 DISTRIBUTIONS (UNAUDITED)
During the fiscal year ended June 30, 1996, distributions of $.75 per share were
paid in shares or cash. This total includes a taxable long-term capital gain
distribution of $.45 per share. The remaining $0.27 per share is taxable to
shareholders as ordinary income in the year in which received by them or
credited to their accounts. Of the ordinary income distribution, 48% is eligible
for the corporate dividend received deduction. The above figures may differ from
those previously reported and those cited elsewhere in this report due to
differences in the calculation of income and capital gains for accounting (book)
purposes and Internal Revenue Service (tax) purposes.
In January 1998, we will send you complete information on the distributions
paid during the calendar year 1997
to help you in completing your federal tax return.
<PAGE>
KEYSTONE
FAMILY OF FUNDS
(graphic of a diamond)
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
Evergreen Keystone
FUNDS(SM)
(Evergreen logo) (Keystone logo)
P.O. Box 2121
Boston, Massachusetts 02106-2121
K1-R Rev01 7/97
(Recycle logo)
KEYSTONE
(picture)
BALANCED
FUND (K-1)
Evergreen Keystone
FUNDS(SM)
(Evergreen logo) (Keystone logo)
ANNUAL REPORT
JUNE 30, 1997
<PAGE>
<TABLE>
<CAPTION>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's) Keystone Balanced Evergreen Balanced
June 30, 1997 Fund Fund
-------------------- ---------------------
Market Market
Shares Value Shares Value
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
COMMON STOCKS - 58.7%
Aerospace & Defense - 1.8%
Boeing Co. (The) 400 $21,225
Honeywell, Inc. 50 3,763
Rockwell International Corp. 50 2,950
United Technologies Corp. 62 5,163
----------
33,101
----------
Automotive Equipment & Manufacturing - 1.2%
Ford Motor Co. 250 9,438
General Motors Corp. 150 8,353 115 $6,404
Genuine Parts Co. 93 3,151
---------- ----------
20,942 6,404
---------- ----------
Banks - 5.4%
Banc One Corp. 140 6,781
BankAmerica Corp. 674 43,510 200 12,913
BankBoston Corp. 250 18,016 67 4,814
Chase Manhattan Corp. 160 15,505 110 10,677
CoreStates Financial Corp. 50 2,688
First Chicago NBD Corp. 125 7,563
Morgan (J.P.) & Co., Inc. 42 4,384
National City Corp. 180 9,450
Wells Fargo & Co. 24 6,522
---------- ----------
87,937 54,886
---------- ----------
Building, Construction & Furnishings - 0.1%
* American Standard Cos., Inc. 115 5,146
Masco Corp. 100 4,175
----------
9,321
----------
Business Equipment & Services - 0.3%
* Quantum Corp. 270 5,484
Xerox Corp. 63 4,951
---------- ----------
4,951 5,484
---------- ----------
Communication Systems & Services - 0.2%
Adaptec, Inc. 50 1,738
Ascend Communications, Inc. 110 4,331
* Cisco Systems, Inc. 100 6,713
----------
12,782
----------
Capital Goods - 3.4%
Deere & Co. 60 3,293
General Electric Co. 792 51,777 300 19,613
Ingersoll Rand Co. 51 3,118
---------- ----------
58,188 19,613
---------- ----------
Chemical & Agricultural Products - 5.8%
Air Products & Chemicals, Inc. 28 2,275
Dow Chemical Co. 133 11,605
Du Pont (E. I.) De Nemours & Co. 862 54,198
Monsanto Co. 600 25,838
PPG Industries, Inc. 136 7,905
----------
101,821
----------
Consumer Products & Services - 2.2%
Avon Products, Inc. 33 2,300
Gillette Co. (The) 150 14,213 40 3,790
International Flavors & Fragrances, Inc. 100 5,050
Nike, Inc. Class B 75 4,378
Procter & Gamble Co. (The) 110 15,537
---------- ----------
37,100 8,168
---------- ----------
Diversified Companies - 1.1%
Allied-Signal Inc. 71 5,989 77 6,502
Fortune Brands Incorporated 210 7,836
Minnesota Mining & Manufacturing Co. 80 8,160
Textron Inc. 210 13,939
---------- ----------
14,149 28,277
---------- ----------
<CAPTION>
Adjustment for Liquidation Pro Forma
of Trust shareholders (Note 1) Combined
------------------------------ --------------------------------
Market Market
Shares Value Shares Value
----------------------------------------- -----------------
COMMON STOCKS - 58.7%
Aerospace & Defense - 1.8%
Boeing Co. (The) 400 $21,225
Honeywell, Inc. 50 3,763
Rockwell International Corp. 50 2,950
United Technologies Corp. 62 5,163
-----------------
33,101
-----------------
Automotive Equipment & Manufacturing - 1.2%
Ford Motor Co. 250 9,438
General Motors Corp. (96) ($5,333) 169 9,424
Genuine Parts Co. 93 3,151
--------------- -----------------
(5,333) 22,013
--------------- -----------------
Banks - 5.4%
Banc One Corp. (117) (5,647) 23 1,134
BankAmerica Corp. (167) (10,754) 707 45,669
BankBoston Corp. (56) (4,009) 261 18,821
Chase Manhattan Corp. (92) (8,892) 178 17,290
CoreStates Financial Corp. (42) (2,239) 8 449
First Chicago NBD Corp. (104) (6,298) 21 1,265
Morgan (J.P.) & Co., Inc. 42 4,384
National City Corp. (150) (7,870) 30 1,580
Wells Fargo & Co. 24 6,522
--------------- -----------------
(45,709) 97,114
--------------- -----------------
Building, Construction & Furnishings - 0.1%
* American Standard Cos., Inc. (96) (4,286) 19 860
Masco Corp. (83) (3,477) 17 698
--------------- -----------------
(7,763) 1,558
--------------- -----------------
Business Equipment & Services - 0.3%
* Quantum Corp. (225) (4,567) 45 917
Xerox Corp. 63 4,951
--------------- -----------------
(4,567) 5,868
--------------- -----------------
Communication Systems & Services - 0.2%
Adaptec, Inc. (42) (1,447) 8 291
Ascend Communications, Inc. (92) (3,607) 18 724
* Cisco Systems, Inc. (83) (5,590) 17 1,123
--------------- -----------------
(10,644) 2,138
--------------- -----------------
Capital Goods - 3.4%
Deere & Co. 60 3,293
General Electric Co. (250) (16,333) 842 55,057
Ingersoll Rand Co. 51 3,118
--------------- -----------------
(16,333) 61,468
--------------- -----------------
Chemical & Agricultural Products - 5.8%
Air Products & Chemicals, Inc. 28 2,275
Dow Chemical Co. 133 11,605
Du Pont (E. I.) De Nemours & Co. 862 54,198
Monsanto Co. 600 25,838
PPG Industries, Inc. 136 7,905
-----------------
101,821
--------------- -----------------
Consumer Products & Services - 2.2%
Avon Products, Inc. 33 2,300
Gillette Co. (The) (33) (3,156) 157 14,847
International Flavors & Fragrances, Inc. 100 5,050
Nike, Inc. Class B (62) (3,646) 13 732
Procter & Gamble Co. (The) 110 15,537
--------------- -----------------
(6,802) 38,466
--------------- -----------------
Diversified Companies - 1.1%
Allied-Signal Inc. (64) (5,415) 84 7,076
Fortune Brands Incorporated (175) (6,526) 35 1,310
Minnesota Mining & Manufacturing Co. 80 8,160
Textron Inc. (175) (11,608) 35 2,331
--------------- -----------------
(23,549) 18,877
--------------- -----------------
</TABLE>
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Balanced
Fund
-----------------------
Market
Shares Value
-------- ------------
<S> <C> <C>
Electrical Equipment & Services - 1.3%
AMP, Inc. 50 $2,088
Atmel Corp.
CINergy Corp.
Motorola, Inc. 200 15,200
Thomas & Betts Corp. 40 2,102
-----------
19,390
-----------
Finance & Insurance - 3.0%
Aetna, Inc. 30 3,072
Allstate Corp. (The) 65 4,737
American International Group, Inc.
CIGNA Corp. 20 3,550
Federal Home Loan Mortgage Corp. 414 14,245
Federal National Mortgage Assn. 200 8,725
General Reinsurance Corp. 15 2,730
* Hartford Life, Inc. Cl. A 25 945
PMI Group, Inc. (The) 54 3,343
SAFECO Corp. 68 3,186
St. Paul Companies, Inc. 40 3,050
Travelers Property Casualty Corp. Cl. A 100 3,987
UNUM Corp.
-----------
51,570
-----------
Food & Beverage Products - 2.9%
American Stores Co.
Anheuser-Busch Companies., Inc. 324 13,588
CPC International, Inc. 47 4,320
Gallaher Group Plc
General Mills, Inc. 30 1,954
H.J. Heinz Co. 79 3,653
Kellogg Co. 44 3,768
McCormick & Co., Inc.
Philip Morris Cos., Inc. 339 15,056
Sara Lee Corp. 86 3,580
-----------
45,919
-----------
Healthcare Products & Services - 9.0%
American Home Products Corp. 300 22,950
Baxter International, Inc. 47 2,477
Bristol-Myers Squibb Co. 110 8,909
HBO & Co.
* HEALTHSOUTH Corp.
Johnson & Johnson 710 45,732
Lilly (Eli) & Co. 48 5,206
* Lincare Holdings, Inc.
Merck & Co., Inc. 213 22,046
Pfizer, Inc. 145 17,351
Schering-Plough Corp. 205 9,805
SmithKline Beecham PLC, ADR 57 5,241
Warner-Lambert Co. 84 10,437
-----------
150,154
-----------
Information Services & Technology - 0.3%
* Compaq Computer Corp.
Intel Corp.
* Microsoft Corp.
Manufacturing - Distributing - 0.1%
Case Corp.
Metal Products & Services - 0.6%
Aluminum Co. of America 40 3,015
Crown Cork & Seal Inc.
Freeport McMoRan Copper & Gold, Class B 56 1,747
Phelps Dodge Corp. 22 1,874
Reynolds Metals Co. 24 1,739
-----------
8,375
-----------
Natural Gas - 1.4%
Enron Corp. 54 2,204
Sonat, Inc. 407 20,859
-----------
23,063
-----------
<CAPTION>
Evergreen Balanced Adjustment for Liquidation ProForma
Fund of Trust shareholders (Note 1) Combined
--------------------------------------------------- ----------------------
Market Market Market
Shares Value Shares Value Shares Value
-------- -------------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Electrical Equipment & Services - 1.3%
AMP, Inc. 50 $2,088
Atmel Corp. 150 4,200 (125) (3,498) 25 702
CINergy Corp. 150 5,222 (125) (4,349) 25 873
Motorola, Inc. 200 15,200
Thomas & Betts Corp. 40 2,102
--------- ---------- ----------
9,422 (7,847) 20,965
--------- ---------- ----------
Finance & Insurance - 3.0%
Aetna, Inc. 30 3,072
Allstate Corp. (The) 110 8,030 (92) (6,687) 83 6,080
American International Group, Inc. 30 4,481 (25) (3,732) 5 749
CIGNA Corp. 20 3,550
Federal Home Loan Mortgage Corp. 414 14,245
Federal National Mortgage Assn. 200 8,725
General Reinsurance Corp. 15 2,730
* Hartford Life, Inc. Cl. A 25 945
PMI Group, Inc. (The) 54 3,343
SAFECO Corp. 68 3,186
St. Paul Companies, Inc. 40 3,050
Travelers Property Casualty Corp. Cl. A 100 3,987
UNUM Corp. 102 4,276 (85) (3,561) 17 715
--------- ---------- ----------
16,787 (13,980) 54,377
--------- ---------- ----------
Food & Beverage Products - 2.9%
American Stores Co. 110 5,449 (92) (4,538) 18 911
Anheuser-Busch Companies., Inc. 324 13,588
CPC International, Inc. 47 4,320
Gallaher Group Plc 210 3,872 (175) (3,225) 35 647
General Mills, Inc. 30 1,954
H.J. Heinz Co. 79 3,653
Kellogg Co. 44 3,768
McCormick & Co., Inc. 235 5,934 (196) (4,942) 39 992
Philip Morris Cos., Inc. 300 13,313 (250) (11,087) 389 17,282
Sara Lee Corp. 200 8,325 (167) (6,933) 119 4,972
--------- ---------- ----------
36,893 (30,725) 52,087
--------- ---------- ----------
Healthcare Products & Services - 9.0%
American Home Products Corp. 300 22,950
Baxter International, Inc. 47 2,477
Bristol-Myers Squibb Co. 220 17,819 (183) (14,839) 147 11,889
HBO & Co. 125 8,609 (104) (7,169) 21 1,440
* HEALTHSOUTH Corp. 200 4,988 (167) (4,154) 33 834
Johnson & Johnson 161 10,332 (134) (8,604) 737 47,460
Lilly (Eli) & Co. 48 5,206
* Lincare Holdings, Inc. 227 9,761 (189) (8,129) 38 1,632
Merck & Co., Inc. 213 22,046
Pfizer, Inc. 130 15,535 (108) (12,937) 167 19,949
Schering-Plough Corp. 205 9,805
SmithKline Beecham PLC, ADR 57 5,241
Warner-Lambert Co. 84 10,437
--------- ---------- ----------
67,044 (55,832) 161,366
--------- ---------- ----------
Information Services & Technology - 0.3%
* Compaq Computer Corp. 80 7,940 (67) (6,612) 13 1,328
Intel Corp. 77 10,920 (64) (9,094) 13 1,826
* Microsoft Corp. 90 11,374 (75) (9,472) 15 1,902
--------- ---------- ----------
30,234 (25,178) 5,056
--------- ---------- ----------
Manufacturing - Distributing - 0.1%
Case Corp. 150 10,331 (125) (8,603) 25 1,728
--------- ---------- ----------
Metal Products & Services - 0.6%
Aluminum Co. of America 150 11,306 (125) (9,415) 65 4,906
Crown Cork & Seal Inc. 85 4,542 (71) (3,783) 14 759
Freeport McMoRan Copper & Gold, Class B 56 1,747
Phelps Dodge Corp. 22 1,874
Reynolds Metals Co. 24 1,739
--------- ---------- ----------
15,848 (13,198) 11,025
--------- ---------- ----------
Natural Gas - 1.4%
Enron Corp. 54 2,204
Sonat, Inc. 150 7,688 (125) (6,402) 432 22,145
--------- ---------- ----------
7,688 (6,402) 24,349
--------- ---------- ----------
</TABLE>
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Balanced
Fund
--------------------------
Market
Shares Value
-------- -------------
Office Equipment & Supplies -1.6%
Hewlett-Packard Co. 200 $11,200
Ikon Office Solutions, Inc. 348 8,679
International Business Machines Corp. 100 9,019
Pitney Bowes, Inc.
-------------
28,898
-------------
Oil - 6.5%
Amoco Corp. 97 8,398
Atlantic Richfield Co. 289 20,375
Chevron Corp. 264 19,490
Exxon Corp. 127 7,810
Mobil Corp. 311 21,717
Occidental Petroleum Corp. 157 3,935
* Reading & Bates Corp.
Royal Dutch Petroleum Co. 280 15,247
Texaco, Inc.
Tosco Corp.
Unocal Corp. 294 11,426
-------------
108,398
-------------
Oil Field Services - 0.6%
Ashland Inc.
Diamond Offshore Drilling Inc.
Halliburton Co. 45 3,582
Schlumberger Ltd. 31 3,888
Ultramar Diamond Shamrock Corp.
Williams Companies., Inc. (The)
-------------
7,470
-------------
Paper & Packaging - 1.9%
Georgia-Pacific Corp. 31 2,630
International Paper Co. 57 2,768
Kimberly-Clark Corp. 70 3,463
Unisource Worldwide, Inc. 174 2,784
Weyerhaeuser Co. 370 19,258
-------------
30,903
-------------
Real Estate - 2.6%
Arden Realty, Inc. (R.E.I.T) 120 3,107
Beacon Properties Corp. (R.E.I.T.) 500 16,688
Boston Properties Inc. (R.E.I.T.) 50 1,375
First Industrial Realty Trust, Inc. (R.E.I.T.) 70 2,048
Healthcare Realty Trust, Inc.
Highwoods Properties, Inc.
Patriot American Hospitality, Inc. (R.E.I.T.) 200 5,100
Prentiss Properties Trust (R.EI.T.) 50 1,281
Rouse Co. 294 8,676
Spieker Properties, Inc. (R.E.I.T.) 100 3,519
TriNet Corporate Realty Trust, Inc. (R.E.I.T.) 100 3,306
-------------
45,100
-------------
Retailing & Wholesale - 0.5%
Dayton Hudson Corp.
May Department Stores Co. 60 2,835
Sears, Roebuck & Co. 70 3,763
-------------
6,598
-------------
Telecommunication Services & Equipment - 3.2%
Ameritech Corp. 124 8,424
Bell Atlantic Corp. 90 6,829
Carolina Power & Light Co.
CMS Energy Corp.
GTE Corp. 162 7,108
Northern Telecom Ltd. 200 18,200
NYNEX Corp. 88 5,076
SBC Communications, Inc.
Southern Co.
Sprint Corp. 75 3,972
-------------
49,609
-------------
<CAPTION>
Adjustment for
Evergreen Balanced Liquidation of Trust Pro Forma
Fund shareholders (Note 1) Combined
-------------------------------------------- ----------------------
Market Market Market
Shares Value Shares Value Shares Value
------- -------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Office Equipment & Supplies -1.6%
Hewlett-Packard Co. 200 $11,200
Ikon Office Solutions, Inc. 348 8,679
International Business Machines Corp. 100 9,019
Pitney Bowes, Inc. 50 3,475 (42) (2,894) 8 581
--------------- ---------- ----------
3,475 (2,894) 29,479
--------------- ---------- ----------
Oil - 6.5%
Amoco Corp. 97 8,398
Atlantic Richfield Co. 289 20,375
Chevron Corp. 150 11,091 (125) (9,236) 289 21,345
Exxon Corp. 127 7,810
Mobil Corp. 110 7,686 (92) (6,401) 329 23,002
Occidental Petroleum Corp. 157 3,935
* Reading & Bates Corp. 175 4,681 (146) (3,898) 29 783
Royal Dutch Petroleum Co. 280 15,247
Texaco, Inc. 140 15,224 (117) (12,678) 23 2,546
Tosco Corp. 60 1,796 (50) (1,496) 10 300
Unocal Corp. 100 3,881 (83) (3,232) 311 12,075
--------------- ---------- ----------
44,359 (36,941) 115,816
--------------- ---------- ----------
Oil Field Services - 0.6%
Ashland Inc. 150 6,956 (125) (5,793) 25 1,163
Diamond Offshore Drilling Inc. 80 6,250 (67) (5,205) 13 1,045
Halliburton Co. 45 3,582
Schlumberger Ltd. 31 3,888
Ultramar Diamond Shamrock Corp. 150 4,894 (125) (4,076) 25 818
Williams Companies., Inc. (The) 50 2,188 (42) (1,822) 8 366
--------------- ---------- ----------
20,288 (16,896) 10,862
--------------- ---------- ----------
Paper & Packaging - 1.9%
Georgia-Pacific Corp. 31 2,630
International Paper Co. 230 11,169 (192) (9,301) 95 4,636
Kimberly-Clark Corp. 70 3,463
Unisource Worldwide, Inc. 174 2,784
Weyerhaeuser Co. 250 13,000 (208) (10,826) 412 21,432
--------------- ---------- ----------
24,169 (20,127) 34,945
--------------- ---------- ----------
Real Estate - 2.6%
Arden Realty, Inc. (R.E.I.T) 120 3,107
Beacon Properties Corp. (R.E.I.T.) 500 16,688
Boston Properties Inc. (R.E.I.T.) 50 1,375
First Industrial Realty Trust, Inc. (R.E.I.T.) 70 2,048
Healthcare Realty Trust, Inc. 280 7,805 (233) (6,500) 47 1,305
Highwoods Properties, Inc. 101 3,216 (84) (2,678) 17 538
Patriot American Hospitality, Inc. (R.E.I.T.) 200 5,100
Prentiss Properties Trust (R.EI.T.) 50 1,281
Rouse Co. 294 8,676
Spieker Properties, Inc. (R.E.I.T.) 100 3,519
TriNet Corporate Realty Trust, Inc. (R.E.I.T.) 100 3,306
--------------- ---------- ----------
11,021 (9,178) 46,943
--------------- ---------- ----------
Retailing & Wholesale - 0.5%
Dayton Hudson Corp. 100 5,319 (83) (4,430) 17 889
May Department Stores Co. 60 2,835
Sears, Roebuck & Co. 150 8,063 (125) (6,715) 95 5,111
--------------- ---------- ----------
13,382 (11,145) 8,835
--------------- ---------- ----------
Telecommunication Services & Equipment - 3.2%
Ameritech Corp. 124 8,424
Bell Atlantic Corp. 100 7,588 (83) (6,319) 107 8,098
Carolina Power & Light Co. 175 6,278 (146) (5,228) 29 1,050
CMS Energy Corp. 125 4,406 (104) (3,669) 21 737
GTE Corp. 260 11,405 (217) (9,498) 205 9,015
Northern Telecom Ltd. 200 18,200
NYNEX Corp. 88 5,076
SBC Communications, Inc. 160 9,900 (133) (8,245) 27 1,655
Southern Co. 400 8,750 (333) (7,287) 67 1,463
Sprint Corp. 75 3,972
--------------- ---------- ----------
48,327 (40,246) 57,690
--------------- ---------- ----------
</TABLE>
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Balanced
Fund
--------------------
Market
Shares Value
-------- ----------
<S> <C> <C>
Transportation - 0.4%
Norfolk Southern Corp. 40 $4,030
Union Pacific Corp. 47 3,299
----------
7,329
----------
Utilities - 1.1%
American Electric Power Co., Inc. 40 1,659
Consolidated Edison Co. of New York, Inc. 74 2,178
Dominion Resources, Inc. 31 1,137
Duke Power Co. 42 2,013
Emerson Electric Co. 108 5,947
Florida Progress Corp. 71 2,236
FPL Group, Inc. 27 1,244
Houston Industries., Inc. 87 1,861
Texas Utilities Co. 44 1,519
----------
19,794
----------
Advertising & Related Services - 0.2%
Gannett Inc. 47 4,622
----------
Total Common Stocks 965,381
==========
CONVERTIBLE PREFERRED - 1.9%
Finance & Insurance - 1.1%
Allstate Corp. (The)
6.76%, Exchangeable Notes Due 4/15/98 64 3,338
Conseco, Inc.
7.00%, PRIDES 64 8,239
SunAmerica, Inc.
$3.188, PERCS 200 8,725
----------
20,302
----------
Office Equipment & Supplies - 0.2%
Ikon Office Solutions, Inc.
$5.04, 10/01/98 55 3,541
----------
Retailing & Wholesale - 0.6%
Kmart Financing I
7.75% 200 10,975
----------
Total Convertible Preferred 34,818
==========
<CAPTION>
Evergreen Balanced Adjustment for Liquidation Pro Forma
Fund of Trust shareholders (Note 1) Combined
--------------------------------------------------- -------------------
Market Market Market
Shares Value Shares Value Shares Value
-------- --------------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Transportation - 0.4%
Norfolk Southern Corp. 40 $4,030
Union Pacific Corp. 47 3,299
----------
7,329
----------
Utilities - 1.1%
American Electric Power Co., Inc. 40 1,659
Consolidated Edison Co. of New York, Inc. 74 2,178
Dominion Resources, Inc. 31 1,137
Duke Power Co. 42 2,013
Emerson Electric Co. 75 $4,130 (62) (3,439) 121 6,638
Florida Progress Corp. 71 2,236
FPL Group, Inc. 27 1,244
Houston Industries., Inc. 87 1,861
Texas Utilities Co. 44 1,519
--------------- ---------- ----------
4,130 (3,439) 20,485
--------------- ---------- ----------
Advertising & Related Services - 0.2%
Gannett Inc. 47 4,622
----------
Total Common Stocks 508,333 (423,331) 1,050,383
=============== ========== ==========
CONVERTIBLE PREFERRED - 1.9%
Finance & Insurance - 1.1%
Allstate Corp. (The)
6.76%, Exchangeable Notes Due 4/15/98 64 3,338
Conseco, Inc.
7.00%, PRIDES 64 8,239
SunAmerica, Inc.
$3.188, PERCS 200 8,725
----------
20,302
----------
Office Equipment & Supplies - 0.2%
Ikon Office Solutions, Inc.
$5.04, 10/01/98 55 3,541
----------
Retailing & Wholesale - 0.6%
Kmart Financing I
7.75% 200 10,975
----------
Total Convertible Preferred 34,818
==========
</TABLE>
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Balanced Evergreen Balanced Adjustment for Liquidation
Fund Fund of Trust shareholders Note 1)
------------------------- -----------------------------------------------------
Market Market Market
Principal Value Principal Value Principal Value
----------- --------- --------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONVERTIBLE DEBENTURES - 1.0%
Business Equipment & Services - 0.2%
US Filter Corp.
6.00%, 9/15/05, 144A $2,000 $3,100
---------
Electrical Equipment & Services - 0.2%
Solectron Corp.
6.00%, 3/1/06 144A 3,000 3,724
---------
Environmental Services - 0.3%
USA Waste Services Inc.
4.00%, 2/1/02 4,900 5,344
---------
Retailing & Wholesale -0.3%
Staples, Inc.
4.50%, 10/1/00 144A 5,250 6,339
---------
Total Convertible Debentures 18,507
=========
CORPORATE BONDS - 14.8%
Aerospace & Defense - 0.4%
Boeing Co.
7.88%, 4/15/43 3,000 3,165
McDonnell Douglas Corp.
9.25%, 4/1/02 3,650 4,013
---------
7,178
---------
Automotive Equipment & Manufacturing - 0.9%
Ford Motor Co.
7.70%, 5/15/97 3,000 3,024
General Motors Corp.
9.63%, 12/1/00 5,600 6,094
Hertz Corp.
7.00%, 5/1/02 7,500 7,528
---------
16,646
---------
Banks - 1.1%
ABN Amro Bank NV Chicago Branch
7.30%, 12/1/26 6,500 6,119
Amsouth Bancorp.
6.75%, 11/1/25 4,500 4,400
Boatmen's Bancshares, Inc.
6.75%, 3/15/03 $3,000 $2,982 (2,498) (2,483)
Export Import Bank Korea
7.10%, 3/15/07 4,500 4,541
First Chicago Corp.,
9.875%, 8/15/00 5,000 5,446 (4,164) (4,535)
NationsBank Corp.
7.625%, 4/15/05 10,000 10,317 (8,328) (8,592)
Wachovia Corp.
6.61%, 10/1/25 1,000 985
--------- ----------- ------------
16,045 18,745 (15,610)
--------- ----------- ------------
Chemical & Agricultural Products - 0.0%
Dow Chemical Co.
8.625%, 4/1/06 5,000 5,548 (4,164) (4,620)
----------- ------------
Electrical Equipment & Services - 0.1%
Korea Electric Power Corp.
7.00%, 2/1/27 2,250 2,206
---------
<CAPTION>
Pro Forma
Combined
----------------------------
Market
Principal Value
------------- ------------
<S> <C> <C>
CONVERTIBLE DEBENTURES - 1.0%
Business Equipment & Services - 0.2%
US Filter Corp.
6.00%, 9/15/05, 144A $2,000 $3,100
------------
Electrical Equipment & Services - 0.2%
Solectron Corp.
6.00%, 3/1/06 144A 3,000 3,724
------------
Environmental Services - 0.3%
USA Waste Services Inc.
4.00%, 2/1/02 4,900 5,344
------------
Retailing & Wholesale -0.3%
Staples, Inc.
4.50%, 10/1/00 144A 5,250 6,339
------------
Total Convertible Debentures 18,507
============
CORPORATE BONDS - 14.8%
Aerospace & Defense - 0.4%
Boeing Co.
7.88%, 4/15/43 3,000 3,165
McDonnell Douglas Corp.
9.25%, 4/1/02 3,650 4,013
------------
7,178
------------
Automotive Equipment & Manufacturing - 0.9%
Ford Motor Co.
7.70%, 5/15/97 3,000 3,024
General Motors Corp.
9.63%, 12/1/00 5,600 6,094
Hertz Corp.
7.00%, 5/1/02 7,500 7,528
------------
16,646
------------
Banks - 1.1%
ABN Amro Bank NV Chicago Branch
7.30%, 12/1/26 6,500 6,119
Amsouth Bancorp.
6.75%, 11/1/25 4,500 4,400
Boatmen's Bancshares, Inc.
6.75%, 3/15/03 502 499
Export Import Bank Korea
7.10%, 3/15/07 4,500 4,541
First Chicago Corp.,
9.875%, 8/15/00 836 911
NationsBank Corp.
7.625%, 4/15/05 1,672 1,725
Wachovia Corp.
6.61%, 10/1/25 1,000 985
------------
19,180
------------
Chemical & Agricultural Products - 0.0%
Dow Chemical Co.
8.625%, 4/1/06 836 928
Electrical Equipment & Services - 0.1%
Korea Electric Power Corp.
7.00%, 2/1/27 2,250 2,206
------------
</TABLE>
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Balanced Evergreen Balanced Adjustment for
Fund Fund Liquidation of
------------------- ------------------ Trust Shareholders
Market Market Market
Principal Value Principal Value Principal Value
--------- -------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Finance & Insurance - 3.8%
Associates Corp. North America
8.63%, 11/15/04 $6,550 $7,160
CCC Putable Asset Trust
6.45%, 10/18/99 144A 5,250 5,234
CIT Group Holdings Inc.
9.25%, 3/15/01 4,500 4,877
Dean Witter, Discover & Co.
6.75%, 10/15/13 $5,500 $5,152 (4,580) (4,290)
Fleet Mortgage Group Inc.
6.50%, 6/15/00 5,050 5,035
Fleet Financial Home Equity Trust
6.70%, 1/16/06 150 150 (125) (125)
Ford Credit Auto Owner Trust
6.30%, 1/15/01 5,400 5,390
Ford Motor Credit
6.90%, 6/5/00 4,750 4,785
General Electric Capital Corp.,
8.75%, 3/14/03 5,500 6,001 (4,580) (4,998)
General Motors Acceptance Corp.
7.13%, 5/1/01 6,400 6,478
International Bank For Reconstruction & Development Co.,
7.95%, 5/15/16 2,750 2,973 (2,290) (2,476)
International Lease Finance Corp.
6.38%, 2/15/02 5,000 4,912
Mellon Capital II
7.99%, 1/15/27 3,000 2,996
Merrill Lynch, Pierce, Fenner & Smith Inc.,
7.00%, 4/27/08 5,000 4,964 (4,164) (4,134)
Michigan Bell Telephone Co.
5.88%, 9/15/99 5,750 5,685
Prudential Funding
7.13%, 7/1/07 2,200 2,196
Smith Barney Holdings, Inc.,
5.50%, 1/15/99 5,000 4,942 (4,164) (4,116)
Sun Life Canada US Cap Trust I
8.53%, 5/29/49 144A 5,500 5,679
Travelers Capital III
7.75%, 12/1/36 3,500 3,395
-------- --------- -----------
63,822 24,182 (20,139)
-------- --------- -----------
Food & Beverage Products - 0.4%
General Mills, Inc.,
9.00%, 12/20/02 5,000 5,504 (4,164) (4,584)
PepsiCo, Inc.,
7.625%, 11/1/98 4,250 4,332 (3,539) (3,608)
Philip Morris Cos., Inc.
7.20%, 2/1/07 5,000 4,934
Philip Morris Cos., Inc.
8.65%, 5/15/98 5,000 5,106 (4,164) (4,252)
-------- --------- -----------
4,934 14,942 (12,444)
-------- --------- -----------
Healthcare Products & Services - 0.0%
Baxter International
7.25%, 2/15/08 5,000 5,101 (4,164) (4,248)
--------- -----------
Industrial Specialty Products & Services - 0.7%
GTE Corp.
8.75%, 11/1/21 7,000 7,906
Jet Equipment Trust, 144a
9.41%, 6/15/10 7,000 8,024 (5,829) (6,682)
Loews Corp.
6.75%, 12/15/06 10,000 9,678 (8,328) (8,060)
Textron Inc.
10.01%, 2/1/00 1,100 1,189
Waste Management Inc.
8.75%, 5/1/18 1,400 1,500 (1,166) (1,249)
-------- --------- -----------
9,095 19,202 (15,991)
-------- --------- -----------
<CAPTION>
Pro Forma
Combined
---------------------------
Market
Principal Value
--------- ---------
<S> <C> <C>
Finance & Insurance - 3.8%
Associates Corp. North America
8.63%, 11/15/04 $6,550 $7,160
CCC Putable Asset Trust
6.45%, 10/18/99 144A 5,250 5,234
CIT Group Holdings Inc.
9.25%, 3/15/01 4,500 4,877
Dean Witter, Discover & Co.
6.75%, 10/15/13 920 862
Fleet Mortgage Group Inc.
6.50%, 6/15/00 5,050 5,035
Fleet Financial Home Equity Trust
6.70%, 1/16/06 25 25
Ford Credit Auto Owner Trust
6.30%, 1/15/01 5,400 5,390
Ford Motor Credit
6.90%, 6/5/00 4,750 4,785
General Electric Capital Corp.,
8.75%, 3/14/03 920 1,003
General Motors Acceptance Corp.
7.13%, 5/1/01 6,400 6,478
International Bank For Reconstruction & Development Co.,
7.95%, 5/15/16 460 497
International Lease Finance Corp.
6.38%, 2/15/02 5,000 4,912
Mellon Capital II
7.99%, 1/15/27 3,000 2,996
Merrill Lynch, Pierce, Fenner & Smith Inc.,
7.00%, 4/27/08 836 830
Michigan Bell Telephone Co.
5.88%, 9/15/99 5,750 5,685
Prudential Funding
7.13%, 7/1/07 2,200 2,196
Smith Barney Holdings, Inc.,
5.50%, 1/15/99 836 826
Sun Life Canada US Cap Trust I
8.53%, 5/29/49 144A 5,500 5,679
Travelers Capital III
7.75%, 12/1/36 3,500 3,395
------------
67,865
------------
Food & Beverage Products - 0.4%
General Mills, Inc.,
9.00%, 12/20/02 836 920
PepsiCo, Inc.,
7.625%, 11/1/98 711 724
Philip Morris Cos., Inc.
7.20%, 2/1/07 5,000 4,934
Philip Morris Cos., Inc.
8.65%, 5/15/98 836 854
------------
7,432
------------
Healthcare Products & Services - 0.0%
Baxter International
7.25%, 2/15/08 836 853
------------
Industrial Specialty Products & Services - 0.7%
GTE Corp.
8.75%, 11/1/21 7,000 7,906
Jet Equipment Trust, 144a
9.41%, 6/15/10 1,171 1,342
Loews Corp.
6.75%, 12/15/06 1,672 1,618
Textron Inc.
10.01%, 2/1/00 1,100 1,189
Waste Management Inc.
8.75%, 5/1/18 234 251
------------
12,306
------------
</TABLE>
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Balanced Evergreen Balanced Adjustment for Liquidation
Fund Fund of Trust shareholders Note 1)
---------------------------- ----------------------------------------------------
Market Market Market
Principal Value Principal Value Principal Value
------------- ----------- ----------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Machinery - Diversified - 0.1%
Caterpillar, Inc.
9.38%, 7/15/01 $2,000 $2,176
-----------
Manufacturing - Distributing - 0.0%
Stanley Works,
7.38%, 12/15/02 $4,300 $4,422 (3,581) (3,683)
----------- -----------
Natural Gas - 0.4%
Tennessee Gas Pipeline Co.
7.50%, 4/1/17 6,575 6,550
-----------
Oil - 1.7%
Atlantic Richfield Co.
9.00%, 4/1/21 4,000 4,687 (3,331) (3,903)
Occidental Petroleum Corp.
10.13%, 9/15/09 4,300 5,245
Oslo Seismic
8.28%, 6/1/11 144A 5,287 5,573
Sun, Inc.
8.13%, 11/1/99 10,000 10,346
Transocean Offshore, Inc.
8.00%, 4/15/27 7,500 7,752
----------- ----------- -----------
28,916 4,687 (3,903)
----------- ----------- -----------
Oil Field Services - 0.6%
Baker Hughes Inc.
7.63%, 2/15/99 10,000 10,195
-----------
Paper & Packaging - 0.4%
James River Corp. of Virginia
6.75%, 10/1/99 8,000 8,051
-----------
Publishing, Broadcasting & Entertainment - 1.6%
Belo (A. H.) Corp.
7.13%, 6/1/07 5,500 5,453
Continental Cablevision Inc.
9.00%, 9/1/08 11,338 12,675
Time Warner Inc.
9.15%, 2/1/23 10,000 11,045
-----------
29,173
-----------
Real Estate - 0.2%
Simon Debartolo Group Inc.
6.88%, 11/15/06 3,500 3,387
-----------
Retailing & Wholesale - 0.3%
Mattel, Inc.
6.75%, 5/15/00 5,250 5,269
-----------
Telecommunication Services & Equipment - 0.5%
Ambac, Inc.
9.38%, 8/1/11 8,000 9,513
-----------
Transportation - 0.5%
Golden State Petroleum Transport Corp.
8.04%, 2/1/19 144A 3,000 2,998
Norfolk Southern Corp.
7.05%, 5/1/37 5,500 5,582
-----------
8,580
-----------
Utilities - 1.1%
Central Illinois Public Service Co.
7.61%, 6/1/17 5,000 5,082
Citizens Utilities Co.
7.05%, 10/1/46 4,000 3,756
Georgia Power Co.
6.13%, 9/1/99 5,000 4,970
Rural Electric Cooperative
8.67%, 9/15/18 4,000 4,399
System Energy Resources, Inc.
11.38%, 9/1/16 568 607
Union Electric Co.,
8.00%, 12/15/22 3,600 3,660 (2,998) (3,048)
----------- ----------- -----------
18,814 3,660 (3,048)
----------- ----------- -----------
Total Corporate Bonds 250,550 100,489 (83,686)
=========== =========== ===========
<CAPTION>
Pro Forma
Combined
-------------------------
Market
Principal Value
--------- -----------
<S> <C> <C>
Machinery - Diversified - 0.1%
Caterpillar, Inc.
9.38%, 7/15/01 $2,000 $2,176
-----------
Manufacturing - Distributing - 0.0%
Stanley Works,
7.38%, 12/15/02 719 739
-----------
Natural Gas - 0.4%
Tennessee Gas Pipeline Co.
7.50%, 4/1/17 6,575 6,550
-----------
Oil - 1.7%
Atlantic Richfield Co.
9.00%, 4/1/21 669 784
Occidental Petroleum Corp.
10.13%, 9/15/09 4,300 5,245
Oslo Seismic
8.28%, 6/1/11 144A 5,287 5,573
Sun, Inc.
8.13%, 11/1/99 10,000 10,346
Transocean Offshore, Inc.
8.00%, 4/15/27 7,500 7,752
-----------
29,700
-----------
Oil Field Services - 0.6%
Baker Hughes Inc.
7.63%, 2/15/99 10,000 10,195
-----------
Paper & Packaging - 0.4%
James River Corp. of Virginia
6.75%, 10/1/99 8,000 8,051
-----------
Publishing, Broadcasting & Entertainment - 1.6%
Belo (A. H.) Corp.
7.13%, 6/1/07 5,500 5,453
Continental Cablevision Inc.
9.00%, 9/1/08 11,338 12,675
Time Warner Inc.
9.15%, 2/1/23 10,000 11,045
-----------
29,173
-----------
Real Estate - 0.2%
Simon Debartolo Group Inc.
6.88%, 11/15/06 3,500 3,387
-----------
Retailing & Wholesale - 0.3%
Mattel, Inc.
6.75%, 5/15/00 5,250 5,269
-----------
Telecommunication Services & Equipment - 0.5%
Ambac, Inc.
9.38%, 8/1/11 8,000 9,513
-----------
Transportation - 0.5%
Golden State Petroleum Transport Corp.
8.04%, 2/1/19 144A 3,000 2,998
Norfolk Southern Corp.
7.05%, 5/1/37 5,500 5,582
-----------
8,580
-----------
Utilities - 1.1%
Central Illinois Public Service Co.
7.61%, 6/1/17 5,000 5,082
Citizens Utilities Co.
7.05%, 10/1/46 4,000 3,756
Georgia Power Co.
6.13%, 9/1/99 5,000 4,970
Rural Electric Cooperative
8.67%, 9/15/18 4,000 4,399
System Energy Resources, Inc.
11.38%, 9/1/16 568 607
Union Electric Co.,
8.00%, 12/15/22 602 612
19,426
-----------
Total Corporate Bonds 267,353
===========
</TABLE>
7
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Evergreen Balanced
Keystone Balanced Fund Fund
----------------------------- -----------------------
Market Market
Principal Value Principal Value
----------- --------- --------- -----
<S> <C> <C> <C> <C>
FOREIGN BONDS (U.S. DOLLARS) - 0.3%
Bayer Corp.
7.13%, 10/1/15 144A $5,000 $4,806
Ontario Province Canada, $5,000 $5,223
7.75%, 6/4/02 ---------- ----------
Total Foreign Bonds (U.S. Dollars) 4,806 $5,233
========== ==========
FOREIGN BONDS (NON U.S. DOLLARS) - 2.4%
Canada Government
8.75%, 12/1/05 18,500 CAD 15,571
Denmark Kingdom
7.00%, 11/15/07 86,299 DKK 13,653
Germany (Republic of)
6.88%, 5/12/05 21,850 DEM 13,681
Nykredit
6.00%, 10/1/26 424 DKK 58
----------
42,963
----------
Total Foreign Bonds (Non U.S. Dollars) 42,963
==========
ASSET-BACKED SECURITIES - 2.5%
Contimortgage Home Equity Loan, Series 1996-4, Class A9,
6.88%, 1/15/28 $2,500 $2,477
Corestates Home Equity Loan, Series 1996-1, Class A4,
7.00%, 6/15/12 6,150 6,106
Green Tree Financial Corp.
Series 1993-4, Class A3, 6.25%, 1/15/19 6,000 5,968
Series 1997-3, Class A5, 7.14%, 7/15/28 6,000 6,068
Olympic Automobile Receivables, Series 1996-C, Class A4,
6.80%, 3/15/02 5,000 5,029
Southern Pacific Secured Assets Corp., Series 1996-3A, Class A4
7.60%, 10/25/27 7,500 7,514
University Support Services Inc., Series 1992-D,
9.07%, 11/1/07 1,185 1,184
Western Financial Owner Trust, Series 1996-D,
6.40%, 4/20/03 3,000 2,984
World Omni Automobile Lease, Series 1997-A, Class A4,
6.90%, 6/25/03 6,650 6,706
----------
44,036
----------
Total Asset-Backed Securities 44,036
==========
</TABLE>
<TABLE>
<CAPTION>
Adjustment for Liquidation Pro Forma
of Trust shareholders Note 1) Combined
---------------------------- --------------------------
Market Market
Principal Value Principal Value
---------------------------- --------- -----
<S> <C> <C> <C> <C>
FOREIGN BONDS (U.S. DOLLARS) - 0.3%
Bayer Corp.
7.13%, 10/1/15 144A $5,000 $4,806
Ontario Province Canada,
7.75%, 6/4/02 (4,164) (4,350) 836 873
--------- --------
Total Foreign Bonds (U.S. Dollars) (4,350) 5,679
========= ========
FOREIGN BONDS (NON U.S. DOLLARS) - 2.4%
Canada Government
8.75%, 12/1/05 18,500 CAD 15,571
Denmark Kingdom
7.00%, 11/15/07 86,299 DKK 13,653
Germany (Republic of)
6.88%, 5/12/05 21,850 DEM 13,681
Nykredit
6.00%, 10/1/26 424 DKK 58
--------
42,963
--------
Total Foreign Bonds (Non U.S. Dollars) 42,963
========
ASSET-BACKED SECURITIES - 2.5%
Contimortgage Home Equity Loan, Series 1996-4, Class A9,
6.88%, 1/15/28 $2,500 $2,477
Corestates Home Equity Loan, Series 1996-1, Class A4,
7.00%, 6/15/12 6,150 6,106
Green Tree Financial Corp.
Series 1993-4, Class A3, 6.25%, 1/15/19 6,000 5,968
Series 1997-3, Class A5, 7.14%, 7/15/28 6,000 6,068
Olympic Automobile Receivables, Series 1996-C, Class A4,
6.80%, 3/15/02 5,000 5,029
Southern Pacific Secured Assets Corp., Series 1996-3A, Class A4,
7.60%, 10/25/27 7,500 7,514
University Support Services Inc., Series 1992-D,
9.07%, 11/1/07 1,185 1,184
Western Financial Owner Trust, Series 1996-D,
6.40%, 4/20/03 3,000 2,984
World Omni Automobile Lease, Series 1997-A, Class A4,
6.90%, 6/25/03 6,650 6,706
--------
44,036
--------
Total Asset-Backed Securities 44,036
========
</TABLE>
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Balanced
Fund
-----------------------
Market
Principal Value
----------- ---------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES - 11.3%
Collateralized Mortgage Obligations - 7.6%
Asset Securitization Corp.:
Series 1996-D3, Class A3, 7.69%, 10/13/26 $3,300 $3,400
Series 1997-D4, Class A2, 7.41%, 4/14/29 4,000 4,129
Bankamerica Mortgage Services, Series 1997-1, Class M,
7.50%, 10/15/25 4,450 4,447
Chase Commercial Mortgage Securities Corp., Series 1997-1, Class B,
7.37%, 4/19/07 2,200 2,236
Chase Mortgage Finance Corp., Series 1994-D, Class M,
6.75%, 2/25/25 4,819 4,501
Criimi Mae Financial Corp., Series 1A,
7.00%, 1/1/33 1,774 1,736
FFCA Secured Lending Corp., Series 1997-1, Class B1,
7.74%, 6/18/13 1,250 1,272
FHLMC:
Series 117, Class G, 8.50%,1/15/21 7,148 7,632
Series 1701, Class PH, 6.50%,3/15/09 5,500 5,391
Series 1996-17, Class A, 6.00%, 8/25/04 6,500 6,269
Financial Asset Securitization, Series 1997-NAM 1, Class FXA2,
7.75%, 4/25/27 5,543 5,632
FNMA
Remic Trust 1993-156, ClassB, 6.50%, 4/25/18 5,000 4,813
Remic Trust 1993-248, ClassSA, 3.38%, 8/25/23 1,250 948
G E Capital Mortgage Services Inc., Series 1994-10, Class A14,
6.50%, 3/25/24 3,454 3,311
GS Mortgage Security Corp., Series 1996-PL, Class A2,
7.41%, 2/15/27 4,450 4,338
Headlands Mortgage Securities, Inc., Series 1997-2, Class AI10,
7.75%, 5/25/27 6,451 6,517
Independent National Mortgage Corp., Series 1997-A, Class A,
7.85%, 12/26/26 7,974 8,003
KS Mortgage Capital, L. P., Series 1995-1, Class A1,
7.06%, 4/20/02 1,274 1,277
Merrill Lynch Mortgage Investors, Inc.
Series 1991-D, Class B, 9.85%, 7/15/11 5,000 5,277
Series 1992-B, Class B, 8.50%, 4/15/12 1,824 1,868
Series 1992-D, Class B, 8.50%, 6/15/17 2,110 2,199
Series 1996-C2, Class B, 6.96%, 11/21/28 2,299 2,263
Series 1997-C1, Class A3, 7.12%, 6/18/29 5,000 5,012
Merrill Lynch Trust XXXV, Class G,
8.45%, 11/1/18 5,870 6,164
Mid State Trust, Series 6, Class A3,
7.54%, 7/1/35 2,000 2,011
Morgan Stanley Capital 1 Inc., Series 1997-WF1, Class A2,
7.22%, 11/15/28 7,000 7,090
Paine Webber Mortgage Acceptance Corp. IV, Series 1993-5, Class A3,
6.88%, 6/25/08 1,131 1,131
PNC Mortgage Securities Corp., Series 1997-4, Class 2PP1,
7.50%, 7/25/27 7,000 7,061
Residential Accredit Loans Inc., Series 1996-QS4, Class AI 10,
7.90%, 8/25/26 6,538 6,622
Residential Funding Mortgage Secs I Inc., Series 1997-S7, Class A4,
7.50%, 5/25/27 9,962 10,123
Ryland Acceptance Corp., Series 1988, Class E,
7.95%, 1/1/19 3,318 3,368
---------
136,041
---------
Mortgage Pass-Through Certificates - 3.7%
Federal Home Loan Mortgage Corp.
7.89%, 4/1/22 3,090 3,256
Federal National Mortgage Assn.
7.68%, 11/1/17 1,414 1,470
7.65%, 1/1/31 1,507 1,589
7.00%, 5/1/24 5,627 5,544
6.50%, 12/1/08 26,258 25,919
5.75%, 2/1/27 8,822 9,138
5.50%, 7/1/09 19,803 18,775
Government National Mortgage Assn.
7.00%, 5/15/24 289 285
---------
65,976
---------
Total Mortgage-Backed Securities 202,017
=========
<CAPTION>
Adjustment
Evergreen Balanced for Liquidation
Fund of Trust shareholders
-------------------------
Market Market
Principal Value Principal Value
----------- -----------------------------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES - 11.3%
Collateralized Mortgage Obligations - 7.6%
Asset Securitization Corp.:
Series 1996-D3, Class A3, 7.69%, 10/13/26
Series 1997-D4, Class A2, 7.41%, 4/14/29
Bankamerica Mortgage Services, Series 1997-1, Class M,
7.50%, 10/15/25
Chase Commercial Mortgage Securities Corp., Series 1997-1, Class B,
7.37%, 4/19/07
Chase Mortgage Finance Corp., Series 1994-D, Class M,
6.75%, 2/25/25
Criimi Mae Financial Corp., Series 1A,
7.00%, 1/1/33
FFCA Secured Lending Corp., Series 1997-1, Class B1,
7.74%, 6/18/13
FHLMC:
Series 117, Class G, 8.50%,1/15/21
Series 1701, Class PH, 6.50%,3/15/09
Series 1996-17, Class A, 6.00%, 8/25/04
Financial Asset Securitization, Series 1997-NAM 1, Class FXA2,
7.75%, 4/25/27
FNMA
Remic Trust 1993-156, ClassB, 6.50%, 4/25/18
Remic Trust 1993-248, ClassSA, 3.38%, 8/25/23
G E Capital Mortgage Services Inc., Series 1994-10, Class A14,
6.50%, 3/25/24
GS Mortgage Security Corp., Series 1996-PL, Class A2,
7.41%, 2/15/27
Headlands Mortgage Securities, Inc., Series 1997-2, Class AI10,
7.75%, 5/25/27
Independent National Mortgage Corp., Series 1997-A, Class A,
7.85%, 12/26/26
KS Mortgage Capital, L. P., Series 1995-1, Class A1,
7.06%, 4/20/02
Merrill Lynch Mortgage Investors, Inc.
Series 1991-D, Class B, 9.85%, 7/15/11
Series 1992-B, Class B, 8.50%, 4/15/12
Series 1992-D, Class B, 8.50%, 6/15/17
Series 1996-C2, Class B, 6.96%, 11/21/28
Series 1997-C1, Class A3, 7.12%, 6/18/29
Merrill Lynch Trust XXXV, Class G,
8.45%, 11/1/18
Mid State Trust, Series 6, Class A3,
7.54%, 7/1/35
Morgan Stanley Capital 1 Inc., Series 1997-WF1, Class A2,
7.22%, 11/15/28
Paine Webber Mortgage Acceptance Corp. IV, Series 1993-5, Class A3,
6.88%, 6/25/08
PNC Mortgage Securities Corp., Series 1997-4, Class 2PP1,
7.50%, 7/25/27
Residential Accredit Loans Inc., Series 1996-QS4, Class AI 10,
7.90%, 8/25/26
Residential Funding Mortgage Secs I Inc., Series 1997-S7, Class A4,
7.50%, 5/25/27
Ryland Acceptance Corp., Series 1988, Class E,
7.95%, 1/1/19
Mortgage Pass-Through Certificates - 3.7%
Federal Home Loan Mortgage Corp.
7.89%, 4/1/22
Federal National Mortgage Assn.
7.68%, 11/1/17
7.65%, 1/1/31
7.00%, 5/1/24
6.50%, 12/1/08
5.75%, 2/1/27
5.50%, 7/1/09
Government National Mortgage Assn.
7.00%, 5/15/24
Total Mortgage-Backed Securities
<CAPTION>
Pro Forma
Combined
------------------------------
Market
Principal Value
--------- ---------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES - 11.3%
Collateralized Mortgage Obligations - 7.6%
Asset Securitization Corp.:
Series 1996-D3, Class A3, 7.69%, 10/13/26 $3,300 $3,400
Series 1997-D4, Class A2, 7.41%, 4/14/29 4,000 4,129
Bankamerica Mortgage Services, Series 1997-1, Class M,
7.50%, 10/15/25 4,450 4,447
Chase Commercial Mortgage Securities Corp., Series 1997-1, Class B,
7.37%, 4/19/07 2,200 2,236
Chase Mortgage Finance Corp., Series 1994-D, Class M,
6.75%, 2/25/25 4,819 4,501
Criimi Mae Financial Corp., Series 1A,
7.00%, 1/1/33 1,774 1,736
FFCA Secured Lending Corp., Series 1997-1, Class B1,
7.74%, 6/18/13 1,250 1,272
FHLMC:
Series 117, Class G, 8.50%,1/15/21 7,148 7,632
Series 1701, Class PH, 6.50%,3/15/09 5,500 5,391
Series 1996-17, Class A, 6.00%, 8/25/04 6,500 6,269
Financial Asset Securitization, Series 1997-NAM 1, Class FXA2,
7.75%, 4/25/27 5,543 5,632
FNMA
Remic Trust 1993-156, ClassB, 6.50%, 4/25/18 5,000 4,813
Remic Trust 1993-248, ClassSA, 3.38%, 8/25/23 1,250 948
G E Capital Mortgage Services Inc., Series 1994-10, Class A14,
6.50%, 3/25/24 3,454 3,311
GS Mortgage Security Corp., Series 1996-PL, Class A2,
7.41%, 2/15/27 4,450 4,338
Headlands Mortgage Securities, Inc., Series 1997-2, Class AI10,
7.75%, 5/25/27 6,451 6,517
Independent National Mortgage Corp., Series 1997-A, Class A,
7.85%, 12/26/26 7,974 8,003
KS Mortgage Capital, L. P., Series 1995-1, Class A1,
7.06%, 4/20/02 1,274 1,277
Merrill Lynch Mortgage Investors, Inc.
Series 1991-D, Class B, 9.85%, 7/15/11 5,000 5,277
Series 1992-B, Class B, 8.50%, 4/15/12 1,824 1,868
Series 1992-D, Class B, 8.50%, 6/15/17 2,110 2,199
Series 1996-C2, Class B, 6.96%, 11/21/28 2,299 2,263
Series 1997-C1, Class A3, 7.12%, 6/18/29 5,000 5,012
Merrill Lynch Trust XXXV, Class G,
8.45%, 11/1/18 5,870 6,164
Mid State Trust, Series 6, Class A3,
7.54%, 7/1/35 2,000 2,011
Morgan Stanley Capital 1 Inc., Series 1997-WF1, Class A2,
7.22%, 11/15/28 7,000 7,090
Paine Webber Mortgage Acceptance Corp. IV, Series 1993-5, Class A3,
6.88%, 6/25/08 1,131 1,131
PNC Mortgage Securities Corp., Series 1997-4, Class 2PP1,
7.50%, 7/25/27 7,000 7,061
Residential Accredit Loans Inc., Series 1996-QS4, Class AI 10,
7.90%, 8/25/26 6,538 6,622
Residential Funding Mortgage Secs I Inc., Series 1997-S7, Class A4,
7.50%, 5/25/27 9,962 10,123
Ryland Acceptance Corp., Series 1988, Class E,
7.95%, 1/1/19 3,318 3,368
---------------
136,041
===============
Mortgage Pass-Through Certificates - 3.7%
Federal Home Loan Mortgage Corp.
7.89%, 4/1/22 3,090 3,256
Federal National Mortgage Assn.
7.68%, 11/1/17 1,414 1,470
7.65%, 1/1/31 1,507 1,589
7.00%, 5/1/24 5,627 5,544
6.50%, 12/1/08 26,258 25,919
5.75%, 2/1/27 8,822 9,138
5.50%, 7/1/09 19,803 18,775
Government National Mortgage Assn.
7.00%, 5/15/24 289 285
---------------
65,976
---------------
Total Mortgage-Backed Securities 202,017
===============
</TABLE>
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Balanced Evergreen Balanced
Fund Fund
------------------- --------------------
Market Market
Principal Value Principal Value
--------- ------ --------- ------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 5.9%
Government Agency Notes & Bonds - 0.1%
Government National Mortgage Assn.
8.50%, 5/15/21 $2,883 $2,997
8.50%, 7/15/21 1,857 1,931
8.50%, 6/15/22 3,579 3,721
9.00%, 10/15/21 3,278 3,466
9.00%, 9/15/21 1,921 2,031
9.50%, 2/15/21 1,690 1,823
---------
15,969
---------
U.S. Treasury - 5.8%
U.S. Treasury Bonds
6.50%, 11/15/26 $8,555 $8,205
6.63%, 2/15/27 30,100 29,451
7.625%, 2/15/07 20,000 20,806
8.75%, 11/15/08 24,100 26,728
8.75%, 5/15/17 20,000 24,069
8.75%, 5/15/20 15,000 18,206
8.88%, 8/15/17 26,000 31,663
9.13%, 5/15/18 17,500 21,853
U.S. Treasury Notes
5.50%, 11/15/98 10,000 9,941
6.25%, 2/15/07 1,500 1,468
6.38%, 7/15/99 8,000 8,047
6.38%, 9/30/01 2,250 2,250
6.50%, 4/30/99 10,000 10,078
6.63%, 3/31/02 39,300 39,655
7.75%, 11/30/99 10,000 10,350
7.75%, 2/15/01 10,000 10,466
8.13%, 2/15/98 22,000 22,323
8.50%, 7/15/97 63,000 63,098
8.88%, 11/15/98 3,500 3,633
----------- ---------
51,578 310,712
----------- ---------
Total U.S. Government & Agency Obligations 51,578 326,681
=========== =========
REPURCHASE AGREEMENTS - 0.7%
Keystone Joint Repurchase Agreement, Investments in repurchase
agreements, in a joint trading account, purchased 6/30/97, 6.039%
maturing 7/1/97 (maturity value $12,666,124)(a) 12,664 12,664
Donaldson, Lufkin & Jenrette Repurchase Agreement, due 7/1/97
(cost $ 928,510)(a) 929 929
----------- ---------
Total Repurchase Agreements 12,664 929
=========== =========
Total Investments (total cost $1,243,809)-99.5% 1,627,320 941,655
Other assets and liablities (net)-0.5% (1,925) 10,765
----------- ---------
Net Assets-100.0% $1,625,395 $952,420
----------- ---------
<CAPTION>
Adjustment for Liquidation Pro Forma
of Trust shareholders Combined
--------------------
Market Market
Principal Value Principal Value
------------------------- --------- -------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 5.9%
Government Agency Notes & Bonds - 0.1%
Government National Mortgage Assn.
8.50%, 5/15/21 (2,401) (2,496) 482 501
8.50%, 7/15/21 (1,546) (1,608) 311 323
8.50%, 6/15/22 (2,980) (3,099) 598 622
9.00%, 10/15/21 (2,730) (2,886) 548 580
9.00%, 9/15/21 (1,600) (1,691) 321 340
9.50%, 2/15/21 (1,407) (1,518) 283 305
-------- ---------
(13,298) 2,671
-------- ---------
U.S. Treasury - 5.8%
U.S. Treasury Bonds
6.50%, 11/15/26 8,555 8,205
6.63%, 2/15/27 (25,067) (24,526) 5,033 4,925
7.625%, 2/15/07 (16,656) (17,327) 3,344 3,479
8.75%, 11/15/08 (20,070) (22,259) 4,030 4,469
8.75%, 5/15/17 (16,656) (20,044) 3,344 4,025
8.75%, 5/15/20 (12,492) (15,162) 2,508 3,044
8.88%, 8/15/17 (21,652) (26,368) 4,348 5,295
9.13%, 5/15/18 (14,574) (18,199) 2,926 3,654
U.S. Treasury Notes
5.50%, 11/15/98 (8,328) (8,279) 1,672 1,662
6.25%, 2/15/07 1,500 1,468
6.38%, 7/15/99 (6,662) (6,701) 1,338 1,346
6.38%, 9/30/01 2,250 2,250
6.50%, 4/30/99 (8,328) (8,393) 1,672 1,685
6.63%, 3/31/02 39,300 39,655
7.75%, 11/30/99 (8,328) (8,619) 1,672 1,731
7.75%, 2/15/01 (8,328) (8,716) 1,672 1,750
8.13%, 2/15/98 (18,321) (18,590) 3,679 3,733
8.50%, 7/15/97 (52,465) (52,547) 10,535 10,551
8.88%, 11/15/98 (2,915) (3,026) 585 607
--------- ---------
(258,756) 103,534
--------- ---------
Total U.S. Government & Agency Obligations (272,054) 106,205
========= =========
REPURCHASE AGREEMENTS - 0.7%
Keystone Joint Repurchase Agreement, Investments in repurchase
agreements, in a joint trading account, purchased 6/30/97, 6.039%
maturing 7/1/97 (maturity value $12,666,124)(a) 12,664
Donaldson, Lufkin & Jenrette Repurchase Agreement, due 7/1/97
(cost $ 928,510)(a) (773) (774) 155 155
--------- -----------
Total Repurchase Agreements (774) 12,819
========== ===========
Total Investments (total cost $1,243,809)-99.5% (346,847) (784,195) 1,784,780
Other assets and liablities (net)-0.5% 8,840
---------- -----------
Net Assets-100.0% ($784,195) $1,793,620
---------- -----------
</TABLE>
* Non-income producing securities.
144A-Securities that may be resold to "qualified
institutional buyers" under Rule 144A of the
Securities Act of 1933. These securities have been
determined to be liquid under the guidelines
established by the Board of Trustees.
(a) The repurchase agreements are fully collateralized by U.S.
Government and/or agency obligations based on market prices
at June 30, 1997
Legend of Portfolio Abbreviations
ADR- American Depository Receipts
FHLMC- Federal Home Loan Mortgage Corporation
FNMA- Federal National Mortgage Association
GNMA- Government National Mortgage Association
PERCS- Preferred Equity Redemption Cumulative Stock
PRIDES- Provisionally Redeemable Income Debt Exchangeable for Stock
R.E.I.T.- Real Estate Investment Trust
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's)
June 30, 1997
<TABLE>
<CAPTION>
Forward Foreign Currency Contracts-Keystone Balanced Fund
Net Unrealized
Exchange US Value at In Exchange Appreciation
Date June 30, 1997 for US $ (Depreciation)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Forward Currency Contracts to Buy:
Contracts to Receive:
-----------------------------------------------
8/12/97 16,000 German Deutsche Marks $9,203 $9,458 $(255)
Forward Foreign Currency Contracts to Sell:
Contracts to Deliver:
-----------------------------------------------
8/12/97 39,638 German Deutsche Marks $22,799 $23,218 $419
8/20/97 94,311 Danish Krone 14,246 14,632 386
8/27/97 21,303 Canadian Dollars 15,481 15,620 139
----------
Unrealized appreciation on forward foreign currency contracts $944
Net unrealized appreciation on forward foreign currency contracts $689
----------
</TABLE>
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (unaudited)
Statement of Assets and Liabilities (000's omitted)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Evergreen Pro
Balanced Balanced Forma
Fund Fund Adj Combined
------------ ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Investments at value (identified cost $1,243,809) $1,627,320 $941,655 (784,195)a $1,784,780
Foreign currency, at value 9 0 9
Receivable for investments sold 4,132 2,772 6,904
Dividends and interest receivable 9,470 9,233 18,703
Unrealized appreciation on forward foreign currency contracts 944 0 944
Receivable for Fund shares sold 1,478 108 1,586
Prepaid expenses and other assets 162 79 241
------------ ----------- -----------
Total Assets 1,643,515 953,847 (784,195) 1,813,167
Liabilities:
Payable for investments purchased 14,732 664 15,396
Payable for Fund shares repurchased 2,080 77 2,157
Unrealized depreciation on forward foreign currency contracts 255 0 255
Distributions payable 935 0 935
Accrued expenses and other liabilities 118 686 804
------------ ----------- -----------
Total Liabilities 18,120 1,427 19,547
Net Assets $1,625,395 $952,420 (784,195) $1,793,620
============ ========================= ===========
Net Assets are comprised of:
Paid-in capital $1,013,621 $720,490 (657,125)a $1,076,986
Undistributed net investment income 3,239 68 3,307
Accumulated realized gains on investments and foreign currency
related transactions 92,402 79,265 171,667
Net unrealized appreciation on investments and foreign currency
related transactions 516,133 152,597 (127,070) 541,660
------------ ------------------------- -----------
Net Assets $1,625,395 $952,420 ($784,195) $1,793,620
============ ========================= ===========
Class A Shares
Net Assets - $45,112 $1,161,433
Shares of beneficial interest outstanding - 3,239 86,531 d 89,770
Net Asset Value - $13.93 $12.95
Maximum Offer Price - 4.75% sales charge - $14.62 $13.60
Class B Shares
Net Assets $1,625,395 $114,906 $623,980
Shares of beneficial interest outstanding 125,634 8,246 (85,662)d 48,219
Net Asset Value $12.95 $13.93 $12.95
Class C Shares
Net Assets - $441 $441
Shares of beneficial interest outstanding - 32 2 b 34
Net Asset Value - $13.85 $12.95
Class Y Shares
Net Assets - $791,961 ($784,195)a $7,766
Shares of beneficial interest outstanding - 56,882 (56,282)c 600
Net Asset Value - $13.92 $12.95
</TABLE>
a Reflects the liquidation of Trust shareholders.
b Reflects the impact of converting shares of the target fund into the survivor
fund.
c Reflects the liquidation of Trust shareholders and the conversion of the
remaining Class Y Shares.
d Reflects the impact of converting shares of the target fund into the survivor
fund and the conversion of Class B shares purchased before 1/1/94 into Class
A shares.
e Reflects the impact of the liquidation of Trust shareholders.
See Notes to Pro Forma Combining Financial Statements.
Page 1
<PAGE>
EVERGREEN BALANCED FUND
Pro Forma Combining Financial Statements (unaudited)
Statement of Operations (000's omitted)
June 30, 1997
<TABLE>
<CAPTION>
Keystone Evergreen Pro
Balanced Balanced Forma
Fund Fund Adj Combined
--------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Investment Income:
Interest income $40,204 $31,816 ($26,197) $45,823
Dividend income (net of foreign withholding taxes of $91) 24,547 12,786 (10,528) 26,805
--------------- ------------ -------------- -----------
64,751 44,602 (36,725)d 72,628
Expenses:
Advisory fees 6,855 4,712 (4,120)a 7,447
Administrative fees 102 395 (395)c 102
Distribution fees 15,437 1,203 24 b 16,664
Transfer agent fees 2,979 434 130 b 3,543
Custodian fees 597 268 (235)c 630
Registration and filing fees 70 145 (145)c 70
Professional fees 57 65 (65)c 57
Trustees' fees and expenses 56 33 (33)c 56
Miscellaneous fees 66 221 (218)c 69
--------------- ------------ -------------- -----------
Total expenses 26,219 7,476 (5,057) 33,695
Less: Indirectly paid expenses (146) 0 (146)
--------------- ------------ -------------- -----------
Net expenses 26,073 7,476 (5,057) 28,492
Net investment income 38,678 37,126 (31,668) 44,136
Net realized gain on investments and foreign
currency related transactions 120,987 97,899 218,886
Net change in unrealized appreciation (depreciation)
of investments and foreign currency related transactions 146,568 25,532 (127,070)e 45,030
--------------- ------------ -------------- -----------
Net realized and unrealized gain on investments
and foreign currency related transactions 267,555 123,431 (127,070) 263,916
--------------- ------------ -------------- -----------
Net increase in net assets resulting from operations $306,233 $160,557 ($158,738) $308,052
--------------- ------------ -------------- -----------
</TABLE>
a Reflects a decrease based on surviving fund's fee schedule and pro forma
combined assets
b Reflects an increase based on combined assets.
c Reflects expected cost savings when the fund's are combined.
d Reflects the reduced income generated by the Evergreen fund with less
assets invested due to the liquidation of Trust shareholders.
e Reflects the impact of the liquidation of Trust shareholders.
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
EVERGREEN BALANCED FUND
Notes to Pro Forma Combining Financial Statements (Unaudited)
June 30, 1997
1. Basis of Combination - The Pro Forma Statement of Assets and Liabilities,
including the Pro Forma Portfolio of Investments, and the related Pro Forma
Statement of Operations ("Pro Forma Statements") reflect the accounts of
Keystone Balanced Fund ("Keystone") and Evergreen Balanced Fund ("Evergreen") at
June 30, 1997 and for the year then ended.
The Pro Forma Statements give effect to the proposed Agreement and Plan of
Reorganizations (the "Reorganizations") to be submitted to shareholders of
Evergreen and Keystone. The Reorganizations provide for the acquisition of all
assets and liabilities of Evergreen and Keystone by Evergreen Balanced Fund
("Evergreen Balanced"), a series of Evergreen Equity Trust, in exchange for
shares of Evergreen Balanced. Thereafter, there will be a distribution of such
shares of Evergreen Balanced to shareholders of Evergreen and Keystone in
liquidation and subsequent termination thereof. As a result of the
Reorganizations, the shareholders of Evergreen and Keystone will become the
owners of that number of full and fractional shares of Evergreen Balanced having
an aggregate net asset value of their shares of Evergreen and Keystone as of the
close of business immediately prior to the date that such Fund's assets are
exchanged for shares of Evergreen Balanced.
The Pro Forma Statements reflect the expenses of each Fund in carrying out its
obligations under the Reorganizations as though the merger occurred at the
beginning of the period presented. It is anticipated that before the
Reorganizations occur, Keystone will begin to offer multiple classes of shares
(Class A, Class B and Class C) each of which will be similar in all respects to
the Class A, Class B and Class C shares of Evergreen Balanced and concurrently
the then outstanding shares of Keystone will become Class B shares of Evergreen
Balanced. Also, the Class B shares of Keystone purchased prior to January 1,
1994 will be converted to Class A shares of the Fund at that time. Shareholders
will receive the same class of shares of Evergreen Balanced held by them in each
Fund prior to the Reorganizations. It is also anticipated that before the
Reorganizations occur, Trust shareholders in Class Y of Evergreen will liquidate
their shares which will be effected by an in-kind transfer of assets for the
Trust shareholders in Class Y.
The information contained herein is based on the experience of each Fund for the
period ended June 30, 1997 and is designed to permit shareholder of the
consolidating mutual funds to evaluate the financial effect of the proposed
Reorganizations. The expenses of Evergreen and Keystone in connection with the
Reorganizations (including the cost of any proxy soliciting agents) will be
borne by First Union National Bank of North Carolina.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of each Fund incorporated by reference in the Statements of
Additional Information.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assume the issuance of Class A, Class B, Class C and Class Y shares of Evergreen
Balanced which would have been issued at June 30, 1997 in connection with the
proposed Reorganizations. Shareholders of
<PAGE>
Keystone would receive the same number of shares of each class as they held on
June 30, 1997. Shareholders of Evergreen would receive shares of Evergreen
Intermediate based on a conversion ratio determined on June 30, 1997. The number
of such shares issued is calculated by applying the conversion ratio which is
calculated by dividing the net asset value per share of Evergreen Class A, Class
B and Class C by the net asset value per share of Keystone. The conversion ratio
for Evergreen Class Y shareholder remaining after the liquidation (as discussed
above) is determined based on the net asset value of Evergreen Class Y divided
by the net asset value of Keystone Class B.
3. Pro Forma Operations - The Pro Forma Statement of Operations assumes similar
rates of gross investment income for the investments of each Fund adjusted for
the liquidation of Trust shareholders. Pro Forma operating expenses include the
actual expenses of each Fund adjusted to reflect the expected expenses of the
combined entity. The investment advisory and distribution fees have been charged
to the combined Fund based on the fee schedule in effect for Keystone at the
combined level of average net assets for the year ended June 30, 1997.
<PAGE>
EVERGREEN EQUITY TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
Number Description
1 Declaration of Trust (1)
2 By-Laws (1)
3 Not applicable
4 Agreements and Plans of Reorganization (included as
Exhibits A-1 and A-2 to the Prospectus contained in
Part A to this registration statement)
5 Declaration of Trust Articles II, III.(6)(c),
IV.(3), IV.(8), V, VI, VII, VIII and By-Laws Articles
II, III, and VIII
6 Investment Advisory Agreement between Keystone
Investment Management Company and the Registrant (1)
7(A) Distribution Agreement between Evergreen Keystone
Distributor, Inc. and the Registrant (1)
(B) Form of Dealer Agreement for Class A, Class B and Class C shares
used by Evergreen Keystone Distributor, Inc. (1)
8 Deferred Compensation Plan (3)
9 Custody Agreement between State Street Bank and Trust
Company and Registrant (1)
10(A) Rule 12b-1 Distribution Plan (1)
(B) Multiple Class Plan (1)
11 Opinion and consent of counsel as to the legality of
the shares being issued (2)
12 Tax opinion and consent of counsel (3)
13 Not applicable
14 Consent of KPMG Peat Marwick LLP (2)
15 Not applicable
16 Powers of Attorney (2)
17(A) Forms of Proxy Card (2)
(B) Registrant's Rule 24f-2 Declaration (1)
- ----------------------
<PAGE>
(1) Incorporated by reference to Registrant's registration statement (File
Nos. 333-37453/ 811-08413) (the "Registration Statement") dated October
8, 1997.
(2) Filed herewith.
(3) To be filed by amendment.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, opinions of counsel or copies of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganizations within a
reasonable time after receipt of such opinions or rulings.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of New York and State
of New York, on the 9th day of October, 1997.
EVERGREEN EQUITY TRUST
By: /s/ John J. Pileggi
----------------------
Name: John J. Pileggi
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities on the 9th day of October,
1997.
Signatures Title
- ---------- -----
/s/John J. Pileggi President and
- ------------------ Treasurer
John J. Pileggi
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
Gerald M. McDonnell
<PAGE>
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
14 Consent of KPMG Peat Marwick LLP
16 Powers of Attorney
17(a) Forms of Proxy
- --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
October 9, 1997
Evergreen Equity Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Equity Trust, a Delaware
business trust with transferable shares and currently consisting of two series
(the "Trust") established under an Agreement and Declaration of Trust dated
September 17, 1997, as amended (the "Declaration"), for our opinion with respect
to certain matters relating to Evergreen Balanced Fund (the "Acquiring Fund"), a
series of the Trust. We understand that the Trust is about to file a
Registration Statement on Form N- 14 for the purpose of registering shares of
the Trust under the Securities Act of 1933, as amended (the "1933 Act"), in
connection with the proposed acquisition by the Acquiring Fund of all of the
assets of Evergreen Balanced Fund, a Massachusetts business trust or a series of
a Massachusetts business trust, and Keystone Balanced Fund (K-1), a Pennsylvania
common law trust or a series of a Pennsylvania common law trust (the "Acquired
Funds"), with transferable shares, in exchange solely for shares of the
Acquiring Fund and the assumption by the Acquiring Fund of certain identified
liabilities of the Acquired Funds pursuant to Agreements and Plans of
Reorganization, forms of which are included in the Form N-1A Registration
Statement (the "Plans").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plans and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
<PAGE>
Evergreen Equity Trust
October 9, 1997
Page 2
Based upon the foregoing, and assuming the approval by shareholders of
each Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on January 6, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plans and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Equity Trust
We consent to:
1) the use of our report dated May 2, 1997 for Evergreen
Balanced Fund incorporated by reference herein;
2) the use of our report dated August 8, 1997 for Keystone Balanced Fund
(K-1) incorporated by reference herein; and
3) the reference to our firm under the caption "FINANCIAL
STATEMENTS AND EXPERTS" in the prospectus/proxy
statement.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
October 9, 1997
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Laurence B. Ashkin Director/Trustee
- ---------------------
Laurence B. Ashkin
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Charles A. Austin, III Director/Trustee
- -------------------------
Charles A. Austin, III
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/K. Dun Gifford Director/Trustee
- -----------------
K. Dun Gifford
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/James S. Howell Director/Trustee
- ------------------
James S. Howell
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Leroy Keith, Jr. Director/Trustee
- -------------------
Leroy Keith, Jr.
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Gerald M. McDonnell Director/Trustee
- ----------------------
Gerald M. McDonnell
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Thomas L. McVerry Director/Trustee
- --------------------
Thomas L. McVerry
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/William Walt Pettit Director/Trustee
- ----------------------
William Walt Pettit
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/David M. Richardson Director/Trustee
- ----------------------
David M. Richardson
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Russell A. Salton, III MD Director/Trustee
- ----------------------------
Russell A. Salton, III MD
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Michael S. Scofield Director/Trustee
- ----------------------
Michael S. Scofield
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Richard J. Shima Director/Trustee
- -------------------
Richard J. Shima
EVERGREEN BALANCED FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 6, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
Dorothy E. Bourassa, Terrence J. Cullen, Martin Wolin or Rosemary Van Antwerp or
any of them as Proxies of the undersigned, with full power of substitution, to
vote on behalf of the undersigned all shares of Evergreen Balanced Fund
("Evergreen Balanced") that the undersigned is entitled to vote at the special
meeting of shareholders of Evergreen Balanced to be held at 3:00 p.m. on
Tuesday, January 6, 1998 at the offices of the Evergreen Keystone Funds, 26th
Floor, 200 Berkeley Street, Boston, Massachusetts 02116 and at any adjournments
thereof, as fully as the undersigned would be entitled to vote if personally
present, as follows:
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Balanced Fund, a series of Evergreen Equity Trust, will (i) acquire all of the
assets of Evergreen Balanced in exchange for shares of Evergreen Balanced Fund;
and (ii) assume certain identified liabilities of Evergreen Balanced, as
substantially described in the accompanying Prospectus/Proxy Statement.
---- FOR ---- AGAINST ---- ABSTAIN
2. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
---- FOR ---- AGAINST ---- ABSTAIN
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF EVERGREEN INVESTMENT TRUST
THE BOARD OF TRUSTEES OF EVERGREEN INVESTMENT TRUST RECOMMENDS A VOTE FOR THE
PROPOSALS.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR THE PROPOSALS IF
NO CHOICE IS INDICATED.
-1-
<PAGE>
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: , 199
---------------- ---
Signature(s):
Signature (of joint owner, if any):
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign the full corporate name
and your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy.
Please sign, date and return.
-2-
<PAGE>
KEYSTONE BALANCED FUND (K-1)
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 6, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
Dorothy E. Bourassa, Terrence J. Cullen, Martin Wolin or Rosemary Van Antwerp or
any of them as Proxies of the undersigned, with full power of substitution, to
vote on behalf of the undersigned all shares of Keystone Balanced Fund (K-1)
("Keystone Balanced") that the undersigned is entitled to vote at the special
meeting of shareholders of Keystone Balanced Fund to be held at 3:00 p.m. on
Tuesday, January 6, 1998 at the offices of the Evergreen Keystone Funds, 26th
Floor, 200 Berkeley Street, Boston, Massachusetts 02116 and at any adjournments
thereof, as fully as the undersigned would be entitled to vote if personally
present, as follows:
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Balanced Fund, a series of Evergreen Equity Trust, will (i) acquire all of the
assets of Keystone Balanced in exchange for shares of Evergreen Balanced Fund;
and (ii) assume certain identified liabilities of Keystone Balanced, as
substantially described in the accompanying Prospectus/Proxy Statement.
---- FOR ---- AGAINST ---- ABSTAIN
2. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
---- FOR ---- AGAINST ---- ABSTAIN
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF KEYSTONE BALANCED
THE BOARD OF TRUSTEES OF KEYSTONE BALANCED RECOMMENDS A VOTE FOR THE PROPOSALS.
-3-
<PAGE>
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR THE PROPOSALS IF
NO CHOICE IS INDICATED.
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: , 199
----------------- ---
Signature(s):
Signature (of joint owner, if any):
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign the full corporate name
and your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy. Please sign, date and return.
-4-
<PAGE>
