1933 Act Registration No. 333-41541
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
EVERGREEN FIXED INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP 1025
Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective :
[X] immediately upon filing pursuant to paragraph (b)
[ ] on __________pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (1)
<PAGE>
[ ] on___________pursuant to paragraph (a) (1)
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on___________pursuant to paragraph (a) (2) of Rule 485
<PAGE>
EVERGREEN FIXED INCOME TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary; Comparison
of Investment Objectives and
Policies; Risks
4. Information About the Summary; Reasons for the
Transaction Reorganization; Comparative
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
7. Voting Information Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of Evergreen
Intermediate Term Bond Fund
dated November 10, 1997
13. Additional Information Statement of Additional
about the Company Being Information of Blanchard Funds
Acquired - Blanchard Short-Term
Flexible Income Fund dated
November 30, 1997
14. Financial Statements Financial Statements of
Evergreen Intermediate Term
Bond Fund dated June 30, 1997;
Financial Statements of
Blanchard Short-Term Flexible
Income Fund dated September
30, 1997; Pro Forma Financial
Statements
<PAGE>
Item of Part C of Form N-14
Incorporated by Reference to
15. Indemnification Part A Caption - "Comparative
Information on Shareholders'
Rights - Liability and
Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
BLANCHARD FUNDS
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January 7, 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of the Blanchard Short-Term Flexible Income Fund, a
series of Blanchard Funds (the "Fund"), to inform you of a Special Shareholders'
meeting to be held on February 20, 1998. Before that meeting, I would like your
vote on the important issues affecting your Fund as described in the attached
Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes three proposals. The first proposal
requests that shareholders consider and act upon an Agreement and Plan of
Reorganization whereby all of the assets of the Fund would be acquired by
Evergreen Intermediate Term Bond Fund in exchange for Class A shares of
Evergreen Intermediate Term Bond Fund and the assumption by Evergreen
Intermediate Term Bond Fund of certain liabilities of the Fund. You will receive
shares of Evergreen Intermediate Term Bond Fund having an aggregate net asset
value equal to the aggregate net asset value of your Fund shares. Details about
Evergreen Intermediate Term Bond Fund's investment objective, portfolio
management team, performance, etc. are contained in the attached
Prospectus/Proxy Statement. The transaction is a non-taxable event for
shareholders.
The second proposal requests shareholder consideration of an Interim Investment
Advisory Agreement between the Fund and Virtus
Capital Management, Inc.
The third and final proposal requests shareholder consideration of an Interim
Sub-Advisory Agreement between Virtus Capital
Management, Inc. and OFFITBANK.
Information relating to the Interim Investment Advisory Agreement and the
Interim Sub-Advisory Agreement is contained in the attached Prospectus/Proxy
Statement.
The Board of Trustees has approved the proposals and recommends that you vote
FOR these proposals.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to
<PAGE>
familiarize yourself with the proposals presented and sign and return your proxy
card in the enclosed postage-paid envelope today.
If you have any questions about this proxy, please call our proxy solicitor,
Shareholder Communications Corporation, at 800-733- 8481 ext. 437. You may also
FAX your completed and signed proxy card to 800-733-1885.
If we do not receive your completed proxy card after several weeks, you may be
contacted by Shareholder Communications Corporation who will remind you to vote
your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
Blanchard Funds
<PAGE>
BLANCHARD FUNDS
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of Blanchard Short-Term Flexible Income Fund, a series of Blanchard
Funds ("Short-Term"), will be held at the offices of the Evergreen Funds, 200
Berkeley Street, Boston, Massachusetts 02116, on February 20, 1998 at 2:00 p.m.
for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of November 26, 1997, providing for the acquisition of all
of the assets of Short-Term by Evergreen Intermediate Term Bond Fund, a series
of Evergreen Fixed Income Trust ("Evergreen Intermediate"), in exchange for
shares of Evergreen Intermediate and the assumption by Evergreen Intermediate of
certain identified liabilities of Short-Term. The Plan also provides for
distribution of such shares of Evergreen Intermediate to shareholders of
Short-Term in liquidation and subsequent termination of Short-Term. A vote in
favor of the Plan is a vote in favor of the liquidation and dissolution of
Short-Term.
2. To consider and act upon the Interim Management Contract between
Short-Term and Virtus Capital Management, Inc.
3. To consider and act upon the Interim Sub-Advisory Agreement between
Virtus Capital Management, Inc. and OFFITBANK.
4. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of Blanchard Funds on behalf of Short-Term have fixed the
close of business on December 26, 1997 as the record date for the determination
of shareholders of Short-Term 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
<PAGE>
SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED
PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Trustees
John W. McGonigle
Secretary
January 7, 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr. John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JANUARY 7, 1998
Acquisition of Assets of
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
a series of
BLANCHARD FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
EVERGREEN INTERMEDIATE TERM BOND FUND
a series of
EVERGREEN FIXED INCOME TRUST
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
Blanchard Short-Term Flexible Income Fund ("Short-Term") in connection with a
proposed Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Short-Term for consideration at a Special Meeting of
Shareholders to be held on February 20, 1998 at 2:00 p.m. at the offices of the
Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts 02116, and any
adjournments thereof (the "Meeting"). The Plan provides for all of the assets of
Short-Term to be acquired by Evergreen Intermediate Term Bond Fund ("Evergreen
Intermediate") in exchange for shares of Evergreen Intermediate and the
assumption by Evergreen Intermediate of certain identified liabilities of
Short-Term (hereinafter referred to as the "Reorganization"). Evergreen
Intermediate and Short-Term are sometimes hereinafter referred to individually
as the "Fund" and collectively as the "Funds." Following the Reorganization,
shares of Evergreen Intermediate will be distributed to shareholders of
Short-Term in liquidation of Short-Term and such Fund will be terminated.
Holders of shares of Short-Term will receive Class A shares of Evergreen
Intermediate having the same Rule 12b-1 distribution-related fees as the shares
of Short-Term held by such holders prior to the Reorganization. No initial sales
charge will be imposed in connection with Class A shares of Evergreen
Intermediate received by holders of shares of Short- Term. As a result of the
proposed Reorganization, shareholders of Short-Term will receive that number of
full and fractional shares of Evergreen Intermediate having an aggregate net
asset value equal to the aggregate net asset value of such shareholder's shares
of Short-Term. The Reorganization is being structured as a tax-free
reorganization for federal income tax purposes.
<PAGE>
Evergreen Intermediate is a separate series of Evergreen Fixed Income
Trust, an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). Evergreen Intermediate seeks
current income by investing primarily in a broad range of investment quality
debt securities and, secondarily, seeks to protect capital. Short- Term seeks to
provide a high level of current income consistent with preservation of capital
by investing primarily in a broad range of short-term debt securities.
Shareholders of Short-Term are also being asked to approve the Interim
Management Contract with Virtus Capital Management, Inc., a subsidiary of First
Union Corporation ("Virtus") (the "Interim Advisory Agreement"), with the same
terms and fees as the previous advisory agreement between Short-Term and Virtus
and the Interim Sub-Advisory Agreement between Virtus and OFFITBANK with the
same terms and fees as the previous sub-advisory agreement between Virtus and
OFFITBANK. The Interim Advisory Agreement and Interim Sub-Advisory Agreement
will be in effect for the period of time between November 28, 1997, the date on
which the merger of Signet Banking Corporation with and into a wholly-owned
subsidiary of First Union Corporation was consummated, and the date of the
Reorganization (scheduled for on or about February 27, 1998).
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen Intermediate
that shareholders of Short-Term should know before voting on the Reorganization.
Certain relevant documents listed below, which have been filed with the
Securities and Exchange Commission ("SEC"), are incorporated in whole or in part
by reference. A Statement of Additional Information dated January 7, 1998,
relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Evergreen (formerly Keystone) Intermediate
Term Bond Fund, the predecessor of Evergreen Intermediate, dated June 30, 1997
and Short-Term dated September 30, 1997, has been filed with the SEC and is
incorporated by reference in its entirety into this Prospectus/Proxy Statement.
A copy of such Statement of Additional Information is available upon request and
without charge by writing to Evergreen Intermediate at 200 Berkeley Street,
Boston, Massachusetts 02116, or by calling toll-free 1- 800-343-2898.
The Prospectus of Evergreen Intermediate relating to Class A shares
dated November 10, 1997 is incorporated herein by reference in its entirety.
Shareholders of Short-Term will receive, with this Prospectus/Proxy Statement, a
copy of the Prospectus of Evergreen Intermediate. Additional information about
Evergreen Intermediate is contained
<PAGE>
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 Intermediate at the address or telephone number listed
in the preceding paragraph.
The Prospectus of Short-Term dated November 30, 1997, insofar as it
relates to Short-Term only, and not to any other funds described therein, is
incorporated herein in its entirety by reference. Copies of the Prospectus and
related Statement of Additional Information dated the same date are available
upon request without charge by writing to Short-Term at the address listed on
the cover page of this Prospectus/Proxy Statement or by calling toll-free
1-800-829-3863.
Included as Exhibits A, B and C to this Prospectus/Proxy Statement are
a copy of the Plan, the Interim Advisory Agreement and Interim Sub-Advisory
Agreement, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk, including
possible
loss of capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES..............................................6
SUMMARY .................................................................. 9
Proposed Plan of Reorganization.....................................9
Tax Consequences................................................ 11
Investment Objectives and Policies of the Funds....................11
Comparative Performance Information for each Fund..................11
Management of the Funds............................................12
Investment Advisers and Sub-Adviser............................. 13
Administrator......................................................14
Portfolio Management...............................................14
Distribution of Shares.............................................14
Purchase and Redemption Procedures.................................16
Exchange Privileges................................................16
Dividend Policy....................................................17
Risks ..........................................................17
REASONS FOR THE REORGANIZATION........................................... 20
Agreement and Plan of Reorganization...............................22
Federal Income Tax Consequences....................................24
Pro-forma Capitalization...........................................26
Shareholder Information............................................27
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES......................... 28
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS.......................... 31
Forms of Organization........................................... 31
Capitalization.....................................................31
Shareholder Liability..............................................31
Shareholder Meetings and Voting Rights.............................32
Liquidation or Dissolution.........................................33
Liability and Indemnification of Trustees..........................33
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT..................... 35
Introduction.................................................... 35
Comparison of the Interim Advisory Agreement and the
Previous Advisory Agreement............................ 36
Information about Short-Term's Investment Adviser..................37
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT................. 38
Introduction.................................................... 38
Comparison of the Interim Sub-Advisory Agreement
and the Previous Sub-Advisory Agreement.....................................39
<PAGE>
ADDITIONAL INFORMATION......................................................40
VOTING INFORMATION CONCERNING THE MEETING...................................41
FINANCIAL STATEMENTS AND EXPERTS......................................... 44
LEGAL MATTERS...............................................................44
OTHER BUSINESS..............................................................44
APPENDIX A............................................................... 46
APPENDIX B............................................................... 48
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class A shares of Evergreen Intermediate set forth in
the following tables and in the examples are based on estimated expenses of
Evergreen Intermediate for the fiscal year ended June 30, 1998. The amounts for
shares of Short-Term set forth in the following tables and in the examples are
based on the expenses for Short-Term for the fiscal year ended September 30,
1997. The pro forma amounts for Class A shares of Evergreen Intermediate are
based on what the combined estimated expenses would have been for Evergreen
Intermediate for the fiscal year ending June 30, 1998. The estimated expenses
for Evergreen Intermediate for the fiscal year ending June 30, 1998 and for
Evergreen Intermediate pro forma are based on the assumption that on or about
January 23, 1998, the assets of Evergreen Intermediate Term Bond Fund II
(formerly Evergreen Intermediate- Term Bond Fund) and Evergreen (formerly
Keystone) Intermediate Term Bond Fund will be acquired by Evergreen
Intermediate. See "Reasons for the Reorganization - Pro Forma Capitalization."
All amounts are adjusted for voluntary expense waivers.
The following tables show for Evergreen Intermediate, Short- Term and
Evergreen Intermediate pro forma, assuming consummation of the Reorganization,
the shareholder transaction expenses and annual fund operating expenses
associated with an investment in the Class A shares of Evergreen Intermediate
and shares of Short- Term, as applicable.
Comparison of Class A Shares
of Evergreen Intermediate With
Shares of Short-Term
<TABLE>
<CAPTION>
Evergreen
Evergreen Short- Intermediate
Intermediate Term Pro Forma
------------ ----- ------------
<S> <C> <C> <C>
Shareholder
Transaction Class A Shares Class A
Expenses ------------ ------ ------------
Maximum Sales Load 3.25% None 3.25%
Imposed on
Purchases (as a
percentage of
offering price)(1)
<PAGE>
Maximum Sales Load None None None
Imposed on
Reinvested
Dividends (as a
percentage of
offering price)
Contingent Deferred None None None
Sales Charge (as a
percentage of
original purchase
price or redemption
proceeds, whichever
is lower)
Exchange Fee None None None
Annual Fund
Operating Expenses
(as a percentage of
average daily net
assets)
Management Fee 0.16% 0.66% 0.13%
(After Waiver)(2)
12b-1 Fees (3) 0.25% 0.25% 0.25%
Other Expenses 0.69% 0.47% 0.72%
------ ---- ----
Annual Fund 1.10% 1.38% 1.10%
Operating Expenses ------ ---- ----
(4) ------ ---- ----
</TABLE>
- - ---------------
(1) The 3.25% sales load, as described in the "Examples" paragraph below,
has been waived for Short-Term's shareholders.
(2) The management fees for Evergreen Intermediate and Short- Term of 0.65%
of average net assets and 0.75% of average net assets, respectively,
have been reduced or waived by the respective investment adviser. The
advisers can terminate this fee reduction or waiver at any time in
their sole discretion.
<PAGE>
(3) Class A shares of Evergreen Intermediate can pay up to
0.75% of average daily net assets as a 12b-1 fee. For
the foreseeable future, the Class A 12b-1 fees will be
limited to 0.25% of average daily net assets.
(4) Total Fund Operating Expenses for Short-Term would have
been 1.47% absent the voluntary waivers. Estimated
Total Fund Operating Expenses for Class A shares of
Evergreen Intermediate would be 1.58% absent
waivers and expense reimbursements.
Examples. The following tables show for Evergreen Intermediate and
Short-Term, and for Evergreen Intermediate pro forma, assuming consummation of
the Reorganization, 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. In the case of
Evergreen Intermediate pro forma, the example does not reflect the imposition of
the 3.25% maximum sales load on purchases of Class A shares since Short-Term
shareholders who receive Class A shares of Evergreen Intermediate in the
Reorganization or who purchase additional Class A shares subsequent to the
Reorganization will not incur any sales load.
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Evergreen $43 $66 $91 $162
Intermediate
Class A
Short-Term $14 $44 $76 $166
Evergreen $11 $35 $61 $134
Intermediate Pro
Forma
Class A
</TABLE>
The purpose of the foregoing examples is to assist Short- Term
shareholders in understanding the various costs and expenses that an investor in
Evergreen Intermediate as a result of the Reorganization would bear directly and
indirectly, as compared with the various direct and indirect expenses currently
borne by a shareholder in Short-Term. These examples should not be
<PAGE>
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
Prospectus of Evergreen Intermediate dated November 10, 1997 and the Prospectus
of Short- Term dated November 30, 1997 (which are incorporated herein by
reference), the Plan, the Interim Advisory Agreement and the Interim
Sub-Advisory Agreement, forms of which are attached to this Prospectus/Proxy
Statement as Exhibits A, B and C, respectively.
Proposed Plan of Reorganization
The Plan provides for the transfer of all of the assets of Short-Term
in exchange for shares of Evergreen Intermediate and the assumption by Evergreen
Intermediate of certain identified liabilities of Short-Term. The Plan also
calls for the distribution of shares of Evergreen Intermediate to Short-Term
shareholders in liquidation of Short-Term as part of the Reorganization. As a
result of the Reorganization, the shareholders of Short-Term will become the
owners of that number of full and fractional Class A shares of Evergreen
Intermediate having an aggregate net asset value equal to the aggregate net
asset value of the shareholders' shares of Short- Term as of the close of
business immediately prior to the date that Short-Term's assets are exchanged
for shares of Evergreen Intermediate. See "Reasons for the Reorganization -
Agreement and Plan of Reorganization."
The Trustees of Blanchard Funds, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of Short-Term, and that the interests of the
shareholders of Short- Term will not be diluted as a result of the transactions
contemplated by the Reorganization. Accordingly, the Trustees have submitted the
Plan for the approval of Short-Term's shareholders.
THE BOARD OF TRUSTEES OF BLANCHARD FUNDS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF SHORT-TERM
OF THE PLAN EFFECTING THE REORGANIZATION.
<PAGE>
The Trustees of Evergreen Fixed Income Trust have also approved the Plan
and, accordingly, Evergreen Intermediate's participation in the Reorganization.
Approval of the Reorganization on the part of Short-Term will require
the affirmative vote of a majority of Short-Term's shares voted and entitled to
vote, with all classes voting together as a single class at a Meeting at which a
quorum of the Fund's shares is present. A majority of the outstanding shares
entitled to vote, represented in person or by proxy, is required to constitute a
quorum at the Meeting. See "Voting Information Concerning the Meeting."
The merger (the "Merger") of Signet Banking Corporation ("Signet") with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
has been consummated and, as a result, by law the Merger terminated the
investment advisory agreement between Virtus and Short-Term and the sub-advisory
agreement between Virtus and OFFITBANK. Prior to consummation of the Merger,
Short-Term received an order from the SEC which permitted the implementation,
without formal shareholder approval, of a new investment advisory agreement
between the Fund and Virtus and a new sub-advisory agreement between Virtus and
OFFITBANK for a period of not more than 120 days beginning on the date of the
closing of the Merger and continuing through the date the Interim Advisory
Agreement and Interim Sub-Advisory Agreement are approved by the Fund's
shareholders (but in no event later than April 30, 1998). The Interim Advisory
Agreement and the Interim Sub-Advisory Agreement have the same terms and fees as
the previous investment advisory agreement between Short-Term and Virtus and the
previous sub-advisory agreement between Virtus and OFFITBANK, respectively. The
Reorganization is scheduled to take place on or about February 27, 1998.
Approval of the Interim Advisory Agreement and Interim Sub- Advisory
Agreement requires the affirmative vote of (i) 67% or more of the shares of
Short-Term present in person or by proxy at the Meeting, if holders of more than
50% of the shares of Short- Term outstanding on the record date are present, in
person or by proxy, or (ii) more than 50% of the outstanding shares of Short-
Term, whichever is less. See "Voting Information Concerning the Meeting."
If the shareholders of Short-Term do not vote to approve the
Reorganization, the Trustees will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
<PAGE>
Prior to or at the completion of the Reorganization, Short- Term will
have received an opinion of Sullivan & Worcester LLP that the Reorganization has
been structured so that no gain or loss will be recognized by the Fund or its
shareholders for federal income tax purposes as a result of the receipt of
shares of Evergreen Intermediate in the Reorganization. The holding period and
aggregate tax basis of shares of Evergreen Intermediate that are received by
Short- Term'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 Short-Term in the hands of Evergreen
Intermediate as a result of the Reorganization will be the same as in the hands
of the Fund immediately prior to the Reorganization, and no gain or loss will be
recognized by Evergreen Intermediate upon the receipt of the assets of the Fund
in exchange for shares of Evergreen Intermediate and the assumption by Evergreen
Intermediate of certain identified liabilities.
Investment Objectives and Policies of the Funds
The investment objectives and policies of Evergreen Intermediate and
Short-Term are substantially similar. The investment objectives of Evergreen
Intermediate are to seek current income by investing primarily in a broad range
of investment quality debt securities and, secondly, to protect capital.
The investment objective of Short-Term is to provide a high level of
current income consistent with preservation of capital by investing primarily in
a broad range of short-term debt securities. The Fund invests in U.S. government
securities and investment grade and high yield, high risk securities of domestic
and foreign issuers. See "Comparison of Investment Objectives and Policies"
below.
Comparative Performance Information for each Fund
Discussions of the manner of calculation of total return are contained
in the respective Prospectus and Statement of Additional Information of the
Funds. As of the date of this Prospectus/Proxy Statement, Evergreen Intermediate
had not commenced operations. Accordingly, no performance information for it is
currently available. However, it is anticipated that on or about January 23,
1998, Evergreen Intermediate will acquire all of the assets of Evergreen
Intermediate Term Bond Fund II and Evergreen (formerly Keystone) Intermediate
Term Bond Fund. The accounting survivor of this fund combination will be
Evergreen Intermediate Term Bond Fund. Therefore, the total return of
<PAGE>
Evergreen Intermediate Term Bond Fund for the one, five and ten year periods,
the total return of Short-Term for the one year period ended September 30, 1997,
and the total return for both Funds for the period from inception through
September 30, 1997 are set forth in the table below. The calculations of total
return assume the reinvestment of all dividends and capital gains distributions
on the reinvestment date and the deduction of all recurring expenses (including
sales charges) that were charged to shareholders' accounts.
<TABLE>
<CAPTION>
Average Annual Total Return (1)
1 Year From
Ended 5 Years 10 Years Inception
September Ended Ended To
30, September September September Inception
1997 30, 1997 30, 1997 30, 1997 Date
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Evergreen 5.99% 5.32% 7.37% 6.35% 4/14/87
Intermediate
Term Bond
Fund
Class A
shares
Short-Term 7.24% N/A N/A 5.95% 4/16/93
</TABLE>
- - --------------
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the average
annual total return during the periods would have been lower.
Important information about Evergreen Intermediate Term Bond Fund is
also contained in management's discussion of Evergreen Intermediate Term Bond
Fund's performance, attached hereto as Exhibit D.
Management of the Funds
The overall management of Evergreen Intermediate and of Short-Term is
the responsibility of, and is supervised by, the Boards of Trustees of Evergreen
Fixed Income Trust and Blanchard
Funds, respectively.
Investment Advisers and Sub-Adviser
Keystone Investment Management Company ("Keystone") serves as investment
adviser to Evergreen Intermediate. Keystone has
<PAGE>
served as investment adviser to the Keystone family of mutual funds since 1932.
Keystone is an indirect wholly-owned subsidiary of First Union National Bank
("FUNB"). FUNB is a subsidiary of First Union, the sixth largest bank holding
company in the United States based on total assets as of September 30, 1997. The
Capital Management Group of FUNB, Evergreen Asset Management Corp. and Keystone
manage the Evergreen family of mutual funds with assets of approximately $40
billion as of November 30, 1997. For further information regarding Keystone,
FUNB and First Union, see "Management of the Funds Investment Adviser" in the
Prospectus of Evergreen Intermediate.
Keystone manages investments, provides various administrative services
and supervises the daily business affairs of Evergreen Intermediate subject to
the authority of the Evergreen Fixed Income Trust's Board of Trustees. The Fund
pays Keystone a fee for its services at the annual rate set forth below:
Average Aggregate Net
Asset Value of the
Management Fee Income Shares of the Fund
- - --------------------------- -------------------------- ----------------------
2.0% of Gross
Dividend and
Interest
Income plus
0.50% of the first $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 $100,000,000 plus
0.30% of the next $100,000,000 plus
0.25% of amounts over $500,000,000.
Virtus serves as the investment adviser for Short-Term. As investment
adviser, Virtus is responsible for providing or procuring for the Fund all
management and administrative services. In carrying out its obligations, Virtus
provides or arranges for investment research and supervision of the Fund's
investments; selects and evaluates the performance of the Fund's sub-adviser
(OFFITBANK); and conducts or arranges for a continuous program of appropriate
sale or other disposition of the Fund's assets, subject at all times to the
direction of the Board of Trustees. Virtus compensates OFFITBANK from the
advisory fee received from Short-Term. See "Information Regarding the Interim
Sub-Advisory Agreement." For its services as investment adviser, Virtus receives
a fee at an annual rate of 0.75% of the Fund's average daily net assets.
<PAGE>
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Administrator
Federated Administrative Services ("FAS") provides Short- Term with
certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to receive a fee for such services at the
following annual rates: 0.15% on the first $250 million of average daily net
assets of combined assets of the funds in the Blanchard/Virtus mutual fund
family, 0.125% on the next $250 million of such assets, 0.10% on the next $250
million of such assets, and 0.075% on assets in excess of $750 million.
Portfolio Management
The portfolio manager of Evergreen Intermediate is Christopher C.
Conkey. Mr. Conkey has served as Chief Investment Officer of Fixed Income for
the past eleven months and as Head of the High Grade Bond Team of Keystone for
the last three years. During the past five years at Keystone, Mr. Conkey has
also served as portfolio manager of several high grade fixed income funds,
several high grade-high yield fixed income funds and several off-shore
closed-end fixed income funds.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of Evergreen Intermediate's shares. EDI
distributes the Fund's shares directly or through broker-dealers, banks
(including FUNB), or other financial intermediaries. Evergreen Intermediate
offers four classes of shares: Class A, Class B, Class C and Class Y. Each class
has separate distribution arrangements. (See "Distribution -Related Expenses"
below.) No class bears the distribution expenses relating to the shares of any
other class.
In the proposed Reorganization, shareholders of Short-Term will receive
Class A shares of Evergreen Intermediate. Class A shares of Evergreen
Intermediate have substantially similar arrangements with respect to the
imposition of Rule 12b-1 distribution and service fees as the shares of
Short-Term. Because the Reorganization will be effected at net asset value
without the imposition of a sales charge, Evergreen Intermediate shares acquired
by shareholders of Short-Term pursuant to the
<PAGE>
proposed Reorganization would not be subject to any initial sales charge or
contingent deferred sales charge as a result of the Reorganization.
The following is a summary description of charges and fees for the
Class A shares of Evergreen Intermediate which will be received by Short-Term
shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
the respective Evergreen Intermediate Prospectus and the Short-Term Prospectus
and in each Fund's respective Statement of Additional Information.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees. For a description of the initial sales charges
applicable to purchases of Class A shares, see "Purchase and Redemption of
Shares - How to Buy Shares" in the Prospectus for Evergreen Intermediate.
Holders of shares of Short-Term who receive Class A shares of Evergreen
Intermediate in the Reorganization will be able to purchase additional Class A
shares of Evergreen Intermediate and of any other Evergreen fund at net asset
value. No initial sales charge will be imposed.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectus and Statement of Additional Information.
Distribution-Related Expenses. Evergreen Intermediate has adopted a
Rule 12b-1 plan with respect to its Class A shares under which the Class may pay
for distribution-related expenses at an annual rate which may not exceed 0.75%
of average daily net assets attributable to the Class. Payments with respect to
Class A shares are currently limited to 0.25% of average daily net assets
attributable to the Class, which amount may be increased to the full plan rate
for the Fund by the Trustees without shareholder approval.
Short-Term has adopted a Rule 12b-1 plan with respect to its shares
under which such shares may pay for distribution-related expenses at an annual
rate of 0.25% of average daily net assets.
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 and distribution-related
fees is provided above. Investments in the
<PAGE>
Funds are not insured. The minimum initial purchase requirement for Evergreen
Intermediate is $1,000 and the minimum investment for Short-Term is $3,000
($2,000 for qualified pension plans). Short-Term has a minimum investment
requirement of $200 for subsequent investments. There is no minimum for
subsequent purchases of shares of Evergreen Intermediate. Each Fund provides for
telephone, mail or wire redemption of shares at net asset value 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
Short-Term currently permits shareholders to exchange such shares for
shares of another fund in the Blanchard Group of Funds or for Investment shares
of other funds managed by Virtus. In addition, such shares may be exchanged for
shares of Federated Emerging Markets Fund. Holders of shares of a class of
Evergreen Intermediate generally may exchange their shares for shares of the
same class of any other Evergreen fund. Short-Term shareholders will be
receiving Class A shares of Evergreen Intermediate in the Reorganization and,
accordingly, with respect to shares of Evergreen Intermediate received by
Short-Term shareholders in the Reorganization, the exchange privilege is limited
to the Class A shares of other Evergreen funds. No sales charge is imposed on an
exchange. An exchange which represents an initial investment in another
Evergreen fund must amount to at least $1,000. The current exchange privileges,
and the requirements and limitations attendant thereto, are described in each
Fund's respective Prospectus and Statement of Additional Information.
Dividend Policy
Each Fund declares dividends from its net investment income daily and
distributes such dividends monthly. Distributions of any net realized gains of a
Fund will be made at least annually. Shareholders begin to earn dividends on the
first business day after shares are purchased unless shares were not paid for,
in which case dividends are not earned until the next business day after payment
is received. Dividends and distributions are reinvested in additional shares of
the same class of the respective Fund, or paid in cash, as a shareholder has
elected.
<PAGE>
See the respective Prospectus of each Fund for further information concerning
dividends and distributions.
After the Reorganization, shareholders of Short-Term who have elected
to have their dividends and/or distributions reinvested will have dividends
and/or distributions received from Evergreen Intermediate reinvested in shares
of Evergreen Intermediate. Shareholders of Short-Term who have elected to
receive dividends and/or distributions in cash will receive dividends and/or
distributions from Evergreen Intermediate in cash after the Reorganization,
although they may, after the Reorganization, elect to have such dividends and/or
distributions reinvested in additional shares of Evergreen Intermediate.
Short-Term has qualified and intends to continue to qualify, and
Evergreen Intermediate 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 net
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.
There is no assurance that investment performances will be positive and that the
Funds will meet their investment objectives.
Evergreen Intermediate may invest up to 25% of its assets in high yield
, high risk bonds (commonly known as "junk bonds"). Short-Term may invest up to
35% of its assets in high yield, high risk bonds. High yield, high risk bonds
are rated Ba or lower by Moody's Investors Service ("Moody's") and BB or lower
by Standard & Poor's Ratings Group ("S&P") and are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. The lower ratings reflect a greater possibility that real or
perceived adverse changes in the financial condition of the issuer or in general
economic conditions or an unanticipated rise in interest rates may impair the
ability of the issuer to make payments of principal and interest or to meet
specific projected business forecasts or obtain additional financing. The values
of high yield, high risk bonds fluctuate in response to changes in
<PAGE>
interest rates, and the secondary market for such securities may be less liquid
at certain times than the secondary market for higher quality debt securities,
thereby affecting the market price of the security, the Fund's ability to
dispose of a particular security and to obtain accurate market quotations for
purposes of valuing its assets.
Each Fund stresses earning income by investing in fixed income
securities, which are interest rate sensitive. This means that their market
values (and the Funds' 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 interest rate changes, but longer
term bonds generally offer higher yields.
The dollar-weighted average maturity of Evergreen Intermediate's
portfolio securities may be longer than the dollar-weighted average maturity of
Short-Term's portfolio securities. Prices of longer-term bonds tend to be more
volatile in periods of changes in interest rates than prices of shorter-term
securities.
In addition, to the extent that investments are made in debt securities
other than U.S. government securities, or in derivatives or structured
securities, such investments, despite favorable credit ratings, are subject to
some risk of default.
The Funds may also invest in derivatives. The market value 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 than investments in other securities. As a result, the
values of such investments may change at rates in excess of the rate at which
traditional fixed income securities change.
Evergreen Intermediate may not invest more than 5% of its assets in
securities of any one issuer or purchase more than 10% of the outstanding voting
securities of any one issuer. As a diversified portfolio under the 1940 Act,
these restrictions apply to 75% of the assets of Evergreen Intermediate.
However, since Short-Term is a non-diversified portfolio for purposes of the
1940 Act, these 5% restrictions apply to only 50% of the assets of Short-Term.
The remaining 50% of the assets of Short- Term may be invested up to 25% in the
securities of a single issuer. Nondiversification may increase investment risks.
<PAGE>
Both Funds may invest in foreign securities. Evergreen Intermediate may
invest up to 50% of its assets in foreign securities. Short-Term may invest up
to 25% of its assets in foreign securities, including up to 10% of its assets in
securities of issuers located in emerging or developing markets countries. These
debt obligations may include bonds, debentures, notes and short-term
obligations. Investment in foreign securities generally entails more risk than
investment in 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; securities
markets and trading may be less regulated; and the possibility of expropriation,
confiscatory taxation, nationalization, establishment of price controls,
political or social instability exists. Investing in securities of issuers in
emerging markets countries involves exposure to economic systems that are
generally less stable than those of developed countries. Investing in companies
in emerging markets countries may involve exposure to national policies that may
restrict 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 markets 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.
When a Fund invests in foreign securities, they usually will be
denominated in foreign currencies, and the Fund may temporarily hold funds in
foreign securities. Thus, the value of a Fund's shares may be affected by
changes in exchange rates.
REASONS FOR THE REORGANIZATION
On July 18, 1997, First Union entered into an Agreement and Plan of
Merger with Signet, which provided, among other things, for the Merger of Signet
with and into a wholly-owned subsidiary of First Union. The Merger was
consummated on November 28, 1997. As a result of the Merger it is expected that
FUNB and its affiliates will succeed to the investment advisory and
administrative functions currently performed for Short-Term by various units of
Signet and various unaffiliated parties. It is also expected that Signet will no
longer, upon completion of the Reorganization and similar reorganizations of
other funds in the Signet mutual fund family, provide investment advisory or
administrative services to investment companies.
<PAGE>
At a meeting held on September 16, 1997, the Board of Trustees of
Blanchard Funds considered and approved the Reorganization as in the best
interests of shareholders of Short- Term and determined that the interests of
existing shareholders of Short-Term will not be diluted as a result of the
transactions contemplated by the Reorganization. In addition, the Trustees
approved the Interim Advisory Agreement and Interim Sub-Advisory Agreement with
respect to Short-Term.
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise Blanchard Funds. The Merger caused,
as a matter of law, termination of the investment advisory agreement between
each series of Blanchard Funds and Virtus and the sub-advisory agreement between
Virtus and OFFITBANK with respect to the Fund. Blanchard Funds have received an
order from the SEC which permits Virtus and OFFITBANK to continue to act as
Short-Term's investment adviser and sub-adviser, respectively, without
shareholder approval, for a period of not more than 120 days from the date the
Merger was consummated (November 28, 1997) to the date of shareholder approval
of a new investment advisory agreement and sub-advisory agreement. Accordingly,
the Trustees considered the recommendations of Signet in approving the proposed
Reorganization.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Evergreen Intermediate and Short-Term. Specifically, Evergreen
Intermediate and Short-Term have substantially similar investment objectives and
policies and comparable risk profiles. See "Comparison of Investment Objectives
and Policies" below. At the same time, the Board of Trustees evaluated the
potential economies of scale associated with larger mutual funds and concluded
that operational efficiencies may be achieved upon the combination of Short-Term
with an Evergreen fund. As of September 30, 1997, Short-Term's net assets were
approximately $134 million. Evergreen Intermediate has not yet commenced
operations and, accordingly, has no net assets. It is expected, however, that on
January 23, 1998, Evergreen Intermediate will acquire all of the assets of the
Evergreen Intermediate Term Bond Fund II (formerly Evergreen Intermediate-Term
Bond Fund) and the Evergreen (formerly Keystone) Intermediate Term Bond Fund. As
of September 30, 1997, these two funds would have an aggregate of approximately
$36 million in net assets after giving effect to the anticipated redemption by
trust shareholders of Class Y shares of Evergreen Intermediate Term Bond Fund
II.
<PAGE>
In addition, assuming that an alternative to the Reorganization would
be to propose that Short-Term continue its existence and be separately managed
by Keystone or one of its affiliates, Short-Term would be offered through common
distribution channels with the substantially similar Evergreen Intermediate.
Short-Term would also have to bear the cost of maintaining its separate
existence. Signet and Keystone believe that the prospect of dividing the
resources of the Evergreen mutual fund organization between two substantially
identical 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, Signet and Keystone believe that the proposed Reorganization
would be in the best interests of each Fund and its shareholders.
The Board of Trustees of Blanchard Funds met and considered the
recommendation of Signet and Keystone and, in addition, considered among other
things, (i) the terms and conditions of the Reorganization; (ii) whether the
Reorganization would result in the dilution of shareholders' interests; (iii)
expense ratios, fees and expenses of Evergreen Intermediate and Short-Term; (iv)
compatibility of their investment objectives and policies; (v) the investment
experience, expertise and resources of Keystone; (vi) the service and
distribution resources available to the Evergreen funds and the broad array of
investment alternatives available to shareholders of the Evergreen funds; (vii)
the personnel and financial resources of First Union and its affiliates; (viii)
the fact that FUNB will bear the expenses incurred by Short-Term in connection
with the Reorganization; (ix) the fact that Evergreen Intermediate will assume
certain identified liabilities of Short-Term; and (x) the expected federal
income tax consequences of the Reorganization.
The Trustees also considered the benefits to be derived by shareholders
of Short-Term from the sale of its assets to Evergreen Intermediate. In this
regard, the Trustees considered the potential benefits of being associated with
a larger entity and the economies of scale that could be realized by the
participation in such an entity by shareholders of Short-Term.
In addition, the Trustees considered that there are alternatives
available to shareholders of Short-Term, including the ability to redeem their
shares, as well as the option to vote against the Reorganization.
<PAGE>
During their consideration of the Reorganization the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Fixed Income Trust also concluded at a
meeting on September 17, 1997 that the proposed Reorganization would be in the
best interests of shareholders of Evergreen Intermediate and that the interests
of the shareholders of Evergreen Intermediate would not be diluted as a result
of the transactions contemplated by the Reorganization.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF SHORT-TERM APPROVE
THE PROPOSED REORGANIZATION.
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the
Plan (Exhibit A hereto).
The Plan provides that Evergreen Intermediate will acquire all of the
assets of Short-Term in exchange for shares of Evergreen Intermediate and the
assumption by Evergreen Intermediate of certain identified liabilities of
Short-Term on or about February 27, 1998 or such other date as may be agreed
upon by the parties (the "Closing Date"). Prior to the Closing Date, Short-Term
will endeavor to discharge all of its known liabilities and obligations.
Evergreen Intermediate will not assume any liabilities or obligations of
Short-Term other than those reflected in an unaudited statement of assets and
liabilities of Short-Term prepared as of the close of regular trading on the
NYSE, currently 4:00 p.m. Eastern time, on the business day immediately prior to
the Closing Date. The number of full and fractional shares of each class of
Evergreen Intermediate to be received by the shareholders of Short-Term will be
determined by multiplying the respective outstanding class of shares of
Short-Term by a factor which shall be computed by dividing the net asset value
per share of the respective class of shares of Short-Term by the net asset value
per share of the respective class of shares of Evergreen Intermediate. Such
computations will take place as of the close of regular trading on the NYSE on
the business day immediately prior to the Closing Date. The net asset value per
share of each class will be determined by dividing assets, less liabilities, in
each case attributable to the respective class, by the total number of
outstanding shares.
State Street Bank and Trust Company, the custodian for Evergreen
Intermediate, will compute the value of each Fund's respective portfolio
securities. The method of valuation employed will be consistent with the
procedures set forth in the
<PAGE>
Prospectus and Statement of Additional Information of Evergreen Intermediate,
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, Short-Term will have declared a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
the Fund's shareholders (in shares of the Fund, or in cash, as the shareholder
has previously elected) all of the Fund's net investment company taxable income
for the taxable period ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
As soon after the Closing Date as conveniently practicable, Short-Term
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
Intermediate received by Short-Term. Such liquidation and distribution will be
accomplished by the establishment of accounts in the names of the Fund's
shareholders on the share records of Evergreen Intermediate's transfer agent.
Each account will represent the respective pro rata number of full and
fractional shares of Evergreen Intermediate due to the Fund's shareholders. All
issued and outstanding shares of Short-Term, including those represented by
certificates, will be canceled. The shares of Evergreen Intermediate to be
issued will have no preemptive or conversion rights. After such distributions
and the winding up of its affairs, Short-Term will be terminated. In connection
with such termination, Blanchard Funds will file with the SEC an application for
termination as a registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Short- Term'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 Short-Term's shareholders,
the Plan may be terminated (a) by the mutual agreement of Short-Term and
Evergreen Intermediate; 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 Short-Term in connection with the Reorganization
(including the cost of any proxy soliciting agent) will be borne by FUNB whether
or not the Reorganization is consummated. No portion of such expenses will be
borne directly or indirectly by Short-Term or its shareholders. There are not
any liabilities or any expected reimbursements in connection with the 12b-1 Plan
of Short-Term. As a result, no 12b-1 liabilities will be assumed by Evergreen
Intermediate following the Reorganization.
If the Reorganization is not approved by shareholders of Short-Term,
the Board of Trustees of Blanchard Funds will consider other possible courses of
action in the best interests of shareholders.
Federal Income Tax Consequences
The Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Short-Term will receive an
opinion of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued thereunder,
current administrative rules, pronouncements and court decisions, for federal
income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of Short-Term solely in exchange
for shares of Evergreen Intermediate and the assumption by Evergreen
Intermediate of certain identified liabilities, followed by the distribution of
Evergreen Intermediate's shares by Short-Term in dissolution and liquidation of
Short-Term, will constitute a "reorganization" within the meaning of section
368(a)(1)(D) of the Code, and Evergreen Intermediate and Short-Term 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 Short-Term on the transfer of
all of its assets to Evergreen Intermediate solely in exchange for Evergreen
Intermediate's shares and the assumption by Evergreen Intermediate of certain
identified liabilities of Short-Term or upon the distribution of Evergreen
Intermediate's shares to Short-Term's shareholders in exchange for their shares
of Short-Term;
(3) The tax basis of the assets transferred will be the same to
Evergreen Intermediate as the tax basis of such assets to Short-Term immediately
prior to the Reorganization, and the holding period of such assets in the hands
of Evergreen
<PAGE>
Intermediate will include the period during which the assets were
held by Short-Term;
(4) No gain or loss will be recognized by Evergreen Intermediate upon
the receipt of the assets from Short-Term solely in exchange for the shares of
Evergreen Intermediate and the assumption by Evergreen Intermediate of certain
identified liabilities of Short-Term;
(5) No gain or loss will be recognized by Short-Term's shareholders
upon the issuance of the shares of Evergreen Intermediate to them, provided they
receive solely such shares (including fractional shares) in exchange for their
shares of Short-Term; and
(6) The aggregate tax basis of the shares of Evergreen Intermediate,
including any fractional shares, received by each of the shareholders of
Short-Term pursuant to the Reorganization will be the same as the aggregate tax
basis of the shares of Short-Term held by such shareholder immediately prior to
the Reorganization, and the holding period of the shares of Evergreen
Intermediate, including fractional shares, received by each such shareholder
will include the period during which the shares of Short-Term exchanged therefor
were held by such shareholder (provided that the shares of Short-Term were held
as a capital asset on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Short-Term 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
Intermediate shares he or she received. Shareholders of Short-Term 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 Intermediate. Since the foregoing discussion relates only to the
federal income tax consequences of the Reorganization, shareholders of
Short-Term 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
Intermediate and Short-Term as of September 30, 1997 and the capitalization of
Evergreen Intermediate on a pro forma
<PAGE>
basis as of that date, giving effect to the proposed acquisition of the assets
of Evergreen Intermediate Term Bond Fund II and Evergreen (formerly, Keystone)
Intermediate Term Bond Fund (see "Comparison of Fees and Expenses") along with
the anticipated redemption by trust shareholders of Class Y shares of Evergreen
Intermediate Term Bond Fund II and the proposed acquisition of assets of
Short-Term at net asset value. The pro forma data reflects an exchange ratio of
approximately 0.33554 Class A shares of Evergreen Intermediate issued for each
share of Short- Term.
<TABLE>
<CAPTION>
Capitalization of Short-Term,
Evergreen Intermediate and Evergreen
Intermediate Term Bond (Pro Forma)
Evergreen
Intermediate
(After
Evergreen Reorgani-
Short-Term Intermediate zation)
--------- -------- ------------
<S> <C> <C> <C>
Net Assets
Shares $133,877,535 N/A N/A
Class A........................ N/A $13,056,915 $146,934,450
Class B........................ N/A $12,013,288 $12,013,288
Class C........................ N/A $6,325,673 $6,325,673
Class Y........................ N/A $4,799,537 $4,799,537
------------ ------------ ------------
Total Net
Assets....................... $133,877,535 $36,195,413 $170,072,948
Net Asset Value Per
Share
Shares $3.04 N/A N/A
Class A........................ N/A $9.06 $9.06
Class B........................ N/A $9.07 $9.07
Class C........................ N/A $9.07 $9.07
Class Y........................ N/A $9.06 $9.06
Shares
Outstanding
Shares 44,036,295 N/A N/A
Class A........................ N/A 16,217,035
1,441,060
Class B........................ N/A 1,324,063 1,324,063
Class C........................ N/A 697,421 697,421
Class Y........................ N/A 529,750 529,750
----------- ----------- -----------
All Classes.................... 44,036,295 3,992,294 18,768,269
</TABLE>
<PAGE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
Shareholder Information
As of December 26, 1997 (the "Record Date"), there were 40,966,595
shares of beneficial interest of Short-Term outstanding.
As of November 30, 1997, the officers and Trustees of Blanchard Funds
beneficially owned as a group less than 1% of the outstanding shares of
Short-Term. To Short-Term's knowledge, no person owned beneficially or of record
more than 5% of Short-Term's total outstanding shares as of November 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 Prospectus and Statement of Additional
Information of the Funds. The investment objective, policies and restrictions of
Evergreen Intermediate can be found in the Prospectus of Evergreen Intermediate
under the caption "Description of the Fund Investment Objectives and Policies."
The investment objective, policies and restrictions of Short-Term can be found
in the Prospectus of the Fund under the caption "The Funds' Investment
Objectives and Policies." Unlike the investment objective of Short-Term, which
is fundamental, the investment objective of Evergreen Intermediate is
non-fundamental and can be changed by the Board of Trustees without shareholder
approval.
The investment objectives of Evergreen Intermediate are to seek current
income by investing primarily in a broad range of investment quality debt
securities, and as a secondary objective, to seek to protect capital. Where
appropriate, the Fund will take advantage of opportunities to realize capital
appreciation.
Evergreen Intermediate seeks current income by normally investing at
least 80% of its assets in debt securities, including: U.S. Treasury bills,
notes and bonds; mortgage-backed securities issued by the U.S. government, its
agencies or instrumentalities; mortgage-backed securities issued by private
issuers; corporate debt securities; and commercial paper. The Fund's debt
securities may also include fixed and adjustable rate or stripped bonds,
debentures, notes, equipment trust
<PAGE>
certificates and debt securities convertible into or exchangeable for preferred
or common stock. The Fund may also invest in units, which are debt securities
with stock or warrants to buy stock attached, and preferred stock.
Under ordinary circumstances, Evergreen Intermediate expects to invest
at least 65% of its assets in bonds and debentures. The Fund will invest in
securities that, at the time of investment, are rated within the four highest
grades by S&P (AAA, AA, A and BBB), by Moody's (Aaa, Aa, A and Baa, or by Fitch
Investors Services, L.P. ("Fitch") (AAA, AA, A, and BBB), or if not rated or
rated under a different system, are of comparable quality to obligations so
rated, as determined by its investment adviser. The Fund may invest up to 25% of
its assets in below- investment grade securities having a rating range of BB to
CCC by s&P and Ba to Caa by Moody's or if unrated or rated under a different
system believed by its investment adviser to be of comparable quality.
The Fund may also invest up to 50% of its assets in securities that are
principally traded in securities markets located outside the United States.
The Fund currently expects that the dollar weighted average maturity of
its investments will range from 3 to 7 years. However, the Fund may invest in
securities with remaining maturities of ten years or fewer. THE PRICES OF
SECURITIES WITH LONGER MATURITIES TEND TO BE MORE VOLATILE IN PERIODS OF
CHANGING INTEREST RATES AS COMPARED TO THE PRICES OF SECURITIES WITH SHORTER
MATURITIES.
Bonds which are rated BBB or Baa are considered to be 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. 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. Such bonds lack outstanding investment characteristics and may have
speculative characteristics.
When the Fund buys securities, it will consider the ratings of Moody's,
S&P and Fitch assigned to various debt securities as well as many other factors,
including the preservation of capital, the potential for realizing capital
appreciation, maturity and yield to maturity. The Fund will adjust its
investments in particular securities or in types of debt securities in response
to its appraisal of changing economic
<PAGE>
conditions and trends. The Fund may sell one security and purchase another
security of comparable quality and maturity to take advantage of what it
believes to be short-term differentials in market value or yield disparities.
The Fund may invest up to 20% of its total assets under ordinary
circumstances and when in its investment adviser's opinion market conditions
warrant, up to 100% of its assets for temporary defensive purposes in the
following types of money market instruments: (1) commercial paper, including
master demand notes, that at the date of investment is rated A-1, the highest
grade by S&P, P-1, the highest grade by Moody's or, if not rated by such
services, is issued by a company which at the date of investment has an
outstanding issue rated A or better by S&P or Moody's; (2) obligations,
including certificates of deposit and bankers' acceptances, of banks or savings
and loan associations having at least $1 billion in assets that are members of
the Federal Deposit Insurance Corporation including U.S. branches of foreign
banks and foreign branches of U.S. banks; (3) corporate obligations which at the
date of investment are rated A or better by S&P or Moody's; and (4) obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
The investment objective of Short-Term is to provide a high level of
current income consistent with preservation of capital by investing primarily in
a broad range of short-term debt securities. The Fund currently intends that the
average maturity of its investments will be three years. However, the Fund
retains the flexibility to increase average maturity to up to five years in
times when abnormal market conditions warrant temporary measures.
Under normal market conditions, at least 65% of Short-Term's assets
will be invested in investment grade bonds. The Fund may invest up to 35% of its
assets in lower-quality debt securities. The Fund will not invest in debt
securities rated lower than Caa by Moody's and CCC by S&P, or, if unrated, of
comparable quality in the opinion of the OFFITBANK. Short-Term may invest up to
20% of its assets in international fixed income securities. This category
consists of obligations of foreign governments, their agencies and
instrumentalities and other fixed income securities denominated in foreign
currencies or composite currencies including: debt obligations issued or
guaranteed by foreign national, provincial, state, municipal or other
governments with taxing authority or by their agencies or instrumentalities;
debt obligations of supranational entities; debt obligations of the U.S.
government issued in non-dollar securities; and debt obligations and other fixed
income securities of foreign and U.S. corporate issuers (non-dollar
denominated). The Fund is not
<PAGE>
limited to purchasing debt securities rated at the time of
purchase by Moody's or S&P.
Short-Term may invest in any country where its investment adviser sees
potential for high income. It presently expects to invest primarily in
non-dollar denominated securities of issuers in the industrialized Western
European countries; in Canada, Japan, Australia and New Zealand; and in Latin
America. The Fund may also invest up to 10% of its assets in the fixed income
securities of issuers in emerging markets countries.
Each Fund may invest in certain types of derivatives including options
and futures.
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 Fixed Income Trust and Blanchard Funds are open-end
management investment companies registered with the SEC under the 1940 Act,
which continuously offer shares to the public. Evergreen Fixed Income Trust is
organized as a Delaware business trust and Blanchard Funds is organized as a
Massachusetts business trust. Each Trust is governed by a Declaration of Trust,
By-Laws and a Board of Trustees. Each Trust is also governed by applicable
Delaware, Massachusetts and federal law. Evergreen Intermediate is a series of
Evergreen Fixed Income Trust and Short-Term is a series of Blanchard Funds.
Capitalization
The beneficial interests in Evergreen Intermediate are represented by
an unlimited number of transferable shares of beneficial interest, $.001 par
value per share. The beneficial interests in Short-Term are represented by an
unlimited number of transferable shares of beneficial interest without par
value. The respective Declaration of Trust under which each Fund has been
established permits the Trustees to allocate shares into an unlimited number of
series, and classes thereof, with rights determined by the Trustees, all without
shareholder approval. Fractional shares may be issued. Each Fund's shares
represent equal proportionate interests in the assets belonging to the Funds.
Shareholders of each Fund are entitled to receive
<PAGE>
dividends and other amounts as determined by the Trustees. Shareholders of each
Fund vote separately, by class, as to matters, such as approval of or amendments
to Rule 12b-1 distribution plans, that affect only their particular class and by
series as to matters, such as approval of or amendments to investment advisory
agreements or proposed reorganizations, that affect only their particular
series.
Shareholder Liability
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the Declaration of Trust under which Short-Term was
established disclaims shareholder liability for acts or obligations of the
series and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The 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.
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 Fixed Income 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 Fixed Income 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 the Trust. Accordingly, the risk of a shareholder of
Evergreen Fixed Income Trust incurring financial loss beyond that shareholder's
investment because of shareholder liability is limited to circumstances in
which: (i) the court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) the Trust itself would be
unable to meet its
<PAGE>
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 Fixed Income Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Fixed Income Trust on behalf of Evergreen
Intermediate nor Blanchard Funds on behalf of Short-Term is required to hold
annual meetings of shareholders. However, a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee must be called when
requested in writing by the holders of at least 10% of the outstanding shares of
Evergreen Fixed Income Trust or Blanchard Funds. In addition, each is required
to call a meeting of shareholders for the purpose of electing Trustees if, at
any time, less than a majority of the Trustees then holding office were elected
by shareholders. Each Trust currently does not intend to hold regular
shareholder meetings. Each Trust does not permit cumulative voting. Except when
a larger quorum is required by applicable law, a majority of the outstanding
shares entitled to vote of each Fund constitutes a quorum for consideration of
such matter. For Evergreen Intermediate and Short-Term, a majority of the votes
cast 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 Fixed Income Trust, each
share of Evergreen Intermediate is entitled to one vote for each dollar of net
asset value applicable to each share. Under the voting provisions governing
Short-Term, each share is entitled to one vote. Over time, the net asset values
of the mutual funds which are each a series of Blanchard Funds have changed in
relation to one another and are expected to continue to do so in the future.
Because of the divergence in net asset values, a given dollar investment in a
fund which is a series of Blanchard Funds and which has a lower net asset value
will purchase more shares and under current voting provisions of Blanchard
Funds, have more votes, than the same investment in a Blanchard Funds' series
with a higher net asset value. Under the Declaration of Trust of Evergreen Fixed
Income Trust, voting power is related to the dollar value of a shareholder's
investment rather than to the number of shares held.
Liquidation or Dissolution
In the event of the liquidation of Evergreen Intermediate and
Short-Term, 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
<PAGE>
liabilities belonging to the Fund or attributable to the class. In either case,
the assets so distributable to shareholders of the Fund will be distributed
among the shareholders in proportion to the number of shares of a class of the
Fund held by them and recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declaration of Trust of Blanchard Funds provides that no Trustee
shall be liable for errors of judgment or mistakes of fact or law. No Trustee
shall be subject to liability unless such Trustee is found to have acted in bad
faith, with willful misfeasance, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
The Declaration of Trust of Blanchard Funds 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 Trust,
provided that no indemnification shall be provided to a Trustee or officer
against any liability to the Trust or any series thereof or the shareholders of
any series by reasons of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen Fixed Income Trust, a
Trustee is liable to the Trust and its shareholders only for such Trustee's own
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of the office of Trustee or the discharge of such
Trustee's functions. As provided in the Declaration of Trust, each Trustee of
the Trust is entitled to be indemnified against all liabilities against him or
her, including the costs of litigation, unless it is determined that the Trustee
(i) did not act in good faith in the reasonable belief that such Trustee's
action was in or not opposed to the best interests of the Trust; (ii) had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
such Trustee's duties; and (iii) in a criminal proceeding, had reasonable cause
to believe that such Trustee's conduct was unlawful (collectively, "disabling
conduct"). A determination that the Trustee did not engage in disabling conduct
and is, therefore, entitled to indemnification may be based upon the outcome of
a court action or administrative proceeding or by (a) a vote of a majority of
those Trustees who are neither "interested persons" within the meaning of the
1940 Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. The Trust may also advance money for such litigation expenses
provided that the Trustee undertakes to repay the Trust if his or her conduct is
<PAGE>
later determined to preclude indemnification and certain other
conditions are met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware and Massachusetts law
and is not a complete description of those documents or law. Shareholders should
refer to the provisions of such Declarations of Trust, By-Laws, Delaware and
Massachusetts
law directly for more complete information.
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of Blanchard Funds recommends that shareholders of
Short-Term approve the Interim Advisory Agreement. The Merger became effective
on November 28, 1997. Pursuant to an order received from the SEC all fees
payable under the Interim Advisory Agreement will be placed in escrow and paid
to Virtus if shareholders approve the contract within 120 days of its effective
date. The Interim Advisory Agreement will remain in effect until the earlier of
the Closing Date for the Reorganization or two years from its effective date.
The terms of the Interim Advisory Agreement are essentially the same as the
Previous Advisory Agreement (as defined below). The only difference between the
Previous Advisory Agreement and the Interim Advisory Agreement, if approved by
shareholders, is the length of time each Agreement is in effect. A description
of the Interim Advisory Agreement pursuant to which Virtus continues as
investment adviser to Short-Term, as well as the services to be provided by
Virtus pursuant thereto is set forth below under "Advisory Services." The
description of the Interim Advisory Agreement in this Prospectus/Proxy Statement
is qualified in its entirety by reference to the Interim Advisory Agreement,
attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management, is an indirect wholly-owned subsidiary of
First Union. Virtus' address is 707 East Main Street, Suite 1300, Richmond,
Virginia 23219. Virtus has served as investment adviser pursuant to an
Investment Advisory Contract dated July 12, 1995. As used herein, the Investment
Advisory Agreement, as amended, for Short-Term is referred to as the "Previous
Advisory Agreement." At a meeting of the Board of Trustees of Blanchard Funds
held on September 16, 1997, the Trustees, including a majority of the
Independent Trustees, approved the Interim Advisory Agreement for Short-Term.
<PAGE>
The Trustees have authorized Blanchard Funds, on behalf of Short-Term,
to enter into the Interim Advisory Agreement with Virtus. Such Agreement became
effective on November 28, 1997. If the Interim Advisory Agreement for Short-Term
is not approved by shareholders, the Trustees will consider appropriate actions
to be taken with respect to Short-Term's investment advisory arrangements at
that time. The Previous Advisory Agreement was last approved by the Trustees,
including a majority of the Independent Trustees, on May 11, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus is responsible for
managing the Fund and overseeing the investment of its assets, subject at all
times to the supervision of the Board of Trustees. Virtus selects, monitors and
evaluates the Fund's sub- adviser. Virtus periodically reviews the sub-adviser's
performance record and will make a change, if necessary, subject to approval of
the Board of Trustees and shareholders.
FAS currently acts as administrator of Short-Term. FAS will continue
during the term of the Interim Advisory Agreement as Short-Term's administrator
for the same compensation as currently received . An affiliate of FAS currently
performs transfer agency services for Short-Term's shareholders . Commencing
February 9, 1998 Evergreen Service Company will provide such transfer agency
services for the same fees charged by Short- Term's current transfer agent. See
"Summary - Administrator."
Fees and Expenses. The investment advisory fees and expense limitations for
Short-Term under the Previous Advisory Agreement and the Interim Advisory
Agreement are identical. See "Summary - Investment Advisers and Sub-Adviser."
Expense Reimbursement. Virtus may, if it deems appropriate, assume
expenses of the Fund or class to the extent that the Fund's or classes' expenses
exceed such lower expense limitation as Virtus may, by notice to the Fund,
voluntarily declare to be effective.
The Interim Advisory Agreement contains an identical provision.
<PAGE>
Payment of Expenses and Transaction Charges. Under the Previous
Advisory Agreement, Blanchard Funds was required to pay or cause to be paid on
behalf of the Fund, all of the Fund's expenses and the Fund's allocable share of
Blanchard Funds' expenses.
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to Blanchard Funds or to the Fund or to any shareholder
for any act or omission in the course of or connected in any way with rendering
services or for any losses that may be sustained in the purchase, holding or
sale of any security.
The Interim Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Advisory Agreement provides that
it may be terminated without penalty by vote of a majority of the outstanding
voting securities of Short-Term (as defined in the 1940 Act) or by a vote of the
Trustees of Blanchard Funds on 60 days' written notice to Virtus or by Virtus on
60 days' written notice to Blanchard Funds. Also, the Interim Advisory Agreement
will automatically terminate in the event of its assignment (as defined in the
1940 Act). The Previous Advisory Agreement contained identical provisions as to
termination and assignment.
Information about Short-Term's Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, other funds of The Virtus Funds, the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus is set forth in Appendix A to this Prospectus/Proxy
Statement.
For the fiscal year ended September 30, 1997 and the period from May 1,
1996 to September 30, 1996, Virtus received from Short-Term management fees of
$1,095,713 and $1,583,881, respectively, of which $129,528 and $474,160,
respectively, were voluntarily waived. For the fiscal year ended April 30, 1996,
the Fund's investment management fee paid to Virtus and the prior manager was
$417,809, of which $187,797 was voluntarily waived. Virtus is currently waiving
a portion of its management fee. See "Comparison of Fees and
<PAGE>
Expenses." Signet acts as custodian for Short-Term and received $48,762 for the
fiscal year ended September 30, 1997. Commencing on or about January 20, 1998
FUNB will act as Short-Term's custodian during the term of the Interim Advisory
Agreement.
The Board of Trustees considered the Interim Advisory Agreement as part
of its overall approval of the Plan. The Board of Trustees considered, among
other things, the factors set forth above in "Reasons for the Reorganization."
The Board of Trustees also considered the fact that there were no material
differences between the terms of the Interim Advisory Agreement and the terms of
the Previous Advisory Agreement.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND THAT
THE SHAREHOLDERS OF SHORT-TERM APPROVE THE
INTERIM ADVISORY AGREEMENT
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of Blanchard Funds recommends that shareholders of
Short-Term approve the Interim Sub-Advisory Agreement. Such Agreement became
effective on November 28, 1997. Pursuant to an order from the SEC, all fees
payable under the Interim Sub-Advisory Agreement will be placed in escrow and
paid to OFFITBANK if shareholders approve the contract within 120 days of its
effective date. The Interim Sub- Advisory Agreement will remain in effect until
the earlier of the Closing Date for the Reorganization or two years from its
effective date. The terms of the Interim Sub-Advisory Agreement are essentially
the same as the Previous Sub-Advisory Agreement (as defined below). The only
difference between the Previous Sub-Advisory Agreement and the Interim
Sub-Advisory Agreement, if approved by shareholders, is the length of time the
Agreement is in effect. A description of the Interim Sub-Advisory Agreement
pursuant to which OFFITBANK continues as the investment sub- adviser to
Short-Term, as well as the services to be provided by OFFITBANK pursuant
thereto, is set forth below under "Sub- Advisory Services." The description of
the Interim Sub-Advisory Agreement in this Prospectus/Proxy Statement is
qualified in its entirety by reference to the Interim Sub-Advisory Agreement,
attached hereto as Exhibit C.
OFFITBANK, 520 Madison Avenue, New York, New York 10022 has served as
sub-investment adviser to Short-Term pursuant to a Sub- Advisory Agreement,
dated July 12, 1995. OFFITBANK, a New York State chartered trust bank, is the
continuation of the business
<PAGE>
of Offit Associates, Inc., a registered investment adviser founded in December,
1982. The firm converted to a trust bank in July, 1990. The core business of
OFFITBANK is portfolio management for institutions, non-profit organizations and
wealthy family groups. OFFITBANK specializes in fixed income management and
offers its clients a complete range of fixed income investments in capital
markets throughout the world. As of July 31, 1997, OFFITBANK had in excess of $8
billion in assets under management. Jack D. Burks, Managing Director of
OFFITBANK, has over 10 years of experience in Fixed Income Portfolio Management
and is responsible for the day-to-day management of the Fund's portfolio. See
"Summary - Investment Advisers and Sub-Adviser." As used herein, the
Sub-Advisory Agreement for Short-Term is referred to as the "Previous
Sub-Advisory Agreement." At a meeting of the Board of Trustees of Blanchard
Funds held on September 16, 1997, the Trustees, including a majority of the
Independent Trustees, approved the Interim Sub-Advisory Agreement for
Short-Term.
The Trustees have authorized Blanchard Funds, on behalf of Short-Term,
to enter into the Interim Sub-Advisory Agreement with Virtus and OFFITBANK. Such
Agreement became effective on November 28, 1997. If the Interim Sub-Advisory
Agreement for Short-Term is not approved by shareholders, the Trustees will
consider appropriate actions to be taken with respect to Short- Term's
investment sub-advisory arrangements at that time. The Previous Sub-Advisory
Agreement was last approved by the Trustees, including a majority of the
Independent Trustees, on May 11, 1997.
Comparison of the Interim Sub-Advisory Agreement and the Previous Sub-Advisory
Agreement
Sub-Advisory Services. The management and advisory services to be
provided by OFFITBANK under the Interim Sub-Advisory Agreement are identical to
those currently provided by OFFITBANK under the Previous Sub-Advisory Agreement.
Under the Previous Sub-Advisory Agreement, OFFITBANK supervised the investment
and reinvestment of the cash, securities or other properties comprising the
Fund's portfolio, subject at all times to the direction of Virtus and the
policies and control of Blanchard Funds' Board of Trustees.
Fees and Expenses. The investment sub-advisory fees under the Previous
Sub-Advisory Agreement and the Interim Sub-Advisory Agreement are identical. As
compensation for its sub-advisory services under the Previous Sub-Advisory
Agreement OFFITBANK was paid by Virtus a monthly fee at the annual rate of 0.30%
of the first $25 million of the Fund's average daily net assets; plus 0.25% of
the Fund's average daily net assets in excess of $25
<PAGE>
million but less than $50 million; plus 0.20% of the Fund's average daily net
assets in excess of $50 million.
The fee paid to OFFITBANK by Virtus for the fiscal year ended September
30, 1997 was $329,690. The fee paid to OFFITBANK by Virtus for the period from
May 1, 1996 through September 30, 1996 was $154,199. The fee paid to OFFITBANK
by the prior manager and by Virtus for the fiscal year ended April 30, 1996 was
$101,549.
The names and addresses of the principal executive officers and
directors of OFFITBANK are set forth in Appendix B to this Prospectus/Proxy
Statement.
Limitation of Liability. The Previous Sub-Advisory Agreement provided
that in the absence of willful misfeasance, bad faith or gross negligence on the
part of OFFITBANK or reckless disregard by OFFITBANK of its duties under the
Agreement, OFFITBANK shall not be liable to Virtus, Blanchard Funds or to any
shareholder of Blanchard Funds for any act or omission in the course of, or
connected with, rendering services thereunder or for any losses that may be
sustained in the purchase, holding or sale of any security. The Interim Sub-
Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Sub-Advisory Agreement provides
that it may be terminated without penalty by vote of a majority of the
outstanding voting securities of Short-Term (as defined in the 1940 Act) or by a
vote of a majority of Blanchard Funds' entire Board of Trustees on 60 days'
written notice to OFFITBANK or by Virtus or OFFITBANK on 60 days' written notice
to the other party to the Agreement. Also, the Interim Sub-Advisory Agreement
will automatically terminate in the event of its assignment (as defined in the
1940 Act). The Previous Sub- Advisory Agreement contained identical provisions
as to termination and assignment.
The Board of Trustees considered the Interim Sub-Advisory Agreement as
part of its overall approval of the Plan. The Board of Trustees considered,
among other things, the factors set forth above in "Reasons for the
Reorganization." The Board of Trustees also considered the fact that there were
no material differences between the terms of the Interim Sub-Advisory Agreement
and the terms of the Previous Sub-Advisory Agreement.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND THAT
THE SHAREHOLDERS OF SHORT-TERM APPROVE THE
INTERIM SUB-ADVISORY AGREEMENT
ADDITIONAL INFORMATION
<PAGE>
Evergreen Intermediate. Information concerning the operation and
management of Evergreen Intermediate is incorporated herein by reference from
the Prospectus dated November 10, 1997, a copy of which is 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 Intermediate at the address listed on the cover page of
this Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
Short-Term. Information about the Fund is included in its current
Prospectus dated November 30, 1997 and in the Statement of Additional
Information of the same date, that have been filed with the SEC, all of which
are incorporated herein by reference. Copies of the Prospectus and Statement of
Additional Information are available upon request and without charge by writing
to Short-Term at the address listed on the cover page of this Prospectus/Proxy
Statement or by calling toll-free 1-800- 829-3863.
Evergreen Intermediate and Short-Term are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information, including
proxy material and charter documents, with the SEC. These items can be inspected
and copies obtained at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices located at Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York, New York
10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of Blanchard Funds to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116, and at any adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the meeting and a proxy card, is first being mailed to
shareholders of Short-Term on or about January 7, 1998. Only shareholders of
record as of the close of business on the Record Date will be entitled to notice
of, and to vote at, the Meeting or any adjournment thereof. The holders of a
majority of the outstanding shares entitled to vote, at the close of business on
the Record Date, present in person or represented by proxy, will constitute a
quorum for the Meeting. If the enclosed form of proxy is properly executed and
returned in time to be voted at the Meeting, the proxies named therein will vote
the shares represented by the proxy in accordance with the
<PAGE>
instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Reorganization, FOR the Interim Advisory Agreement, FOR the Interim Sub-Advisory
Agreement 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, but will not be counted as shares voted and will have no effect on
the vote regarding the Plan. However, such "broker non-votes" will have the
effect of being counted as votes against the Interim Advisory Agreement and the
Interim Sub-Advisory Agreement which must be approved by a percentage of the
shares present at the Meeting or a majority of the outstanding votes securities.
A proxy may be revoked at any time on or before the Meeting by written notice to
the Secretary of Blanchard Funds, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby, FOR approval of the Interim Advisory Agreement and FOR approval of the
Interim Sub-Advisory Agreement.
Approval of the Plan will require the affirmative vote of a majority of
the shares voted and entitled to vote at the Meeting at which a quorum of the
Fund's shares is present. Approval of the Interim Advisory Agreement and Interim
Sub-Advisory Agreement will require the affirmative vote of (i) 67% or more of
the outstanding voting securities if holders of more than 50% of the outstanding
voting securities are present, in person or by proxy, at the Meeting, or (ii)
more than 50% of the outstanding voting securities, whichever is less. 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 Keystone or Signet, their affiliates or
other representatives of Short-Term (who will not be paid for their soliciting
activities). Shareholders Communications Corporation has been engaged by
Short-Term to assist in soliciting proxies.
If you wish to participate in the Meeting, you may submit the proxy
card included with this Prospectus/Proxy Statement or attend in person. Any
proxy given by you is revocable.
<PAGE>
In the event that sufficient votes to approve the Reorganization are
not received by February 20, 1998, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of Blanchard
Funds to demand payment for, or an appraisal of, his or her shares. However,
shareholders should be aware that the Reorganization as proposed is not expected
to result in recognition of gain or loss to shareholders for federal income tax
purposes and that, if the Reorganization is consummated, shareholders will be
free to redeem the shares of Evergreen Intermediate which they receive in the
transaction at their then-current net asset value. Shares of Short-Term may be
redeemed at any time prior to the consummation of the Reorganization.
Shareholders of Short-Term may wish to consult their tax advisers as to any
differing consequences of redeeming Fund shares prior to the Reorganization or
exchanging such shares in the Reorganization.
Short-Term does not hold annual shareholder meetings. If the
Reorganization is not approved, shareholders wishing to submit proposals for
consideration for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of Blanchard Funds
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
The votes of the shareholders of Evergreen Intermediate are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Short-Term whether other persons are beneficial owners of shares
for which proxies are being solicited and, if so, the number of copies of this
<PAGE>
Prospectus/Proxy Statement needed to supply copies to the beneficial owners of
the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Evergreen (formerly, Keystone) Intermediate
Term Bond Fund 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 Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements and financial highlights of Short- Term
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of the Blanchard Funds for the year ended September 30, 1997 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Intermediate will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
The Trustees of Blanchard Funds do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND APPROVAL OF THE PLAN, THE
INTERIM ADVISORY AGREEMENT AND THE INTERIM SUB-ADVISORY AGREEMENT, AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF
APPROVAL OF THE PLAN, THE INTERIM ADVISORY AGREEMENT AND THE INTERIM
SUB-ADVISORY AGREEMENT.
January 7, 1998
<PAGE>
APPENDIX A
The names and addresses of the principal executive officers
and directors of Virtus Capital Management, Inc. are as follows:
OFFICERS:
Name Address
- - ---- -------
David C. Francis, Chief First Union National Bank
Investment Officer 201 South College Street
Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Clemons Rosson, Vice Virtus Capital Management, Inc.
President, Assistant 707 East Main Street
Secretary Suite 1300
Richmond, Virginia 23219
L. Robert Cheshire, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
John E. Gray, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Dillon S. Harris, Jr., Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
J. Kellie Allen, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
DIRECTORS:
<PAGE>
Name Address
- - ---- -------
First Union National Bank
201 South College
David C. Francis Street
Charlotte, North
Carolina 28288-1195
Donald A. McMullen First Union National Bank
201
South College Street
Charlotte, North Carolina 28288-
1195
William M. Ennis First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
<PAGE>
APPENDIX B
The names and addresses of the principal executive officers and
directors of OFFITBANK are as follows:
OFFICERS :
Name Address
- - ---- -------
Morris OFFITBANK
W. Offit, Chairman, Chief 520 Madison Avenue
Executive Officer New York, New York 10022
Wallace OFFITBANK
Mathai-Davis, Chief Financial 520 Madison Avenue
Officer, Secretary New York, New York 10022
Vincent M. OFFITBANK
Rella, Comptroller 520 Madison Avenue
New York, New York 10022
Stephen B. OFFITBANK
Wells, Compliance Officer 520 Madison Avenue
New York, New York 10022
DIRECTORS:
Name Address
- - ---- -------
H. Furlong Baldwin OFFITBANK
520 Madison Avenue
New York, New York 10022
Morris W. OFFITBANK
Offit 520 Madison Avenue
New York, New York 10022
OFFITBANK
520 Madison Avenue
Alessandro C. Di Montezemolo New York, New York 10022
<PAGE>
Name Address
- - ---- -------
David I.
Margolis OFFITBANK
520 Madison Avenue
New York, New York 10022
Harvey M. OFFITBANK
Meyerhoff 520 Madison Avenue
New York, New York 10022
Dr. George R. Packard OFFITBANK
520 Madison Avenue
New York, New York 10022
Edward V. Regan OFFITBANK
520 Madison Avenue
New York, New York 10022
B. Lance Saverteig OFFITBANK
520 Madison Avenue
New York, New York 10022
Ricardo Steinbruch OFFITBANK
520 Madison Avenue
New York, New York 10022
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 26th day of November, 1997, by and between the Evergreen Fixed Income
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to the
Evergreen Intermediate Term Bond Fund series (the "Acquiring Fund"), and
Blanchard Funds, a Massachusetts business trust, with its principal place of
business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, with
respect to its Blanchard Short-Term Flexible Income Fund series (the "Selling
Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(D) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Blanchard Funds have determined that the
Selling Fund should exchange all of its assets and
<PAGE>
certain identified liabilities for Acquiring Fund Shares and that the interests
of the existing shareholders of the Selling Fund will not be diluted as a result
of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
<PAGE>
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable time prior to the
Closing Date, furnish the Acquiring Fund with a list of its portfolio securities
and other investments. In the event that the Selling Fund holds any investments
that the Acquiring Fund may not hold, the Selling Fund, if requested by the
Acquiring Fund, will dispose of such securities prior to the Closing Date. In
addition, if it is determined that the Selling Fund and the Acquiring Fund
portfolios, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Selling Fund if requested by the Acquiring Fund will dispose of
a sufficient amount of such investments as may be necessary to avoid violating
such limitations as of the Closing Date. Notwithstanding the foregoing, nothing
herein shall require the Selling Fund to dispose of any investments or
securities if, in the reasonable judgment of the Selling Fund, such disposition
would adversely affect the tax-free nature of the Reorganization or would
violate the Selling Fund's fiduciary duty to its shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately prior
to the Reorganization the Aggregate NASD Cap of the Selling Fund immediately
prior to the Reorganization, in each case calculated in accordance with such
Rule 2830.
<PAGE>
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
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
<PAGE>
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectuses and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of shares of
the Selling Fund will receive Class A shares of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
<PAGE>
3.2 CUSTODIAN'S CERTIFICATE. Signet Trust Company, as custodian for the
Selling Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Selling Fund's portfolio securities,
cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Closing Date; and (b) all necessary taxes including all
applicable federal and state stock transfer stamps, if any, shall have been
paid, or provision for payment shall have been made, in conjunction with the
delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Blanchard Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
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
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Blanchard Funds' Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected on the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or 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
<PAGE>
governmental body that materially and adversely affects its business or its
ability to consummate the transactions herein contemplated.
(g) The financial statements of the Selling Fund at September
30, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since September 30, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued 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.
<PAGE>
(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.
4.2.1 REPRESENTATIONS OF THE ACQUIRING FUND. The
Acquiring Fund represents and warrants to the Selling Fund as
follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series
of a Delaware business trust that is registered as an investment
<PAGE>
company classified as a management company of the open-end type, and its
registration with the Commission as an investment company under the 1940 Act is
in full force and effect.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The financial statements of the Acquiring Fund at June 30,
1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly reflect the financial condition of the Acquiring
Fund as of such date, and there are no known contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
(g) Since June 30, 1997 there has not been any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise
<PAGE>
disclosed to and accepted by the Selling Fund. For the purposes of this
subparagraph (g), a decline in the net asset value of the Acquiring Fund shall
not constitute a material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with
<PAGE>
federal securities and other laws and regulations applicable
thereto.
(n) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Keystone
Intermediate Term Bond Fund (the "Predecessor Fund"), a Massachusetts business
trust, as of the date hereof. The Acquiring Fund shall deliver to the Selling
Fund a certificate of the Predecessor Fund of even date making the
representations set forth in Section 4.2.1 with respect to the Predecessor Fund
to the extent applicable to the Predecessor Fund as of the date hereof.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. Blanchard Funds will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
<PAGE>
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by KPMG Peat
Marwick LLP and certified by Blanchard Funds' President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
5.8 CAPITAL LOSS CARRYFORWARDS. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause KPMG Peat Marwick LLP to issue a letter addressed to
the Acquiring Fund and the Selling Fund, in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
<PAGE>
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 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
<PAGE>
Agreement are duly authorized and upon such delivery will be legally issued and
outstanding and fully paid and non-assessable. No shareholder of the Acquiring
Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which the Acquiring Fund is
a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
<PAGE>
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus and Proxy Statement and related matters
were discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus and Proxy Statement (except to the extent indicated
in paragraph (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the Trust's officers
and other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus and Proxy Statement as
of its date, as of the date of the Selling Fund Shareholders' meeting, and as of
the Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquiring Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquiring Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus and Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of Blanchard Funds and the Selling Fund. Such opinion shall contain such
other assumptions and limitations as shall be in the opinion of Sullivan &
Worcester LLP appropriate to render the opinions expressed therein.
In this paragraph 6.2, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the
<PAGE>
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 Blanchard Funds'
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Blanchard Funds.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
<PAGE>
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Blanchard Funds' Declaration of Trust or By-laws, or any provision
of any material agreement, indenture, instrument, contract, lease or other
undertaking (in each case known to such counsel) to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
Regarding the Interim Advisory Agreement," the Interim Sub- Advisory Agreement
and the Previous Sub-Advisory Agreement, as set forth under the caption
"Information Regarding the Interim Sub-Advisory Agreement" and the description
of voting requirements applicable to approval of the Interim Advisory Agreement
and Interim Sub-Advisory Agreement, as set forth under the caption "Voting
Information Concerning the Meeting," insofar as the latter constitutes a summary
of applicable voting requirements under the Investment Company Act of 1940, as
amended, are, in each case, accurate and fairly present the information required
to be shown by the applicable requirements of Form N-14.
(g) Such counsel does not know of any legal or governmental
proceedings, insofar as they relate to the Selling Fund existing on or before
the date of mailing of the Prospectus and Proxy Statement and the Closing Date,
required to be described in the Prospectus and Proxy Statement or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and
<PAGE>
the Selling Fund is neither a party to nor subject to the provisions of any
order, decree or judgment of any court or governmental body, which materially
and adversely affects its business other than as previously disclosed in the
Prospectus and Proxy Statement.
7.3.2 The Acquiring Fund shall have received on the Closing Date an
opinion of C. Grant Anderson, Esq., Assistant Secretary of the Blanchard Funds,
in form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof has been
paid, and assuming that such shares were issued in accordance with the terms of
the Selling Fund's registration statement, or any amendment thereto, in effect
at the time of such issuance, all issued and outstanding shares of the Selling
Fund are legally issued and fully paid and non-assessable (except that, under
Massachusetts law, Selling Fund Shareholders could under certain circumstances
be held personally liable for obligations of the Selling Fund).
Mr. Anderson shall also state that he has reviewed and is familiar with
the contents of the Prospectus and Proxy Statement and, although he is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and Proxy
Statement on the basis of the foregoing, no facts have come to his attention
that lead him to believe that the Prospectus and Proxy Statement as of its date,
as of the date of the Selling Fund Shareholders' meeting, and as of the Closing
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding the Selling Fund or
necessary, in the light of the circumstances under which they were made, to make
the statements therein regarding the Selling Fund not misleading. Such opinion
may state that he does not express any opinion or belief as to the financial
statements or any financial or statistical data, or as to the information
relating to the Acquiring Fund, contained in the Prospectus and Proxy Statement
or Registration Statement.
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Massachusetts law, that as Dickstein Shapiro Morin &
Oshinsky LLP and C. Grant Anderson are not admitted to the bar of Massachusetts,
such opinions are based either upon the review of published statutes,
<PAGE>
cases and rules and regulations of the Commonwealth of Massachusetts or upon an
opinion of Massachusetts counsel.
In this paragraph 7.3, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
7.4 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Blanchard Funds'
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding 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
<PAGE>
failure to obtain any such consent, order, or permit would not involve a risk of
a material adverse effect on the assets or properties of the Acquiring Fund or
the Selling Fund, provided that either party hereto may for itself waive any of
such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's net investment
company taxable income for all taxable periods ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on or prior to the
Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(D) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(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
<PAGE>
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;
(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 Blanchard Funds 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 requirement of the 1933 Act and
the published rules and regulations thereunder;
<PAGE>
(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;
(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 with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
<PAGE>
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
<PAGE>
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Blanchard Funds, the respective
Trustees or officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
<PAGE>
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 the Selling Fund, shall
be governed and construed in accordance with the laws of the Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
and the Acquiring Fund hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents, or employees of Blanchard Funds or the
Evergreen Equity Trust personally, but shall bind only the trust property of the
Selling Fund and the Acquiring Fund, as provided in the Declarations of Trust of
Blanchard Funds and the Trust. The execution and delivery of this Agreement have
been authorized by the Trustees of Blanchard Funds on behalf of the Selling Fund
and the Trust on behalf of the Acquiring Fund and signed by authorized officers
of Blanchard Funds and the Trust, acting as such, and neither such authorization
by such Trustees nor such execution and delivery by such officers shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the trust property of the Selling
Fund and the Acquiring Fund as provided in the Declarations of Trust of
Blanchard Funds and the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN FIXED INCOME TRUST
ON BEHALF OF EVERGREEN INTERMEDIATE
TERM BOND FUND
By:
Name:
Title:
BLANCHARD FUNDS
ON BEHALF OF BLANCHARD SHORT-TERM
FLEXIBLE INCOME FUND
By:
Name:
Title:
<PAGE>
EXHIBIT B
BLANCHARD FUNDS
INTERIM MANAGEMENT CONTRACT
This Contract is made this 28th day of November, 1997 between Virtus
Capital Management, Inc., a Maryland corporation having its principal place of
business in Richmond, Virginia (the "Manager"), and Blanchard Funds, a
Massachusetts business trust having its principal place of business in
Pittsburgh,
Pennsylvania (the "Trust").
WHEREAS the Trust is an open-end management investment company as that
term is defined in the Investment Company Act of 1940, as amended, and
is registered as such with the Securities and Exchange Commission; and
WHEREAS Manager is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The Trust hereby appoints Manager as manager for each of the
portfolios ("Funds") of the Trust which executes an exhibit to this Contract,
and Manager accepts the appointments. Subject to the direction of the Trustees
of the Trust, Manager shall provide or procure on behalf of each of the Funds
all management and administrative services. In carrying out its obligations
under this paragraph, the Manager shall: (i) provide or arrange for investment
research and supervision of the investments of the Funds; (ii) select and
evaluate the performance of each Fund's Portfolio Sub-Adviser; (iii) select and
evaluate the performance of the Administrator; and (iv) conduct or arrange for a
continuous program of appropriate sale or other disposition and reinvestment of
each Fund's assets.
2. Manager, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's investment objective and policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statements and exhibits as may be
on file with the Securities and Exchange Commission.
3. Each Fund shall pay or cause to be paid all of its own expenses and
its allocable share of Trust expenses, including, without limitation, the
expenses of organizing the Trust and continuing its existence; fees and expenses
of Trustees and officers of the Trust; fees for management services and
<PAGE>
administrative personnel and services; expenses incurred in the distribution of
its shares ("Shares"), including expenses of administrative support services;
fees and expenses of preparing and printing its Registration Statements under
the Securities Act of 1933 and the Investment Company Act of 1940, as amended,
and any amendments thereto; expenses of registering and qualifying the Trust,
the Funds, and Shares of the Funds under federal and state laws and regulations;
expenses of preparing, printing, and distributing prospectuses (and any
amendments thereto) to shareholders; interest expense, taxes, fees, and
commissions of every kind; expenses of issue (including cost of Share
certificates), purchase, repurchase, and redemption of Shares, including
expenses attributable to a program of periodic issue; charges and expenses of
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing and mailing costs, auditing, accounting, and
legal expenses; reports to shareholders and governmental officers and
commissions; expenses of meetings of Trustees and shareholders and proxy
solicitations therefor; insurance expenses; association membership dues and such
nonrecurring items as may arise, including all losses and liabilities incurred
in administering the Trust and the Funds. Each Fund will also pay its allocable
share of such extraordinary expenses as may arise including expenses incurred in
connection with litigation, proceedings, and claims and the legal obligations of
the Trust to indemnify its officers and Trustees and agents with respect
thereto.
4. Each of the Funds shall pay to Manager, for all services rendered to
each Fund by Manager hereunder, the fees set forth in the exhibits attached
hereto.
5. If, for any fiscal year, the total of all ordinary business expenses
of the Fund, including all investment advisory fees but excluding distribution
fees, taxes, interest and extraordinary expenses and certain other excludable
expenses, would exceed the most restrictive expense limits imposed by any
statute or regulatory authority of any jurisdiction in which Shares of the Fund
are offered for sale Manager shall reduce its management fee in order to reduce
such excess expenses, but will not be required to reimburse the Fund for any
ordinary business expenses which exceed the amount of its management fee for
such fiscal year. The amount of any such reduction is to be borne by the Manager
and shall be deducted from the monthly management fee otherwise payable to the
Manager during such fiscal year. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the current fiscal year which shall
have elapsed prior to the date hereof and shall include the portion of the then
current fiscal year which shall have elapsed at the date of termination of this
Agreement.
<PAGE>
6. The net asset value of each Fund's Shares as used herein will be
calculated to the nearest 1/10th of one cent.
7. The Manager may from time to time and for such periods as it deems
appropriate reduce its compensation (and, if appropriate, assume expenses of one
or more of the Funds) to the extent that any Fund's expenses exceed such lower
expense limitation as the Manger may, by notice to the Fund, voluntarily declare
to be effective.
8. This Contract shall begin for each Fund as of the date of execution
of the applicable exhibit and shall continue in effect with respect to each Fund
presently set forth on an exhibit (and any subsequent Funds added pursuant to an
exhibit during the initial term of this Contract) until the earlier of the
Closing Date defined in the Agreement and Plan of Reorganization dated as of
November 26, 1997 with respect to each Fund or for two years from the date of
this Contract set forth above and thereafter for successive periods of one year,
subject to the provisions for termination and all of the other terms and
conditions hereof if: (a) such continuation shall be specifically approved at
least annually by the vote of a majority of the Trustees of the Trust, including
a majority of the Trustees who are not parties to this Contract or interested
persons of any such party cast in person at a meeting called for that purpose;
and (b) Manager shall not have notified a Fund in writing at least sixty (60)
days prior to the anniversary date of this Contract in any year thereafter that
it does not desire such continuation with respect to that Fund. If a Fund is
added after the first approval by the Trustees as described above, this Contract
will be effective as to that Fund upon execution of the applicable exhibit and
will continue in effect until the next annual approval of the Contract by the
Trustees and thereafter for successive periods of one year, subject to approval
as described above.
9. Notwithstanding any provision in this Contract, it may be terminated
at any time with respect to any Fund, without the payment of any penalty, by the
Trustees of the Trust or by a vote of the shareholders of that Fund on sixty
(60) days' written notice to Manager.
10. This Contract may not be assigned by Manager and shall
automatically terminate in the event of any assignment. Manager may employ or
contract with such other person, persons, corporation, or corporations at its
own cost and expense as it shall determine in order to assist it in carrying out
this Contract.
<PAGE>
11. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the obligations or duties under this Contract on the
part of Manager, Manager shall not be liable to the Trust or to any of the Funds
or to any shareholder for any act or omission in the course of or connected in
any way with rendering services or for any losses that may be sustained in the
purchase, holding, or sale of any security.
12. This Contract may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by the vote of a
majority of the Trustees of the Trust, including a majority of the Trustees who
are not parties to this Contract or interested persons of any such party to this
Contract (other than as Trustees of the Trust) cast in person at a meeting
called for that purpose, and where required by Section 15(a)(2) of the Act, on
behalf of a Fund by a majority of the outstanding voting securities of such Fund
as defined in Section 2(a)(42) of the Act.
13. The Manager acknowledges that all sales literature for investment
companies (such as the Trust) are subject to strict regulatory oversight. The
Manager agrees to submit any proposed sales literature for the Trust (or any
Fund) or for itself or its affiliates which mentions the Trust (or any Fund) to
the Trust's distributor for review and filing with the appropriate regulatory
authorities prior to the public release of any such sales literature, provided,
however, that nothing herein shall be construed so as to create any obligation
or duty on the part of the Manager to produce sales literature for the Trust (or
any Fund). The Trust agrees to cause its distributor to promptly review all such
sales literature to ensure compliance with relevant requirements, to promptly
advise Manager of any deficiencies contained in such sales literature, to
promptly file complying sales literature with the relevant authorities, and to
cause such sales literature to be distributed to prospective investors in the
Trust.
14. A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees, or any of the officers,
employees, agents or shareholders of the Trust individually but are binding only
upon the assets and property of the Trust. Notice is also hereby given that the
obligations pursuant to this instrument of a particular Fund and of the Trust
with respect to that particular Fund shall be limited solely to the assets of
that particular Fund.
<PAGE>
15. This Contract shall be construed in accordance with and governed by
the laws of the Commonwealth of Pennsylvania.
16. This Contract will become binding on the parties hereto upon their
execution of the attached exhibits to this Contract.
<PAGE>
EXHIBIT A
to the
Management Contract
Blanchard Global Growth Fund
Blanchard Flexible Income Fund
Blanchard Short-Term Flexible Income Fund
Blanchard Flexible Tax-Free Bond Fund
Blanchard Growth & Income Fund
For all services rendered by Manager hereunder, the above-named Funds
of the Trust shall pay to Manager and Manager agrees to accept as full
compensation for all services rendered hereunder, an annual management fee equal
to the following percentage ("the applicable percentage") of the average daily
net assets of each Fund
Name of Fund Percentage of Net Assets
Blanchard Global Growth Fund 1% of the first $150 million
of average daily net
assets, .875% of the
Fund's average daily
net assets in excess
of $150 million but
not exceeding $300
million and .75% of
the Fund's average
daily net assets in
excess of $300
million.
Blanchard Flexible Income Fund .75%
Blanchard Growth & Income Fund 1.10% of the Fund's average
daily net assets, .40% of
which, which would otherwise
be received by Manager and
paid to the Chase Manhattan
Bank, N.A. ("Chase") for
portfolio advisory services,
shall be paid to Chase
directly by the Fund under a
separate investment advisory
agreement between Chase and
the Fund.
Blanchard Short-Term .75%
Flexible Income Fund
Blanchard Flexible Tax-Free .75%
Bond Fund
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.
The advisory fee so accrued shall be paid to Manager daily except for
the Blanchard Growth & Income Fund which shall be paid to Manager monthly.
Witness the execution hereof this 28th day of November, 1997.
Attest: Virtus Capital Management, Inc.
________________________ By: ___________________________
Secretary Executive Vice President
Attest: Blanchard Funds
________________________ By: ____________________________
Assistant Secretary Vice President
<PAGE>
EXHIBIT C
INTERIM SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this 28th day of November, 1997 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the "Manager"), and
OFFITBANK, a New York banking corporation (the "Sub-Adviser" or "OFFITBANK")
with respect to the following recital of fact:
R E C I T A L
WHEREAS, Blanchard Funds (the "Trust") is registered as an open-end,
non-diversified, management investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"), and the rules and regulations promulgated
thereunder; and
WHEREAS, the Sub-Adviser is a New York banking corporation
and engages in the business of acting as an investment adviser;
and
WHEREAS, the Trust is authorized to issue shares of beneficial interest
in separate series, with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Trust offers shares in one series called the Blanchard
Short-Term Flexible Income Fund (such series, being referred to as the "Fund");
and
WHEREAS, the Trust and the Manager have entered into an agreement of
even date herewith to provide for management services for the Fund on the terms
and conditions set forth therein (the "Interim Management Agreement"); and
WHEREAS, OFFITBANK proposes to render investment advisory services to
the Manager in connection with the Manager's responsibilities to the Fund's
portfolio on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Investment Management. OFFITBANK shall act as a Sub- Adviser for the
Fund and shall, in such capacity, supervise the investment and reinvestment of
the cash, securities or other properties comprising the Fund's portfolio,
subject at all times to the direction of the Manager and the policies and
control of
<PAGE>
the Trust's Board of Trustees. OFFITBANK shall give the Fund the
benefit of its best judgment, efforts and facilities in rendering
its services as Sub-Adviser.
2. Investment Analysis and Implementation. In carrying
out its obligation under paragraph 1 hereof, the Sub-Adviser
shall:
(a) use the same skill and care in providing such service as
it uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) obtain and evaluate pertinent information about
significant developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally
or the Fund's portfolio and whether concerning the individual issuers
whose securities are included in the Fund's portfolio or the activities
in which the issuers engage, or with respect to securities which the
Sub-Adviser considers desirable for inclusion in the Fund's portfolio;
(c) determine which issuers and securities shall be
represented in the Fund's portfolio and regularly report thereon to the
Trust's Board of Trustees;
(d) formulate and implement continuing programs for the
purchases and sales of the securities of such issuers and regularly
report thereon to the Trust's Board of Trustees;
(e) be authorized to give instructions to the custodian and/or
sub-custodian of the Fund appointed by the Trust's Board of Trustees,
as to deliveries of securities, transfers of currencies and payments of
cash for the account of the Fund, in relation to the matters
contemplated by this Agreement; and
(f) take, on behalf of the Fund, all actions which appear to
the Trust and the Manager necessary to carry into effect such purchase
and sale programs and supervisory functions as aforesaid, including the
placing of orders for the purchase and sale of securities for the Fund
and the prompt reporting to the Manager of such purchases and sales.
3. Broker-Dealer Relationships. The Sub-Adviser is responsible for
decisions to buy and sell securities for the Fund's portfolio, broker-dealer
selection, and negotiation of brokerage commission rates. The Sub-Adviser's
primary consideration in effecting a security transaction will be
<PAGE>
execution at the most favorable price. In selecting a broker-dealer to execute
each particular transaction, the Sub-Adviser will take the following into
consideration: the best net price available, the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Fund on a continuing basis.
Accordingly, the price to the Fund in any transaction may be less favorable than
that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered. Subject
to such policies as the Board of Trustees may determine, the Sub-Adviser shall
not be deemed to have acted unlawfully or to have breached any duty created by
this Agreement or otherwise solely by reason of its having caused the Fund to
pay a broker or dealer for effecting a portfolio investment transaction in
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction, if the Sub-Adviser determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Sub-Adviser's overall
responsibilities with respect to the Fund and to its other clients as to which
it exercises investment discretion. Subject to such policies as the Board of
Trustees may determine, the Sub-Adviser will purchase and sell foreign currency
contracts and other securities for the Fund. The Sub-Adviser is further
authorized to allocate the orders placed by it on behalf of the Fund to any
affiliated broker-dealer of the Fund or to such brokers and dealers who also
provide research or statistical material, or other services to the Fund, the
Manager or the Sub-Adviser. Such allocation shall be in such amounts and
proportions as the Sub-Adviser shall determine and the Sub-Adviser will report
on said allocations regularly to the Board of Trustees of the Trust indicating
the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by
the Sub-Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Adviser on behalf of the Fund pursuant thereto, shall at
all times be subject to any directives of the Board of Trustees of the Trust.
The Manager shall provide the Sub-Adviser with written notice of all such
directives, so long as this Agreement remains in effect.
5. Compliance with Applicable Requirements. In carrying
out its obligations under this Agreement, the Sub-Adviser shall
at all times conform to:
(a) all applicable provisions of the 1940 Act;
<PAGE>
(b) the provisions of the Registration Statement of
the Trust under the Securities Act of 1933 and the 1940 Act;
and
(c) any other applicable provisions of state and
federal law.
6. Expenses. The Sub-Adviser shall maintain, at its expense and without
cost to the Manager or the Fund, a trading function in order to carry out its
obligations under subparagraph (f) of paragraph 2 hereof to place orders for the
purchase and sale of portfolio securities for the Fund.
7. Delegation of Responsibilities. Upon request of the Manager and with
the approval of the Trust's Board of Trustees, the Sub-Adviser may perform
services on behalf of the Fund which are not required by this Agreement. Such
services will be performed on behalf of the Fund and the Sub-Adviser's cost in
rendering such services may be billed monthly to the Manager, subject to
examination by the Manager's independent accountants. Payment or assumption by
the Sub-Adviser of any Fund expense that the Sub-Adviser is not required to pay
or assume under this Agreement shall not relieve the Manager or the Sub-Adviser
of any of their obligations to the Fund or obligate the Sub-Adviser to pay or
assume any similar Fund expense on any subsequent occasions.
8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Sub- Adviser a monthly fee at the
annual rate of .30% of the Fund's first $25 million of average daily net assets;
plus .25% of the Fund's average daily net assets in excess of $25 million but
less than $50 million; plus .20% of the Fund's average daily net assets in
excess of $50 million. Compensation under this Agreement shall be calculated and
accrued daily and the amounts of the daily accruals shall be paid monthly. The
compensation paid to the Sub-Adviser will not be reduced by the amount of
brokerage commissions received by the Sub-Adviser or its affiliated
broker-dealer pursuant to Section 17(e)(2) of the 1940 Act. If this Agreement
becomes effective subsequent to the first day of a month or shall terminate
before the last day of a month, compensation for that part of the month this
Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fees as set forth above. Payment of the Sub- Adviser's
compensation for the preceding month shall be made as promptly as possible after
the end of each month.
9. Exclusivity. OFFITBANK agrees that it will not render advisory or
sub-advisory services to any other similar publicly offered no-load or low-load
open-end investment company
<PAGE>
registered with the Securities and Exchange Commission while this Agreement is
in effect. In the event of the termination of this Agreement by the Sub-Adviser
such exclusivity shall continue for a period of [ ] months from the effective
date of such termination. For the purposes of this Agreement, low-load shall be
defined as a sales charge of 3% or less. The Sub-Adviser, however, shall be free
to render investment advisory or other services to others (including unit trusts
and registered investment companies other than no load or low load investment
companies) and to engage in other activities, so long as its services under this
Agreement are not impaired thereby.
10. Term. This Agreement shall become effective at the close of
business on the date hereof and shall remain in force and effect until the
earlier of the Closing Date defined in the Agreement and Plan of Reorganization
dated November 26, 1997 with respect to the Fund or for an initial term of two
years, and shall remain in effect thereafter if approved in the manner set forth
in Section 10 hereof.
11. Renewal. Following the expiration of its initial two year term,
this Agreement shall continue in force and effect from year to year, provided
that such continuance is specifically approved at least annually:
(a) (i) by the Trust's Board of Trustees or (ii) by the vote
of a majority of the Fund's outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act), and
(b) by the affirmative vote of a majority of the Trustees who
are not parties to this agreement or interested persons of a party to
this Agreement (other than as a Trustee of the Trust), by votes cast in
person at a meeting specifically called for such purpose.
12. Termination. This Agreement may be terminated at any time, without
the payment of any penalty, by vote of the Trust's Board of Trustees or by vote
of a majority of the Fund's outstanding voting securities (as defined in Section
2(a)(42) of the 1940 Act), or by the Manager or the Sub-Adviser, on sixty (60)
days' written notice to the other party. This Agreement shall automatically
terminate: (a) in the event of its assignment, the term "assignment" having the
meaning defined in Section 2(a)(4) of the 1940 Act, or (b) in the event that the
Interim Management Agreement between the Fund and the Manager shall terminate.
13. Liability of the Sub-Adviser. In the absence of willful
misfeasance, bad faith or gross negligence on the part of
<PAGE>
the Sub-Adviser or its officers, directors or employees, or reckless disregard
by the Sub-Adviser of its duties under this Agreement, the Sub-Adviser shall not
be liable to the Manager, the Trust or to any shareholder of the Trust for any
act or omission in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding or
sale of any security.
14. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the Manager
for this purpose shall be 707 East Main Street, Suite 1300, Richmond, Virginia
23219, that of the Trust for this purpose shall be Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779, and the address of the Sub-Adviser for this
purpose shall be 520 Madison Avenue, New York, New York 10022.
15. Questions of Interpretation. Any questions of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretations thereof, if any, by the
United States Courts or in the absence of any controlling decision of any such
courts, by rules, regulations or orders of the Securities and Exchange
Commission issued pursuant to said Act. In addition, where the effect of a
requirement of the 1940 Act reflected in a provision of this Agreement is
revised by rule, regulation or order of the Securities and Exchange Commission,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
Attest: OFFITBANK
By
Title: Managing Director Title: Managing Director
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
By
Title: Senior Vice President Title: Senior Vice President
<PAGE>
EXHIBIT D
KEYSTONE
INTERMEDIATE TERM BOND FUND
(logo and picture of stars)
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
One year with sales charge 5.30 % 3.17 % 7.06 %
One year w/o sales charge 8.83 % 8.17 % 8.06 %
One year dividends per share 52.0 (cents) 46.3(cents) 46.3 (cents)
30-day SEC Yield
(as of 6/30/97) 5.82 % 5.25 % 5.26 %
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Three years 6.34 % 5.82 % 6.67 %
Five years 5.89 % N/A N/A
Ten years 6.56 % N/A N/A
Since Inception* N/A 4.61 % 4.96 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Eleven months w/o sales charge 8.40 % 7.81 % 7.70 %
Three years 20.24 % 18.51 % 21.38 %
Five years 33.11 % N/A N/A
Ten years 88.72 % N/A N/A
Since Inception* N/A 22.01 % 23.80 %
</TABLE>
* CLASSES B AND C BEGAN 2/1/93.
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE. FOR CLASSES WITH
MORE THAN A 10-YEAR HISTORY, THE 10-YEAR HISTORY IS PRESENTED.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
Total Net Assets (all classes) $29.0 million
Average Credit Quality AA-
Average Maturity 6.3 years
Duration 4.6 years
</TABLE>
PORTFOLIO QUALITY JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
BBB 18%
A 32%
AAA 38%
AA 12%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Keystone Intermediate Term Bond Fund seeks current income and, secondarily,
capital preservation from investments in investment grade and high quality
bonds.
STRATEGY
The Fund is designed to balance the benefits of short-and long-term bonds, by
providing more income than short-term bonds and greater price stability than
long-term bonds. The Fund invests primarily in government and corporate bonds
and mortgage-backed securities with maturities of less than 10 years.
PORTFOLIO MANAGER
(photo of Christopher P. Conkey, Senior Vice President and Chief
Christopher Investment Officer, Fixed Income, of Keystone Investment
P. Conkey) Management Company, is Portfolio Manager of Keystone
Intermediate Term Bond Fund. An investment professional with
more than 14 years' experience, Mr. Conkey also is Portfolio
Manager of Keystone Diversified Bond Fund (B-2). Mr. Conkey
joined Keystone in 1988 from Constitution Capital, where he
was a Vice President. A Chartered Financial Analyst, Mr.
Conkey is a member of the Government Bond Club of New England
and the Bond Analysts Society of Boston. He is a graduate of
Clark University and received his M.B.A. from Boston
University.
6
<PAGE>
KEYSTONE
INTERMEDIATE TERM BOND FUND (logo and picture
of stars)
MANAGEMENT REPORT
August 1997
Dear Shareholder:
We are pleased to report to you on the Keystone Intermediate Term Bond Fund for
the fiscal period that ended on June 30, 1997. This report is an annual report,
reflecting the new fiscal year ending date of June 30, replacing the former
fiscal year ending each July 31.
PERFORMANCE
Your Fund performed very well during the past year. In an environment of
moderate economic growth, modest inflation, and relatively stable interest
rates, your Fund was able to take advantage of opportunities among better
quality corporate bonds and mortgage-backed securities to provide generous
income consistent with limited price fluctuation.
ENVIRONMENT
During the past year, the U.S. economy enjoyed healthy economic growth and low
inflation. If one were to look at interest rates at the beginning and end of the
year, despite some near-term volatility one would see remarkable stability in
rates. For example, the yield on a 30-year Treasury bond was 6.78% on June 30,
just slightly below the 6.97% of July 31, 1996. This was an environment in which
corporate bonds tended to do very well, as credit risk was low because of the
overall strength of the economy.
STRATEGY
In the relatively stable interest rate environment of the past year, your Fund
did not try to manage the portfolio maturities significantly in an effort to
anticipate the direction of interest rate movements. Rather, the portfolio
management team has searched for relative value among the various sectors in
which the Fund invests.
Your Fund took advantage of the strong economy to increase its emphasis on high
grade and investment grade corporate bonds and mortgage-backed securities, while
de-emphasizing U.S. Treasuries. Between December 31, 1996 and June 30, 1997, for
example, the allocation to U.S. government bonds in the portfolio was reduced
from 21% to 9% of net assets, while the allocation to industrial bonds was
increased from 13% to 16% and the allocation to collateralized mortgage
obligations was increased from 21% to 28%.
The Fund also has increased its allocation to foreign securities from 9% on
December 31, 1996 to approximately 24% at the end of the fiscal year. The
foreign emphasis was increased to take advantage of the yield advantage of
foreign bonds and to give the portfolio greater diversification. The Fund, which
has hedged all foreign securities back into the U.S. dollar to protect against
currency fluctuations, has invested in government bonds issued in Canada,
Denmark and Germany. All three countries are enjoying low inflation and
benefiting from sound fiscal policies.
PORTFOLIO COMPOSITION JUNE 30, 1997
(AS A PERCENTAGE OF NET ASSETS)
(A pie graph appears here. See table below for plot points)
Repurchase agreements and other net assets 2.2%
U.S Government 8.8%
Financial Corp. 15.3%
Industrial Corp. 15.9%
International/U.S.$ 15.4%
International/non-U.S.$* 8.8%
Mortgage-backed 27.5%
Asset-backed 6.1%
* NON-U.S.-DOLLAR-DENOMINATED BONDS WERE FULLY HEDGED BACK INTO U.S. CURRENCY.
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
We believe the economy may increase its growth rate in the third quarter of 1997
after the apparent slowdown of the second, with gross domestic product growing
at an anticipated annualized rate of 2 1/2-to-3% during the second half of the
year. At the same time, we believe inflation can be contained within the present
2 1/2-to-3% range, and that interest rates will remain stable. We will continue,
however, to monitor wage costs very closely to watch for early signs of
inflation. With this favorable outlook, we anticipate a continued emphasis on
corporate and mortgage-backed securities for at least the next several months.
Thank you for your support of Keystone Intermediate Term Bond Fund.
Sincerely,
/s/ALBERT H. ELFNER, III
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
/s/CHRISTOPHER P. CONKEY
CHRISTOPHER P. CONKEY
SENIOR VICE PRESIDENT
CHIEF INVESTMENT OFFICER, FIXED INCOME
7
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
a Series of
BLANCHARD FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
EVERGREEN INTERMEDIATE TERM BOND FUND
a Series of
EVERGREEN FIXED INCOME 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 Blanchard Short-Term Flexible
Income Fund ("Short- Term"), a series of Blanchard Funds, to Evergreen
Intermediate Term Bond Fund ("Evergreen Intermediate"), in exchange for Class A
shares of beneficial interest, $.001 par value per share, of Evergreen
Intermediate, 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
Intermediate dated November 10, 1997;
(2) The Statement of Additional Information of Short-Term dated
November 30, 1997;
(3) Annual Report of Short-Term for the year ended September 30,
1997;
(4) Annual Report of Evergreen Intermediate Term Bond Fund
(formerly known as Keystone Intermediate Term Bond Fund) for
the year ended June 30, 1997; and
(5) Pro Forma Combining Financial Statements (unaudited) dated
June 30, 1997.
<PAGE>
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Intermediate and Short-Term dated January 7, 1998. A copy
of the Prospectus/Proxy Statement may be obtained without charge by calling or
writing to Evergreen Intermediate or Flexible Income at the telephone numbers or
addresses set forth above.
The date of this Statement of Additional Information is January 7,
1998.
EVERGREEN LONG TERM BOND FUNDS
EVERGREEN SHORT AND INTERMEDIATE TERM BOND FUNDS
200 BERKELEY STREET, BOSTON, MASSACHUSETTS
(800) 343-2898
STATEMENT OF ADDITIONAL INFORMATION DATED NOVEMBER 10, 1997
FOR THE FOLLOWING SERIES OF THE EVERGREEN
FIXED INCOME TRUST (THE "TRUST"):
EVERGREEN DIVERSIFIED BOND FUND
EVERGREEN INTERMEDIATE TERM BOND FUND
(EACH A "FUND", TOGETHER THE "FUNDS")
This statement of additional information ("SAI") provides additional
information about all classes of shares of the Funds listed above. It is not a
prospectus and you should read it in conjunction with the prospectuses of the
Funds dated November 10, 1997, as supplemented from time to time. You may obtain
a copy of the prospectuses from the Funds' distributor, Evergreen Distributor,
Inc.
TABLE OF CONTENTS
INVESTMENT POLICIES........................................................3
Investment Restrictions And Guidelines............................8
MANAGEMENT OF THE TRUST...................................................10
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.......................12
INVESTMENT ADVISORY AND OTHER SERVICES....................................13
Investment Advisory Services.....................................13
Distribution Plan................................................14
Additional Service Providers.....................................15
BROKERAGE ALLOCATION AND OTHER PRACTICES..................................16
Brokerage Commissions............................................16
Selection of Brokers.............................................16
General Brokerage Policies.......................................17
ORGANIZATION..............................................................17
Form of Organization.............................................17
Description of Shares............................................17
Voting Rights....................................................18
Limitation of Trustees' Liability................................18
PURCHASE, REDEMPTION AND PRICING OF SHARES................................18
How the Funds Offer Shares to the Public.........................18
Sales Charge Waivers or Reductions...............................20
Exchanges........................................................21
How The Funds Value Shares.......................................22
Shareholder Services.............................................22
PRINCIPAL UNDERWRITER.....................................................23
ADDITIONAL TAX INFORMATION................................................24
CALCULATION OF PERFORMANCE DATA...........................................26
ADDITIONAL INFORMATION....................................................26
Other Information................................................26
FINANCIAL STATEMENTS......................................................26
APPENDIX A...............................................................A-1
INVESTMENT POLICIES
SECURITIES AND INVESTMENT PRACTICES
The investment objectives of each Fund and a description of the securities
in which each Fund may invest are set forth in each Fund's prospectuses. The
following expands upon the discussion in the prospectuses regarding certain
investments of the Funds.
U.S GOVERNMENT OBLIGATIONS
The types of U.S. Government obligations in which each Fund may invest
generally include obligations that the U.S. Government agencies or
instrumentalities issued or guaranteed.
These securities are backed by:
(1) the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities; or
(2) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive financial
support from the U.S. Government are:
(i) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association.
GNMA SECURITIES
The Funds may invest in securities issued by the Government National
Mortgage Association ("GNMA"), a wholly-owned U.S. Government corporation, which
guarantees the timely payment of principal and interest, but not premiums paid
to purchase these instruments. The market value and interest yield of these
instruments can vary due to market interest rate fluctuations and early
prepayments of underlying mortgages. These securities represent ownership in a
pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to
accurately predict the average maturity of a particular GNMA pool. The scheduled
monthly interest and principal payments relating to mortgages in the pool will
be "passed through" to investors. GNMA securities differ from conventional bonds
in that principal is paid back to the certificate holders over the life of the
loan rather than at maturity. As a result, there will be monthly scheduled
payments of principal and interest. In addition, there may be unscheduled
principal payments representing prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available
from other types of U.S. Government securities, GNMA certificates may be less
effective than other types of securities as a means of "locking in" attractive
long-term rates because of the prepayment feature. For instance, when interest
rates decline, the value of a GNMA certificate likely will not rise as much as
comparable debt securities due to the prepayment feature. In addition, these
prepayments can cause the price of a GNMA certificate originally purchased at a
premium to decline in price compared to its par value, which may result in a
loss.
LIMITED PARTNERSHIPS
Evergreen Diversified Bond Fund may invest in limited and master limited
partnerships. A limitedpartnership is a partnership consisting of one or more
general partners, jointly and severally responsible as ordinary partners, and by
whom the business is conducted, and one or more limited partners who contribute
cash as capital to the partnership and who generally are not liable for the
debts of the partnership beyond the amounts contributed. Limited partners are
not involved in the day-to-day management of the partnership. They receive
income, capital gains and other tax benefits associated with the partnership
project in accordance with terms established in the partnership agreement.
Typical limited partnerships are in real estate, oil and gas and equipment
leasing, but they also finance movies, research and development, and other
projects.
For an organization classified as a partnership under the Internal Revenue
Code, each item of income, gain, loss, deduction, and credit is not taxed at the
partnership level but flows through to the holder of the partnership unit. This
allows the partnership to avoid double taxation and to pass through income to
the holder of the partnership unit at lower individual rates.
A master limited partnership is a publicly traded limited partnership. The
partnership units are registered with the Securities and Exchange Commission
("SEC") and are freely exchanged on a securities exchange or in the
over-the-counter market.
RESTRICTED AND ILLIQUID SECURITIES
Pursuant to Rule 144A under the Securities Act of 1933 ("Rule 144A"), the
Board of Trustees of the Trust determines the liquidity of certain restricted
securities Rule 144A is a non-exclusive, safe-harbor for certain secondary
market transactions involving securities subject to restrictions on resale under
federal securities laws. Rule 144A provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
Rule 144A was expected to further enhance the liquidity of the secondary market
for securities eligible for sale under Rule 144A. In determining the liquidity
of certain restricted securities the Trustees consider: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades.
WHEN-ISSUED, DELAYED-DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
The Funds may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis. These
transactions involve the purchase of debt obligations with delivery and payment
normally taking place within a month or more after the date of commitment to
purchase. The Funds will only make commitments to purchase obligations on a
when-issued basis with the intention of actually acquiring the securities, but
may sell them before the settlement date. The when-issued securities are subject
to market fluctuation, and no interest accrues on the security to the purchaser
during this period. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the purchaser enters into
the commitment.
Segregated accounts will be established with the custodian, and each Fund
will maintain liquid assets in an amount at least equal in value to its
commitments to purchase when-issued securities. If the value of these assets
declines, a Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
Purchasing obligations on a when-issued basis is a form of leveraging and
can involve a risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself. In that case there could be an unrealized loss at the time of delivery.
Each Fund uses when-issued, delayed-delivery and forward commitment
transactions to secure what it considers to be an advantageous price and yield
at the time of purchase. When a Fund engages in when-issued, delayed-delivery
and forward commitment transactions, it relies on the buyer or seller, as the
case may be, to consummate the sale. If the buyer or seller fails to complete
the sale, then a Fund may miss the opportunity to obtain the security at a
favorable price or yield.
Typically, no income accrues on securities a Fund has committed to purchase
prior to the time delivery of the securities is made, although the Funds may
earn income on securities it has deposited in a segregated account. When
purchasing a security on a when-issued, delayed delivery, or forward commitment
basis, a Fund assumes the rights and risks of ownership of the security,
including the risk of price and yield fluctuations, and takes such fluctuations
into account when determining its net asset value. Because a Fund is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with its other investments.
LOANS OF SECURITIES
To generate income and offset expenses, the Funds may lend portfolio
securities to broker-dealers and other financial institutions. Loans of
securities by each Fund may not exceed 30% of the value of its total assets.
While securities are on loan, the borrower will pay a Fund any income accruing
on the security. The Funds may invest any collateral they receive in additional
portfolio securities, such as U.S. Treasury notes, certificates of deposit,
other high-grade, short-term obligations or interest bearing cash equivalents.
Gains or losses in the market value of a security lent will affect each Fund and
its shareholders.
When a Fund lends its securities, it will require the borrower to give the
Fund collateral in cash or government securities. Each Fund will require
collateral in an amount equal to at least 100% of the current market values of
the securities lent, including accrued interest. A Fund has the right to call a
loan and obtain the securities lent any time on notice of not more than five
business days. A Fund may pay reasonable fees in connection with such loans.
Although voting rights attendant to securities lent pass to the borrower,
the Funds may call such loans at any time and may vote the securities if they
believe a material event affecting the investment is to occur. The Funds may
experience a delay in receiving additional collateral or in recovering the
securities lent or may even suffer a loss of rights in the collateral should the
borrower of the securities fail financially. The Funds may only make loans to
borrowers deemed to be of good standing, under standards approved by the Board
of Trustees, when the income to be earned from the loan justifies the attendant
risks.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with entities that are
registered as U.S. Government securities dealers, including member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. Government securities or other financial institutions believed by each
Fund's investment adviser (as hereinafter defined) to be creditworthy. In a
repurchase agreement, a Fund obtains a security and simultaneously commits to
return the security to the seller (a member bank of the Federal Reserve System
or recognized securities dealer) at an agreed upon price (including principal
and interest) on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or maturity of the underlying security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security.
A Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from a
Fund, a Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. Each Fund's investment adviser believes that under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of such
securities. The Funds will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker-dealers, which are
deemed by the investment adviser to be creditworthy pursuant to guidelines
established by the Board of Trustees.
REVERSE REPURCHASE AGREEMENTS
As described herein, the Funds may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, a Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
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.
FINANCIAL FUTURES CONTRACTS
The Funds may enter into financial futures contracts as a hedge against
decreases or increases in the value of securities they hold or intend to
acquire.
The Funds will not maintain open positions in futures contracts they have
sold or call options they have written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of their securities portfolios 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, each 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.
OPTIONS
The Funds may buy or sell (i.e., write) put and call options on securities
they hold or intend to acquire. The Funds may also buy and sell options on
financial futures contracts. The Funds will use options as a hedge against
decreases or increases in the value of securities they hold or intend to
acquire. The Funds may purchase put and call options for the purpose of
offsetting previously written put and call options of the same series.
The Funds may write only covered options. With regard to a call option,
this means that a Fund will own, for the life of the option, the securities
subject to the call option. Each Fund will cover put options by holding, in a
segregated account, liquid assets having a value equal to or greater than the
price of securities subject to the put option. If a Fund is unable to effect a
closing purchase transaction with respect to the covered options it has sold, it
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.
Each Fund currently does not intend to invest more than 5% of its net
assets in options.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Funds do not pay or receive
money upon the purchase or sale of a futures contract. Rather, each 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 a 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, a Fund pays or
receives cash, called "variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, a Fund
will mark-to-market its open futures positions. Each Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
The Funds may not buy or sell futures contracts or related options if,
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
FOREIGN SECURITIES
The Funds may invest in foreign securities or U.S. securities traded in
foreign markets. Permissible investments may consist of obligations of foreign
branches of U.S. banks and of foreign banks, including European certificates of
deposit, European time deposits, Canadian time deposits and Yankee certificates
of deposit, and investments in Canadian commercial paper, foreign securities and
Europaper. These instruments may subject a Fund to investment risks that differ
in some respects from those related to investments in obligations of U.S.
domestic issuers. Such risks include future adverse political and economic
developments, the possible imposition of withholding taxes on interest or other
income, possible seizure, nationalization, or expropriation of foreign deposits,
the possible establishment of exchange controls or taxation at the source,
greater fluctuations in value due to changes in exchange rates, or the adoption
of other foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations. Such investments may also
entail higher custodial fees and sales commissions than domestic investments.
Foreign issuers of securities or obligations are often subject to accounting
treatment and engage in business practices different from those respecting
domestic issuers of similar securities or obligations. Foreign branches of U.S.
banks and foreign banks may be subject to less stringent reserve requirements
than those applicable to domestic branches of U.S. banks.
FOREIGN CURRENCY TRANSACTIONS
As one way of managing exchange rate risk, the Funds may enter into forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). The exchange rate for the transaction (the amount of
currency the Fund will deliver and receive when the contract is completed) is
fixed when a Fund enters into the contract. A Fund usually will enter into these
contracts to stabilize the U.S. dollar value of a security it has agreed to buy
or sell. A Fund intends to use these contracts to hedge the U.S. dollar value of
a security it already owns, particularly if the Fund expects a decrease in the
value of the currency in which the foreign security is denominated. Although the
Fund will attempt to benefit from using forward contracts, the success of its
hedging strategy will depend on the investment adviser's ability to predict
accurately the future exchange rates between foreign currencies and the U.S.
dollar. The value of a Fund's investments denominated in foreign currencies will
depend on the relative strengths of those currencies and the U.S. dollar, and
the Fund may be affected favorably or unfavorably by changes in the exchange
rates or exchange control regulations between foreign currencies and the U.S.
dollar. Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by a Fund. A Fund may also purchase and sell options related to
foreign currencies in connection with hedging strategies.
HIGH YIELD BONDS
Each Fund may invest in high yield, high risk bonds. While investment in
high yield bonds provides opportunities to maximize return over time, investors
should be aware of the following risks associated with high yield bonds:
(1) High yield bonds are rated below investment grade, i.e., BB or lower by
Standard & Poor's Ratings Group ("S&P") or Ba or lower by Moody's Investors
Service ("Moody's"). Securities so rated are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments.
(2) The lower ratings of these securities 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 or 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.
(3) Their value may be more susceptible to real or perceived adverse
economic, company or industry conditions and publicity than is the case for
higher quality securities.
(4) Their value, like those of other fixed income securities,
fluctuates 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, but are more
sensitive to adverse or positive economic changes or individual corporate
developments.
(5) The secondary market for such securities may be less liquid at certain
times than the secondary market for higher quality debt securities, which may
adversely effect (1) the market price of the security, (2) the Fund's ability to
dispose of particular issues and (3) the Fund's ability to obtain accurate
market quotations for purposes of valuing its assets.
(6) Zero coupon bonds and PIKs involve additional special considerations.
For example, zero coupon bonds pay no interest to holders prior to maturity of
interest. PIKs are debt obligations that provide that the issuer may, at its
option, pay interest on such bonds in cash or in the form of additional debt
obligations. Such investments may experience greater fluctuation in value due to
changes in interest rates than debt obligations that pay interest currently.
Even though these investments do not pay current interest in cash, the Fund is,
nonetheless, required by tax laws to accrue interest income on such investments
and to distribute such amounts at least annually to shareholders. Thus, the Fund
could be required at times to liquidate investments in order to fulfill its
intention to distribute substantially all of its net income as dividends. The
Fund will not be able to purchase additional income producing securities with
cash used to make such distributions, and its current income ultimately may be
reduced as a result.
Evergreen Diversified Bond Fund may invest in securities rated as low as D
by S&P or C- by Moody's. Such securities may have defaulted on payments of
principal and/or interest at the time of investment. (Rating categories are
described in the Appendix.) Evergreen Diversified Bond Fund will invest in debt
so rated only when the investment adviser believes the issuer's financial
condition will improve through reorganization or other measures. Evergreen
Intermediate Term Bond Fund will not invest in securities rated below CCC by S&P
or Caa by Moody's. Each Fund may also invest in high yield, high risk securities
which are unrated or rated under a different system if a Fund's investment
adviser believes they are comparable to high yield securities in which each Fund
may otherwise invest.
The investment adviser considers the ratings of S&P and Moody's assigned to
various securities, but does not rely solely on these ratings because (1) S&P
and Moody's 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 category.
INVESTMENT RESTRICTIONS AND GUIDELINES
FUNDAMENTAL POLICIES
The Funds have adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of each Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the "1940
Act"). Unless otherwise stated, all references to the assets of a Fund are in
terms of current market value.
DIVERSIFICATION
Each Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
CONCENTRATION
Each Fund may not concentrate its investments in the securities of issuers
primarily engaged in a particular industry (other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities).
ISSUING SENIOR SECURITIES
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
BORROWING
Each Fund may not borrow money, except to the extent permitted by
applicable law.
UNDERWRITING
Each Fund may not underwrite securities of other issuers, except insofar as
each Fund may be deemed an underwriter in connection with the disposition of its
portfolio securities.
REAL ESTATE
Each Fund may not purchase or sell real estate, except that, to the extent
permitted by applicable law, each Fund may invest in (a) securities that are
directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
COMMODITIES
Each Fund may not purchase or sell physical commodities or contracts on
commodities except to the extent that each Fund may engage in financial futures
contacts and related options and currency contracts and related options and may
otherwise do so in accordance with applicable law and without registering as a
commodity pool operator under the Commodity Exchange Act.
LOANS TO OTHER PERSONS
Each Fund may not make loans to other persons, except that a Fund may lend
its portfolio securities in accordance with applicable law. The acquisition of
investment securities or other investment instruments shall not be deemed to be
the making of a loan.
GUIDELINES
Unlike the Fundamental Policies above, the following guidelines may be
changed by the Trust's Board of Trustees without shareholder approval.
DIVERSIFICATION
Under the 1940 Act, with respect to the 75% of its total assets, a
diversified investment company may not invest more than 5% 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, determined at the time of purchase. These
limitations do not apply to investments in securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities.
BORROWINGS
Each Fund may borrow from banks in an amount up to 33 1/3% of its total
assets, taken at market value. Each Fund may only borrow as a temporary measure
for extraordinary or emergency purposes such as the redemption of Fund shares.
Each Fund will not purchase securities while borrowings are outstanding except
to exercise prior commitments and to exercise subscription rights. (as defined
in the 1940 Act) or enter into reverse repurchase agreements, in amounts up to
33 1/3 % of its total assets (including the amount borrowed). Each Fund may
borrow up to an additional 5% of its total assets for temporary purposes. Each
Fund may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities. Each Fund may purchase securities
on margin and engage in short sales to the extent permitted by applicable law.
ILLIQUID SECURITIES
Each Fund may not invest more than 15% of its net assets in securities that
are Illiquid. A security is Illiquid when a Fund may not dispose of it in the
ordinary course of business within seven days at approximately the value at
which each Fund has the investment on its books.
INVESTMENT IN OTHER INVESTMENT COMPANIES
Each Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, each Fund may not (1) own more
than 3% of the outstanding voting stock of another investment company, (2)
invest more than 5% of its assets in any single investment company, and (3)
invest more than 10% of its assets in investment companies. However, each Fund
may invest all of its investable assets in securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as each Fund.
SHORT SALES
Each Fund may not make short sales of securities or maintain a short
position unless, at all times when a short position is open, it owns an equal
amount of such securities or of securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short. Each Fund may
effect a short sale in connection with an underwriting in which each Fund is a
participant.
MANAGEMENT OF THE TRUST
Set forth below are the Trustees and officers of the Trust and their
principal occupations and some of their affiliations over the last five years.
Unless otherwise indicated, the address for each Trustee and officer is 200
Berkeley Street, Boston, Massachusetts 02116. Each Trustee is also a Trustee of
each of the other Trusts in the Evergreen Fund complex, other than Evergreen
Variable Trust of which Messrs. Howell, Salton and Scofield are the only
Trustees.
<TABLE>
<CAPTION>
NAME AND DATE OF BIRTH POSITION WITH TRUST PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- - ------------------------------- -------------------------- -------------------------------------------------------------
<S> <C> <C>
Laurence B. Ashkin Trustee Real estate developer and construction consultant;
(DOB: 2/2/28) President of Centrum Equities and Centrum
Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.;
(DOB: 10/23/34) former Managing Director, Seaward Management
Corporation (investment advice).
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance
(DOB: 10/12/38) Committee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and
Wine; Chairman and President, Oldways Preservation
and Exchange Trust (education); former Chairman of
the Board, Director, and Executive Vice President,
The London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive Officer,
Gifford Gifts of Fine Foods; former Chairman, Gifford,
Drescher & Associates (environmental consulting); former
Director, Keystone Investments, Inc.
22159 10
<PAGE>
NAME AND DATE OF BIRTH POSITION WITH TRUST PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- - ------------------------------- -------------------------- -------------------------------------------------------------
James S. Howell Chairman of the Former Chairman of the Distribution Foundation for
(DOB: 8/13/24) Board of Trustees the Carolinas; former Vice President of Lance Inc.
(food manufacturing).
Leroy Keith, Jr. Trustee Director of Phoenis Total Return Fund and Equifax,
Inc.; Trustee of Phoenix Series Fund, Phoenix
(DOB: 2/14/39) Multi-Portfolio Fund, and The Phoenix Big Edge
Series Fund; and former President, Morehouse
College.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc.
(DOB: 7/14/39) (steel producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham
(DOB: 8/2/39) Corporation; and former Director of Carolina
Cooperative Federal Credit Union.
*William Walt Pettit Trustee Partner in the law firm of Holcomb and Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President,
(DOB: 9/14/41) 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.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health
(DOB: 6/2/47) Services; and former Managed Health Care
Consultant; former President, Primary Physician
Care.
Michael S. Scofield Trustee Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43)
Richard J. Shima Trustee Chairman, Environmental Warranty, Inc. (insurance
(DOB: 8/11/39) 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.
John J. Pileggi President and Senior Managing Director, Furman Selz LLC since
Treasurer 1992; Managing Director from 1984 to 1992;
Consultant to BISYS Fund Services since 1996;
230 Park Avenue, Suite 910, New York, NY.
George O. Martinez Secretary Senior Vice President and Director of
Administration and Regulatory Services, BISYS
Fund Services; Vice President/Assistant General
Counsel, Alliance Capital Management from 1988
to 1995; 3435 Stelzer Road, Columbus, Ohio.
</TABLE>
*This Trustee may be considered an interested Trustee within the
meaning of the 1940 Act.
The officers of the Trust are all officers and/or employees of BISYS
Fund Services ("BISYS"), except for Mr. Pileggi, who is a consultant to BISYS.
For more information on BISYS, see "Sub-Administrator" below.
Listed below is the estimated aggregate Trustee compensation for calendar
year 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Name Of Person, Aggregate Pension Or Estimated Annual Total
Postion Compensation Retirement Benefits Upon Compensation
From Registant Benefits Accrued Retirement From Registrant
As Part Of Fund And Fund
Expenses Complex Paid To
Directors
Laurence B. Ashkin $5,000 $0 $0 $75,000
Charles A. Austin $5,000 $0 $0 $75,000
K. Dun Gifford $4,500 $0 $0 $70,000
James S. Howell $6,000 $0 $0 $95,000
Leroy Keith Jr. $4,500 $0 $0 $70,000
Gerald M. McDonnell $5,000 $0 $0 $75,000
Thomas L. McVerry $5,500 $0 $0 $86,000
William Walt Petit $4,500 $0 $0 $70,000
David M. Richardson $5,000 $0 $0 $75,000
Russell A. Salton, III $4,500 $0 $0 $70,000
Michael S. Scofield $4,500 $0 $0 $70,000
Richard J. Shima $4,500 $0 $0 $70,000
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of the date of this SAI, the officers and Trustees of the Trust owned as
a group less than 1% of the outstanding Class A, Class B, Class C or Class Y
shares of any Fund. As of the same date, no person, to any Fund's knowledge,
owned beneficially or of record more than 5% of a class of a Fund's outstanding
shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISER
The investment adviser to the Funds (the "Adviser") is KEYSTONE INVESTMENT
MANAGEMENT COMPANY, 200 Berkeley Street, Boston, Massachusetts 02116. The
Adviser is a subsidiary of First Union Corporation, which is a bank holding
company headquartered at 301 South College Street, Charlotte North Carolina
28288. First Union Corporation and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
Each Fund pays the Adviser a fee for its services at the annual rate set
forth below:
Aggregate Net
Annual Asset Value of the
MANAGEMENT FEE INCOME SHARES OF THE FUND
2% of Gross Dividend and
Interest Income, Plus
0.50% of the first $ 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 $ 100,000,000 plus
0.30% of the next $ 100,000,000 plus
0.25% of amounts over $ 500,000,000.
The Adviser's fee is computed as of the close of business each business day and
payable monthly.
INVESTMENT ADVISORY CONTRACTS
On behalf of each Fund, the Trust has entered into investment advisory
agreements with the Adviser (the "Advisory Agreements"). Under the Advisory
Agreements, and subject to the supervision of the Trust's Board of Trustees, the
Adviser furnishes to the appropriate 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. The
Adviser 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 the Adviser, 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 (as applicable) (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 such Fund and its shares with
the 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 Trust on matters
relating to such Fund; (14) charges and expenses of filing annual and other
reports with the SEC and other authorities; and all extraordinary charges and
expenses of such Fund.
Each 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 Trust or by a vote of a majority of the
Fund's outstanding shares. 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 (Trustees who are not interested persons of the Fund, as
defined in the 1940 Act) cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreements may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees or by a
vote of a majority of outstanding shares. Each Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
GENERAL
The Trust has adopted procedures pursuant to Rule 17a-7 of the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit a Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union Corporation is an investment adviser. The Rule 17a-7 Procedures also allow
the Funds to buy or sell securities from other advisory clients for whom a
subsidiary of First Union Corporation is an investment adviser. The Funds may
engage in such transaction if they are equitable to each participant and
consistent with each participant's investment objective.
DISTRIBUTOR
Evergreen Distributor, Inc. (the "Distributor"), markets the Funds through
broker-dealers and other financial representatives. Its address is 125 W. 55th
Street, New York, NY 10019.
DISTRIBUTION PLANS
Distribution fees are accrued daily and paid monthly on Class A, Class B
and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B shares and Class C shares are
designed to permit an investor to purchase such shares through broker-dealers
without the assessment of a front-end sales charge, and, in the case of Class C
shares, without the assessment of a contingent deferred sales charge after the
first year following the month of purchase, while at the same time permitting
the Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares and
the Class C shares are the same as those of the front-end sales charge and
distribution fee with respect to the Class A shares in that in each case the
sales charge and/or distribution fee provide for the financing of the
distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each Fund
with respect to each of its Class A, Class B and Class C shares (each a "Plan"
and collectively, the "Plans"), the Treasurer of each Fund reports the amounts
expended under the Plans and the purposes for which such expenditures were made
to the Trustees of the Trust for their review on a quarterly basis. Also, each
Plan provides that the selection and nomination of the disinterested Trustees
are committed to the discretion of such disinterested Trustees then in office.
The Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for successive
twelve-month periods provided, however, that such continuance is specifically
approved at least annually by the Trustees of the Trust or by vote of the
holders of a majority of the outstanding voting securities of that Class and, in
either case, by a majority of the Independent Trustees of the Trust who have no
direct or indirect financial interest in the operation of the Plan or any
agreement related thereto.
The Plans permit the payment of fees to brokers and others for distribution
and shareholder-related administrative services and to broker-dealers,
depository institutions, financial intermediaries and administrators for
administrative services as to Class A, Class B and Class C shares. The Plans are
designed to (i) stimulate brokers to provide distribution and administrative
support services to each Fund and holders of Class A, Class B and Class C shares
and (ii) stimulate administrators to render administrative support services to
the Fund and holders of Class A, Class B and Class C shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to
providing office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding Class A, Class B and
Class C shares; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A, Class B and Class C shares.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (i) by a Fund without penalty
at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
disinterested Trustees, or (ii) by the Distributor. To terminate any
Distribution Agreement, any party must give the other parties 60 days' written
notice; to terminate a Plan only, the Fund need give no notice to the
Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
ADDITIONAL SERVICE PROVIDERS
ADMINISTRATOR
Evergreen Investment Services, Inc. ("EIS") serves as administrator to each
Fund, subject to the supervision and control of the Trust's Board of Trustees.
EIS provides each Fund with facilities, equipment and personnel and is entitled
to receive a fee based on the aggregate average daily net assets of the Fund
based on the total assets of all mutual funds advised by First Union Corporation
subsidiaries. The fee paid to EIS is calculated in accordance with the following
schedule: 0.50% 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
bilion and 0.010% on assets in excess of $30 billion.
SUB-ADMINISTRATOR
BISYS provides such personnel and certain administrative services to the
Funds pursuant to a sub- administrator agreement. For its services under that
agreement, BISYS receives a fee from EIS based on the aggregate average daily
net assets of each Fund at a rate based on the total assets of all mutual funds
administered by EIS for which subsidiaries of First Union Corporation also serve
as investment adviser. The sub-administrator fee is calculated in accordance
with the following schedule: 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. BISYS is an affiliate of the Distributor.
TRANSFER AGENT
Evergreen Service Company, a subsidiary of First Union Corporation, is the
Funds' transfer agent. Under agreements with the Funds, the transfer agent
issues and redeems shares, pays dividends and performs other duties in
connection with the maintenance of shareholder accounts. The transfer agent's
address is 200 Berkeley Street, Boston, Massachusetts 02116.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP audits each Fund's financial statements. The
auditor's address is 99 High Street, Boston, Massachusetts 02110.
CUSTODIAN
State Street Bank and Trust Company is the Funds' custodian. Under
agreements with the Funds, the bank keeps custody of each Fund's securities and
cash and performs other related duties. The custodian's address is 225 Franklin
Street, Boston, Massachusetts 02110.
LEGAL COUNSEL
Sullivan & Worcester LLP provides legal advice to the Funds. Its address is
1025 Connecticut Avenue, N.W., Washington, D.C. 20036.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE COMMISSIONS
Each Fund expects to buy and sell its fixed-income securities through
principal transactions directly from the issuer or from an underwriter or market
maker for the securities. Generally, a Fund will not pay brokerage commissions
for such purchases. Usually, when a Fund buys a security from an underwriter,
the purchase price will include an underwriting commission or concession. The
purchase price for securities bought from dealers serving as market makers will
similarly include the dealer's mark up or reflect a dealer's mark down. When a
Fund executes transactions in the over-the-counter market, it will deal with
primary market makers unless more favorable prices are otherwise obtainable.
SELECTION OF BROKERS
In effecting transactions in portfolio securities for each Fund, the
Adviser seeks the best execution of orders at the most favorable prices. The
Adviser 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 they effect the transaction,
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, and
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").
Each Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Each Fund considers the receipt of research services by a Fund or the
Adviser to be in addition to, and not instead of, the services the Adviser is
required to perform under the Advisory Agreement. The Adviser believes that it
cannot determine or practically allocate the cost, value and specific
application of such research ervices between a Fund and its other clients, who
may indirectly benefit from the availability of such services. Similarly, the
Fund may indirectly benefit from information made available from transactions
effected for the Adviser's other clients. The Advisory Agreements also permit
the Adviser to pay higher brokerage commissions for brokerage and research
services in accordance with Section 28(e) of the Securities Exchange Act of
1934; if the Adviser does so on a basis that is fair and equitable to the Fund.
Neither the Funds nor the Adviser intends on placing securities
transactions with any particular broker-dealer. The Trust's Board of Trustees
has determined, however, that each Fund may consider sales of Fund shares when
selecting of broker-dealers to execute portfolio transactions, subject to the
requirements of best execution described above.
GENERAL BROKERAGE POLICIES
The Adviser makes investment decisions for each Fund independently from
those of its other clients. It may frequently develop, however, that the Adviser
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, the Adviser 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 a Fund's securities, each Fund believes that in
other cases its ability to participate in volume transactions will produce
better executions. In order to take advantage of the availability of lower
purchase prices, the Funds may occasionally participate in group bidding for the
direct purchase from an issuer of certain securities.
The Board of Trustees periodically reviews each Fund's brokerage policy.
Because of the possibility 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.
ORGANIZATION
FORM OF ORGANIZATION
Each Fund is a series of an open-end management investment company, known
as "EVERGREEN FIXED INCOME TRUST" (the "Trust"). The Trust was formed as a
Delaware business trust on September 17, 1997 (the "Declaration of Trust"). A
copy of the Declaration of Trust is on file as an exhibit to the Trust's
Registration Statement, of which this SAI is a part. This summary is qualified
in its entirety by reference to the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest of series and classes of shares. Each share of a
Fund represents an equal proportionate interest with each other share of that
series and/or class. Upon liquidation, shares are entitled to a pro rata share
of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Trust is not required to
hold annual meetings. However, the Trust intends to hold meetings at least
annually. At meetings called for the initial election of Trustees or to consider
other matters, each share is entitled to one vote for each dollar of net asset
value applicable to such share. Shares generally vote together as one class on
all matters. Classes of shares of each Fund have equal voting rights. No
amendment may be made to the Declaration of Trust that adversely affects any
class of shares without the approval of a majority of the votes applicable to
the shares of that class. Shares have non-cumulative voting rights, which means
that the holders of more than 50% of the votes applicable to shares voting for
the election of Trustees can elect 100% of the Trustees to be elected at a
meeting and, in such event, the holders of the remaining 50% or less of the
shares voting will not be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and 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.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
PURCHASE, REDEMPTION AND PRICING OF SHARES
HOW THE FUNDS OFFER SHARES TO THE PUBLIC
You may buy shares of a Fund through the Distributor, broker-dealers that
have entered into special agreements with the Distributor or certain other
financial institutions. Evergreen Diversified Bond Fund offers three classes of
shares, Class A, Class B and Class C, each of which differs primarily with
respect to sales charges and distribution fees. Evergreen Intermediate Term Bond
Fund offers four classes of shares, Class A, Class B, Class C and Class Y, each
of which differs primarily with respect to sales charges and distribution fees.
Depending upon the class of shares, you will pay an initial sales charge when
you buy a Fund's shares, a contingent deferred sales charge (a "CDSC") when you
redeem a Fund's shares or no sales charges at all.
PURCHASE ALTERNATIVES
CLASS A SHARES
With certain exceptions, when you purchase Class A shares of Evergreen
Diversified Bond Fund you will pay a maximum sales charge of 4.75%. When you
purchase Class A shares of Evergreen Intermediate Term Bond Fund you will pay a
maximum sales charge of 3.25%. (The prospectuses contain a complete table of
applicable sales charges and a discussion of sales charge reductions or waivers
that may apply to purchases.) If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, a Fund will charge a CDSC of
1.00% if you redeem during the month of purchase and the 12-month period
following the month of purchase. See "Contingent Deferred Sales Charge" below.
CLASS B SHARES
The Funds offer Class B shares at net asset value (without a front-end
load). With certain exceptions, however, the Funds will charge a CDSC on shares
you redeem within 72 months after the month of purchase. The Funds will charge
CDSCs at the following rates:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase.................5.00%
Second twelve-month
period following the month of purchase.................4.00%
Third twelve-month
period following the month of purchase.................3.00%
Fourth twelve-month
period following the month of purchase.................3.00%
Fifth twelve-month
period following the month of purchase.................2.00%
Sixth twelve-month
period following the month of purchase.................1.00%
Thereafter..................................................0.00%
Class B shares that have been outstanding for seven years after the month of
purchase will automatically convert to Class A shares without imposition of a
front-end sales charge. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificate to ESC.)
CLASS C SHARES
Class C shares are available only through broker-dealers who have entered
into special distribution agreements with the Distributor. The Funds offer Class
C shares at net asset value (without an initial sales charge). With certain
exceptions, however, the Funds will charge a CDSC of 1.00% on shares you redeem
within 12-months after the month of your purchase. See "Contingent Deferred
Sales Charge" below.
CLASS Y (EVERGREEN INTERMEDIATE TERM BOND FUND ONLY)
No CDSC is imposed on the redemption of Class Y shares. Class Y shares are
not offered to the general public and are available only to (1) persons who at
or prior to December 31, 1994 owned shares in a mutual fund advised by Evergreen
Asset Management Corp. ("Evergreen Asset"), (2) certain institutional investors
and (3) investment advisory clients of the Capital Management Group of First
Union National Bank, Evergreen Asset, Keystone Investment Management Company, or
their affiliates. Class Y shares are offered at net asset value without a
front-end or back-end sales charge and do not bear any Rule 12b-1 distribution
expenses.
CONTINGENT DEFERRED SALES CHARGE
The Funds charge a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that they have incurred in connection
with the sales of their shares (see "Distribution Plans"). If imposed, the Funds
deduct the CDSC from the redemption proceeds you would otherwise receive. The
CDSC is a percentage of the lesser of (1) the net asset value of the shares at
the time of redemption or (2) the shareholder's original net cost for such
shares. Upon request for redemption, to keep the CDSC a shareholder must pay as
low as possible, a Fund will first seek to redeem shares not subject to the CDSC
and/or shares held the longest, in that order. The CDSC on any redemption is, to
the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the distributor or a predecessor distributor.
SALES CHARGE WAIVERS OR REDUCTIONS
REDUCING CLASS A FRONT-END LOADS
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
COMBINED PURCHASES
You can reduce your sales charge by combining purchases of Class A shares
of multiple Evergreen funds. For example, if you invested $75,000 in each of two
different Evergreen funds with a maximum sales load of 4.75%, you would pay a
sales charge based on a $150,000 purchase (i.e., 3.75% of the offering price,
rather than 4.75%).
RIGHTS OF ACCUMULATION
You can reduce your sales charge by adding the value of Class A shares of
Evergreen funds you already own to the amount of your next Class A investment.
For example, if you hold Class A shares valued at $99,999 and purchase an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75%, rather than 4.75%, assuming shares were sold with a
maximum sales load of 4.75%.
LETTER OF INTENT
You can, by completing the the "Letter of Intent" section of the
application, purchase Class A shares over a 13-month period and receive the same
sales charge as if you had invested all the money at once. All purchases of
Class A shares of an Evergreen fund during the period will qualify as Letter of
Intent purchases.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
WAIVER OF SALES CHARGES
The Funds may sell their shares at net asset value without an initial sales
charge to:
1. purchasers of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax
sheltered annuity or TSA plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan") or
a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust
departments and registered investment advisers;
4. investment advisers, consultants or financial planners who
place trades for their own accounts or the accounts of their
clients and who charge such clients a management, consulting,
advisory or other fee;
5. clients of investment advisers or financial planners who place
trades for their own accounts if the accounts are linked to
the master account of such investment advisers or financial
planners on the books of the broker-dealer through whom shares
are purchased;
6. institutional clients of broker-dealers, including retirement
and deferred compensation plans and the trusts used to fund
these plans, which place trades through an omnibus account
maintained with a Fund by the broker-dealer;
7. employees of First Union National Bank, its affiliates, the
Distributor, any broker-dealer with whom the Distributor has
entered into an agreement to sell shares of a Fund, and
members of the immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen Funds, the Distributor or their affiliates and to
the immediate families of such persons; or
9. a bank or trust company in a single account in the name of
such bank or trust company as trustee if the initial
investment in any Evergreen Fund made pursuant to this waiver
is at least $500,000 and any commission paid at the time of
such purchase is not more than 1% of the amount invested.
With respect to items 8 and 9 above, a Fund will only sell shares to these
parties upon the purchasers' written assurances that the purchases are for their
personal investment purposes only. Such purchasers may not resell the securities
except through redemption by a Fund. The Funds will not charge any CDSC on
redemptions by such purchasers.
WAIVER OF CDSCS
The Funds do not impose a CDSC when the shares you are redeeming represent:
1. an increase in the share value above the net cost of such
shares;
2. certain shares for which a Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares that are in the accounts of a shareholder who has died
or become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder
who is a least 59 1/2 years old;
6. shares in an account that we have closed because the account
has an aggregate net asset value of less than $1,000;
7. an automatic withdrawal under a Systematic Withdrawal Plan of
up to 1.0% per month of your initial account balance;
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan
that purchased Class C shares (this waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially
all of its assets).
EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of any
other Evergreen fund, as described under the section entitled "Exchanges" in the
Fund's prospectuses. Before you make an exchange, you should read the prospectus
of the Evergreen fund into which you want to exchange. The Trust's Board of
Trustees reserves the right to discontinue, alter or limit the exchange
privilege at any time.
HOW THE FUNDS VALUE SHARES
HOW AND WHEN THE FUNDS CALCULATE ITS NET ASSET VALUE PER SHARE ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as
described in the prospectuses. Each Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of each Fund is calculated by dividing the value of a Fund's net
assets attributable to that class by all of the shares issued for that class.
HOW A FUND VALUES THE SECURITIES IT OWNS
Current values for a Fund's portfolio securities are determined as follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis
of the last sales price on the exchange where primarily traded or on
the NMS prior to the time of the valuation, provided that a sale has
occurred.
(2) Securities traded in the over-the-counter market, other than on
NMS, are valued at the mean of the bid and asked prices at the time of
valuation.
(3) Short-term investments maturing in more than sixty days for which
market quotations are readily available, are valued at current market
value.
(4) Short-term investments maturing in sixty days or less (including
all master demand notes) are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates
market.
(5) Short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are
valued at amortized cost (market value on the sixtieth day adjusted for
amortization of premium or accretion of discount), which, when combined
with accrued interest, approximates market.
(6) Securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS
if, in the Fund's opinion, the last sales price does not reflect a
current market value or if no sale occurred; and other assets are
valued at prices deemed in good faith to be fair under procedures
established by the Board of Trustees.
Foreign securities for which market quotations are not readily available
are valued on the basis of valuations provided by a pricing service, approved by
the Trust's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities and various relationships between
securities and yield to maturity in determining value.
SHAREHOLDER SERVICES
As described in the prospectuses, a shareholder may elect to receive their
dividends and capital grains distributions in cash instead of shares. However,
ESC will automatically convert a shareholder's distribution option so that the
shareholder reinvests all dividends and distributions in additional shares when
it learns that the postal or other delivery service is unable to deliver checks
or transaction confirmations to the shareholder's address of record. The Funds
will hold the returned distribution or redemption proceeds in a non
interest-bearing account in the shareholder's name until the shareholder updates
his or her address. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
PRINCIPAL UNDERWRITER
The Distributor is the principal underwriter for the Trust and with respect
to each class of each Fund. The Trust has entered into Principal Underwriting
Agreements ( "Underwriting Agreements") with the Distributor with respect to
each class of each Fund. The Distributor is a subsidiary of The BISYS Group,
Inc.
The Distributor, as agent, has agreed to use its best efforts to find
purchasers for the shares. The Distributor 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
Agreements provide that the Distributor will bear the expense of preparing,
printing, and distributing advertising and sales literature and prospectuses
used by it.
All subscriptions and sales of shares by the Distributor are at the public
offering price of the Funds' shares, which is determined in accordance with the
provisions of the Trust's Declaration of Trust, By-Laws, current prospectuses
and SAI. All orders are subject to acceptance by the Trust and the Trust
reserves the right, in its sole discretion, to reject any order received. Under
the Underwriting Agreements, the Trust is not liable to anyone for failure to
accept any order.
The Distributor has agreed that it will, in all respects, duly conform with
all state and federal laws applicable to the sale of the shares. The Distributor
has also agreed that it will indemnify and hold harmless the Trust and each
person who has been, is, or may be a Trustee or officer of the Trust against
expenses reasonably incurred by any of them in connection with any claim,
action, suit, or proceeding to which any of them may be a party that arises out
of or is alleged to arise out of any misrepresentation or omission to state a
material fact on the part of the Distributor or any other person for whose acts
the Distributor is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Trust.
The Underwriting Agreements provide that they will remain in effect as long
as their terms and continuance are approved annually (1) by a vote of a majority
of the Trust's Independent Trustees, and (2) by vote of a majority of the
Trust's Trustees, in each case, cast in person at a meeting called for that
purpose.
The Underwriting Agreements 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 subject to such agreement. The Underwriting Agreements will
terminate automatically upon their "assignments," as that term is defined in the
1940 Act.
From time to time, if, in the Distributor's judgment, it could benefit the
sales of shares, the Distributor may provide to selected broker-dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software, and data files.
ADDITIONAL TAX INFORMATION
REQUIREMENTS FOR QUALIFICATION AS A REGISTERED INVESTMENT COMPANY
Each Fund intends to qualify for and elect the tax treatment applicable to
a regulated investment company ("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 RIC, 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 (this requirement is repealed for Fund fiscal years beginning after
August 5, 1997); and (iii) diversify its holdings so that, at the end of each
quarter of its taxable year, (a) 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 (b) 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.
TAXES ON DIVIDENDS
Distributions will be taxable to shareholders 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.
To calculate ordinary income for federal income tax purposes, shareholders
must generally include dividends paid by the Fund from its investment company
taxable income (net investment income plus net realized short-term capital
gains, if any). Since none of a Fund's income will consist of corporate
dividends, no distributions will qualify for the 70% corporate dividends
received deduction.
From time to time, the Fund will distribute the excess of its net long-term
capital gains over its short-term capital loss to shareholders. For federal tax
purposes, shareholders must include such distributions when calculating their
long-term capital gains. Distributions of long-term capital gains are taxable as
such to a shareholder, no matter how long the shareholder has held the shares.
Distributions by a Fund reduce its NAV. A distribution that reduces the
Fund's NAV below a shareholder's cost basis is taxable as described above,
although from an investment standpoint, it is a return of capital. In
particular, if a shareholder buys Fund shares just before the Fund makes a
distribution, when the Fund makes the distribution the shareholder will receive
what is in effect a return of capital. Nevertheless, the shareholder must pay
taxes on the distribution. Therefore, shareholders should carefully consider the
tax consequences of buying Fund shares just before a distribution.
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.
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 credit or deduction is subject to a number of
limitations.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
Upon a sale or exchange of Fund shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. A shareholder
must treat such gains or losses as a capital gain or loss if the shareholder
held the shares as capital assets. Capital gain on assets held for more than
eighteen months is generally subject to a maximum federal income tax rate of 20%
for an individual. The maximum capital gains tax rate for capital assets held by
an individual for more than twelve months but not more than eighteen months is
generally 28%. Also, a shareholder must treat as long-term capital gains or
losses any capital gains or losses on Fund shares held for more than one year.
Generally, the Code will not allow a shareholder to realize a loss on shares he
or she has sold or exchanged and replaced within a sixty-one-day period
beginning thirty days before and ending thirty days after he or she sold or
exchanged the shares. The Code will treat a shareholder's loss on shares held
for six months or less as a long-term capital loss to the extent the shareholder
received distributions of net capital gains on such shares.
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.
GENERAL
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 30% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
CALCULATION OF PERFORMANCE DATA
Total return quotations for a class of shares of each Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
Current yield quotations as they may appear, from time to time, in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of a Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period.
Any given yield or total return quotation should not be considered
representative of a Fund's yield or total return for any future period.
ADDITIONAL INFORMATION
OTHER INFORMATION
Except as otherwise stated in its prospectus or required by law, each 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.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in a Fund's
prospectuses, SAI or in supplemental sales literature issued by such Fund or the
Distributor, and no person is entitled to rely on any information or
representation not contained therein.
The Funds' prospectuses and SAI omit certain information contained in the
Trust's registration statement. The Funds have filed this SAI with the SEC and
you may get a copy of the SAI by writing to the Securities and Exchange
Commission's principal office in Washington, D.C. To get a copy of the SAI from
the SEC, you will have to pay the fee prescribed by their rules and regulations.
FINANCIAL STATEMENTS
The audited statement of assets and liabilities and the reports thereon of
KPMG Peat Marwick LLP for the Funds will be filed by amendment.
APPENDIX A
COMMON AND PREFERRED STOCK RATINGS
A. S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors, such
as product and industry position, corporate resources, and financial policy,
with results that make some common stocks more highly esteemed than others,
Standard & Poor's Corporation ("S&P") believes that earnings and dividend
performance is the end result of the interplay of these factors and that, over
the long run, the record of this performance has a considerable bearing on
relative quality. S&P rankings, however, do not reflect all of the factors,
tangible or intangible, that bear on stock quality.
Growth and stability of earnings and dividends are deemed key elements in
establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on per share
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line, and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these, scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
B. MOODY'S COMMON STOCK RANKINGS
Moody's Investors Service ("Moody's") presents a concise statement of the
important characteristics of a company and an evaluation of the grade (quality)
of its common stock. Data presented includes: (a) capsule stock information
which reveals short and long term growth and yield afforded by the indicated
dividend, based on a recent price; (b) a long term price chart which shows
patterns of monthly stock price movements and monthly trading volumes; (c) a
breakdown of a company's capital account which aids in determining the degree of
conservatism or financial leverage in a company's balance sheet; (d) interim
earnings for the current year to date, plus three previous years; (e) dividend
information; (f) company background; (g) recent corporate developments; (h)
prospects for a company in the immediate future and the next few years; and (i)
a ten year comparative statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently, and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings, and record of dividend payments.
Other considerations include conservativeness of capitalization, depth and
caliber of management, accounting practices, technological capabilities, and
industry position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
C. MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. AAA: An issue that is rated AAA is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. AA: An issue that is rated AA is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
3. A: An issue that is rated A is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the AAA
and AA classification, earnings and asset protection are, nevertheless, expected
to be maintained at adequate levels.
4. BAA: An issue that is rated BAA is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
5. BA: An issue that is rated BA is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. B: An issue that is rated B generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
7. CAA: An issue that is rated CAA is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
8. CA: An issue that is rated CA is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
9. C: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
CORPORATE BOND RATINGS
A. S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the United States,
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
a. 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;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation
in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from AA to A may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. 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.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC and C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and 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.
B. MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. 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.
2. AA - Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in AAA securities.
3. 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.
4. BAA - Bonds which are rated BAA are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. 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 both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
6. 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.
7. 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.
8. Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
market shortcomings.
9. C - Bonds which are rated as C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated November 30, 1997 (the "Prospectus"), pursuant to which
the Blanchard Flexible Tax-Free Bond Fund (the "FUND") is offered.
Please retain this document for future reference.
To obtain the Prospectus please call the FUND at 1-800-829-3863.
TABLE OF CONTENTS Page
General Information and History 2
Investment Objective and Policies 2
Securities in Which the FUND May Invest 3
Investment Restrictions 8
Portfolio Transactions 9
Computation of Net Asset Value 10
Performance Information 11
Additional Purchase and Redemption Information 13
Tax Matters 13
Blanchard Funds Management 18
Management Services 22
Portfolio Management Services 23
Custodian 23
Administrative Services 24
Distribution Plan 24
Description of the FUND 24
Shareholder Reports 25
Appendix A - Description of Bond Ratings A-26
MANAGER
Virtus Capital Management, Inc.
PORTFOLIO ADVISER
United States Trust Company of New York
DISTRIBUTOR
Federated Securities Corp.
CUSTODIAN
Signet Trust Company
TRANSFER AGENT
Federated Shareholder Services Company
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Dated: November 30, 1997
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND is a "no-load" fund which seeks to provide a high level of current interest
income exempt from Federal income tax consistent with the preservation of
principal. The FUND invests primarily in obligations of varying maturities
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies,
authorities and instrumentalities, the interest from which, in the opinion of
bond counsel for the issuer, is exempt from Federal income tax ("Municipal
Obligations"). There is no assurance that the FUND will achieve its investment
objective. This objective is a fundamental policy and may not be changed except
by a majority vote of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies," "Securities in Which the Fund May Invest" and "Other
Investment Information."
The FUND's investment objective is to provide a high level of current
interest income exempt from Federal income tax consistent with the preservation
of principal. The FUND will invest at least 65% of its assets in Municipal
Obligations, except when maintaining a temporary defensive position.
The FUND invests in Municipal Obligations which are determined by U.S.
Trust to present minimal credit risks. As a matter of fundamental policy, except
during temporary defensive periods, the FUND will maintain at least 80% of its
assets in tax-exempt obligations. (This policy may not be changed without the
vote of the holders of a majority of the FUND's outstanding shares.) However,
from time to time on a temporary defensive basis due to market conditions, the
FUND may hold uninvested cash reserves or invest in taxable obligations in such
proportions as, in the opinion of U.S. Trust, prevailing market or economic
conditions may warrant. Uninvested cash reserves will not earn income. Should
the FUND invest in taxable obligations, it would purchase: (i) obligations of
the U.S. Treasury; (ii) obligations of agencies and instrumentalities of the
U.S. Government; (iii) money market instruments, such as certificates of
deposit, commercial paper, and bankers' acceptances; (iv) repurchase agreements
collateralized by U.S. Government obligations or other money market instruments;
(v) municipal bond index futures and interest rate futures contracts; or (vi)
securities issued by other investment companies that invest in high quality,
short-term securities. Interest income from certain short-term holdings may be
taxable to shareholders as ordinary income.
In seeking to achieve its investment objective, the FUND may invest in
"private activity bonds" (see "Municipal Obligations" below), the interest on
which is treated as a specific tax preference item under the Federal alternative
minimum tax. Investments in such securities, however, will not exceed, under
normal market conditions, 20% of the FUND's total assets when added together
with any taxable investments held by the FUND.
The Municipal Obligations purchased by the FUND will consist of: (1)
municipal bonds rated "A" or better by Moody's Investors Service, Inc.
("Moody's") or by Standard & Poor's Ratings Group ("S&P") or, in certain
instances, municipal bonds with lower ratings if they are deemed by U.S. Trust
to be comparable to A-rated issues; (2) municipal notes rated "MIG-2" or better
("VMIG-2" or better in the case of variable rate notes) by Moody's or "SP-2" or
better by S&P; and (3) municipal commercial paper rated "Prime-2" or better by
Moody's or "A-2" or better by S&P. If not rated, securities purchased by the
FUND will be of comparable quality to the above ratings as determined by U.S.
Trust under the supervision of the FUND's Board of Trustees. A discussion of
Moody's and S&P's rating categories is contained in Appendix A.
<PAGE>
Although the FUND does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by U.S. Trust. To the extent that
the FUND's assets are concentrated in Municipal Obligations payable from
revenues on similar projects, the FUND will be subject to the peculiar risks
presented by such projects to a greater extent than it would be if the FUND's
assets were not so concentrated.
SECURITIES IN WHICH THE FUND MAY INVEST
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal
Obligations which may be held by the FUND are "general obligation" securities
and "revenue" securities. General obligation securities are secured by the
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the user of the facility being financed. Private activity bonds held by the
FUND are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity revenue bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
The FUND's portfolio may also include "moral obligation" securities,
which are normally issued by special-purpose public authorities. If the issuer
of moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund the restoration of which is
a moral commitment, but not a legal obligation of the state or municipality
which created the issuer. There is no limitation on the amount of moral
obligation securities that may be held by the FUND.
The FUND may also purchase custodial receipts evidencing the right to
receive either the principal amount or the periodic interest payments
("stripped") or both with respect to specific underlying Municipal Obligations.
In general, such "stripped" Municipal Obligations are offered at a substantial
discount in relation to the principal and/or interest payments which the holders
of the receipt will receive. To the extent that such discount does not produce a
yield to maturity for the investor that exceeds the original tax-exempt yield on
the underlying Municipal Obligation, such yield will be exempt from Federal
income tax for such investor to the same extent as interest on the underlying
Municipal Obligation. The FUNDs intend to purchase "stripped" Municipal
Obligations only when the yield thereon will be, as described above, exempt from
Federal income tax to the same extent as interest on the underlying Municipal
Obligations. "Stripped" Municipal Obligations are considered illiquid securities
subject to the 10% limit described in "Investment Limitations" in the Statement
of Additional Information.
FUTURES CONTRACTS. The FUND may purchase and sell municipal bond index
and interest rate futures contracts as a hedge against changes in market
conditions. A municipal bond index assigns values daily to the municipal bonds
included in the index based on the independent assessment of dealer-to-dealer
municipal bond brokers. A municipal bond index futures contract represents a
firm commitment by which two parties agree to take or make a delivery of an
amount equal to a specified dollar amount times the difference between the
municipal bond index value on the last trading date of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the underlying securities in the index is made.
The FUND may enter into contracts for the future delivery of
fixed-income securities commonly known as interest rate futures contracts.
Interest rate futures contracts are similar to the municipal bond index futures
contracts except that, instead of a municipal bond index, the "underlying
commodity" is represented by various types of fixed-income securities.
The FUND will not engage in transactions in futures contracts for
speculation, but only as a hedge against changes in market values of securities
which it holds or intends to purchase where the transactions are intended to
reduce risks inherent in the management of the FUND. The FUND may engage in
futures contracts only to the extent permitted by the Commodity Futures Trading
Commission ("CFTC") and the Securities and Exchange Commission ("SEC").
<PAGE>
When investing in futures contracts, the FUND must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When the FUND takes a long position in a futures contract, it must maintain a
segregated account containing cash and/or certain liquid assets equal to the
purchase price of the contract, less any margin or deposit. When the FUND takes
a short position in a futures contract, the FUND must maintain a segregated
account containing cash and/or certain liquid assets equal to the market value
of the securities underlying such contract, less any margin or deposit, which
must be at least equal to the market price at which the short position was
established.
Transactions by the FUND in futures contracts may subject the FUND to a
number of risks. Successful use of futures by the FUND is subject to the ability
of U.S. Trust to anticipate correctly movements in the direction of the market.
In addition, there may be an imperfect correlation, or no correlation at all,
between movements in the price of the futures contracts and movements in the
price of the instruments being hedged. Further, there is no assurance that a
liquid market will exist for any particular futures contract at any particular
time. Consequently, the FUND may realize a loss on a futures transaction that is
not offset by a favorable movement in the price of securities which it holds or
intends to purchase, or it may be unable to close a futures position in the
event of adverse price movements. Any income from investments in futures
contracts will be taxable income of the FUND.
MONEY MARKET INSTRUMENTS. Money market instruments that may be
purchased by the FUND in accordance with its investment objectives and policies
stated above include, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by a
savings association or savings bank which is insured by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation. Investments in time
deposits are limited to no more than 5% of the value of the FUND's total assets
at time of purchase.
Investments by the FUND in commercial paper will consist of issues that
are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In addition,
the FUND may acquire unrated commercial paper that is determined by U.S. Trust
at the time of purchase to be of comparable quality to rated instruments that
may be acquired by the FUND.
Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by the FUND, the FUND may, from time to time as specified
in the instrument, demand payment of the principal of the instrument or may
resell the instrument to a third party. The absence of an active secondary
market, however, could make it difficult for the FUND to dispose of the
instrument if the issuer defaulted on its payment obligation or during periods
that the FUND is not entitled to exercise its demand rights, and the FUND could,
for this or other reasons, suffer a loss with respect to such instrument.
REPURCHASE AGREEMENTS. As stated above, the FUND may agree to purchase
portfolio securities subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price ("repurchase agreements"). The FUND will
enter into repurchase agreements only with financial institutions such as banks
or broker/dealers which are deemed to be creditworthy by U.S. Trust under
guidelines approved by the FUND's Board of Trustees. The FUND will not enter
into repurchase agreements with U.S. Trust or its affiliates. Repurchase
agreements maturing in more than seven days will be considered illiquid
securities subject to the 10% limit described in "Investment Restrictions."
The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose the
FUND to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Income on
the repurchase agreements will be taxable.
<PAGE>
INVESTMENT COMPANY SECURITIES. The FUND may also invest in securities
issued by other investment companies that invest in high-quality, short-term
securities and that determine their net asset value per share based on the
amortized cost or penny-rounding method. In addition to the advisory fees and
other expenses the FUND bears directly in connection with its own operations, as
a shareholder of another investment company, the FUND would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the FUND's shareholders would indirectly bear the expenses of the FUND and
the other investment company, some or all of which would be duplicative. Such
securities will be acquired by the FUND within the limits prescribed by the
Investment Company Act of 1940 (the "1940 Act").
WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS. The FUND
may purchase eligible securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions involve a
commitment by the FUND to purchase or sell particular securities with payment
and delivery taking place in the future, beyond the normal settlement date, at a
stated price and yield. Securities purchased on a "forward commitment" or "when
issued" basis are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. It is expected that forward
commitments and "when-issued" purchases will not exceed 25% of the value of the
FUND's total assets absent unusual market conditions, and that the length of
such commitments will not exceed 45 days. The FUND does not intend to engage in
"when-issued" purchases and forward commitments for speculative purposes, but
only in furtherance of its investment objectives.
In addition, the FUND may acquire "stand-by commitments" with respect
to Municipal Obligations that it holds. Under a "stand-by commitment," a dealer
agrees to purchase, at the FUND's option, specified Municipal Obligations at a
specified price. The FUND will acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. "Stand-by commitments" acquired by the FUND
would be valued at zero in determining the FUND's net asset value.
RISK FACTORS:
FUTURES CONTRACTS. The FUND may enter into contracts for the purchase
or sale for future delivery of municipal bond indices or fixed-income securities
which otherwise meet the FUND's investment policies, to the extent permitted by
the Commodity Futures Trading Commission (the "CFTC"). U.S. futures contracts
have been designed by exchanges which have been designated "contract markets" by
the CFTC, and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on a number of contract markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange.
A municipal bond index futures contract represents a firm commitment by
which two parties agree to take or make a delivery of an amount equal to a
specified dollar amount times the difference between the municipal bond index
value on the last trading date of the contract and the price at which the
futures contract is originally struck. An interest rate futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specific, interest rate-sensitive financial instrument
(debt security) at a specified price, date, time and place.
The FUND will not use leverage when it enters into long futures or
options contracts. For each such long position the FUND will deposit cash or
cash equivalents, such as U.S. Government Securities or high grade debt
obligations, having a value equal to the underlying commodity value of the
contract as collateral with its custodian in a segregated account.
No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, equal to approximately 5% of the contract amount (this amount is
subject to change by the exchange on which the contract is traded and brokers
may charge a higher amount). This amount is known as "initial margin" and 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. The broker will have access to
amounts in
<PAGE>
the margin account if the FUND fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker, will
be made daily as the price of the currency or securities underlying the futures
contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." At any time prior
to the expiration of a futures contract, the FUND may elect to close the
position by taking an opposite position, which will operate to terminate the
FUND's existing position in the contract.
There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability of FUND
management to predict correctly movements in the price of the securities or
currencies underlying the particular transaction. These predictions and, thus,
the use of futures contracts involve skills and techniques that are different
from those involved in the management of portfolio securities.
Positions in futures contracts may be closed out only on the exchange
on which they were entered into (or through a linked exchange). No secondary
market for such contracts exists. Although the FUND intends to enter into
futures contracts only if there is an active market for such contracts, there is
no assurance that an active market will exist for the contracts at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit. It is possible that futures contract prices could
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting the FUND to substantial losses. In such event, and in the event of
adverse price movements, the FUND would be required to make daily cash payments
of variation margin.
REPURCHASE AGREEMENTS. The FUND may enter into repurchase agreements.
Under a repurchase agreement, the FUND acquires a debt instrument for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the FUND to resell such debt
instrument at a fixed price. The resale price is in excess of the purchase price
in that it reflects an agreed-upon market interest rate effective for the period
of time during which the FUND's money is invested. The FUND's risk is limited to
the ability of the seller to pay the agreed-upon sum upon the delivery date.
When the FUND enters into a repurchase agreement, it obtains collateral having a
value at least equal to the amount of the purchase price. Repurchase agreements
can be considered loans, as defined by the 1940 Act, collateralized by the
underlying securities. The return on the collateral may be more or less than
that from the repurchase agreement. The securities underlying a repurchase
agreement will be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including the accrued
interest earned. In evaluating whether to enter into a repurchase agreement, the
Portfolio Adviser will carefully consider the creditworthiness of the seller. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the FUND may incur a loss.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM or the Portfolio
Adviser. The borrower at all times during the loan must maintain with the FUND
cash or cash equivalent collateral or provide to the FUND an irrevocable letter
of credit equal in value at all times to at least 100% of the value of the
securities loaned. During the time portfolio securities are on loan, the
borrower pays the FUND any dividends or interest paid on such securities, and
the FUND may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. Loans are subject to
termination at the option of the FUND or the borrower at any time. The FUND may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the income earned on the cash to the borrower or
placing broker.
<PAGE>
ILLIQUID SECURITIES
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. The staff of the SEC defines an illiquid security as any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the company has valued the instrument.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. FUND management anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
<PAGE>
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. The FUND, a non-diversified management investment company, at the
close of each quarter of the FUND's taxable year, has the following
restrictions: (a) with respect to 50% of the FUND's total assets, the
FUND may not invest more than 5% of its total assets, at market value,
in the securities of one issuer (except the securities of the U.S.
Government, its agencies and instrumentalities) and (b) with respect to
the other 50% of the FUND's total assets, the FUND may not invest more
than 25% of the market value of its total assets in a single issuer
(except the securities of the U.S. Government, its agencies and
instrumentalities). These two restrictions, hypothetically, could give
rise to the FUND having securities, other than U.S. Government
securities, of as few as twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities
of any single company; (b) more than 5% of its total assets would be
invested in the securities of companies (including predecessors) that
have been in continuous operation for less than 3 years; (c) more than
25% of its total assets would be concentrated in companies within any
one industry (except that this restriction does not apply to U.S.
Government securities); or (d) more than 5% of net assets would be
invested in warrants or rights. (Included within that amount, but not
to exceed 2% of the value of the FUND's net assets, may be warrants
which are not listed on the New York or American Stock Exchanges.)
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the
market value of its total assets). This does not preclude the FUND from
obtaining such short-term credit as may be necessary for the clearance
of purchases and sales of its portfolio securities. The FUND will not
purchase additional securities while the amount of any borrowings is in
excess of 5% of the market value of its total assets.
4. The FUND will not make loans of money or securities except (i)
through repurchase agreements, (ii) through loan participations, and
(iii) through the lending of its portfolio securities as described in
the Prospectus and in this Statement of Additional Information.
5. The FUND may not invest more than 10% of its total assets in the
securities of other investment companies or purchase more than 3% of
any other investment company's voting securities, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.
6. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND
may pledge securities having a value at the time of pledge not
exceeding 10% of the market value of the FUND's total assets.
Collateral arrangements with respect to the FUND's permissible futures
transactions, including initial and variation margin, are not
considered to be a pledge of assets for purposes of this restriction.
7. The FUND may not buy any securities or other property on margin
(except for the deposit of initial or variation margin in connection
with hedging and risk management transactions and for such short term
credits as are necessary for the clearance of transactions) or engage
in short sales.
8. The FUND may not invest in companies for the purpose of exercising
control or management.
<PAGE>
9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing
or selling portfolio securities.
10. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers
and Trustees of the FUND and the officers and directors of VCM or the
Portfolio Adviser who individually own beneficially more than 1/2 of 1%
of the outstanding securities of such issuer, together own beneficially
more than 5% of such outstanding securities.
11. The FUND may not purchase or sell real property (including limited
partnership interests, but excluding readily marketable securities of
companies which invest in real estate).
12. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases.
13. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Adviser subject to the supervision of VCM
and the Trustees and pursuant to authority contained in the Investment Advisory
Contract between the FUND and VCM, and the Sub-Advisory Agreement between VCM
and the Portfolio Adviser. In selecting such brokers or dealers, the Portfolio
Adviser will consider various relevant factors, including, but not limited to
the best net price available, the size and type of the transaction, the nature
and character of the markets for the security to be purchased or sold, the
execution efficiency, settlement capability, financial condition of the
broker-dealer firm, the broker-dealer's execution services rendered on a
continuing basis and the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to the Portfolio Adviser for the
FUND's use, which in the opinion of the Trustees, are reasonable and necessary
to the FUND's normal operations. Those services may include economic studies,
industry studies, security analysis or reports, sales literature and statistical
services furnished either directly to the FUND or to the Portfolio Adviser. Such
allocation shall be in such amounts as VCM or the Portfolio Adviser shall
determine and the Portfolio Adviser shall report regularly to VCM who will in
turn report to the Trustees on the allocation of brokerage for such services.
The receipt of research from broker-dealers may be useful to the
Portfolio Adviser in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers who
have executed orders on behalf of the Portfolio Adviser's other clients may be
useful to the Portfolio Adviser in carrying out its obligations to the FUND. The
receipt of such research may not reduce the Portfolio Adviser's normal
independent research activities.
<PAGE>
The Portfolio Adviser is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are authorized
to use Federated Securities Corp. ("the Distributor"), and the Portfolio Adviser
or an affiliated broker-dealer on an agency basis, to effect a substantial
amount of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from portfolio transactions earned by the Distributor as a result of
FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory Contract
does not provide for any reduction in the management fee as a result of profits
resulting from brokerage commissions effected through the Distributor. In
addition, the Sub-Advisory Agreement between VCM and the Portfolio Adviser does
not provide for any reduction in the advisory fees as a result of profits
resulting from portfolio transactions effected through the Portfolio Adviser or
an affiliated brokerage firm. For the fiscal year ended September 30, 1997, and
for the period from May 1, 1996 through September 30, 1996, and for the fiscal
years ended April 30, 1996 and 1995, the FUND paid no brokerage commissions. For
the period from August 12, 1993 (commencement of operations) to April 30, 1994,
the FUND paid no brokerage commissions.
The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid to the Distributor or to the Portfolio Adviser or an affiliated
broker-dealer must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." The Rule and the procedures also contain review requirements
and require VCM to furnish reports to the Trustees and to maintain records in
connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of the Portfolio Adviser. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in accordance with a formula considered by VCM to be equitable
to each, taking into consideration such factors as size of account,
concentration of holdings, investment objectives, tax status, cash availability,
purchase cost, holding period and other pertinent factors relative to each
account. In some cases this system could have a detrimental effect on the price
or volume of the security as far as the FUND is concerned. In other cases,
however, the ability of the FUND to participate in volume transactions will
produce better executions for the FUND.
For the fiscal year ended September 30, 1997, and for the period from
May 1, 1996 through September 30, 1996, and for the fiscal years ended April 30,
1996 and 1995, the FUND's annual rates of portfolio turnover were approximately
163%, 25%, 275%, and 170%, respectively.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
Time) on each day that the New York Exchange is open for business and on such
other days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Year's Day, Presidents' Day, Good Friday, Martin Luther King Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
<PAGE>
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the FUND's portfolio securities are determined
as follows:
o according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on
more than one exchange, the price on the primary market for
that security, as determined by the Adviser or sub-adviser, is
used.);
o according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded
over-the-counter;
o for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term
obligations with remaining maturities of 60 days or less at
the time of purchase, may be valued at amortized cost; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate; maturity;
type of issue; trading characteristics; and other market data.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10
year periods (or fractional portion
thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
<PAGE>
The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
fiscal year ended September 30, 1997, and the period from May 1, 1996 through
September 30, 1996 was 9.59% and 7.27%, respectively. For the fiscal year ended
April 30, 1996 and since inception (August 12, 1993 through September 30, 1997)
the FUND's aggregate annualized total rates of return were 6.86% and 7.63%,
respectively.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. and Morningstar, Inc., or similar
independent services or financial publications, the FUND calculates its
aggregate total return for the specified periods of time by assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial net asset value of the investment from the ending net asset value and by
dividing the remainder by the beginning net asset value. The FUND does not, for
these purposes, deduct the pro rata share of the account opening fee, which was
in effect from August, 1993 to 1994, from the initial value invested. The FUND
will, however, disclose the pro rata share of the account opening fee and will
disclose that the performance data does not reflect such non-recurring charge
and that inclusion of such charge would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in such
advertising than the information prescribed under the Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, 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 period, according to the following formula:
YIELD = 2[( a-b +1)6-1]
cd
Where: a = dividends and 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.
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
<PAGE>
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
The FUND'S yield for the 30-day period ended September 30, 1997 was 4.18%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, including foreign
currency gains and loss) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its "investment company taxable income"
(i.e., net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Please note that the below-listed and defined "Short-Short Gain
Test" has been repealed pursuant to the Taxpayer Relief Act of 1997, effective
for taxable years beginning after the date of enactment. For purposes of the
FUND, the effective date of the repeal will be October 1, 1997. Distributions by
the FUND made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and can therefore satisfy
the Distribution Requirement.
<PAGE>
In addition to satisfying the Distribution Requirement, a regulated
investment company with investment objectives, policies and restrictions similar
to the FUND must (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities and other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock or securities (the "Income
Requirement"); and (2) derive less than 30% of its gross income (exclusive of
certain gains on designated hedging transactions that are offset by realized or
unrealized losses on offsetting positions) from the sale or other disposition of
stock, or securities or foreign currencies (or options, futures or forward
contracts thereon) held for less than three months (the "Short-Short Gain
Test"). Because of the Short-Short Gain Test, the FUND may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent the FUND from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by the FUND at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income attributable to
realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose. At September 30, 1997, the
FUND had a net capital loss carryover of $354,460, which is available through
the year 2003 to offset future capital gains.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation.
Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts and options on stock indexes and futures contracts)
will be subject to special tax treatment as "Section 1256 contracts." Section
1256 contracts are treated as if they are sold for their fair market value on
the last business day of the taxable year, even though a taxpayer's obligations
(or rights) under such contract have not terminated (by delivery, exercise,
entering into a closing transaction or otherwise) as of such date. Any gain or
loss recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is taken into account for the taxable year together with any
other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss for
the taxable year with respect to Section 1256 contracts (including any capital
gain or loss arising as a consequence of the year-end deemed sale of such
contracts) is
<PAGE>
generally treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss. The FUND may elect not to have this special tax treatment
apply to Section 1256 contracts that are part of a "mixed straddle" with other
investments of the FUND that are not Section 1256 contracts. The Internal
Revenue Service has held in several private rulings and Treasury Regulations now
provide that gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held for
not less than three months if the gains arise as a result of a constructive sale
under Code Section 1256.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, or any net long-term capital loss incurred after October 31 as if
they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, options (call or
put) with respect to a security are treated as issued by the issuer of the
security and not by the issuer of the option.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will he subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
<PAGE>
FUND DISTRIBUTIONS
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporations.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. Federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
<PAGE>
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the FUND's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having been paid. Such a foreign shareholder would generally be
exempt from U.S. Federal income tax on gains realized on the sale of shares of
the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. Federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
<PAGE>
BLANCHARD FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, and present
positions with Blanchard Funds, and principal occupations.
<TABLE>
<CAPTION>
<S> <C>
JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND; Chairman and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research;
Chairman and Director, Federated Research Corp. and
Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and
Director or Trustee of the Funds. Mr. Donahue is
the father of J. Christopher Donahue, Executive
Vice President of the Trust.
THOMAS G. BIGLEY
15 OLD TIMBER TRAIL
PITTSBURGH, PA
BIRTHDATE: FEBRUARY 3, 1934 TRUSTEE OF THE FUND; Chairman of the Board,
Children's Hospital of Pittsburgh formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000
Group, Inc.; Director, Member of Executive
Committee, University of Pittsburgh; Director or
Trustee of the Funds.
JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL TRUSTEE OF THE FUND; President, Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or
Trustee in private real estate ventures in
Southwest Florida; formerly, President, Naples
Property Management, Inc. and Northgate Village
Development Corporation; Director or Trustee of the
Funds.
WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA TRUSTEE OF THE FUND; Director and Member of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC
Bank Corp. and Director, Ryan Homes, Inc.; Director
or Trustee of the Funds.
<PAGE>
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-law; Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or Trustee of
the Funds.
LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor of Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical Director,
University of Pittsburgh Medical
Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore Hospitals;
Director or Trustee of the Funds.
EDWARD L. FLAHERTY, JR.@
MILLER AMENT HENNY & KOCHUBA
205 ROSS STREET TRUSTEE OF THE FUND; Attorney of Counsel, Miller,
PITTSBURGH, PA Ament, Henny & Kochuba; Director, Eat'N Park
BIRTHDATE: JUNE 18, 1924 Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Director or
Trustee of the Funds. .
EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE FUND;
BIRTHDATE: OCTOBER 22, 1930 Vice Chairman, Treasurer, and Trustee, Federated
Investors; Vice President, Federated Advisers,
Federated Management, Federated Research,
Federated Research Corp., Federated Global Research
Corp. and Passport Research, Ltd.; Executive Vice
President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company;
Trustee or Director of some of the Funds;
President, Executive Vice President and
Treasurer of some of the Funds.
PETER E. MADDEN
ONE ROYAL PALM WAY
100 ROYAL PALM WAY
PALM BEACH, FL TRUSTEE OF THE FUND; Consultant; Former State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation;
Director or Trustee of the Funds.
<PAGE>
JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA TRUSTEE OF THE FUND; President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor, International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., National Defense University, and
U.S. Space Foundation; President Emeritus,
University of Pittsburgh; Founding Chairman;
National Advisory Council for
Environmental Policy and Technology,
Federal Emergency Management Advisory Board and
Czech Management Center,Prague; Director or
Trustee of the Funds.
MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA TRUSTEE OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning; Director
or Trustee of the Funds.
J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND; President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research:; President and Director, Federated
Research Corp. and Federated Global Research Corp.;
President, Passport Research, Ltd.; Trustee,
Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated
Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some
of the Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Trustee of the Trust.
<PAGE>
JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT, AND SECRETARY OF THE FUND;
BIRTHDATE: OCTOBER 26, 1938 Executive Vice President, Secretary, and Trustee,
Federated Investors; Trustee, Federated Advisers,
Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Shareholder Services Company;
Director, Federated Services Company; President and
Trustee, Federated Shareholder Services; Director,
Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND; Executive Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director, Federated
Securities Corp.; President or Vice President of
some of the Funds; Director or Trustee of some of
the Funds.
JOESEPH S. MACHI
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT AND ASSISTANT TREASURER; Vice
BIRTHDATE: MAY 22, 1962 President and Assistant Treasurer of some of the
Funds.
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for
U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds;
The Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
FUND OWNERSHIP
As of October 29, 1997, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of October 29, 1997, the
following shareholders owned 5% or more of the outstanding shares of the FUND:
Stephens Inc., Little Rock, AR, for the exclusive benefit of its customers,
owned approximately 547,502 shares (12.69%), and William J. Harnett, Waldorf,
MD, owned approximately 343,023 shares (7.95%).
OFFICERS AND TRUSTEES COMPENSATION
<TABLE>
<CAPTION>
- - -------------------------------------- ------------------------------------- -------------------------------------
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION PAID TO TRUSTEES
NAME, POSITION THE TRUST* FROM THE FUND AND FUND COMPLEX**
WITH THE TRUST
- - -------------------------------------- ------------------------------------- -------------------------------------
- - -------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
John F. Donahue, Chairman and Trustee $0 $0 for the Fund Complex
Thomas G. Bigley, Trustee $1,011 $3,217 for the Fund Complex
John T. Conroy, Jr., Trustee $1,114 $3,538 for the Fund Complex
William J. Copeland, Trustee $1,114 $3,538 for the Fund Complex
James E. Dowd, Trustee $1,114 $3,538 for the Fund Complex
Lawrence D. Ellis, M.D., Trustee $1,011 $3,217 for the Fund Complex
Edward L. Flaherty, Jr., Trustee $1,114 $3,538 for the Fund Complex
Edward C. Gonzales, President and $0 $0 for the Fund Complex
Trustee
Peter E. Madden, Trustee $1,011 $3,217 for the Fund Complex
John E. Murray, Jr., J.D., S.J.D., $1,011 $3,217 for the Fund Complex
Trustee
Wesley W. Posvar, Trustee $1,011 $3,217 for the Fund Complex
Marjorie P. Smuts $1,011 $3,217 for the Fund Complex
Trustee
</TABLE>
* The aggregate compensation for the fiscal year ended 9/30/97 is provided for
the Trust which is comprised of five portfolios.
**The total compensation is provided for the Fund Complex, which consists of the
Blanchard Precious Metals Fund, The Virtus Funds, and the Trust. The
information is provided for Blanchard Funds and Blanchard Precious Metals
Fund, Inc. and The Virtus Funds for the fiscal year ended 9/30/97.
MANAGEMENT SERVICES
MANAGER TO THE TRUST
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a wholly-owned subsidiary of Signet Banking Corporation. Because of the
internal controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
MANAGEMENT FEES
For its services, VCM receives an annual management fee as described in
the prospectus. For the fiscal year ended September 30, 1997, and for the period
from May 1, 1996 through September 30, 1996, the FUND's investment management
fee paid to VCM was $169,751 and $71,788, respectively, of which $142,067 and
$71,788, respectively, was voluntarily waived. For the fiscal year ended April
30, 1996, the FUND's investment management fee paid to the prior manager and to
VCM was $132,013 and $30,642, respectively, all of which was voluntary waived.
For the fiscal years ended April 30, 1995, the FUND's investment management fee
paid to the prior manager were $127,835, all of which was voluntarily waived.
For the period from August 12, 1993 (commencement of operations) to April 30,
1994, the FUND's investment management fee paid to the prior manager was
$89,180, all of which was voluntarily waived.
PORTFOLIO MANAGEMENT SERVICES
Pursuant to a sub-advisory agreement which became effective on July 12,
1995, (the "Sub-Advisory Agreement") between VCM and United States Trust Company
of New York ("U.S. Trust"), VCM has delegated to U.S. Trust the authority and
responsibility to make and execute decisions for the FUND within the framework
of the FUND's investment policies, subject to review by VCM and the Board of
Trustees of the FUND. Under the terms of the Sub-Advisory Agreement, U.S. Trust
has discretion to purchase and sell securities, except as limited by the FUND's
investment objective, policies and restrictions.
The Sub-Advisory Agreement provides for the payment to U.S. Trust, by
VCM, of monthly compensation based on the FUND's average daily net assets for
providing investment advice to the FUND and managing the investment of assets of
the FUND. For the services to be rendered, VCM shall pay U.S. Trust a monthly
fee at the annual rate of 0.20% of the FUND's average daily net assets. For the
fiscal year ended September 30, 1997, and for the period from May 1, 1996
through September 30, 1996, the aggregate amount paid to U.S. Trust by VCM was
$45,267 and $19,145, respectively. For the fiscal year ended April 30, 1996, the
aggregate amount paid to U.S. Trust and prior sub-adviser by VCM and the prior
manager was $42,605. For the fiscal year ended April 30, 1995 and the period
from August 12, 1993 (commencement of operations) to April 30, 1994, the
aggregate amounts paid to the prior sub-adviser by the prior manager were
$34,662 and $9,758, respectively.
The Sub-Advisory Agreement dated July 12, 1995 was approved by the
FUND's Board of Trustees and the FUND's shareholders. The Sub-Advisory Agreement
provides that it may be terminated without penalty by either the FUND or U.S.
Trust at any time by the giving of 60 days' written notice to the other and
terminates automatically in the event of "assignment", as defined in the
Investment Company Act. The Sub-Advisory Agreement provides that, unless sooner
terminated, it shall continue in effect from year to year only so long as such
continuance is specifically approved at least annually by either the Board of
Trustees of the FUND or by a vote of the majority of the outstanding voting
securities of the FUND, provided, that in either event, such continuance is also
approved by the vote of the majority of the Trustees who are not parties cast in
person at a meeting called for the purpose of voting on such approval.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of the
Funds. Under the Custodian Agreement, Signet Trust Company holds the Funds'
portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. The custodian receives a fee at an annual rate
of .05% on the first $10 million of average net assets of each of the six
respective portfolios and .025% on average net assets in excess of $10 million.
There is a $20 fee imposed on each transaction. The custodian fee received
during any fiscal year shall be at least $1,000 per Fund.
<PAGE>
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus. For the fiscal year ended September 30, 1997,
and for the period from May 1, 1996 through September 30, 1996, and for the
fiscal year ended April 30, 1996, Federated Administrative Services earned
$75,000, $31,438 and $31,841, respectively, in administrative services fees, of
which $39,951, $22,290 and $0, respectively, were voluntarily waived. For the
fiscal years ended April 30, 1995 and 1994, the administrative services fees
were included as part of the Management fee.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the fiscal year ended September 30, 1997, and for the period from May 1,
1996 through September 30, 1996, the FUND accrued payments under the Plan
amounting to $56,584 and $23,929, respectively, all of which were voluntarily
waived. For the fiscal year ended April 30, 1996 the FUND accrued payments under
the Plan amounting to $54,218, all of which was voluntarily waived.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objective, and properly servicing these accounts, the Fund may be able to
curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
SHAREHOLDER AND TRUSTEE LIABILITY. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
<PAGE>
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee 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.
VOTING RIGHTS. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
The financial statements for the fiscal year ended September 30, 1997,
are incorporated herein by reference from the FUND's Annual Report dated
September 30, 1997. A copy of the FUND'S Annual Report may be obtained without
charge by contacting Signet Financial Services, Inc. at 1-800-829-3863.
<PAGE>
APPENDIX A
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
BOND RATINGS:
AAA: Bonds which are rated Aaa judged to be 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 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.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in the generic
rating classifications Aa and A in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category, the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months.
Issuers rated PRIME-1 or P-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations. Prime-1
or P-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated PRIME-2 or P-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
A-26
<PAGE>
DESCRIPTION OF STANDARD AND POOR'S CORPORATION'S
BOND RATINGS:
AAA: Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest; and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
PLUS (+) OR MINUS (-): The ratings AA and A may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
NOTES WITH RESPECT TO ALL RATINGS:
Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal that are similar to the risks of
lower-rated bonds. The Fund is dependent on Fund management's judgment, analysis
and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
Cusip 093212603
G01386-13
A-27
- - -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
- - -------------------------------------------------------------------------------
Dear Investor:
I'm pleased to present the Annual Report to Shareholders for the Blanchard Group
of Funds. This report covers the funds' fiscal year, which is the period from
October 1, 1996 through September 30, 1997.
For greater efficiency in printing and mailing, this report now combines
information for all funds. It begins with a commentary by the portfolio manager,
and follows with a complete list of holdings and financial statements for each
fund.
A fund-by-fund summary for the period follows:
.. BLANCHARD GLOBAL GROWTH FUND
The fund's diversified portfolio of U.S. and foreign stocks and bonds+ produced
a solid total return of 13.20%* through dividends totaling $0.21 per share and
capital gains totaling $2.26 per share. Assets in the fund totaled more than $62
million at the end of the period.
.. BLANCHARD PRECIOUS METALS FUND, INC.
Due to extremely weak market conditions, the fund's portfolio of precious metals
investments and securities of mining companies produced a negative total return
of (15.24%).* While the fund paid dividends totaling $0.30 per share and capital
gains totaling $2.25 per share, the fund's share price fell from $8.90 to $5.37
as prices of the fund's holdings declined with the market. The fund's assets
closed the period at $67 million.
.. BLANCHARD FLEXIBLE INCOME FUND
The fund's diversified portfolio of fixed income securities paid monthly
dividends totaling $0.31 per share and recorded a $0.14 per share increase in
net asset value. As a result, the fund achieved a total return of 9.53%.* The
fund's assets reached $155 million.
.. BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
The fund's conservative portfolio of fixed income securities produced a total
return of 7.24%* through monthly dividends totaling $0.17 per share, and a $0.04
per share increase in net asset value. Assets in the fund totaled more than $133
million.
.. BLANCHARD FLEXIBLE TAX-FREE BOND FUND
Designed for tax-sensitive investors, this fund paid federally tax-free
dividends totaling $0.25 per share.** Through this income stream and a $0.25 per
share increase in net asset value, the fund achieved a total return of 9.59%.*
Assets reached $24 million.
- - -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE (CONTINUED)
- - -------------------------------------------------------------------------------
Thank you for pursuing your financial goals through the Blanchard Group of
Funds. If you are not already doing so, consider reinvesting your earnings
automatically in additional shares. It's a convenient way to gain the advantage
of compounding--and increase your opportunity to participate in key financial
markets over time.
Sincerely,
/s/ Edward C. Gonzales
Edward C. Gonzales
President
November 15, 1997
+Foreign investing involves special risks including currency risk, increased
volatility of foreign securities, and differences in auditing and other
financial standards.
*Performance quoted reflects past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
**Income may be subject to the federal alternative minimum tax and state and
local taxes.
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Global Growth Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A1 omitted. See Appendix."]
The Blanchard Global Growth Fund's total return (price change plus
reinvestment of distributions) for the year ending September 30, 1997 was
13.20%. By comparison, the Morgan Stanley World Index (MSCI World) rose 24.12%,
and the Salomon Brothers World Government Bond Index (WGBI) was up 2.41% for the
same period.*
During the past year, equity markets substantially outperformed bond markets
around the globe. It appears the markets have priced in a continued period of
strong economic growth with low inflation. Equity markets in Continental Europe
performed better than the rest of the world, mainly because corporate earnings
have increased. Corporate earnings increased due to a pick up in economic
growth, and an increase in exports (due to their weaker currencies), as well as
from gains in productivity. Among the major stock markets, only
*The Morgan Stanley World Index is based on the share prices of approximately
1,600 companies listed on the stock exchanges of 22 countries. The Salomon
Brothers World Government Bond Index is comprised of 17 Government bond markets
whose eligibility is determined based on market capitalization and investment
criteria; a market's issues must total at least US$20 billion, DM30 billion,
and 2.5 trillion for three consecutive months, after which it will be added to
the SBWGBI at the end of the following quarter. These indices are unmanaged.
Actual investment cannot be made in an index.
the Japanese stock market declined during the past year. The low interest rate
environment in Japan has yet to spur economic growth, as the deregulation of the
financial industry has been slow.
The Blanchard Global Growth Fund benefited from its exposure to equities,
since equities posted higher returns than bonds. However, our allocation across
equity markets did not help performance. We were overweighted in Continental
Europe and Japan and underweighted in the United States. Our currency hedging
strategy added value, since the U.S. Dollar strengthened against most currencies
in Continental Europe and Japan. We continue to hedge a portion of our Japanese
Yen, Swiss Franc, and Dutch Guilder exposure.
During the past year, the Blanchard Global Growth Fund sold equities in favor
of fixed income securities, as the result of strong equity performance during
the past year. We also shifted a portion of the fund out of U.S. equities and
into foreign equities. Continental Europe and Japan offer more attractive
values, since the U.S. equity market has appreciated substantially in the past
few years. We believe the gloom has been overdone in Japan, and the stock market
reflects attractive long-term value.
Thank you for your continued patronage.
Sincerely,
/s/ Thomas B. Hazuka
Thomas B. Hazuka, Ph.D.
Chief Investment Officer
Mellon Capital Management Corporation
Portfolio Manager of the
Blanchard Global Growth Fund
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Precious Metals Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A2 omitted. See Appendix."]
THE YEAR IN REVIEW
One year ago, gold was trading around the $380 level and concerns were
mounting that the International Monetary Fund, or IMF, was likely to sell 5
million ounces of gold to fund capital projects in developing countries. This
and other concerns, such as the strengthening U.S. dollar, moved us to adopt a
more defensive posture in the portfolio to reflect the increasing likelihood
that the gold price would come under pressure.
This turned out to be quite an understatement, as large sales of gold by
central banks, particularly the Dutch and Australians, drove the yellow metal
sharply lower. Central bank sales are almost impossible to forecast except for
the general expectation that they do occur every year, but generally in
quantities that don't disrupt the market. This is partly because other central
banks tend to buy about half of the gold sold by their sister institutions. In
the 1990's, central bank gold sales have netted out to about 7.5 million ounces
per year when central bank buying is accounted for.
Surprisingly, the past year has not been terribly out of the ordinary. About
15 million ounces of central bank gold has been sold, with perhaps 9 million of
this not taken up by other central bank purchases. Ordinarily, one would not
expect the price of gold to swoon by as much as 19% (from $380 to $308) in
response. However, this time was different in a very significant way.
Aggressive speculative short sales of gold accompanied every announcement of a
central bank sale. Large quantities of gold have been borrowed from central
banks at a borrowing cost of 2-3% per annum and sold in the marketplace in what
turned out to be a successful effort to drive the gold price lower. These
speculators have correctly assumed that gold buyers will be timid in the face of
a growing perception that some banks are less willing to hold onto their sizable
gold holdings.
Estimates of the quantity of gold borrowed and sold short range as high as
2,000 metric tons, which is about 65 million ounces! Clearly, this swamps the
actual amount of gold sold by the banks and amply explains the sharp gold price
decline, which has in turn pushed most gold equities dramatically lower. In line
with the gold price decline, the Blanchard Precious Metals Fund declined by
15.24% in the past year.
A LOOK AHEAD
The dominant theme of increasing and long-lasting central bank gold sales
continues to weigh heavily on the bullion price as 1997 draws to a close. In
recent days, the focal point of the issue has become the potential for sales of
Swiss gold reserves starting in the year 2000. These sales could come about in
response to a change in the Swiss constitution, which would eliminate or reduce
the requirement for a gold backstop in the money supply. Complicating the issue
is the proposal to create a Solidarity Foundation for charitable purposes, which
would be funded in part by gold bullion sales, perhaps as much as 800 metric
tons (about 26 million ounces).
These proposals would both require political approval, followed by popular
approval in a national referendum. If successful, the gold would be sold
gradually over a period of five to eight years. The worst-case scenario at
present seems to be the addition of 9 million ounces of gold to the annual
supply-demand equation, which would last 5 years. Putting this into perspective,
the annual gold market is currently sized at 130 million ounces of gold, so this
is a manageable quantity. However, the larger issue is whether a significant
change in central bank attitudes toward gold is at hand. If central banks are
more willing to part with their gold in the years ahead, then gold will settle
into a lower trading range than we have become accustomed to in the past ten
years. If instead, the net supply of
central bank gold remains at less than ten million ounces per year as in the
past, then we can look forward to an explosive rally in the gold market as the
huge outstanding short position is bought back.
We lean toward the latter scenario, particularly since gold is now trading
below the cost of production for about one quarter of the global gold mining
community! New mining projects are being canceled or deferred and the supply of
newly mined gold and scrap is now falling. Nonetheless, caution is the order of
the day until we discern a more predictable upward path for the gold price.
Thank you for your continued patronage.
Sincerely,
/s/ Peter C. Cavelti
Peter C. Cavelti
Chairman and CEO
Cavelti Capital Management Ltd.
Portfolio Manager of the
Blanchard Precious Metals Fund, Inc.
Dear Shareholders,
Enclosed please find the annual report for your Blanchard Flexible Income Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A3 omitted. See Appendix."]
The past year has been one of relatively good economic growth and declining
inflation. The Federal Reserve Board (the "Fed") has continued its policy of
promoting price stability and the market has responded by pushing bonds yields
lower.
The fund has benefited from this environment as the investments in high yield
bonds* and mortgage backed securities have not only earned attractive yields,
but have also appreciated in price. The third allocation, U.S. Treasurys, has
provided the anchor to the portfolio.
Looking forward, we are increasingly concerned with the tight labor markets
and high resource utilization currently existing in the U.S. In order to relieve
these pressures, higher interest rates will probably be required. However, if
the Fed continues to be vigilant in its fight against inflation, significant
interest rate increases should not be in the offing.
*Lower rated bonds involve a higher degree of risk than investment grade bonds
in return for higher yield potential.
While the markets will undoubtedly have bouts of volatility, relative
stability may remain the norm. In this environment, the fund should continue to
benefit from its prudent blend of financial assets.
Thank you for your continued patronage.
Sincerely,
/s/ Jack D. Burks
Jack D. Burks
Managing Director of OFFITBANK
Portfolio Manager of the
Blanchard Flexible Income Fund
Dear Shareholders,
Enclosed please find the annual report for your Blanchard Short-Term Flexible
Income Fund for the fiscal year ended September 30, 1997.
["Graphic representation A4 omitted. See Appendix."]
The past year has been one of relatively good economic growth and declining
inflation. The Federal Reserve Board (the "Fed") has continued its policy of
promoting price stability and the market has responded by pushing bond yields
lower.
The fund has benefited from this environment as the investments in high yield
bonds* and mortgage backed securities have not only earned attractive yields,
but have also appreciated in price. The third allocation, U.S. Treasurys, has
provided the anchor to the portfolio.
Looking forward, we are increasingly concerned with the tight labor markets
and high resource utilization currently existing in the U.S. In order to relieve
these pressures, higher interest rates will probably be required. However, if
the Fed continues to be vigilant in its fight against inflation, significant
interest rate increases should not be in the offing.
*Lower rated bonds involve a higher degree of risk than investment grade bonds
in return for higher yield potential.
While the markets will undoubtedly have bouts of volatility, relative
stability may remain the norm. In this environment, the fund should continue to
benefit from its prudent blend of financial assets.
Thank you for your continued patronage.
Sincerely,
/s/ Jack D. Burks
Jack D. Burks
Managing Director of OFFITBANK
Portfolio Manager of the
Blanchard Short-Term Flexible Income Fund
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Flexible Tax-Free
Bond Fund for the fiscal year ended September 30, 1997.
["Graphic representation A5 omitted. See Appendix."]
The past fiscal year was an excellent one for investors in the Blanchard
Flexible Tax-Free Bond Fund. Interest rates declined during the first fiscal
quarter, but rose sharply in early 1997 as the Federal Reserve Board raised
interest rates to slow an extremely strong economy and quell inflation fears.
Although the economy continued to grow at a 3.5% - 4% rate over the next two
quarters, inflation continued moderate with the consumer price index rising only
2.2% over the past 12 months. Consequently, interest rates declined during the
final two quarters of the fund's fiscal year.
The Blanchard Flexible Tax-Free Bond Fund was invested in a portfolio of
longer-term, high-quality tax exempt bonds, with a maturity of approximately 20
years for most of the year. During the latter part of the fiscal year, cash
reserves were raised to reduce the average maturity of the fund in anticipation
of possible interest rate increases.
Overall, the fund had an excellent year, posting a total return of 9.59%
versus 8.43% for the Lehman Brothers Current Municipal Bond Index.+
Additionally, the fund was ranked #31 by Lipper Analytical Services out of 233
funds in its category of general municipal debt funds for total cumulative
reinvested performance for the twelve month period ended 9/30/97. The fund also
outperformed the Lipper General Municipal Debt Fund average of 8.59%.++
Morningstar has awarded the Blanchard Flexible Tax-Free Bond Fund its 4-star
rating for risk-adjusted performance for the overall period ended 9/30/97 in its
category of 1,374 municipal funds.*
Naturally, past performance is no guarantee of future performance. As with any
fixed income fund, investment return, yield, and principal value will vary with
changing market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original purchase price.
Thank you for your continued patronage.
Sincerely,
/s/ Kenneth J. McAlley
Kenneth J. McAlley
Executive Vice President
United States Trust Company of New York
Portfolio Manager of the
Blanchard Flexible Tax-Free Bond Fund
+Lehman Brothers Municipal Index is an unmanaged broad market performance
benchmark for the tax-exempt bond market. To be included in the Lehman
Brothers Municipal Bond Index, bonds must have a minimum credit rating of at
least Baa. Actual investments cannot be made in an index.
++Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the respective categories indicated. Lipper rankings and figures do not
reflect sales charges.
*Morningstar proprietary ratings reflect risk-adjusted performance through
9/30/97. The ratings are subject to change every month. Past performance is
not a guarantee of future results. Morningstar ratings are calculated from the
fund's three-year returns in excess of 90-day Treasury bill returns, and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The fund received 4 stars for the three-year period. It was rated among 1,374
municipal funds for the three-year period. The top ten percent of the funds in
the category receive 5 stars, the next 22.5% receive 4 stars, and the next 35%
receive 3 stars. The rating shown does not reflect certain management fees
which were waived during the period. If reflected, they may have impacted the
rating.
BLANCHARD GLOBAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------ -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--29.8%
-------------------------------------
AUSTRIA--0.1%
------------------------------
BANKING--0.0%
------------------------------
100 Bank Austria, AG $ 4,865
------------------------------
100 (a)Bank Austria AG, Rights 226
------------------------------ -----------
Total 5,091
------------------------------ -----------
CHEMICALS--0.0%
------------------------------
200 Lenzing AG 11,821
------------------------------ -----------
FINANCIAL SERVICES--0.0%
------------------------------
100 Creditanstalt-Bankverein 6,298
------------------------------
200 Creditanstalt-Bankverein, Pfd. 10,422
------------------------------ -----------
Total 16,720
------------------------------ -----------
PETROLEUM--0.1%
------------------------------
150 OMV AG 22,375
------------------------------ -----------
RUBBER & MISC. MATERIALS--0.0%
------------------------------
200 Radex-Heraklith 8,299
------------------------------ -----------
STEEL--0.0%
------------------------------
100 Boehler-Uddeholm 8,403
------------------------------ -----------
UTILITIES--0.0%
------------------------------
100 Oest Elektrizitats, Class A 7,081
------------------------------ -----------
TOTAL AUSTRIA 79,790
------------------------------ -----------
BRAZIL--0.0%
------------------------------
7,481 Rhodia-Ster S.A., GDR 18,702
------------------------------ -----------
DENMARK--0.1%
------------------------------
BANKING--0.1%
------------------------------
200 Den Danske Bank 21,787
------------------------------
400 Unidanmark, Class A 25,978
------------------------------ -----------
Total 47,765
------------------------------ -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------ ------------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-------------------------------------
DENMARK--CONTINUED
------------------------------
COMMUNICATIONS EQUIPMENT--0.0%
------------------------------
200 Tele Danmark AS, Class B $ 10,492
------------------------------ ------------
ENVIRONMENTAL SERVICES--0.0%
------------------------------
100 Danisco 5,662
------------------------------ ------------
INDUSTRIAL SERVICES--0.0%
------------------------------
100 Nkt Holding 7,728
------------------------------ ------------
MISCELLANEOUS--0.0%
------------------------------
300 Korn-Og Foderstof 9,363
------------------------------ ------------
TRANSPORTATION-AIR--0.0%
------------------------------
400 SAS Danmark AS 6,717
------------------------------ ------------
TOTAL DENMARK 87,727
------------------------------ ------------
FINLAND--0.2%
------------------------------
BANKING--0.0%
------------------------------
3,950 Merita Ltd, Class A 18,739
------------------------------ ------------
ELECTRICAL EQUIPMENT--0.1%
------------------------------
250 Nokia AB, Class K 23,672
------------------------------
500 Nokia AB-A 47,534
------------------------------ ------------
Total 71,206
------------------------------ ------------
MISCELLANEOUS--0.1%
------------------------------
36 Rauma Oy 748
------------------------------
1,300 UPM-Kymmene OY 36,118
------------------------------ ------------
Total 36,866
------------------------------ ------------
NON-FERROUS METALS--0.0%
------------------------------
500 Outokumpu Oy 9,119
------------------------------ ------------
TRADING COMPANY--0.0%
------------------------------
750 Kesko 10,560
------------------------------ ------------
TOTAL FINLAND 146,490
------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------------
FRANCE--0.7%
----------------------------------------
AUTOMOBILE--0.0%
----------------------------------------
150 Peugeot S.A. $ 19,772
---------------------------------------- -----------
BEVERAGE--0.2%
----------------------------------------
310 LVMH (Moet-Hennessy) 65,891
---------------------------------------- -----------
BROADCASTING--0.0%
----------------------------------------
150 Havas S.A. 10,182
---------------------------------------- -----------
BUILDING MATERIALS--0.1%
----------------------------------------
255 Compagnie de St. Gobain 39,329
----------------------------------------
280 Lafarge-Coppee 20,521
---------------------------------------- -----------
Total 59,850
---------------------------------------- -----------
CHEMICALS--0.1%
----------------------------------------
1,122 Rhone-Poulenc, Class A 44,633
---------------------------------------- -----------
FINANCIAL SERVICES--0.1%
----------------------------------------
260 AXA 17,442
----------------------------------------
230 Compagnie Financiere de Paribas, Class A 17,058
---------------------------------------- -----------
Total 34,500
---------------------------------------- -----------
MOTOR VEHICLE PARTS--0.0%
----------------------------------------
384 Michelin, Class B 21,813
---------------------------------------- -----------
PHARMACEUTICALS--0.2%
----------------------------------------
220 L'Oreal 88,072
----------------------------------------
290 Sanofi S.A. 26,934
---------------------------------------- -----------
Total 115,006
---------------------------------------- -----------
RETAILERS-BROADLINE--0.0%
----------------------------------------
60 Pinault-Printemps-Redoute S.A. 28,146
---------------------------------------- -----------
RETAILERS SPECIALTY--0.0%
----------------------------------------
275 Castorama Dubois Investisse 29,574
---------------------------------------- -----------
UTILITIES--0.0%
----------------------------------------
170 Lyonnaise des Eaux S.A. 18,970
---------------------------------------- -----------
TOTAL FRANCE 448,337
---------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------------
GERMANY--2.6%
-----------------------------------------
AIRLINES--0.1%
-----------------------------------------
2,500 Deutsche Lufthansa AG $ 49,237
----------------------------------------- -----------
AUTOMOTIVE & RELATED--0.1%
-----------------------------------------
1,000 Daimler Benz AG 82,515
----------------------------------------- -----------
BANKING--0.4%
-----------------------------------------
2,250 Bayerische Hypotheken-Und Wechsel-Bank AG 96,140
-----------------------------------------
2,700 Deutsche Bank AG 190,090
----------------------------------------- -----------
Total 286,230
----------------------------------------- -----------
CHEMICALS--0.2%
-----------------------------------------
4,500 Bayer AG 179,165
----------------------------------------- -----------
ELECTRICAL EQUIPMENT--0.6%
-----------------------------------------
5,650 Siemens AG 381,634
----------------------------------------- -----------
HEALTHCARE-GENERAL--0.1%
-----------------------------------------
1,500 Merck KGAA 57,302
----------------------------------------- -----------
INSURANCE-LIFE--0.6%
-----------------------------------------
1,500 Allianz AG Holding 361,895
----------------------------------------- -----------
MULTI-INDUSTRY--0.2%
-----------------------------------------
218 Viag AG 97,566
----------------------------------------- -----------
STEEL--0.1%
-----------------------------------------
200 Thyssen AG 46,634
----------------------------------------- -----------
UTILITIES-ELECTRIC--0.2%
-----------------------------------------
2,050 RWE AG 99,254
----------------------------------------- -----------
TOTAL GERMANY 1,641,432
----------------------------------------- -----------
HONG KONG--1.1%
-----------------------------------------
BANKING--0.2%
-----------------------------------------
4,844 Bank Of East Asia 18,093
-----------------------------------------
6,000 Hang Seng Bank, Ltd. 73,856
-----------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------
HONG KONG--CONTINUED
----------------------------------
BANKING--CONTINUED
----------------------------------
1,545 HSBC Holdings PLC $ 51,713
----------------------------------
1,200 Wing Lung Bank 7,118
---------------------------------- -----------
Total 150,780
---------------------------------- -----------
BROADCASTING--0.0%
----------------------------------
2,000 Television Broadcasting 7,082
---------------------------------- -----------
ENTERTAINMENT & RECREATION--0.0%
----------------------------------
3,000 Hong Kong & Shang Hot 3,644
----------------------------------
4,000 Shangri-La Asia 4,110
---------------------------------- -----------
Total 7,754
---------------------------------- -----------
FINANCIAL SERVICES--0.0%
----------------------------------
6,000 Peregrine Investment 10,196
---------------------------------- -----------
MULTI-INDUSTRY--0.2%
----------------------------------
9,000 Hutchison Whampoa 88,686
----------------------------------
3,000 Swire Pacific, Ltd. 22,971
---------------------------------- -----------
Total 111,657
---------------------------------- -----------
PROPERTY--0.1%
----------------------------------
2,000 Hysan Development Co., Ltd. 5,983
----------------------------------
5,033 New World Development Co., Ltd. 30,440
----------------------------------
4,000 Wharf Holdings Ltd. 14,732
---------------------------------- -----------
Total 51,155
---------------------------------- -----------
REAL ESTATE--0.3%
----------------------------------
5,000 Cheung Kong 56,216
----------------------------------
10,000 Sun Hung Kai Properties 117,601
---------------------------------- -----------
Total 173,817
---------------------------------- -----------
TELECOMMUNICATIONS--0.2%
----------------------------------
34,843 Hong Kong Telecommunications, Ltd. 78,800
---------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------
HONG KONG--CONTINUED
---------------------------------
UTILITIES--0.1%
---------------------------------
9,000 China Light and Power Co., Ltd. $ 49,548
---------------------------------
12,000 Hong Kong and China Gas Co., Ltd. 24,735
--------------------------------- -----------
Total 74,283
--------------------------------- -----------
TOTAL HONG KONG 665,524
--------------------------------- -----------
IRELAND--0.3%
---------------------------------
BANKING--0.0%
---------------------------------
1 Bank of Ireland PLC 7
--------------------------------- -----------
BUILDING MATERIALS--0.3%
---------------------------------
14,329 CRH PLC 163,425
--------------------------------- -----------
TOTAL IRELAND 163,432
--------------------------------- -----------
ITALY--1.0%
---------------------------------
AUTOMOTIVE & RELATED--0.2%
---------------------------------
37,510 Fiat SPA 133,859
---------------------------------
4,180 Fiat SPA 7,434
--------------------------------- -----------
Total 141,293
--------------------------------- -----------
BANKING--0.1%
---------------------------------
5,300 Banca Commerciale Italiana 15,229
---------------------------------
600 Imi 6,437
--------------------------------- -----------
Total 21,666
--------------------------------- -----------
BROADCASTING--0.0%
---------------------------------
3,500 Mediaset SPA 18,046
--------------------------------- -----------
FINANCE-0.0%
---------------------------------
6,200 Credito Italiano 16,774
--------------------------------- -----------
PAPER PRODUCTS--0.0%
---------------------------------
1,000 Burgo (Cartiere) SPA 6,488
--------------------------------- -----------
PETROLEUM--0.3%
---------------------------------
26,000 Eni SPA 163,729
--------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------------
ITALY--CONTINUED
---------------------------------------
RUBBER & MISC. MATERIALS--0.0%
---------------------------------------
2,300 Pirelli SPA $ 6,742
--------------------------------------- -----------
TELECOMMUNICATIONS--0.4%
---------------------------------------
46,000 Telecom Italia Mobile SPA 182,545
---------------------------------------
9,944 Telecom Italia SPA 66,249
--------------------------------------- -----------
Total 248,794
--------------------------------------- -----------
UTILITIES--0.0%
---------------------------------------
1,200 Edison SPA 6,458
--------------------------------------- -----------
TOTAL ITALY 629,990
--------------------------------------- -----------
JAPAN--10.3%
---------------------------------------
AIRLINES-0.0%
---------------------------------------
2,000 Japan Airlines Co. 7,276
--------------------------------------- -----------
AUTOMOTIVE & RELATED--1.0%
---------------------------------------
2,000 Denso Corp. 48,562
---------------------------------------
3,000 Honda Motor Co., Ltd. 104,666
---------------------------------------
5,000 Nissan Motor Co., Ltd. 29,833
---------------------------------------
15,000 Toyota Motor Credit Corp. 459,932
--------------------------------------- -----------
Total 642,993
--------------------------------------- -----------
BANKING--1.7%
---------------------------------------
9,000 Asahi Bank, Ltd. 52,208
---------------------------------------
18,000 Bank of Tokyo-Mitsubishi, Ltd. 343,084
---------------------------------------
9,000 Fuji Bank, Ltd., Tokyo 99,196
---------------------------------------
8,000 Industrial Bank of Japan, Ltd., Tokyo 99,445
---------------------------------------
6,000 Mitsubishi Trust & Banking Corp., Tokyo 93,478
---------------------------------------
4,000 Mitsui Trust & Banking 19,922
---------------------------------------
15,000 Sakura Bank, Ltd., Tokyo 71,725
---------------------------------------
10,000 Sumitomo Bank, Ltd., Osaka 150,825
---------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------
JAPAN--CONTINUED
-----------------------------------
BANKING--CONTINUED
-----------------------------------
8,000 Tokai Bank, Ltd., Nagoya $ 66,230
----------------------------------- -----------
Total 996,113
----------------------------------- -----------
BUILDING & CONSTRUCTION-0.0%
-----------------------------------
1,000 Obayashi Corp. 6,041
----------------------------------- -----------
BUILDING MATERIALS--0.0%
-----------------------------------
3,000 Takara Standard Co. 21,331
----------------------------------- -----------
CAPITAL GOODS--0.2%
-----------------------------------
13,000 Asahi Glass Co., Ltd. 101,052
----------------------------------- -----------
CHEMICALS & RELATED--0.4%
-----------------------------------
12,000 Daicel Chemical Industries 30,728
-----------------------------------
6,000 Sekisui Chemical Co. 45,198
-----------------------------------
1,000 Shin-Etsu Chemical Co. 27,513
-----------------------------------
6,000 Sumitomo Bakelite Co., Ltd. 42,562
-----------------------------------
2,000 Sumitomo Chemical Co. 7,342
-----------------------------------
3,000 Takeda Chemical Industries 89,998
----------------------------------- -----------
Total 243,341
----------------------------------- -----------
CHEMICAL-SPECIALTY--0.3%
-----------------------------------
2,000 Fuji Photo Film Co. 82,539
-----------------------------------
5,000 Shiseido Co. 80,385
----------------------------------- -----------
Total 162,924
----------------------------------- -----------
COMMUNICATION EQUIPMENT--0.3%
-----------------------------------
8,000 Matsushita Electric Industrial Co. 144,526
-----------------------------------
1 NTT Data Communications Systems Co. 45,330
----------------------------------- -----------
Total 189,856
----------------------------------- -----------
COMPUTERS--0.2%
-----------------------------------
6,000 Fujitsu, Ltd. 75,081
-----------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ---------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------------
JAPAN--CONTINUED
----------------------------------------
COMPUTERS--CONTINUED
----------------------------------------
6,000 NEC Corp. $ 73,092
---------------------------------------- -----------
Total 148,173
---------------------------------------- -----------
CONSUMER ELECTRONIC--0.4%
----------------------------------------
1,000 Rohm Co. 117,676
----------------------------------------
6,000 Sharp Corp. 54,695
----------------------------------------
1,000 Sony Corp. 94,473
---------------------------------------- -----------
Total 266,844
---------------------------------------- -----------
ELECTRONICS & ELECTRICAL EQUIPMENT--0.9%
----------------------------------------
500 Advantest 49,308
----------------------------------------
2,000 Canon Sales Co., Inc. 39,446
----------------------------------------
5,000 Canon, Inc. 146,267
----------------------------------------
16,000 Hitachi, Ltd. 139,223
----------------------------------------
600 Kyocera Corp. 39,231
----------------------------------------
1,000 Mitsubishi Corp. 9,696
----------------------------------------
1,000 Murata Manufacturing 43,258
----------------------------------------
1,000 Tokyo Electron, Ltd. 61,076
----------------------------------------
4,000 Yamatake-Honeywell 56,352
---------------------------------------- -----------
Total 583,857
---------------------------------------- -----------
FINANCIAL SERVICES--0.8%
----------------------------------------
2,200 Credit Saison Co., Ltd. 59,799
----------------------------------------
4,000 Daiwa Securities Co., Ltd. 24,530
----------------------------------------
134,000 (a)Nikkei 300 Stock Index List Fund 304,268
----------------------------------------
7,000 Nomura Securities Co., Ltd. 91,075
----------------------------------------
3,000 Yamaichi Securities Co., Ltd. 6,166
---------------------------------------- -----------
Total 485,838
---------------------------------------- -----------
FOOD PROCESSING--0.1%
----------------------------------------
3,000 House Foods Corp. 50,965
---------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------
JAPAN--CONTINUED
-----------------------------------
HOUSING & CONSTRUCTION--0.1%
-----------------------------------
13,000 Taisei Corp. $ 48,587
----------------------------------- -----------
INSURANCE--0.2%
-----------------------------------
11,000 Sumitomo Marine & Fire 76,117
-----------------------------------
4,000 Tokio Marine and Fire Insurance Co. 48,065
----------------------------------- -----------
Total 124,182
----------------------------------- -----------
MACHINERY--0.3%
-----------------------------------
14,000 Komatsu, Ltd. 78,313
-----------------------------------
4,000 Mori Seiki Co. 46,739
-----------------------------------
4,000 Takuma Co., Ltd. 39,778
----------------------------------- -----------
Total 164,830
----------------------------------- -----------
NON-RESIDENTIAL CONSTRUCTION--0.1%
-----------------------------------
7,000 Sekisui House, Ltd. 66,711
----------------------------------- -----------
OIL & RELATED--0.0%
-----------------------------------
8,000 Mitsubishi Oil Co. 21,480
----------------------------------- -----------
PAPER PRODUCTS--0.0%
-----------------------------------
2,000 Nippon Paper Industries Co. 10,972
----------------------------------- -----------
PHARMACEUTICALS--0.4%
-----------------------------------
6,000 Chugai Pharmaceutical Co. 51,711
-----------------------------------
4,000 Kaken Pharmaceutical 13,823
-----------------------------------
2,000 Sankyo Co., Ltd. 69,280
-----------------------------------
4,000 Shionogi and Co. 24,894
-----------------------------------
3,000 Yamanouchi Pharmaceutical Co., Ltd. 74,086
----------------------------------- -----------
Total 233,794
----------------------------------- -----------
PHOTO EQUIPMENT & SUPPLIES--0.0%
-----------------------------------
1,000 Nikon Corp. 15,745
----------------------------------- -----------
PRINTING-COMMERCIAL--0.0%
-----------------------------------
1,000 Dai Nippon Printing Co., Ltd. 21,381
----------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------
JAPAN--CONTINUED
----------------------------------
REAL ESTATE--0.2%
----------------------------------
8,000 Mitsubishi Estate Co., Ltd. $ 116,682
---------------------------------- -----------
RETAIL--0.3%
----------------------------------
1,000 Daiei, Inc. 5,519
----------------------------------
5,000 Hankyu Department Stores, Inc. 41,435
----------------------------------
1,000 Isetan Co. 9,613
----------------------------------
2,000 Ito Yokado Co., Ltd. 108,395
---------------------------------- -----------
Total 164,962
---------------------------------- -----------
RUBBER & MISC. MATERIALS--0.1%
----------------------------------
3,000 Bridgestone Corp. 72,097
---------------------------------- -----------
SHIPBUILDING--0.2%
----------------------------------
27,000 Mitsubishi Heavy Industries, Ltd. 147,899
---------------------------------- -----------
STEEL--0.1%
----------------------------------
44,000 NKK Corp. 59,070
----------------------------------
9,000 Nippon Steel Co. 19,839
---------------------------------- -----------
Total 78,909
---------------------------------- -----------
TELECOMMUNICATIONS--0.9%
----------------------------------
62 Nippon Telegraph & Telephone Corp. 570,316
---------------------------------- -----------
TEXTILE & APPAREL--0.1%
----------------------------------
6,000 Nisshinbo Industries 39,728
---------------------------------- -----------
TRADING COMPANY--0.3%
----------------------------------
15,000 Itochu Corp. 51,960
----------------------------------
22,000 Marubeni Corp. 72,926
----------------------------------
4,000 Onward Kashiyama Co., Ltd. 57,678
---------------------------------- -----------
Total 182,564
---------------------------------- -----------
TRANSPORTATION--0.4%
----------------------------------
12 East Japan Railway Co. 56,286
----------------------------------
35,000 (a)Kawasaki Kisen Kaisha, Ltd. 38,286
----------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
--------------------------------------
JAPAN--CONTINUED
-------------------------------
TRANSPORTATION--CONTINUED
-------------------------------
28,000 Kinki Nippon Railway $ 159,874
------------------------------- -----------
Total 254,446
------------------------------- -----------
UTILITIES--0.3%
-------------------------------
900 Kansai Electric Power Co., Inc. 16,035
-------------------------------
1,000 Sumitomo Electric Industries 14,337
-------------------------------
8,100 Tokyo Electric Power Co. 155,731
------------------------------- -----------
Total 186,103
------------------------------- -----------
TOTAL JAPAN 6,427,992
------------------------------- -----------
NETHERLANDS--0.7%
-------------------------------
BANKING--0.1%
-------------------------------
1,621 ABN-Amro Hldgs N.V. 32,822
------------------------------- -----------
CONSUMER & RELATED--0.0%
-------------------------------
200 Heineken N.V. 35,080
------------------------------- -----------
FOOD PROCESSING--0.1%
-------------------------------
200 Unilever N.V. 42,687
------------------------------- -----------
HOUSEHOLD DURABLES--0.1%
-------------------------------
600 Philips Electronics N.V. 50,766
------------------------------- -----------
INSURANCE--0.2%
-------------------------------
315 Aegon N.V. 25,228
-------------------------------
1,065 Ahold N.V. 28,788
-------------------------------
1,436 ING Groep N.V. 65,945
------------------------------- -----------
Total 119,961
------------------------------- -----------
PETROLEUM--0.2%
-------------------------------
2,600 Royal Dutch Petroleum 145,526
------------------------------- -----------
TOTAL NETHERLANDS 426,842
------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------
NEW ZEALAND--0.1%
---------------------------------
BUILDING MATERIALS--0.0%
---------------------------------
5,552 Fletcher Challenge Energy $ 6,936
--------------------------------- -----------
FOREST PRODUCTS--0.1%
---------------------------------
8,300 Carter Holt Harvey 18,026
---------------------------------
222 Fletcher Challenge Forests 277
--------------------------------- -----------
Total 18,303
--------------------------------- -----------
TELECOMMUNICATIONS--0.0%
---------------------------------
3,900 Telecom Corp. of New Zealand 19,788
--------------------------------- -----------
TOTAL NEW ZEALAND 45,027
--------------------------------- -----------
NORWAY--0.2%
---------------------------------
ENERGY--0.1%
---------------------------------
1,000 Norsk Hydro AS 59,591
--------------------------------- -----------
FOREST PRODUCTS--0.1%
---------------------------------
300 Norske Skogindustrier AS, Class A 11,271
---------------------------------
200 Norske Skogindustrier AS, Class B 6,867
--------------------------------- -----------
Total 18,138
--------------------------------- -----------
INSURANCE-LIFE--0.0%
---------------------------------
1,300 (a)Storebrand ASA 9,329
--------------------------------- -----------
MULTI-INDUSTRY--0.0%
---------------------------------
200 Aker AS, Class A 3,743
---------------------------------
40 Aker AS, Class B 681
---------------------------------
100 Orkla Borregaard AS, Class A 8,837
--------------------------------- -----------
Total 13,261
--------------------------------- -----------
NON-FERROUS METALS--0.0%
---------------------------------
400 Elkem AS, Class A 7,092
--------------------------------- -----------
TOTAL NORWAY 107,411
--------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ -------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------
SOUTH AFRICA--0.1%
--------------------------------
MINERAL PRODUCTS--0.1%
--------------------------------
20,000 Billiton PLC $ 77,030
-------------------------------- -----------
SPAIN--0.8%
--------------------------------
BANKING--0.1%
--------------------------------
300 Argentaria SA 17,947
--------------------------------
900 Banco Bilbao Vizcaya SA 27,705
--------------------------------
1,200 Banco Santander 39,311
-------------------------------- -----------
Total 84,963
-------------------------------- -----------
PETROLEUM--0.1%
--------------------------------
1,100 Repsol SA 47,531
-------------------------------- -----------
REAL ESTATE--0.3%
--------------------------------
6,000 Vallehermosa SA 165,405
-------------------------------- -----------
TELECOMMUNICATIONS--0.1%
--------------------------------
2,200 Telefonica de Espana 69,123
-------------------------------- -----------
UTILITIES--0.2%
--------------------------------
2,400 Endesa SA 51,209
--------------------------------
400 Gas Natural SDG SA 21,063
--------------------------------
2,200 Iberdrola SA 27,045
--------------------------------
600 Union Elec Fenosa 5,205
-------------------------------- -----------
Total 104,522
-------------------------------- -----------
TOTAL SPAIN 471,544
-------------------------------- -----------
SWEDEN--0.7%
--------------------------------
BANKING--0.0%
--------------------------------
1,500 Skand Enskilda BKN, Class A 18,188
--------------------------------
300 Svenska Handelsbanken, Stockholm 10,399
-------------------------------- -----------
Total 28,587
-------------------------------- -----------
COMMUNICATIONS--0.2%
--------------------------------
2,300 Telefonaktiebolaget LM Ericsson 110,491
-------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------------------------
SWEDEN--CONTINUED
-------------------------------------------------
MISCELLANEOUS--0.2%
-------------------------------------------------
2,600 Scania AB, Class A 78,814
-------------------------------------------------
2,600 Scania AB, Class B $ 78,814
------------------------------------------------- -----------
Total 157,628
------------------------------------------------- -----------
PHARMACEUTICALS--0.3%
-------------------------------------------------
8,800 Astra AB, Class A 162,372
------------------------------------------------- -----------
TOTAL SWEDEN 459,078
------------------------------------------------- -----------
SWITZERLAND--7.6%
-------------------------------------------------
AIRLINES-0.1%
-------------------------------------------------
30 Sairgroup 40,120
------------------------------------------------- -----------
BANKING--1.2%
-------------------------------------------------
600 Credit Suisse Group 81,064
-------------------------------------------------
200 Schweizerische Bankgesellschaft (UBS) 46,755
-------------------------------------------------
300 Schweizerische Bankgesellschaft (UBS) 350,454
-------------------------------------------------
900 Schweizerischer Bankverein 243,193
------------------------------------------------- -----------
Total 721,466
------------------------------------------------- -----------
BUILDING PRODUCTS--0.1%
-------------------------------------------------
50 Holderbank Financiere Glaris AG, Class B 47,442
-------------------------------------------------
100 Holderbank Financiere Glaris AG, Class R 19,527
------------------------------------------------- -----------
Total 66,969
------------------------------------------------- -----------
COMMERCIAL SERVICES--0.0%
-------------------------------------------------
15 SGS Societe Generale de Surveillance Holding S.A. 26,248
------------------------------------------------- -----------
ELECTRICAL EQUIPMENT--0.3%
-------------------------------------------------
95 ABB AG 139,913
-------------------------------------------------
10 Schindler Holding AG 12,445
-------------------------------------------------
50 Sulzer AG 38,023
------------------------------------------------- -----------
Total 190,381
------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ -------------------------------------------------------- ------------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------------------------------
SWITZERLAND--CONTINUED
--------------------------------------------------------
FOOD PROCESSING--1.1%
--------------------------------------------------------
500 Nestle SA $ 696,507
-------------------------------------------------------- ------------
HEALTHCARE-GENERAL--1.6%
--------------------------------------------------------
100 Roche Holding AG 1,015,677
-------------------------------------------------------- ------------
HOUSEHOLD PRODUCTS--0.4%
--------------------------------------------------------
600 Zurich Versicherungsgesellschaft 261,139
-------------------------------------------------------- ------------
HUMAN RESOURCES--0.1%
--------------------------------------------------------
200 Adecco S.A. 80,446
-------------------------------------------------------- ------------
INSURANCE-LIFE--0.5%
--------------------------------------------------------
190 Schw Rueckversicherungs 284,922
-------------------------------------------------------- ------------
METAL & MINING--0.1%
--------------------------------------------------------
75 Alusuisse Lonza Holding AG 73,002
-------------------------------------------------------- ------------
MISCELLANEOUS--2.0%
--------------------------------------------------------
790 Novartis AG 1,211,909
-------------------------------------------------------- ------------
RETAIL-RESTAURANTS--0.0%
--------------------------------------------------------
50 Valora Holding AG 10,640
-------------------------------------------------------- ------------
UNASSIGNED--0.1%
--------------------------------------------------------
50 Societe Suisse pour la Microelectronique et l'Horlogerie 29,772
--------------------------------------------------------
200 Societe Suisse pour la Microelectronique et l'Horlogerie 27,537
-------------------------------------------------------- ------------
Total 57,309
-------------------------------------------------------- ------------
TOTAL SWITZERLAND 4,736,735
-------------------------------------------------------- ------------
UNITED KINGDOM--3.2%
--------------------------------------------------------
AEROSPACE--0.1%
--------------------------------------------------------
1,900 British Aerospace PLC 50,307
-------------------------------------------------------- ------------
BANKING--0.6%
--------------------------------------------------------
7,100 Lloyds TSB Group PLC 95,311
--------------------------------------------------------
18,028 National Westminster Bank PLC, London 272,242
-------------------------------------------------------- ------------
Total 367,553
-------------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
--------------------------------------------------------
UNITED KINGDOM--CONTINUED
-------------------------------------------------
BROADCASTING--0.4%
-------------------------------------------------
900 British Sky Broadcasting Group PLC $ 6,809
-------------------------------------------------
27,500 Carlton Communications PLC 227,572
------------------------------------------------- -----------
Total 234,381
------------------------------------------------- -----------
DIVERSIFIED OPERATIONS--0.2%
-------------------------------------------------
19,334 Williams Holdings PLC 115,040
------------------------------------------------- -----------
FOOD PROCESSING--0.2%
-------------------------------------------------
14,300 Allied Domecq PLC 113,334
------------------------------------------------- -----------
HEALTH CARE--0.5%
-------------------------------------------------
33,224 Smithkline Beecham Corp. 324,121
------------------------------------------------- -----------
MACHINERY--0.3%
-------------------------------------------------
8,800 Siebe PLC 176,949
------------------------------------------------- -----------
MULTI-INDUSTRY--0.3%
-------------------------------------------------
7,500 Hanson PLC, ADR 180,938
------------------------------------------------- -----------
OIL & RELATED--0.2%
-------------------------------------------------
10,370 British Petroleum Co. PLC 156,347
------------------------------------------------- -----------
PHARMACEUTICALS--0.2%
-------------------------------------------------
4,800 Glaxo Wellcome PLC 107,036
------------------------------------------------- -----------
PUBLISHING--0.2%
-------------------------------------------------
12,722 EMI Group PLC 124,933
------------------------------------------------- -----------
RETAIL--0.0%
-------------------------------------------------
5,468 Thorn EMI 12,318
------------------------------------------------- -----------
TELECOMMUNICATIONS--0.0%
-------------------------------------------------
1,125 Cable & Wireless 9,578
------------------------------------------------- -----------
TOTAL UNITED KINGDOM 1,972,835
------------------------------------------------- -----------
TOTAL FOREIGN SECURITIES SECTOR (IDENTIFIED COST
$18,032,118) 18,605,918
------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
--------- --------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--9.9%
-------------------------------------------------------------
ARGENTINA--0.3%
---------------------------------------------------
PETROLEUM--0.3%
---------------------------------------------------
21,385 Compania Naviera Perez Companc S.A., Class B $ 172,398
--------------------------------------------------- ------------
BRAZIL--1.4%
---------------------------------------------------
BANKING--0.1%
---------------------------------------------------
7,000,000 Banco Bradesco S.A., Pfd. 73,794
--------------------------------------------------- ------------
BASIC INDUSTRY--0.6%
---------------------------------------------------
4,387 (a)Cia Acos Especiais Itabira-Acesita, ADR 16,937
---------------------------------------------------
3,207 (a)Companhia Energetica de Minas Gerais, ADR 176,219
---------------------------------------------------
7,400 Companhia Vale Do Rio Doce, ADR 181,017
--------------------------------------------------- ------------
Total 374,173
--------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.6%
---------------------------------------------------
2,750 Telecomunicacoes Brasileras, ADR 354,063
--------------------------------------------------- ------------
STEEL--0.0%
---------------------------------------------------
1,211,792 Cia Acos Especiais Itabira-Acesita, Pfd. 2,632
--------------------------------------------------- ------------
UTILITIES--0.1%
---------------------------------------------------
150,000 Centrais Eletricas Brasileiras S.A., Pfd., Series B 84,887
---------------------------------------------------
6,588 Light Servicos de Eletricidade S.A. 2,820
--------------------------------------------------- ------------
Total 87,707
--------------------------------------------------- ------------
TOTAL BRAZIL 892,369
--------------------------------------------------- ------------
CHILE--0.8%
---------------------------------------------------
CONSUMER DURABLES--0.2%
---------------------------------------------------
4,200 Compania Cervecerias Unidas S.A., ADR 120,750
--------------------------------------------------- ------------
ENGINEERING-BUSINESS SERVICES--0.3%
---------------------------------------------------
5,319 Chilgener S.A., ADR 145,940
--------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
---------------------------------------------------
2,525 Compania Telecomunicacion Chile, ADR 81,747
--------------------------------------------------- ------------
UTILITIES--0.2%
---------------------------------------------------
3,750 (b)Chilectra S.A., ADR 118,378
--------------------------------------------------- ------------
TOTAL CHILE 466,815
--------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ------------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
--------------------------------------------------------------
COLOMBIA--0.4%
------------------------------------------------------
BANKING--0.3%
------------------------------------------------------
2,600 Banco Ganadero S.A., ADR, Class B $ 104,000
------------------------------------------------------
5,500 Banco Industrial Colombiano, ADR 98,313
------------------------------------------------------ ------------
Total 202,313
------------------------------------------------------ ------------
MISCELLANEOUS--0.1%
------------------------------------------------------
3,500 Cementos Diamante S.A., GDR 45,500
------------------------------------------------------ ------------
TOTAL COLOMBIA 247,813
------------------------------------------------------ ------------
GREECE--0.0%
------------------------------------------------------
BANKING--0.0%
------------------------------------------------------
422 Ergo Bank S.A. 28,267
------------------------------------------------------ ------------
INDIA--0.3%
------------------------------------------------------
CHEMICALS--0.1%
------------------------------------------------------
5,700 Indian Petrochemicals, GDR 58,397
------------------------------------------------------ ------------
STEEL--0.0%
------------------------------------------------------
5,500 Steel Authority of India, GDR 35,888
------------------------------------------------------ ------------
TEXTILES--0.2%
------------------------------------------------------
4,300 Reliance Industries, Ltd., GDR 98,631
------------------------------------------------------ ------------
TOTAL INDIA 192,916
------------------------------------------------------ ------------
INDONESIA--0.3%
------------------------------------------------------
BANKING--0.2%
------------------------------------------------------
275,626 (a)PT Bank Dagang Nasional 54,455
------------------------------------------------------
39,374 (a)PT Bank Dagang Nasional, Warrants 2/14/2000 2,274
------------------------------------------------------
260,814 (a)PT Bank International Indonesia 75,311
------------------------------------------------------
32,072 (a)PT Bank International Indonesia, Warrants 1/17/2000 2,720
------------------------------------------------------ ------------
Total 134,760
------------------------------------------------------ ------------
CAPITAL GOODS--0.1%
------------------------------------------------------
3,100 (a)PT Indosat, ADR 81,375
------------------------------------------------------ ------------
TOTAL INDONESIA 216,135
------------------------------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------------------- -----------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
----------------------------------------------------
KOREA--0.6%
---------------------------------------------
AUTOMOBILE--0.0%
---------------------------------------------
2,066 Hyundai Motor Service Co., Pfd. $ 13,999
--------------------------------------------- -----------
CAPITAL GOODS--0.1%
---------------------------------------------
3,284 (a)Anam Industrial Co., Ltd. 52,400
--------------------------------------------- -----------
COMPUTERS--0.1%
---------------------------------------------
5,750 Anam Industrial Co., Ltd., Pfd. 33,934
--------------------------------------------- -----------
ELECTRONICS & ELECTRICAL--0.0%
---------------------------------------------
2 (a)Samsung Electronics Co. 193
---------------------------------------------
18 (b)Samsung Electronics Co., GDR 968
--------------------------------------------- -----------
Total 1,161
--------------------------------------------- -----------
HOUSING & CONSTRUCTION--0.0%
---------------------------------------------
9,000 (a)Kumho Construction & Engineering Co., Pfd. 21,836
--------------------------------------------- -----------
MACHINERY--0.0%
---------------------------------------------
6,000 (a)(b)Daewoo Heavy Industries, Pfd. 23,213
--------------------------------------------- -----------
MULTI-INDUSTRY--0.2%
---------------------------------------------
2,283 (a)(b)Dong Bang Forwarding Co. 118,516
---------------------------------------------
913 (a)Dong Bang Forwarding Co., Rights 14,222
--------------------------------------------- -----------
Total 132,738
--------------------------------------------- -----------
PETROLEUM--0.1%
---------------------------------------------
2,571 (a)Yukong, Ltd. 47,767
--------------------------------------------- -----------
UTILITIES--0.1%
---------------------------------------------
3,200 (a)Korea Electric Power Corp. 70,995
--------------------------------------------- -----------
TOTAL KOREA 398,043
--------------------------------------------- -----------
MALAYSIA--0.9%
---------------------------------------------
AIRLINES--0.1%
---------------------------------------------
25,000 Malaysian Airline System 40,071
--------------------------------------------- -----------
BANKING--0.2%
---------------------------------------------
14,000 Commerce Asset Holdings Berhad 15,708
---------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------------ ----------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-------------------------------------------------------------
MALAYSIA--CONTINUED
------------------------------------------------------
BANKING--CONTINUED
------------------------------------------------------
1,750 (a)Commerce Asset Holdings Berhad, Warrants 12/31/2002 $ 566
------------------------------------------------------
25,000 RHB Capital BHD 29,591
------------------------------------------------------
12,000 Malayan Banking Berhad 60,291
------------------------------------------------------ ----------
Total 106,156
------------------------------------------------------ ----------
BEVERAGES--0.1%
------------------------------------------------------
40,000 Guinness Anchor Berhad 61,648
------------------------------------------------------ ----------
FOREST PRODUCTS--0.0%
------------------------------------------------------
10,000 Jaya Tiasa Holdings 27,587
------------------------------------------------------ ----------
INDUSTRIAL COMPONENT--0.0%
------------------------------------------------------
9,000 United Engineers, Ltd. 28,851
------------------------------------------------------ ----------
LEISURE & RECREATION--0.1%
------------------------------------------------------
12,000 Genting Berhad 37,358
------------------------------------------------------ ----------
MULTI-INDUSTRY--0.1%
------------------------------------------------------
35,000 Sime Darby Berhad 72,821
------------------------------------------------------ ----------
NON RESIDENTIAL CONSTRUCTION--0.1%
------------------------------------------------------
47,000 Renong Berhad 46,359
------------------------------------------------------ ----------
TELECOMMUNICATIONS--0.1%
------------------------------------------------------
13,500 Telekom Malaysia Berhad 40,988
------------------------------------------------------ ----------
UTILITIES--0.1%
------------------------------------------------------
18,000 Petronas Gas Berhad 53,263
------------------------------------------------------ ----------
TOTAL MALAYSIA 515,102
------------------------------------------------------ ----------
MEXICO--1.4%
------------------------------------------------------
FINANCIAL SERVICES--0.3%
------------------------------------------------------
4,900 (a)Carso Global Telecom, ADR 41,592
------------------------------------------------------
4,900 (a)Grupo Carso S.A. de C.V., Class A1, ADR 78,898
------------------------------------------------------
16,000 (a)Grupo Financiero Banamex Accivel, Class B 50,450
------------------------------------------------------
1,140 (a)Grupo Financiero Banamex Accivel, Class L 3,345
------------------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ------------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
--------------------------------------------------------------
MEXICO--CONTINUED
------------------------------------------------------
FINANCIAL SERVICES--CONTINUED
------------------------------------------------------
68 Grupo Financiero Inbursa, S.A. de C.V., Class B, ADR $ 1,504
------------------------------------------------------ ------------
Total 175,789
------------------------------------------------------ ------------
INDUSTRIAL & RELATED--0.1%
------------------------------------------------------
11,000 Apasco S.A. de C.V. 83,668
------------------------------------------------------ ------------
MULTI-INDUSTRY--0.2%
------------------------------------------------------
12,791 Alfa, S.A. de C.V., Class A 120,173
------------------------------------------------------ ------------
PAPER PRODUCTS--0.2%
------------------------------------------------------
25,000 Kimberly-Clark de Mexico 130,792
------------------------------------------------------ ------------
TELECOMMUNICATIONS--0.5%
------------------------------------------------------
110,000 Telefonos de Mexico 286,679
------------------------------------------------------ ------------
TELECOMMUNICATION SERVICES--0.1%
------------------------------------------------------
4,000 Grupo Televisa S.A. 71,094
------------------------------------------------------ ------------
TOTAL MEXICO 868,195
------------------------------------------------------ ------------
PHILIPPINES--0.1%
------------------------------------------------------
BANKING--0.0%
------------------------------------------------------
1,935 Metro Bank and Trust Co. 17,247
------------------------------------------------------ ------------
OIL & RELATED--0.1%
------------------------------------------------------
400,000 (a)Belle Corp. 52,174
------------------------------------------------------
80,000 (a)Belle Corp., warrants 10/6/2000 0
------------------------------------------------------ ------------
Total 52,174
------------------------------------------------------ ------------
TOTAL PHILIPPINES 69,421
------------------------------------------------------ ------------
PORTUGAL--0.6%
------------------------------------------------------
ENGINEERING-BUSINESS SERVICES--0.1%
------------------------------------------------------
Sonae Investimentos Sociedade Gestora de Participacoes
1,500 Sociais, S.A. 59,303
------------------------------------------------------ ------------
FINANCIAL SERVICES--0.2%
------------------------------------------------------
6,000 Banco Commercial Portugues, Class R 126,709
------------------------------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------------------
PORTUGAL--CONTINUED
----------------------------------------------------
FOOD & BEVERAGE--0.2%
----------------------------------------------------
1,399 Estabelecimentos Jeronimo Martins & Filho SGPS, S.A. $ 107,681
---------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
----------------------------------------------------
2,000 Portugal Telecom S.A. 86,751
---------------------------------------------------- ------------
TOTAL PORTUGAL 380,444
---------------------------------------------------- ------------
SINGAPORE--0.3%
----------------------------------------------------
BANKING--0.1%
----------------------------------------------------
3,000 Development Bank of Singapore, Ltd. 30,598
----------------------------------------------------
6,000 Oversea-Chinese Banking Corp., Ltd. 41,582
---------------------------------------------------- ------------
Total 72,180
---------------------------------------------------- ------------
BROADCASTING--0.0%
----------------------------------------------------
1,000 Singapore Press Holdings, Ltd. 14,711
---------------------------------------------------- ------------
ENTERTAINMENT & RECREATION--0.0%
----------------------------------------------------
3,000 Hotel Properties, Ltd. 3,707
---------------------------------------------------- ------------
MACHINERY--0.0%
----------------------------------------------------
1,250 Keppel Corp. 4,985
----------------------------------------------------
2,000 Van Der Horst, Ltd. 2,733
---------------------------------------------------- ------------
Total 7,718
---------------------------------------------------- ------------
PROPERTY--0.1%
----------------------------------------------------
2,000 City Developments, Ltd. 12,945
----------------------------------------------------
3,000 DBS Land Ltd. 7,297
----------------------------------------------------
2,000 First Capital Corp., Ltd. 4,472
----------------------------------------------------
9,000 United Overseas Bank, Ltd. 35,829
---------------------------------------------------- ------------
Total 60,543
---------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
----------------------------------------------------
13,000 Singapore Telecommunications 22,014
---------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------
SINGAPORE--CONTINUED
----------------------------------------
TRANSPORTATION-AIR--0.0%
----------------------------------------
3,000 Singapore Airlines, Ltd. $ 22,164
---------------------------------------- ------------
TOTAL SINGAPORE 203,037
---------------------------------------- ------------
SOUTH AFRICA--1.8%
----------------------------------------
BANKING--0.2%
----------------------------------------
7,186 Amalgamated Banks of South Africa 48,955
----------------------------------------
2,515 Nedcor, Ltd. 54,234
----------------------------------------
1,000 Standard Bank Investment Corp., Ltd. 44,523
---------------------------------------- ------------
Total 147,712
---------------------------------------- ------------
CHEMICAL--0.2%
----------------------------------------
9,000 Sasol, Ltd. 124,075
---------------------------------------- ------------
COAL--0.0%
----------------------------------------
419 Anglo American Coal Corp., Ltd. 24,454
---------------------------------------- ------------
ENTERTAINMENT--0.1%
----------------------------------------
62,743 Sun International (South Africa), Ltd. 38,503
---------------------------------------- ------------
FINANCIAL SERVICES--0.2%
----------------------------------------
312 (a)Dimension Data Holdings, Ltd. 1,305
----------------------------------------
4,500 Free State Consolidated Gold Mines, Ltd. 26,553
----------------------------------------
6,000 Malbak Limited 8,754
----------------------------------------
7,000 Rembrandt Group, Ltd. 63,384
---------------------------------------- ------------
Total 99,996
---------------------------------------- ------------
FOOD & BEVERAGE--0.0%
----------------------------------------
672 Foodcorp., Ltd. 4,326
---------------------------------------- ------------
HOUSEHOLD PRODUCTS--0.0%
----------------------------------------
837 Ellerine Holdings, Ltd. 6,645
----------------------------------------
81 (a)JD Group, Ltd. 613
---------------------------------------- ------------
Total 7,258
---------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
--------- -------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
------------------------------------------------------------
SOUTH AFRICA--CONTINUED
--------------------------------------------------
INDUSTRIAL MANUFACTURING--0.2%
--------------------------------------------------
6,045 Barlow Ltd. $ 69,069
--------------------------------------------------
1,030 Anglo American Industrial Corp., Ltd. 38,676
-------------------------------------------------- ------------
Total 107,745
-------------------------------------------------- ------------
INSURANCE--0.3%
--------------------------------------------------
27,826 LibLife Strategic Investments, Ltd. 96,127
--------------------------------------------------
3,000 Liberty Life Association of Africa, Ltd. 87,544
-------------------------------------------------- ------------
Total 183,671
-------------------------------------------------- ------------
LODGING & RESTAURANT--0.2%
--------------------------------------------------
4,068 South African Breweries, Ltd. 118,055
-------------------------------------------------- ------------
MEDICAL-DRUGS--0.0%
--------------------------------------------------
989 South African Druggists, Ltd. 6,451
-------------------------------------------------- ------------
METALS & MINING--0.4%
--------------------------------------------------
3,000 Anglo American Platinum Corp., Ltd. 51,979
--------------------------------------------------
1,500 Anglo American Corporation of South Africa Limited 76,762
--------------------------------------------------
3,300 De Beers Centenary AG 96,299
--------------------------------------------------
4,000 Gencor Ltd. 9,441
-------------------------------------------------- ------------
Total 234,481
-------------------------------------------------- ------------
RETAIL-DIVERSIFIED--0.0%
--------------------------------------------------
2,284 New Clicks Holdings, Ltd. 2,960
-------------------------------------------------- ------------
TOTAL SOUTH AFRICA 1,099,687
-------------------------------------------------- ------------
TAIWAN--0.4%
--------------------------------------------------
MISCELLANEOUS--0.1%
--------------------------------------------------
7,018 (a)Walsin Lihwa Wire, GDR 56,846
-------------------------------------------------- ------------
NON-RESIDENTIAL CONSTRUCTION--0.1%
--------------------------------------------------
10,902 (a)Tuntex Distinct Corp., GDR 62,414
-------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- ------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------------------
TAIWAN--CONTINUED
------------------------------------------------
TECHNOLOGY--0.2%
------------------------------------------------
4,213 (a)Macronix International Co., Ltd., ADR $ 94,529
------------------------------------------------ ------------
TOTAL TAIWAN 213,789
------------------------------------------------ ------------
THAILAND--0.3%
------------------------------------------------
BANKING--0.1%
------------------------------------------------
27,000 Krung Thai Bank PLC 18,223
------------------------------------------------
13,500 Siam Commercial Bank 43,884
------------------------------------------------ ------------
Total 62,107
------------------------------------------------ ------------
BUILDING MATERIALS--0.0%
------------------------------------------------
2,000 Siam Cement Co., Ltd 32,837
------------------------------------------------ ------------
COMMUNICATIONS--0.1%
------------------------------------------------
35,000 (a)TelecomAsia Corp. 28,444
------------------------------------------------
9,000 United Communication Industry Public Co., Ltd. 26,777
------------------------------------------------ ------------
Total 55,221
------------------------------------------------ ------------
PETROLEUM--0.1%
------------------------------------------------
4,500 PTT Exploration and Production Public Co. 60,248
------------------------------------------------ ------------
TOTAL THAILAND 210,413
------------------------------------------------ ------------
TURKEY--0.0%
------------------------------------------------
MULTI-INDUSTRY--0.0%
------------------------------------------------
349 Koc Yatirim Ve Sanayi Mamulleri Pazarlama S.A. 132
------------------------------------------------ ------------
TOTAL EMERGING MARKETS SECURITIES SECTOR 6,174,976
(IDENTIFIED COST $6,248,756)
------------------------------------------------ ------------
COMMERCIAL PAPER--28.8%
-----------------------------------------------------------
FINANCE--28.8%
------------------------------------------------
$3,000,000 Ford Motor Credit Corp., 5.50%, 12/12/1997 2,969,670
------------------------------------------------
3,000,000 General Electric Capital Corp., 5.50%, 10/8/1997 2,996,792
------------------------------------------------
3,000,000 Hertz Corp., 5.50%, 12/12/1997 2,969,670
------------------------------------------------
3,000,000 Monte Rosa Capital Corp., 5.54%, 10/2/1997 2,999,538
------------------------------------------------
New Center Asset Trust, A1/P1 Series, 5.53%,
3,000,000 10/6/1997 2,997,696
------------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
FOREIGN VALUE
CURRENCY PAR IN U.S.
AMOUNT DOLLARS
------------ -------------------------------------------------- -----------
<C> <S> <C>
COMMERCIAL PAPER--CONTINUED
---------------------------------------------------------------
FINANCE--CONTINUED
--------------------------------------------------
$ 3,000,000 Sheffield Receivables Corp., 5.54%, 10/2/1997 $ 2,999,538
-------------------------------------------------- -----------
TOTAL COMMERCIAL PAPER (IDENTIFIED COST
$17,927,564) 17,932,904
-------------------------------------------------- -----------
U.S. FIXED INCOME SECURITIES SECTOR--10.7%
---------------------------------------------------------------
GOVERNMENT/AGENCY--10.7%
--------------------------------------------------
1,500,000 United States Treasury Bill, 12/11/1997 1,485,591
--------------------------------------------------
325,000 United States Treasury Bond, 7.25%, 8/15/2022 355,427
--------------------------------------------------
500,000 United States Treasury Bond, 7.50%, 11/15/2016 556,730
--------------------------------------------------
1,200,000 United States Treasury Bond, 7.625%, 11/15/2022 1,368,528
--------------------------------------------------
1,430,000 United States Treasury Bond, 11.75%, 11/15/2014 2,076,432
--------------------------------------------------
400,000 United States Treasury Note, 6.25%, 2/15/2003 404,000
--------------------------------------------------
350,000 United States Treasury Receipt PO Strip, 8/15/2005 216,097
--------------------------------------------------
350,000 United States Treasury Receipt IO Strip, 2/15/2005 223,298
-------------------------------------------------- -----------
TOTAL U.S. FIXED INCOME SECURITIES SECTOR
(IDENTIFIED COST $6,431,631) 6,686,103
-------------------------------------------------- -----------
FOREIGN FIXED INCOME SECURITIES SECTOR--17.1%
---------------------------------------------------------------
DENMARK--0.9%
--------------------------------------------------
3,310,000 Denmark--Bullet, Bond, 8.00%, 3/15/2006 562,497
-------------------------------------------------- -----------
FRANCE--3.7%
--------------------------------------------------
10,500,000 France (Govt. of), 6.50%, 10/25/2006 1,909,509
--------------------------------------------------
2,150,000 France O.A.T., Bond, 7.25%, 4/25/2006 409,622
-------------------------------------------------- -----------
Total 2,319,131
-------------------------------------------------- -----------
GERMANY--3.4%
--------------------------------------------------
1,040,000 Republic of Germany, Bond, 6.25%, 4/26/2006 620,604
--------------------------------------------------
287,000 Republic of Germany, Deb., 7.125%, 12/20/2002 178,442
--------------------------------------------------
1,065,000 Germany (Fed. Republic), 6.50%, 7/15/2003 646,130
--------------------------------------------------
1,140,000 Germany (Fed. Republic), Bond, 6.00%, 1/5/2006 669,438
-------------------------------------------------- -----------
Total 2,114,614
-------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
FOREIGN VALUE
CURRENCY PAR IN U.S.
AMOUNT DOLLARS
------------ --------------------------------------------------- -----------
<C> <S> <C>
FOREIGN FIXED INCOME SECURITIES SECTOR--CONTINUED
----------------------------------------------------------------
ITALY--1.2%
---------------------------------------------------
$880,000,000 Buoni Poliennali Del Tes, Deb., 10.50%, 4/15/1998 $ 519,182
---------------------------------------------------
310,000,000 Italy (Republic of), Deb., 10.50%, 4/1/2005 227,162
--------------------------------------------------- -----------
Total 746,344
--------------------------------------------------- -----------
NETHERLANDS--3.1%
---------------------------------------------------
1,690,000 Dutch Government Bond, 5.75%, 2/15/2007 864,572
---------------------------------------------------
580,000 Netherlands Government Bond, 7.50%, 4/15/2010 337,602
---------------------------------------------------
880,000 Dutch Government Bond, 7.25%, 10/1/2004 493,875
---------------------------------------------------
410,000 Netherlands Government Bond, 7.00%, 2/15/2003 225,363
--------------------------------------------------- -----------
Total 1,921,412
--------------------------------------------------- -----------
SPAIN--1.3%
---------------------------------------------------
104,600,000 Kingdom of Spain, Deb., 12.25%, 3/25/2000 817,732
--------------------------------------------------- -----------
SWEDEN--0.4%
---------------------------------------------------
1,600,000 Sweden (Kingdom of), 10.25%, 5/5/2000 236,091
--------------------------------------------------- -----------
UNITED KINGDOM--3.1%
---------------------------------------------------
245,000 United Kingdom Treasury Bond, 8.00%, 12/7/2015 455,561
---------------------------------------------------
239,000 United Kingdom Treasury, 7.75%, 9/8/2006 417,789
---------------------------------------------------
400,000 United Kingdom Treasury, 8.50%, 7/16/2007 737,321
---------------------------------------------------
190,000 United Kingdom Treasury, 9.75%, 8/27/2002 346,591
--------------------------------------------------- -----------
Total 1,957,262
--------------------------------------------------- -----------
TOTAL FOREIGN FIXED INCOME SECURITIES SECTOR
(IDENTIFIED COST $10,804,770) 10,675,083
--------------------------------------------------- -----------
(C) REPURCHASE AGREEMENT--1.9%
----------------------------------------------------------------
1,176,958 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(at amortized cost) 1,176,958
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $60,621,797)(D) $61,251,942
--------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- - -------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $261,075 which represents 0.4% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $60,689,138 The
net unrealized appreciation of investments on a federal tax basis amounts to
$562,804 which is comprised of $2,899,362 appreciation and $2,336,558
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($62,197,366) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depositary Receipt
GDR--Global Depositary Receipt
IO--Interest Only
PO--Principal Only
PLC--Public Limited Company
SPA--Standby Purchase Agreement
STRIP--Separate Trading of Registered Interest & Principal of Securities
(See Notes which are an integral part of the Financial Statements)
BLANCHARD PRECIOUS METALS FUND, INC.
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
--------- -------------------------------- -----------
<C> <S> <C>
EQUITIES--84.5%
------------------------------------------
METALS & MINING--84.5%
--------------------------------
AUSTRALIA--1.0%
--------------------------------
600,000 (a)Croesus Mining NL $ 152,449
--------------------------------
1,000,000 (a)Laverton Gold NL 148,820
--------------------------------
1,258,000 (a)(b)Lone Star Exploration NL 200,253
--------------------------------
1,300,000 (a)Lone Star Exploration NL 215,500
-------------------------------- -----------
Total 717,022
-------------------------------- -----------
CANADA--53.0%
--------------------------------
1,640,000 (a)Ariel Resources, Ltd. 367,859
--------------------------------
421,000 Cambior, Inc. 4,736,840
--------------------------------
229,600 (a)Dayton Mining Corp. 803,600
--------------------------------
1,405,500 (a)(b)Eldorado Gold Corp., Ltd. 3,823,798
--------------------------------
230,000 (a)First Silver Reserve, Inc. 183,061
--------------------------------
95,200 Franco-Nevada Mining Corp., Ltd. 2,242,148
--------------------------------
721,000 (a)Geomaque Explorations, Ltd. 1,930,249
--------------------------------
50,000 (a)Goldcorp, Inc., Class A 318,750
--------------------------------
401,500 (a)Golden Knight Resources, Inc. 1,191,093
--------------------------------
316,000 (a)Greenstone Resources, Ltd. 3,235,339
--------------------------------
510,000 (a)Kinross Gold Corp. 2,836,875
--------------------------------
194,300 (a)Philex Gold, Inc. 773,235
--------------------------------
135,000 Placer Dome, Inc. 2,581,875
--------------------------------
4,115,069 (a)Santa Cruz Gold, Inc. 1,488,755
--------------------------------
1,260,000 (a)TVX Gold, Inc. 7,840,527
--------------------------------
466,000 (a)Viceroy Resource Corp. 1,180,131
-------------------------------- -----------
Total 35,534,135
-------------------------------- -----------
</TABLE>
BLANCHARD PRECIOUS METALS FUND, INC.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- ---------------------------------------------------- -----------
<C> <S> <C>
EQUITIES--CONTINUED
---------------------------------------------------------------
GHANA--4.8%
----------------------------------------------------
290,000 Ashanti Goldfields Co., GDR $ 3,190,000
---------------------------------------------------- -----------
SOUTH AFRICA--5.0%
----------------------------------------------------
551,700 East Rand Gold & Uranium Co., Ltd., ADR 764,325
----------------------------------------------------
200,000 Free State Consolidated Gold Mines Ltd., ADR 1,218,750
----------------------------------------------------
255,000 Vaal Reefs Explorations & Mining Co., Ltd., ADR 1,370,625
---------------------------------------------------- -----------
Total 3,353,700
---------------------------------------------------- -----------
UNITED STATES--20.7%
----------------------------------------------------
1,425,000 (a)Canyon Resources Corp. 3,918,750
----------------------------------------------------
260,000 Homestake Mining Co. 3,981,250
----------------------------------------------------
626,500 (a)Meridian Gold, Inc. 3,093,344
----------------------------------------------------
64,500 Newmont Mining Corp. 2,898,469
---------------------------------------------------- -----------
Total 13,891,813
---------------------------------------------------- -----------
TOTAL EQUITIES (IDENTIFIED COST $78,030,194) 56,686,670
---------------------------------------------------- -----------
WARRANTS--1.3%
---------------------------------------------------------------
227,500 (a)Atlas Corp., Warrants (expire 12/15/99) 1,138
----------------------------------------------------
75,000 (a)Canyon Resources Corp., Warrants (expire 3/20/99) --
----------------------------------------------------
(a)(b)Geomaque Explorations Ltd., Warrants (expire 870,084
325,000 3/19/99)
---------------------------------------------------- -----------
TOTAL WARRANTS (IDENTIFIED COST $827,565) 871,222
---------------------------------------------------- -----------
PREFERRED STOCK--0.8%
---------------------------------------------------------------
UNITED STATES--0.8%
----------------------------------------------------
25,000 Freeport-McMoRan Copper & Gold, Inc., Cumulative
Pfd., Series SILV (IDENTIFIED COST $432,868) 528,125
---------------------------------------------------- -----------
U.S. TREASURY SECURITIES--7.8%
---------------------------------------------------------------
U.S. TREASURY BILL--7.8%
----------------------------------------------------
$5,300,000 12/11/1997 (IDENTIFIED COST $5,248,217) 5,249,088
---------------------------------------------------- -----------
</TABLE>
BLANCHARD PRECIOUS METALS FUND, INC.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- --------------------------------------------------- -----------
<C> <S> <C>
(C) REPURCHASE AGREEMENT--8.2%
--------------------------------------------------------------
$5,492,706 CS First Boston Corp., 6.05%, dated 9/30/1997, due
10/1/1997 (at amortized cost) $ 5,492,706
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $90,031,550)(D) $68,827,811
--------------------------------------------------- -----------
</TABLE>
(a) Non-income producing security.
(b) Certain of these securities are subject to restrictions on resale under
Federal Securities laws. At September 30, 1997, these securities amounted to
$4,894,135 with represents 7.3% of net assets.
(c) The repurchase agreements is fully collateralized by U.S.government and/or
agency obligations based on market prices at the date of the portfolio.
(d) The cost of investments for federal tax purposes amounts to $90,719,260. The
net unrealized depreciation of investments on a federal tax basis amounts to
$20,522,951 which is comprised of $1,599,113 appreciation and $22,122,064
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($67,037,240) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
GDR--Global Depository Receipt
(See Notes which are an integral part of the Financial Statements)
BLANCHARD FLEXIBLE INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--26.6%
---------------------------------------------------------------
AEROSPACE--1.1%
-------------------------------------------------
$ 1,700,000 Sequa Corp., Sr. Note, 8.75%, 12/15/2001 $ 1,738,250
------------------------------------------------- ------------
CONSUMER RELATED--1.3%
-------------------------------------------------
Host Marriot Travel Plaza, Sr. Note, 9.50%, 1,062,500
1,000,000 5/15/2005
-------------------------------------------------
John Q. Hammons Hotels, 1st Mtg. Bond, 8.875%, 1,015,000
1,000,000 2/15/2004
------------------------------------------------- ------------
Total 2,077,500
------------------------------------------------- ------------
FINANCE--3.5%
-------------------------------------------------
Americo Life, Inc., Sr. Sub. Note, 9.25%, 1,548,750
1,500,000 6/1/2005
-------------------------------------------------
1,000,000 Navistar Financial Corp. Owner Trust 1995-A , Sr.
Sub. Note, 8.875%, 11/15/1998 1,024,241
-------------------------------------------------
Presidential Life Corp., Sr. Note, 9.50%, 1,556,250
1,500,000 12/15/2000
-------------------------------------------------
Reliance Group Holdings, Inc., Sr. Note, 9.00%, 1,306,250
1,250,000 11/15/2000
------------------------------------------------- ------------
Total 5,435,491
------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.6%
-------------------------------------------------
1,000,000 EnviroSource, Inc., Sr. Note, 9.75%, 6/15/2003 1,005,000
------------------------------------------------- ------------
OIL REFINING--1.5%
-------------------------------------------------
2,250,000 PDV America, Sr. Note, 7.25%, 8/1/1998 2,267,957
------------------------------------------------- ------------
PAPER/FOREST PRODUCTS/CONTAINERS--4.9%
-------------------------------------------------
Doman Industries, Ltd., Sr. Note, 8.75%, 995,000
1,000,000 3/15/2004
-------------------------------------------------
1,250,000 Fort Howard Corp., Sr. Sub. Note, 9.00%, 2/1/2006 1,358,749
-------------------------------------------------
1,000,000 Maxxam Group, Inc., Sr. Note, 11.25%, 8/1/2003 1,065,000
-------------------------------------------------
1,000,000 Repap New Brunswick, 1st Priority Sr. Secd. Note,
9.875%, 7/15/2000 1,012,500
-------------------------------------------------
1,000,000 Repap Wisconsin, Inc., 1st Priority Sr. Secd.
Note, 9.25%, 2/1/2002 1,058,750
-------------------------------------------------
2,000,000 (a)Stone Container Finance Co. CDA, Company
Guarantee, 11.50%, 8/15/2006 2,130,000
------------------------------------------------- ------------
Total 7,619,999
------------------------------------------------- ------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
REAL ESTATE DEVELOPMENT--1.0%
-------------------------------------------------
Granite Development Partners, Sr. Note, Series B, $ 1,477,500
$ 1,500,000 10.83%, 11/15/2003
------------------------------------------------- ------------
RETAIL TRADE--0.7%
-------------------------------------------------
(a)Nine West Group, Inc., Sr. Note, 8.375%, 1,010,000
1,000,000 8/15/2005
------------------------------------------------- ------------
SERVICES--2.0%
-------------------------------------------------
1,000,000 (a)Calpine Corp., Sr. Note, 8.75%, 7/15/2007 1,022,500
-------------------------------------------------
HMH Properties, Inc., Sr. Note, Series B, 9.50%, 1,057,500
1,000,000 5/15/2005
-------------------------------------------------
Prime Hospitality Corp., Sr. Sub. Note, 9.75%, 1,060,000
1,000,000 4/1/2007
------------------------------------------------- ------------
Total 3,140,000
------------------------------------------------- ------------
STEEL--1.7%
-------------------------------------------------
1,500,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 1,552,500
-------------------------------------------------
Bethlehem Steel Corp., Sr. Note, 10.375%, 1,080,000
1,000,000 9/1/2003
------------------------------------------------- ------------
Total 2,632,500
------------------------------------------------- ------------
TELECOMMUNICATIONS/CABLE--2.0%
-------------------------------------------------
Centennial Cellular Corp., Sr. Note, 8.875%, 1,020,000
1,000,000 11/1/2001
-------------------------------------------------
Lenfest Communications Inc., Sr. Note, 8.375%, 1,007,500
1,000,000 11/1/2005
-------------------------------------------------
Teleport Communications Group, Inc., Sr. Note, 1,097,500
1,000,000 9.875%, 7/1/2006
------------------------------------------------- ------------
Total 3,125,000
------------------------------------------------- ------------
TRANSPORTATION--4.1%
-------------------------------------------------
Eletson Holdings, Inc., 1st Mtg. Note, 9.25%, 1,541,250
1,500,000 11/15/2003
-------------------------------------------------
1,389,000 Piedmont Aviation, 10.15%, 3/28/2003 1,451,505
-------------------------------------------------
852,000 Piedmont Aviation, 9.90%, 1/15/2001 862,650
-------------------------------------------------
1,500,000 Sea Containers Ltd., Sr. Note, 9.50%, 7/1/2003 1,552,500
-------------------------------------------------
896,000 USAir, Inc., 9.90%, 1/15/2001 885,920
------------------------------------------------- ------------
Total 6,293,825
------------------------------------------------- ------------
UTILITIES-ELECTRIC--2.2%
-------------------------------------------------
1,000,000 Cleveland Electric Illuminating Co., 1st Mtg.
Bond, 9.50%, 5/15/2005 1,090,000
-------------------------------------------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
UTILITIES-ELECTRIC--CONTINUED
-------------------------------------------------
$ 2,218,808 (a)Tucson Electric Power Co., 10.21%, 1/1/2009 $ 2,307,561
------------------------------------------------- ------------
Total 3,397,561
------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST 41,220,583
$39,374,399)
------------------------------------------------- ------------
FOREIGN SECURITIES--1.0%
---------------------------------------------------------------
TELECOMMUNICATIONS--1.0%
-------------------------------------------------
CAD 2,000,000 Rogers Cablesystems, Ltd., Sr. Secd. Note, 9.65%,
1/15/2014 (IDENTIFIED COST $1,511,716) 1,545,948
------------------------------------------------- ------------
MORTGAGE BACKED SECURITIES--31.1%
---------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--31.1%
-------------------------------------------------
35,403 Pool E00434, 7.00%, 5/1/2011 35,809
-------------------------------------------------
975,488 Pool E00466, 7.00%, 1/1/2012 986,676
-------------------------------------------------
993,214 Pool E00497, 7.00%, 7/1/2012 1,004,139
-------------------------------------------------
1,627,552 Pool E20217, 7.00%, 1/1/2011 1,646,202
-------------------------------------------------
3,643,090 Pool E20271, 7.00%, 11/1/2011 3,684,872
-------------------------------------------------
702,239 Pool E64769, 7.00%, 7/1/2011 710,292
-------------------------------------------------
264,596 Pool E64891, 7.00%, 7/1/2011 267,631
-------------------------------------------------
1,498,267 Pool E65184, 7.00%, 8/1/2011 1,515,450
-------------------------------------------------
440,315 Pool E65186, 7.00%, 8/1/2011 445,365
-------------------------------------------------
58,006 Pool E65399, 7.00%, 9/1/2011 58,671
-------------------------------------------------
459,199 Pool E65450, 7.00%, 10/1/2011 464,466
-------------------------------------------------
283,376 Pool E65454, 7.00%, 10/1/2011 286,626
-------------------------------------------------
163,361 Pool E65468, 7.00%, 10/1/2011 165,235
-------------------------------------------------
2,208,871 Pool E65490, 7.00%, 10/1/2011 2,234,205
-------------------------------------------------
2,821,959 Pool E65503, 7.00%, 10/1/2011 2,854,324
-------------------------------------------------
304,766 Pool E65597, 7.00%, 10/1/2011 308,261
-------------------------------------------------
241,313 Pool E65645, 7.00%, 11/1/2011 244,080
-------------------------------------------------
643,716 Pool E65660, 7.00%, 11/1/2011 651,099
-------------------------------------------------
786,446 Pool E65690, 7.00%, 11/1/2011 795,466
-------------------------------------------------
1,523,500 Pool E65702, 7.00%, 11/1/2011 1,540,973
-------------------------------------------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- --------------------------------------------- ------------
<C> <S> <C>
MORTGAGE BACKED SECURITIES--CONTINUED
-----------------------------------------------------------
$ 945,741 Pool E65703, 7.00%, 11/1/2011 $ 956,588
---------------------------------------------
1,908,905 Pool E65712, 7.00%, 12/1/2011 1,930,799
---------------------------------------------
326,516 Pool E65717, 7.00%, 11/1/2011 330,261
---------------------------------------------
1,026,390 Pool E65723, 7.00%, 11/1/2011 1,038,161
---------------------------------------------
409,609 Pool E65750, 7.00%, 11/1/2011 414,307
---------------------------------------------
34,080 Pool E65759, 7.00%, 12/1/2011 34,471
---------------------------------------------
3,252,636 Pool E67171, 7.00%, 7/1/2012 3,288,412
---------------------------------------------
2,981,906 Pool E67276, 7.00%, 8/1/2012 3,014,704
---------------------------------------------
30,851 Pool G10524, 7.00%, 5/1/2011 31,205
---------------------------------------------
596,894 Pool G10556, 7.00%, 7/1/2011 603,740
---------------------------------------------
298,671 Pool G10590, 7.00%, 10/1/2011 302,097
---------------------------------------------
16,291,034 Pool G10690, 7.00%, 7/1/2012 16,470,219
--------------------------------------------- ------------
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED 48,314,806
COST $47,988,240)
--------------------------------------------- ------------
U.S. TREASURY--37.5%
-----------------------------------------------------------
U.S. TREASURY BONDS--13.7%
---------------------------------------------
20,000,000 7.25%, 5/15/2004 21,256,240
--------------------------------------------- ------------
U.S. TREASURY NOTES--23.8%
---------------------------------------------
35,000,000 7.00%, 7/15/2006 36,914,047
--------------------------------------------- ------------
TOTAL U.S. TREASURY (IDENTIFIED COST 58,170,287
$56,623,205)
--------------------------------------------- ------------
(B)REPURCHASE AGREEMENT--2.9%
-----------------------------------------------------------
4,512,438 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) 4,512,438
--------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $153,764,062
$150,009,998)(C)
--------------------------------------------- ------------
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $6,470,061 which represents 4.2% of net assets.
(b) The repurchase agreement is fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $150,009,998.
The net unrealized appreciation of investments on a federal tax basis
amounts to $3,754,064 which is comprised of $3,781,564 appreciation and
$27,500 depreciation at September 30, 1997.
BLANCHARD FLEXIBLE INCOME FUND
- - --------------------------------------------------------------------------------
Note: The categories of investments are shown as a percentage of net assets
($155,222,701) at September 30, 1997.
The following acronyms are used throughout this portfolio:
CAD--Canadian Dollars
CDA--Community Development Administration
(See Notes which are an integral part of the Financial Statements)
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS--4.5%
---------------------------------------------------------------
FINANCIAL SERVICES--0.4%
---------------------------------------------------
$ 4,796 CMC Securities Corp. 1993-A, Series 1993-A, Class
A2, 7.50%, 2/25/2023 $ 4,785
---------------------------------------------------
583,666 Merrill Lynch Mortgage Investors, Series 1990-I,
Class A, 9.20%, 1/15/2011 583,223
--------------------------------------------------- ------------
Total 588,008
--------------------------------------------------- ------------
GOVERNMENT/AGENCY--4.1%
---------------------------------------------------
1,892,678 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-3,
Series 1992-3, Class A2, 6.45%, 10/25/2019 1,896,823
---------------------------------------------------
1,283,183 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-3,
Series 1992-3, Class A3, 6.05%, 6/25/2021 1,287,200
---------------------------------------------------
1,412,944 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-6,
Series 1992-6, Class A4, 7.36%, 11/25/2025 1,423,542
---------------------------------------------------
774,275 Resolution Trust Corp. Mtg. Pass-Thru 1992-C1,
Series 1992-C1, Class A1, 8.80%, 8/25/2023 781,778
--------------------------------------------------- ------------
Total 5,389,343
--------------------------------------------------- ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(IDENTIFIED COST $5,841,278) 5,977,351
--------------------------------------------------- ------------
CORPORATE BONDS--29.3%
---------------------------------------------------------------
AEROSPACE/DEFENSE--0.4%
---------------------------------------------------
500,000 Sequa Corp., Sr. Note, 8.75%, 12/15/2001 511,250
--------------------------------------------------- ------------
AIRLINES--0.1%
---------------------------------------------------
200,000 USAir, Inc., 9.80%, 1/15/2000 208,250
--------------------------------------------------- ------------
CHEMICALS--1.9%
---------------------------------------------------
500,000 Borden Chemicals & Plastics Operating, Note, 9.50%,
5/1/2005 528,750
---------------------------------------------------
Harris Chemical North America, Inc., Sr. Note, 523,750
500,000 10.25%, 7/15/2001
---------------------------------------------------
300,000 ISP Holdings, Inc., Sr. Note, 9.00%, 10/15/2003 315,000
---------------------------------------------------
500,000 Kaiser Aluminum & Chemical Corp., Sr. Note, 9.875%,
2/15/2002 522,500
---------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------------- ------------
<C> <S> <C>
CHEMICALS--CONTINUED
-------------------------------------------------
$ 600,000 SIFTO Canada, Inc., Sr. Note, 8.50%, 7/15/2000 $ 612,000
------------------------------------------------- ------------
Total 2,502,000
------------------------------------------------- ------------
CONSUMER RELATED--4.0%
-------------------------------------------------
750,000 Chiquita Brands International Inc., Sr. Note,
9.625%, 1/15/2004 795,000
-------------------------------------------------
800,000 HMH Properties, Inc., Sr. Note, Series B, 9.50%,
5/15/2005 846,000
-------------------------------------------------
2,460,000 RJR Nabisco, Inc., Note, 8.75%, 7/15/2007 2,615,172
-------------------------------------------------
1,000,000 Revlon Consumer Products Corp., Note, 9.375%,
4/1/2001 1,037,500
------------------------------------------------- ------------
Total 5,293,672
------------------------------------------------- ------------
CONTAINERS-PAPER/PLASTIC--0.8%
-------------------------------------------------
500,000 Container Corp. of America, Sr. Note, 11.25%,
5/1/2004 555,000
-------------------------------------------------
500,000 Sea Containers Ltd., 9.50%, 7/1/2003 517,500
------------------------------------------------- ------------
Total 1,072,500
------------------------------------------------- ------------
ENERGY MINERALS--1.4%
-------------------------------------------------
2,000,000 USX Marathon Group, 5.75%, 7/1/2001 1,962,500
------------------------------------------------- ------------
ENTERTAINMENT--4.2%
-------------------------------------------------
1,000,000 Caesars World, Inc., Sr. Sub. Note, 8.875%,
8/15/2002 1,037,500
-------------------------------------------------
1,000,000 Harrah's Operations, Inc., Sr. Sub. Note, 8.75%,
3/15/2000 1,027,500
-------------------------------------------------
405,000 Host Marriot Travel Plazas Inc., Sr. Note, 9.50%,
5/15/2005 430,312
-------------------------------------------------
900,000 Station Casinos, Inc., Sr. Sub. Note, 9.625%,
6/1/2003 904,500
-------------------------------------------------
1,000,000 Time Warner Entertainment Co. LP, Note, 9.625%,
5/1/2002 1,116,927
-------------------------------------------------
600,000 Trump Atlantic City Associations, Company
Guarantee, 11.25%, 5/1/2006 584,250
-------------------------------------------------
500,000 Viacom, Inc., Sub. Deb., 8.00%, 7/7/2006 500,000
------------------------------------------------- ------------
Total 5,600,989
------------------------------------------------- ------------
FINANCIAL SERVICES--1.9%
-------------------------------------------------
500,000 Navistar Financial Corp. Owner Trust 1995-A , Sr.
Sub. Note, 8.875%, 11/15/1998 512,120
-------------------------------------------------
500,000 Presidential Life Corp., Sr. Note, 9.50%,
12/15/2000 518,750
-------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
FINANCIAL SERVICES--CONTINUED
---------------------------------------------------
$ 1,000,000 Reliance Group Holdings, Inc., Sr. Note, 9.00%,
11/15/2000 $ 1,045,000
---------------------------------------------------
500,000 Williams Scotsman, Inc., Sr. Note, 9.875%, 6/1/2007 512,500
--------------------------------------------------- ------------
Total 2,588,370
--------------------------------------------------- ------------
INDUSTRIAL RELATED--2.9%
---------------------------------------------------
850,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 879,750
---------------------------------------------------
350,000 Bethlehem Steel Corp., Sr. Note, 10.375%, 9/1/2003 378,000
---------------------------------------------------
500,000 Exide Corp., Sr. Note, 10.75%, 12/15/2002 531,250
---------------------------------------------------
500,000 Fort Howard Corp., Sr. Sub. Note, 9.00%, 2/1/2006 543,499
---------------------------------------------------
700,000 John Q. Hammon Hotels, 1st Mtg. Bond, 8.875%,
2/15/2004 710,500
---------------------------------------------------
500,000 Unisys Corp., Deb., 9.50%, 7/15/1998 503,750
---------------------------------------------------
300,000 Unisys Corp., Sr. Note, 10.625%, 10/1/1999 311,250
--------------------------------------------------- ------------
Total 3,857,999
--------------------------------------------------- ------------
OIL REFINING--1.1%
---------------------------------------------------
1,000,000 Clark Oil Refining and Corp. Del, Sr. Note, 10.50%,
12/1/2001 1,035,000
---------------------------------------------------
500,000 PDV America Inc., Sr. Note, 7.25%, 8/1/1998 503,991
--------------------------------------------------- ------------
Total 1,538,991
--------------------------------------------------- ------------
PAPER PRODUCTS--2.0%
---------------------------------------------------
500,000 Repap New Brunswick Inc., 1st Priority Sr. Secd.
Note, 9.875%, 7/15/2000 506,250
---------------------------------------------------
500,000 Repap New Brunswick Inc., Sr. Note, 9.0625%,
7/15/2000 495,000
---------------------------------------------------
700,000 Repap Wisconsin, Inc., 1st Priority Sr. Secd. Note,
9.25%, 2/1/2002 741,125
---------------------------------------------------
700,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 714,875
---------------------------------------------------
200,000 Stone Container Corp., Sr. Sub. Note, 11.00%,
8/15/1999 208,500
--------------------------------------------------- ------------
Total 2,665,750
--------------------------------------------------- ------------
PRINTING & PUBLISHING--0.5%
---------------------------------------------------
600,000 World Color Press Inc., Sr. Sub. Note, 9.125%,
3/15/2003 630,750
--------------------------------------------------- ------------
RETAIL TRADE--0.7%
---------------------------------------------------
1,000,000 Nine West Group, Inc., Sr. Note, 8.375%, 8/15/2005 1,010,000
--------------------------------------------------- ------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
SERVICES--1.2%
---------------------------------------------------
$ 600,000 Fleming Cos., Inc., Sr. Note, 10.625%, 12/15/2001 $ 642,000
---------------------------------------------------
500,000 Marcus Cable Operating Co. LP, Sr. Disc. Note,
0/13.50%, 8/1/2004 453,750
---------------------------------------------------
500,000 Prime Hospitality Corp., 1st Mtg. Bond, 9.25%,
1/15/2006 526,875
--------------------------------------------------- ------------
Total 1,622,625
--------------------------------------------------- ------------
STEEL--0.6%
---------------------------------------------------
750,000 Wheeling Pittsburgh Corp., Sr. Note, 9.375%,
11/15/2003 774,375
--------------------------------------------------- ------------
TELECOMMUNICATIONS--4.0%
---------------------------------------------------
750,000 Centennial Cellular Corp., Sr. Note, 8.875%,
11/1/2001 765,000
---------------------------------------------------
750,000 Century Communications, Corp., Sr. Note, 9.75%,
2/15/2002 795,000
---------------------------------------------------
1,000,000 Comcast Corp., Sr. Sub. Deb., 9.375%, 5/15/2005 1,075,000
---------------------------------------------------
1,000,000 Videotron Group Ltd., Sr. Note, 10.625%, 2/15/2005 1,110,000
---------------------------------------------------
1,000,000 Lenfest Communications Inc., Sr. Note, 8.375%,
11/1/2005 1,007,500
---------------------------------------------------
500,000 Olympus Communications LP, Sr. Note, 10.625%,
11/15/2006 544,375
--------------------------------------------------- ------------
Total 5,296,875
--------------------------------------------------- ------------
TEXTILE PRODUCTS--0.4%
---------------------------------------------------
500,000 Dominion Textile USA Inc., Sr. Note, 8.875%,
11/1/2003 513,750
--------------------------------------------------- ------------
UTILITIES-ELECTRIC--1.2%
---------------------------------------------------
500,000 Jones Intercable, Inc., Sr. Note, 9.625%, 3/15/2002 537,500
---------------------------------------------------
1,000,000 Long Island Lighting Co., Deb., 7.30%, 7/15/1999 1,016,131
--------------------------------------------------- ------------
Total 1,553,631
--------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $37,300,571) 39,204,277
--------------------------------------------------- ------------
CORPORATE NOTE--0.8%
---------------------------------------------------------------
TELECOMMUNICATIONS--0.8%
---------------------------------------------------
1,000,000 Rogers Cablesystems Ltd., Note, 9.625%, 8/1/2002
(identified cost $1,006,758) 1,075,000
--------------------------------------------------- ------------
U.S. TREASURY OBLIGATIONS--61.8%
---------------------------------------------------------------
U.S. TREASURY NOTES--61.8%
---------------------------------------------------
15,000,000 5.75%, 12/31/1998 15,009,375
---------------------------------------------------
20,000,000 6.125%, 5/15/1998 20,075,000
---------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS--CONTINUED
---------------------------------------------------------------
U.S. TREASURY NOTES--CONTINUED
---------------------------------------------------
$20,000,000 6.25%, 3/31/1999 $ 20,143,740
---------------------------------------------------
27,000,000 6.875%, 8/31/1999 27,514,674
--------------------------------------------------- ------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST
$82,053,737) 82,742,789
--------------------------------------------------- ------------
(B)REPURCHASE AGREEMENT--2.9%
---------------------------------------------------------------
3,832,176 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997 (at amortized cost) 3,832,176
--------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $130,034,520)(C) $132,831,593
--------------------------------------------------- ------------
</TABLE>
(a) Denotes variable rate securities which show current rate.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $130,034,520.
The net unrealized appreciation of investments on a federal tax basis
amounts to $2,797,073 which is comprised of $2,812,462 appreciation and
$15,389 depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($133,877,535) at September 30, 1997.
The following acronym is used throughout this portfolio:
LP--Limited Partnership
(See Notes which are an integral part of the Financial Statements)
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--94.5%
--------------------------------------------------------
ALASKA--4.1%
---------------------------------------------
$1,000,000 Valdez, AK Marine Terminal, Revenue Refunding
Bonds (Series B), 5.50% (BP Pipeline Inc.),
10/1/2028 AA $ 983,917
--------------------------------------------- -----------
CALIFORNIA--8.1%
---------------------------------------------
1,000,000 California State Department of Water
Resources, Revenue Refunding Bonds, 5.375%
(Original Issue Yield: 5.67%), 12/1/2027 AAA 994,002
---------------------------------------------
1,000,000 East Bay Municipal Utility District, CA,
Water System Subordinated Refunding Revenue
Bonds (Series 1996), 5.00% (FGIC
INS)/(Original Issue Yield: 5.39%), 6/1/2026 AAA 947,502
--------------------------------------------- -----------
Total 1,941,504
--------------------------------------------- -----------
FLORIDA--8.0%
---------------------------------------------
1,000,000 Dade County, FL Water & Sewer System, Revenue
Bonds, 5.25% (FGIC INS)/(Original Issue
Yield: 5.70%), 10/1/2026 AAA 979,577
---------------------------------------------
1,000,000 Florida State Board of Education Capital
Outlay, GO UT, (Series A), 5.00% (Original
Issue Yield: 5.40%), 6/1/2027 AA+ 948,163
--------------------------------------------- -----------
Total 1,927,740
--------------------------------------------- -----------
ILLINOIS--16.5%
---------------------------------------------
1,000,000 Cook County, IL, GO UT Refunding Bonds (Series B), 5.375% (MBIA
INS)/(Original Issue
Yield: 5.72%), 11/15/2018 AAA 1,001,236
---------------------------------------------
1,000,000 Illinois Health Facilities Authority, Revenue
Bonds Daily VRDNs (Healthcorp Affiliates) Aaa 1,000,000
---------------------------------------------
1,000,000 Illinois State Sales Tax, Refunding Revenue
Bonds (Series Q), 5.50% (Original Issue
Yield: 6.202%), 6/15/2020 AAA 1,000,000
---------------------------------------------
1,000,000 Metropolitan Pier & Exposition Authority, IL,
Revenue Refunding Bonds, 5.25% (McCormick
Plan Expansion Project)/(AMBAC INS)/(Original
Issue Yield: 5.90%), 6/15/2027 AAA 972,077
--------------------------------------------- -----------
Total 3,973,313
--------------------------------------------- -----------
</TABLE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
--------------------------------------------------------
INDIANA--4.2%
---------------------------------------------
$1,000,000 Purdue University, IN, Student Fees Revenue
Bonds (Series H), Weekly VRDNs (Purdue
University, IN LOC) AA- $ 1,000,000
--------------------------------------------- -----------
MASSACHUSETTS--3.9%
---------------------------------------------
1,000,000 Massachusetts Water Resources Authority,
Water Revenue Bonds, 5.00% (Original Issue
Yield: 5.35%), 12/1/2025 AAA 942,362
--------------------------------------------- -----------
MICHIGAN--4.1%
---------------------------------------------
1,000,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds,
5.25% (Henry Ford Health System, MI)/(Original Issue Yield:
5.70%), 11/15/2025 AA 984,047
--------------------------------------------- -----------
NEVADA--4.1%
---------------------------------------------
1,000,000 Clark County, NV School District, GO UT,
5.25% (Original Issue Yield: 5.83%),
6/15/2017 AAA 996,268
--------------------------------------------- -----------
NEW JERSEY--4.2%
---------------------------------------------
1,000,000 New Jersey State Transportation Trust Fund
Agency, Revenue Bonds, 5.25% (Original Issue
Yield: 5.70%), 6/15/2016 A+ 1,004,261
--------------------------------------------- -----------
NEW YORK--20.8%
---------------------------------------------
1,000,000 New York City Municipal Water Finance
Authority, Revenue Bonds, 5.50% (Original
Issue Yield: 5.855%), 6/15/2027 AAA 1,003,925
---------------------------------------------
1,000,000 New York State Dormitory Authority, Revenue
Bonds, 5.25% (Monte Fiore Medical
Center)/(AMBAC and FHA INSs)/(Original Issue
Yield: 5.53%), 2/1/2015 AAA 1,006,724
---------------------------------------------
1,000,000 New York State Local Government Assistance
Corp., Refunding Revenue Bonds (Series B),
5.50% (Original Issue Yield: 5.97%), 4/1/2021 A 1,003,043
---------------------------------------------
1,000,000 New York State Medical Care Facilities
Finance Agency, Revenue Refunding Bonds,
5.375% (Presbyterian Hospital)/(Original
Issue Yield: 5.52%), 2/15/2025 AAA 995,669
---------------------------------------------
1,000,000 Port Authority of New York and New Jersey,
Revenue Bonds (104th Series), 5.20% (AMBAC
INS)/(Original Issue Yield: 5.35%), 7/15/2021 AAA 990,487
--------------------------------------------- -----------
Total 4,999,848
--------------------------------------------- -----------
</TABLE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
--------------------------------------------------------
TEXAS--8.2%
---------------------------------------------
$1,000,000 Coastal Bend Health Facilities Development
Corp., TX, Revenue Bonds Weekly VRDNs
(Incarnate World Health Systems)/(First
National Bank of Chicago LOC) Aa3 $ 1,000,000
---------------------------------------------
1,000,000 San Antonio, TX, Electric & Gas, Revenue Refunding Bonds, 5.00%
(Original Issue Yield:
5.275%), 2/1/2014 AA 980,250
--------------------------------------------- -----------
Total 1,980,250
--------------------------------------------- -----------
WASHINGTON--4.2%
---------------------------------------------
1,000,000 Port of Seattle, WA, Revenue Bonds, 5.50%
(FGIC INS)/(Original Issue Yield: 5.80%),
10/1/2022 AAA 1,008,212
--------------------------------------------- -----------
WISCONSIN--4.2%
---------------------------------------------
1,000,000 Wisconsin State Transportation, Revenue Bonds
(Series B), 5.50% (Original Issue Yield:
5.912%), 7/1/2022 AA- 1,004,466
--------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST
$21,420,079) 22,746,188
--------------------------------------------- -----------
MUTUAL FUND SHARES--4.2%
--------------------------------------------------------
999,900 Dreyfus Tax Exempt Cash Management (AT NET
ASSET VALUE) 999,900
--------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST
$22,419,979)(A) $23,746,088
--------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
(a) The cost of investments for federal tax purposes amounts to $22,419,979. The
unrealized appreciation of investments on a federal tax basis amounts to
$1,326,109 at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($24,076,686) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company FHA--Federal Housing Administration GO--General Obligation
INS--Insured LOC--Letter of Credit MBIA--Municipal Bond Investors Assurance
UT--Unlimited Tax VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROUP OF FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD BLANCHARD
BLANCHARD BLANCHARD BLANCHARD SHORT -TERM FLEXIBLE
GLOBAL PRECIOUS METALS FLEXIBLE FLEXIBLE TAX-FREE
GROWTH FUND FUND, INC. INCOME FUND INCOME FUND BOND FUND
- - ------------------------ ----------- --------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
- - ------------------------
Investments in
repurchase agreements $ 1,176,958 $ 5,492,706 $ 4,512,438 $ 3,832,176 $ --
- - ------------------------
Investments in
securities 60,074,984 63,335,105 149,251,624 128,999,417 23,746,088
- - ------------------------ ----------- ----------- ------------ ------------ -----------
Total investments in
securities, at value $61,251,942 $68,827,811 $153,764,062 $132,831,593 $23,746,088
- - ------------------------
Cash -- -- -- -- 72
- - ------------------------
Income receivable 330,910 191,606 2,362,460 2,479,981 365,497
- - ------------------------
Receivable for
investments sold 1,820,484 485,614 -- -- --
- - ------------------------
Receivable for shares
sold 1,350 1,250,418 72,325 46,320 41,115
- - ------------------------
Net receivable for
foreign currency
exchange contracts sold 150,030 -- -- -- --
- - ------------------------
Deferred organizational
costs -- -- 15,094 17,490 16,399
- - ------------------------ ----------- ----------- ------------ ------------ -----------
Total assets 63,554,716 70,755,449 156,213,941 135,375,384 24,169,171
- - ------------------------ ----------- ----------- ------------ ------------ -----------
LIABILITIES:
- - ------------------------
Payable for investments
purchased 1,024,123 2,114,799 -- -- --
- - ------------------------
Payable for shares
redeemed 60,354 605,097 272,640 497,950 24,696
- - ------------------------
Income distribution
payable -- -- 446,081 75,908 40,374
- - ------------------------
Payable to Bank -- 803,519 -- 625,000 --
- - ------------------------
Payable for forward
foreign currency
exchange contracts -- -- 7,439 -- --
- - ------------------------
Payable for taxes
withheld 7,796 3,188 -- --
- - ------------------------
Payable for daily
variation margin 63,340 -- -- -- --
- - ------------------------
Accrued expenses 201,737 191,606 265,080 298,991 27,415
- - ------------------------ ----------- ----------- ------------ ------------ -----------
Total liabilities 1,357,350 3,718,209 991,240 1,497,849 92,485
- - ------------------------ ----------- ----------- ------------ ------------ -----------
NET ASSETS CONSIST OF:
- - ------------------------
Paid in capital 53,368,473 92,377,394 168,418,381 140,351,915 23,120,612
- - ------------------------
Net unrealized
appreciation
(depreciation) of
investments, translation
of assets and
liabilities in foreign
currency, and futures
contracts 821,161 (21,203,902) 3,746,717 2,798,583 1,326,109
- - ------------------------
Accumulated net realized
gain (loss) on
investments, foreign
currency transactions,
and futures contracts 7,100,967 (5,605,824) (16,630,125) (9,171,223) (354,461)
- - ------------------------
Distributions in excess
of/Undistributed net
investment income 906,765 1,469,572 (312,272) (101,740) (15,574)
- - ------------------------ ----------- ----------- ------------ ------------ -----------
Total Net Assets $62,197,366 $67,037,240 $155,222,701 $133,877,535 $24,076,686
- - ------------------------ ----------- ----------- ------------ ------------ -----------
NET ASSET VALUE,
OFFERING PRICE AND
REDEMPTION PROCEEDS PER
SHARE: $ 10.54 $ 5.37 $ 4.98 $ 3.04 $ 5.56
- - ------------------------ ----------- ----------- ------------ ------------ -----------
Shares Outstanding 5,899,615 12,486,361 31,152,932 44,036,295 4,328,344
- - ------------------------ ----------- ----------- ------------ ------------ -----------
Investments, at
identified cost $60,621,797 $90,031,550 $150,009,998 $130,034,520 $22,419,979
- - ------------------------ ----------- ----------- ------------ ------------ -----------
Investments, at tax cost $60,689,138 $90,719,260 $150,009,998 $130,034,520 $22,419,979
- - ------------------------ ----------- ----------- ------------ ------------ -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROUP OF FUNDS
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD BLANCHARD
BLANCHARD BLANCHARD BLANCHARD SHORT -TERM FLEXIBLE
GLOBAL PRECIOUS METALS FLEXIBLE FLEXIBLE TAX-FREE
GROWTH FUND FUND, INC. INCOME FUND INCOME FUND BOND FUND
- - ------------------------ ----------- --------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
- - ------------------------
Dividends $ 376,712(a) $ 675,606(c) $ -- $ -- $ --
- - ------------------------
Interest 2,434,670(b) 631,572 13,043,023 10,247,264 1,236,154
- - ------------------------ ---------- ------------ ----------- ----------- ----------
Total income 2,811,382 1,307,178 13,043,023 10,247,264 1,236,154
- - ------------------------ ---------- ------------ ----------- ----------- ----------
EXPENSES:
- - ------------------------
Management fee 645,955 744,283 1,273,719 1,095,713 169,751
- - ------------------------
Administrative personnel
and services fee 75,000 78,467 165,355 142,259 75,000
- - ------------------------
Custodian fees 63,163 50,200 68,539 48,762 16,080
- - ------------------------
Transfer and dividend
disbursing agent fees
and expenses 118,177 77,453 317,118 343,119 37,447
- - ------------------------
Directors'/Trustees'
fees 2,098 2,544 3,267 3,420 1,598
- - ------------------------
Auditing fees 20,726 21,698 20,688 12,277 26,804
- - ------------------------
Legal fees 2,939 2,290 1,764 1,653 85
- - ------------------------
Portfolio accounting
fees 49,714 54,606 57,885 49,725 43,386
- - ------------------------
Distribution services
fee 484,467 558,212 424,573 365,238 56,584
- - ------------------------
Share registration costs 11,775 21,568 12,098 13,477 11,706
- - ------------------------
Printing and postage 61,840 28,849 33,894 48,635 7,825
- - ------------------------
Insurance premiums 2,255 1,873 1,665 2,288 1,412
- - ------------------------
Taxes 495 697 495 495 --
- - ------------------------
Miscellaneous 2,018 1,786 34,211 18,580 17,258
- - ------------------------ ---------- ------------ ----------- ----------- ----------
Total expenses 1,540,622 1,644,526 2,415,271 2,145,641 464,936
- - ------------------------ ---------- ------------ ----------- ----------- ----------
WAIVERS--
- - ------------------------
Waiver of management fee -- -- -- (129,528) (142,067)
- - ------------------------
Waiver of administrative
personnel and services
fee -- -- -- -- (39,951)
- - ------------------------
Waiver of distribution
services fee -- -- -- -- (56,584)
- - ------------------------ ---------- ------------ ----------- ----------- ----------
Total waivers -- -- -- (129,528) (238,602)
- - ------------------------ ---------- ------------ ----------- ----------- ----------
Net expenses 1,540,622 1,644,526 2,415,271 2,016,113 226,334
- - ------------------------ ---------- ------------ ----------- ----------- ----------
Net investment income
(loss) 1,270,760 (337,348) 10,627,752 8,231,151 1,009,820
- - ------------------------ ---------- ------------ ----------- ----------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS, FOREIGN
CURRENCY, AND FUTURES
CONTRACTS:
- - ------------------------
Net realized gain (loss)
on investments, foreign
currency transactions,
and futures contracts 8,407,403 (2,561,982) 2,191,827 483,971 285,298
- - ------------------------
Net change in unrealized
appreciation
(depreciation) of
investments, translation
of assets and liablities
in foreign currency, and
futures contracts (1,721,197) (9,413,528) 2,926,980 1,694,128 784,728
- - ------------------------ ---------- ------------ ----------- ----------- ----------
Net realized and
unrealized gain (loss)
on investments 6,686,206 (11,975,510) 5,118,807 2,178,099 1,070,026
- - ------------------------ ---------- ------------ ----------- ----------- ----------
Change in net assets
resulting from
operations $7,956,966 $(12,312,858) $15,746,559 $10,409,250 $2,079,846
- - ------------------------ ---------- ------------ ----------- ----------- ----------
</TABLE>
(a) Net of Foreign taxes withheld $33,962.
(b) Net of Foreign taxes withheld $4,228.
(c) Net of Foreign taxes withheld $47,201.
(See Notes which are an integral part of the Financial Statements)
THE BLANCHARD GROUP OF FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD GLOBAL BLANCHARD PRECIOUS
GROWTH FUND METALS FUND, INC.
--------------------------------------- ----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
---------------- ------------- ------------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS:
----------------
OPERATIONS--
----------------
Net investment
income/operating
(loss) $ 1,270,760 $ 465,544 $ 295,860 $ (337,348) $ (500,885) $ (1,069,928)
----------------
Net realized
gain (loss) on
investments,
foreign currency
transactions and
futures
contracts 8,407,403 6,148,207 8,019,815 (2,561,982) 10,615,594 13,950,013
----------------
Net change in
unrealized
appreciation/depreciation
of investments,
translation of
assets and
liablities in
foreign
currency, and
futures
contracts (1,721,197) (5,394,534) 5,636,916 (9,413,528) (19,953,719) 13,616,081
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
operations 7,956,966 1,219,217 13,952,591 (12,312,858) (9,839,010) 26,496,166
---------------- ----------- ----------- ----------- ----------- ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS--
----------------
Distributions
from net
investment
income (1,170,525) -- (295,860) (2,843,687) -- --
----------------
Distributions
from net
realized gains (12,602,965) (20,849,369) -- --
----------------
Distributions in
excess of net
investment
income -- -- (274,732) -- -- --
----------------
Tax return of
capital -- -- -- -- -- --
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
distributions
to shareholders (13,773,490) -- (570,592) (23,693,056) -- --
---------------- ----------- ----------- ----------- ----------- ----------- ------------
SHARE
TRANSACTIONS--
----------------
Proceeds from
sale of shares 10,109,624 8,636,590 5,765,409 60,617,474 35,684,735 103,376,874
----------------
Net asset value
of shares issued
to shareholders
in payment of
distributions
declared 13,095,694 -- 548,261 21,735,905 -- --
----------------
Cost of shares
redeemed (23,098,557) (13,130,249) (35,601,975) (67,198,114) (67,247,212) (75,865,525)
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
share
transactions 106,761 (4,493,659) (29,288,305) 15,155,265 (31,562,477) 27,511,349
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets (5,709,763) (3,274,442) (15,906,306) (20,850,649) (41,401,487) 54,007,515
----------------
NET ASSETS:
----------------
Beginning of
period 67,907,129 71,181,571 87,087,877 87,887,889 129,289,376 75,281,861
---------------- ----------- ----------- ----------- ----------- ----------- ------------
End of period $62,197,366 $67,907,129 $71,181,571 $67,037,240 $87,887,889 $129,289,376
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Undistributed
net investment
income included
in net assets at
end of period $ 906,765 $ 818,136 $ -- $ 1,469,572 $ 2,856,971 $ 1,904,789
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Net gain (loss)
as computed for
federal tax
purposes $ 7,911,101 $ 6,561,362 $ 5,881,028 $ 76,050 $ 9,039,433 $ 12,174,374
---------------- ----------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
BLANCHARD FLEXIBLE
INCOME FUND
--------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996
- - --------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS:
- - ---------------------------
OPERATIONS--
- - ---------------------------
Net investment
income/operating
(loss) $10,627,752 $ 5,059,729 $ 14,539,300
- - ---------------------------
Net realized
gain (loss) on
investments,
foreign currency
transactions and
futures
contracts 2,191,827 175,174 480,236
- - ---------------------------
Net change in
unrealized
appreciation/depreciation
of investments,
translation of
assets and
liablities in
foreign
currency, and
futures
contracts 2,926,980 2,016,909 5,042,160
- - --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
operations 15,746,559 7,251,812 20,061,696
- - --------------------------- -------------- -------------- --------------
DISTRIBUTIONS TO
SHAREHOLDERS--
- - ---------------------------
Distributions
from net
investment
income (10,302,558) (5,012,727) (15,359,777)
- - ---------------------------
Distributions
from net
realized gains -- -- --
- - ---------------------------
Distributions in
excess of net
investment
income -- -- --
- - ---------------------------
Tax return of
capital (342,877) (48,762) --
- - --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
distributions
to shareholders (10,645,435) (5,061,489) (15,359,777)
- - --------------------------- -------------- -------------- --------------
SHARE
TRANSACTIONS--
- - ---------------------------
Proceeds from
sale of shares 33,454,106 13,294,718 60,702,516
- - ---------------------------
Net asset value
of shares issued
to shareholders
in payment of
distributions
declared 8,400,717 4,042,963 11,757,432
- - ---------------------------
Cost of shares
redeemed (79,085,787) (38,410,603) (133,349,811)
- - --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
share
transactions (37,230,964) (21,072,922) (60,889,863)
- - --------------------------- -------------- -------------- --------------
Change in net
assets (32,129,840) (18,882,599) (56,187,944)
- - ---------------------------
NET ASSETS:
- - ---------------------------
Beginning of
period 187,352,541 206,235,140 262,423,084
- - --------------------------- -------------- -------------- --------------
End of period $155,222,701 $187,352,541 $ 206,235,140
- - --------------------------- -------------- -------------- --------------
Undistributed
net investment
income included
in net assets at
end of period $ -- $ -- $ --
- - --------------------------- -------------- -------------- --------------
Net gain (loss)
as computed for
federal tax
purposes $ 1,771,520 $ (1,335,786) $ (3,223,064)
- - --------------------------- -------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE BLANCHARD GROUP OF FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD SHORT-TERM BLANCHARD FLEXIBLE
FLEXIBLE INCOME FUND TAX-FREE BOND FUND
------------------------------------------ -----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
- - ------------------------ ------------- ------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
- - ------------------------
OPERATIONS--
- - ------------------------
Net investment income $ 8,231,151 $ 3,640,476 $ 3,088,222 $ 1,009,820 $ 461,956 $ 960,342
- - ------------------------
Net realized gain (loss)
on investments, foreign
currency transactions
and futures contracts 483,971 (42,344) 511,538 285,298 39,445 891,432
- - ------------------------
Net change in unrealized
appreciation/
depreciation of
investments, translation
of assets and liablities
in foreign currency, and
futures contracts 1,694,128 526,658 767,013 784,728 594,290 (406,293)
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from
operations 10,409,250 4,124,790 4,366,773 2,079,846 1,095,691 1,445,481
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS--
- - ------------------------
Distributions from net
investment income (8,210,879) (3,150,985) (3,088,222) (1,005,915) (445,952) (960,342)
- - ------------------------
Distributions from net
realized gains (45,361) -- -- -- -- --
- - ------------------------
Distributions in excess
of net investment income -- -- (4,918) -- -- (8,706)
- - ------------------------
Tax return of capital -- (529,561) -- -- -- --
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from
distributions to
shareholders (8,256,240) (3,680,546) (3,093,140) (1,005,915) (445,952) (969,048)
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
SHARE TRANSACTIONS--
- - ------------------------
Proceeds from sale of
shares 34,559,663 12,700,025 13,369,396 10,279,470 6,936,750 26,287,368
- - ------------------------
Proceeds from shares
issued in connection
with the acquisition of
Blanchard Short-Term
Global Income Fund -- -- 174,188,041 -- -- --
- - ------------------------
Net asset value of
shares issued to
shareholders in payment
of distributions
declared 7,218,527 3,194,311 2,652,603 919,487 411,088 750,232
- - ------------------------
Cost of shares redeemed (68,087,183) (36,071,531) (37,161,711) (10,766,336) (8,149,963) (24,287,075)
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from share
transactions (26,308,993) (20,177,195) 153,048,329 432,621 (802,125) 2,750,525
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets (24,155,983) (19,732,951) 154,321,962 1,506,552 (152,386) 3,226,958
- - ------------------------
NET ASSETS:
- - ------------------------
Beginning of period 158,033,518 177,766,469 23,444,507 22,570,134 22,722,520 19,495,562
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
End of period $133,877,535 $158,033,518 $177,766,469 $ 24,076,686 $22,570,134 $ 22,722,520
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Undistributed net
investment income
included in net assets
at end of period $ -- $ -- $ -- $ -- $ -- $ --
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Net gain (loss) as
computed for federal tax
purposes $ 483,971 $ 87,710 $ 493,015 $ -- $ -- $ --
- - ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
[This Page Intentionally Left Blank]
63
BLANCHARD GROUP OF FUNDS
FINANCIAL HIGHLIGHTS
- - -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NET REALIZED AND DISTRIBUTIONS
UNREALIZED FROM NET
GAIN/(LOSS) REALIZED GAINS
NET ON INVESTMENTS, ON INVESTMENTS,
YEAR NET ASSET INVESTMENT FUTURES DISTRIBUTIONS DISTRIBUTIONS FUTURES
ENDED VALUE INCOME/ CONTRACTS, AND TOTAL FROM FROM NET IN EXCESS OF TAX CONTRACTS, AND
APRIL30/ BEGINNING OPERATING FOREIGN CURRENCY INVESTMENT INVESTMENT NET INVESTMENT RETURN FOREIGN CURRENCY
SEPTEMBER 30, OF PERIOD (LOSS) TRANSACTIONS OPERATIONS INCOME INCOME(E) OF CAPITAL TRANSACTIONS
- - ------------- --------- ---------- ---------------- ---------- ------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BGGF
1993 $ 9.92 0.25 0.32 0.57 (0.30) -- -- (0.19)
1994 $10.00 0.03 1.29 1.32 -- -- -- (1.28)
1995 $10.04 0.08 (0.19) (0.11) -- -- -- --
1996 $ 9.71 0.04 1.86 1.90 (0.04) (0.04) -- --
1996(a) $11.53 0.08 0.13 0.21 -- -- -- --
1997 $11.74 0.23 1.04 1.27 (0.21) -- -- (2.26)
BPMF
1993 $ 5.04 (0.08)(h) 1.87(h) 1.79 -- -- -- --
1994 $ 6.83 (0.11)(h) 2.01(h) 1.90 -- -- -- --
1995 $ 8.73 (0.02) (0.41) (0.43) -- -- (0.09) (0.03)
1996 $ 7.12 (0.10) 2.75 2.65 -- -- -- --
1996(a) $ 9.77 (0.10) (0.77) (0.87) -- -- -- --
1997 $ 8.90 (0.02) (0.96) (0.98) (0.30) -- -- (2.25)
BFIF
1993(b) $ 5.00 0.21 0.09 0.30 (0.21) -- -- --
1994 $ 5.09 0.40 (0.17) 0.23 (0.36) -- (0.03) (0.08)
1995 $ 4.85 0.30 (0.13) 0.17 (0.00)(i) -- (0.31) --
1996 $ 4.71 0.28 0.10 0.38 (0.31) -- -- --
1996(a) $ 4.78 0.15 0.04 0.19 (0.13) -- (0.00)(i) --
1997 $ 4.84 0.30 0.15 0.45 (0.30) -- (0.01) --
BSTFIF
1993(c) $ 3.00 0.00(i) 0.00(i) 0.00(i) (0.00)(i) -- -- (0.00)(i)
1994 $ 3.00 0.17 (0.06) 0.11 (0.17) -- -- (0.01)
1995 $ 2.93 0.15 -- 0.15 (0.14) (0.00)(i) -- --
1996 $ 2.94 0.22 -- 0.22 (0.17) (0.00)(i) -- --
1996(a) $ 2.99 0.07 0.01 0.08 (0.06) (0.00)(i) (0.01) --
1997 $ 3.00 0.17 0.04 0.21 (0.17) -- -- (0.00)(i)
BFTFBF
1994(d) $ 5.00 0.18 (0.20) (0.02) (0.18) -- -- (0.03)
1995 $ 4.77 0.24 0.26 0.50 (0.23) (0.01) -- --
1996 $ 5.03 0.22 0.13 0.35 (0.22) -- -- --
1996(a) $ 5.16 0.11 0.15 0.26 (0.11) -- -- --
1997 $ 5.31 0.25 0.25 0.50 (0.25) -- -- --
<CAPTION>
DISTRIBUTIONS
IN EXCESS OF
NET REALIZED
GAINS ON
INVESTMENTS,
YEAR FUTURES
ENDED CONTRACTS, AND
APRIL30/ FOREIGN CURRENCY
SEPTEMBER 30, TRANSACTIONS(E)
- - ------------- ----------------
<S> <C>
BGGF
1993 --
1994 --
1995 (0.22)
1996 --
1996(a) --
1997 --
BPMF
1993 --
1994 --
1995 (1.06)
1996 --
1996(a) --
1997 --
BFIF
1993(b) --
1994 --
1995 --
1996 --
1996(a) --
1997 --
BSTFIF
1993(c) --
1994 --
1995 --
1996 --
1996(a) --
1997 --
BFTFBF
1994(d) --
1995 --
1996 --
1996(a) --
1997 --
</TABLE>
* Computed on an annualized basis.
(a) The Funds have changed their fiscal year end from April 30 to September 30.
Reflects operations for the period from May 1, 1996 to September 30, 1996.
(b) Reflects operations for the period from November 2, 1992 (commencement of
operations) to April 30, 1993.
(c) Reflects operations for the period from April 16, 1993 (commencement of
operations) to April 30, 1993.
(d) Reflects operations for the period from August 12, 1993 (commencement of
operations) to April 30, 1994.
(e) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(f) Based on net asset value.
(g) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(h) Calculated based on average shares outstanding-prior years amounts restated
for comparative purposes.
(i) Less than one cent per share.
(j) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
------------------------------------
NET
INVESTMENT NET ASSETS,
NET ASSET INCOME/ EXPENSE END AVERAGE PORTFOLIO
TOTAL VALUE, AND TOTAL OPERATING WAIVER/ OF PERIOD COMMISSIONS TURNOVER
DISTRIBUTIONS OF PERIOD RETURN(F) EXPENSES (LOSS) REIMBURSEMENT(G) (000 OMITTED) RATE PAID(J) RATE
- - ------------- ---------- --------- -------- ---------- ---------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.49) $10.00 6.08% 2.40% 1.72% -- $ 84,780 -- 138%
(1.28) $10.04 12.91% 2.61% 0.67% -- $109,805 -- 166%
(0.22) $ 9.71 (1.04%) 2.51% 0.76% -- $ 87,088 -- 221%
(0.08) $11.53 19.68% 2.54% 0.38% -- $ 71,182 -- 91%
-- $11.74 1.91% 2.52%* 1.60%* -- $ 67,907 $0.0040 47%
(2.47) $10.54 13.20% 2.39% 1.97% -- $ 62,197 $0.0049 49%
-- $ 6.83 35.50% 3.24% (1.46%) -- $ 32,636 -- 66%
-- $ 8.73 27.80% 2.46% (1.21%) -- $ 68,092 -- 174%
(1.18) $ 7.12 (4.39%) 2.49% (1.48%) -- $ 75,282 -- 116%
-- $ 9.77 37.03% 2.36% (1.27%) -- $129,289 -- 176%
-- $ 8.90 (8.90%) 2.32%* (1.13%)* -- $ 87,888 $0.0199 36%
(2.55) $ 5.37 (15.24%) 2.21% (0.45%) -- $ 67,037 $0.0125 97%
(0.21) $ 5.09 6.17% 0.20%* 9.02%* -- $315,845 -- 129%
(0.47) $ 4.85 4.11% 1.30% 7.10% -- $550,254 -- 346%
(0.31) $ 4.71 3.74% 1.58% 6.52% -- $262,423 -- 455%
(0.31) $ 4.78 8.06% 1.56% 6.06% -- $206,235 -- 347%
(0.13) $ 4.84 3.95% 1.59%* 7.38%* 0.01%* $187,353 -- 87%
(0.31) $ 4.98 9.53% 1.42% 6.26% -- $155,223 -- 101%
(0.00)(i) $ 3.00 0.15% 3.03%* 3.89%* -- $ 2,000 -- 36%
(0.18) $ 2.93 3.72% 0.63% 5.64% 1.42% $ 42,381 -- 212%
(0.14) $ 2.94 5.34% 1.38% 4.80% 0.75% $ 23,445 -- 84%
(0.17) $ 2.99 7.47% 1.44% 5.49% 0.40% $177,766 -- 291%
(0.07) $ 3.00 2.61% 1.39%* 5.26%* 0.25%* $158,034 -- 21%
(0.17) $ 3.04 7.24% 1.38% 5.63% 0.09% $133,878 -- 80%
(0.21) $ 4.77 (0.48%) 0.00%* 6.79%* 2.22%* $ 23,267 -- 190%
(0.24) $ 5.03 10.74% 1.00% 4.87% 1.17% $ 19,496 -- 170%
(0.22) $ 5.16 6.86% 1.05% 4.43% 1.25% $ 22,723 -- 275%
(0.11) $ 5.31 5.02% 1.01%* 4.83%* 1.23%* $ 22,570 -- 25%
(0.25) $ 5.56 9.59% 1.00% 4.46% 1.05% $ 24,077 -- 163%
</TABLE>
BLANCHARD GROUP OF FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- - -------------------------------------------------------------------------------
(1) ORGANIZATION
Blanchard Group of Funds consists of Blanchard Funds (the "Trust") and Blanchard
Precious Metals Fund, Inc. (the "Company") which are registered under the
Investment Company Act of 1940, as amended (the "Act"), as open-end management
investment companies. The Trust consists of six portfolios. The financial
statements of the following portfolios (individually referred to as the "Fund",
or collectively as the "Funds") are presented herein:
<TABLE>
<CAPTION>
PORTFOLIO NAME DIVERSIFICATION INVESTMENT OBJECTIVE
-------------- --------------- --------------------
<S> <C> <C>
Blanchard Global Growth Fund diversified Long-term capital growth.
("BGGF")
Blanchard Precious Metal Fund, non- Long-term capital appreciation and
Inc. ("BPMF") diversified preservation of purchasing power
through investments in
physical precious metals,
such as gold, silver,
platinum and palladium, and
in securities of companies
involved in precious metals.
A secondary objective of the
Fund is to reduce the risk of
loss of capital and decrease
the volatility often
associated with precious
metals investments by
changing the allocation of
its assets from precious
metals securities to physical
precious metals and/or
investing in short-term
instruments and government
securities during periods
when the Fund's portfolio
manager believes the precious
metals markets may experience
declines.
Blanchard Flexible Income Fund diversified High current income while seeking
("BFIF") opportunities for capital appreciation.
Blanchard Short-Term Flexible diversified High current income while seeking
Income Fund ("BSTFIF") opportunities for capital appreciation.
Blanchard Flexible Tax-Free Bond diversified High level of current interest income
Fund ("BFTFBF") exempt from federal income tax,
consistent with the preservation of
capital.
</TABLE>
In addition, the Trust offers Blanchard Asset Allocation Fund which is presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, and unlisted securities
and private placement securities are generally valued at the mean of the
latest bid and asked price as furnished by an independent pricing service.
Listed equity foreign valued at the last sale price reported on a national
securities exchange. Short-term foreign and domestic securities are valued at
the prices provided by an independent pricing service. However, short-term
foreign or domestic securities purchased with remaining maturities of sixty
days or less may be valued at amortized cost, which approximates fair market
value. Investments in open-end regulated investment companies are valued at
net asset value. Foreign government and corporate bonds are valued at the last
sales price reported on a national exchange. If the last sales price is not
available the securities are valued at the mean of the latest bid and ask
price as furnished by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Funds to require a custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Funds to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Funds' adviser to be creditworthy pursuant to guidelines and/or standards
reviewed or established by the Board of Trustees (the "Trustees"). Risks may
arise from the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Funds could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code").
Distributions in excess of net investment income were the result of certain
book and tax timing differences. These distributions do not represent a return
of capital for federal income tax purposes.
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions. In addition, BPMF and BFIF reclassed a tax
return of capital. The following reclassifications have been made to the
financial statements as of September 30, 1997.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT
FUND PAID-IN ACCUMULATED NET INCOME/ DISTRIBUTIONS IN EXCESS
NAME CAPITAL REALIZED GAIN/LOSS OF NET INVESTMENT INCOME
------------ --------- ------------------ -------------------------------
<S> <C> <C> <C>
BGGF -- $ 11,606 $ (11,606)
BPMF $ 120,846 (1,911,826) 1,790,980
BFIF (342,877) (258,682) 601,559
</TABLE>
Net investment income, net realized gain/losses, and net assets were not
affected by this change.
FEDERAL TAXES--It is the Funds' policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
Withholding taxes on foreign interest have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
At September 30, 1997, BFIF, BSTFIF, and BFTFBF, for federal tax purposes, had
capital loss carryforwards, as noted below, which will reduce the Funds
taxable income arising from future net realized gain on investments, if any,
to the extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to relieve
the Funds of any liability for federal tax.
<TABLE>
<CAPTION>
FUNDS TOTAL TAX LOSS CARRYFORWARD
------ ---------------------------
<S> <C>
BFIF $16,630,124
BSTFIF 9,125,862
BFTFBF 354,460
</TABLE>
Pursuant to the Code, such capital loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
BFIF BSTFIF
---------------------------------------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT EXPIRATION YEAR EXPIRATION AMOUNT
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
2002 $12,071,274 2003 $9,125,862
2003 3,223,064
2004 1,335,786
</TABLE>
<TABLE>
<CAPTION>
BFTFBF
------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C> <C> <C>
2003 $354,460
</TABLE>
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
Additionally, net capital losses, as noted below, attributable to security
transactions incurred after October 31, 1996 are treated as arising on October
1, 1997 the first day of the Funds' next taxable year.
<TABLE>
<CAPTION>
FUND TOTAL TAX LOSS PUSHFORWARD
---- --------------------------
<S> <C>
BPMF $4,504,362
BFIF 157,286
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
FUTURES CONTRACTS--BGGF purchases stock index futures contracts to manage
cashflows, enhance yield, and to potentially reduce transaction costs. Upon
entering into a stock index futures contract with a broker, the Fund is
required to deposit in a segregated account a specified amount of cash or U.S.
government securities. Futures contracts are valued daily and unrealized gains
or losses are recorded in a "variation margin" account. Daily, the Fund
receives from or pays to the broker a specified amount of cash based upon
changes in the variation margin account. When a contract is closed, the Fund
recognizes a realized gain or loss. For the period ended September 30, 1997,
BGGF had realized gains on futures contracts of $5,426,009. Futures contracts
have market risks, including the risk that the change in the value of the
contract may not correlate with changes in the value of the underlying
securities.
At September 30, 1997, BGGF had outstanding futures contracts as set forth
below:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION APPRECIATION
DATE CONTRACTS TO RECEIVE POSITION (DEPRECIATION)
----------- -------------------- -------- --------------
<S> <C> <C> <C>
December 1997 20 S&P 500 Long $332,326
December 1997 4 Long Gilt Long 17,265
December 1997 5 Notional Long 3,412
December 1997 7 CAC 40 Long 773
December 1997 7 Bund Long 15,831
December 1997 3 DAX Long 28,979
December 1997 221 Nikkei 300 Long (195,176)
December 1997 12 T Bond Long 43,438
December 1997 11 T Note Long 20,875
December 1997 5 ALL--Ords Long 253
December 1997 5 FT-SE Long 81,577
--------
Net Unrealized Appreciation on
Futures Contracts $349,553
</TABLE>
FOREIGN EXCHANGE CONTRACTS--BGGF, BPMF, BFIF, and BSTFIF may enter into
foreign currency exchange contracts as a way of managing foreign exchange rate
risk. BGGF, BPMF, BFIF, and BSTFIF may enter into these contracts for the
purchase or sale of a specific foreign currency at a
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
fixed price on a future date as a hedge or cross hedge against either specific
transactions or portfolio positions. The objective of the Funds foreign
currency hedging transactions is to reduce the risk that the U.S. dollar value
of the Funds foreign currency denominated securities will decline in value due
to changes in foreign currency exchange rates. All foreign currency exchange
contracts are "marked to market" daily at the applicable translation rates
resulting in unrealized gains or losses. Realized gains or losses are recorded
at the time the foreign currency exchange contract is offset by entering into
a closing transaction or by the delivery or receipt of the currency. Risk may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. At
September 30, 1997, only BGGF and BFIF had outstanding foreign exchange
contracts as set forth below:
BGGF
<TABLE>
<CAPTION>
CONTRACTS TO IN UNREALIZED
SETTLEMENT DELIVER/ EXCHANGE CONTRACTS AT APPRECIATION
DATE RECEIVE FOR VALUE (DEPRECIATION)
---------------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
CONTRACTS PURCHASED:
Australian Dollar 10/2/97 517,000 $ 388,913 $ 387,621 $ 1,292
Australian Dollar 1/5/98 330,000 240,059 240,195 (136)
Swiss Franc 10/2/97 7,812,500 5,368,856 5,372,931 (4,075)
Deutsche Mark 12/23/97 3,787,600 2,147,104 2,155,278 (8,174)
French Franc 10/2/97-1/5/98 15,903,400 2,662,152 2,687,859 (25,707)
British Pound 12/23/97 907,200 1,457,870 1,457,897 (27)
Netherlands Guilder 10/2/97 3,975,000 1,998,692 1,997,458 1,234
<CAPTION>
CONTRACTS SOLD:
<S> <C> <C> <C> <C> <C>
Swiss Franc 10/2/97-12/23/97 14,772,000 10,111,286 10,205,532 94,246
Deutsche Mark 12/23/97 971,000 552,489 552,533 44
French Franc 10/2/97 9,246,200 1,553,066 1,558,737 5,671
British Pound 12/23/97 127,000 204,286 204,093 (193)
Japanese Yen 12/18/97 414,228,700 3,460,752 3,472,727 11,975
Netherlands Guilder 10/2/97-12/23/97 7,950,000 3,931,396 4,005,276 73,880
--------
Net Unrealized Appreciation on Foreign Exchange Contracts $150,030
========
</TABLE>
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
BFIF
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS AT APPRECIATION
DATE DELIVER/RECEIVE FOR VALUE (DEPRECIATION)
---------- --------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Contracts Sold:
Canadian Dollar 12/15/97 2,200,000 $1,591,320 $1,598,759 ($7,439)
-------
Net Unrealized Depreciation on Foreign Exchange Contracts ($7,439)
-------
</TABLE>
FOREIGN CURRENCY TRANSLATION--The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies ("FC") are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and
collected or paid are adjusted when reported by the custodian bank. The Funds
does not isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales of
FCs, currency gains or losses realized between the trade and settlement dates
on securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at fiscal year
end, resulting from changes in the exchange rate.
RESTRICTED SECURITIES--Restricted securities are securities that may only be
resold upon registration under federal or international securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities may
be resold in the secondary market in transactions exempt from registration.
Such restricted securities may be determined to be liquid under criteria
established by the Board of Trustees. The Fund will not incur any registration
costs upon such resales. The Funds' restricted securities are valued at the
price provided by dealers in the secondary market or, if no market prices are
available, at the fair value as determined by the Fund's pricing committee.
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
Additional information on each restricted security held by BGGF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
----------------------------- ---------------- ----------------
<S> <C> <C>
Chilectra S.A. ADR 7/19/96 $91,177
Daewoo Heavy Industries, Pfd. 2/3/95-4/12/95 49,952
Samsung Electronics Co., GDR 1/3/95 917
Dong Bang Forwarding Co. 2/3/95-5/29/95 74,380
</TABLE>
Additional information on each restricted security held by BPMF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
--------------------------- ----------------- ----------------
<S> <C> <C>
Eldorado Gold Corp. Ltd. 04/08/96-08/14/97 $433,523
Geomaque Explorations Ltd.,
Warrants 3/11/97 827,565
Lone Star Exploration 2/26/96-3/26/97 587,746
</TABLE>
Additional information on each restricted security held by BFIF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
--------------------------- ------------------ ----------------
<S> <C> <C>
Calpine Corp. 7/2/1997 $ 996,412
Nine West Group, Inc. 7/1/1997 999,012
Stone Container Finance Co. 8/9/1996 2,000,000
Tucson Electric Power Co. 2/10/1993-12/22/93 2,098,170
</TABLE>
CHANGE IN FISCAL YEAR--The Funds changed their fiscal year-end from April 30
to September 30 beginning May 1, 1996.
DEFERRED EXPENSES--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
over a period not to exceed five years from each Fund's commencement date.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Articles of Incorporation permit the Directors to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
BGGF BPMF
--------------------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED
1997 1996 1996 1997 1996 APRIL 30, 1996
------------- ------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 973,160 748,872 559,635 9,876,823 3,728,778 11,891,108
Shares issued to
shareholders in payment
of distributions
declared 1,381,403 -- 52,311 3,428,378 -- --
Shares redeemed (2,237,898) (1,137,138) (3,413,086) (10,697,610) (7,081,402) (9,230,002)
----------- ----------- ----------- ----------- ----------- -----------
Net change resulting
from share transactions 116,665 (388,266) (2,801,140) 2,607,591 (3,352,624) 2,661,106
=========== =========== =========== =========== =========== ===========
<CAPTION>
BFIF BSTFIF
--------------------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
------------- ------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 6,828,666 2,777,685 12,498,920 11,452,843 4,248,564 4,477,310
Shares issued in
connection with the
acquisition of Blanchard
Short-Term Global Income
Fund -- -- -- -- -- 57,869,781
Shares issued to
shareholders in payment
of distributions
declared 1,711,576 844,211 2,424,612 2,391,887 1,070,524 888,044
Shares redeemed (16,127,237) (8,034 ,939) (27,527,713) (22,560,468) (12,096,346) (11,691,202)
----------- ----------- ----------- ----------- ----------- -----------
Net change resulting
from share transactions (7,586,995) (4,413,043) (12,604,181) (8,715,738) (6,777,258) 51,543,933
=========== =========== =========== =========== =========== ===========
<CAPTION>
BFTFBF
---------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996
------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,901,018 1,341,280 5,015,985
Shares issued to
shareholders in payment
of distributions
declared 169,611 78,775 142,764
Shares redeemed (1,995,557) (1,571,250) (4,631,991)
----------- ----------- -----------
Net change resulting
from share transactions 75,072 (151,195) 526,758
=========== =========== ===========
</TABLE>
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
(4) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEE--Virtus Capital Management, Inc., the Trust's manger (the
"Manager"), receives for its services an annual management fee based on a
percentage of each Fund's average daily net assets (see below).
<TABLE>
<CAPTION>
FUND ANNUAL RATE
------ -----------------------------------------------------------------------
<C> <S>
BGGF 1.00% of the first 150 million, 0.875% of the excess of 150 million but
not exceeding 300 million, 0.75% in excess of 300 million
BPMF 1.00% of the first 150 million, 0.875% of the excess of 150 million but
not exceeding 300 million, 0.75% in excess of 300 million
BFIF 0.75%
BSTFIF 0.75%
BFTFBF 0.75%
</TABLE>
The Manager may voluntarily choose to waive a portion of its fee. The Manager
can modify or terminate this voluntary waiver at any time at its sole
discretion.
SUB-ADVISORY FEE--To provide portfolio advisory services for the Funds, the
Manager has entered into sub-advisory agreements with the sub-advisers listed
below. Under the terms of each sub-advisory agreement, the Manager will pay each
sub-adviser a fee based on a percentage of each Fund's average daily net assets
(see below).
<TABLE>
<CAPTION>
FUND SUB-ADVISER ANNUAL RATE
------ --------------------------------------- -------------------------------
<C> <C> <S>
BGGF Mellon Capital Mortgage Corp. 0.375% of the first $100
million, 0.350% of the excess
of $100 million but not
exceeding $150 million, 0.325%
of the excess of $150 million
BPMF Cavelti Capital Management, Ltd. 0.30% of the first $150
million, 0.2625% of the excess
of $150 million but less than
$300 million, and 0.255% in
excess of $300 million
BFIF OFFITBANK 0.30% of the first $25 million,
0.25% of the next $25 million,
and 0.20% in excess of $50
million
BSTFIF OFFITBANK 0.30% of the first $25 million,
0.25% of the next $25 million,
and 0.20% in excess of $50
million
BFTFBF United States Trust Company of New York 0.20%
</TABLE>
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Funds with administrative
personnel and services. The fee paid to FAS is based on the level of average
aggregate daily net assets of the Funds and The Virtus Funds for the period. FAS
may voluntarily choose to waive a portion of its fee. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $75,000 per portfolio. FAS can modify or terminate this voluntary waiver
at any time at its sole discretion.
DISTRIBUTION SERVICES FEE--The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, each
Fund will reimburse Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
result in the sale of the Fund's Investment Shares. The Plan provides that the
Funds may incur distribution expenses up to 0.25% of the average daily net
assets of the BFIF, BSTFIF, and BFTFBF and up to 0.75% of the average daily net
assets of BGGF and BPMF, annually, to reimburse FSC. The distributor may
voluntarily choose to waive any portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Funds.
The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Funds' accounting records
for which it receives a fee. The fee is based on the level of each Fund's
average net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Signet Trust Company is the Funds' custodian for which it
receives a fee. The fee is based on the level of each Fund's average net assets
for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--The Funds' Manager paid the organization expenses of
the Funds listed below incurred prior to the public offering of its shares. The
Funds reimbursed the Manager for these expenses and has deferred and is
amortizing such expenses over five years from the date of commencement of the
Funds operations. Organizational expenses paid is as follows:
<TABLE>
<CAPTION>
FUND ORGANIZATIONAL EXPENSES
- - ------ -----------------------
<S> <C>
BFIF $151,712
BSTFIF 80,724
BFTFBF 89,448
</TABLE>
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended September 30, 1997 were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- - ------ ------------ -----------
<S> <C> <C>
BGGF $ 44,853,363 $18,165,537
BPMF 63,481,368 66,049,224
BFIF 164,757,771 202,202,473
BSTFIF 109,275,828 128,141,491
BFTFBF 35,259,413 35,460,535
</TABLE>
BLANCHARD GROUP OF FUNDS
- - -------------------------------------------------------------------------------
(6) CONCENTRATION OF CREDIT RISK
BGGF, BPMF, and BFIF invest in securities of non-U.S. issuers. The political or
economic developments within a particular country or region may have an adverse
effect on the ability of domiciled issuers to meet their obligations.
Additionally, political or economic developments may have an effect on the
liquidity and volatility of portfolio securities and currency holdings.
(7) PROPOSED FUND MERGER
On July 18, 1997, Signet Banking Corporation ("Signet") entered into a
definitive Agreement and Plan of Reorganization whereby Signet was acquired by
First Union Corporation ("First Union"). It is anticipated that the merger will
be consummated on or about November 28, 1997.
As a result of this First Union merger, First Union will succeed to the
investment advisory and functions formerly performed for the Funds by various
units of Signet and various unaffiliated parties.
The Board of Trustees/Directors of the Funds has approved an Agreement and Plan
of Reorganization pursuant to which, on or about February 27, 1998, all of the
assets, and certain liabilities of the Funds would be acquired in exchange for
shares of similarly managed funds (the "Acquiring Funds") that is advised by
affiliates of First Union. The reorganization would result in the liquidation
and termination of the Funds. Pursuant to the reorganization, shareholders of
the Funds will receive, tax-free, the number of shares of the Acquiring Funds
having a value equal to the value of their shares immediately prior to the
reorganization. Consummation of the reorganization is subject to approval of the
shareholders of the Funds.
INDEPENDENT AUDITORS' REPORT
- - -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of Blanchard Group of Funds:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Blanchard Group of Funds (comprising the
following portfolios: Blanchard Global Growth Fund, Blanchard Precious Metals
Fund, Inc., Blanchard Flexible Income Fund, Blanchard Short- Term Flexible
Income Fund, Blanchard Flexible Tax-Free Bond Fund) as of September 30, 1997,
and the related statements of operations for the year then ended, the statements
of changes in net assets for the year ended September 30, 1997 and the period
ended September 30, 1996, and the financial highlights for the periods ended in
1997 and 1996. The financial highlights for the periods ended in 1993, 1994 and
1995 were audited by other auditors, whose reports thereon dated June 20, 1995,
expressed an unqualified opinion. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Blanchard Group of
Funds as of September 30, 1997, the results of its operations, the changes in
its net assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
As more fully described in Note 7, in November, 1997 the Funds are expected to
enter into an Agreement and Plan of Reorganization, pursuant to which (subject
to Fund shareholder approval) on or about February 27, 1998, all of the assets,
and certain liabilities of the Funds would be acquired in exchange for shares of
similarly managed funds that are advised by affiliates of First Union
Corporation. The reorganization would result in the liquidation and termination
of the Funds.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
November 7, 1997
TRUSTEES/DIRECTORS OFFICERS
- - --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
William J. Copeland President and Treasurer
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. John W. McGonigle
Edward C. Gonzales Executive Vice President and
Peter E. Madden Secretary
John E. Murray, Jr. Joseph S. Machi
Wesley W. Posvar Vice President and Assistant
Marjorie P. Smuts Treasurer
Richard B. Fisher
Vice President
C. Grant Anderson
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contain facts concerning
its objective and policies, management fees, expenses and other information.
PORTFOLIO ADVISERS B L A N C H A R D
Global Growth Fund GLOBAL GROWTH FUND
Mellon Capital Management Corp.
Precious Metals Fund, Inc. PRECIOUS METALS FUND, INC.
Cavelti Capital Management Ltd.
Flexible Income Fund FLEXIBLE INCOME FUND
OFFITBANK
Short-Term Flexible Income Fund SHORT-TERM FLEXIBLE INCOME FUND
OFFITBANK
Flexible Tax-Free Bond Fund FLEXIBLE TAX-FREE BOND FUND
United States Trust Company of New York
The Blanchard Group of Funds are available through Signet(R) Financial Services,
Inc., member NASD, and are advised by an affiliate, Virtus Capital Management,
Inc., which is
compensated for this service.
- - ---------------------------------------------
INVESTMENT PRODUCTS ARE NOT DEPOSITS,
OBLIGATIONS OF, OR GUARANTEED BY ANY
BANK. THEY ARE NOT INSURED BY THE FDIC.
THEY INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL INVESTED.
- - ---------------------------------------------
Federated Securities Corporation is the ANNUAL REPORT
distributor of the Funds. SEPTEMBER 30, 1997
Managed by: Virtus Capital
Management, Inc.
G01684-12
CUSIP 093212603/093212405/093265106/093212306/093254100
(2431)AR1197
A1. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Global Growth Fund (the "Fund") is represented by a broken line. The Standard &
Poor's 500 Index (the "S&P 500") is represented by a solid line. The line graph
is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 4/30/98 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$20,006 and $44,582, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, five-year, ten-year and the since inception (6/1/86) periods ended
9/30/97, which were 13.20%, 10.51%, 6.44% and 8.97%, respectively.
A2. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Precious Metals Fund (the "Fund") is represented by a broken line. The Toronto
Stock Exchange Gold & Silver Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Toronto Stock Exchange Gold & Silver
Index. The "x" axis reflects computation periods from 6/23/88 to 9/30/97. The
"y" axis reflects the cost of the investment. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to the
Toronto Stock Exchange Gold & Silver Index; the ending values were $11,167and
$13,936, respectively. The legend in the upper middle quadrant of the graphic
presentation indicates the Fund's Average Annual Total Return for the one-year,
five-year, and the since inception (6/23/88) periods ended 9/30/97, which were
(15.24%), 9.96%, and 1.27%, respectively.
A3. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Income Fund (the "Fund") is represented by a broken line. The Merrill
Lynch Aggregate Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Merrill Lynch Aggregate Bond Index.
The "x" axis reflects computation periods from 11/2/92 to 9/30/97. The "y" axis
reflects the cost of the investment. The right margin reflects the ending value
of the hypothetical investment in the Fund as compared to the Merrill Lynch
Aggregate Bond Index; the ending values were $14,003 and $14,387, respectively.
The legend in the upper middle quadrant of the graphic presentation indicates
the Fund's Average Annual Total Return for the one-year, and the since inception
(11/2/92) periods ended 9/30/97, which were 9.53% and 7.25%, respectively.
A4. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Short-Term Flexible Income Fund (the "Fund") is represented by a broken line.
The Merrill Lynch Short-Term Govenment Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Fund and the Merrill Lynch Short-Term
Govenment Index. The "x" axis reflects computation periods from 4/16/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Merrill Lynch Short-Term Govenment Index; the ending values were $12,940
and $12,709, respectively. The legend in the upper middle quadrant of the
graphic presentation indicates the Fund's Average Annual Total Return for the
one-year, and the since inception (4/16/93) periods ended 9/30/97, which were
7.24% and 5.95%, respectively.
A5. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Tax-Free Bond Fund (the "Fund") is represented by a broken line. The
Lehman Brothers Current Municipal Bond Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Fund and the Lehman Brothers Current
Municipal Bond Index. The "x" axis reflects computation periods from 8/12/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Lehman Brothers Current Municipal Bond Index; the ending values were
$13,553 and $12,485, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, and the since inception (8/12/93) periods ended 9/30/97, which
were 9.59% and 7.63%, respectively.
A6. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Asset Alocation Fund (the "Fund") is represented by a broken line. The Standard
& Poor's 500 Index (the "S&P 500") is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 6/6/96 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$14,534 and $14,571, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year and the since inception (6/6/96) periods ended 9/30/97, which were
38.64%, 33.03%, respectively.
Evergreen Keystone
Short & Intermediate
Term Bond Funds
(photo of Grand Canyon)
1997 Annual Report
Evergreen Keystone
(logo) FUNDS (SM) (logo)
<PAGE>
EVERGREEN KEYSTONE
(logo
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders............................... 1
Keystone Capital Preservation and Income Fund
Fund at a Glance................................... 2
Management Report.................................. 3
</TABLE>
Evergreen Intermediate-Term Bond Fund
<TABLE>
<S> <C>
Fund at a Glance................................... 4
Management Report.................................. 5
Keystone Intermediate Term Bond Fund
Fund at a Glance................................... 6
Management Report.................................. 7
Evergreen Intermediate-Term Government Securities
Fund
Fund at a Glance................................... 8
Management Report.................................. 9
Evergreen Short-Intermediate Bond Fund
Fund at a Glance................................... 10
Management Report.................................. 11
Growth of Investments................................ 12
Financial Highlights
Keystone Capital Preservation and Income Fund...... 14
Evergreen Intermediate-Term Bond Fund.............. 16
Keystone Intermediate Term Bond Fund............... 18
Evergreen Intermediate-Term Government Securities
Fund............................................ 20
Evergreen Short-Intermediate Bond Fund............. 22
Schedule of Investments
Keystone Capital Preservation and Income Fund...... 25
Evergreen Intermediate-Term Bond Fund.............. 27
Keystone Intermediate Term Bond Fund............... 29
Evergreen Intermediate-Term Government Securities
Fund............................................ 31
Evergreen Short-Intermediate Bond Fund............. 32
Statements of Assets and Liabilities................. 34
Statements of Operations............................. 35
Statements of Changes in Net Assets.................. 37
Combined Notes to Financial Statements............... 40
Independent Auditors' Report-- KPMG Peat Marwick
LLP................................................ 49
</TABLE>
ABOUT EVERGREEN KEYSTONE
Since 1971, the Evergreen Funds have been providing investors with a proven,
value-driven approach to equity investment management. For over 60 years of
changing economic conditions, Keystone has taken pride in helping investors meet
their financial goals through a broad range of financial products and services.
Combined, Evergreen Keystone offers over 70 funds designed to meet a broad range
of objectives, including fixed-income, balanced, growth and income, and
aggressive growth. Assets under management total more than $30 billion.
<PAGE>
EVERGREEN KEYSTONE (logo)
LETTER TO SHAREHOLDERS
August 1997
(photo of William M. Ennis)
WILLIAM M. ENNIS
Dear Shareholders:
Investors in fixed income funds may sometimes feel as if they are watching all
the fun from the sidelines. Certainly, during the past year, investors in many
equity-oriented mutual funds enjoyed another year in which many funds returned
20% or more.
At times such as this, however, it is important to remind ourselves that seeking
equity-like returns is not what some funds are supposed to be doing. The five
mutual funds discussed in this annual report all have similar objectives-- to
provide regular income and to conserve principal.
We believe each of these funds did a very good job of meeting that objective
during a year which was challenging for fixed income investors. While interest
rates finished the 12-month period at about the same point at which they
started, the point-to-point comparison masked a great deal of rate fluctuations
during the year, with longer-term rates falling and then rising by almost a full
percentage point. In this environment, the short-to-intermediate term strategies
employed by each of the funds worked very well, delivering regular income and
protecting principal. By the end of the 12-month period, each of the funds
provided handsome real returns, especially when measured against the low rate of
inflation we have been enjoying. And they provided these returns without taking
the significant credit risks of high yield bonds or the market risks of
longer-maturity bonds.
These conservative investment strategies make sense for investors who are
interested in regular income, but who want to limit the risks they take with
their investment dollars. However, after the stock market's sharp ascent this
spring and summer, these strategies also make sense for growth-oriented
investors who want to reduce their overall portfolio risks by putting at least
part of their investments in conservative fixed income funds. Diversification
always is prudent, but it is especially prudent when one asset class (in this
case common stocks) has risen dramatically in relative price after a prolonged
period of above-average returns.
At Evergreen Keystone, we encourage all shareholders to consult regularly with
their financial advisers to help determine whether their mix of investments
continues to be appropriate, given current needs, tolerance for risk, and market
conditions.
I am delighted to inform you that Evergreen Keystone has successfully integrated
all service functions of Evergreen and Keystone Funds. This means that you now
have full exchange privileges among all Evergreen and Keystone America funds. In
addition, you will be receiving the top-flight service that earned Evergreen
Keystone the 1996 Dalbar Quality Tested Service Seal, the highest award for
mutual fund service presented by Dalbar, an independent mutual fund survey and
rating firm.
In the following pages, Evergreen Keystone investment professionals will give
you more detailed information about the investment environment and the
strategies employed in managing your funds. You will notice that this annual
report is a departure from past reports in format. It represents the effort of
Evergreen Keystone Funds to provide thoughtful reports and to present them in a
format that is attractive and makes information easily accessible. We are very
interested in hearing your thoughts on this new format, and we welcome your
suggestions.
Sincerely,
/s/WILLIAM M. ENNIS
WILLIAM M. ENNIS
MANAGING DIRECTOR
1
<PAGE>
KEYSTONE
(Logo and picture) CAPITAL PRESERVATION AND INCOME FUND
of capital)
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
One year with sales charge 3.26 % 1.04 % 5.05 %
One year w/o sales charge 6.73 % 6.04 % 6.05 %
One year dividends per share 57.1(cents) 49.4(cents) 49.4 (cents)
30-day SEC Yield
(as of 6/30/97) 5.81 % 5.22 % 5.25 %
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Three years N/A 4.59 % 5.54 %
Five years N/A 3.80 % N/A
Since Inception* 5.84 % 4.51 % 4.55 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Nine months w/o sales charge 5.12 % 4.53 % 4.53 %
Three years N/A 14.41 % 17.55 %
Five years N/A 20.50 % N/A
Since Inception* 15.26 % 30.35 % 21.70 %
</TABLE>
* CLASS A BEGAN 12/30/94; CLASS B BEGAN 7/1/91;
CLASS C BEGAN 2/1/93.
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C> <C> <C>
Total Net Assets (all classes) $52.8 million
Average Credit Quality AAA
Average Maturity 4.92 years
Average Duration 0.75 years
</TABLE>
PORTFOLIO ALLOCATIONS JUNE 30, 1997
(AS A PERCENTAGE OF NET ASSETS)
(A PIE GRAPH APPEARS HERE. SEE TABLE BELOW FOR PLOT POINTS.)
U.S. Treasuries 3.7%
Fixed rate mortgages 2.2%
Repurchase agreements & other net assets 2.8%
Adjustable-rate mortgages 91.3%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Keystone Capital Preservation and Income Fund seeks high current income
consistent with low volatility of principal by investing in adjustable-rate
mortgage-backed securities and loan pools. The Fund may be appropriate for
investors seeking monthly dividends, an investment in a fund composed 100% of
government securities and therefore of the highest credit quality, and the
potential for less share price fluctuation than intermediate and longer-term
bond funds.
STRATEGY
The Fund invests primarily in adjustable-rate mortgage securities issued by the
U.S. Government, its agencies or instrumentalities. Adjustable-rate mortgage
securities (ARMS) are pools of residential mortgage loans on which the interest
rate is periodically adjusted to reflect the current interest rate environment.
By investing in ARMS, the Fund seeks to minimize fluctuations in its share price
relative to other bond funds. However, unlike money market funds, the Fund does
not seek to maintain a completely stable share price.
PORTFOLIO MANAGER
(picture of
Gary Pzegeo) Gary Pzegeo, a Vice President and Portfolio Manager in the
Fixed Income Group of Keystone Investment Management Company,
is Portfolio Manager of Keystone Capital Preservation and
Income Fund. An investment professional with seven years'
experience, Mr. Pzegeo also is manager of Keystone
Institutional Adjustable Rate Fund. Mr. Pzegeo joined Keystone
in 1990. He has several years' experience in analysis of
mortgage-backed securities. A Chartered Financial Analyst, Mr.
Pzegeo is a member of the Boston Securities Analysts Society,
the Government Bond Club of New England, and the Association
of Investment Management and Research. He holds a B.A. in
business administration from the University of Massachusetts.
2
<PAGE>
KEYSTONE (logo and picture
CAPITAL PRESERVATION AND INCOME FUND of capital)
MANAGEMENT REPORT
August 1997
Dear Shareholder:
We are pleased to report to you on the Keystone Capital Preservation and Income
Fund for the fiscal period that ended on June 30, 1997. This report is an annual
report, reflecting the new fiscal year ending date of June 30, replacing the
former fiscal year ending each September 30.
PERFORMANCE
Your Fund performed well during the past year, as the relatively high
concentration of adjustable-rate mortgage securities helped the Fund be
responsive to changes in interest rates. In addition to providing a yield
premium over money market funds, the Fund was able to protect principal by
maintaining a relatively stable net asset value. The Fund concentrated its
investments in relatively low-risk, geographically diverse adjustable-rate
securities. As an example of the Fund's price stability during the past year,
the net asset value of Class A Shares began the fiscal period at $9.74 per share
on September 30, 1996. The net asset value was $9.76 on December 31, 1996 and
$9.80 on June 30, 1997.
ENVIRONMENT
In late 1996 and the first half of 1997, the investment environment was marked
by changing attitudes about the pace of economic growth in the United States. In
the latter part of 1996 and early this year, the economy appeared to be
accelerating, primarily driven by consumer demand. Slowing retail sales and
stable housing sales began to be evident late in the first quarter, however,
signaling a slowdown in consumer activity.
In the bond market, after long-term interest rates hit a low point in November
1996, they started rising because of reports of strong growth late in 1996 and
in expectation that the Federal Reserve Board might increase short-term rates.
In fact, the Federal Reserve Board did increase short-term rates by one-quarter
of one percent in late March.
Interest rates appeared to peak in late March before gradually moving back down.
For example, the interest rate of a two-year Treasury declined from 6.41% on
March 31 to 6.06% on June 30.
STRATEGY
Starting in the second half of 1996, following reports of strong economic growth
and in anticipation of increases in interest rates, your Fund's management team
began increasing the emphasis on adjustable-rate mortgages, both as a defensive
measure to protect the net asset value and to gain the benefit of additional
interest income from higher rates. This increased emphasis continued into 1997.
Adjustable-rate mortgages, whose interest payments reset at regular intervals as
interest rates rise and fall, increased from about 85% of net assets on
September 30, 1996 to 96% by March 31, 1997. By the close of the fiscal year,
the percentage was about 91%.
Within the fixed-rate portion of the portfolio, maturities were extended
somewhat as the threat of higher rates subsided.
The overriding strategy of the Fund has been to seek a yield advantage over
other short-term investments, while providing capital protection. In pursuing
this strategy, the portfolio management team has purchased adjustable-rate
mortgages that are mature, with an average age of seven years. Mortgages of this
age historically have tended not to be refinanced as frequently as younger
mortgages. The geographical sources of these mortgages also has been
diversified, to reduce the risk that events in any one section of the country
could have a disproportionate impact on the Fund. The reset dates of the
adjustable-rate mortgages also are diversified to reduce the risk that market
interest rates at any one point could have a disproportionate impact on the
Fund.
All mortgages are backed by the U.S. government or government agencies. The
average credit rating remains AAA.
OUTLOOK
Going forward, we believe the economy may increase its growth rate in the third
quarter of 1997 after the apparent slowdown of the second, with gross domestic
product growing at an anticipated 2 1/2-to-3% during the second half of the
year. At the same time, we believe inflation can be contained within the present
2 1/2-to-3% range, and that interest rates will remain stable. We expect to
continue to manage the Fund conservatively, with a relatively high concentration
of adjustable-rate mortgages.
Thank you for your support of Keystone Capital Preservation and Income Fund.
Sincerely,
/s/ ALBERT H. ELFNER, III
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
/s/GARY E. PZEGEO
GARY E. PZEGEO
VICE PRESIDENT
PORTFOLIO MANAGER
3
<PAGE>
EVERGREEN
(logo and picture INTERMEDIATE-TERM BOND FUND
of a star)
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR
PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 3.41 % 0.91 % 4.91 % 6.97 %
One year w/o sales
charge 6.88 % 5.91 % 5.91 % 6.97 %
One year dividends per
share 60.6(cents) 51.3(cents) 51.3(cent) 61.5(cents)
30-day SEC Yield
(as of 6/30/97) 5.57 % 4.81 % 4.83 % 5.82 %
<CAPTION>
AVERAGE ANNUAL
RETURNS**
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 7.18 %
Five years N/A N/A N/A 6.60 %
Since Inception* 5.24 % -1.15 % 5.31 % 7.13 %
<CAPTION>
CUMULATIVE
RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 23.14 %
Five years N/A N/A N/A 37.67 %
Since Inception* 11.71 % -1.62 % 6.26 % 47.77 %
</TABLE>
* CLASS A BEGAN 5/2/95; CLASS B BEGAN 1/30/96; CLASS C BEGAN 4/29/96; CLASS Y
BEGAN 11/1/91.
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
Total Net Assets (all classes) $160.4 million
Average Credit Quality AAA
Average Maturity 8.89 years
Duration 4.61 years
</TABLE>
CREDIT QUALITY JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
AA 6%
A 21%
AAA 73%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen Intermediate-Term Bond Fund seeks to preserve principal while
maximizing current yield.
STRATEGY
The Fund invests primarily in U.S. Government obligations, mortgage-backed
securities and corporate bonds and debentures. These securities typically have
average maturities of five to 10 years.
PORTFOLIO MANAGER
(photo of Bruce J. Besecker, C.F.A., a Vice President and Senior
Bruce J. Portfolio Manager of First Union Capital Management Group, is
Besecker) Portfolio Manager of Evergreen Intermediate-Term Bond Fund.
Mr. Besecker, who has more than 16 years' professional
investment experience, is manager of the Philadelphia Taxable
Fixed Income Unit of First Union Capital Management. Prior to
joining First Union, Mr. Besecker was an Assistant Vice
President in Institutional Sales at Merrill Lynch in New York,
and a Senior Trust Officer and Portfolio Manager at First
Fidelity Bank. He also has served as a Research Assistant in
the Economics Department at the Federal Reserve Bank in
Philadelphia. Mr. Besecker, a Chartered Financial Analyst, is
a member of the Philadelphia Financial Analysts Society. He is
a graduate of the University of Pennsylvania and holds an
M.B.A. from The Wharton School.
4
<PAGE>
EVERGREEN (logo and picture
INTERMEDIATE-TERM BOND FUND of a star)
MANAGEMENT REPORT
August 1997
Dear Shareholders:
We are pleased to report to you on the Evergreen Intermediate-Term Bond Fund for
the 12-month fiscal year that ended on June 30, 1997.
PERFORMANCE
Your Fund performed very well during the past fiscal year, buoyed by the
addition of higher yielding securities that increased yield and total return,
and by the decision to maintain a fully invested position.
ENVIRONMENT
During the 12-month fiscal year, the U.S. economy grew at an exceptional pace.
As this growth persisted, often in defiance of predictions of an economic
slowdown, bond market participants became increasingly concerned that the
strength of the economy could provoke an increase in inflation. In response to
these concerns, interest rates rose dramatically during the early months of
1997. Conversely, during the second quarter of 1997, investors' fears receded as
economic data indicated slower economic growth and little inflationary pressure.
This resulted in a steady decline in interest rates, reversing most of the first
quarter's increase. However, the financial markets are keeping a wary eye on
each new economic report, searching for any signs of inflationary pressure that
could prompt the Federal Reserve Board to raise the Federal Funds rate beyond
the 0.25% increase of March 25.
STRATEGY
The fluctuating interest rate environment and seemingly trendless market over
the past 12 months have made portfolio management increasingly challenging.
During this period, duration was maintained in a range of 90% to 110% of the
Fund's benchmark, the Lehman Brothers Intermediate Government Corporate Bond
Index. As of June 30, the duration was at the lower end of this range. We
anticipate maintaining our shorter relative duration as we believe rates may
modestly rise in the coming months. At the end of the fiscal year, duration was
4.61 years and average maturity was 8.89 years.
In addition, your Fund's Treasury position has been reduced and the allocations
to both corporate bonds and mortgage-backed securities have been increased both
to increase yield and to improve total return opportunities. We also adjusted
the maturity structure of the portfolio by underweighting the intermediate
position and overweighting both short-term and longer-term securities. This
strategy is being pursued to enhance returns as yield spreads narrow between
short-term and long-term maturities.
MATURITY AS OF JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
0-1 Year 21%
1-3 Years 10%
3-5 Years 15%
5-10 Years 8%
10-20 Years 25%
20+ Years 21%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
We enter the second half of 1997 with a degree of caution. The principal concern
in the bond market remains the inflation "wildcard," as investors try to
determine whether interest rates can continue their bullish run in this economic
environment. According to traditional analysis, this cannot continue. Our
primary concern is that strong economic growth ultimately brings inflationary
pressures, which in turn would push the Federal Reserve Board to raise interest
rates. With this uncertainty in the market, we plan to keep portfolio structure
and duration relatively neutral. We also will continue to look for opportunities
to increase yield through the addition of attractive mortgage-backed securities
and other higher yielding instruments.
Thank you for your investment in Evergreen Intermediate-Term Bond Fund.
Sincerely,
/s/RICHARD K. WAGONER
RICHARD K. WAGONER
EXECUTIVE VICE PRESIDENT
CHIEF INVESTMENT OFFICER
First Union Capital Management Group
/s/BRUCE J. BESECKER
BRUCE J. BESECKER
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
5
<PAGE>
KEYSTONE
INTERMEDIATE TERM BOND FUND
(logo and picture of stars)
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
One year with sales charge 5.30 % 3.17 % 7.06 %
One year w/o sales charge 8.83 % 8.17 % 8.06 %
One year dividends per share 52.0 (cents) 46.3(cents) 46.3 (cents)
30-day SEC Yield
(as of 6/30/97) 5.82 % 5.25 % 5.26 %
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Three years 6.34 % 5.82 % 6.67 %
Five years 5.89 % N/A N/A
Ten years 6.56 % N/A N/A
Since Inception* N/A 4.61 % 4.96 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Eleven months w/o sales charge 8.40 % 7.81 % 7.70 %
Three years 20.24 % 18.51 % 21.38 %
Five years 33.11 % N/A N/A
Ten years 88.72 % N/A N/A
Since Inception* N/A 22.01 % 23.80 %
</TABLE>
* CLASSES B AND C BEGAN 2/1/93.
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE. FOR CLASSES WITH
MORE THAN A 10-YEAR HISTORY, THE 10-YEAR HISTORY IS PRESENTED.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
Total Net Assets (all classes) $29.0 million
Average Credit Quality AA-
Average Maturity 6.3 years
Duration 4.6 years
</TABLE>
PORTFOLIO QUALITY JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
BBB 18%
A 32%
AAA 38%
AA 12%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Keystone Intermediate Term Bond Fund seeks current income and, secondarily,
capital preservation from investments in investment grade and high quality
bonds.
STRATEGY
The Fund is designed to balance the benefits of short-and long-term bonds, by
providing more income than short-term bonds and greater price stability than
long-term bonds. The Fund invests primarily in government and corporate bonds
and mortgage-backed securities with maturities of less than 10 years.
PORTFOLIO MANAGER
(photo of Christopher P. Conkey, Senior Vice President and Chief
Christopher Investment Officer, Fixed Income, of Keystone Investment
P. Conkey) Management Company, is Portfolio Manager of Keystone
Intermediate Term Bond Fund. An investment professional with
more than 14 years' experience, Mr. Conkey also is Portfolio
Manager of Keystone Diversified Bond Fund (B-2). Mr. Conkey
joined Keystone in 1988 from Constitution Capital, where he
was a Vice President. A Chartered Financial Analyst, Mr.
Conkey is a member of the Government Bond Club of New England
and the Bond Analysts Society of Boston. He is a graduate of
Clark University and received his M.B.A. from Boston
University.
6
<PAGE>
KEYSTONE
INTERMEDIATE TERM BOND FUND (logo and picture
of stars)
MANAGEMENT REPORT
August 1997
Dear Shareholder:
We are pleased to report to you on the Keystone Intermediate Term Bond Fund for
the fiscal period that ended on June 30, 1997. This report is an annual report,
reflecting the new fiscal year ending date of June 30, replacing the former
fiscal year ending each July 31.
PERFORMANCE
Your Fund performed very well during the past year. In an environment of
moderate economic growth, modest inflation, and relatively stable interest
rates, your Fund was able to take advantage of opportunities among better
quality corporate bonds and mortgage-backed securities to provide generous
income consistent with limited price fluctuation.
ENVIRONMENT
During the past year, the U.S. economy enjoyed healthy economic growth and low
inflation. If one were to look at interest rates at the beginning and end of the
year, despite some near-term volatility one would see remarkable stability in
rates. For example, the yield on a 30-year Treasury bond was 6.78% on June 30,
just slightly below the 6.97% of July 31, 1996. This was an environment in which
corporate bonds tended to do very well, as credit risk was low because of the
overall strength of the economy.
STRATEGY
In the relatively stable interest rate environment of the past year, your Fund
did not try to manage the portfolio maturities significantly in an effort to
anticipate the direction of interest rate movements. Rather, the portfolio
management team has searched for relative value among the various sectors in
which the Fund invests.
Your Fund took advantage of the strong economy to increase its emphasis on high
grade and investment grade corporate bonds and mortgage-backed securities, while
de-emphasizing U.S. Treasuries. Between December 31, 1996 and June 30, 1997, for
example, the allocation to U.S. government bonds in the portfolio was reduced
from 21% to 9% of net assets, while the allocation to industrial bonds was
increased from 13% to 16% and the allocation to collateralized mortgage
obligations was increased from 21% to 28%.
The Fund also has increased its allocation to foreign securities from 9% on
December 31, 1996 to approximately 24% at the end of the fiscal year. The
foreign emphasis was increased to take advantage of the yield advantage of
foreign bonds and to give the portfolio greater diversification. The Fund, which
has hedged all foreign securities back into the U.S. dollar to protect against
currency fluctuations, has invested in government bonds issued in Canada,
Denmark and Germany. All three countries are enjoying low inflation and
benefiting from sound fiscal policies.
PORTFOLIO COMPOSITION JUNE 30, 1997
(AS A PERCENTAGE OF NET ASSETS)
(A pie graph appears here. See table below for plot points)
Repurchase agreements and other net assets 2.2%
U.S Government 8.8%
Financial Corp. 15.3%
Industrial Corp. 15.9%
International/U.S.$ 15.4%
International/non-U.S.$* 8.8%
Mortgage-backed 27.5%
Asset-backed 6.1%
* NON-U.S.-DOLLAR-DENOMINATED BONDS WERE FULLY HEDGED BACK INTO U.S. CURRENCY.
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
We believe the economy may increase its growth rate in the third quarter of 1997
after the apparent slowdown of the second, with gross domestic product growing
at an anticipated annualized rate of 2 1/2-to-3% during the second half of the
year. At the same time, we believe inflation can be contained within the present
2 1/2-to-3% range, and that interest rates will remain stable. We will continue,
however, to monitor wage costs very closely to watch for early signs of
inflation. With this favorable outlook, we anticipate a continued emphasis on
corporate and mortgage-backed securities for at least the next several months.
Thank you for your support of Keystone Intermediate Term Bond Fund.
Sincerely,
/s/ALBERT H. ELFNER, III
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
/s/CHRISTOPHER P. CONKEY
CHRISTOPHER P. CONKEY
SENIOR VICE PRESIDENT
CHIEF INVESTMENT OFFICER, FIXED INCOME
7
<PAGE>
EVERGREEN
(logo and photo of George Washington)
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 2.55 % 0.03 % 4.03 % 6.08 %
One year w/o sales
charge 6.00 % 5.03 % 5.03 % 6.08 %
One year dividends per
share 55.4(cents) 46.3(cents) 46.3(cents) 56.2 (cents)
30-day SEC Yield
(as of 6/30/97) 5.25 % 4.44 % 4.17 % 5.49 %
<CAPTION>
AVERAGE ANNUAL
RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 6.19 %
Five years N/A N/A N/A 5.38 %
Since Inception* 4.38 % -0.66 % 4.85 % 5.82 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 19.76 %
Five years N/A N/A N/A 29.94 %
Since Inception* 9.74 % -0.92 % 5.97 % 37.82 %
</TABLE>
* CLASS A BEGAN 5/2/95; CLASS B BEGAN 2/9/96; CLASS C BEGAN 4/10/96;
CLASS Y BEGAN 11/1/91
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C> <C> <C>
Total Net Assets (all classes) $72.9 million
Average Credit Quality AAA
Average Maturity 3.88 years
Duration 2.93 years
</TABLE>
PORTFOLIO COMPOSITION JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See tables below for plot points.)
U.S. Treasuries 71%
Mortgage-backed securities 18%
U.S. Govt. Agencies 10%
Short-term securities 1%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen Intermediate-Term Government Securities Fund seeks to maximize total
return and preserve principal while providing current income.
STRATEGY
The Fund invests primarily in securities issued by the U.S. Government and its
agencies. These securities typically have an average maturity of three to six
years, with a maximum maturity of ten years. The Fund seeks its objective over
full interest rate cycles, which typically last three to five years.
PORTFOLIO MANAGER
(photo of L. L. Robert Cheshire, a Vice President and Senior Portfolio
Robert Cheshire) Manager of First Union Capital Management Group, is Portfolio
Manager of Evergreen Intermediate-Term Government Securities
Fund. Mr. Cheshire also is in charge of the Newark Taxable
Fixed Income Unit of First Union. Prior to joining First
Union, Mr. Cheshire was a Vice President at Shearson Lehman
Hutton for 11 years in the Asset Management and Institutional
Government Securities Division. He was also a Vice President
of Government Securities for Charles E. Quincey and an
Assistant Vice President in the Municipal Securities
Department with Bankers Trust Co. in New York. Mr. Cheshire is
a graduate of Rutgers University and holds an M.B.A. from
Fairleigh Dickinson University.
8
<PAGE>
EVERGREEN (logo and
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND photo of
George Washington)
MANAGEMENT REPORT
August 1997
Dear Shareholders:
We are pleased to report on Evergreen Intermediate-Term Government Securities
Fund for the 12-month fiscal year that ended on June 30, 1997.
PERFORMANCE
During the year, the Fund delivered satisfactory returns, consistent with its
objective to seek total return while preserving principal. For the first nine
months of the fiscal year, as interest rates rose, the Fund's slightly long
duration caused some underperformance against industry benchmarks. However, the
Fund outperformed its benchmark during the final three months of the year as
interest rates fell.
ENVIRONMENT
During the 12-month fiscal period, the U.S. economy experienced a pattern best
described as a series of "mini-cycles," with bonds trading within a relatively
narrow range of interest rates. Economic growth surged during the fourth quarter
of 1996 into the first quarter of 1997, subsequently causing concern over
inflationary pressure. Against this backdrop, bond market participants reviewed
each new economic report for any signs of inflation that could prompt the
Federal Reserve Board to increase interest rates. These market concerns resulted
in rising interest rates throughout the first quarter of 1997, culminating in
the March 25 decision by the Federal Reserve Board to raise the Federal Funds
rate by 0.25%. Conversely, investors' fears of inflation receded during the
second quarter of 1997 amid reports of slowing economic growth. As a result,
interest rates fell.
STRATEGY
The Fund's duration, or sensitivity to interest rate changes, was consistent
with that of the benchmark Lehman Brothers Intermediate Government Index during
the fiscal year. In implementing duration strategy, your Fund's investment
manager uses a disciplined process focusing on longer-term trends in the
economic environment. The Fund's duration was modestly shortened following the
Federal Reserve Board's decision to raise the Federal Funds rate in late March.
In response to the declining interest rate environment in the second quarter,
portfolio duration was brought back to neutral. To capture additional yield, the
Fund's emphasis on mortgage-backed securities was also increased, ending the
fiscal year at more than 18% of net assets.
Consistent with the Fund's concentration on government securities, average
credit quality was maintained at AAA.
MATURITY AS OF JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
0-1 Year 4%
1-5 Years 45%
5-10 Years 51%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
We are continuing to monitor closely new economic reports, vigilant for any
indications of a resurgence of inflationary pressure that could cause the
Federal Reserve Board to raise the Federal Funds rate during the second half of
1997. The overall bond market continues to be characterized by near-term
interest rate fluctuations, without any over-riding trend. This environment
dictates a very cautious approach in the coming quarters, with portfolio
duration adjusted consistent with a changing market environment.
We anticipate that your Fund's relatively neutral duration and conservative
style should protect the fund from any significant fluctuations in the market.
In addition, we will continue to seek attractive opportunities by increasing the
Fund's yield through the addition of mortgage-backed securities and other
relatively higher yielding instruments.
Thank you for your investment in Evergreen Intermediate-Term Government
Securities Fund.
Sincerely,
/s/RICHARD K. WAGONER
RICHARD K. WAGONER
EXECUTIVE VICE PRESIDENT
CHIEF INVESTMENT OFFICER
First Union Capital Management Group
/s/ L. ROBERT CHESHIRE
L. ROBERT CHESHIRE
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
9
<PAGE>
EVERGREEN
(logo and photo of flag) SHORT-INTERMEDIATE BOND FUND
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 3.30 % 0.78 % 4.77 % 6.88 %
One year w/o sales
charge 6.77 % 5.78 % 5.77 % 6.88 %
One year dividends per
share 63.5(cents) 54.5(cents) 54.5(cents) 64.6(cents)
30-day SEC Yield
(as of 6/30/97) 5.99 % 5.29 % 5.28 % 6.30 %
<CAPTION>
AVERAGE ANNUAL
RETURNS**
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years 5.62 % 4.98 % N/A 6.92 %
Five years 5.05 % N/A N/A 5.92 %
Since Inception* 7.14 % 4.17 % 5.73 % 7.01 %
<CAPTION>
CUMULATIVE
RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years 17.84 % 15.68 % N/A 22.23 %
Five years 27.92 % N/A N/A 33.29 %
Since Inception* 78.78 % 19.87 % 16.99 % 55.28 %
</TABLE>
* CLASS A BEGAN 1/3/89; CLASS B BEGAN 1/25/93; CLASS C BEGAN 9/6/94; CLASS Y
BEGAN 1/4/91.
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C> <C> <C>
Total Net Assets (all classes) $398.7 million
Average Credit Quality AA+
Average Maturity 4.06 years
Duration 2.96 years
</TABLE>
CREDIT QUALITY JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
A 26%
AA 3%
AAA 67%
BBB 4%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen Short-Intermediate Bond Fund seeks to provide a high level of current
income with the potential for some capital appreciation.
STRATEGY
The Fund seeks to attain its objective by investing in a broad range of higher
quality and investment-grade debt securities. The Fund normally will invest at
least 80% of its assets in debt securities. The Fund also intends to maintain an
average maturity of five years or less to control price fluctuations.
PORTFOLIO MANAGER
(photo of Thomas L. Ellis, a Vice President and Senior Portfolio Manager
Thomas L. Ellis) of First Union Capital Management Group, is Portfolio Manager
of Evergreen Short-Intermediate Bond Fund. At First Union, Mr.
Ellis is responsible for managing more than $1 billion in
fixed income portfolios, including the Fixed Income Fund, a
common trust fund. Prior to joining First Union, Mr. Ellis
served in the Bond Department of First Tennessee Bank. He is a
graduate of the University of Baltimore and holds an M.B.A.
from Morgan State University.
10
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE BOND FUND (logo and a photo
of flag)
MANAGEMENT REPORT
August 1997
Dear Shareholders:
We are pleased to report to you on the Evergreen Short-Intermediate Bond Fund
for the 12-month fiscal year that ended on June 30, 1997.
PERFORMANCE
During the fiscal year, concentrations in corporate bonds and mortgage-backed
securities helped the Fund deliver strong performance, consistent with its
objective. At the same time, the Fund's relatively short duration gave the Fund
a relative advantage over the first nine months of the year, although it held
back performance during the final three months when interest rates declined.
ENVIRONMENT
Throughout the fiscal year, the U.S. economy experienced strong growth
accompanied by relatively low levels of inflation. During this period, the bond
market was characterized by near-term interest rate volatility. For example, the
yield on the 10-year U.S. Treasury fell from 6.80% to 6.10% during the final six
months of 1996, only to rise back to 7.0% by April 1997, then to fall again to
6.5% by June of 1997. We believe this volatility mirrors changes in the
underlying economy. While Gross Domestic Product (GDP) grew at a 2.5% rate in
1996, real GDP surged by a 5.9% annualized rate during the first quarter 1997.
This led the Federal Reserve Board to increase the Federal Funds rate by 0.25%
in March, with many observers anticipating that further rate increases would
follow. However, growth slowed during the second quarter to an annualized rate
of 2.0%. This, coupled with surprisingly low inflation, led the bond market to
rally amid optimistic expectations.
STRATEGY
As a result of our belief that interest rates may rise during the remainder of
1997, at this writing we are maintaining a portfolio duration of 2.9 years,
slightly less than the short-intermediate benchmark.
We will continue to slightly overweight the Fund's focus on corporate bonds and
mortgage-backed securities. Although the "spread," or yield differential, that
corporates and mortgages enjoy over U.S. Treasuries has narrowed, we have a
positive fundamental outlook for both these sectors and expect to maintain an
emphasis on them to increase the Fund's yield.
The Fund's portfolio maintains an average credit quality of AA+.
MATURITY JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
0-1 Year 22%
1-3 Years 44%
3-5 Years 18%
5-10 Years 16%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
For the final half of 1997, we anticipate that economic growth, spurred by
increased consumer spending, may increase to an annualized rate of about 3.0%.
We believe that with unemployment rates approaching 25-year lows, tight labor
markets could eventually be reflected in upward pressure on prices. This
potential for increased inflation, combined with the possibility of a fall-off
in optimism in the bond market, could lead to rising interest rates during the
second half of 1997. In response to the possibility of increased inflationary
pressure, we expect that the Federal Reserve Board may again tighten monetary
policy, increasing the Federal Funds rate by 0.25% to 0.50% before the end of
the year.
Thank you for your investment in Evergreen Short-Intermediate Bond Fund.
Sincerely,
/s/RICHARD K. WAGONER
RICHARD K. WAGONER
EXECUTIVE VICE PRESIDENT
CHIEF INVESTMENT OFFICER
First Union Capital Management Corp.
/s/THOMAS L. ELLIS
THOMAS L. ELLIS
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
11
<PAGE>
EVERGREEN KEYSTONE
(logo)
GROWTH OF INVESTMENTS
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
Comparison of a $10,000 investment in Keystone Capital Preservation and Income
Fund, Class B sharess, versus a similar investment in a 6-Month Treasury Bill
and the Consumer Price Index (CPI).
In Thousands
7/91 6/92 6/93 6/94 6/95 6/96 6/97
Class B Shares (CUSTOMER: PLEASE FILL IN) $13,124
CPI $13,034
6-Month T-Bill $11,786
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 3.26% N/A 5.84%
Class B 1.04% 3.80% 4.51%
Class C 5.05% N/A 4.55%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The 6-Month Treasuty Bill is an unmanaged market
index. The index does not include transaction costs assciated with buying and
selling securities nor any management fees. The Consumer Price Index, a measure
of inflation, is through June 30, 1997.
EVERGREEN INTERMEDIATE-TERM BOND FUND
Comparison of a $10,000 investment in Evergreen Intermediate-Term Bond Fund,
Class A shares, versus a similar investment in the Lehman Brothers Intermediate
Government/Corporate Bond Index and the Consumer Price Index (CPI).
In Thousands
5/95 6/96 12/95 6/96 12/96 6/97
CPI (CUSTOMER: PLEASE FILL IN) $11,171
LBIGCBI $10,554
Class A Shares $11,817
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 3.41% N/A 5.24%
Class B 0.91% N/A -1.15%
Class C 4.91% N/A 5.31%
Class Y 6.97% 6.60% 7.13%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Intermediate
Government/Corporate Bond Index is an unmanaged market index. The index does not
include transaction costs assciated with buying and selling securities nor any
management fees. The Consumer Price Index, a measure of inflation, is through
June 30, 1997.
KEYSTONE INTERMEDIATE TERM BOND FUND
Comparison of a $10,000 investment in Keystone Intermediate Term Bond Fund,
Class A shares, versus a similar investment in the Lehman Brothers Intermediate
Government/Corporate Bond Index and the Consumer Price Index (CPI).
In Thousands
6/87 6/88 6/89 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97
CPI (CUSTOMER: PLEASE FILL IN) $18,870
LBIGCBI $14,118
Class A Shares $22,184
Average Annual Total Returns
1 Year 5 Year 10 Year Life of Class
Class A 5.30% 5.89% 6.56% N/A
Class B 3.17% N/A N/A 4.61%
Class C 7.06% N/A N/A 4.96%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Intermediate
Government/Corporate Bond Index is an unmanaged market index. The index does not
include transaction costs assciated with buying and selling securities nor any
management fees. The Consumer Price Index, a measure of inflation, is through
June 30, 1997.
EVERGREEN INTERMEDIATE-TERM
GOVERNMENT SECURITIES FUND
Comparison of a $10,000 investment in Evergreen Intermediate-Term Government
Securities Fund, Class A shares, versus a similar investment in the
Lehman Brothers Intermediate Government Bond Index and the Consumer Price Index
(CPI).
5/95 6/95 12/95 6/96 12/96 6/97
CPI (CUSTOMER: PLEASE FILL IN) $10,974
LBIGBI $10,554
Class A Shares $11,661
In Thousands
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 2.55% N/A 4.38%
Class B 0.03% N/A -0.66%
Class C 4.03% N/A 4.85%
Class Y 6.08% 5.28% 5.82%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Intermediate Government Bond
Index is an unmanaged market index. The index does not include transaction costs
assciated with buying and selling securities nor any management fees. The
Consumer Price Index, a measure of inflation, is through June 30, 1997.
12
<PAGE>
EVERGREEN KEYSTONE
(logo)
GROWTH OF INVESTMENTS (CONTINUED)
EVERGREEN SHORT-INTERMEDIATE BOND FUND
Comparison of a $10,000 investment in Evergreen Short-Intermediate Bond Fund,
Class A shares, versus a similar investment in the Lehman Brothers Intermediate
Government/Corporate Bond Index and the Consumer Price Index (CPI).
1/89 6/89 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97
CPI (CUSTOMER: PLEASE FILL IN) $17,879
LBIGCBI $13,235
Class A Shares $19,937
In Thousands
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 3.30% 5.05% 7.14%
Class B 0.78% N/A 4.17%
Class C 4.77% N/A 5.73%
Class Y 6.88% 5.92% 7.01%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Intermediate
Government/Corporate Bond Index is an unmanaged market index. The index does not
include transaction costs assciated with buying and selling securities nor any
management fees. The Consumer Price Index, a measure of inflation, is through
June 30, 1997.
13
<PAGE>
(logo and a photo KEYSTONE
of capital) CAPITAL PRESERVATION AND INCOME FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
DECEMBER 30, 1994
YEAR ENDED (COMMENCEMENT OF
NINE MONTHS ENDED SEPTEMBER 30, CLASS OPERATIONS) TO
JUNE 30, 1997 (D) 1996 (C) SEPTEMBER 30, 1995
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 9.74 $ 9.68 $ 9.51
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.46 0.61 0.46
Net realized and unrealized gain on investments..................... 0.03 0.01 0.14
Total from investment operations.................................... 0.49 0.62 0.60
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.42) (0.53) (0.42)
In excess of net investment income.................................. (0.01) 0 (0.01)
Tax basis return of capital......................................... 0 (0.03) 0
Total distributions................................................. (0.43) (0.56) (0.43)
NET ASSET VALUE END OF PERIOD....................................... $ 9.80 $ 9.74 $ 9.68
Total return (b).................................................... 5.12% 6.56% 6.36%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 0.92%(a) 0.91% 0.86%(a)
Total expenses excluding indirectly paid expenses................. 0.90%(a) 0.90% 0.82%(a)
Total expenses excluding waivers and reimbursements............... 1.47%(a) 1.33% 1.27%(a)
Net investment income............................................. 6.24%(a) 6.31% 6.37%(a)
Portfolio turnover rate............................................. 52% 74% 67%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $15,751 $22,684 $ 19,293
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30,
JUNE 30, 1997 (D) 1996 (C) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF
PERIOD........................ $ 9.75 $ 9.68 $ 9.62 $ 9.91 $ 9.88 $ 10.06
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........... 0.39 0.55 0.52 0.47 0.45 0.58
Net realized and unrealized gain
(loss) on investments......... 0.04 0.01 0.03 (0.41) (0.05) (0.21)
Total from investment
operations.................... 0.43 0.56 0.55 0.06 0.40 0.37
LESS DISTRIBUTIONS FROM:
Net investment income........... (0.36) (0.46) (0.48) (0.34) (0.37) (0.55)
In excess of net investment
income........................ (0.01) 0 (0.01) (0.01) 0 0
Tax basis return of capital..... 0 (0.03) 0 0 0 0
Total distributions............. (0.37) (0.49) (0.49) (0.35) (0.37) (0.55)
NET ASSET VALUE END OF PERIOD... $ 9.81 $ 9.75 $ 9.68 $ 9.62 $ 9.91 $ 9.88
Total return (b)................ 4.53% 5.90% 5.81% 0.58% 4.16% 3.71%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................ 1.67%(a) 1.63% 1.53% 1.50% 1.50% 1.36%
Total expenses excluding
indirectly paid expenses.... 1.65%(a) 1.62% 1.50% -- -- --
Total expenses excluding
waivers and
reimbursements.............. 2.23%(a) 2.09% 2.09% 1.93% 1.94% 2.03%
Net investment income......... 5.52%(a) 5.63% 5.46% 4.05% 4.44% 5.50%
Portfolio turnover rate......... 52% 74% 67% 34% 60% 41%
NET ASSETS END OF PERIOD
(THOUSANDS)................... $32,964 $ 44,096 $62,998 $95,761 $144,725 $186,742
<CAPTION>
JULY 1, 1991
(COMMENCEMENT OF
CLASS OPERATIONS) TO
SEPTEMBER 30, 1991
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF
PERIOD........................ $ 10.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........... 0.18
Net realized and unrealized gain
(loss) on investments......... 0.06
Total from investment
operations.................... 0.24
LESS DISTRIBUTIONS FROM:
Net investment income........... (0.18)
In excess of net investment
income........................ 0
Tax basis return of capital..... 0
Total distributions............. (0.18)
NET ASSET VALUE END OF PERIOD... $ 10.06
Total return (b)................ 2.43%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................ 1.19%(a)
Total expenses excluding
indirectly paid expenses.... --
Total expenses excluding
waivers and
reimbursements.............. 3.19%(a)
Net investment income......... 6.42%(a)
Portfolio turnover rate......... 2%
NET ASSETS END OF PERIOD
(THOUSANDS)................... $ 25,769
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) The Fund changed its fiscal year end from September 30 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
KEYSTONE (logo and photo of
CAPITAL PRESERVATION AND INCOME FUND capital)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED (COMMENCEMENT OF
NINE MONTHS ENDED SEPTEMBER 30, CLASS OPERATIONS) TO
JUNE 30, 1997 (D) 1996 (C) 1995 1994 SEPTEMBER 30, 1993
<S> <C> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD..................... $ 9.74 $ 9.67 $ 9.60 $ 9.90 $ 9.82
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.40 0.54 0.52 0.40 0.23
Net realized and unrealized gain (loss) on
investments........................................... 0.03 0.02 0.04 (0.35) 0.09
Total from investment operations........................ 0.43 0.56 0.56 0.05 0.32
LESS DISTRIBUTIONS FROM:
Net investment income................................... (0.36) (0.46) (0.48) (0.34) (0.24)
In excess of net investment income...................... (0.01) 0 (0.01) (0.01) 0
Tax basis return of capital............................. 0 (0.03) 0 0 0
Total distributions..................................... (0.37) (0.49) (0.49) (0.35) (0.24)
NET ASSET VALUE END OF PERIOD........................... $ 9.80 $ 9.74 $ 9.67 $ 9.60 $ 9.90
Total return (b)........................................ 4.53% 5.91% 5.93% 0.48% 3.28%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................................ 1.67%(a) 1.64% 1.53% 1.50% 1.50%(a)
Total expenses excluding indirectly paid expenses..... 1.65%(a) 1.62% 1.50% -- --
Total expenses excluding waivers and reimbursements... 2.23%(a) 2.09% 2.08% 1.94% 1.67%(a)
Net investment income................................. 5.53%(a) 5.60% 5.51% 4.08% 2.91%(a)
Portfolio turnover rate................................. 52% 74% 67% 34% 60%
NET ASSETS END OF PERIOD (THOUSANDS).................... $ 4,105 $4,152 $2,755 $2,874 $2,077
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) The Fund changed its fiscal year end from September 30 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
EVERGREEN
INTERMEDIATE-TERM BOND FUND
(logo and photo of a star)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 (C)
<S> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................... $ 10.10 $10.30
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................. 0.60 0.48
Net realized and unrealized gain (loss) on investments................. 0.08 (0.20)
Total from investment operations....................................... 0.68 0.28
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (0.59) (0.48)
Tax basis return of capital............................................ (0.02) 0
Total distributions.................................................... (0.61) (0.48)
NET ASSET VALUE END OF PERIOD.......................................... $ 10.17 $10.10
Total return (b)....................................................... 6.88% 2.72%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................................................... 0.85% 0.82%(a)
Total expenses excluding indirectly paid expenses.................... 0.85% --
Total expenses excluding waivers and reimbursements.................. 1.04% 1.10%(a)
Net investment income................................................ 5.92% 6.30%(a)
Portfolio turnover rate................................................ 86% 52%
NET ASSETS END OF PERIOD (THOUSANDS)................................... $ 3,038 $2,943
<CAPTION>
MAY 2, 1995 (COMMENCEMENT OF CLASS OPERATIONS)
THROUGH
AUGUST 31, 1995
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................... $ 9.98
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................. 0.18
Net realized and unrealized gain (loss) on investments................. 0.33
Total from investment operations....................................... 0.51
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (0.19)
Tax basis return of capital............................................ 0
Total distributions.................................................... (0.19)
NET ASSET VALUE END OF PERIOD.......................................... $10.30
Total return (b)....................................................... 5.17%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................................................... 0.80%(a)
Total expenses excluding indirectly paid expenses.................... --
Total expenses excluding waivers and reimbursements.................. 1.38%(a)
Net investment income................................................ 5.53%(a)
Portfolio turnover rate................................................ 73%
NET ASSETS END OF PERIOD (THOUSANDS)................................... $160
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from August 31 to June 30.
<TABLE>
<CAPTION>
JANUARY 30, 1996
(COMMENCEMENT
OF CLASS OPERATIONS)
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD....................................................... $ 10.10 $10.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................................................... 0.50 0.20
Net realized and unrealized gain (loss) on investments.................................... 0.08 (0.58)
Total from investment operations.......................................................... 0.58 (0.38)
LESS DISTRIBUTIONS FROM:
Net investment income..................................................................... (0.49) (0.20)
Tax basis return of capital............................................................... (0.02) 0
Total distributions....................................................................... (0.51) (0.20)
NET ASSET VALUE END OF PERIOD............................................................. $ 10.17 $10.10
Total return (b).......................................................................... 5.91% (3.52%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................................................... 1.81% 1.80%(a)
Total expenses excluding indirectly paid expenses....................................... 1.81% --
Total expenses excluding waivers and reimbursements..................................... 1.81% 1.89%(a)
Net investment income................................................................... 5.00% 5.18%(a)
Portfolio turnover rate................................................................... 86% 52%
NET ASSETS END OF PERIOD (THOUSANDS)...................................................... $ 1,013 $402
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
EVERGREEN (logo and photo of a star)
INTERMEDIATE-TERM BOND FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
APRIL 29, 1996
(COMMENCEMENT
OF CLASS OPERATIONS)
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD....................................................... $ 10.10 $10.15
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................................................... 0.51 0.08
Net realized and unrealized gain (loss) on investments.................................... 0.07 (0.05)
Total from investment operations.......................................................... 0.58 0.03
LESS DISTRIBUTIONS FROM:
Net investment income..................................................................... (0.49) (0.08)
Tax basis return of capital............................................................... (0.02) 0
Total distributions....................................................................... (0.51) (0.08)
NET ASSET VALUE END OF PERIOD............................................................. $ 10.17 $10.10
Total return (b).......................................................................... 5.91% 0.33%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................................................... 1.80% 1.80%(a)
Total expenses excluding indirectly paid expenses....................................... 1.80% --
Total expenses excluding waivers and reimbursements..................................... 1.80% 1.88%(a)
Net investment income................................................................... 4.97% 5.30%(a)
Portfolio turnover rate................................................................... 86% 52%
NET ASSETS END OF PERIOD (THOUSANDS)...................................................... $29 $25
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED AUGUST 31,
JUNE 30, 1997 JUNE 30, 1996 (b) 1995 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD...... $ 10.10 $ 10.29 $ 9.93 $ 10.99 $ 10.56
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 0.61 0.48 0.56 0.55 0.63
Net realized and unrealized gain (loss)
on investments......................... 0.08 (0.19) 0.40 (0.86) 0.66
Total from investment operations......... 0.69 0.29 0.96 (0.31) 1.29
LESS DISTRIBUTIONS FROM:
Net investment income.................... (0.60) (0.48) (0.56) (0.55) (0.64)
Net realized gains on investments........ 0 0 (0.04) (0.20) (0.22)
Tax basis return of capital.............. (0.02) 0 0 0 0
Total distributions...................... (0.62) (0.48) (0.60) (0.75) (0.86)
NET ASSET VALUE END OF PERIOD............ $ 10.17 $ 10.10 $ 10.29 $ 9.93 $ 10.99
Total return............................. 6.97% 2.82% 10.13% (2.91%) 12.90%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................... 0.81% 0.80%(a) 0.69% 0.55% 0.55%
Total expenses excluding indirectly
paid expenses........................ 0.81% -- -- -- --
Total expenses excluding waivers and
reimbursements....................... 0.81% 0.87%(a) 0.83% 0.83% 0.83%
Net investment income.................. 5.97% 5.75%(a) 5.63% 5.32% 5.93%
Portfolio turnover rate.................. 86% 52% 73% 69% 49%
NET ASSETS END OF PERIOD (THOUSANDS)..... $ 156,346 $ 157,814 $95,961 $91,724 $86,892
<CAPTION>
NOVEMBER 1, 1991
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
AUGUST 31, 1992
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD...... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 0.55
Net realized and unrealized gain (loss)
on investments......................... 0.55
Total from investment operations......... 1.10
LESS DISTRIBUTIONS FROM:
Net investment income.................... (0.54)
Net realized gains on investments........ 0
Tax basis return of capital.............. 0
Total distributions...................... (0.54)
NET ASSET VALUE END OF PERIOD............ $ 10.56
Total return............................. 11.29%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................... 0.55%(a)
Total expenses excluding indirectly
paid expenses........................ --
Total expenses excluding waivers and
reimbursements....................... 0.86%(a)
Net investment income.................. 6.49%(a)
Portfolio turnover rate.................. 65%
NET ASSETS END OF PERIOD (THOUSANDS)..... $ 66,695
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year from August 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
(logo and picture KEYSTONE
of stars) INTERMEDIATE TERM BOND FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED JULY 31,
JUNE 30, 1997 (e) 1996 1995 1994 (c)
<S> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 8.73 $ 8.88 $ 8.84 $ 9.46
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.54 0.59 0.63 0.57
Net realized and unrealized gain (loss) on investments, closed
futures contracts and foreign currency related transactions....... 0.18 (0.16) 0.02 (0.59 )
Total from investment operations.................................... 0.72 0.43 0.65 (0.02 )
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.52) (0.58) (0.57) (0.57 )
In excess of net investment income.................................. 0 0 (0.04) (0.02 )
Tax basis return of capital......................................... 0 0 0 (0.01 )
Total distributions................................................. (0.52) (0.58) (0.61) (0.60 )
NET ASSET VALUE END OF PERIOD....................................... $ 8.93 $ 8.73 $ 8.88 $ 8.84
Total return (b).................................................... 8.40% 4.95% 7.76% (0.29%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.12%(a) 1.10% 1.00% 1.00%
Total expenses excluding indirectly paid expenses................. 1.10%(a) 1.08% -- --
Total expenses excluding waivers and reimbursements............... 1.58%(a) 1.54% 1.48% 1.80%
Net investment income............................................. 6.43%(a) 6.57% 7.13% 6.81%
Portfolio turnover rate............................................. 179% 231% 149% 280%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $10,341 $12,958 $14,558 $16,036
<CAPTION>
1993
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 9.23
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.70
Net realized and unrealized gain (loss) on investments, closed
futures contracts and foreign currency related transactions....... 0.18
Total from investment operations.................................... 0.88
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.65)
In excess of net investment income.................................. 0
Tax basis return of capital......................................... 0
Total distributions................................................. (0.65)
NET ASSET VALUE END OF PERIOD....................................... $ 9.46
Total return (b).................................................... 9.88%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.52%
Total expenses excluding indirectly paid expenses................. --
Total expenses excluding waivers and reimbursements............... 1.99%
Net investment income............................................. 7.48%
Portfolio turnover rate............................................. 160%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $18,032
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD....................... $ 8.64 $ 8.60 $ 9.11 $ 9.05 $ 9.61
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... 0.71 0.72 0.67 0.69 0.72
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions............................................ 0.60 0.05 (0.45) 0.10 (0.45)
Total from investment operations.......................... 1.31 0.77 0.22 0.79 0.27
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.71) (0.72) (0.70) (0.73) (0.83)
In excess of net investment income........................ (0.01) (0.01) (0.03) 0 0
Total distributions....................................... (0.72) (0.73) (0.73) (0.73) (0.83)
NET ASSET VALUE END OF PERIOD............................. $ 9.23 $ 8.64 $ 8.60 $ 9.11 $ 9.05
Total return (b).......................................... 15.65% 9.42% 2.71% 9.13% 2.95%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................... 1.88% 2.00% 2.00% 1.92% 1.30%
Total expenses excluding indirectly paid expenses....... -- -- -- -- --
Total expenses excluding waivers and reimbursements..... 1.88% 2.06% 2.33% 2.19% 2.65%
Net investment income................................... 7.85% 8.42% 7.90% 7.88% 7.48%
Portfolio turnover rate................................... 90% 76% 107% 148% 208%
NET ASSETS END OF PERIOD (THOUSANDS)...................... $19,288 $20,227 $23,694 $30,337 $38,615
<CAPTION>
FEBRUARY 13, 1987
(COMMENCEMENT
OF OPERATIONS)
THROUGH
JULY 31, 1987
<S> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD....................... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... 0.17
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions............................................ (0.42)
Total from investment operations.......................... (0.25)
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.14)
In excess of net investment income........................ 0
Total distributions....................................... (0.14)
NET ASSET VALUE END OF PERIOD............................. $ 9.61
Total return (b).......................................... (2.50%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................... 1.00%(d)
Total expenses excluding indirectly paid expenses....... --
Total expenses excluding waivers and reimbursements..... 12.47%(d)
Net investment income................................... 6.86%(d)
Portfolio turnover rate................................... 14%
NET ASSETS END OF PERIOD (THOUSANDS)...................... $ 1,679
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
(e) The Fund changed its fiscal year end from July 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
KEYSTONE (logo and picture
INTERMEDIATE TERM BOND FUND of stars)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED JULY 31,
JUNE 30, 1997 (d) 1996 1995 1994 (c)
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 8.74 $ 8.89 $ 8.85 $ 9.47
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.47 0.52 0.56 0.49
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions.............................................. 0.20 (0.16) 0.02 (0.58)
Total from investment operations............................ 0.67 0.36 0.58 (0.09)
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.46) (0.51) (0.51) (0.49)
In excess of net investment income.......................... 0 0 (0.03) (0.03)
Tax basis return of capital................................. 0 0 0 (0.01)
Total distributions......................................... (0.46) (0.51) (0.54) (0.53)
NET ASSET VALUE END OF PERIOD............................... $ 8.95 $ 8.74 $ 8.89 $ 8.85
Total return (b)............................................ 7.81% 4.10% 6.87% (1.05%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.87%(a) 1.85% 1.75% 1.75%
Total expenses excluding indirectly paid expenses......... 1.85%(a) 1.83% -- --
Total expenses excluding waivers and reimbursements....... 2.35%(a) 2.32% 2.21% 2.36%
Net investment income..................................... 5.68%(a) 5.82% 6.38% 5.48%
Portfolio turnover rate..................................... 179% 231% 149% 280%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $11,368 $16,034 $17,985 $ 17,819
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING)
THROUGH
JULY 31, 1993
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 9.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.29
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions.............................................. 0.12
Total from investment operations............................ 0.41
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.29)
In excess of net investment income.......................... 0
Tax basis return of capital................................. 0
Total distributions......................................... (0.29)
NET ASSET VALUE END OF PERIOD............................... $ 9.47
Total return (b)............................................ 4.42%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.76%(a)
Total expenses excluding indirectly paid expenses......... --
Total expenses excluding waivers and reimbursements....... 2.71%(a)
Net investment income..................................... 5.67%(a)
Portfolio turnover rate..................................... 160%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $8,159
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) The Fund changed its fiscal year end from July 31 to June 30.
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED JULY 31,
JUNE 30, 1997 (d) 1996 1995 1994 (c)
<S> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD.......................... $ 8.74 $ 8.89 $ 8.85 $ 9.46
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................ 0.46 0.52 0.55 0.49
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions............................................... 0.20 (0.16) 0.03 (0.57)
Total from investment operations............................. 0.66 0.36 0.58 (0.08)
LESS DISTRIBUTIONS FROM:
Net investment income........................................ (0.46) (0.51) (0.51) (0.49)
In excess of net investment income........................... 0 0 (0.03) (0.03)
Tax basis return of capital.................................. 0 0 0 (0.01)
Total distributions.......................................... (0.46) (0.51) (0.54) (0.53)
NET ASSET VALUE END OF PERIOD................................ $ 8.94 $ 8.74 $ 8.89 $ 8.85
Total return (b)............................................. 7.70% 4.10% 6.87% (0.95%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................. 1.87%(a) 1.85% 1.75% 1.75%
Total expenses excluding indirectly paid expenses.......... 1.85%(a) 1.83% -- --
Total expenses excluding waivers and reimbursements........ 2.35%(a) 2.31% 2.23% 2.37%
Net investment income...................................... 5.68%(a) 5.82% 6.37% 5.44%
Portfolio turnover rate...................................... 179% 231% 149% 280%
NET ASSETS END OF PERIOD (THOUSANDS)......................... $ 7,259 $9,084 $10,185 $ 13,086
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING)
THROUGH
JULY 31, 1993
<S> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD.......................... $ 9.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................ 0.29
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions............................................... 0.11
Total from investment operations............................. 0.40
LESS DISTRIBUTIONS FROM:
Net investment income........................................ (0.29)
In excess of net investment income........................... 0
Tax basis return of capital.................................. 0
Total distributions.......................................... (0.29)
NET ASSET VALUE END OF PERIOD................................ $ 9.46
Total return (b)............................................. 4.31%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................. 1.77%(a)
Total expenses excluding indirectly paid expenses.......... --
Total expenses excluding waivers and reimbursements........ 2.61%(a)
Net investment income...................................... 5.61%(a)
Portfolio turnover rate...................................... 160%
NET ASSETS END OF PERIOD (THOUSANDS)......................... $7,522
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) The Fund changed its fiscal year end from July 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
(logo and picture EVERGREEN
of president) INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MAY 2, 1995
(COMMENCEMENT
TEN MONTHS OF CLASS OPERATIONS)
YEAR ENDED ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996 (c) AUGUST 31, 1995
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................... $ 9.99 $ 10.15 $ 9.95
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................. 0.55 0.46 0.19
Net realized and unrealized gain (loss) on investments................. 0.03 (0.16) 0.20
Total from investment operations....................................... 0.58 0.30 0.39
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (0.55) (0.46) (0.19)
Total distributions.................................................... (0.55) (0.46) (0.19)
NET ASSET VALUE END OF PERIOD.......................................... $ 10.02 $ 9.99 $10.15
Total return (b)....................................................... 6.00% 3.00% 3.90%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................................................... 0.86% 0.81%(a) 0.80%(a)
Total expenses excluding indirectly paid expenses.................... 0.86% -- --
Total expenses excluding waivers and reimbursements.................. 0.94% 1.06%(a) 1.34%(a)
Net investment income................................................ 5.47% 5.49%(a) 5.42%(a)
Portfolio turnover rate................................................ 68% 28% 45%
NET ASSETS END OF PERIOD (THOUSANDS)................................... $ 571 $ 497 $ 9
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from August 31 to June 30.
<TABLE>
<CAPTION>
FEBRUARY 9, 1996
(COMMENCEMENT
OF CLASS OPERATIONS)
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD....................................................... $ 9.99 $10.38
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................................................... 0.45 0.18
Net realized and unrealized gain (loss) on investments.................................... 0.04 (0.39)
Total from investment operations.......................................................... 0.49 (0.21)
LESS DISTRIBUTIONS FROM:
Net investment income..................................................................... (0.46) (0.18)
Total distributions....................................................................... (0.46) (0.18)
NET ASSET VALUE END OF PERIOD............................................................. $ 10.02 $ 9.99
Total return (b).......................................................................... 5.03% (1.99)%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................................................... 1.81% 1.80%(a)
Total expenses excluding indirectly paid expenses....................................... 1.81% --
Total expenses excluding waivers and reimbursements..................................... 1.89% 1.91%(a)
Net investment income................................................................... 4.53% 4.62%(a)
Portfolio turnover rate................................................................... 68% 28%
NET ASSETS END OF PERIOD (THOUSANDS)...................................................... $ 742 $ 359
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
EVERGREEN
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
(logo and picture of
FINANCIAL HIGHLIGHTS (CONTINUED) George
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) Washington)
<TABLE>
<CAPTION>
APRIL 10, 1996
(COMMENCEMENT
OF CLASS OPERATIONS)
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD....................................................... $ 9.99 $10.01
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................................................... 0.40 0.11
Net realized and unrealized gain (loss) on investments.................................... 0.09 (0.02)
Total from investment operations.......................................................... 0.49 0.09
LESS DISTRIBUTIONS FROM:
Net investment income..................................................................... (0.46) (0.11)
Total distributions....................................................................... (0.46) (0.11)
NET ASSET VALUE END OF PERIOD............................................................. $ 10.02 $ 9.99
Total return (b).......................................................................... 5.03% 0.89%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................................................... 1.81% 1.80%(a)
Total expenses excluding indirectly paid expenses....................................... 1.81% --
Total expenses excluding waivers and reimbursements..................................... 1.90% 1.91%(a)
Net investment income................................................................... 4.53% 4.47%(a)
Portfolio turnover rate................................................................... 68% 28%
NET ASSETS END OF PERIOD (THOUSANDS)...................................................... $ 12 $ 32
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED AUGUST 31,
JUNE 30, 1997 JUNE 30, 1996 (b) 1995 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 9.99 $ 10.15 $ 9.92 $ 10.61 $ 10.41
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.56 0.46 0.55 0.54 0.57
Net realized and unrealized gain
(loss) on investments............... 0.03 (0.16) 0.23 (0.64) 0.24
Total from investment operations...... 0.59 0.30 0.78 (0.10) 0.81
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.56) (0.46) (0.55) (0.54) (0.58)
Net realized gains on investments..... 0 0 0 (0.05) (0.03)
Total distributions................... (0.56) (0.46) (0.55) (0.59) (0.61)
NET ASSET VALUE END OF PERIOD......... $ 10.02 $ 9.99 $ 10.15 $ 9.92 $ 10.61
Total return.......................... 6.08% 3.00% 8.16% (0.99%) 8.03%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.81% 0.80%(a) 0.70% 0.55% 0.55%
Total expenses excluding indirectly
paid expenses..................... 0.81% -- -- -- --
Total expenses excluding waivers and
reimbursements.................... 0.89% 0.87%(a) 0.84% 0.82% 0.83%
Net investment income............... 5.52% 5.47%(a) 5.54% 5.22% 5.48%
Portfolio turnover rate............... 68% 28% 45% 45% 31%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $71,588 $87,004 $106,066 $106,448 $119,172
<CAPTION>
NOVEMBER 1, 1991
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
AUGUST 31, 1992
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.48
Net realized and unrealized gain
(loss) on investments............... 0.40
Total from investment operations...... 0.88
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.47)
Net realized gains on investments..... 0
Total distributions................... (0.47)
NET ASSET VALUE END OF PERIOD......... $ 10.41
Total return.......................... 9.04%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.55%(a)
Total expenses excluding indirectly
paid expenses..................... --
Total expenses excluding waivers and
reimbursements.................... 0.86%(a)
Net investment income............... 5.68%(a)
Portfolio turnover rate............... 47%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 87,648
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year end from August 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
(logo and picture of EVERGREEN
flag) SHORT-INTERMEDIATE BOND FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, ENDED DECEMBER 31,
1997 1996 JUNE 30, 1995 (c) 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 9.82 $ 10.02 $ 9.52 $ 10.42 $ 10.41
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.63 0.63 0.32 0.65 0.65
Net realized and unrealized gain (loss) on investments.............. 0.02 (0.19) 0.50 (0.91) 0.19
Total from investment operations.................................... 0.65 0.44 0.82 (0.26) 0.84
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.64) (0.64) (0.32) (0.64) (0.65)
In excess of net investment income.................................. 0 0 0 0 0
Net realized gains on investments................................... 0 0 0 0 (0.18)
Total distributions................................................. (0.64) (0.64) (0.32) (0.64) (0.83)
NET ASSET VALUE END OF PERIOD....................................... $ 9.83 $ 9.82 $ 10.02 $ 9.52 $ 10.42
Total return (b).................................................... 6.77% 4.45% 8.77% (2.57%) 8.29%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 0.72% 0.79% 0.77%(a) 0.75% 0.93%
Total expenses excluding indirectly paid expenses................. 0.72% -- -- -- --
Total expenses excluding waivers and reimbursements............... -- -- -- -- --
Net investment income............................................. 6.37% 6.35% 6.58%(a) 6.46% 6.15%
Portfolio turnover rate............................................. 45% 76% 34% 48% 73%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $17,703 $18,630 $18,898 $19,127 $22,865
</TABLE>
<TABLE>
<CAPTION>
JANUARY 28, 1989
(COMMENCEMENT OF
CLASS
YEAR ENDED NINE MONTHS OPERATIONS)
DECEMBER 31, ENDED YEAR ENDED THROUGH
1992 1991 DECEMBER 31, 1990 (d) MARCH 31, 1990 MARCH 31, 1989
<S> <C> <C> <C> <C> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD.......... $ 10.54 $ 9.99 $ 9.72 $ 9.50 $ 9.70
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................ 0.71 0.73 0.55 0.79 0.10
Net realized and unrealized gain (loss) on
investments................................ (0.06) 0.60 0.24 0.20 (0.14)
Total from investment operations............. 0.65 1.33 0.79 0.99 (0.04)
LESS DISTRIBUTIONS FROM:
Net investment income........................ (0.67) (0.70) (0.52) (0.77) (0.16)
In excess of net investment income........... 0 (0.01) 0 0 0
Net realized gains on investments............ (0.11) (0.07) 0 0 0
Total distributions.......................... (0.78) (0.78) (0.52) (0.77) (0.16)
NET ASSET VALUE END OF PERIOD................ $ 10.41 $ 10.54 $ 9.99 $ 9.72 $ 9.50
Total return (b)............................. 6.39% 13.74% 8.31% 10.51% (0.31%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................. 0.90% 0.80% 1.01%(a) 1.00% 1.78%(a)
Total expenses excluding indirectly paid
expenses................................. -- -- -- -- --
Total expenses excluding waivers and
reimbursements........................... -- 0.89% 1.82%(a) 1.50% --
Net investment income...................... 6.79% 7.30% 7.53%(a) 7.57% 6.10%(a)
Portfolio turnover rate...................... 66% 53% 27% 32% 18%
NET ASSETS END OF PERIOD (THOUSANDS)......... $21,488 $17,680 $11,765 $6,496 $ 11,580
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
(d) The Fund changed its fiscal year end from March 31 to December 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE BOND FUND
(logo and picture
FINANCIAL HIGHLIGHTS (CONTINUED) of flag)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, ENDED DECEMBER 31,
1997 1996 JUNE 30, 1995 (c) 1994
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD............ $ 9.84 $ 10.04 $ 9.54 $ 10.44
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................... 0.54 0.55 0.28 0.58
Net realized and unrealized gain (loss) on
investments.................................. 0.01 (0.19) 0.50 (0.92)
Total from investment operations............... 0.55 0.36 0.78 (0.34)
LESS DISTRIBUTIONS FROM:
Net investment income.......................... (0.54) (0.56) (0.28) (0.56)
Net realized gains on investments.............. 0 0 0 0
Total distributions............................ (0.54) (0.56) (0.28) (0.56)
NET ASSET VALUE END OF PERIOD.................. $ 9.85 $ 9.84 $ 10.04 $ 9.54
Total return (b)............................... 5.78% 3.62% 8.31% (3.33%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................... 1.62% 1.69% 1.67%(a) 1.50%
Total expenses excluding indirectly paid
expenses................................... 1.62% -- -- --
Net investment income........................ 5.48% 5.45% 5.68%(a) 5.75%
Portfolio turnover rate........................ 45% 76% 34% 48%
NET ASSETS END OF PERIOD (THOUSANDS)........... $22,237 $21,006 $17,366 $17,625
<CAPTION>
JANUARY 25, 1993
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1993
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD............ $10.57
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................... 0.58
Net realized and unrealized gain (loss) on
investments.................................. 0.05
Total from investment operations............... 0.63
LESS DISTRIBUTIONS FROM:
Net investment income.......................... (0.58)
Net realized gains on investments.............. (0.18)
Total distributions............................ (0.76)
NET ASSET VALUE END OF PERIOD.................. $10.44
Total return (b)............................... 6.08%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................... 1.57%(a)
Total expenses excluding indirectly paid
expenses................................... --
Net investment income........................ 5.42%(a)
Portfolio turnover rate........................ 73%
NET ASSETS END OF PERIOD (THOUSANDS)........... $8,876
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JUNE 30, ENDED
1997 1996 JUNE 30, 1995 (c)
<S> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................. $ 9.84 $10.05 $ 9.55
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ 0.54 0.55 0.26
Net realized and unrealized gain (loss) on investments............... 0.01 (0.20) 0.50
Total from investment operations..................................... 0.55 0.35 0.76
LESS DISTRIBUTIONS FROM:
Net investment income................................................ (0.54) (0.56) (0.26)
Total distributions.................................................. (0.54) (0.56) (0.26)
NET ASSET VALUE END OF PERIOD........................................ $ 9.85 $ 9.84 $ 10.05
Total return (b)..................................................... 5.77% 3.51% 8.23%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................... 1.62% 1.69% 1.67%(a)
Total expenses excluding indirectly paid expenses.................. 1.62% -- --
Net investment income.............................................. 5.47% 5.46% 5.69%(a)
Portfolio turnover rate............................................ 45% 76% 34%
NET ASSETS END OF PERIOD (THOUSANDS)................................. $1,029 $1,155 $ 527
<CAPTION>
SEPTEMBER 6, 1994 (COMMENCEMENT OF CLASS OPERATION
THROUGH
DECEMBER 31, 1994
<S> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................. $ 9.85
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ 0.18
Net realized and unrealized gain (loss) on investments............... (0.30)
Total from investment operations..................................... (0.12)
LESS DISTRIBUTIONS FROM:
Net investment income................................................ (0.18)
Total distributions.................................................. (0.18)
NET ASSET VALUE END OF PERIOD........................................ $ 9.55
Total return (b)..................................................... (1.27%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................... 1.65%(a)
Total expenses excluding indirectly paid expenses.................. --
Net investment income.............................................. 5.87%(a)
Portfolio turnover rate............................................ 48%
NET ASSETS END OF PERIOD (THOUSANDS)................................. $ 512
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
EVERGREEN
(logo and a picture SHORT-INTERMEDIATE BOND FUND
of flag)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JUNE 30, ENDED YEAR ENDED DECEMBER 31,
1997 1996 JUNE 30, 1995 (b) 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 9.82 $ 10.02 $ 9.52 $ 10.43 $ 10.41 $ 10.54
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.64 0.64 0.33 0.65 0.69 0.70
Net realized and unrealized gain
(loss) on investments............... 0.02 (0.19) 0.49 (0.91) 0.19 (0.02)
Total from investment operations...... 0.66 0.45 0.82 (0.26) 0.88 0.68
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.65) (0.65) (0.32) (0.65) (0.68) (0.70)
In excess of net investment income.... 0 0 0 0 0 0
Net realized gains on investments..... 0 0 0 0 (0.18) (0.11)
Total distributions................... (0.65) (0.65) (0.32) (0.65) (0.86) (0.81)
NET ASSET VALUE END OF PERIOD......... $ 9.83 $ 9.82 $ 10.02 $ 9.52 $ 10.43 $ 10.41
Total return.......................... 6.88% 4.63% 8.80% (2.55%) 8.67% 6.64%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.62% 0.69% 0.67%(a) 0.65% 0.66% 0.69%
Total expenses excluding indirectly
paid expenses..................... 0.62% -- -- -- -- --
Net investment income............... 6.48% 6.45% 6.68%(a) 6.56% 6.41% 6.67%
Portfolio turnover rate............... 45% 76% 34% 48% 73% 66%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $357,706 $352,095 $ 347,050 $345,025 $376,445 $324,068
<CAPTION>
JANUARY 4, 1991
(COMMENCEMENT OF
CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1991
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.06
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.71
Net realized and unrealized gain
(loss) on investments............... 0.56
Total from investment operations...... 1.27
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.71)
In excess of net investment income.... (0.01)
Net realized gains on investments..... (0.07)
Total distributions................... (0.79)
NET ASSET VALUE END OF PERIOD......... $ 10.54
Total return.......................... 13.80%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.69%(a)
Total expenses excluding indirectly
paid expenses..................... --
Net investment income............... 7.12%(a)
Portfolio turnover rate............... 53%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 256,254
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year end from December 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
KEYSTONE
CAPITAL PRESERVATION AND INCOME FUND (logo and picture
of capital)
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE-RATE MORTGAGE SECURITIES-- 91.3%
<C> <S> <C>
FHLMC-- 44.4%
$1,291,156 FHLMC Pool #846163, Cap 13.08%,
Margin 1.99% + WTAL, Resets
Annually
7.66%, 7/1/30...................... $ 1,349,465
1,507,099 FHLMC Pool #605386, Cap 12.89%,
Margin 2.12% + CMT, Resets Annually
7.95%, 9/1/17...................... 1,582,212
1,637,125 FHLMC Pool #605343, Cap 13.60%,
Margin 2.13% + CMT, Resets Annually
7.83%, 3/1/19...................... 1,692,341
141,104 FHLMC Pool #645062, Cap 14.11%,
Margin 2.31% + CMT, Resets Annually
8.10%, 5/1/19...................... 146,461
145,638 FHLMC Pool #785114, Cap 13.23%,
Margin 2.13% + CMT, Resets Annually
7.81%, 7/1/19...................... 153,147
587,551 FHLMC Pool #865220, Cap 15.05%,
Margin 2.35% + WTAL, Resets
Triennially
8.37%, 4/1/20...................... 606,741
69,528 FHLMC Pool #785147, Cap 12.79%,
Margin 2.02% + CMT, Resets Annually
7.68%, 5/1/20...................... 72,069
725,921 FHLMC Pool #606541, Cap 13.56%,
Margin 2.04% + CMT, Resets Annually
7.71%, 3/1/21...................... 761,084
2,257,810 FHLMC Pool #845039, Cap 12.50%,
Margin 2.09% + CMT, Resets Annually
7.82%, 10/1/21..................... 2,338,245
1,369,007 FHLMC Pool #606679, Cap 12.07%,
Margin 2.16% + CMT, Resets Annually
7.97%, 10/1/21..................... 1,437,882
1,916,889 FHLMC Pool #845063, Cap 12.05%,
Margin 2.18% + CMT, Resets Annually
7.91%, 11/1/21..................... 1,991,168
2,263,629 FHLMC Pool #845070, Cap 11.84%,
Margin 2.12% + CMT, Resets Annually
7.80%, 1/1/22...................... 2,359,834
<CAPTION>
PRINCIPAL
AMOUNT VALUE
ADJUSTABLE-RATE MORTGAGE SECURITIES-- CONTINUED
<C> <S> <C>
FHLMC-- CONTINUED
$1,088,728 FHLMC Pool #845082, Cap 12.34%,
Margin 1.98% + CMT, Resets Annually
7.58%, 3/1/22...................... $ 1,122,071
4,051,462 FHLMC Pool #607352, Cap 13.62%,
Margin 2.17% + CMT, Resets Annually
7.84%, 4/1/22...................... 4,267,972
3,452,568 FHLMC Pool #846298, Cap 13.04%,
Margin 1.85% + CMT, Resets Annually
7.44%, 8/1/22...................... 3,589,048
TOTAL FHLMC.......................... 23,469,740
FNMA-- 46.9%
1,402,664 FNMA Pool #124497, Cap 12.97%,
Margin 2.80% + CMT, Resets Annually
7.78%, 9/1/22...................... 1,477,188
1,040,611 FNMA Pool #094564, Cap 15.86%,
Margin 1.98% + CMT, Resets Annually
7.70%, 1/1/16...................... 1,088,094
448,069 FNMA Pool #092086, Cap 15.47%,
Margin 2.08% + CMT, Resets Annually
7.85%, 10/1/16..................... 466,691
739,969 FNMA Pool #070033, Cap 14.35%,
Margin 1.75% + CMT, Resets Annually
7.50%, 10/1/17..................... 768,872
3,318,250 FNMA Pool #070119, Cap 12.01%,
Margin 2.00% + CMT, Resets Annually
7.68%, 11/1/17..................... 3,450,980
302,549 FNMA Pool #062610, Cap 12.75%,
Margin 2.13% + CMT, Resets Annually
7.75%, 6/1/18...................... 316,826
2,589,728 FNMA Pool #090678, Cap 13.14%,
Margin 2.18% + CMT, Resets Annually
7.91%, 9/1/18...................... 2,732,163
1,059,213 FNMA Pool #124015, Cap 13.24%,
Margin 2.57% + CMT, Resets Annually
7.57%, 11/1/18..................... 1,100,925
</TABLE>
(CONTINUED)
25
<PAGE>
KEYSTONE
CAPITAL PRESERVATION AND INCOME FUND
(logo and picture
of capital) SCHEDULE OF INVESTMENTS (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE-RATE MORTGAGE SECURITIES-- CONTINUED
FNMA-- CONTINUED
$ 311,452 FNMA Pool #114714, Cap
12.62%,
Margin 1.75% + CMT, Resets
Annually
7.47%, 3/1/19.............$ 323,814
307,339 FNMA Pool #105007, Cap
13.13%,
Margin 2.03% + CMT, Resets
Annually
7.85%, 7/1/19............. 318,240
1,274,325 FNMA Pool #095405, Cap
13.70%,
Margin 2.08% + CMT, Resets
Annually
7.83%, 12/1/19............ 1,321,316
162,598 FNMA Pool #391290, Cap
12.68%,
Margin 2.72% + CMT, Resets
Annually
7.74%, 2/1/17............. 167,096
539,539 FNMA Pool #102905, Cap
13.08%,
Margin 2.00% + CMT, Resets
Annually
7.74%, 7/1/20............. 567,358
481,731 FNMA Pool #142963, Cap
11.03%,
Margin 2.63% + CMT, Resets
Annually
7.45%, 1/1/22............. 498,591
6,564,994 FNMA Pool #124289, Cap
13.44%,
Margin 2.01% + CMT, Resets
Annually
7.70%, 9/1/21............. 6,889,171
990,524 FNMA Pool #124204, Cap
13.60%,
Margin 2.01% + CMT, Resets
Annually
7.72%, 1/1/22............. 1,038,970
252,868 FNMA Pool #070327, Cap
12.95%,
Margin 2.75% + CMT, Resets
Annually
7.60%, 6/1/19............. 262,510
<CAPTION>
PRINCIPAL
AMOUNT VALUE
ADJUSTABLE-RATE MORTGAGE SECURITIES-- CONTINUED
FNMA-- CONTINUED
$1,865,470 FNMA Pool #124945, Cap
12.73%,
Margin 2.11% + CMT, Resets
Annually
7.81%, 1/1/31.............$ 1,966,914
TOTAL FNMA.................. 24,755,719
TOTAL ADJUSTABLE-RATE
MORTGAGE SECURITIES
(COST-- $47,698,037)...... 48,225,459
FIXED RATE MORTGAGE SECURITIES-- 2.2%
FHLMC-- 0.1%
24,914 FHLMC CMO, Series 11 Class 11C,
(Est. Mat. 1998) (b)
9.50%, 4/15/19............
25,771
FNMA-- 2.1%
355,662 FNMA Pool #100051
9.50%, 4/1/05............. 371,778
462,692 FNMA Pool #002497
11.00%, 1/1/16............ 510,798
230,612 FNMA Pool #058442
11.00%, 1/1/18............ 254,462
TOTAL FNMA.................. 1,137,038
TOTAL FIXED RATE MORTGAGE
SECURITIES
(COST-- $1,158,066)....... 1,162,809
U.S. TREASURY NOTES-- 3.7%
(COST-- $1,958,136)
1,950,000 U.S. Treasury Notes
6.63%, 4/30/02............ 1,967,979
REPURCHASE AGREEMENT-- 1.4% (COST-- $742,000)
742,000 Keystone Joint Repurchase
Agreement (Investments in
repurchase agreements, in
a joint trading account,
6.04% dated 6/30/97, due
7/1/97, maturity value
$742,125 (a))............. 742,000
TOTAL INVESTMENTS
(COST-- $51,556,239)...... 98.6% 52,098,247
<C> <S> <C> <C>
OTHER ASSETS AND
LIABILITIES-- NET......... 1.4 721,440
NET ASSETS--................ 100.0% $52,819,687
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at June 30, 1997.
(b) The estimated maturity of a Collateralized Motgage Obligation (CMO) is based
on current and projected prepayment rates. Changes in interest rates can
cause the estimated maturity to differ from the listed dates.
LEGEND OF PORTFOLIO ABBREVIATIONS
CMT-- 1, 3, or 5 year Constant Maturity Treasury Index
FHLMC-- Federal Home Loan Mortgage Corporation
FNMA-- Federal National Mortgage Association
WTAL-- 1 or 3 year Weekly Treasury Average Lookback Index
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
EVERGREEN (logo and picture
INTERMEDIATE-TERM BOND FUND of star)
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
CORPORATE BONDS-- 19.2%
<C> <S> <C>
BANKS-- 5.0%
$ 500,000 Cenfed Financial Corp., Senior
Debenture (a),
11.17%, 12/15/01................. $ 533,750
800,000 Harris Bancorp.,
9.38%, 6/1/01.................... 868,088
2,000,000 NationsBank Corp.,
8.13%, 6/15/02................... 2,108,780
4,000,000 NBD Bank N.A.,
Subordinated Note,
8.25%, 11/1/24................... 4,461,932
7,972,550
FINANCE & INSURANCE-- 7.8%
6,500,000 Associates Corporation North
America, Note,
5.96%, 5/15/37................... 6,514,196
2,500,000 General Electric Capital Corp.,
6.29%, 12/15/07.................. 2,473,247
1,000,000 Goldman Sachs Group L.P. (a),
6.38%, 6/15/00................... 990,333
1,500,000 Grand Metropolitan Investment
Corp.,
6.50%, 9/15/99................... 1,504,614
1,000,000 KFW International Finance,
Guaranteed Note,
8.85%, 6/15/99................... 1,046,610
12,529,000
INDUSTRIAL SPECIALTY PRODUCTS & SERVICES-- 3.2%
2,000,000 Baxter International, Inc.,
9.25%, 12/15/99.................. 2,125,250
600,000 Deere & Co.,
8.95%, 6/15/19................... 673,289
2,000,000 Jet Equipment Trust, (a)
9.41%, 6/15/10................... 2,292,488
5,091,027
UTILITIES-- 3.2%
3,100,000 ALLTEL Corp.,
6.50%, 11/1/13................... 2,857,199
2,000,000 Carolina Power & Light Co.,
8.63%, 9/15/21................... 2,272,160
5,129,359
TOTAL CORPORATE BONDS
(COST $30,200,050)............... 30,721,936
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
MORTGAGE-BACKED SECURITIES-- 20.7%
Federal Home Loan Mortgage Corp.,
$ 2,521,993 6.55%, 9/1/26...................... $ 2,593,539
2,027,061 7.50%, 5/1/09...................... 2,058,734
1,210,345 8.00%, 10/1/25..................... 1,241,776
1,293,208 Federal National Mortgage
Association,
6.69%, 12/1/25................... 1,328,618
Government National Mortgage
Association,
1,400,389 6.00%, 6/20/26..................... 1,406,241
8,356,714 6.50%, 10/15/23-- 10/20/26......... 8,362,955
3,922,487 7.00%, 9/20/25-- 3/15/26........... 3,919,730
3,087,455 7.13%, 7/20/25..................... 3,182,360
3,599,131 7.50%, 9/15/23-- 3/15/26........... 3,616,198
3,144,302 8.00%, 10/15/24.................... 3,216,030
1,209,660 9.00%, 4/15/20-- 8/15/21........... 1,278,837
563,266 9.50%, 2/15/21..................... 607,799
414,383 Paine Webber Trust P-3,
9.00%, 10/1/12................... 417,549
TOTAL MORTGAGE-BACKED SECURITIES
(COST $33,064,340)............... 33,230,366
U. S. AGENCY OBLIGATIONS-- 3.7%
2,500,000 Farm Credit Systems Financial
Assistance Co.,
8.80%, 6/10/05................... 2,814,268
3,000,000 Federal Home Loan Bank,
Consolidated Bond,
7.70%, 9/20/04................... 3,174,930
TOTAL U. S. AGENCY OBLIGATIONS
(COST $5,651,434)................ 5,989,198
<CAPTION>
U. S. TREASURY OBLIGATIONS-- 28.0%
<C> <S> <C>
U.S. Treasury Bonds:
11,450,000 6.88%, 8/15/25..................... 11,489,354
4,500,000 7.50%, 11/15/16.................... 4,810,779
1,400,000 8.75%, 5/15/17..................... 1,684,812
3,950,000 8.88%, 8/15/17..................... 4,810,357
U.S. Treasury Notes:
1,400,000 5.13%, 12/31/98.................... 1,383,812
12,900,000 5.63%, 8/31/97..................... 12,904,024
6,100,000 6.38%, 1/15/99..................... 6,138,125
1,600,000 8.25%, 7/15/98..................... 1,639,000
TOTAL U.S. TREASURY OBLIGATIONS
(COST $44,311,257)............... 44,860,263
</TABLE>
(CONTINUED)
27
<PAGE>
EVERGREEN
INTERMEDIATE-TERM BOND FUND
(logo and picture of
star) SCHEDULE OF INVESTMENTS (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
YANKEE OBLIGATIONS-- 14.5%
Bayerische Landesbank Girozen
New York,
Tranche Sr 00001,
$2,500,000 6.38%, 8/31/00............ $2,492,183
Tranche Trust 00007,
2,000,000 6.20%, 2/9/06............. 1,907,344
3,000,000 Hydro-Quebec,
8.00%, 2/1/13........... 3,160,257
3,500,000 Japan Finance Corp. Municipal
Enterprises, Guaranteed Bond,
6.85%, 4/15/06.......... 3,504,071
2,000,000 Manitoba Province (Canada),
8.00%, 4/15/02.......... 2,109,140
800,000 Petro Canada Ltd.,
8.60%, 1/15/10.......... 907,463
5,300,000 Philips Electers N V,
Debenture,
7.13%, 5/15/25.......... 5,282,685
Svenska Handelsbanken,
2,000,000 8.13%, 8/15/07............ 2,123,682
1,000,000 8.35%, 7/15/04............ 1,075,661
700,000 Westpac Banking,
Subordinated Debenture,
9.13%, 8/15/01.......... 758,563
TOTAL YANKEE OBLIGATIONS
(COST $22,612,971)...... 23,321,049
PRINCIPAL
AMOUNT VALUE
<C> <C> <C>
REPURCHASE AGREEMENT-- 12.8%
$20,495,557 Donaldson, Lufkin &
Jenrette Securities
Corp, 5.90% dated
6/30/97, due 7/1/97,
maturity value
$20,498,916
(collateralized by
$20,553,000 U.S.
Treasury Notes, 5.00%,
due 1/31/98; value,
including accrued
interest $20,905,756)
(cost $20,495,557)...... $ 20,495,557
TOTAL INVESTMENTS--
(COST $156,335,609)..... 98.9% 158,618,369
OTHER ASSETS AND
LIABILITIES-- NET....... 1.1 1,807,246
NET ASSETS--.............. 100.0% $160,425,615
</TABLE>
(a) Securities that may be sold to qualified institutional buyers under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
KEYSTONE (logo and picture
INTERMEDIATE TERM BOND FUND of stars)
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES-- 6.1%
<C> <S> <C>
$1,000,000 Southern Pacific Secured Assets
Corporation, Series 1996-3 Class
A4,
7.60%, 10/25/27.................... $ 1,001,875
750,000 U.S. Home Equity Loan Asset Backed,
Series 1991-2 Class B,
9.13%, 4/15/21..................... 752,812
TOTAL ASSET-BACKED SECURITIES
(COST $1,748,125).................. 1,754,687
<CAPTION>
CORPORATE BONDS-- 31.2%
<C> <S> <C>
DIVERSIFIED-- 1.7%
500,000 Belo (A. H.) Corporation,
Senior Note,
7.13%, 6/1/07...................... 495,723
FINANCE & BANKING-- 15.3%
1,000,000 Amsouth Bancorporation,
Sub Debentures Puttable 2005,
6.75%, 11/1/25..................... 977,750
1,250,000 Chase Manhattan Corporation,
Subordinated Notes,
9.38%, 7/1/01...................... 1,358,712
1,000,000 CIT Group Holdings Incorporated,
Medium Term Note, Tranche Trust
00001,
9.25%, 3/15/01..................... 1,083,480
500,000 General Mtrs Acceptance Corporation,
Note,
7.13%, 5/1/01...................... 506,015
500,000 Prudential Insurance, Note (b),
7.13%, 7/1/07...................... 499,000
4,424,957
INDUSTRIALS-- 12.5%
700,000 Ford Motor Co., Debenture,
9.00%, 9/15/01..................... 756,252
800,000 Occidental Petroleum Corporation,
Medium Term Note, Tranche Trust
00134,
8.50%, 11/9/01..................... 847,336
1,000,000 Philip Morris Cos Inc., Senior Note,
7.20%, 2/1/07...................... 986,760
1,000,000 Transocean Offshore Inc, Note,
7.45%, 4/15/27..................... 1,028,740
3,619,088
TRANSPORTATION-- 1.7%
500,000 Norfolk Southern Corporation, Note,
7.05%, 5/1/37...................... 507,470
TOTAL CORPORATE BONDS
(COST $9,126,551).................. 9,047,238
<CAPTION>
PRINCIPAL
AMOUNT VALUE
COLLATERALIZED MORTGAGE OBLIGATIONS-- 27.5%
<C> <S> <C>
$ 500,000 Chase Commercial Mortgage Security
Corporation (a),
7.37%, 6/19/29..................... $ 508,281
478,831 Chase Mortgage Finance Corporation
(a)(b),
7.87%, 11/25/25.................... 468,207
443,548 Criimi Mae Financial Corporation (a),
7.00%, 1/1/33...................... 433,984
1,000,000 Federal National Mortgage Association
Guaranteed (a)(d),
3.26%, 8/25/23..................... 758,125
653,517 GE Capital Mortgage Services
Incorporated (a),
6.50%, 3/25/24..................... 626,355
500,000 Merrill Lynch Trust (a),
8.45%, 11/1/18..................... 525,000
700,000 Morgan Stanley Capital I
Incorporated,
1997 C1 Class B (a),
7.69%, 1/15/07..................... 724,719
953,300 Paine Webber Mortgage Acceptance
Corporation (a),
7.50%, 5/25/23..................... 951,214
1,250,000 Resolution Trust Corp. (a),
7.50%, 10/25/28.................... 1,256,055
698,466 Ryland Acceptance Corporation Four
(a),
7.95%, 1/1/19...................... 709,159
996,752 Independent National Mortgage Corp. (a)(b),
7.84%, 12/26/26...................... 1,000,413
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS
(COST $7,870,825).................. 7,961,512
<CAPTION>
U.S. AGENCY OBLIGATIONS-- 2.6% (COST $749,062)
<C> <S> <C>
750,000 Federal Home Loan Mortgage Corp,
Global Note,
6.70%, 1/5/07...................... 745,080
<CAPTION>
U.S. TREASURY OBLIGATIONS-- 6.2% (COST $1,796,303)
<C> <S> <C>
1,810,000 U.S. Treasury Notes,
6.50%, 10/15/06.................... 1,802,362
<CAPTION>
FOREIGN BONDS-- (US DOLLAR DENOMINATED)-- 15.4%
<C> <S> <C>
500,000 Export Import Bank Korea, Note,
7.10%, 3/15/07..................... 504,570
1,250,000 Fomento Economico Mexico,
Euro-Dollars,
9.50%, 7/22/97..................... 1,250,000
500,000 Korea Electric Power Corp, Debenture,
7.00%, 2/1/27...................... 490,205
</TABLE>
(CONTINUED)
29
<PAGE>
KEYSTONE
INTERMEDIATE TERM BOND FUND
(logo and picture
of stars) SCHEDULE OF INVESTMENTS (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
FOREIGN BONDS-- (US DOLLAR DENOMINATED)--
CONTINUED
<C> <S> <C>
$1,000,000 Southern Peru Limited,
Secured Export Note (b),
7.90%, 5/30/07.............$1,019,400
1,200,000 Telebras,
10.38%, 9/9/97............. 1,210,500
TOTAL FOREIGN BONDS--
(US DOLLAR DENOMINATED)
(COST $4,453,359).......... 4,474,675
FOREIGN BONDS-- (NON-US DOLLAR DENOMINATED)-- 8.8%
1,150,000 Canada Government,
CAD Canadian Series A79,
8.75%, 12/1/05............. 967,917
3,698,000 Denmark Kingdom,
DKK 7.00%, 11/15/07..............585,061
<CAPTION>
PRINCIPAL
AMOUNT VALUE
FOREIGN BONDS-- (NON-US DOLLAR DENOMINATED)--
CONTINUED
1,575,000 Germany Federal Republic,
DEM 6.88%, 5/12/05............... 986,125
18,000 Nykredit,
DKK 6.00%, 10/1/26............... 2,463
TOTAL FOREIGN BONDS--
(NON-US DOLLAR DENOMINATED)
(COST $2,689,307).......... 2,541,566
REPURCHASE AGREEMENT-- 0.8%
$ 243,000 Keystone Joint Repurchase
Agreement, (Investments in
repurchase agreements, in a
joint trading account,
6.04% dated 6/30/97, due
7/1/97, maturity value
$243,043(c))
(cost $243,000)............ 243,000
TOTAL INVESTMENTS--
(COST $28,676,532)......... 98.6% 28,570,120
OTHER ASSETS AND
LIABILITIES-- NET.......... 1.4 397,464
NET ASSETS--................. 100.0% $28,967,584
</TABLE>
(a) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected prepayment rates. Changes in interest rates
can cause the estimated maturity to differ from the listed date.
(b) Securities that may be sold to qualified institutional buyers under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
(c) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at June 30, 1997.
(d) Inverse floater, resets monthly.
LEGEND OF PORTFOLIO ABBREVIATIONS
CAD-- Canadian Dollar
DKK-- Danish Kroner
DEM-- German Deutschemark
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
NET UNREALIZED
EXCHANGE U.S. $ VALUE AT IN EXCHANGE APPRECIATION/
DATE JUNE 30, 1997 FOR U.S. $ (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to
Buy:
Contracts to Receive
8/12/97 1,150,000 Deutsche Marks $ 661,452 679,790 $(18,338)
Forward Foreign Currency Exchange Contracts to
Sell:
Contracts to Deliver
8/27/97 1,324,225 Canadian Dollars 962,359 970,947 8,588
8/12/97 2,860,000 Deutsche Marks 1,645,000 1,675,255 30,255
8/20/97 4,041,900 Danish Krone 610,524 627,098 16,574
$ 55,417
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
EVERGREEN (logo and picture
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND of George
Washington)
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES-- 19.4%
<C> <S> <C>
$5,000,000 Federal Home Loan Mortgage Corp.,
5.60%, 2/15/13..................... $ 4,975,120
4,250,909 Federal Home Loan Mortgage Corp.
Gold,
9.00%, 1/1/17...................... 4,552,550
3,688,718 Federal National Mortgage Assn.,
7.00%, 3/1/24...................... 3,639,285
1,000,000 U.S. Department of Veteran Affairs,
7.00%, 5/15/12..................... 1,002,350
TOTAL MORTGAGE-BACKED SECURITIES
(COST $14,039,691)................. 14,169,305
<CAPTION>
U.S. AGENCY OBLIGATIONS-- 10.4%
<C> <S> <C>
1,300,000 Federal Home Loan Bank,
8.60%, 1/25/00..................... 1,370,776
Federal National Mortgage Assn.,
2,000,000 7.50%, 2/11/02....................... 2,077,826
2,000,000 7.875%, 2/24/05...................... 2,137,652
2,000,000 Tennessee Valley Authority,
6.375%, 6/15/05.................... 1,960,340
TOTAL U.S. AGENCY OBLIGATIONS
(COST $7,352,820).................. 7,546,594
<CAPTION>
U.S. TREASURY OBLIGATIONS-- 77.9%
<C> <S> <C>
U.S. Treasury Notes:
4,500,000 5.50%, 2/28/99....................... 4,463,437
6,800,000 5.88%, 1/31/99....................... 6,787,250
500,000 6.00%, 11/30/97...................... 500,937
3,400,000 6.00%, 9/30/98....................... 3,404,250
3,500,000 6.13%, 12/31/01...................... 3,467,188
4,000,000 6.25%, 7/31/98....................... 4,018,748
4,000,000 6.38%, 7/15/99....................... 4,023,748
<CAPTION>
PRINCIPAL
AMOUNT VALUE
U.S. TREASURY OBLIGATIONS-- CONTINUED
<C> <S> <C>
U.S. Treasury Notes-- continued
$3,000,000 6.50%, 4/30/99....................... $ 3,023,436
3,000,000 6.63%, 6/30/01....................... 3,030,936
1,000,000 6.75%, 4/30/00....................... 1,013,437
4,300,000 7.00%, 7/15/06....................... 4,424,967
4,000,000 7.50%, 10/31/99...................... 4,115,000
2,000,000 7.50%, 11/15/01...................... 2,085,000
2,000,000 7.50%, 5/15/02....................... 2,093,124
3,250,000 7.50%, 2/15/05....................... 3,439,920
1,700,000 7.88%, 4/15/98....................... 1,728,155
3,500,000 7.88%, 11/15/04...................... 3,776,717
1,300,000 8.50%, 11/15/00...................... 1,386,531
TOTAL U. S. TREASURY OBLIGATIONS
(COST $56,635,374)................. 56,782,781
<CAPTION>
REPURCHASE AGREEMENT-- 1.4%
<C> <S> <C>
1,039,957 Donaldson, Lufkin & Jenrette
Securities Corp., 5.90% dated
6/30/97, due 7/1/97, maturity value
$1,040,127 (collateralized by
$347,000 U.S. Treasury Bonds,
11.25%, due 2/15/15; $540,000 U.S.
Treasury Bills, due 7/3/97; value,
including accrued interest
$1,061,419)
(cost $1,039,957).................. 1,039,957
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $79,067,842)......... 109.1% 79,538,637
OTHER ASSETS AND
LIABILITIES-- NET.......... (9.1) (6,625,429)
NET ASSETS--................. 100.0% $72,913,208
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
(logo and picture of EVERGREEN
a flag) SHORT-INTERMEDIATE BOND FUND
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES-- 12.2%
<C> <S> <C>
$ 4,334,324 Advanta Home Equity Loan Trust,
7.20%, 11/25/08.................. $ 4,379,662
541,975 Bank of West Trust,
9.50%, 2/15/05................... 547,075
1,750,000 Case Equipment Loan Trust,
6.45%, 9/15/02................... 1,719,865
2,000,000 EQCC Home Equity Loan Trust,
5.82%, 9/15/09................... 1,983,940
3,309,037 FCC Grantor Trust,
9.00%, 7/15/97................... 3,306,489
2,020,649 First Bank Auto Receivable,
8.30%, 1/15/00................... 2,051,646
3,082,064 First Security Auto Grantor Trust,
6.25%, 1/15/01................... 3,099,016
483,220 Fleet Financial Home Equity Trust,
6.70%, 1/16/06-- 10/15/06........ 485,893
6,439,643 Fleetwood Credit Grantor Trust,
4.95%, 8/15/08................... 6,334,483
7,500,000 Household Affinity Credit Card
Master Trust,
7.20%, 12/15/99.................. 7,567,650
1,259,186 SCFC Recreational Vehicle Loan
Trust,
7.25%, 9/15/06................... 1,267,887
Western Financial Grantor Trust:
4,828,859 5.88%, 3/1/02...................... 4,819,684
2,179,177 6.20%, 2/1/02...................... 2,188,155
9,000,000 Xerox Rental Equipment Trust (a),
6.20%, 12/26/05.................. 8,956,406
TOTAL ASSET-BACKED SECURITIES
(COST $48,706,732)............... 48,707,851
<CAPTION>
CORPORATE BONDS-- 24.8%
<C> <S> <C>
BANKS-- 7.5%
3,400,000 Abbey National Plc,
6.69%, 10/17/05.................. 3,330,909
3,350,000 Amsouth Bancorporation,
6.75%, 11/1/25................... 3,287,057
3,000,000 Cenfed Financial Corp. (a),
11.17%, 12/15/01................. 3,202,500
2,000,000 Chase Manhattan Corporation,
8.00%, 5/15/04................... 2,046,792
First Chicago Corp.:
4,000,000 9.00%, 6/15/99..................... 4,187,408
2,000,000 9.20%, 12/17/01.................... 2,180,510
5,000,000 First Security Corp.,
6.40%, 2/10/03................... 4,854,390
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS-- CONTINUED
<C> <S> <C>
BANKS-- CONTINUED
$ 6,000,000 National Bank of Canada,
8.13%, 8/15/04................... $ 6,316,668
500,000 Security Pacific Corp.,
10.45%, 5/8/01................... 559,918
29,966,152
ENERGY-- 0.5%
2,000,000 Ras Laffan Liquefied Natural Gas
(a),
7.63%, 9/15/06................... 2,033,704
FINANCE & INSURANCE-- 13.4%
2,000,000 American Express Credit Corp.,
6.25%, 8/10/05................... 1,981,028
3,000,000 Associated P&C Holdings, Inc. (a),
6.75%, 7/15/03................... 2,893,680
3,000,000 Bear Stearns Co., Inc.,
7.63%, 4/15/00................... 3,075,390
1,000,000 Horace Mann Educators Corp.,
6.63%, 1/15/06................... 963,587
Lehman Brothers Holdings, Inc.:
5,000,000 6.63%, 11/15/00.................... 4,979,145
2,500,000 6.84%, 10/7/99..................... 2,510,392
5,000,000 8.88%, 3/1/02...................... 5,357,505
Metropolitan Life Insurance Co.
(a):
5,000,000 6.30%, 11/1/03..................... 4,800,750
5,000,000 7.00%, 11/1/05..................... 4,934,405
5,000,000 Money Store, Inc.,
7.88%, 9/15/00................... 5,090,000
6,000,000 Progressive Corp., Ohio,
6.60%, 1/15/04................... 5,870,634
7,000,000 Salomon Incorporated,
7.20%, 2/1/04.................... 6,978,097
4,000,000 Traveler's Group, Inc.,
6.88%, 6/1/25.................... 3,991,232
53,425,845
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 2.7%
5,000,000 Boral Limited Australia Co.,
7.90%, 11/19/99.................. 5,151,045
5,000,000 GTE Corp.,
10.25%, 11/1/20.................. 5,720,350
10,871,395
TRANSPORTATION-- 0.7%
2,500,000 Continental Airlines, Inc. (a),
7.46%, 4/1/13.................... 2,523,495
TOTAL CORPORATE BONDS
(COST $98,853,357)............... 98,820,591
</TABLE>
(CONTINUED)
32
<PAGE>
EVERGREEN (logo and picture of
SHORT-INTERMEDIATE BOND FUND flag)
SCHEDULE OF INVESTMENTS (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
MORTGAGE-BACKED SECURITIES-- 39.5%
AFC Home Equity Loan Trust:
$ 275,254 6.60%, 10/26/26.................... $ 274,973
153,907 8.05%, 4/27/26..................... 155,624
3,150,000 Chase Commercial Mortgage Security Corp.,
6.90%, 11/19/28.................... 3,075,455
3,139,786 CMC Securities Corp.,
10.00%, 7/25/23.................. 3,322,688
2,500,000 DLJ Mortgage Acceptance Corp.,
7.95%, 5/25/23................... 2,587,109
Federal Home Loan Mortgage Corp.:
1,126,515 6.75%, 2/15/04..................... 1,129,703
4,000,000 6.80%, 10/15/05.................... 4,023,880
2,000,000 6.97%, 6/16/05..................... 1,995,910
2,945,000 7.30%, 7/30/01..................... 2,946,832
9,833,952 7.40%, 10/15/05.................... 9,938,340
2,200,000 7.99%, 3/23/05..................... 2,217,195
391,210 10.50%, 9/1/15..................... 430,820
Federal Housing Administration-
Puttable Project Loans:
GMAC 56,
4,017,498 7.43%, 11/1/22..................... 4,057,299
Merrill Lynch 199,
4,672,669 8.43%, 12/31/99.................... 4,859,356
Reilly 18,
2,939,118 6.88%, 4/1/15...................... 2,924,422
Reilly 55,
1,571,878 7.43%, 3/1/24...................... 1,589,591
Reilly 64,
10,310,265 7.43%, 1/1/24...................... 10,421,616
USGI,
5,331,922 7.43%, 7/1/22...................... 5,394,380
Federal National Mortgage Assn.:
1,500,000 5.30%, 8/25/98..................... 1,490,037
500,000 6.00%, 12/15/00.................... 491,826
2,766,670 6.23%, 12/25/25.................... 2,772,987
12,000,000 6.60%, 2/14/02..................... 11,981,244
7,500,000 6.64%, 6/19/00..................... 7,502,768
5,000,000 7.11%, 8/7/01...................... 4,995,665
2,500,000 7.65%, 5/4/05...................... 2,515,170
2,100,000 8.00%, 11/25/06.................... 2,176,257
9,000,000 8.10%, 4/25/25..................... 9,343,260
9,518,330 11.00%, 1/1/99..................... 10,749,764
38,645 14.00%, 6/1/11..................... 44,743
5,000,000 Federal National Mortgage Assn.,
Medium Term Note,
6.02%, 4/14/00................... 4,997,500
1,521,066 GCC Second Mortgage Trust,
10.00%, 7/15/05.................. 1,551,275
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
MORTGAGE-BACKED SECURITIES-- CONTINUED
$ 5,547,633 Government National
Mortgage Assn.,
7.50%, 11/20/08..........$5,621,389
4,000,000 Kidder Peabody Acceptance
Corp.,
6.65%, 2/1/06............ 3,987,612
Potomac Gurnee Finance
Corp. (a):
2,483,287 6.89%, 12/21/26.......... 2,455,573
2,500,000 7.00%, 12/21/26.......... 2,474,625
Prudential Home Mortgage
Securities:
5,419,711 6.30%, 5/25/99............. 5,417,705
4,788,537 6.50%, 10/25/08............ 4,649,286
4,302,927 Prudential Securities
Secured Financing Corp.,
8.12%, 2/17/25........... 4,427,548
6,305,826 Saxon Mortgage Securities
Corp.,
7.38%, 9/25/23........... 6,348,265
TOTAL MORTGAGE-BACKED
SECURITIES
(COST $156,702,480) 157,339,692
U.S. GOVERNMENT AGENCY OBLIGATIONS-- 3.7%
(cost $15,000,000)
15,000,000 Federal Farm Credit Bank
Consolidated Disc. Note,
6.82%, 6/15/01........... 14,919,195
U.S. TREASURY NOTES-- 19.3%
U.S. Treasury Notes:
35,000,000 5.13%, 2/28/98.............34,868,785
9,980,000 7.00%, 7/15/06.............10,270,039
2,000,000 7.13%, 9/30/99.............2,041,874
11,000,000 7.75%, 11/30/99............11,385,000
17,400,000 8.88%, 2/15/99.............18,161,250
TOTAL U. S. TREASURY NOTES
(COST $79,099,261).......76,726,948
REPURCHASE AGREEMENT-- 0.0%
143,985 Donaldson, Lufkin &
Jenrette Securities
Corp., 5.90% dated
6/30/97, due 7/1/97,
maturity value $144,009
(Collateralized by
$98,000 U.S. Treasury
Bonds, 11.25%, due
02/15/15; value,
including accrued
interest $147,318)
(cost $143,985).......... 143,985
TOTAL INVESTMENTS--
(COST $398,505,815)...... 99.5% 396,658,262
<S> <C> <C>
OTHER ASSETS AND
LIABILITIES-- NET........ 0.5 2,017,390
NET ASSETS--............... 100.0% $398,675,652
</TABLE>
(a) Securities that may be sold to qualified institutional buyers under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 1997
<TABLE>
<CAPTION> (picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
CAPITAL EVERGREEN KEYSTONE INTERMEDIATE
PRESERVATION INTERMEDIATE INTERMEDIATE GOVERNMENT
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
ASSETS
Investments at market value (identified
cost-- $51,556,239, $156,335,609, $28,676,532,
$79,067,842 and $398,505,815, respectively)........ $52,098,247 $158,618,369 $28,570,120 $79,538,637
Cash................................................. 16,515 283 1,758 20
Interest receivable.................................. 476,566 2,037,735 500,852 1,240,062
Receivable for investments sold...................... 135,662 0 1,388,640 0
Principal paydown receivable......................... 134,735 0 0 0
Receivable for Fund shares sold...................... 135,285 11,761 1,596 2,720
Unrealized appreciation on forward foreign currency
contracts.......................................... 0 0 55,417 0
Due from investment adviser.......................... 11,877 0 16,749 0
Prepaid expenses and other assets.................... 25,636 14,435 20,302 15,257
Total assets..................................... 53,034,523 160,682,583 30,555,434 80,796,696
LIABILITIES
Payable for investments purchased.................... 0 0 1,357,677 0
Payable for Fund shares redeemed..................... 80,751 75,274 99,777 7,807,242
Dividends payable.................................... 96,575 0 69,273 0
Distribution fee payable............................. 6,513 891 7,736 759
Due to related parties............................... 1,060 136,213 762 45,121
Unrealized depreciation on forward foreign currency
contracts.......................................... 0 0 18,338 0
Accrued expenses and other liabilities............... 29,937 44,590 34,287 30,366
Total liabilities................................ 214,836 256,968 1,587,850 7,883,488
NET ASSETS............................................. $52,819,687 $160,425,615 $28,967,584 $72,913,208
NET ASSETS REPRESENTED BY
Paid-in capital...................................... $59,369,842 $162,631,066 $32,844,616 $74,620,343
Undistributed net investment income (accumulated
distributions in excess of net investment
income)............................................ (95,813) (5,106) 242,787 (5,097)
Accumulated net realized loss on investments and
foreign currency related transactions.............. (6,996,350) (4,483,105) (4,050,016) (2,172,833)
Net unrealized appreciation (depreciation) on
investments and foreign currency related
transactions....................................... 542,008 2,282,760 (69,803) 470,795
Total net assets................................. $52,819,687 $160,425,615 $28,967,584 $72,913,208
NET ASSETS CONSIST OF
Class A.............................................. $15,751,098 $ 3,037,664 $10,340,563 $ 571,508
Class B.............................................. 32,963,820 1,012,650 11,368,453 741,650
Class C.............................................. 4,104,769 28,812 7,258,568 12,097
Class Y.............................................. -- 156,346,489 -- 71,587,953
$52,819,687 $160,425,615 $28,967,584 $72,913,208
SHARES OUTSTANDING
Class A.............................................. 1,607,197 298,775 1,157,517 57,029
Class B.............................................. 3,360,676 99,621 1,270,826 74,011
Class C.............................................. 418,845 2,834 811,659 1,207
Class Y.............................................. -- 15,380,764 -- 7,142,890
NET ASSET VALUE PER SHARE
Class A.............................................. $ 9.80 $ 10.17 $ 8.93 $ 10.02
Class A-- Offering price (based on sales charge of
3.25%)............................................. $ 10.13 $ 10.51 $ 9.23 $ 10.36
Class B.............................................. $ 9.81 $ 10.17 $ 8.95 $ 10.02
Class C.............................................. $ 9.80 $ 10.17 $ 8.94 $ 10.02
Class Y.............................................. -- $ 10.17 -- $ 10.02
<CAPTION> (picture of
flag)
SHORT-
INTERMEDIATE
FUND
<S> <C>
ASSETS
Investments at market value (identified
cost-- $51,556,239, $156,335,609, $28,676,532,
$79,067,842 and $398,505,815, respectively)........ $396,658,262
Cash................................................. 997
Interest receivable.................................. 5,731,695
Receivable for investments sold...................... 0
Principal paydown receivable......................... 0
Receivable for Fund shares sold...................... 271,580
Unrealized appreciation on forward foreign currency
contracts.......................................... 0
Due from investment adviser.......................... 0
Prepaid expenses and other assets.................... 56,168
Total assets..................................... 402,718,702
LIABILITIES
Payable for investments purchased.................... 0
Payable for Fund shares redeemed..................... 3,803,972
Dividends payable.................................... 0
Distribution fee payable............................. 16,078
Due to related parties............................... 186,244
Unrealized depreciation on forward foreign currency
contracts.......................................... 0
Accrued expenses and other liabilities............... 36,756
Total liabilities................................ 4,043,050
NET ASSETS............................................. $398,675,652
NET ASSETS REPRESENTED BY
Paid-in capital...................................... $416,539,149
Undistributed net investment income (accumulated
distributions in excess of net investment
income)............................................ (16,203)
Accumulated net realized loss on investments and
foreign currency related transactions.............. (15,999,741)
Net unrealized appreciation (depreciation) on
investments and foreign currency related
transactions....................................... (1,847,553)
Total net assets................................. $398,675,652
NET ASSETS CONSIST OF
Class A.............................................. $ 17,703,034
Class B.............................................. 22,237,190
Class C.............................................. 1,029,416
Class Y.............................................. 357,706,012
$398,675,652
SHARES OUTSTANDING
Class A.............................................. 1,800,182
Class B.............................................. 2,257,458
Class C.............................................. 104,492
Class Y.............................................. 36,392,215
NET ASSET VALUE PER SHARE
Class A.............................................. $ 9.83
Class A-- Offering price (based on sales charge of
3.25%)............................................. $ 10.16
Class B.............................................. $ 9.85
Class C.............................................. $ 9.85
Class Y.............................................. $ 9.83
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF OPERATIONS
Period Ended June 30, 1997
<TABLE>
<CAPTION>
(picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
CAPITAL EVERGREEN KEYSTONE INTERMEDIATE
PRESERVATION INTERMEDIATE INTERMEDIATE GOVERNMENT
FUND* FUND*** FUND** FUND***
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest (net of foreign withholding taxes of $0,
$3,364, $0, $0, $0, respectively)................... $3,173,485 $11,145,047 $2,343,240 $5,768,839
<CAPTION>
<S> <C> <C> <C> <C>
EXPENSES
Management fee........................................ 284,977 987,044 202,102 546,941
Distribution Plan expenses............................ 346,141 14,407 228,750 8,731
Transfer agent fees................................... 83,571 66,508 83,025 35,360
Custodian fees........................................ 51,296 82,597 39,350 51,941
Administrative services fees.......................... 34,481 69,536 11,267 38,083
Professional fees..................................... 23,622 17,269 26,033 16,910
Registration and filing fees.......................... 42,963 53,298 25,890 90,281
Trustees' fees and expenses........................... 0 4,106 0 4,047
Organization expenses................................. 0 986 0 1,035
Other................................................. 25,905 44,367 32,197 26,280
Fee waivers and/or expense reimbursement by
affiliates.......................................... (245,255) (5,480) (145,636) (73,557)
Total expenses...................................... 647,701 1,334,638 502,978 746,052
Less: Indirectly paid expenses........................ (11,507) (640) (6,039) (641)
Net expenses........................................ 636,194 1,333,998 496,939 745,411
NET INVESTMENT INCOME................................. 2,537,291 9,811,049 1,846,301 5,023,428
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY RELATED TRANSACTIONS
Net realized gain (loss) on:
Investments......................................... (101,173) (1,614,828) (207,489) (16,049)
Foreign currency related transactions............... 0 0 311,507 0
Net realized gain on investments and foreign currency
related transactions................................ (101,173) (1,614,828) 104,018 (16,049)
Net change in unrealized appreciation on:
Investments......................................... 279,120 2,782,704 589,966 219,766
Foreign currency related transactions............... 0 0 79,789 0
Net change in unrealized appreciation on investments
and foreign currency related transactions........... 279,120 2,782,704 669,755 219,766
Net realized and unrealized gain on investments and
foreign currency related transactions............... 177,947 1,167,876 773,773 203,717
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.......................................... $2,715,238 $10,978,925 $2,620,074 $5,227,145
<CAPTION>
(picture of
flag)
SHORT-
INTERMEDIATE
FUND***
<S> <C>
INVESTMENT INCOME
Interest (net of foreign withholding taxes of $0,
$3,364, $0, $0, $0, respectively)................... $28,349,460
EXPENSES
Management fee........................................ 1,998,063
Distribution Plan expenses............................ 251,695
Transfer agent fees................................... 96,271
Custodian fees........................................ 78,107
Administrative services fees.......................... 167,636
Professional fees..................................... 19,246
Registration and filing fees.......................... 57,771
Trustees' fees and expenses........................... 9,310
Organization expenses................................. 0
Other................................................. 47,316
Fee waivers and/or expense reimbursement by
affiliates.......................................... 0
Total expenses...................................... 2,725,415
Less: Indirectly paid expenses........................ (2,308)
Net expenses........................................ 2,723,107
NET INVESTMENT INCOME................................. 25,626,353
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY RELATED TRANSACTIONS
Net realized gain (loss) on:
Investments......................................... (2,101,788)
Foreign currency related transactions............... 0
Net realized gain on investments and foreign currency
related transactions................................ (2,101,788)
Net change in unrealized appreciation on:
Investments......................................... 2,666,233
Foreign currency related transactions............... 0
Net change in unrealized appreciation on investments
and foreign currency related transactions........... 2,666,233
Net realized and unrealized gain on investments and
foreign currency related transactions............... 564,445
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.......................................... $26,190,798
</TABLE>
* Nine months ended June 30, 1997. During the period, the Fund changed its
fiscal year end from September 30 to June 30.
** Eleven months ended June 30, 1997. During the period, the Fund changed its
fiscal year end from July 31 to June 30.
*** Year ended June 30, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF OPERATIONS
Prior Periods
<TABLE>
<CAPTION> (picture of (picture of
capital) stars)
CAPITAL KEYSTONE
PRESERVATION INTERMEDIATE
FUND* FUND**
<S> <C> <C>
INVESTMENT INCOME
Interest................................................................................... $5,536,633 $3,205,120
EXPENSES
Management fee............................................................................. 493,147 273,644
Distribution Plan expenses................................................................. 610,933 312,408
Transfer agent fees........................................................................ 139,248 106,796
Custodian fees............................................................................. 57,386 46,630
Administrative services fees............................................................... 24,176 23,963
Professional fees.......................................................................... 37,958 29,575
Registration and filing fees............................................................... 45,925 41,731
Organization expenses...................................................................... 3,896 0
Other...................................................................................... 34,903 27,827
Fee waivers and/or expense reimbursement by affiliates..................................... (341,016) (191,096)
Total expenses........................................................................... 1,106,556 671,478
Less: Indirectly paid expenses............................................................. (12,182) (6,981)
Net expenses............................................................................. 1,094,374 664,497
NET INVESTMENT INCOME...................................................................... 4,442,259 2,540,623
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS
Net realized gain (loss) on:
Investments.............................................................................. (549,777) (35,859)
Foreign currency related transactions.................................................... 0 62,463
Net realized gain (loss) on investments and foreign currency related transactions.......... (549,777) 26,604
Net change in unrealized appreciation (depreciation) on:
Investments.............................................................................. 648,310 (687,165)
Foreign currency related transactions.................................................... 0 (43,181)
Net change in unrealized appreciation (depreciation) on investments and foreign currency
related transactions..................................................................... 648,310 (730,346)
Net realized and unrealized gain (loss) on investments and foreign currency related
transactions............................................................................. 98,533 (703,742)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $4,540,792 $1,836,881
</TABLE>
* Year ended September 30, 1996.
** Year ended July 31, 1996.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Period Ended June 30, 1997
<TABLE>
<CAPTION> (picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
CAPITAL EVERGREEN KEYSTONE INTERMEDIATE
PRESERVATION INTERMEDIATE INTERMEDIATE GOVERNMENT
FUND* FUND*** FUND** FUND***
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income................................ $ 2,537,291 $ 9,811,049 $ 1,846,301 $ 5,023,428
Net realized gain (loss) on investments and foreign
currency related transactions...................... (101,173) (1,614,828) 104,018 (16,049)
Net change in unrealized appreciation (depreciation)
on investments and foreign currency related
transactions....................................... 279,120 2,782,704 669,755 219,766
<CAPTION>
Net increase in net assets resulting from
operations....................................... 2,715,238 10,978,925 2,620,074 5,227,145
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................ (710,409) (179,161) (666,667) (31,632)
Class B............................................ (1,412,040) (36,467) (719,674) (29,748)
Class C............................................ (160,768) (1,275) (417,078) (1,189)
Class Y............................................ 0 (9,653,448) 0 (4,959,781)
In excess of net investment income:
Class A............................................ (20,595) 0 0 (97)
Class B............................................ (40,936) 0 0 (91)
Class C............................................ (4,661) 0 0 (4)
Class Y............................................ 0 0 0 (15,207)
Tax basis return of capital
Class A............................................ 0 (1,220) 0 0
Class B............................................ 0 (248) 0 0
Class C............................................ 0 (9) 0 0
Class Y............................................ 0 (65,758) 0 0
Total distributions to shareholders................ (2,349,409) (9,937,586) (1,803,419) (5,037,749)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................ 8,631,265 50,138,853 3,559,906 35,487,793
Proceeds from reinvestment of distributions.......... 1,854,608 6,780,391 1,095,398 3,993,534
Payment for shares redeemed.......................... (28,964,306) (58,718,452) (14,580,292) (54,650,906)
Net increase (decrease) in net assets resulting
from capital share transactions.................. (18,478,433) (1,799,208) (9,924,988) (15,169,579)
Total increase (decrease) in net assets.......... (18,112,604) (757,869) (9,108,333) (14,980,183)
NET ASSETS
Beginning of period.................................. 70,932,291 161,183,484 38,075,917 87,893,391
END OF PERIOD........................................ $52,819,687 $160,425,615 $28,967,584 $72,913,208
Undistributed net investment income (accumulated
distributions in excess of net investment income).... $ (95,813) $ (5,106) $ 242,787 $ (5,097)
<CAPTION>
(picture of
flag)
SHORT-
INTERMEDIATE
FUND***
<S> <C>
OPERATIONS
Net investment income................................ $ 25,626,353
Net realized gain (loss) on investments and foreign
currency related transactions...................... (2,101,788)
Net change in unrealized appreciation (depreciation)
on investments and foreign currency related
transactions....................................... 2,666,233
Net increase in net assets resulting from
operations....................................... 26,190,798
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................ (1,217,283)
Class B............................................ (1,225,460)
Class C............................................ (58,085)
Class Y............................................ (23,369,583)
In excess of net investment income:
Class A............................................ 0
Class B............................................ 0
Class C............................................ 0
Class Y............................................ 0
Tax basis return of capital
Class A............................................ 0
Class B............................................ 0
Class C............................................ 0
Class Y............................................ 0
Total distributions to shareholders................ (25,870,411)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................ 122,641,025
Proceeds from reinvestment of distributions.......... 15,137,626
Payment for shares redeemed.......................... (132,309,835)
Net increase (decrease) in net assets resulting
from capital share transactions.................. 5,468,816
Total increase (decrease) in net assets.......... 5,789,203
NET ASSETS
Beginning of period.................................. 392,886,449
END OF PERIOD........................................ $398,675,652
Undistributed net investment income (accumulated
distributions in excess of net investment income).... $ (16,203)
</TABLE>
* Nine months ended June 30, 1997. During the period, the Fund changed its
fiscal year end from September 30 to June 30.
** Eleven months ended June 30, 1997. During the period, the Fund changed its
fiscal year end from July 31 to June 30.
*** Year ended June 30, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
37
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Fiscal Periods Ended 1996
<TABLE>
<CAPTION>
(picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
CAPITAL EVERGREEN KEYSTONE INTERMEDIATE
PRESERVATION INTERMEDIATE INTERMEDIATE GOVERNMENT
FUND* FUND** FUND*** FUND**
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income................................ $ 4,442,259 $ 5,797,073 $ 2,540,623 $ 4,606,598
Net realized gain (loss) on investments and foreign
currency related transactions...................... (549,777) 314,598 26,604 11,468
Net change in unrealized appreciation (depreciation)
on investments and foreign currency related
transactions....................................... 648,310 (3,327,986) (730,346) (1,507,190)
Net increase in net assets resulting from
operations....................................... 4,540,792 2,783,685 1,836,881 3,110,876
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................ (1,089,444) (35,386) (898,299) (23,774)
Class B............................................ (2,568,398) (2,841) (1,028,103) (2,363)
Class C............................................ (147,748) (169) (576,335) (255)
Class Y............................................ 0 (5,670,902) 0 (4,562,840)
Tax basis return of capital:
Class A............................................ (52,292) 0 0 0
Class B............................................ (123,279) 0 0 0
Class C............................................ (7,092) 0 0 0
Total distributions to shareholders................ (3,988,253) (5,709,298) (2,502,737) (4,589,232)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................ 12,691,883 38,531,458 10,120,565 13,828,502
Proceeds from shares issued in the acquisition of
Evergreen Managed Bond Fund........................ 0 79,773,557 0 0
Proceeds from reinvestment of distributions.......... 2,823,494 4,544,198 1,417,473 4,095,518
Payment for shares redeemed.......................... (30,181,809) (54,860,961) (15,524,524) (34,626,524)
Net increase (decrease) in net assets resulting
from capital share transactions.................. (14,666,432) 67,988,252 (3,986,486) (16,702,504)
Total increase (decrease) in net assets.......... (14,113,893) 65,062,639 (4,652,342) (18,180,860)
NET ASSETS
Beginning of period.................................. 85,046,184 96,120,845 42,728,259 106,074,251
END OF PERIOD........................................ $70,932,291 $161,183,484 $38,075,917 $87,893,391
Undistributed net investment income (accumulated
distributions in excess of net investment income).... $ (305,808) $ 87,592 $ (21,199) $ 17,332
<CAPTION>
(picture of
flag)
SHORT-
INTERMEDIATE
FUND****
<S> <C>
OPERATIONS
Net investment income................................ $ 24,943,586
Net realized gain (loss) on investments and foreign
currency related transactions...................... (4,715,061)
Net change in unrealized appreciation (depreciation)
on investments and foreign currency related
transactions....................................... (2,841,758)
Net increase in net assets resulting from
operations....................................... 17,386,767
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................ (1,165,625)
Class B............................................ (1,059,184)
Class C............................................ (49,329)
Class Y............................................ (23,005,091)
Tax basis return of capital:
Class A............................................ 0
Class B............................................ 0
Class C............................................ 0
Total distributions to shareholders................ (25,279,229)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................ 170,338,605
Proceeds from shares issued in the acquisition of
Evergreen Managed Bond Fund........................ 0
Proceeds from reinvestment of distributions.......... 18,879,027
Payment for shares redeemed.......................... (172,279,164)
Net increase (decrease) in net assets resulting
from capital share transactions.................. 16,938,468
Total increase (decrease) in net assets.......... 9,046,006
NET ASSETS
Beginning of period.................................. 383,840,443
END OF PERIOD........................................ $392,886,449
Undistributed net investment income (accumulated
distributions in excess of net investment income).... $ 98,373
</TABLE>
* Year ended September 30, 1996.
** Ten months ended June 30, 1996. The Fund changed its fiscal year end from
August 31 to June 30.
*** Year ended July 31, 1996.
**** Year ended June 30, 1996.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
38
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Prior Periods
<TABLE>
<CAPTION> picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
EVERGREEN KEYSTONE
CAPITAL INTERMEDIATE INTERMEDIATE INTERMEDIATE
PRESERVATION FUND FUND FUND GOVERNMENT FUND
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 AUGUST 31, 1995 JULY 31, 1995 AUGUST 31, 1995
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income................................. $ 5,308,068 $ 5,110,145 $ 2,911,914 $ 5,851,118
Net realized gain (loss) on investments and foreign
currency related transactions....................... (1,162,200) (741,577) (583,642) (1,236,390)
Net change in unrealized appreciation (depreciation)
on investments and futures contracts................ 1,169,382 4,454,061 628,176 3,611,699
Net increase in net assets resulting from
operations........................................ 5,315,250 8,822,629 2,956,448 8,226,427
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................. (909,585) (2,134) (1,002,996) (10,951)
Class B............................................. (3,706,229) 0 (1,010,554) 0
Class C............................................. (143,406) 0 (654,159) 0
Class Y............................................. 0 (5,105,153) 0 (5,850,108)
In excess of net investment income:
Class A............................................. (26,148) 0 (61,783) 0
Class B............................................. (106,543) 0 (62,249) 0
Class C............................................. (4,122) 0 (40,296) 0
Net realized gain on investments:
Class Y............................................. 0 (401,810) 0 0
Total distributions to shareholders................. (4,896,033) (5,509,097) (2,832,037) (5,861,059)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................. 28,808,789 16,277,483 8,978,216 19,842,837
Proceeds from shares issued in the acquisition of
Keystone America Capital Preservation and Income
Fund-- Class A...................................... 23,825,980 0 0 0
Proceeds from reinvestment of distributions........... 3,281,799 4,957,099 1,575,164 5,214,391
Payment for shares redeemed........................... (69,924,430) (20,151,849) (14,890,499) (27,796,468)
Net increase (decrease) in net assets resulting from
capital share transactions........................ (14,007,862) 1,082,733 (4,337,119) (2,739,240)
Total increase (decrease) in net assets........... (13,588,645) 4,396,265 (4,212,708) (373,872)
NET ASSETS
Beginning of period................................... 98,634,829 91,724,580 46,940,967 106,448,123
END OF PERIOD......................................... $ 85,046,184 $96,120,845 $42,728,259 $ 106,074,251
Accumulated distributions in excess of net investment
income................................................ $ (415,117) $ (183) $ (94,328) $ (34)
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Evergreen Keystone Short and Intermediate Term Bond Funds consist of
Keystone Capital Preservation and Income Fund ("Capital Preservation Fund"),
Evergreen Intermediate-Term Bond Fund ("Evergreen Intermediate Fund"), Keystone
Intermediate Term Bond Fund ("Keystone Intermediate Fund"), Evergreen
Intermediate-Term Government Securities Fund ("Intermediate Government Fund")
and Evergreen Short-Intermediate Bond Fund ("Short-Intermediate Fund"),
(collectively, the "Funds"), all of which are registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as diversified, open-end
management investment companies. The Evergreen Intermediate Fund and the
Intermediate Government Fund are separate series of The Evergreen Lexicon Fund
and Short-Intermediate Fund is a separate series of the Evergreen Investment
Trust.
The Funds offer Class A, Class B, Class C and/or Class Y shares. Class A shares
are sold with a maximum front-end sales charge of 3.25%. Class B and Class C
shares are sold without a front-end sales charge, but pay a higher ongoing
distribution fee than Class A. Class B shares are sold subject to a contingent
deferred sales charge that is payable upon redemption and decreases depending on
how long the shares have been held. Class C shares are sold subject to a
contingent deferred sales charge payable on shares redeemed within one year
after the month of purchase. Class B shares purchased after January 1, 1997 will
automatically convert to Class A shares after seven years. Class B shares
purchased prior to January 1, 1997 retain their existing conversion rights.
Class Y shares are sold at net asset value and are not subject to contingent
deferred sales charges or distribution fees. Class Y shares are sold only to
investment advisory clients of First Union and its affiliates, certain
institutional investors or Class Y shareholders of record of certain other funds
managed by First Union and its affiliates as of December 30, 1994.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
U.S. government obligations held by the Funds 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
Each Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held by the custodian on the Fund's behalf. Each
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, including
accrued interest. Each Fund will only enter into repurchase agreements with
banks and other financial institutions which are deemed by the investment
advisor to be creditworthy pursuant to guidelines established by the Board of
Trustees.
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Capital Preservation and Keystone Intermediate Funds, 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.
C. REVERSE REPURCHASE AGREEMENTS
To obtain short-term financing, Capital Preservation and Keystone Intermediate
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
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 Funds 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 securities transactions and foreign currency related transactions and
is included in realized gain (loss) on foreign currency related transactions.
Foreign currency transactions related to the difference between the amounts of
interest and dividends recorded on the books of the Fund and the amount actually
received is included in gross investment income. 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 investments.
40
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premium.
F. DISTRIBUTIONS
Distributions from net investment income for the Capital Preservation and
Keystone Intermediate Funds are declared daily and paid monthly. Distributions
from net investment income are declared and paid monthly for the Evergreen
Intermediate, Intermediate Government and Short-Intermediate Funds.
Distributions from net realized capital gains, if any, are paid at least
annually. Distributions to shareholders are recorded at the close of business on
the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment for mortgage
paydown gains (losses) and foreign securities transactions, if any.
G. CLASS ALLOCATIONS
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
H. ORGANIZATION EXPENSES
For the Evergreen Intermediate and Intermediate Government Funds, organization
expenses were amortized to operations over a five-year period on a straight-line
basis. During the year ended June 30, 1997, organization costs were fully
amortized for the Evergreen Intermediate and Intermediate Government Funds.
I. FEDERAL INCOME TAXES
The Funds have qualified and intend to continue to qualify as regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Funds will not incur any federal income tax liability since
they are expected to distribute all of their net investment company taxable
income, net tax-exempt income and net capital gains, if any, to their
shareholders. The Funds also intend to avoid any excise tax liability by making
the required distributions under the Code. Accordingly, no provision for federal
income taxes is required. To the extent that realized capital gains can be
offset by capital loss carryforwards, it is each Fund's policy not to distribute
such gains.
2. CAPITAL SHARE TRANSACTIONS
The Capital Preservation Fund and Keystone Intermediate Fund have unlimited
number of shares of beneficial interest with no par value authorized. The
Evergreen Intermediate Fund, Intermediate Government Fund and Short-Intermediate
Fund each have unlimited number of shares of beneficial interest with a par
value of $0.0001 authorized. Shares of beneficial interest of the Funds are
currently divided into Class A, Class B, Class C and/or Class Y. Transactions in
shares of the Funds were as follows:
CAPITAL PRESERVATION FUND
<TABLE>
<CAPTION>
DECEMBER 30, 1994
(COMMENCEMENT OF
NINE MONTHS ENDED YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 534,956 $ 5,229,171 808,295 $ 7,859,112 72,460 $ 699,481
Share issued in acquisition of Keystone America
Capital Preservation Income Fund.............. 0 0 0 0 2,506,041 23,825,980
Shares issued in reinvestment of
distributions................................. 61,902 604,810 89,475 865,840 71,420 689,075
Shares redeemed................................. (1,318,046) (12,878,080) (563,085) (5,471,951) (656,221) (6,023,682)
Net increase (decrease)......................... (721,188) $ (7,044,099) 334,685 $ 3,253,001 1,993,700 $ 19,190,854
</TABLE>
41
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CAPITAL PRESERVATION FUND-- continued
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS B
Shares sold..................................... 182,841 $ 1,788,928 282,004 $ 2,742,007 2,758,618 $ 26,668,622
Shares issued in reinvestment of
distributions................................. 114,536 1,119,992 187,040 1,829,883 257,649 2,480,740
Shares redeemed................................. (1,459,187) (14,270,487) (2,455,640) (23,865,587) (6,464,191) (62,204,625)
Net decrease.................................... (1,161,810) $(11,361,567) (1,986,596) $(19,293,697) (3,447,924) $(33,055,263)
CLASS C
Shares sold..................................... 164,962 $ 1,613,166 215,390 $ 2,090,764 150,700 $ 1,440,686
Shares issued in reinvestment of
distributions................................. 13,283 129,806 12,718 127,771 11,638 111,984
Shares redeemed................................. (185,566) (1,815,739) (86,982) (844,271) (176,498) (1,696,123)
Net increase (decrease)......................... (7,321) $ (72,767) 141,126 $ 1,374,264 (14,160) $ (143,453)
</TABLE>
EVERGREEN INTERMEDIATE FUND
<TABLE>
<CAPTION>
MAY 2, 1995
(COMMENCEMENT OF
YEAR ENDED TEN MONTHS ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 52,051 $ 529,465 292,734 $ 2,962,857 24,799 $ 255,892
Shares issued in reinvestment of
distributions................................. 17,590 178,344 3,368 34,080 209 2,134
Shares redeemed................................. (62,211) (632,271) (20,323) (206,789) (9,442) (96,968)
Net increase.................................... 7,430 $ 75,538 275,779 $ 2,790,148 15,566 $ 161,058
</TABLE>
<TABLE>
<CAPTION>
JANUARY 30, 1996
(COMMENCEMENT OF
YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS B
Shares sold..................................... 62,610 $ 633,834 40,844 $ 415,640
Shares issued in reinvestment of
distributions................................. 2,120 21,504 228 2,296
Shares redeemed................................. (4,937) (50,000) (1,244) (12,553)
Net increase.................................... 59,793 $ 605,338 39,828 $ 405,383
</TABLE>
<TABLE>
<CAPTION>
APRIL 29, 1996
(COMMENCEMENT OF
YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS C
Shares sold..................................... 490 $ 5,000 2,450 $ 24,797
Shares issued in reinvestment of
distributions................................. 126 1,282 16 167
Shares redeemed................................. (249) (2,514) 0 0
Net increase.................................... 367 $ 3,768 2,466 $ 24,964
</TABLE>
42
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EVERGREEN INTERMEDIATE FUND-- continued
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS Y
Shares sold..................................... 4,825,919 $ 48,970,554 3,399,442 $ 35,128,164 1,606,066 $ 16,021,590
Shares issued in acquisition of Evergreen
Managed Bond Fund............................. 0 0 7,674,423 79,773,557 0 0
Shares issued in reinvestment of
distributions................................. 649,188 6,579,261 438,427 4,507,655 498,736 4,954,965
Shares redeemed................................. (5,719,188) (58,033,667) (5,208,789) (54,641,619) (2,018,177) (20,054,880)
Net increase (decrease)......................... (244,081) $ (2,483,852) 6,303,503 $ 64,767,757 86,625 $ 921,675
</TABLE>
KEYSTONE INTERMEDIATE FUND
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JULY 31, 1996 JULY 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold........................................ 175,221 $ 1,566,271 258,497 $ 2,283,194 214,382 $ 1,875,188
Shares issued in reinvestment of distributions..... 45,592 404,429 52,934 469,775 61,155 533,202
Shares redeemed.................................... (547,872) (4,863,536) (465,961) (4,141,580) (449,814) (3,937,486)
Net decrease....................................... (327,059) $(2,892,836) (154,530) $(1,388,611) (174,277) $(1,529,096)
CLASS B
Shares sold........................................ 170,620 $ 1,528,256 555,555 $ 4,965,806 566,892 $ 4,978,695
Shares issued in reinvestment of distributions..... 46,270 411,336 63,537 565,232 66,016 576,332
Shares redeemed.................................... (779,593) (6,943,044) (808,199) (7,205,208) (624,636) (5,447,096)
Net increase (decrease)............................ (562,703) $(5,003,452) (189,107) $(1,674,170) 8,272 $ 107,931
CLASS C
Shares sold........................................ 52,022 $ 465,379 318,799 $ 2,871,565 243,954 $ 2,124,333
Shares issued in reinvestment of distributions..... 31,491 279,633 42,997 382,466 53,388 465,630
Shares redeemed.................................... (311,128) (2,773,712) (468,122) (4,177,736) (630,936) (5,505,917)
Net decrease....................................... (227,615) $(2,028,700) (106,326) $ (923,705) (333,594) $(2,915,954)
</TABLE>
INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
MAY 2, 1995
TEN MONTHS (COMMENCEMENT OF
YEAR ENDED ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 10,763 $ 107,284 64,791 $ 663,129 879 $ 8,925
Shares issued in reinvestment of
distributions................................. 2,429 24,330 1,503 15,239 0 0
Shares redeemed................................. (5,953) (59,462) (17,382) (175,816) 0 0
Net increase.................................... 7,239 $ 72,152 48,912 $ 502,552 879 $ 8,925
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 9, 1996
(COMMENCEMENT OF
YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS B
Shares sold..................................... 49,960 $ 500,124 35,925 $ 359,696
Shares issued in reinvestment of
distributions................................. 1,735 17,379 67 666
Shares redeemed................................. (13,674) (136,147) (2) (23)
Net increase.................................... 38,021 $ 381,356 35,990 $ 360,339
</TABLE>
43
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND-- continued
APRIL 10, 1996
(COMMENCEMENT OF
YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS C
Shares sold..................................... 2,288 $ 22,910 3,551 $ 35,538
Shares issued in reinvestment of
distributions................................. 85 967 26 254
Shares redeemed................................. (4,419) (44,414) (324) (3,205)
Net increase (decrease)......................... (2,046) $ (20,537) 3,253 $ 32,587
</TABLE>
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS Y
Shares sold..................................... 3,476,575 $ 34,857,475 1,257,974 $ 12,770,139 1,999,05 $ 19,833,912
Shares issued in reinvestment of
distributions................................. 394,427 3,950,858 402,054 4,079,359 526,254 5,214,391
Shares redeemed................................. (5,437,776) (54,410,883) (3,404,763) (34,447,480) (2,799,781) (27,796,468)
Net increase (decrease)......................... (1,566,774) $(15,602,550) 1,744,735 $ 17,597,982 (274,476) $ (2,748,165)
</TABLE>
SHORT-INTERMEDIATE FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold........................................................... 584,893 $ 5,786,371 417,422 $ 4,161,754
Shares issued in reinvestment of distributions........................ 93,998 924,863 91,045 906,558
Shares redeemed....................................................... (775,720) (7,650,833) (498,266) (4,979,754)
Net increase (decrease)............................................... (96,829) $ (939,599) 10,201 $ 88,558
CLASS B
Shares sold........................................................... 520,912 $ 5,138,212 844,991 $ 8,456,439
Shares issued in reinvestment of distributions........................ 87,527 862,791 74,101 739,247
Shares redeemed....................................................... (486,579) (4,795,124) (512,788) (5,128,366)
Net increase.......................................................... 121,860 $ 1,205,879 406,304 $ 4,067,320
CLASS C
Shares sold........................................................... 35,729 $ 354,646 94,089 $ 944,432
Shares issued in reinvestment of distributions........................ 4,508 44,442 3,083 30,731
Shares redeemed....................................................... (53,064) (524,077) (32,296) (321,263)
Net increase (decrease)............................................... (12,827) $ (124,989) 64,876 $ 653,900
CLASS Y
Shares sold........................................................... 11,302,391 $111,361,796 15,667,603 $156,775,980
Shares issued in reinvestment of distributions........................ 1,353,407 13,305,530 1,726,865 17,202,491
Shares redeemed....................................................... (12,121,462) (119,339,801) (16,165,702) (161,849,781)
Net increase.......................................................... 534,336 $ 5,327,525 1,228,766 $ 12,128,690
</TABLE>
44
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the year ended June 30, 1997:
<TABLE>
<CAPTION>
COST OF PURCHASES PROCEEDS FROM SALES
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
<CAPTION>
<S> <C> <C> <C> <C>
Capital Preservation Fund*............ $ 30,413,800 $ 0 $ 42,505,286 $ 0
Evergreen Intermediate Fund........... 108,340,939 24,077,086 138,666,138 6,840,920
Keystone Intermediate Fund**.......... 28,261,905 30,738,558 31,902,091 36,582,139
Intermediate Government Fund.......... 59,320,521 0 65,407,081 0
Short-Intermediate Fund............... 103,309,243 113,815,506 71,256,326 99,358,914
</TABLE>
* For the nine months ended June 30, 1997
** For the eleven months ended June 30, 1997
The average daily balance of reverse repurchase agreements outstanding for the
Capital Preservation Fund and the Keystone Intermediate Fund during the period
ended June 30, 1997 was approximately $988,000 and $1,102,000, respectively, at
a weighted average interest rate of 5.40% and 5.58%, respectively. The maximum
amount outstanding under reverse repurchase agreements during the period ended
June 30, 1997 for the Capital Preservation Fund was $4,066,236 (including
accrued interest) and $2,017,983 (including accrued interest) for Keystone
Intermediate Fund. There were no reverse repurchase agreements outstanding at
June 30, 1997 for either Fund.
On June 30, 1997, the composition of gross unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal tax purposes was as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET UNREALIZED
TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
<S> <C> <C> <C> <C>
Capital Preservation Fund.................. $ 51,559,754 $ 541,790 $ (3,297) $ 538,493
Evergreen Intermediate Fund................ 156,347,538 3,200,532 (929,701) 2,270,831
Keystone Intermediate Fund................. 28,676,532 258,959 (365,371) (106,412)
Intermediate Government Fund............... 79,147,737 712,159 (321,259) 390,900
Short-Intermediate Fund.................... 398,505,815 3,176,863 (5,024,416) (1,847,553)
</TABLE>
As of June 30, 1997, the Funds had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
EXPIRATION
<S> <C> <C> <C> <C> <C> <C>
1999 2001 2002 2003 2004 2005
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Capital Preservation Fund.......... -- $5,900,000 $ 197,000 $642,000 $ 254,000 $ --
Evergreen Intermediate Fund........ -- 1,440,000 -- 907,000 211,000 1,200,000
Keystone Intermediate Fund......... $970,000 -- 2,688,000 94,000 -- 147,000
Intermediate Government Fund....... -- -- -- 642,000 1,140,000 --
Short-Intermediate Fund............ -- -- 6,021,000 -- 4,049,000 4,374,000
</TABLE>
4. DISTRIBUTION PLANS
Since December 11, 1996, Evergreen Keystone Distributor, Inc. (formerly,
Evergreen Funds Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of The
BISYS Group Inc. ("BISYS") has served as principal underwriter to the Capital
Preservation Fund and the Keystone Intermediate Fund. Prior to December 11,
1996, Evergreen Keystone Investment Services, Inc. ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the principal underwriter. EKD also serves as
the principal underwriter for the Evergreen Intermediate, Intermediate
Government and Short-Intermediate Funds.
Each Fund has adopted Distribution Plans for each class of shares as allowed by
Rule 12b-1 of the 1940 Act. Distribution plans permit each Fund to reimburse its
principal underwriter for costs related to selling shares of the Fund and for
various other services. These costs, which consist primarily of commissions and
service fees to broker-dealers who sell shares of the Fund, are paid by
shareholders through expenses called "Distribution Plan expenses". Each class,
except Class Y, currently pays a service fee equal to 0.25% of the average daily
net assets of the class. The service fee for Class A shares of
Short-Intermediate is currently limited to 0.10% of average daily net assets.
Class B and Class C also presently pay distribution fees equal to 0.75% of the
average daily net assets of each respective class. Distribution Plan expenses
are calculated daily and paid monthly.
With respect to Class B and Class C shares of the Capital Preservation Fund and
the Keystone Intermediate Fund, the principal underwriter may incur 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%.
45
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the year ended June 30, 1997, amounts accrued or paid to EKD and/or EKIS
pursuant to each Fund's Class A, Class B and Class C Distribution Plans were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Capital Preservation Fund*............................................ $28,581 $285,293 $32,267
Evergreen Intermediate Fund........................................... 6,972 7,180 255
Keystone Intermediate Fund**.......................................... 24,268 129,648 74,834
Intermediate Government Fund.......................................... 2,047 6,442 242
Short-Intermediate Fund............................................... 18,961 222,264 10,470
</TABLE>
* For the nine months ended June 30, 1997
** For the eleven months ended June 30, 1997
For the year ended June 30, 1997, EKD voluntarily waived Class A distribution
fees for the Evergreen Intermediate and Intermediate Government Funds in the
amounts of $5,480 and $1,763, respectively.
Each of the Distribution Plans for the Capital Preservation and the Keystone
Intermediate Funds 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
respective class. However, after the termination of any Distribution Plan, and
subject to the discretion of the Independent Trustees, payments to EKIS and/or
EKD may continue as compensation for services which had been earned while the
Distribution 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 Class B or Class C shares would
be within permitted limits.
EKD and/or its predecessor has advised the Funds that it has retained front-end
sales charges resulting from the sales of Class A shares during the period ended
June 30, 1997 as follows:
<TABLE>
<S> <C>
Capital Preservation Fund....................................................... $ 9,851
Evergreen Intermediate Fund..................................................... 504
Keystone Intermediate Fund...................................................... 11,043
Intermediate Government Fund.................................................... 77
Short-Intermediate Fund......................................................... 6,833
</TABLE>
Contingent deferred sales charges paid by redeeming shareholders are paid to EKD
or its predecessor.
5. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Keystone Investment Management Company ("Keystone"), a subsidiary of First Union
Corporation ("First Union"), is the investment adviser for the Capital
Preservation Fund and the Keystone Intermediate Fund. In return for providing
investment management and administrative services, each Fund pays Keystone a
management fee that is calculated daily and paid monthly. The management fee is
computed at an annual rate of 2.00% of the each respective Fund's gross
investment income plus an amount determined by applying percentage rates
starting at 0.50% and declining to 0.25% per annum as net assets increase, 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 Keystone Intermediate Fund and provided investment
management and administrative services. Under an investment advisory agreement
between KMI and Keystone, Keystone served as the investment adviser and provided
investment advisory and management services to the Keystone Intermediate Fund.
In return for its services, Keystone received an annual fee equal to 85% of the
management fee received by KMI.
Effective January 1, 1997, BISYS became the sub-administrator to the Capital
Preservation and Keystone Intermediate Funds and is paid by Keystone.
First Union serves as the investment adviser to the Evergreen Intermediate Fund,
Intermediate Government Fund and Short-Intermediate Fund and is paid a
management fee that is computed daily and paid monthly. For the Evergreen
Intermediate Fund and the Intermediate Government Fund, First Union is entitled
to a fee at an annual rate of 0.60% of each Fund's respective average daily net
assets. For the Short-Intermediate Fund, First Union is entitled to a fee at an
annual rate of 0.50% of the Fund's average daily net assets.
For Evergreen Intermediate Fund, Intermediate Government Fund and
Short-Intermediate Fund, Evergreen Keystone Investment Services, Inc. ("EKIS"),
a subsidiary of First Union, is the administrator. Prior to March 11, 1997,
Evergreen Asset Management Corp. ("Evergreen Asset"), a wholly-owned subsidiary
of First Union, was the administrator. Furman Selz LLC ("Furman Selz") was the
sub-administrator through December 31, 1996. Effective January 1, 1997, BISYS
acquired Furman Selz' mutual fund unit and accordingly BISYS became
sub-administrator. The administrator and sub-administrator for each Fund is
entitled to an annual fee based on the average daily net assets of the funds
administered by EKIS for which First Union or its investment advisory
subsidiaries are also the investment advisors. The administration fee is
calculated by applying percentage rates, which start at 0.05% and decline to
0.01% per annum as net assets increase, to the average daily net asset value of
the
46
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund. The sub-administration fee is calculated by applying percentage rates,
which start at 0.01% and decline to .004% as net assets increase, to the average
daily net asset value of the Fund.
For the Capital Preservation and Keystone Intermediate Funds, Keystone has
voluntarily limited the expenses, excluding indirectly paid expenses, to the
following rates based on the average daily net assets of each respective class:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Capital Preservation Fund............................................... 0.90% 1.65% 1.65%
Keystone Intermediate Fund.............................................. 1.10% 1.85% 1.85%
</TABLE>
For the period ended June 30, 1997, the Funds waived management fees as follows:
<TABLE>
<S> <C>
Capital Preservation Fund.................................................................. $245,255
Keystone Intermediate Fund................................................................. 145,636
Intermediate Government Fund............................................................... 71,794
</TABLE>
During the period ended June 30, 1997, the Funds paid or accrued to EKIS the
following amounts for certain administrative services:
<TABLE>
<S> <C>
Capital Preservation Fund................................................................... $34,481
Evergreen Intermediate Fund................................................................. 57,505
Keystone Intermediate Fund.................................................................. 11,267
Intermediate Government Fund................................................................ 31,665
Short-Intermediate Fund..................................................................... 139,440
</TABLE>
Evergreen Keystone Service Company ("EKSC"), a wholly-owned subsidiary of
Keystone, serves as the transfer and dividend disbursing agent for the Capital
Preservation and Keystone Intermediate Funds. Effective May 5, 1997, EKSC also
began providing transfer and dividend disbursing agent services for the
Evergreen Intermediate Fund, Intermediate Government Fund and Short-Intermediate
Fund that were formerly provided by State Street Bank and Trust Company ("State
Street"). For certain accounts, State Street had and subsequent to May 5, 1997,
EKSC has sub-contracted First Union to maintain shareholder sub-account records,
take fund purchase and redemption orders and answer inquiries. For each account
of the Evergreen Intermediate Fund, Intermediate Government Fund and
Short-Intermediate Fund, First Union earned a fee which in aggregate totaled
$23,547, $24 and $103,428, respectively for the year ended June 30, 1997.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds. Currently the Independent Trustees of the Capital Preservation
and the Keystone Intermediate Funds receive no compensation for their services.
As sub-administrator, BISYS provides the officers of the Funds.
6. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an expense offset arrangement with their custodian.
The assets deposited with the custodian under this expense offset arrangement
could have been invested in income-producing assets.
7. DEFERRED TRUSTEES' FEES
Each Independent Trustee of the Evergreen Intermediate Fund, Intermediate
Government Fund and Short-Intermediate Fund may defer any or all compensation
related to performance of duties as a Trustee. Each Trustee's deferred balances
are allocated to deferral accounts which are included in the accrued expenses
for the Fund. The investment performance of the deferral accounts are based on
the investment performance of certain Evergreen Keystone Funds. Any gains earned
or losses incurred in the deferral accounts are reported in each Fund's
Trustees' fees and expenses. Trustees will be paid either in one lump sum or in
quarterly installments for up to ten years at their election, not earlier than
either the year in which the Trustee ceases to be a member of the Board of
Trustees or January 1, 2000. As of June 30, 1997, the value of the Trustees'
deferral accounts for the Evergreen Intermediate Fund, Intermediate Government
Fund and Short-Intermediate Fund were $5,106, $5,097 and $16,203, respectively.
8. FINANCING AGREEMENT
On October 31, 1996, a financing agreement between all of the Evergreen Funds
and State Street, Societe Generale and ABN Amro Bank N.V. (collectively, the
"Banks") became effective. Under this agreement, the Banks provide an unsecured
credit facility in the aggregate amount of $225 million ($112.5 million
committed and $112.5 million uncommitted) allocated evenly between the Banks.
Borrowings under this facility bear interest at 0.75% per annum above the
Federal Funds rate. A commitment fee of 0.10% per annum will be incurred on the
unused portion of the committed facility which will be allocated to all
participating funds. State Street acts as agent for the Banks, and as agent is
entitled to a fee of $15,000 which is allocated to all of the Evergreen Funds.
During the period ended June 30, 1997, the Funds had no borrowings under this
agreement.
47
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS
On December 30, 1994, the Capital Preservation Fund acquired the net assets of
Keystone America Capital Preservation and Income Fund ("Preservation and Income
Fund") in exchange for Class A shares and on February 29, 1996 the Evergreen
Intermediate Fund acquired the net assets of Evergreen Managed Bond Fund
("Managed Bond Fund") in exchange for Class Y shares. Both acquisitions were
accomplished by a tax-free exhange of the respective shares of each respective
fund. The value of assets acquired, number of shares issued, unrealized
appreciation acquired and aggregate net assets of each fund immediately after
the acquisition are as follows:
<TABLE>
<CAPTION>
UNREALIZED
VALUE OF NET NUMBER OF APPRECIATION
ACQUIRING FUND ACQUIRED FUND ASSETS ACQUIRED SHARES ISSUED (DEPRECIATION)
<S> <C> <C> <C> <C>
Capital Preservation Fund Preservation and Income Fund $23,825,980 2,506,041 $ (301,751)
Evergreen Intermediate Fund Managed Bond Fund 79,773,557 7,674,423 1,789,417
<CAPTION>
NET ASSETS
AFTER
ACQUISITION
<C>
$115,746,857
158,097,520
</TABLE>
48
<PAGE>
EVERGREEN KEYSTONE
(logo)
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Capital Preservation and Income Fund
The Evergreen Lexicon Fund
Keystone Intermediate Term Bond Fund
Evergreen Investment Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of the Evergreen Keystone Short and Intermediate
Term Bond Funds listed below as of June 30, 1997, and the related statements of
operations, statements of changes in net assets, and financial highlights for
each of the years or periods listed below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND-- statements of operations for
the nine months ended June 30, 1997 and the year ended September 30, 1996,
statements of changes in net assets for the nine months ended June 30, 1997
and each of the years in the two-year period ended September 30, 1996, and
financial highlights for the periods presented on pages 14 and 15.
EVERGREEN INTERMEDIATE-TERM BOND FUND (ONE OF THE PORTFOLIOS CONSTITUTING
THE EVERGREEN LEXICON FUND)-- statement of operations for the year ended
June 30, 1997, statements of changes in net assets for the year ended June
30, 1997 and the ten months ended June 30, 1996, and the financial
highlights for the periods presented on pages 16 and 17, except for the
periods prior to June 30, 1996. The financial highlights for the periods
prior to June 30, 1996 and the statements of changes in net assets for the
year ended August 31, 1995 were audited by other auditors whose report dated
October 6, 1995 expressed an unqualified opinion thereon.
KEYSTONE INTERMEDIATE TERM BOND FUND-- statements of operations for the
eleven months ended June 30, 1997 and the year ended July 31, 1996,
statements of changes in net assets for the eleven months ended June 30,
1997 and each of the years in the two-year period ended July 31, 1996, and
the financial highlights for the periods presented on pages 18 and 19.
EVERGREEN INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND (ONE OF THE
PORTFOLIOS CONSTITUTING THE EVERGREEN LEXICON FUND)-- statement of
operations for the year ended June 30, 1997, statements of changes in net
assets for the year ended June 30, 1997 and the ten months ended June 30,
1996, and the financial highlights for the periods presented on pages 20 and
21, except for the periods ended prior to June 30, 1996. The financial
highlights for the periods prior to June 30, 1996 and the statements of
changes in net assets for the year ended August 31, 1995 were audited by
other auditors whose report dated October 6, 1995 expressed an unqualified
opinion thereon.
EVERGREEN SHORT-INTERMEDIATE BOND FUND (ONE OF THE PORTFOLIOS CONSTITUTING
EVERGREEN INVESTMENT TRUST)-- 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, and the financial highlights for
the periods presented on pages 22-24.
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. These 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 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 Capital Preservation and Income Fund, Evergreen Intermediate-Term Bond
Fund, Keystone Intermediate Term Bond Fund, Evergreen Intermediate-Term
Government Securities Fund and Evergreen Short-Intermediate Bond Fund as of June
30, 1997, the results of their operations for the years or periods then ended,
and the changes in their net assets and financial highlights for each of the
years or periods specified in the first paragraph above in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
August 8, 1997
49
<PAGE>
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<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
This brochure must be preceded or accompanied by a prospectus of an
Evergreen fund contained herein. The prospectus contains more complete
information, including fees and expenses, and should be read carefully
before investing or sending money.
NOT May lose value
FDIC No bank guarantee
INSURED
Evergreen Keystone Distributor, Inc.
60922 Form #541496
8/97
<PAGE>
EVERGREEN KEYSTONE FUNDS
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
200 Berkeley Street
Boston, MA 02116-5034
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, D.C.
Attn: File Room
Re: THE EVERGREEN KEYSTONE SHORT/INTERMEDIATE-TERM BOND FUNDS:
Keystone Capital Preservation and Income Fund
File No. 811-6278
CCC # md#bzdw6
CIK # 0000872324
Keystone Intermediate Term Bond Fund
File No. 811-4952
CCC # azz*ud8s
CIK # 0000808333
Evergreen Investment Trust
Evergreen Short-Intermediate Bond Fund
File No. 811-4154
CCC # 4apyfsr*
CIK # 0000757440
Evergreen Lexicon Trust
Evergreen Intermediate-Term Government Securities Fund
Evergreen Intermediate Term Bond Fun
File No. 811-6368
CCC # 3@hcmfcw
CIK # 0000877698
Commissioners:
Please be advised that the 6/30/97 Annual Report for the above referenced
Trust(s)/Fund(s) were submitted to your office on August 29, 1997, via
electronic transmission (EDGAR).
Any questions or comments about this document should be directed to the
undersigned at (617) 210-3258.
Very Truly Yours,
/s/ Laura Yong
Laura Yong
Assistant Vice President
Evergreen Intermediate Term Bond Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
SCHEDULE OF INVESTMENTS (000's omitted)
June 30, 1997
<TABLE>
<CAPTION>
Evergreen IntermediateBlanchard Short-Term Pro Forma
Term Bond Fund Flexible Income Fund Combined
Maturity Market Market Market
Coupon Date Principal Value Principal Value AdjustmPrincipal Value
Asset-Backed Securities -1.0%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Southern Pacific Secured Assets Corp. 7.60% 10/25/27 1,000 1,002 1,000 $1,002
U.S. Home Equity Loan Asset Backed 9.13 4/15/21 750 753 750 753
Total Asset-Backed Securities (Cost $1,748) 1,755 1,755
Corporate Bonds and Notes-28.7%
Aerospace/Defense - 0.7%
Sequa Corp. 8.75 12/15/01 $ 500 512 500 512
UNC Inc. 9.13 7/15/03 700 740 700 740
1,252 1,252
Airlines - 0.1%
US Air Inc. 9.80 1/15/00 200 208 200 208
Banks - 0.1%
Cenfed Financial Corp ., Senior
Debenture (a) 11.17 12/15/01 8 8 8 8
Harris Bancorp. 9.38 6/1/01 12 13 12 13
Nations Bank Corp. 8.13 6/15/02 31 33 31 33
NBD Bank N.A., Subordinated Note 8.25 11/1/24 62 69 62 69
123 123
Chemicals -1.9%
Borden Chemicals & Plastics Operating
Limited Partnership 9.50 5/1/05 500 528 500 528
Harris Chemical North America 10.25 7/15/01 500 519 500 519
ISP Holdings Inc. 9.00 10/15/03 300 312 300 312
Kaiser Aluminum & Chemical Group 9.88 2/15/02 500 516 500 516
SIFTO Canada Inc. 8.50 7/15/00 600 606 600 606
Uniroyal Chemical Corp. 9.00 9/1/00 700 730 700 730
3,211 3,211
Consumer Related - 3.0%
Chiquita Brands International 9.63 1/15/04 750 800 750 800
HMH Properties, Inc. 9.50 5/15/05 800 836 800 836
Revlon Consumer Products Corp. 9.38 4/1/01 1,000 1,033 1,000 1,033
RJR Nabisco, Inc. 8.75 7/15/07 2,460 2,496 2,460 2,496
5,165 5,165
Containers-Paper/Plastic - 1.0%
Container Corp. of America 11.25 5/1/04 500 550 500 550
Gaylord Container Corp. 11.50 5/15/01 700 738 700 738
Sea Containers Ltd, 9.50 7/1/03 500 521 500 521
1,809 1,809
Diversified -0.3%
Belo (A. H.) Corporation 7.13 6/1/07 500 496 500 496
Entertainment - 3.0%
Caesars World, Inc. 8.88 8/15/97 1,000 1,035 1,000 1,035
Harrah's Operations, Inc. 8.75 3/15/00 1,000 1,033 1,000 1,033
Station Casions, Inc. 9.63 6/1/03 900 896 900 896
Time Warner, Inc. 9.63 5/1/02 1,000 1,107 1,000 1,107
Trump Hotels & Casino Resorts, Inc. 11.25 5/1/06 600 588 600 588
Viacom, Inc. 8.00 7/7/06 500 485 500 485
5,144 5,144
Finance & Banking - 3.9%
Amsouth Bancorporation 6.75 11/1/25 1,000 978 1,000 978
Associates Corporation North America, Note 5.96 5/15/37 100 101 100 101
Chase Manhattan Corporation 9.38 7/1/01 1,250 1,359 1,250 1,359
CIT Group Holdings Inc. 9.25 3/15/01 1,000 1,084 1,000 1,084
General Electric Capital Corp. 6.29 12/15/07 39 38 39 38
General Motors Acceptance Corp. 7.13 5/1/01 500 506 500 506
Goldman Sachs Group L.P. (a) 6.38 6/15/00 15 15 15 15
Grand Metropolitan Investment Corp. 6.50 9/15/99 23 23 23 23
KFW International Finance, Guaranteed N 8.85 6/15/99 15 16 15 16
Navistar Financial Corp. 8.88 11/15/98 500 511 500 511
Presidential Life Corp. 9.50 12/15/00 500 520 500 520
Prudential Insurance 7.13 7/1/07 500 499 500 499
Reliance Group Holdings, Inc. 9.00 11/15/00 1,000 1,038 1,000 1,038
4,619 2,069 6,688
Industrials - 3.9%
Armco Inc. 9.38 11/1/00 850 875 850 875
Baxter International, Inc. 9.25 12/15/99 31 33 31 33
Bethlehem Steel Corp. 10.38 9/1/03 350 367 350 367
Deer & Co. 8.95 6/15/19 9 10 9 10
Exide Corp. 10.75 12/15/02 500 529 500 529
Ford Motor Co. 9.00 9/15/01 700 756 700 756
Jet Equipment Trust, (a) 9.41 6/15/10 31 35 31 35
John Q. Hammons Hotels 8.88 2/15/04 500 508 500 508
Occidental Petroleum Corp. 8.50 11/9/01 800 847 800 847
Philip Morris Cos Inc. 7.20 2/1/07 1,000 987 1,000 987
Transocean Offshore Inc. 7.45 4/15/27 1,000 1,029 1,000 1,029
Unisys Corp., 9.50 7/15/98 500 504 500 504
Unisys Corp., 10.63 10/1/99 300 312 300 312
3,697 3,095 6,792
Oil Refining - 2.0%
Clark Refining & Marketing Inc. 10.50 12/1/01 1,000 1,037 1,000 1,037
PDV America 7.25 8/1/98 500 503 500 503
USX Marathon Corp. 5.75 7/1/01 2,000 1,928 2,000 1,928
3,468 3,468
Paper Products 1.8%
Fort Howard Corp. 9.00 2/1/06 500 529 500 529
Repap New Brunswick Inc 8.88 7/15/02 500 497 500 497
Repap New Brunswick Inc 9.88 7/15/02 500 505 500 505
Repap Wisconsin, Inc. 9.25 2/1/02 700 709 700 709
Stone Container Corp. 9.88 2/1/01 700 700 700 700
Stone Container Corp. 11.00 8/15/99 200 206 200 206
3,146 3,146
Printing & Publishing -0.4%
World Color Press 9.13 3/15/03 600 624 600 624
Real Estate & Lodging - 0.5%
Host Marriott Travel Plaza 9.50 5/15/05 405 425 405 425
Williams Scotsman Inc. 9.88 6/1/07 500 503 500 503
928 928
Services - 0.3%
Prime Hospitality Corp. 9.25 1/15/06 500 517 500 517
Steel - 0.4%
Wheeling Pittsburgh Corp. 9.38 11/15/03 750 727 750 727
Telecommunications -3.8%
Cablevision Systems Corp. 10.75 4/1/04 1,000 1,037 1,000 1,037
Centennial Cellular Corp. 8.88 11/1/01 750 748 750 748
Century Communications Corp. 9.75 2/15/02 750 780 750 780
Comcast Corp. 9.38 5/15/05 1,000 1,056 1,000 1,056
Lenfest Communications Inc. 8.38 11/1/05 1,000 989 1,000 989
Marcus Cable Operations Co. 13.50 8/1/04 500 436 500 436
Olympus Communications 10.63 11/15/06 500 528 500 528
Rogers Cablesystems 9.63 8/1/02 1,000 1,057 1,000 1,057
6,631 6,631
Textile Products - 0.3%
Dominion Textiles Inc. 8.88 11/1/03 500 515 500 515
Transportation - 0.3%
Norfolk Southern Corp. 7.05 5/1/37 500 507 500 507
Utilities-Electric -0.9%
ALLTEL Corp. 6.50 11/1/13 48 44 48 44
Carolina Power & Light Co. 8.63 9/15/21 31 35 31 35
Jones Intercable, Inc. 9.63 3/15/02 500 526 500 526
Long Island Lighting Co. 7.30 7/15/99 1,000 1,012 1,000 1,012
79 1,538 1,617
Total Corporate Bonds and Notes (Cost $48,118) 9,521 40,047 49,568
Collateralized Mortgage Obligations - 8.7%
Independent National Mtge Corp. (a)(b) 7.84 12/26/26 998 1,001 998 1,001
CMC Securities Corp. 7.50 2/25/23 595 595 595 595
Chase Commercial Mortgage Secs Corp. (b) 7.37 6/19/29 500 508 500 508
Chase Mortgage Finance Corp. (a)(b) 7.87 11/25/25 479 468 479 468
Criimi Mae Financial Corp. (b) 7.00 1/1/33 444 434 444 434
Federal National Mortgage Assoc. (b) (c) 3.26 8/25/23 1,000 758 1,000 758
GE Capital Mortgage Services Inc. (b) 6.50 3/25/24 654 626 654 626
Merrill Lynch Trust (b) 8.45 11/1/18 500 525 500 525
Merrill Lynch Mortgage Investors 1990-I
Class A 9.20 1/15/11 733 732 733 732
Morgan Stanley Capital I Inc., 1997 C1
Class B (b) 7.69 1/15/07 700 725 700 725
Paine Webber Mortgage Acceptance Corp.(b) 7.50 5/25/23 953 951 953 951
Resolution Trust Corp., (b) 7.50 10/25/2 1,250 1,256 1,250 1,256
Resolution Trust Corp 1992-C1, Class A1 8.80 8/25/23 849 855 849 855
Resolution Trust Corp 1992-3, Class A2 6.89 9/25/19 2,001 1,995 2,001 1,995
Resolution Trust Corp 1992-3, Class A3 6.96 5/25/21 1,385 1,375 1,385 1,375
Resolution Trust Corp 1992-6, Class A4 7.52 11/25/25 1,486 1,492 1,486 1,492
Ryland Acceptance Corp. Four (b) 7.95 1/1/19 698 709 698 709
Total Collateralized Mortgage Obligations (Cost $14,801) 7,961 7,044 15,005
Mortgage-Backed Securities -0.7%
Federal Home Loan Mortgage Corp 6.55 9/1/26 39 40 39 40
Federal Home Loan Mortgage Corp., Global
Note 6.70 1/5/07 750 745 750 745
Federal Home Loan Mortgage Corp 7.50 5/1/09 31 32 31 32
Federal Home Loan Mortgage Corp 8.00 10/1/25 19 19 19 19
Federal National Mortgage Assn. 6.69 12/1/25 20 21 20 21
Government National Mortgage Assn. 6.00 6/20/26 22 22 22 22
Government National Mortgage Assn. 6.50 10/15/23-
10/15/26 129 129 129 129
Government National Mortgage Assn. 7.00 9/20/25-
3/15/26 61 60 61 60
GovernmentNational Mortgage Assn. 7.13 7/20/25 48 49 48 49
GovernmentNational Mortgage Assn. 7.50 9/15/23-
3/15/26 56 56 56 56
GovernmentNational Mortgage Assn. 8.00 10/15/24 49 50 49 50
GovernmentNational Mortgage Assn. 9.00 4/15/20-
8/15/21 19 20 19 20
GovernmentNational Mortgage Assn. 9.50 2/15/21 9 9 9
Paine Webber Trust 9.00 10/1/12 6 6 6
Total Mortgage-Backed Securities (cost $1,253) 1,258 1,258
U.S. Agency Obligations -0.1%
Farm Credit Systems Financial Assistanc 8.80 6/10/05 39 43 39 43
Federal Home Loan Bank, Consolidated Bond 7.70 9/20/00 46 49 46 49
Total U.S. Agency Obligations (cost $91) 92 92
U.S. Treasury Obligations - 50.8%
U.S. Treasury Bonds 6.88 8/15/25 177 178 177 178
U.S. Treasury Bonds 7.50 11/15/16 69 74 69 74
U.S. Treasury Bonds 8.75 5/15/17 22 26 22 26
U.S. Treasury Bonds 8.88 8/15/17 61 74 61 74
U.S. Treasury Notes 5.13 12/31/9 22 21 22 21
U.S. Treasury Notes 5.63 8/31/97 199 200 199 200
U.S. Treasury Notes 5.75 12/31/98 15,000 14,958 15,000 14,958
U.S. Treasury Notes 6.25 3/31/99 20,000 20,075 20,000 20,075
U.S. Treasury Notes 6.38 1/15/99 94 95 94 95
U.S. Treasury Notes 6.88 8/31/99 30,000 30,459 30,000 30,459
U.S. Treasury Notes 6.13 5/15/98 20,000 20,062 20,000 20,062
U.S. Treasury Notes 6.50 10/15/07 1,810 1,802 1,810 1,802
U.S. Treasury Notes 8.25 7/15/98 25 25 25
Total U. S. Treasury Notes (Cost $87,549) 2,495 85,554 88,049
Yankee Obligations- 0.2%
Bayerische Landesbank Girozen New York,
Tranche Sr 00001 6.38 8/31/00 39 38 39 38
Bayerische Landesbank Girozen New York,
Tranche Sr 00007 6.20 2/9/06 31 29 31 29
Hydro-Quebec 8.00 2/1/13 46 49 46 49
Japan Finance Corp. Municipal Enterprises,
Guaranteed Bond 6.85 4/15/06 54 54 54 54
Manitoba Province (Canada) 8.00 4/15/02 31 33 31 33
Petro Canada Ltd. 8.60 1/15/10 12 14 12 14
Philips Electers N.V., Debenture 7.13 5/15/25 82 82 82 82
Svenska Handelsbanken 8.13 8/15/07 31 33 31 33
Svenska Handelsbanken 8.35 7/15/04 15 17 15 17
Westpac Banking Subordinated Debenture 9.13 8/15/01 11 12 11 12
Total Yankee Obligations (cost $351) 361 361
Foreign Bond ( US Dollar Denominated) - 3.2%
Export Import Bank Korea, Note 7.10 3/15/07 500 505 500 505
Fomento Economico Mexico, Euro-Dollars 9.50 7/22/97 1,250 1,250 1,250 1,250
Korea Elec Power Corp, Debenture 7.00 2/1/27 500 490 500 490
Southern Peru Limited, Secured
Export Notes (a) 7.90 5/30/07 1,000 1,019 1,000 1,019
Telebras 10.38 9/9/97 1,200 1,211 1,200 1,211
Videotron Group 10.63 2/15/05 1,000 1,110 1,000 1,110
Total Foreign Bond ( US Dollar Denominated) (Cost $5,473) 4,475 1,110 5,585
Foreign Bond ( Non-US Dollar Denominated) -1.5 %
Canada Government, Canadian Series A79 8.75 12/1/05 1,150 968 1,150 CAD 968
Denmark Kingdom 7.00 11/15/07 3,698 585 3,698 DKK 585
Germany Federal Republic 6.88 5/12/05 1,575 986 1,575 DEM 986
Nykredit 6.00 10/1/26 18 2 18 DKK 2
Total Foreign Bond ( Non-US Dollar Denominated) (Cost $2,689) 2,541 2,541
Repurchase Agreements - 3.2%
Credit Suisse First Boston, dated 6/30/97 (d) 5.75 7/1/97 4,850 4,850 4,850 4,850
Donaldson, Lufkin & Jenrette Securities (d) 5.90 7/1/97 316 316 316 316
Keystone Joint Repurchase Agreement,
(investments in
repurchase agreements in a joint trading
account, dated 6/30/97, maturity value
$243)(d) 6.04 7/1/97 243 243 243 243
Total Repurchase Agreements (Cost $5,409) 559 4,850 5,409
Total Investments (Cost $167,482) 31,018 138,605 169,623
Other Assets and Liabilities (net) 2,206 1,335 3,541
Net Assets 33,224 $139,940 173,164
(a) Securities that may be sold to qualified institutional buyers under Rule 144A or securities offered pursuant
to Section 4(2) of the Securities Act of 1933, as amended. These securities have been determined to be liquid
under the guidelines established by the Board of Trustees.
(b) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is based on current and projected
prepayment rates. Changes in interest rates can cause the estimated maturity to differ from the listed date.
(c) Inverse floater, resets monthly.
(d) The repurchase agreements are fully collateralized by U.S. government and/or agency obligations based on market
prices at the date of the portfolio.
Forward Foreign Currency Exchange Transactions Net
Unrealized
Exchange U.S. $ Value In Exchange Appreciation/
Date June 30, 1997 for U.S. $ (Depreciation)
Forward Foreign Currency Exchange Contracts to Buy:
Contracts to Receive
8/12/97 1,150 Deutsche Marks $ 661 679 $ (18)
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
8/27/97 1,324 Canadian Dollar 962 971 9
8/12/97 2,860 Deutsche Marks 1,645 1,675 30
8/20/97 4,042 Danish Krone 611 627 16
$ 55
See Notes to Pro Forma Combining Financial Statements.
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<TABLE>
<CAPTION>
EVERGREEN INTERMEDIATE TERM BOND FUND Pro Forma Combining Financial Statements
(unaudited) Statement of Assets and Liabilities (000's) June 30, 1997
Evergreen Blanchard
Intermediate Short-Term Flexible Pro Forma
Bond Fund Income Fund Adjustments Combined
<S> <C> <C> <C> <C>
Assets:
Investments at value (cost $165,078) $31,018 $138,605 $169,623
Cash 2 0 2
Interest receivable 2,539 2,708 5,247
Receivable for investment sold 1,389 0 1,389
Receivable for Fund shares sold 14 0 14
Unrealized appreciation from forward foreign currency
contracts 55 0 55
Due from investment adviser 17 0 17
Prepaid expenses 35 17 52
Total Assets 35,069 141,330 176,399
Liabilities:
Payable for investments purchased 1,358 0 1,358
Dividends payable 69 663 732
Payable for Fund shares redeemed 175 0 175
Unrealized depreciation from forward foreign
currency contracts 18 0 18
Distribution fee payable 9 34 43
Due to related parties 137 87 224
Due to custodian 0 429 429
Accrued liabilities and other expenses 79 177 256
Total Liabilities 1,845 1,390 3,235
Net Assets $33,224 $139,940 $173,164
Net assets are comprised of:
Paid-in capital 41,548 137,752 179,300
Undistributed net investment income (accumulated
distributions in excess of net investment income) (8,533) 604 (7,929)
Accumulmated net realized gain (loss) on investments
and foreign currency related transactions 238 (623) (385)
Net unrealized appreciation (depreciation) on
investments and foreign currency related transactions (29) 2,207 2,178
Net Assets $33,224 $139,940 $173,164
Class A Shares
Net Assets $13,379 $139,940 $153,319
Shares of Beneficial Interest Outstanding 1,499 46,285 (30,640)(a) 17,144
Net Asset Value $8.93 $3.02 $8.93
Maximum Offering Price (3.25%) $9.23 $9.23
8.943
Class B Shares
Net Assets $12,381 $12,381
Shares of Beneficial Interest Outstanding 1,385 1,385
Net Asset Value $8.95 $8.95
Class C Shares
Net Assets $7,288 $7,288
Shares of Beneficial Interest Outstanding 815 815
Net Asset Value $8.94 $8.94
Class C Shares
Net Assets $176 $176
Shares of Beneficial Interest Outstanding 20 20
Net Asset Value $8.93 $8.93
(a) Reflects the impact of converting shares of the target fund into the
survivor fund.
EVERGREEN INTERMEDIATE TERM BOND FUND Pro Forma Combining Financial Statements
(unaudited) Statement of Operations (000's) Year ended June 30, 1997
Evergreen Blanchard
Intermediate Short-Term Flexible Pro Forma
Bond Fund Income Fund Adjustment Combined
Investment Income:
Interest income $2,894 $9,799 $12,693
Expenses:
Advisory fee 272 1,139 (218)a 1,193
Administrative services fees 11 147 (108)b 50
Distribution fee 269 380 649
Transfer agent fee 115 399 (354)c 160
Custodian fee 53 51 138 b 242
Reports and notices to shareholders 27 57 (48)c 36
Registration and filing fees 29 17 (17)c 29
Professional fees 29 86 (47)c 68
Other 0 23 (5)b 18
Less: Fee waivers and/or reimbursements (166) (202) 248 (120)
- - -----------------------------------------------------------------------------------------------------------------------------
Total Expenses 639 2,097 (411) 2,325
Less: Indirectly paid expenses (7) 0 (8) (15)
- - -----------------------------------------------------------------------------------------------------------------------------
Net expenses 632 2,097 (419) 2,310
- - -----------------------------------------------------------------------------------------------------------------------------
Net investment income 2,262 7,702 419 10,383
Net realized and unrealized gain (loss) on investments
and foreign currency
related transactions:
Net realized gain on investments and foreign currency
related transactions (1,495) 1102 (393)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency related transaction 1,144 1,683 2,827
Net realized and unrealized gain on investments
and foreign currency related transactions (351) 2,785 0 2,424
Net increase in net assets resulting from operations $1,911 $10,487 (419) $12,817
a Reflects a decrease based on the surviving fund's fee schedule.
b Reflects an increase (decrease) based on the assets of the combined fund.
c Reflects expected cost savings based on combining the two funds.
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Evergreen Intermediate Term Bond Fund
Notes to Pro Forma Combining Financial Statements (Unaudited)
June 30, 1997
1. Basis of Combination - The Pro Forma Combining Statement of Assets and
Liabilities, including the Pro Forma Schedule of Investments, and the related
Pro Forma Combining Statement of Operations (APro Forma Statements@) reflect the
accounts of Evergreen Intermediate Term Bond Fund (AEvergreen@) and Blanchard
Short-Term Flexible Income Fund (ABlanchard@) at June 30, 1997 and for the year
then ended. The information relating to Evergreen gives effect to the proposed
acquisition of the assets of Evergreen Intermediate Term Bond Fund II and
Evergreen (formerly, Keystone) Intermediate Term Bond Fund (expected to occur on
or about January 23, 1998) and the anticipated liquidation of Trust shareholders
in Class Y of Evergreen Intermediate Term Bond Fund II prior to January 23, 1998
(the date of the acquisition).
The Pro Forma Statements give effect to the proposed Agreement and Plan of
Reorganization (the AReorganization@) to be submitted to shareholders of
Blanchard. The Reorganization provides for the acquisition of all assets and
liabilities of Blanchard by Evergreen, in exchange for Class A shares of
Evergreen. Thereafter, there will be a distribution of Class A shares of
Evergreen to shareholders of Blanchard in liquidation and subsequent termination
thereof. As a result of the Reorganization, the shareholders of Blanchard will
become the owners of that number of full and fractional Class A shares of
Evergreen having an aggregate net asset value equal to the aggregate net asset
value of their shares of Blanchard as of the close of business immediately prior
to the date that Blanchard assets are exchanged for Class A shares of Evergreen.
The Pro Forma Statements reflect the expenses of each Fund in carrying out
its obligations under the Reorganization as though the merger occurred at the
beginning of the period presented.
The information contained herein is based on the experience of each Fund
for the year ended June 30, 1997 and is designed to permit shareholders of the
consolidating mutual funds to evaluate the financial effect of the proposed
Reorganization. The expenses of Blanchard in connection with the Reorganization
(including the cost of any proxy soliciting agents) will be borne by First Union
National Bank of North Carolina. It is not anticipated that the securities of
the combined portfolio will be sold in significant amounts in orfer to comply
with the policies and investment practices of Keystone.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of Blanchard which are incorporated by reference in the
Statement of Additional Information.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assume the issuance of Class A shares of Evergreen which would have been issued
at June 30, 1997 in connection with the proposed Reorganization. Shareholders of
Blanchard would receive Class A shares of Evergreen based on a conversion ratio
determined on June 30, 1997. The conversion ratio is calculated by dividing the
net asset value of Blanchard by the net asset value per share of the Class A
shares of Evergreen.
3. Pro Forma Operations - The Pro Forma Combining Statement of Operations
assumes similar rates of gross investment income for the investments of each
Fund. Accordingly, the combined gross investment income is equal to the sum of
the Funds= gross investment income. Pro Forma operating expenses include the
actual expenses of the Funds adjusted to reflect the expected expenses of the
combined entity. The investment advisory and distribution fees have been charged
to the combined Fund based on the fee schedule in effect for Evergreen at the
combined level of average net assets for the year ended June 30, 1997.
4. Expense Offset Arangement - The Evergreen Intermediate Term Bond 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>
EVERGREEN FIXED INCOME TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust. Incorporated by reference to
Registrant's Registration Statement on Form N-1A filed on October
8, 1997 - Registration No. 333-37433 ("Form N-1A Registration
Statement").
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit A to Prospectus contained in
Part A of this Registration Statement.
5. Declaration of Trust Articles II., III.(6)(c), IV.(3),
IV.(8), V., VI., VII. and VIII. and By-Laws Articles II., III and
VIII.
6(a). Form of Investment Advisory Agreement between Keystone Investment
Management Company and the Registrant. Incorporated by reference to the Form
N-1A Registration Statement.
6(b). Form of Interim Management Contract. Exhibit B to
Prospectus contained in Part A of this Registration Statement.
6(c). Form of Interim Sub-Advisory Agreement. Exhibit C to
Prospectus contained in Part A of this Registration Statement.
7(a). Principal Underwriting Agreement between Evergreen
Distributor, Inc. and the Registrant. Incorporated by reference
to the Form N-1A Registration Statement.
7(b). Form of Dealer Agreement for Class A, Class B and Class C shares used by
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
<PAGE>
8. Deferred Compensation Plan. Incorporated by reference to the Form N-1A
Registration Statement.
9. Custody Agreement between State Street Bank and Trust Company and the
Registrant. Incorporated by reference to the Form N-1A Registration Statement.
10(a). Rule 12b-1 Distribution Plan. Incorporated by reference to the Form N-1A
Registration Statement.
10(b). Multiple Class Plan. Incorporated by reference to the
Form N-1A Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. Filed herewith.
13. Not applicable.
14(a). Consent of KPMG Peat Marwick LLP. Filed herewith.
14(b). Consent of Deloitte & Touche LLP. Filed herewith.
15. Not applicable.
16. Powers of Attorney. Previously filed.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part
<PAGE>
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, an opinion of counsel or copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post- Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of Columbus and State of Ohio, on the 5th day of
January, 1998.
EVERGREEN FIXED INCOME TRUST
By: /s/ William J. Tomko
-----------------------
Name: William J. Tomko
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Post-Effective Amendment No. 1 to the Registration Statement in the
capacities indicated on the 5th day of January, 1998.
Signatures Title
- - ---------- -----
/s/William J. Tomko President and
- - ------------------- Treasurer
William J. Tomko
/s/Laurence B. Ashkin* Trustee
- - ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- - -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- - -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- - ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- - -------------------
Leroy Keith, Jr.
<PAGE>
/s/Gerald M. McDonnell* Trustee
- - ----------------------
Gerald M. McDonnell
/s/Thomas L. McVerry* Trustee
- - --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- - ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- - ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- - -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- - ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- - -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
12 Tax Opinion and Consent of Sullivan & Worcester LLP
14(a) Consent of KPMG Peat Marwick LLP
14(b) Consent of Deloitte & Touche LLP
17 Form of Proxy
- - --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 5, 1998
Evergreen Fixed Income Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Fixed Income Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 17, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Evergreen Intermediate-Term Bond Fund (the "Acquiring Fund"), a series of the
Trust. We understand that the Trust is about to file Post- Effective Amendment
No. 1 to its Registration Statement on Form N-14 (Registration No. 333-41541)
for the purpose of registering shares of the Acquiring Fund 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 Blanchard Short-Term
Flexible Income Fund (the "Acquired Fund"), a series of a Massachusetts business
trust with transferable shares, in exchange solely for shares of the Acquiring
Fund and the assumption by the Acquiring Fund of certain identified liabilities
of the Acquired Fund pursuant to an Agreement and Plan of Reorganization, the
form of which is included in the Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and
the District of Columbia and generally do not purport to be familiar with the
laws of the State of Delaware.
<PAGE>
To the extent that the conclusions based on the laws of the State of Delaware
are involved in the opinion set forth herein below, we have relied, in rendering
such opinions, upon our examination of Chapter 38 of Title 12 of the Delaware
Code Annotated, as amended, entitled "Treatment of Delaware Business Trusts"
(the "Delaware business trust law") and on our knowlege of interpretation of
analogous common law of The Commonwealth of Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on February 20, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 5, 1998
Blanchard Short-Term Flexible Income Fund
Evergreen Intermediate Term Bond Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of Blanchard Short-Term Flexible
Income Fund by Evergreen Intermediate Term Bond Fund
Ladies and Gentlemen:
You have asked for our opinion as to certain Federal income tax
consequences of the transactions described below:
Parties to the Transaction. Blanchard Short-Term Flexible
Income Fund ("Target Fund") is a series of Blanchard Funds, a
Massachusetts business trust.
Evergreen Intermediate Term Bond Fund ("Acquiring Fund") is
a series of Evergreen Fixed Income Trust, a Delaware business
trust.
Description of Proposed Transaction. Acquiring Fund will issue its
shares to Target Fund and assume certain stated liabilities of Target Fund, in
exchange for all of the assets of Target Fund. Target Fund will then immediately
dissolve and distribute all of the Acquiring Fund shares which it holds to its
shareholders pro rata in proportion to their shareholdings in Target Fund, in
complete redemption of all outstanding shares of Target Fund.
Scope of Review and Assumptions. In rendering our opinion, we have
reviewed and relied upon the form of Agreement and Plan of Reorganization (the
"Reorganization Agreement") between Acquiring Fund and Target Fund dated as of
November 26, 1997 which is enclosed in a draft prospectus/proxy statement to be
dated January 7, 1998 which describes the proposed transaction, and on the
information provided in such prospectus/proxy statement. We have relied, without
independent verification, upon the factual statements made therein, and assume
that there will be no change in material facts disclosed therein between the
<PAGE>
date of this letter and the date of the closing of the transaction. We further
assume that the transaction will be carried out in accordance with the
Reorganization Agreement.
Representations. Written representations, copies of which are attached
hereto, have been made to us by the appropriate officers of Target Fund and of
Acquiring Fund, and we have without independent verification relied upon such
representations in rendering our opinions.
Opinions
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, we have the following opinions:
1. The acquisition by Acquiring Fund of all of the assets of Target
Fund solely in exchange for voting shares of Acquiring Fund and assumption of
certain specified liabilities of Target Fund followed by the distribution by
Target Fund of said Acquiring Fund shares to the shareholders of Target Fund in
exchange for their Target Fund shares will constitute a reorganization within
the meaning of ss. 368(a)(1)(D) of the Code, and Acquiring Fund and Target Fund
will each be "a party to a reorganization" within the meaning of ss. 368(b) of
the Code.
2. No gain or loss will be recognized to Target Fund upon the transfer
of all of its assets to Acquiring Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of certain specified liabilities
of Target Fund, or upon the distribution of such Acquiring Fund voting shares to
the shareholders of Target Fund in exchange for all of their Target Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of any liabilities of Target
Fund.
4. The basis of the assets of Target Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund
immediately prior to the transfer, and the holding period of the assets of
Target Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Target Fund.
5. The shareholders of Target Fund will recognize no gain or loss upon
the exchange of all of their Target Fund shares solely for Acquiring Fund voting
shares.
6. The basis of the Acquiring Fund voting shares to be received by the
Target Fund shareholders will be the same as the basis of the Target Fund shares
surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Target Fund shareholders will include the period during which
the Target Fund shares surrendered in
<PAGE>
exchange therefor were held, provided the Target Fund shares were held as a
capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in such
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Intermediate Term Bond Fund
We consent to the use of our report dated August 8, 1997 for Evergreen
Intermediate Term Bond Fund incorporated by reference herein and to the
references 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
January 5, 1998
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Evergreen Fixed Income Trust on Form N-14 of our report on Blanchard Short-Term
Flexible Income Fund dated November 7, 1997, appearing in the Annual Report of
the Blanchard Funds for the year ended September 30, 1997, and to the reference
to us under the heading "Financial Statements and Experts" in the
Prospectus/Proxy Statement, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 5, 1998
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
C. Grant Anderson, Carol B. Kayworth, Terrence J. Cullen, Dorothy C. Bourassa
and Martin J. Wolin or any of them as Proxies of the undersigned, with full
power of substitution, to vote on behalf of the undersigned all shares of
Blanchard Short-Term Flexible Income Fund ("Short-Term") that the undersigned is
entitled to vote at the special meeting of shareholders of Short-Term to be held
at 2:00 p.m. on Friday, February 20, 1998 at the offices of the Evergreen Funds,
200 Berkeley Street, Boston, Massachusetts 02116, and at any adjournments
thereof, as fully as the undersigned would be entitled to vote if personally
present.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON
THIS PROXY. If joint owners, EITHER may sign this
Proxy. When signing as attorney, executor,
administrator, trustee, guardian, or custodian for a
minor, please give your full title. When signing on
behalf of a corporation or as a partner for a
partnership, please give the full corporate or
partnership name and your title, if any.
Date , 199
----------------------------------------
----------------------------------------
Signature(s) and Title(s), if applicable
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF BLANCHARD
FUNDS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTION TO
BE TAKEN ON THE FOLLOWING PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED
AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF
TRUSTEES OF BLANCHARD FUNDS RECOMMENDS A VOTE FOR THE PROPOSALS. PLEASE MARK
YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK. EXAMPLE: X
---
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Intermediate Term Bond Fund, a series of Evergreen Fixed Income Trust, will (i)
acquire all of the assets of Short-Term in exchange for shares of Evergreen
Intermediate Term Bond Fund; and (ii) assume certain identified liabilities of
Short-Term, as substantially described in the accompanying Prospectus/Proxy
Statement.
- - ---- FOR ---- AGAINST ---- ABSTAIN
2. To approve the proposed Interim Management Contract with Virtus
Capital Management, Inc.
- - ---- FOR ---- AGAINST ---- ABSTAIN
3. To approve the proposed Interim Sub-Advisory Agreement between
Virtus Capital Management, Inc. and OFFITBANK.
- - ---- FOR ---- AGAINST ---- ABSTAIN
4. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
<PAGE>
