<PAGE>
Annual Report
as of April 30, 2000
Evergreen
Quality Income Fund
[LOGO OF EVERGREEN FUNDS]
[SEAL OF MUTUAL SERVICE AWARD]
<PAGE>
Table of Contents
Letter to Shareholders .................................................... 1
Quality Income Fund
Fund at a Glance .......................................................... 2
Portfolio Manager Interview ............................................... 3
Financial Highlights ...................................................... 5
Schedule of Investments ................................................... 7
Statement of Assets and Liabilities ....................................... 10
Statements of Operations .................................................. 11
Statements of Changes in Net Assets ....................................... 12
Notes to Financial Statements ............................................. 13
Independent Auditors' Report .............................................. 20
Evergreen Funds
Evergreen Funds is one of the nation's fastest growing investment companies with
approximately $80 billion in assets under management.
With over 80 mutual funds to choose among and acclaimed service and operations
capabilities, investors enjoy a broad range of quality investment products and
services designed to meet their needs.
The Evergreen Funds employ intensive, research-driven investment strategies
executed by over 90 research analysts and portfolio managers. The fund company
remains dedicated to meeting the needs of investors and their advisors in a
global economy. Look to Evergreen Funds to provide a distinctive level of
service and excellence in investment management.
This annual report 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.
------------------------------------------------------------
Mutual Funds: NOT FDIC INSURED MAY LOSE VALUE NOT BANK GUARANTEED
------------------------------------------------------------
Evergreen Distributor,Inc.
Evergreen Funds(SM)is a service mark of Evergreen Investment Services, Inc.
<PAGE>
Letter to Shareholders
----------------------
June 2000
[PHOTO]
William M. Ennis
President and CEO
Dear Evergreen Shareholders,
We are pleased to provide the Evergreen Quality Income Fund annual report, which
covers the seven-month period ended April 30, 2000.
U.S. Bond Markets Experience Volatility
The bond market environment has suffered a great deal of volatility and
unpredictability for the past seven-month period. The Federal Reserve Board
increased interest rates three times during the period as a response to a
potential inflationary environment. In addition, the Treasury's announcement of
a plan to curtail new and existing supplies of long-term government bonds led
investors to seek longer-term issues in anticipation of possible shortages.
These factors contributed to an abnormal investment environment where
longer-term bonds paid lower rates than short-term bonds, this is also known as
an "inverted yield curve". Amidst this volatile environment, we still believe
that bonds are relatively attractive over the long term.
We believe that sound investing is about taking steps to meet your long-term
financial needs and goals. We remind you to take advantage of your financial
advisor's expertise to develop and refine a financial plan that will enable you
to meet your objectives. Evergreen Funds offers a broad mix of stock, bond and
money market funds that could make it simple for you to choose the most
appropriate for your portfolio.
Website Enhancements
Please visit our enhanced website, evergreen-funds.com, for more information
about Evergreen Funds. The site offers an array of helpful information including
an investment education center, interactive calculators to assist your
investment planning and general information about Evergreen Funds.
Thank you for your continued investment in Evergreen Funds.
Sincerely,
/s/ William M. Ennis
William M. Ennis
President and CEO
Evergreen Investment Company, Inc.
1
<PAGE>
EVERGREEN
Quality Income Fund
Fund at a Glance as of April 30, 2000
Portfolio Management
--------------------
P.Michael Jones, Timothy E.Anderson,
CFA CFA
Tenure: March 1995 Tenure: June 1998
Jan.J Buskop, Dennis L.Clary,
CFA CFA
Tenure: March 1999 Tenure: May 1998
Todd C.Kuimjian,
CPA
Tenure: January 1997
--------------------------------------------------------------------------------
CURRENT INVESTMENT STYLE
--------------------------------------------------------------------------------
[STYLE BOX]
Morningstar's Style Box is based on a portfolio date as of 4/30/2000.
The Fixed-Income Style Box placement is based on a fund's average effective
maturity or duration and the average credit rating of the bond portfolio.
1 Source: 2000 Morningstar, Inc.
2 Past performance is no guarantee of future results. The investment return and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than original cost. The performance of each class may vary
based on differences in loads, fees and expenses paid by the shareholders
investing in each class. Performance includes the reinvestment of income
dividends and capital gain distributions.
Historical performance shown for Classes B and Y prior to their inception is
based on the performance of Class A, one of the original classes offered along
with Class C. These historical returns for Classes B and Y have not been
adjusted to reflect the effect of each Class' 12b-1 fees. These fees are 0.25%
for Class A and 1.00% for Classes B and C. Class Y does not pay a 12b-1 fee. If
these fees had been reflected, returns for Class B would have been lower while
returns for Class Y would have been higher.
The advisor is waiving a portion of its advisory fee. Had the fee not been
waived, returns would have been lower.
--------------------------------------------------------------------------------
PERFORMANCE AND RETURNS(2)
--------------------------------------------------------------------------------
Portfolio Inception Date: 4/29/1992 Class A Class B Class C Class Y
Class Inception Date 4/29/1992 10/18/1999 4/29/1992 11/19/1997
--------------------------------------------------------------------------------
Average Annual Returns*
1 year with sales charge -6.68% -7.17% -4.39% n/a
1 year w/o sales charge -2.01% -2.43% -2.55% -2.47%
5 years 4.35% 4.96% 4.82% 5.27%
Since Portfolio Inception 4.00% 4.55% 4.10% 4.57%
Maximum Sales Charge 4.75% 5.00% 2.00% n/a
Front End CDSC CDSC
30-day SEC yield 7.23% 6.83% 6.83% 7.98%
Distributions per share
for the period** $ 0.46 $ 0.37 $ 0.41 $ 0.50
* Adjusted for maximum applicable sales charge.
** For Class B, the period from the Class' inception on October 18, 1999 through
April 30, 2000. For Class A, Class C and Class Y, for the seven-month period
ended April 30, 2000.
--------------------------------------------------------------------------------
LONG TERM GROWTH
--------------------------------------------------------------------------------
Evergreen Quality Merrill Lynch 5-7 Consumer Price
Income A Market Value Yr Govt Value Index - US Value
--------------------------------------------------------------------------------
4/30/92 9,518 10,000 10,000
4/30/93 10,197 11,610 10,323
4/30/94 9,988 11,645 10,566
4/30/95 10,537 12,449 10,889
4/30/96 11,346 13,502 11,204
4/30/97 12,167 14,331 11,484
4/30/98 13,247 15,890 11,649
4/30/99 13,969 17,022 11,914
4/30/00 13,685 17,151 12,302
Comparison of a $10,000 investment in Evergreen Quality Income Fund, Class A
shares2, versus a similar investment in the Merrill Lynch 5-7 Year Treasury
Index (ML5-7YTI) and the Consumer Price Index (CPI).
The ML5-7YTI is an unmanaged market index which does not include transaction
costs associated with buying and selling securities or any mutual fund
expenses. The CPI is a commonly used measure of inflation and does not represent
an investment return. It is not possible to invest directly in an index.
Funds that invest in high yield, lower-rated bonds may contain more risk due to
increased possibility of default.
Foreign investments may contain more risk due to the inherent risks associated
with changing political climates, foreign market instability and foreign
currency fluctuations.
U.S. government guarantees apply only to the underlying securities of the Fund's
portfolio and not to the Fund's shares.
All data is as of April 30, 2000 and subject to change.
2
<PAGE>
EVERGREEN
Quality Income Fund
Portfolio Manager Interview
How did the Fund perform?
Evergreen Quality Income Fund Class A shares returned -0.20% for the seven-month
period ended April 30, 2000, versus 0.12% generated by the Merrill Lynch 5-7
Year Treasury Index. The Fund's performance is before deduction of any
applicable sales charges. We attribute the modest lag in performance to the
Fund's orientation toward income and the index's heavier weighting in U.S.
Treasuries. Securities that produce a higher level of income, such as
mortgage-backed securities and corporate bonds, underperformed U.S. Treasuries
in the second half of the Fund's fiscal period. During the past six months,
investors witnessed a yield curve inversion, a rare market event in which
30-year securities yield less than instruments with shorter maturities.
The Fund's income orientation leads it to typically concentrate its investments
in bonds with five- to ten-year maturities. Normally, these bonds offer the
highest yield for their inherent interest rate risk. However, periods in which
only 30-year securities appreciate in value, concentrating our investments in
this segement of the curve can hurt relative performance.
Portfolio
Characteristics
---------------
Total Net Assets $147,977,587
Average Credit Quality A+
Effective Maturity 7.8 years
Average Duration 5.5 years
Why did the securities perform differently?
30-Year U.S. Treasuries benefited from a supply/demand imbalance that was unique
to that sector and maturity range. As January 2000 came to a close, the U.S.
Treasury announced plans to buy back as much as $30 billion in bonds in the
30-year maturity range and also curtail the size of future 30-year auctions. The
announcement coincided with the purchase of a huge block of U.S. Treasuries in
the same maturity range by one of the world's largest money managers. Many
investors became concerned that a shortage of 30-year U.S. Treasuries could
develop, igniting a rally that drove 30-year U.S. Treasury rates down to 5.84%
from a high of nearly 6.75% during the period.
In contrast, interest rates in all other maturities rose, forcing bond prices
lower. No longer concerned with Y2K, investors turned their attention to the
economy's continued explosive growth and its implications for future inflation
and interest rate hikes. Stock prices soared for most of the period, enhancing
the "wealth effect" and adding to the economy's momentum. For the most part,
however, inflation remained well-contained. Commodity and oil prices rose, but
with the exception of oil prices, cost increases were not passed along to
consumers.
Extraordinary demand and expectations of a continually lower supply of 30-year
U.S. Treasuries drove yields lower and prices higher. At the same time, demand
for higher income oriented bonds fell, forcing their prices lower and yields
higher. The performance disparity that occurred between 30-Year U.S. Treasuries
and income oriented bonds changed yield relationships between the sectors.
Although 30-Year U.S. Treasuries outperformed income oriented securities, the
changes in their respective yields laid the groundwork for longer-
3
<PAGE>
EVERGREEN
Quality Income Fund
Portfolio Manager Interview
term opportunity. By the end of the period, many mortgage-backed securities,
corporate bonds and U.S. agency securities had begun to provide yield advantages
over U.S. Treasuries that were extremely attractive by historical standards.
Top 5 Industries
----------------
(as a percentage of 4/30/2000 net assets)
Collateralized Mortgage Obligations 26.1%
Mortgage-Backed Securities 22.8%
Asset Backed Securities 15.5%
Finance & Insurance 11.1%
Telecommunication Services & Equipment 8.1%
What strategies did you use to manage the Fund in this difficult environment?
We maintained a longer-term perspective, believing the performance disparity
between U.S. Treasuries and income oriented securities was temporary. We focused
on monitoring yield changes to take advantage of the longer-term opportunities
that short-term price fluctuations can create. Because we expected short-term
rates to rise, we reduced the Fund's position in two-year maturities. We also
increased our exposure to bonds in the five- to 10-year range, to increase
yield. As the period came to a close, we added to the Fund's U.S. agency
position because yield advantages in this sector reached extremely attractive
levels. When yields on long-term bonds rose above 6.0%, we added some positions
in 30-Year securities.
Top 10 Holdings
---------------
(as a percentage of 4/30/2000 net assets)
Coupon Maturity
------ --------
FHLB 7.375% 2/12/2010 4.6%
Credit Suisse First Boston Mtge. Securities Corp. 7.18% 2/25/2018 4.2%
FNMA 8.50% 4/1/2030 3.8%
Norwest Asset Secs Corp. 6.25% 9/25/2028 3.6%
General Electric Capital Mtge. Svcs., Inc. 6.265% 4/25/2029 3.0%
U.S. Treasury Bonds 5.25% 2/15/2029 2.8%
JC Penney Master Credit Card Trust 5.50% 6/15/2007 2.5%
Green Tree Finl. Corp. 6.13% 2/15/2019 2.5%
Enron Corp. 6.725% 11/17/2008 2.5%
Prudential Home Mtge Secs 7.00% 11/25/2025 2.3%
What is your outlook for the bond market over the next six months?
We expect bond prices to fluctuate until the economy begins to cool. In our
opinion, three factors could slow economic growth. First, further tightening
moves by the Federal Reserve Board. Second, moderating gains and/or continued
significant volatility in stock prices. Lastly, a dramatic rise in oil and gas
prices. We believe the future course of interest rates depends on developments
in each of these areas.
With the direction of interest rates uncertain, we intend to build returns by
focusing on the attractive yield advantages offered by income oriented
securities, particularly high quality bonds such as mortgage-backed securities
and highly liquid corporate bonds. We think the market's fluctuations in the
first quarter of 2000 created opportunity in these sectors, laying the
groundwork for stronger performance in the months ahead.
4
<PAGE>
EVERGREEN
Quality Income Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended September 30,
Year Ended ---------------------------------------------
April 30, 2000 (a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES (b)
Net asset value,
beginning of period $ 12.43 $ 13.61 $ 13.18 $ 12.91 $ 13.29 $ 12.75
------- -------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.44 0.79 0.79 0.97 0.89 0.84
Net realized and
unrealized gains or
losses on securities
and futures contracts (0.46) (1.18) 0.47 0.26 (0.37) 0.61
------- -------- ------- ------- ------- -------
Total from investment
operations (0.02) (0.39) 1.26 1.23 0.52 1.45
------- -------- ------- ------- ------- -------
Distributions to
shareholders from
Net investment income (0.43) (0.79) (0.83) (0.96) (0.90) (0.91)
Tax return of capital (0.03) 0 0 0 0 0
------- -------- ------- ------- ------- -------
Total distributions to
shareholders (0.46) (0.79) (0.83) (0.96) (0.90) (0.91)
------- -------- ------- ------- ------- -------
Net asset value, end of
period $ 11.95 $ 12.43 $ 13.61 $ 13.18 $ 12.91 $ 13.29
------- -------- ------- ------- ------- -------
Total return* (0.20%) (2.89%) 9.95% 9.86% 4.09% 11.82%
Ratios and supplemental
data
Net assets, end of
period (thousands) $74,822 $103,794 $94,279 $53,176 $21,092 $24,472
Ratios to average net
assets
Expenses++ 1.63%**+ 1.05% 1.05% 1.05% 1.05% 1.32%
Net investment income 6.35%+ 6.08% 5.73% 7.01% 6.84% 6.73%
Portfolio turnover rate 89% 171% 114% 100% 254% 368%
</TABLE>
<TABLE>
<CAPTION>
Year Ended
April 30, 2000 (c)
<S> <C>
CLASS B SHARES
Net asset value, beginning of period $12.32
------
Income from investment operations
Net investment income 0.35
Net realized and unrealized gains or losses on securities
and futures contracts (0.35)
------
Total from investment operations 0
------
Distributions to shareholders from
Net investment income (0.34)
Tax return of capital (0.03)
------
Total distributions to shareholders (0.37)
------
Net asset value, end of period $11.95
------
Total return* 0.02%
Ratios and supplemental data
Net assets, end of period (thousands) $ 457
Ratios to average net assets
Expenses++ 2.36%**+
Net investment income 5.60%+
Portfolio turnover rate 89%
</TABLE>
(a) For the seven months ended April 30, 2000. The Fund changed its fiscal year
end from September 30 to April 30, effective April 30, 2000.
(b) Effective October 18, 1999, shareholders of Mentor Quality Income Portfolio
Class A, Class B and Class Y shares became owners of that number of full
and fractional shares of Class A, Class C and Class Y shares, respectively,
of Evergreen Quality Income Fund.
(c) For the period from October 18, 1999 (commencement of class operations) to
April 30, 2000.
* Excluding applicable sales charges.
** Ratio of expenses to average net assets includes interest expense.
++ Ratio of expenses to average net assets includes fee waivers and excludes
expense reductions.
+ Annualized.
See Notes to Financial Statements.
5
<PAGE>
EVERGREEN
Quality Income Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended September 30,
Year Ended ---------------------------------------------
April 30, 2000 (a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
CLASS C SHARES (b)
Net asset value,
beginning of period $ 12.43 $ 13.61 $ 13.18 $ 12.93 $ 13.31 $ 12.76
------- ------- -------- ------- ------- -------
Income from investment
operations
Net investment income 0.37 0.71 0.72 0.86 0.84 0.79
Net realized and
unrealized gains or
losses on securities
and futures contracts (0.44) (1.16) 0.48 0.30 (0.38) 0.61
------- ------- -------- ------- ------- -------
Total from investment
operations (0.07) (0.45) 1.20 1.16 0.46 1.40
------- ------- -------- ------- ------- -------
Distributions to
shareholders from
Net investment income (0.38) (0.73) (0.77) (0.91) (0.84) (0.85)
Tax return of capital (0.03) 0 0 0 0 0
------- ------- -------- ------- ------- -------
Total distributions to
shareholders (0.41) (0.73) (0.77) (0.91) (0.84) (0.85)
------- ------- -------- ------- ------- -------
Net asset value, end of
period $ 11.95 $ 12.43 $ 13.61 $ 13.18 $ 12.93 $ 13.31
------- ------- -------- ------- ------- -------
Total return* (0.62%) (3.34%) 9.46% 9.29% 3.57% 11.33%
Ratios and supplemental
data
Net assets, end of
period (thousands) $72,698 $97,403 $112,901 $75,046 $58,239 $62,155
Ratios to average net
assets
Expenses++ 2.35%**+ 1.55% 1.55% 1.55% 1.55% 1.74%
Net investment income 5.60%+ 5.57% 5.22% 6.51% 6.36% 6.24%
Portfolio turnover rate 89% 171% 114% 100% 254% 368%
</TABLE>
<TABLE>
<CAPTION>
Year Ended
September 30,
Year Ended -----------------
April 30, 2000 (a)# 1999 1998 (c)
<S> <C> <C> <C>
CLASS Y SHARES (b)
Net asset value, beginning of period $13.09 $13.69 $13.20
------ ------ ------
Income from investment operations
Net investment income 0.50 0.84 0.78
Net realized and unrealized gains or
losses on securities and futures
contracts (0.59) (1.20) 0.39
------ ------ ------
Total from investment operations (0.09) (0.36) 1.17
------ ------ ------
Distributions to shareholders from
Net investment income (0.47) (0.24) (0.68)
Tax return of capital (0.03) 0 0
------ ------ ------
Total distributions to shareholders (0.50) (0.24) (0.68)
------ ------ ------
Net asset value, end of period $12.50 $13.09 $13.69
------ ------ ------
Total return (0.73%) (2.63%) 8.94%
Ratios and supplemental data
Net assets, end of period (thousands) $ 1 $ 1 $ 1
Ratios to average net assets
Expenses++ 1.18%**+ 0.80% 0.80%+
Net investment income 6.65%+ 6.30% 7.09%+
Portfolio turnover rate 89% 171% 114%
</TABLE>
(a) For the seven months ended April 30, 2000. The Fund changed its fiscal year
end from September 30, to April 30, effective April 30, 2000.
(b) Effective October 18, 1999, shareholders of Mentor Quality Income Portfolio
Class A, Class B and Class Y shares became owners of that number of full
and fractional shares of Class A, Class C and Class Y shares, respectively,
of Evergreen Quality Income Fund. Additionally, the accounting and perfor-
mance history of Class B of Mentor Quality Income Portfolio was
redesignated as Class C of Evergreen Quality Income Fund.
(c) For the period from November 19, 1997 (commencement of class operations) to
September 30, 1998.
# Net investment income is based on average shares outstanding throughout the
period.
* Excluding applicable sales charges.
** Ratio of expenses to average net assets includes interest expense.
++ Ratio of expenses to average net assets includes fee waivers and excludes
expense reductions.
+ Annualized.
See Notes to Financial Statements.
6
<PAGE>
EVERGREEN
Quality Income Fund
Schedule of Investments
April 30, 2000
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
ASSET-BACKED SECURITIES - 15.5% (a)
Advanta Mtge. Loan Trust:
$ 702,051 Ser. 1993-3, Class A-5,
5.55%, 1/25/2025................................... $ 664,018
534,112 Ser. 1993-4, Class A-2,
5.55%, 3/25/2010................................... 518,128
432,983 AFG Receivables Trust,
Ser. 1997-B, Class C,
7.00%, 2/15/2003................................... 431,305
2,535,000 Capital One Master Trust,
Ser. 1998-4, Class A,
5.43%, 1/15/2007................................... 2,371,505
6,500,000 Credit Suisse First Boston Mtge. Secs. Corp.,
Ser. 1996-2, Class A-6,
7.18%, 2/25/2018................................... 6,218,712
873,250 Equifax Credit Corp. Home Equity Loan Trust
Ser. 1994-1, Class B,
5.75%, 3/15/2009................................... 847,991
101,013 Fifth Third Bank Auto Grantor Trust,
Ser. 1996-A, Class A,
6.20%, 9/15/2001................................... 101,013
3,900,000 Green Tree Finl. Corp.,
Ser. 1999-A, Class A-5,
6.13%, 2/15/2019................................... 3,719,449
4,000,000 J.C. Penney Master Credit Card Trust,
Ser. E, Class A,
5.50%, 6/15/2007................................... 3,762,980
1,989,256 Northwest Airlines Corp.,
Ser. 1999-2, Class B,
7.95%, 3/1/2015.................................... 2,022,248
2,500,000 Saxon Asset Secs. Trust, Ser.
1999-2, Class A-6,
6.415%, 3/25/2014.................................. 2,333,863
------------
Total Asset-Backed Securities
(cost $23,988,474)................................. 22,991,212
------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 26.1% (a)
Bank America Mtge. Secs., Inc.:
400,114 Ser. 1998-3,
6.50%, 7/25/2013................................... 379,253
617,687 Ser. 1998-3, Class 2M,
6.50%, 7/25/2013................................... 570,814
1,989,401 Ser. 1999-3, Sub. Class B-1,
6.25%, 5/25/2014................................... 1,804,257
929,026 Ser. 1999-3, Sub. Class B-2,
6.25%, 5/25/2014................................... 848,069
Chase Mtge. Fin. Trust:
2,666,321 Ser. 1993-L, Class 2-M,
7.00%, 10/25/2024.................................. 2,502,249
2,501,910 Ser. 1999-S, Class M,
6.50%, 10/25/2014.................................. 2,290,242
Citicorp Mtge. Secs., Inc.:
903 Ser. 1999-8, Class B-1,
6.25%, 10/25/2029.................................. 781
3,612 Ser. 1999-8, Class M,
6.25%, 10/25/2029.................................. 3,152
General Electric Capital Mtge. Svcs., Inc.:
1,573,558 Ser. 1993-18, Class B-1,
6.00%, 2/25/2009................................... 1,479,845
680,458 Ser. 1998-1, Class M,
6.75%, 1/25/2013................................... 638,777
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS - continued
General Electric Capital Mtge.
Svcs., Inc. - continued
$1,069,225 Ser. 1998-11, Class 3-M,
6.50%, 6/25/2013................................... $ 988,696
4,750,000 Ser. 1999-H, Class A-7,
6.265%, 4/25/2029.................................. 4,418,616
178,317 Key Auto Fin. Trust,
Ser. 1997-2, Class A-4,
6.15%, 10/15/2001.................................. 178,384
Nationsbanc Montgomery Funding:
2,553,419 Ser. 1998-4,
6.25%, 10/25/2028.................................. 2,205,784
2,920,530 Ser. 1998-5, Class B,
6.00%, 11/25/2013.................................. 2,627,836
Norwest Asset Secs. Corp.:
6,027,068 6.25%, 9/25/2028................................... 5,303,845
1,642,423 6.50%, 2/25/2028................................... 1,484,069
1,599,830 7.00%, 9/25/2011................................... 1,529,349
Prudential Home Mtge. Secs.:
1,345,927 Ser. 1993-18, Class M,
7.00%, 6/25/2023................................... 1,277,776
1,422,680 Ser. 1995-5, Class B-1,
7.25%, 9/25/2025................................... 1,366,586
2,508,660 Ser. 1995-5, Class M,
7.25%, 9/25/2025................................... 2,390,289
3,602,384 Ser. 1995-7, Class M,
7.00%, 11/25/2025.................................. 3,388,492
1,110,748 Ser. 1996-4, Class B-1,
6.50%, 4/25/2026................................... 1,006,388
------------
Total Collateralized Mortgage Obligations
(cost $41,007,635)................................. 38,683,549
------------
CORPORATE BONDS - 33.5%
Airlines - 1.4%
2,400,000 Delta Air Lines, Inc.,
8.30%, 12/15/2029.................................. 2,114,681
------------
Cable/Other Video Distribution - 3.7%
1,400,000 Century Communications Corp.,
9.50%, 8/15/2000................................... 1,410,514
1,200,000 Charter Communications,
8.625%, 4/1/2009................................... 1,054,500
750,000 CSC Holdings, Inc.,
9.875%, 5/15/2006.................................. 768,750
500,000 Telewest Communications, PLC,
0.00%, 10/1/2007 (b).. ............................ 472,500
2,000,000 Time Warner, Inc.,
6.875%, 6/15/2018.................................. 1,753,146
------------
5,459,410
------------
Chemical & Agricultural Products - 0.4%
525,000 Lyondell Chemical Co., Ser. B,
9.875%, 5/1/2007................................... 519,094
------------
Communication Systems & Services - 1.9%
625,000 Adelphia Communications Corp.,
9.875%, 3/1/2005................................... 615,625
</TABLE>
7
<PAGE>
EVERGREEN
Quality Income Fund
Schedule of Investments (continued)
April 30, 2000
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
CORPORATE BONDS - continued
Communication Systems & Services - continued
$ 420,000 Microcell Telecommunications, Inc.,
Ser. B,
0.00%, 6/1/2006 (b)................................ $ 381,150
750,000 Nextel Communications, Inc.,
Sr. Disc. Notes, Step Bond,
0.00%, 9/15/2007 (b)............................... 571,875
1,250,000 Rogers Cantel, Inc.,
8.80%, 10/1/2007................................... 1,193,750
------------
2,762,400
------------
Diversified Companies - 1.7%
2,500,000 Duke Capital Corp.,
8.00%, 10/1/2019................................... 2,459,035
------------
Electronic Equipment & Services - 2.1%
800,000 Amkor Technology, Inc.,
9.25%, 5/1/2006.................................... 788,000
2,450,000 FPL Group Capital, Inc.,
7.375%, 6/1/2009................................... 2,351,030
------------
3,139,030
------------
Finance & Insurance - 7.6%
2,400,000 ERAC USA Fin. Co.,
7.95%, 12/15/2009 (c),............................. 2,284,906
2,000,000 Ford Motor Credit Co.,
7.375%, 10/28/2009................................. 1,943,020
3,130,000 National Rural Util. Coop. Fin.,
5.70%, 1/15/2010................................... 2,698,320
2,400,000 Paine Webber Group, Inc.,
7.625%, 12/1/2009.................................. 2,281,742
2,000,000 Salomon, Inc.,
7.30%, 5/15/2002................................... 1,993,072
------------
11,201,060
------------
Food & Beverage Products - 1.3%
2,000,000 Kroger Co.,
8.15%, 7/15/2006................................... 1,972,958
------------
Forest Products - 1.2%
2,000,000 Georgia Pacific Corp.,
7.75%, 11/15/2029.................................. 1,823,488
------------
Gaming - 0.7%
600,000 Casino Magic Louisiana Corp., Ser. B,
13.00%, 8/15/2003.................................. 645,000
375,000 Isle of Capri Casinos, Inc.,
8.75%, 4/15/2009................................... 340,312
------------
985,312
------------
Hospitals/Nursing Homes/Healthcare - 0.5%
700,000 Tenet Healthcare Corp.,
8.625%, 1/15/2007.................................. 674,625
------------
Oil/Energy - 3.5%
4,000,000 Enron Corp.,
6.725%, 11/17/2008................................. 3,668,312
550,000 Eott Energy Partners LP,
11.00%, 10/1/2009.................................. 554,125
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
CORPORATE BONDS - continued
Oil/Energy - continued
$ 500,000 Ocean Energy, Inc.,
Ser. B,
8.375%, 7/1/2008................................... $ 482,500
550,000 Pride Petroleum Svcs., Inc.,
9.375%, 5/1/2007................................... 542,437
------------
5,247,374
------------
Printing, Publishing, Broadcasting &
Entertainment - 1.6%
2,500,000 Times Mirror Co.,
7.45%, 10/15/2009.................................. 2,434,070
------------
Retailing & Wholesale - 0.3%
475,000 K-Mart Corp.,
8.375%, 12/1/2004.................................. 460,947
------------
Telecommunication Services & Equipment - 3.7%
350,000 Allegiance Telecom, Inc.,
12.875%, 5/15/2008................................. 383,250
430,000 Intermedia Communications, Inc.,
Ser. B,
8.60%, 6/1/2008.................................... 393,450
500,000 Level 3 Communications, Inc.,
11.00%, 3/15/2008.................................. 486,250
1,200,000 McLeod USA, Inc.,
9.25%, 7/15/2007................................... 1,152,000
420,000 Metromedia Fiber Network, Inc.,
Ser. B,
10.00%, 11/15/2008................................. 401,100
3,000,000 Sprint Capital Corp.,
6.125%, 11/15/2008................................. 2,669,670
------------
5,485,720
------------
Utilities - Electric - 1.9%
3,000,000 Central Power & Light Co.,
Ser. K,
6.625%, 7/1/2005................................... 2,841,960
------------
Total Corporate Bonds (cost $52,206,387)............ 49,581,164
------------
MORTGAGE-BACKED SECURITIES - 22.8% (a)
6,700,000 FHLB,
7.375%, 2/12/2010 (e).............................. 6,741,064
1,569,064 FHLMC,
Ser. 1647, Class B,
6.50%, 11/15/2008 (e).............................. 1,511,660
FNMA:
3,008,185 6.00%, 12/1/2013................................... 2,773,878
2,372,206 6.50%, 9/25/2008 - 11/1/2014 (e)................... 2,243,068
8,700,870 7.50%, 4/1/2015 - 5/1/2015 (e)..................... 8,656,415
6,482,000 8.50%, 4/1/2030 (e)................................ 6,584,416
GNMA:
3,607,510 7.00%, 12/15/2008 - 4/15/2024 (e).................. 3,531,551
1,683,041 7.125%, 4/15/2001 (e) ............................. 1,708,136
------------
Total Mortgage-Backed Securities
(cost $34,148,897)................................. 33,750,188
------------
U. S. TREASURY OBLIGATIONS - 2.8%
4,650,000 U.S. Treasury Bonds,
5.25%, 2/15/2029
(cost $4,168,690) (e).............................. 4,087,643
------------
</TABLE>
8
<PAGE>
EVERGREEN
Quality Income Fund
Schedule of Investments (continued)
April 30, 2000
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C>
PREFERRED STOCK - 2.3%
4,350,000 Home Ownership Funding, (cost $3,427,677)........... $ 3,375,626
------------
<CAPTION>
Principal
Amount Value
<C> <S> <C>
YANKEE OBLIGATIONS - 9.8%
Cable/Other Video Distribution - 0.8%
$1,100,000 Rogers Cablesystems Ltd.,
Ser. B,
10.00%, 3/15/2005.................................. 1,149,500
------------
Diversified Companies - 1.1%
2,000,000 Rothmans Nederland Holdings BV, MTN,
6.875%, 5/6/2008................................... 1,709,273
------------
Finance & Insurance - 3.5%
2,525,000 Ford Capital BV,
9.875%, 5/15/2002.................................. 2,620,670
2,500,000 Principal Finl. Group Australia,
8.20%, 8/15/2009 (c)............................... 2,498,317
------------
5,118,987
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
YANKEE OBLIGATIONS - continued
Telecommunication Services & Equipment - 4.4%
$3,000,000 Cable & Wireless Communications,
6.75%, 12/1/2008................................... $ 2,967,600
550,000 Clearnet Communications, Inc.,
Sr. Disc. Notes, Step Bond,
0.00%, 12/15/2005 (b).............................. 561,000
3,000,000 Vodafone Airtouch, PLC,
7.75%, 2/15/2010................................... 2,958,504
------------
6,487,104
------------
Total Yankee Obligations
(cost $14,959,178)................................. 14,464,864
------------
REPURCHASE AGREEMENT - 4.1%
6,022,594 State Street Bank & Trust Co.,
5.67%, dated 04/28/2000, maturing 05/01/2000;
maturity value $6,025,440 (cost $6,022,594) (d).... 6,022,594
------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
Total Investments -
(cost $179,929,532)......................... 116.9% 172,956,840
Other Assets and Liabilities - net........... (16.9) (24,979,253)
----- ------------
Net Assets................................... 100.0% $147,977,587
===== ============
</TABLE>
(a) The estimated maturity may be shorter than the stated maturity due to ac-
celerated prepayments of principal.
(b) Security initially issued in zero coupon form which converts to coupon form
at a specified rate and date. An effective interest rate is applied to rec-
ognize interest income daily for the bond. This rate is based on total ex-
pected interest to be earned over the life of the bond which consists of
the aggregate coupon-interest payments and discount at acquisition. The
rate shown is the stated rate at the current period end.
(c) Securities that may be sold to qualified institutional buyers under Rule
144A of the Securities Act of 1933, as amended. These securities have been
determined to be liquid under guidelines established by the Board of Trust-
ees.
(d) The repurchase agreement is fully collateralized by $6,045,000 FNMA 6.195%,
12/27/2000; value including accrued interest--$6,147,850.
(e) A portion of these securities have been segregated as collateral for re-
verse repurchase agreements.
Summary of Abbreviations:
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
GNMA Government National Mortgage Association
MTN Medium Term Note
See Notes to Financial Statements.
9
<PAGE>
EVERGREEN
Quality Income Fund
Statement of Assets and Liabilities
April 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Identified cost of securities................................... $179,929,532
Net unrealized gains or losses on securities.................... (6,972,692)
-------------------------------------------------------------------------------
Market value of securities...................................... 172,956,840
Cash............................................................ 3,559
Receivable for securities sold.................................. 1,973,640
Receivable for Fund shares sold................................. 67,209
Interest receivable............................................. 2,611,273
Prepaid expenses and other assets............................... 204,714
-------------------------------------------------------------------------------
Total assets................................................... 177,817,235
-------------------------------------------------------------------------------
Liabilities
Distributions payable........................................... 762,817
Payable for Fund shares redeemed................................ 198,795
Payable for reverse repurchase agreements....................... 28,823,971
Distribution Plan expenses payable.............................. 7,535
Due to other related parties.................................... 1,214
Accrued expenses and other liabilities.......................... 45,316
-------------------------------------------------------------------------------
Total liabilities.............................................. 29,839,648
-------------------------------------------------------------------------------
Net assets....................................................... $147,977,587
-------------------------------------------------------------------------------
Net assets represented by
Paid-in capital................................................. $179,931,034
Overdistributed net investment income........................... (763,354)
Accumulated net realized gains or losses on securities and
futures contracts.............................................. (24,217,401)
Net unrealized gains or losses on securities.................... (6,972,692)
-------------------------------------------------------------------------------
Total net assets................................................. $147,977,587
-------------------------------------------------------------------------------
Net assets consists of
Class A......................................................... $ 74,821,491
Class B......................................................... 456,750
Class C......................................................... 72,698,296
Class Y......................................................... 1,050
-------------------------------------------------------------------------------
Total net assets................................................. $147,977,587
-------------------------------------------------------------------------------
Shares outstanding
Class A......................................................... 6,262,811
Class B......................................................... 38,227
Class C......................................................... 6,085,045
Class Y......................................................... 84
-------------------------------------------------------------------------------
Net asset value per share
Class A......................................................... $ 11.95
-------------------------------------------------------------------------------
Class A--Offering price (based on sales charge of 4.75%)........ $ 12.55
-------------------------------------------------------------------------------
Class B......................................................... $ 11.95
-------------------------------------------------------------------------------
Class C......................................................... $ 11.95
-------------------------------------------------------------------------------
Class Y......................................................... $ 12.50
-------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
EVERGREEN
Quality Income Fund
Statements of Operations
<TABLE>
<CAPTION>
Year Ended
-------------------------------------
April 30, 2000 (a) September 30, 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Interest................................ $ 8,209,858 $ 17,136,331
Dividends............................... 0 144,975
-------------------------------------------------------------------------------
Total investment income................ 8,209,858 17,281,306
-------------------------------------------------------------------------------
Expenses
Advisory fee............................ 621,650 1,258,891
Distribution Plan expenses.............. 619,272 1,058,124
Administrative services fees............ 103,608 209,815
Transfer agent fee...................... 198,858 240,192
Trustees' fees and expenses............. 3,634 4,330
Printing and postage expenses........... 7,302 24,733
Custodian fee........................... 43,022 31,164
Registration and filing fees............ 41,544 168,883
Professional fees....................... 12,858 34,915
Interest expense........................ 572,234 2,331,502
Other................................... 50,445 15,878
-------------------------------------------------------------------------------
Total expenses......................... 2,274,427 5,378,427
Less: Expense reductions............... (18,530) 0
Fee waivers...................... (235,525) (312,164)
-------------------------------------------------------------------------------
Net expenses........................... 2,020,372 5,066,263
-------------------------------------------------------------------------------
Net investment income................... 6,189,486 12,215,043
-------------------------------------------------------------------------------
Net realized and unrealized gains or
losses on securities and futures
contracts
Net realized gains or losses on:
Securities............................. (4,664,207) (4,581,576)
Futures contracts...................... (607,223) (307,773)
-------------------------------------------------------------------------------
Net realized gains or losses on
securities and futures contracts....... (5,271,430) (4,889,349)
-------------------------------------------------------------------------------
Net change in unrealized gains or losses
on securities and futures contracts.... (1,369,537) (14,077,222)
-------------------------------------------------------------------------------
Net realized and unrealized gains or
losses on securities and futures
contracts.............................. (6,640,967) (18,966,571)
-------------------------------------------------------------------------------
Net decrease in net assets resulting
from operations........................ $ (451,481) $ (6,751,528)
-------------------------------------------------------------------------------
</TABLE>
(a) For the seven months ended April 30, 2000. The Fund changed its fiscal year
end from September 30 to April 30, effective April 30, 2000.
See Notes to Financial Statements.
11
<PAGE>
EVERGREEN
Quality Income Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
April 30, 2000 (a) September 30, 1999 September 30, 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations
Net investment income.. $ 6,189,486 $ 12,215,043 $ 9,334,606
Net realized gains or
losses on securities
and futures
contracts............. (5,271,430) (4,889,349) 713,191
Net change in
unrealized gains or
losses on securities
and futures
contracts............. (1,369,537) (14,077,222) 6,558,180
----------------------------------------------------------------------------------
Net increase
(decrease) in net
assets resulting from
operations........... (451,481) (6,751,528) 16,605,977
----------------------------------------------------------------------------------
Distributions to
shareholders from
Net investment income
Class A............... (3,273,056) (6,334,342) (4,831,082)
Class B............... (6,996) 0 0
Class C (b)........... (2,651,977) (6,056,792) (5,431,749)
Class Y............... (39) (19) (51)
Tax return of capital
Class A............... (208,907) 0 0
Class B............... (447) 0 0
Class C (b)........... (169,266) 0 0
Class Y............... (2) 0 0
----------------------------------------------------------------------------------
Total distributions ... (6,310,690) (12,391,153) (10,262,882)
----------------------------------------------------------------------------------
Capital share
transactions
Proceeds from shares
sold.................. 58,056,307 111,477,462 106,644,051
Net asset value of
shares issued in
reinvestment of
distributions......... 3,944,826 8,117,826 (40,705,601)
Payment for shares
redeemed.............. (108,459,191) (106,436,056) 6,677,759
----------------------------------------------------------------------------------
Net increase
(decrease) in net
assets resulting from
capital share
transactions......... (46,458,058) 13,159,232 72,616,209
----------------------------------------------------------------------------------
Total increase
(decrease) in net
assets.............. (53,220,229) (5,983,449) 78,959,304
Net assets
Beginning of period.... 201,197,816 207,181,265 128,221,961
----------------------------------------------------------------------------------
End of period.......... $ 147,977,587 $ 201,197,816 $207,181,265
----------------------------------------------------------------------------------
Overdistributed net
investment income...... $ (763,354) $ (972,239) $ (923,573)
----------------------------------------------------------------------------------
</TABLE>
(a) For the seven months ended April 30, 2000. The Fund changed its fiscal year
end from September 30 to April 30, effective April 30, 2000.
(b) Effective October 18, 1999, Class B shares of Mentor Quality Income Portfo-
lio were redesignated as Class C shares of Evergreen Quality Income Fund.
See Notes to Financial Statements.
12
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
The Evergreen Quality Income Fund (the "Fund") (formerly Mentor Quality Income
Fund) is a diversified series of Evergreen Fixed Income Trust (the "Trust"), a
Delaware business trust organized on September 18, 1997. The Trust is an open-
end management investment company registered under the Investment Company Act
of 1940, as amended (the "1940 Act"). Prior to October 15, 1999 the Fund was a
diversified series of a Massachusetts business trust.
The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares
are sold with a maximum front-end sales charge of 4.75%. Class B and Class C
shares are sold without a front-end sales charge, but pay a higher ongoing dis-
tribution fee than Class A. Class B shares are sold subject to a contingent de-
ferred sales charge that is payable upon redemption and decreases depending on
how long the shares have been held. 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 follow the conversion rights at the
time the shares were purchased. Class C shares are sold subject to a 2.00% con-
tingent deferred sales charge payable on shares redeemed within one year after
the month of purchase and a 1.00% contingent deferred sales charge if such
shares are redeemed within two years after the month of purchase. Class C
shares purchased prior to February 1, 2000 follow the contingent deferred sales
charge schedule at the time the shares were initially purchased. 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 advi-
sory clients of First Union Corporation ("First Union") and its affiliates,
certain institutional investors or Class Y shareholders of record of certain
other funds managed by First Union and its affiliates as of December 30, 1994.
Effective October 18, 1999, the former Mentor Quality Income Portfolio Class B
shares became Class C shares of the Fund.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently fol-
lowed by the Fund in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles, which require
management to make estimates and assumptions that affect amounts reported here-
in. Actual results could differ from these estimates.
A. Valuation of Securities
Corporate bonds, U.S. government obligations, mortgage and other asset-backed
securities and other fixed-income securities are valued at prices provided by
an independent pricing service. In determining a price for normal institution-
al-size transactions, the pricing service uses methods based on market transac-
tions 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 may be valued by brokers which use prices provided by market makers or
estimates of market value obtained from yield data relating to investments or
securities with similar characteristics. Otherwise, securities for which valua-
tions are not readily available from an independent pricing service (including
restricted securities) are valued at fair value as determined in good faith ac-
cording to procedures established by the Board of Trustees.
Mutual fund shares held by the Fund are valued at the net asset value of the
mutual fund.
Short-term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value.
B. Repurchase Agreements
The Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held in a segregated account by the custodian on
the Fund's behalf. Collateral for certain tri-party repurchase agreements is
held at the counterparty's custodian in a segregated account for the benefit of
the Fund and the counterparty. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of
13
<PAGE>
Notes to Financial Statements (continued)
the repurchase agreement, including accrued interest. The 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 Fund 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, the Fund may enter into reverse repurchase
agreements with qualified third-party broker-dealers. Interest on the value of
reverse repurchase agreements is based upon competitive market rates at the
time of issuance. At the time the Fund enters into a reverse repurchase agree-
ment, 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. Futures Contracts
In order to gain exposure to or protect against changes in security values, the
Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures trans-
action is subsequently adjusted by daily payments or receipts ("variation mar-
gin") as the value of the contract changes. Such changes are recorded as
unrealized gains or losses. Realized gains or losses are recognized on closing
the contract.
Risks of entering into futures contracts include (i) the possibility of an il-
liquid market for the contract, (ii) the possibility that a change in the value
of the contract may not correlate with changes in the value of the underlying
instrument or index, and (iii) the credit risk that the other party will not
fulfill their obligations under the contract. Futures contracts also involve
elements of market risk in excess of the amount reflected in the Statement of
Assets and Liabilities.
E. Securities Lending
In order to generate income and to offset expenses, the Fund may lend portfolio
securities to brokers, dealers and other qualified financial organizations. The
Fund's investment advisor will monitor the creditworthiness of such borrowers.
Loans of securities may not exceed 33 1/3% of a Fund's total assets and will be
collateralized by cash, letters of credit or U.S. Government securities that
are maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities, including accrued interest. The Fund
monitors the adequacy of the collateral daily and will require the borrower to
provide additional collateral in the event the value of the collateral falls
below 100% of the market value of the securities on loan. While such securities
are on loan, the borrower will pay a Fund any income accruing thereon, and the
Fund may invest any cash collateral received in portfolio securities, thereby
increasing its return. The Fund will have the right to call any such loan and
obtain the securities loaned at any time on five days' notice. Any gain or loss
in the market price of the loaned securities, which occurs during the term of
the loan, would affect a Fund and its investors. The Fund may pay fees in con-
nection with such loans.
F. Mortgage Dollar Roll Transactions
The Fund may engage in mortgage dollar roll transactions with respect to mort-
gage-backed securities issued by GNMA, FNMA, and FHLMC. In a mortgage dollar
roll transaction, the Fund sells a mortgage-backed security to a financial in-
stitution, such as a bank or broker/dealer, and simultaneously agrees to repur-
chase a substantially similar (i.e., same type, coupon, and maturity) security
from the institution at a later date at an agreed upon price. The mortgage-
backed securities that are repurchased will bear the same interest rate as
those sold, but generally will be collateralized by different pools of mort-
gages with different prepayment histories. During the roll period the Fund
foregoes principal and interest paid on the securities. The Fund receives com-
pensation from the interest earned on the cash proceeds of the initial sale and
in the form of a fee which is recorded as deferred income and amortized to in-
come over the roll period, or alternatively, a lower
14
<PAGE>
Notes to Financial Statements (continued)
price for the security upon its repurchase. Mortgage dollar rolls may be re-
newed with a new purchase and repurchase price and cash settlement made at each
renewal without physical delivery of the securities subject to the contract.
G. Residual Interests
A derivative security is any investment that derives its value from an under-
lying security, asset, or market index. The Fund may invest in mortgage secu-
rity residual interests ("residuals"), which are considered derivative securi-
ties. The Fund's investments in residuals are primarily in securities issued by
proprietary mortgage trusts. While these entities have been highly leveraged,
often having indebtedness of up to 95% of their total value, the Fund has not
incurred any indebtedness in the course of making these residual investments;
nor has the Fund's assets been pledged to secure the indebtedness of the issu-
ing structure or the Fund's investment in the residuals. In consideration of
the risk associated with investment in residual securities, it is the Fund's
policy to limit their exposure at the time of purchase to no more than 20% of
their total assets.
H. When-issued and Delayed Delivery Transactions
The Fund records when-issued or delayed delivery transactions on the trade date
and will segregate with the custodian qualifying assets having a value suffi-
cient to make payment for the securities purchased. Securities purchased on a
when-issued or delayed delivery basis are marked-to-market daily and the Fund
begins earning interest on the settlement date. Losses may arise due to changes
in the market value of the underlying securities or if the counterparty does
not perform under the contract.
I. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date or in the case of some foreign securities, on the date there-
after when the Fund is made aware of the dividend. Foreign income and capital
gains realized on some foreign securities may be subject to foreign withholding
taxes, which are accrued as applicable.
J. Federal Taxes
The Fund has qualified and intends to continue to qualify as a regulated in-
vestment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund will not incur any federal income tax liability since
it is expected to distribute all of its net investment company taxable income
and net capital gains, if any, to its shareholders. The Fund also intends to
avoid any excise tax liability by making the required distributions under the
Code. Accordingly, no provision for federal taxes is required. To the extent
that realized capital gains can be offset by capital loss carryforwards, it is
the Fund's policy not to distribute such gains.
K. Distributions
Distributions from net investment income for the Fund are declared daily and
paid monthly. Distributions from net realized capital gains, if any, are paid
at least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in accor-
dance with income tax regulations, which may differ from generally accepted ac-
counting 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 futures
contracts, mortgage dollar roll transactions, residual interests and certain
losses on securities repurchased.
L. Class Allocations
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the rela-
tive net assets of each class. Currently, class specific expenses are limited
to expenses incurred under the Distribution Plans for each class.
15
<PAGE>
Notes to Financial Statements (continued)
3. INVESTMENT ADVISORY AGREEMENTS AND OTHER AFFILIATED TRANSACTIONS
Mentor Investment Advisors, LLC ("Mentor Advisors"), a subsidiary of First
Union, is the investment advisor to the Fund, and is paid a management fee that
is computed and paid daily at an annual rate of 0.60% of the Fund's average
daily net assets.
During the period ended April 30, 2000, the amount of investment advisory fees
waived by the investment advisor was $235,525, which impacted the Fund's
annualized expense ratio by 0.23% of the Fund's average daily net assets.
Evergreen Investment Services ("EIS"), a subsidiary of First Union, is the ad-
ministrator to the Fund. As administrator, EIS provides the Fund with facili-
ties, equipment and personnel. EIS is entitled to a fee at an annual rate of
0.10% of the average daily net assets of the Fund.
Officers of the Fund and affiliated Trustees received no compensation directly
from the Fund.
Evergreen Service Company ("ESC"), a subsidiary of First Union, is the transfer
and dividend disbursing agent for the Fund.
4. DISTRIBUTION PLANS
Evergreen Distributor, Inc. ("EDI"), a wholly owned subsidiary of the BISYS
Group, Inc. ("BISYS"), serves as principal underwriter to the Fund.
The Fund has adopted Distribution Plans, as allowed by Rule 12b-1 of the 1940
Act, for each class of shares, except Class Y. Distribution plans permit a Fund
to compensate 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 the Fund through "Distribution Plan expenses". Under the Distribu-
tion Plans, Class A incurs distribution fees equal to 0.25% of the average
daily net asset of the class, all of which is used to pay for shareholder serv-
ice fees. Class B and Class C incur distribution fees equal to 1.00% of the av-
erage daily net assets of each class. Of this amount, 0.25% is used to pay for
shareholder service fees and 0.75% is used to pay for distribution-related
costs. Distribution Plan expenses are calculated and paid daily.
During the period ended April 30, 2000, amounts paid or accrued to EDI pursuant
to the Fund's Class A, Class B and Class C Distribution Plans were $122,829,
$1,312 and $430,397, respectively.
With respect to Class B and Class C shares, the principal underwriter may pay
distribution fees greater than the allowable annual amounts the Fund is permit-
ted to pay under the Distribution Plans.
Each of the Distribution Plans may be terminated at any time by vote of the In-
dependent Trustees or by vote of a majority of the outstanding voting shares of
the respective class.
Prior to October 18, 1999, Mentor Distributors, LLC ("Mentor Distributors")
served as principal underwriter to the Mentor Quality Income Portfolio. Mentor
Distributors is a wholly owned subsidiary of BISYS Fund Services, Inc. The for-
mer Mentor Quality Income Portfolio had adopted a Distribution Plan under Rule
12b-1 of the 1940 Act for its Class B shares. To compensate Mentor Distributors
for the services it provided and for the expenses it incurred, Class B shares
of the former Mentor Fund paid a distribution fee of 0.50%, which was accrued
daily and paid monthly.
Prior to October 18, 1999, the former Mentor Quality Income Portfolio had also
adopted a Shareholder Servicing Plan (the "Service Plan") with Mentor Distribu-
tors with respect to its Class A and Class B shares. Under the Service Plan,
financial institutions entered into shareholder service agreements with the
Mentor Quality Income Portfolio to provide administrative support services to
its customers, who from time to time might have been owners of record or bene-
ficial owners of Class A or Class B shares of the former Mentor Quality Income
Portfolio. In return for providing these support services, a financial institu-
tion might have received
16
<PAGE>
Notes to Financial Statements (continued)
payments from the former Mentor Quality Income Portfolio at an annual rate of
0.25% of the average daily net assets of the Class A or Class B shares of the
former Mentor Quality Income Portfolio beneficially owned by the financial in-
stitution's customers for whom it was a holder of record or with whom it had a
servicing relationship.
For the period ended April 30, 2000, amounts paid or accrued to Mentor Distrib-
utors pursuant to the Mentor Quality Income Portfolio Class A and Class B Dis-
tribution and Service Plans were $12,375 and $52,359, respectively.
5. CAPITAL SHARE TRANSACTIONS
The Fund has an unlimited number of shares of beneficial interest with $0.001
par value authorized. Shares of beneficial interest of the Fund are currently
divided into Class A, Class B, Class C and Class Y. Transactions in shares of
the Fund were as follows:
Quality Income Fund
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
April 30, 2000 (a) September 30, 1999 September 30, 1998
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A
Shares sold............. 1,463,559 $ 18,095,721 6,870,812 $ 86,944,421 4,256,782 $ 56,191,423
Shares issued in
reinvestment of
distributions.......... 167,765 2,058,340 300,159 3,883,017 (1,597,720) (21,178,895)
Shares redeemed......... (3,720,341) (45,571,203) (5,746,275) (71,969,150) 233,015 3,077,659
------------------------------------------------------------------------------------------------------
Net increase
(decrease)............. (2,089,017) (25,417,142) 1,424,696 18,858,288 2,892,077 38,090,187
------------------------------------------------------------------------------------------------------
Class B (c)
Shares sold............. 42,854 524,456
Shares issued in
reinvestment of
distributions.......... 220 2,687
Shares redeemed......... (4,847) (58,919)
------------------------------------------------------------------------------------------------------
Net increase............ 38,227 468,224
------------------------------------------------------------------------------------------------------
Class C (b)
Shares sold............. 3,247,735 39,436,130 1,882,214 24,533,041 3,811,046 50,451,628
Shares issued in
reinvestment of
distributions.......... 153,598 1,883,747 327,045 4,234,809 (1,478,885) (19,526,706)
Shares redeemed......... (5,153,798) (62,829,069) (2,669,108) (34,466,906) 272,551 3,600,049
------------------------------------------------------------------------------------------------------
Net decrease............ (1,752,465) (21,509,192) (459,849) (5,699,056) 2,604,712 34,524,971
------------------------------------------------------------------------------------------------------
Class Y
Shares sold............. 0 0 0 0 76 1,000
Shares issued in
reinvestment of
distributions.......... 4 52 0 0 0 0
Shares redeemed......... 0 0 0 0 4 51
------------------------------------------------------------------------------------------------------
Net increase............ 4 52 0 0 80 1,051
------------------------------------------------------------------------------------------------------
Net increase
(decrease)............. $(46,458,058) $ 13,159,232 $ 72,616,209
------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the seven months ended April 30, 2000. The Fund changed it's fiscal
year end from September 30 to April 30, effective April 30, 2000.
(b) Effective October 18, 1999, shareholders of Mentor Quality Income Portfolio
Class B shares became owners of that number of full and fractional shares
of Class C shares of Quality Income Fund.
(c) For the period from October 18, 1999 (commencement of class operations) to
April 30, 2000.
6. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and mortgage dollar roll transactions) were as follows
for the period ended April 30, 2000:
<TABLE>
<CAPTION>
Cost of Purchases Proceeds from Sales
------------------------------------- -----------------------------------
U.S. Government Non-U.S. Government U.S. Government Non-U.S. Government
----------------------------------------------------------------------------
<S> <C> <C> <C>
$90,801,270 $80,774,799 $126,687,844 $78,162,102
</TABLE>
During the period ended April 30, 2000, the Fund entered into reverse repur-
chase agreements. The average daily balance of reverse repurchase agreements
was approximately $16,960,629 at a weighted average interest rate of 5.80%.
During the period ended April 30, 2000, the Fund incurred an interest expense
of $572,234 related to reverse repurchase agreements. The impact on the Fund's
expense ratio represented as a percentage of its average net assets was 0.55%.
The maximum amount outstanding during the period was $28,553,270 (including ac-
crued interest). At April 30, 2000, the Fund had reverse repurchase agreements
outstanding of
17
<PAGE>
Notes to Financial Statements (continued)
$24,714,578 and $4,109,393 with interest rates and maturity dates of 6.00%
and 5/3/2000 and 5.95% and 5/3/2000, respectively. State Street Bank and Trust
Co. is the counterparty for both reverse repurchase agreements.
The Fund loaned securities during the period ended April 30, 2000 to certain
brokers who paid the Fund a negotiated lenders' fee. These fees are included in
interest income. During the period ended April 30, 2000, the Fund earned $2,549
in income from securities lending. As of April 30, 2000, the Fund had no secu-
rities on loan.
During the period ended April 30, 2000, the Fund entered into mortgage dollar
roll transactions in which the Fund earned $61,303. At April 30, 2000, the Fund
had no mortgage dollar roll agreements outstanding.
At April 30, 2000, the composition of unrealized appreciation and depreciation
on securities based on the aggregate cost of securities for federal income tax
purposes were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Tax Cost Appreciation Depreciation Depreciation
------------------------------------------------------------------------
<S> <C> <C> <C>
$180,390,355 $39,664 $(7,473,179) $(7,433,515)
</TABLE>
As of April 30, 2000, the Fund had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
Expiration
------------------------------------------------------------------
Total 2002 2003 2004 2005 2008
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$19,492,367 $3,547,591 $7,326,035 $1,708,773 $1,325,149 $5,584,819
</TABLE>
Capital losses incurred after October 31 within a Fund's fiscal year are deemed
to arise on the first business day of the Fund's following fiscal year. The
Fund has incurred and will elect to defer post October losses of $4,264,212.
7. EXPENSE REDUCTIONS
The Fund has entered into expense offset arrangements with ESC and its custo-
dian whereby credits realized as a result of uninvested cash balances were used
to reduce a portion of the Fund's related expenses. The assets deposited with
ESC and the custodian under these expense offset arrangements could have been
invested in income-producing assets. The amount of expense reductions received
by the Fund was $18,530 which impacted the Fund's annualized expense ratio by
0.02% of the Fund's average daily net assets.
8. DEFERRED TRUSTEES' FEES
Each Independent Trustee of the Fund may defer any or all compensation related
to performance of their duties as Trustees. The Trustees' deferred balances are
allocated to deferral accounts, which are included in the accrued expenses for
the Fund. The investment performance of the deferral accounts are based on the
investment performance of certain Evergreen Funds. Any gains earned or losses
incurred in the deferral accounts are reported in the Fund's Trustees' fees and
expenses. At the election of the Trustees, the deferral account will be paid
either in one lump sum or in quarterly installments for up to ten years.
9. FINANCING AGREEMENT
On August 6, 1999, the Fund became party to a credit agreement between certain
Evergreen Funds and a group of banks (the "Lenders"). Under this agreement, ef-
fective for certain Evergreen Funds on July 27, 1999, the Lenders provide an
unsecured revolving credit commitment in the aggregate amount of $1.050 bil-
lion. The credit facility is allocated, under the terms of the financing agree-
ment, among the Lenders. The credit facility is accessed by the Funds for tem-
porary or emergency purposes to fund the redemption of their shares or for gen-
eral working capital purposes as permitted by each Fund's borrowing restric-
tions. Borrowings under this facility bear interest at 0.75% per annum above
the Federal Funds rate (1.50% per annum above the Federal Funds rate during the
period from and including December 1, 1999 through and including January 31,
2000). A commitment fee of 0.10% per annum is incurred on the average daily un-
used portion of the revolving credit commitment. The commitment fee is allo-
cated to all funds. For its assistance in arranging this financing agree-
18
<PAGE>
Notes to Financial Statements (continued)
ment, First Union Capital Markets Corp. was paid a one-time arrangement fee of
$250,000. State Street serves as paying agent for the funds and as paying agent
is entitled to a fee of $20,000 per annum which is allocated to all the funds.
The Fund did not borrow under this agreement during the period ended April 30,
2000.
19
<PAGE>
Independent Auditors' Report
Board of Trustees and Shareholders
Evergreen Fixed Income Trust
We have audited the accompanying statements of assets and liabilities, includ-
ing the schedule of investments of the Evergreen Quality Income Fund, a portfo-
lio of Evergreen Fixed Income Trust, as of April 30, 2000, and the related
statements of operations for the seven months then ended and the year ended
September 30, 1999, statements of changes in net assets for the seven months
then ended and the two year period ended September 30, 1999, and the financial
highlights for the seven months ended April 30, 2000 and each of the years or
periods in the five-year period ended September 30, 1999. These financial
statements and financial highlights are the responsibility of the Fund's man-
agement. Our responsibility is to express an opinion on these financial state-
ments and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform our audit to obtain reasonable assurance about whether the finan-
cial 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 April 30, 2000 by correspondence with the custodian.
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 Ever-
green Quality Income Fund as of April 30, 2000, the results of its operations,
changes in its net assets and financial highlights for each of the years or pe-
riods described above in conformity with accounting principles generally ac-
cepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
June 9, 2000
20
<PAGE>
Evergreen Funds
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Income
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Balanced
Tax Strategic Foundation Fund
Foundation Fund
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Growth & Income
Utility Fund
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Value Fund
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Growth Fund
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Express Line
800.346.3858
Investor Services
800.343.2898
[LOGO OF EVERGREEN FUNDS]
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www.evergreen-funds.com
554904 6/2000
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