1933 Act Registration No. 333-93287
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
(Evergreen Intermediate Term Bond Fund)
[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)
Michael H. Koonce, Esq.
Evergreen 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 on filing pursuant to paragraph (b)
<PAGE>
[ ] on _____ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on _____ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(1)
[ ] on _____ pursuant to paragraph (a)(2) of Rule 485
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
124 EAST MARCY
SANTA FE, NEW MEXICO 87501
January 20, 2000
Dear Shareholder :
I am writing to inform you of a Special Shareholders' Meeting of your
Davis Intermediate Investment Grade Bond Fund to be held at the Fund's offices
at 124 Marcy Street, Santa Fe, New Mexico 87501 at 10:00 a.m. on March 17, 2000.
You do not need to attend the meeting to participate. However, it is important
that you take a few minutes to read the enclosed material and vote your shares.
You are being asked to consider and approve an Agreement and Plan of
Reorganization whereby Evergreen Intermediate Term Bond Fund would acquire all
of the assets and assume the identified liabilities of your Fund. In return you
will receive Class A, B, C or Y shares of Evergreen Intermediate Term Bond Fund
having an aggregate net asset value equal to your Davis Intermediate Investment
Grade Bond Fund Class A, B, C or Y shares. At a board meeting on December 7,
1999, your Board of Directors determined that the proposal is in the best
interest of the Fund and its shareholders and recommends a vote "For" the
proposal.
I realize that this Prospectus/Proxy Statement will take time to
review, but regardless of the number of shares you own, it is important that
they be represented and voted. Please take the time to
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read the enclosed material and sign, date and mail the proxy card as soon as
possible. Your prompt response will help save the expenses related to additional
solicitation.
If you have any questions regarding the enclosed proxy material, need
assistance in voting your shares, please contact our proxy solicitor, D.F. King
& Co., at 1-800-769-4414. For your convenience you can also fax back your
completed and signed proxy ballot (both front and back sides) to us at
1-212-269-2796 or vote by telephone at the toll-free number indicated on the
enclosed card containing telephone voting instructions. If you are eligible
to vote your shares via the Internet, your materials include Internet voting
instructions.
Thank you for taking this matter seriously and participating in this
important process.
Sincerely,
/s/Shelby M.C. Davis
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Shelby M.C. Davis
President
Davis Intermediate Investment Grade Bond Fund, Inc.
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<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 17, 2000
Notice is hereby given that a Special Meeting (the "Meeting") of Shareholders of
Davis Intermediate Investment Grade Bond Fund (the "Fund"), a series of Davis
Intermediate Investment Grade Bond Fund, Inc., will be held at the Fund's
offices at 124 East Marcy Street, Santa Fe, New Mexico 87501, on March 17, 2000
at 10:00 a.m. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization (the
"Plan") providing for the acquisition of all of the assets of the Fund by
Evergreen Intermediate Term Bond Fund ("Evergreen Intermediate Fund"), a series
of Evergreen Fixed Income Trust, in exchange for shares of Evergreen
Intermediate Fund and the assumption by Evergreen Intermediate Fund of the
identified liabilities of the Fund. The Plan also provides for distribution of
these shares of Evergreen Intermediate Fund to shareholders of the Fund in
liquidation and subsequent termination of the Fund. A vote in favor of the Plan
is a vote in favor of the liquidation and termination of the Fund.
2. To transact any other business which may properly come before the Meeting or
any adjournment or adjournments thereof.
On behalf of the Fund, the Board of Directors has fixed the close of business on
January 10, 2000 as the record date for the determination of shareholders of the
Fund entitled to notice of and to vote at the Meeting or any adjournment
thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED TO SIGN AND RETURN THE ENCLOSED PROXY IN
THE ENCLOSED ENVELOPE WITHOUT DELAY, WHICH REQUIRES NO POSTAGE, SO THAT THEIR
SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED
PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Directors
Thomas Tays
Secretary
January 20, 2000
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<PAGE>
INSTRUCTIONS FOR PROXY CARD ENDORSEMENT
Please review the following information regarding valid endorsement of your
proxy card. If your endorsement, or signature, does meet these guidelines, your
proxy card will be returned to you.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it appears in the
registration on the proxy card.
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.
3. MINOR'S ACCOUNTS: The custodian listed in the registration must sign the
proxy card. If the minor has reached the age of majority in his or her state,
please contact the customer service department.
4. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration.
Please review the following example registrations and the corresponding
signature required:
<TABLE>
<CAPTION>
REGISTRATION EXAMPLE TYPE OF ACCOUNT/SIGNATURE
<S> <C>
1. AARON M. SMITH 1. "INDIVIDUAL ACCOUNT"
124 E. MARCY STREET
SANTA FE NM 87501-2019 Signature: Aaron M. Smith
2. ANDREA E. MALONEY 2. "JOINT TENANT ACCOUNT"
MICHAEL T. MALONEY JT WROS
124 E. MARCY STREET Signature: Andrea E. Maloney
SANTA FE, NM 87501-2019 Or Michael T. Maloney
3. ALBERT N. ANDERSON CUST 3. "MINOR'S ACCOUNT"
ASHLEY H. ANDERSON
UNIF TRANSFER MIN ACT MD
124 E. MARCY STREET
MECHANICSVILLE MD 20659-3478 Signature: Albert N. Anderson, Custodian
4. NASOYA CORPORATION 4. "CORPORATE ACCOUNT"
TOMMY NAKIJIMA PRES.
FRED T. FARKLE TREAS.
124 E. MARCY STREET Signature: Tommy Nakijima, President
BROCKTON MA 02302-1901 Or Fred T. Farkle, Treasurer
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<PAGE>
5. H. WAGNER & J. GUMENICK TTEE 5. "TRUST ACCOUNT"
GEROME GUMENICK TRUST
U/A DTD JUL 09 91 Signature: H. Wagner, Trustee
124 EAST MARCY STREET Or J. Gumenick, Trustee
LAKE WORTH FL 33467-8852
</TABLE>
If you have a different registration type or you are unable to contact the legal
owner of the account, please contact our proxy solicitor at 1-800- 769- 4414
during New York Stock Exchange business days between the hours of 8:00 a.m. and
10:00 p.m. Eastern Time.
INSTRUCTIONS FOR TELEPHONE VOTING
To vote by telephone follow the three easy steps below:
1. Call the toll-free number indicated on the enclosed card which discusses
telephone voting.
2. Please have your Proxy Card at hand when you call.
3. Enter the twelve-digit "Control No." found on the card, then follow the
simple recorded instructions.
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<PAGE>
PROSPECTUS/PROXY STATEMENT
January 20, 2000
Acquisition of Assets of
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
a series of
Davis Intermediate Investment Grade Bond Fund, Inc.
124 East Marcy Street
Santa Fe, New Mexico 87501
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 Davis
Intermediate Investment Grade Bond Fund ("Davis Intermediate Fund") in
connection with the Agreement and Plan of Reorganization (the "Plan") to be
submitted to shareholders of Davis Intermediate Fund for consideration at a
Special Meeting of Shareholders to be held on March 17, 2000 at 10:00 a.m. at
the Fund's offices at 124 East Marcy Street, Santa Fe, New Mexico 87501 and any
adjournments thereof (the "Meeting"). The Plan provides for all of the assets of
Davis Intermediate Fund to be acquired by Evergreen Intermediate Term Bond Fund
("Evergreen Intermediate Fund") in exchange for shares of Evergreen Intermediate
Fund and the assumption by Evergreen Intermediate Fund of the identified
liabilities of Davis Intermediate Fund (hereinafter referred to as the
"Reorganization"). Evergreen Intermediate Fund and Davis Intermediate Fund are
sometimes hereinafter referred to individually as the "Fund" and collectively as
the "Funds."
Evergreen Intermediate Fund 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"). The investment objectives and
investment strategies of Evergreen Intermediate Fund are similar to those of
Davis Intermediate Fund. Evergreen Intermediate Fund seeks current income by
investing primarily in a broad range of investment quality debt securities. As a
secondary objective, the Fund seeks to protect capital. Where appropriate, the
Fund will take advantage of opportunities to realize capital appreciation. Davis
Intermediate Fund seeks primarily to achieve a high level of current income.
Secondarily, the Fund seeks capital growth so long as such objective is
consistent with the Fund's primary objective. Both Funds invest primarily in
investment grade debt securities.
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<PAGE>
Following the Reorganization, shares of Evergreen Intermediate Fund will be
distributed to shareholders of Davis Intermediate Fund in liquidation of Davis
Intermediate Fund and such Fund will be terminated. Holders of Class A, B, C or
Y shares of Davis Intermediate Fund will receive that number of full and
fractional Class A, B, C or Y shares of Evergreen Intermediate Fund having an
aggregate net asset value equal to the aggregate net asset value of the shares
they currently hold of Davis Intermediate Fund. Each such class of shares of
Evergreen Intermediate Fund has similar Rule 12b-1 distribution-related fees, if
any, as the shares of the respective class of Davis Intermediate Fund held by
them prior to the Reorganization. No sales charge will be imposed in connection
with Class A shares of Evergreen Intermediate Fund received by holders of Class
A shares of Davis Intermediate Fund. In addition, no contingent deferred sales
charge ("CDSC") will be deducted at the time of the Reorganization in connection
with Class B or Class C shares of Evergreen Intermediate Fund received by
holders of Class B or Class C shares of Davis Intermediate Fund. Holders of
Class B and Class C shares of Evergreen Intermediate Fund received in the
Reorganization will be subject to the schedules of CDSCs currently applicable to
the Class B and C shares of Davis Intermediate Fund and not the schedules of
CDSCs applicable to Class B and C shares, respectively, of Evergreen
Intermediate Fund. Class B shares of Evergreen Intermediate Fund received in the
Reorganization will automatically convert to Class A shares after eight years
after the month of initial purchase in accordance with the terms of conversion
applicable to Class B shares of Davis Intermediate Fund rather than in seven
years after the month of purchase in accordance with the conversion terms
applicable to Class B shares of Evergreen Intermediate Fund.
Class B and C shares of Evergreen Intermediate Fund purchased
subsequent to the Reorganization will be subject to the CDSC and conversion
schedules of Evergreen Intermediate Fund. The Reorganization is being structured
as a tax-free reorganization for federal income tax purposes.
This Prospectus/Proxy Statement, which should be retained for future reference,
sets forth concisely the information about Evergreen Intermediate Fund that
shareholders of Davis Intermediate Fund 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 20,
2000, relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Davis Intermediate Fund dated March 31,
1999 and September 30, 1999 and of Evergreen Intermediate Fund dated June 30,
1999, 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 Fund at 200 Berkeley Street, Boston, Massachusetts
02116 or by calling the Fund toll-free at 1-800-343-2898.
The Prospectus of Evergreen Intermediate Fund which pertains to Class A, B, C
and Y shares, dated November 1, 1999, and its Annual Report for the fiscal year
ended June 30, 1999 are incorporated herein by reference in their entirety,
insofar as they relate to Evergreen Intermediate Fund only and not to any other
fund therein. Shareholders of Davis Intermediate
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Fund will receive, with this Prospectus/Proxy Statement, a copy of the
Prospectus of Evergreen Intermediate Fund. Additional information about
Evergreen Intermediate Fund is contained in its Statement of Additional
Information also dated November 1, 1999 which has been filed with the SEC and
which is available upon request and without charge by writing to or calling
Evergreen Intermediate Fund at the address or telephone number listed in the
preceding paragraph.
The two Prospectuses of Davis Intermediate Fund which pertain (i) to Class A, B,
and C shares and (ii) to Class Y shares, each dated August 2, 1999, are
incorporated herein in their entirety by reference. Copies of the Prospectuses,
related Statement of Additional Information dated August 2, 1999, the Annual
Report for the fiscal year ended March 31, 1999 and the Semi-Annual Report for
the six month period ended September 30, 1999, are available upon request and
without charge by writing to Davis Intermediate Fund at the address listed on
the cover page of this Prospectus/Proxy Statement or by calling the Fund
toll-free at 1-800-279-0279.
A copy of the Plan is included as Exhibit A to this Prospectus/Proxy Statement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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.
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<PAGE>
TABLE OF CONTENTS
COMPARISON OF FEES AND EXPENSES.........................................8
SUMMARY.................................................................14
Proposed Plan of Reorganization.........................................14
Tax Consequences........................................................15
Investment Objectives and Investment Strategies of the Funds............ 16
Comparative Performance Information.....................................16
Management of the Funds................................................. 21
Investment Advisers.....................................................21
Administrator...........................................................22
Portfolio Management....................................................22
Distribution of Shares.................................................. 23
Purchase and Redemption Procedures......................................25
Exchange Privileges..................................................... 26
Dividend Policy......................................................... 26
Risks................................................................... 27
REASONS FOR THE REORGANIZATION.......................................... 29
Agreement and Plan of Reorganization.................................... 32
Federal Income Tax Consequences......................................... 34
Pro-forma Capitalization................................................35
Shareholder Information.................................................36
COMPARISON OF INVESTMENT OBJECTIVES AND
STRATEGIES OF THE FUNDS.............................................. 38
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS......................... 40
Forms of Organization................................................... 40
Capitalization..........................................................40
Shareholder Liability................................................... 41
Shareholder Meetings and Voting Rights..................................41
Liquidation............................................................. 42
Liability and Indemnification of Directors or Trustees.................. 42
ADDITIONAL INFORMATION.................................................. 43
VOTING INFORMATION CONCERNING THE MEETING............................... 44
FINANCIAL STATEMENTS AND EXPERTS........................................ 46
<PAGE>
LEGAL MATTERS............................................................. 46
OTHER BUSINESS............................................................ 46
EXHIBIT A: Agreement and Plan of Reorganization..................A-1
EXHIBIT B: Management's Discussion and Analysis of Evergreen
Intermediate Fund Performance..........................B-1
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<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class A, B, C and Y shares of Evergreen Intermediate Fund set
forth in the following tables and in the examples are based on the expenses of
Evergreen Intermediate Fund for the fiscal year ended June 30, 1999 as set forth
in the current Prospectus of Evergreen Intermediate Fund as supplemented.
Effective February 1, 2000, the CDSC schedule of Evergreen Intermediate Fund's
Class C shares was changed. The amounts for Class A, B, C and Y shares of Davis
Intermediate Fund set forth in the following tables and in the examples are
based on the expenses for Davis Intermediate Fund for the fiscal year ended
March 31, 1999 adjusted to reflect a reduction in the management fee as of
October 6, 1998 as set forth in the current Prospectuses of Davis Intermediate
Fund. The pro forma amounts for Class A, B, C, and Y shares of Evergreen
Intermediate Fund are based on what the combined expenses would have been for
Evergreen Intermediate Fund for the fiscal year ended June 30, 1999 as restated
to reflect the current management fees and shareholder transaction expenses.
The following tables show for Davis Intermediate Fund, Evergreen Intermediate
Fund, and Evergreen Intermediate Fund pro forma, assuming consummation of the
Reorganization, the shareholder transaction expenses and annual fund operating
expenses associated with an investment in the Class A, B, C and Y shares of
Evergreen Intermediate Fund and Davis Intermediate Fund.
<TABLE>
<CAPTION>
Comparison of
Davis Intermediate Fund's Class A, B, C and Y shares
With
Evergreen Intermediate Fund's Class A, B, C and Y shares
Davis Intermediate Fund
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 4.75% None None None
-8-
<PAGE>
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, whichever is lower)................ None(1) 4.00% in 1.00% in None
the first the first
year year and
declining 0.00%
to 1.00% thereafter
in the
sixth year
and
0.00%
thereafter
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Management Fee(2)....................................... 0.55% 0.55% 0.55% 0.55%
12b-1 Fees(3)........................................... 0.18% 1.00% 1.00% None
Other Expenses.......................................... 0.54% 0.56% 0.54% 0.36%
---- ---- ----
Annual Fund Operating Expenses ....................... 1.27% 2.11% 2.09% 0.91%
==== ==== ==== ====
Evergreen Intermediate Fund
Class A Class B Class C Class Y
------- ------- ------- -------
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 3.25% None None None
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<PAGE>
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, whichever is lower)................ None(1) 5.00% in None
the first 2.00% in
year the first
declining year,
to 1.00% 1.00% in
in the the
sixth year second
and year and
0.00% 0.00%
thereafter thereafter
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Management Fee(4)....................................... 0.62% 0.62% 0.62% 0.62%
12b-1 Fees(3)........................................... 0.25% 1.00% 1.00% None
Other Expenses.......................................... 0.38% 0.38% 0.38% 0.38%
---- ---- ---- ----
Annual Fund Operating Expenses(5)....................... 1.25% 2.00% 2.00% 1.00%
==== ==== ==== ====
Evergreen Intermediate Fund Pro Forma
Class A Class B (6) Class C (7) Class Y
------- ------- ------- -------
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 3.25% None None None
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Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, whichever is lower)................ None(1) 5.00% in None
the first 2.00% in the
year first year,
declining 1.00% in the
to 1.00% in second year
the sixth and 0.00%
year and thereafter
0.00%
thereafter
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Management Fee.......................................... 0.53 % 0.53% 0.53%
0.53%
12b-1 Fees(3)........................................... 0.25% 1.00% 1.00% None
Other Expenses.......................................... 0.45% 0.45% 0.45%
----- ---- ---- ----
0.45%
Annual Fund Operating 1.23% 1.98% 1.98% 0.98%
==== ==== ==== ====
Expenses(8).............................................
</TABLE>
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(1) Investments of $1 million or more are not subject to a front-end sales
charge, but may be subject to a contingent deferred sales charge of
1.00% (0.75% in the case of Davis Intermediate Fund) upon redemption
within one year after the month of purchase.
(2) On October 6, 1998 the Management Fee for Davis Intermediate Fund was
reduced to 0.55%. Annual Operating Expenses for the Fund have been
restated to reflect current fees.
(3) Class A shares of Evergreen Intermediate Fund 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. Class A shares of Davis Intermediate Fund can pay up to 0.25%
of average daily net assets as a 12b-1 fee. The current effective rate
is 0.18% of average daily net assets.
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(4) After waivers, Evergreen Intermediate Fund's Management Fee is 0.47%. These
waivers may be modified or canceled at any time.
(5) After waivers, Annual Fund Operating Expenses for the Evergreen
Intermediate Fund's Class A, B, C and Y shares were 1.10%, 1.85%, 1.85%
and 0.85%, respectively, for the fiscal year ended June 30, 1999.
(6) Class B shares of Evergreen Intermediate Fund received in the
Reorganization will be subject to the schedule of CDSCs currently
applicable to Class B shares of Davis Intermediate Fund and not to the
schedule of CDSCs applicable to Class B shares of Evergreen
Intermediate Fund. Class B shares of Evergreen Intermediate Fund
purchased subsequent to the Reorganization will be subject to the
Evergreen Intermediate Fund's schedule of CDSCs.
(7) Class C shares of Evergreen Intermediate Fund received in the
Reorganization will be subject to the schedule of CDSCs currently
applicable to Class C shares of Davis Intermediate Fund and not the
schedule of CDSCs applicable to Class C shares of Evergreen
Intermediate Fund. Class C shares of Evergreen Intermediate Fund
purchased subsequent to the Reorganization will be subject to Evergreen
Intermediate Fund's schedule of CDSCs.
(8) In connection with the Reorganization, the investment adviser
to Evergreen Intermediate Fund has contractually agreed for a
period of at least two years to limit the Annual Fund
Operating Expenses as follows: 1.16%, 1.91%, 1.91% and 0.91%
for Class A, B, C and Y shares,
respectively.
Examples: The following tables show for Davis Intermediate Fund, for Evergreen
Intermediate Fund and for Evergreen Intermediate Fund 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 $10,000 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.
For Class B and C shares, the tables also show the effect if the shares are not
redeemed. In the case of Evergreen Intermediate Fund pro forma, the examples for
Class B and C shares reflect, as described in footnotes 6 and 7 above, the CDSC
schedules applicable to Class B and C shares, respectively, of Davis
Intermediate Fund and, with respect to Class B shares, the conversion to Class A
after eight years in accordance with the schedules applicable to Class B shares
of Davis Intermediate Fund. All tables assume reinvestment of dividends and
capital gain distributions.
<TABLE>
<CAPTION>
Davis Intermediate Fund
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A shares 598 859 1,139 1,936
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Class B shares (assuming 614 961 1,334 2,227
redemption at the end of the period)
Class B shares (assuming no 214 661 1,134 2,227
redemption at the end of the period)
Class C shares (assuming 312 655 1,124 2,421
redemption at the end of the period)
Class C shares (assuming no 212 655 1,124 2,421
redemption at the end of the period)
Class Y shares 93 290 504 1,120
Evergreen Intermediate Fund
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
Class A shares 448 709 989 1,787
Class B shares (assuming 703 927 1,278 2,043
redemption at the end of the period)
Class B shares (assuming no 203 627 1,078 2,043
redemption at the end of the period)
Class C shares (assuming 303 627 1,078 2,327
redemption at the end of the period)
Class C shares (assuming no 203 627 1,078 2,327
redemption at the end of the period)
Class Y shares 102 318 552 1,225
Evergreen Intermediate Fund
Pro Forma
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
Class A shares 446 703 979 1,765
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<PAGE>
Class B shares (assuming 601 921 1,268 2,113
redemption at the end of the period)
Class B shares (assuming no 201 621 1,068 2,113
redemption at the end of the period)
Class C shares (assuming 301 621 1,068 2,306
redemption at the end of the period)
Class C shares (assuming no 201 621 1,068 2,306
redemption at the end of the period)
Class Y shares 100 312 542 1,201
</TABLE>
The purpose of the foregoing examples is to assist Davis Intermediate Fund
shareholders in understanding the various costs and expenses that an investor in
Evergreen Intermediate Fund, 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 Davis Intermediate Fund. These
examples should not be considered a representation of past or future expenses or
annual return. Actual expenses may be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Prospectus/Proxy Statement, the
Prospectus of Evergreen Intermediate Fund dated November 1, 1999, the
Prospectuses of Davis Intermediate Fund dated August 2, 1999 (which are
incorporated herein by reference), and the Plan, the form of which is attached
to this Prospectus/Proxy Statement as Exhibit A.
Proposed Plan of Reorganization
The Plan provides for the transfer of all of the assets of Davis Intermediate
Fund in exchange for shares of Evergreen Intermediate Fund and the assumption by
Evergreen Intermediate Fund of the identified liabilities of Davis Intermediate
Fund. The identified liabilities consist only of those liabilities reflected on
the Fund's statement of assets and liabilities determined immediately preceding
the Reorganization. The Plan also calls for the distribution of shares of
Evergreen Intermediate Fund to Davis Intermediate Fund shareholders in
liquidation of Davis Intermediate Fund as part of the Reorganization. As a
result of the Reorganization, the holders of Davis Intermediate Fund Class A, B,
C and Y shares will become the owners of that number of full and fractional
Class A, B, C and Y shares, respectively, of Evergreen Intermediate Fund having
an aggregate net asset value equal to the aggregate net asset value of the
shareholders' shares of Davis Intermediate Fund as of the close of business
immediately prior to the date that Davis
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<PAGE>
Intermediate Fund's assets are exchanged for shares of Evergreen Intermediate
Fund. See "Reasons for the Reorganization - Agreement and Plan of
Reorganization."
The Directors of Davis Intermediate Investment Grade Bond Fund, Inc., including
the Directors who are not "interested persons," as such term is defined in the
1940 Act (the "Independent Directors"), have concluded that the Reorganization
would be in the best interests of shareholders of Davis Intermediate Fund, and
that the interests of the shareholders of Davis Intermediate Fund will not be
diluted as a result of the transactions contemplated by the Reorganization.
Accordingly, the Directors have submitted the Plan for the approval of Davis
Intermediate Fund's shareholders.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL BY SHAREHOLDERS OF DAVIS INTERMEDIATE
FUND OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Fixed Income Trust have also approved the Plan and,
accordingly, Evergreen Intermediate Fund's participation in the Reorganization.
Approval of the Reorganization on the part of Davis Intermediate Fund will
require the affirmative vote of a majority of the dollar value (each dollar of
net asset value per share is entitled to one vote ) of Davis Intermediate Fund's
shares outstanding and entitled to vote. All classes will vote together as a
single class at a Meeting at which a quorum of the Fund's shares is present. A
majority of the dollar value of the outstanding shares, represented in person or
by proxy, is required to constitute a quorum at the Meeting. See "Voting
Information Concerning the Meeting."
If approved by shareholders of the Fund, it is currently contemplated that the
Reorganization will become effective on or about the close of business on March
17, 2000. However, the Reorganization may become effective at another time and
date should the Meeting be adjourned to a later date or should any other
condition to the Reorganization not be satisfied at that time. Notwithstanding
prior shareholder approval, the Plan may be terminated at any time prior to its
implementation by the mutual agreement of the parties thereto.
If the shareholders of Davis Intermediate Fund do not vote to approve the
Reorganization, the Directors will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Davis Intermediate Fund
will have received an opinion of KPMG 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 Fund in the Reorganization. The holding period
and aggregate tax basis of shares of Evergreen Intermediate Fund that are
received by Davis Intermediate Fund's shareholders will be the same as the
holding period and aggregate tax basis of shares of the Fund previously held by
such shareholders, provided that shares of the Fund are held as capital assets.
In addition, the holding period and tax basis of the assets of Davis
-15-
<PAGE>
Intermediate Fund in the hands of Evergreen Intermediate Fund 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 Fund upon the receipt of the assets of the Fund in exchange for
shares of Evergreen Intermediate Fund and the assumption by Evergreen
Intermediate Fund of the identified liabilities of Davis Intermediate Fund.
Investment Objectives and Investment Strategies of the Funds
The investment objectives and investment strategies of Evergreen Intermediate
Fund are similar to those of Davis Intermediate Fund. Evergreen Intermediate
Fund seeks current income by investing primarily in a broad range of investment
grade debt securities. As a secondary objective, the Fund seeks to protect
capital. Where appropriate, the Fund will take advantage of opportunities to
realize capital appreciation. The Fund 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 or by private issuers); corporate
debt securities; and commercial paper. Up to 25% of the Fund's assets may be
invested in high yield, high risk, or below investment-grade, securities ("junk
bonds") having a rating range of BB to CCC by Standard and Poor's Rating
Services ("S&P") and Fitch IBCA, Inc. ("Fitch") and Ba to Caa by Moody's
Investors Service, Inc. ("Moody's"). The Fund currently expects that the
dollar-weighted average maturity of its investments will range from three to
seven years. However, the Fund may invest in securities with remaining
maturities of ten years or less. The Fund may invest up to 50% of its assets in
securities that are primarily traded in securities markets located outside the
United States.
The investment objective of Davis Intermediate Fund is primarily to
achieve a high level of current income. Secondarily, the Fund seeks capital
growth so long as such objective is consistent with the Fund's primary
objective. Under normal market conditions, the Fund invests at least 65% of its
total assets in U.S. dollar-denominated investment grade debt securities,
including corporate bonds and debt issued by the U.S. government, its agencies
and instrumentalities. The Fund invests primarily in a broad range of investment
grade corporate bonds. The Fund may also invest up to 35% of its total assets in
high yield, high risk securities. Under normal market conditions, the Fund
maintains an average maturity of five to ten years. The Fund may invest in
foreign securities provided such securities are denominated in U.S. dollars.
See "Comparison of Investment Objectives and Strategies of the Funds" below.
Comparative Performance Information
Discussions of the manner of calculation of total return are contained in the
respective Prospectuses and Statements of Additional Information of the Funds.
Past performance is not an indication of future results. The calculations of
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment date.
-16-
<PAGE>
The charts below show the percentage gain or loss in each of the past ten
calendar years for Class A shares of Davis Intermediate Fund and Evergreen
Intermediate Fund. They should give you a general idea of how each Fund's return
has varied from year-to-year. Note that prior to October 6, 1998, the Davis
Intermediate Fund invested primarily in high yield, high risk debt securities.
Beginning on October 6, 1998, the Fund began investing primarily in intermediate
investment grade debt securities. Both the bar chart and table for Davis
Intermediate Fund include the results of investing principally in high yield,
high risk debt securities rather than in intermediate investment grade debt
securities.
The graphs include the effects of Fund expenses, but not sales charges. Returns
would be lower if any applicable sales charges were included. The return for the
other classes of shares offered by this Prospectus/Proxy Statement will differ
from the Class A returns shown in the chart, depending on the expenses of that
class.
-17-
<PAGE>
<TABLE>
<CAPTION>
Year-by-Year Total Return for Class A Shares of Davis Intermediate Fund
30%
25%
20% 20.63% 23.37%
15% 17.41%
10% 11.10% 10.41%
5% 7.81%
0% 1.63%
- -5%
(2.47)%
- -10% (8.67)%
- -15%
- -20% (16.07%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
90 91 92 93 94 95 96 97 98 99
</TABLE>
Best Quarter: 9.93% 1st Quarter 1992
Worst Quarter: (12.30)% 4th Quarter 1990
- ----------------
-18-
<PAGE>
<TABLE>
<CAPTION>
Year-by-Year Total Return for Class A Shares of Evergreen Intermediate Fund
30%
25%
20%
15% 16.78%
10% 9.29% 14.46% 8.46%
5% 5.89% 8.13% 4.93% 6.80%
0% -2.40%
- -5% -3.23%
- -10%
- -15%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
90 91 92 93 94 95 96 97 98 99
</TABLE>
Best Quarter: 5.86% 3rd Quarter 1992
Worst Quarter: -2.36% 1st Quarter 1994
- -------------------
The next table lists each Fund's average annual return of Class A,
Class B, Class C and Class Y shares for the 1-year period, 5-year period,
10-year period, if applicable, and since inception (through 12/31/99), including
any applicable sales charges for Class A, B and C shares. These tables are
intended to provide you with some indication of the risks of investing in the
Funds. At the bottom of the table you can compare Evergreen Intermediate Fund's
performance with the Lehman Brothers Intermediate Government/Corporate Bond
Index ("Lehman Brothers Intermediate Bond Index") and Davis Intermediate Fund's
performance with the Merrill Lynch U.S. Corporate Five to Ten Year Index
("Merrill Lynch Intermediate Index") and the Salomon Brothers Long-Term High
Yield Index ("Salomon Brothers High Yield Index"). The Lehman Brothers
Intermediate Bond Index is an unmanaged index based on all publicly issued
intermediate government and corporate debt securities with an average maturity
of one to five years. The Merrill Lynch Intermediate Index is an unmanaged
market capitalization weighted index including fixed-coupon domestic investment
grade corporate bonds with at least $150 million par amount outstanding.
Maturities for all bonds are greater than or equal to five years and less than
ten years. The Salomon Brothers High Yield Index is an unmanaged index which
measures the performance of below investment grade corporate bonds issued in the
United States. An index does not include transaction costs associated with
buying and selling securities nor any management fees. It is not possible to
directly invest in an index.
-19-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
of Davis Intermediate Fund and Evergreen Intermediate Fund
Inception Performance
Date of Since
Class 1 Year 5 Year 10 Year 4/14/87
----------- ------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
Evergreen
Intermediate Fund(1)
Class A shares (5.61)% 5.60% 6.39% 5.73%
2/13/87
Class B shares (7.91)% 5.15% 6.17% 5.57%
2/1/93
Class C shares (4.15)% 5.47% 6.17% 5.57%
2/1/93
Class Y shares (2.16)% 4.34% 6.41% 6.05%
1/26/98
-20-
<PAGE>
Lehman Brothers
Intermediate Bond
Index 0.39% 7.10% 7.26%
7.59%*
</TABLE>
- --------------------------------
* Performance since 4/30/87.
<TABLE>
<CAPTION>
Inception Performance
Date of Since
Class 1 Year 5 Year 10 Year Inception
----------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Davis Intermediate
Fund
-21-
<PAGE>
Class A shares 5/29/80 (7.08)% 2.33% 5.27% 7.19%
Class B shares 12/5/94 (6.92)% 2.10% N/A 2.29%
Class C shares 8/12/97 (3.90)% N/A N/A (3.73)%
Class Y shares 3/20/97 (2.02)% N/A N/A (1.01)%
Merrill Lynch
Intermediate Index (2.16)% 7.95% 8.29% 10.25%*
Salomon Brothers High
Yield Index 0.27% 12.46% 12.47% 12.41%*
</TABLE>
- ---------------------------------
* Performance since 5/31/80.
(1) Historical performance shown for Classes B, C and Y prior to their
inception is based on the performance of Class A, the original class
offered. These historical returns for Classes B, C and Y have not been
adjusted to reflect the effect of each Class' 12b-1 fees. These fees
for Class A are 0.25%, for Class B are 1.00% and for Class C are 1.00%.
Class Y does not pay a 12b-1 fee. If these fees had been reflected,
returns for Classes B and C would have been lower while returns for
Class Y would have been higher.
Important information about Evergreen Intermediate Fund is also contained in
management's discussion of Evergreen Intermediate Fund's performance, attached
hereto as Exhibit B. This information also appears in Evergreen Intermediate
Fund's most recent Annual Report.
Management of the Funds
The overall management of Evergreen Intermediate Fund and of Davis Intermediate
Fund is the responsibility of, and is supervised by, the Board of Trustees of
Evergreen Fixed Income Trust and the Board of Directors of Davis Intermediate
Investment Grade Bond Fund, Inc., respectively.
Investment Advisers
Evergreen Investment Management Company ("EIMC") serves as the investment
adviser for Evergreen Intermediate Fund. EIMC is located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034. EIMC is an indirect subsidiary of First Union
National Bank ("FUNB") which is
-22-
<PAGE>
itself a subsidiary of First Union Corporation, the sixth largest bank holding
company in the United States based on total assets as of September 30, 1999.
FUNB and its affiliates manage the Evergreen family of mutual funds with assets
of approximately $80 billion as of December 31, 1999.
EIMC manages investments and supervises the daily business affairs of Evergreen
Intermediate Fund subject to the authority of the Trustees. Effective January 3,
2000, EIMC is entitled to receive from Evergreen Intermediate Fund an annual fee
of 2.00% of gross dividend and interest income, plus the following:
Average Daily Net Fee
Assets
First $100 million 0.41%
Next $100 million 0.36%
Next $100 million 0.31%
Next $100 million 0.26%
Next $100 million 0.21%
Over $500 million 0.16%
- ----------------------------------- ---------------------------------
Davis Selected Advisers, LP ("DSA") serves as the investment adviser for Davis
Intermediate Fund. As investment adviser, DSA has overall responsibility for
management of the Fund and its daily business affairs. For its services as
investment adviser, DSA is entitled to receive a fee at an annual rate of 0.55%
of the Fund's average daily net assets. DSA's address is 2949 E. Elvira Road,
Suite 101, Tucson, Arizona 85706.
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
Evergreen Investment Services, Inc. ("EIS") serves as administrator to Evergreen
Intermediate Fund, subject to the supervision and control of the Evergreen Fixed
Income Trust's Board of Trustees. EIS provides the Fund with facilities,
equipment and personnel and is entitled to receive an annual fee from the Fund
at a rate of 0.10% of the Fund's average daily net assets.
-23-
<PAGE>
DSA provides certain administrative services at cost to Davis Intermediate Fund
for which it is reimbursed by the Fund.
Portfolio Management
David J. Bowers, CFA, has been the portfolio manager of the Evergreen
Intermediate Fund since January 1999. Mr. Bowers has been a Vice President and
portfolio manager on the High Grade Bond Team at EIMC since January 1999. Prior
to his appointment as portfolio manager of the Fund, Mr. Bowers served as an
associate analyst specializing in investment grade corporate bonds since June
1995. Prior to that, he was a senior managing accountant with EIMC. Mr. Bowers
has been at EIMC since 1987.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund Services, acts
as underwriter of Evergreen Intermediate Fund's shares. EDI distributes the
Fund's shares directly or through broker-dealers, banks (including FUNB), or
other financial intermediaries. Evergreen Intermediate Fund offers Class A, B, C
and Y shares. Each class has separate distribution arrangements. (See
"Distribution-Related and Shareholder Servicing-Related Expenses" below.) No
class bears the distribution expenses relating to the shares of any other class.
In the proposed Reorganization, Davis Intermediate Fund Class A, B, C and Y
shareholders will receive Evergreen Intermediate Fund Class A, B, C or Y shares,
respectively. Each Class of Evergreen Intermediate Fund shares has similar
arrangements with respect to the imposition of Rule 12b-1 distribution and
service fees as the identically designated class of Davis Intermediate Fund
shares. Because the Reorganization will be effected at net asset value without
the imposition of a sales charge, Evergreen Intermediate Fund shares acquired by
shareholders of Davis Intermediate Fund pursuant to the proposed Reorganization
will not be subject to any new initial sales charges or CDSC as a result of the
Reorganization. However, Class B and C shares acquired as a result of the
Reorganization would continue to be subject to a CDSC upon subsequent redemption
to the same extent as if shareholders had continued to hold their shares of
Davis Intermediate Fund. The CDSC schedules applicable to the Class B and C
shares of Evergreen Intermediate Fund received in the Reorganization will be the
CDSC schedules of Class B and C shares, respectively, of Davis Intermediate Fund
in effect at the time Class B and C shares of Davis Intermediate Fund were
originally purchased. Class B shares of Evergreen Intermediate Fund received in
the Reorganization will automatically convert to Class A shares after eight
years after the month of initial purchase in accordance with the terms of
conversion applicable to Class B shares of Davis Intermediate Fund rather than
in seven years after the month of purchase in accordance with the conversion
terms applicable to Class B shares of Evergreen Intermediate Fund. Subsequent
purchases of Class B and C shares of Evergreen
-24-
<PAGE>
Intermediate Fund will be subject to the CDSC and conversion schedules (with
respect to Class B shares) of Evergreen Intermediate Fund.
The following is a summary description of charges and fees for Evergreen
Intermediate Fund Class A, B, C and Y shares which will be received by Davis
Intermediate Fund shareholders in the Reorganization. More detailed descriptions
of the distribution arrangements applicable to the classes of shares are
contained in the Evergreen Intermediate Fund Prospectus and the Davis
Intermediate Fund Prospectuses and in each Fund's Statement of Additional
Information.
NO FRONT-END OR CONTINGENT DEFERRED SALES CHARGE WILL BE IMPOSED ON ANY OF THE
SHAREHOLDERS IN CONNECTION WITH THE REORGANIZATION.
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. The
initial maximum sales charges applicable to purchases of Class A shares is
3.25%. No initial sales charge will be imposed on Class A shares of Evergreen
Intermediate Fund received by Davis Intermediate Fund's shareholders in the
Reorganization. Subsequent purchases of Class A shares will be subject to
initial sales charges. For further discussion of the initial sales charges
applicable to purchases of Class A shares, see "How to Choose the Share Class
that Best Suits You" in the Prospectus of Evergreen Intermediate Fund.
Class B Shares. Class B shares are sold without an initial sales charge but are
subject to a CDSC, which ranges from 5% to 1%, if shares are redeemed during the
first six years after the month of purchase. In addition, Class B shares are
subject to distribution-related fees and shareholder servicing-related fees as
described below. Class B shares issued in the Reorganization will automatically
convert to Class A shares after eight years after the month of initial purchase
in accordance with the terms of conversion applicable to Class B shares of Davis
Intermediate Fund rather than in seven years after the month of purchase in
accordance with the conversion terms applicable to Class B shares of Evergreen
Intermediate Fund. For purposes of determining when Class B shares issued in the
Reorganization to shareholders of Davis Intermediate Fund will convert to Class
A shares, such shares will be deemed to have been purchased as of the date Class
B shares of Davis Intermediate Fund were originally purchased.
Class B shares are subject to higher distribution-related fees than the
corresponding Class A shares on which a front-end sales charge is imposed (until
they convert to Class A shares). The higher fees mean a higher expense ratio, so
Class B shares pay correspondingly lower dividends and may have a lower net
asset value than Class A shares of the Fund.
Class C Shares. Class C shares are sold without initial sales charges and are
subject to distribution-related and shareholder servicing-related fees. Class C
shares are subject to a 2.00% CDSC if such shares are redeemed during the month
of purchase and the 12-month period following the month of purchase and to a
1.00% CDSC if such shares are redeemed during the second 12-month period
following the month of purchase. No CDSC is imposed on amounts redeemed
thereafter. Class C shares incur higher distribution-related and shareholder
servicing- related fees than Class A shares, and do not convert to any other
class of shares.
-25-
<PAGE>
Class Y Shares. Class Y shares are sold at net asset value without any initial
or deferred sales charge and are not subject to distribution-related or
shareholder servicing-related fees. Class Y shares are only available to certain
classes of investors as is more fully described in the Prospectus of Evergreen
Intermediate Fund. Davis Intermediate Fund shareholders who receive Evergreen
Intermediate Fund Class Y shares in the Reorganization and who wish to make
subsequent purchases of Evergreen Intermediate Fund will be able to purchase
Class Y shares.
Additional information regarding the classes of shares of the Funds are included
in their respective Prospectuses and Statements of Additional Information.
Distribution-Related and Shareholder Servicing-Related Expenses. Evergreen
Intermediate Fund 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. This amount may be
increased to the full plan rate for the Fund by the Trustees without shareholder
approval at any time, although there is no intention or expectation that the
rate at which payments are made under the plan will be increased.
Davis Intermediate Fund has adopted a Rule 12b-1 Plan with respect to its Class
A shares under which the Class may pay for distribution and shareholder
servicing-related expenses at an annual rate of up to 0.25% of the average daily
net assets attributable to the Class. Payments with respect to Class A shares
are currently payable at the rate of 0.18% of average daily net assets
attributable to the Class.
Both Funds have adopted a Rule 12b-1 Plan with respect to their Class B and
Class C shares, respectively, under which the Class may pay for
distribution-related and shareholder servicing- related expenses at an annual
rate which may not exceed 1.00% of average daily net assets attributable to the
Class.
The Class B and Class C Rule 12b-1 Plans of Evergreen Intermediate Fund provide
that, of the total 1.00% 12b-1 fee, up to 0.25% may be for payment in respect of
shareholder services. Consistent with the requirements of Rule 12b-1 and the
applicable rules of the National Association of Securities Dealers, Inc.,
following the Reorganization Evergreen Intermediate Fund may make
distribution-related and shareholder servicing-related payments with respect to
Fund shares sold prior to the Reorganization including payments to Davis
Intermediate Fund's former underwriter.
Neither Evergreen Intermediate Fund nor Davis Intermediate Fund has adopted a
Rule 12b-1 Plan or a shareholder servicing plan with respect to its Class Y
shares. A Rule 12b-1 Plan can only be adopted with shareholder approval.
Additional information regarding the Rule 12b-1 Plans adopted by the Funds is
included in their respective Prospectuses and Statements of Additional
Information.
-26-
<PAGE>
Purchase and Redemption Procedures
Information concerning applicable sales charges and distribution-related and
shareholder servicing-related fees is provided above. Investments in the Funds
are not insured. The minimum initial purchase requirement for regular accounts
for both Funds is $1,000. There is no minimum for subsequent purchases of shares
of Evergreen Intermediate Fund. The minimum for subsequent purchases of Davis
Intermediate Fund is $25. 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 Prospectuses for each Fund. Each Fund may involuntarily redeem
shareholders' accounts if the account balance falls below $1,000 in the case of
Evergreen Intermediate Fund and below $250 in the case of Davis Intermediate
Fund (as a result of a redemption or exchange). 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
Class A, B, C, and Y shareholders of either Fund generally may exchange their
shares for shares of the same class of any other Davis Fund (in the case of
Davis Intermediate Fund shares) or Evergreen Fund (in the case of Evergreen
Intermediate Fund shares). Evergreen Intermediate Fund limits exchanges to five
per calendar year and three per calendar quarter. No sales charge is imposed on
an exchange. An exchange which represents an initial investment in another Davis
Fund or Evergreen Fund must amount to at least $1,000. The Evergreen Fund family
for which this exchange privilege is available currently consists of
approximately 60 funds including 24 equity funds, 20 fixed income funds and 16
money market funds. These funds have different investment objectives and
policies. The current exchange privileges, and the requirements and limitations
attendant thereto, are described in the Funds' respective Prospectuses and
Statements of Additional Information.
Dividend Policy
Davis Intermediate Fund declares and pays dividends monthly. Dividends are paid
from estimated net investment income and short-term capital gains on
investments. Evergreen Intermediate Fund distributes dividends from its net
investment income (the dividends, interest and other income on the securities in
which it invests) monthly and any short-term capital gains annually.
Distributions of any net realized long-term gains of each 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. See
the respective Prospectuses of the Funds for further information concerning
dividends and distributions.
-27-
<PAGE>
After the Reorganization, shareholders of Davis Intermediate Fund who have
elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from Evergreen Intermediate Fund
reinvested in shares of Evergreen Intermediate Fund. Shareholders of Davis
Intermediate Fund who have elected to receive dividends and/or distributions in
cash will receive dividends and/or distributions from Evergreen Intermediate
Fund 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 Fund.
Each of Evergreen Intermediate Fund and Davis Intermediate Fund has qualified,
and intends to continue to qualify in the future, 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
Because the investment objectives and investment strategies of Evergreen
Intermediate Fund are similar to those of Davis Intermediate Fund, the risks
associated with the particular investment policies and strategies that each Fund
are authorized to employ also are similar. There is no assurance that investment
performance will be positive and that the Funds will meet their investment
objectives. For a discussion of each Fund's objectives and policies, see
"Comparison of Investment Objectives and Strategies of the Funds."
Each Fund invests in debt securities. The main risks of investing in debt
securities are:
Interest Rate Risk. When interest rates go up, the value of debt securities
tends to fall. Since the Funds both invest substantially all of their portfolios
in debt securities, if interest rates rise, then the value of a shareholder's
investment in the Funds may decline. When interest rates go down, interest
earned by the Funds on their debt securities may also decline, which could cause
the Funds to reduce the dividends they pay. Davis Intermediate Fund attempts to
manage its interest rate sensitivity by maintaining an average maturity of
between five and ten years. Evergreen Intermediate Fund attempts to manage its
interest rate sensitivity by maintaining an average maturity of between three
and seven years. At September 30, 1999, the average maturity of Evergreen
Intermediate Fund's portfolio securities was 7.4 years and the average maturity
of Davis Intermediate Fund's portfolio securities was 8.2 years.
Credit Risk. The value of a debt security is directly affected by the issuer's
ability to repay principal and pay interest on time. Since the Funds invest in
debt securities, the value of a shareholder's investment in the Funds may
decline if an issuer fails to pay an obligation on a timely basis.
-28-
<PAGE>
Below Investment Grade Security Risk. Below investment grade securities are
commonly referred to as "junk bonds" or high yield, high risk securities because
they are usually backed by issuers of less proven or questionable financial
strength. Such issuers are more vulnerable to financial setbacks and less
certain to pay interest and principal than issuers of bonds offering lower
yields and risk. Markets may react to unfavorable news about issuers of below
investment grade securities, causing sudden and steep declines in value.
In addition, issuers of below investment grade securities are likely to have a
substantial amount of other debt. Most, if not all, of this other debt will be
"senior" to the below investment grade securities; an issuer must be current on
its senior obligations before it can pay lower- ranking obligations. In
addition, some of the other debt may be secured by the issuer's primary assets.
If the issuer defaults on those other debts, the lenders may seize their
collateral -- possibly forcing the issuer into bankruptcy. Furthermore, such
securities may also be difficult to resell because many investors do not want
below investment grade securities, and others are prohibited from buying them.
Below investment grade securities are also subject to call or income risk, which
is the possibility that securities with high interest rates will be prepaid (or
called) by the issuer prior to maturity during periods of falling interest
rates. This would require a Fund to invest the resulting proceeds elsewhere at
generally lower interest rates.
Changes in Debt Rating. If a rating agency gives a security a low rating, the
value of the security will decline because investors will demand a higher rate
of return. Neither Fund is required to sell or otherwise dispose of any security
that loses its rating or has its rating reduced after the Fund has purchased it.
Mortgage-Backed Securities Risk. Each Fund may invest in mortgage-backed and
asset-backed securities. Early repayment of the mortgages or other collateral
underlying these securities may expose a Fund to a lower rate of return when it
reinvests the principal. The rate of prepayments will affect the price and
volatility of the mortgage-backed security and may have the effect of shortening
or extending the effective maturity beyond what the Fund anticipated at the time
of purchase. In addition, asset-backed securities present certain risks. For
instance, in the case of credit card receivables, these securities may not have
the benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicer to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
-29-
<PAGE>
Foreign Investment Risk. If either Fund invests in non-U.S. securities it could
be exposed to certain unique risks of foreign investing. For example, political
turmoil and economic instability in the countries in which the Fund invests
could adversely affect the value of your investment. The foreign debt securities
in which the Davis Intermediate Fund may invest will be denominated in U.S.
dollars. Evergreen Intermediate Fund may invest in foreign securities
denominated in foreign currencies. If the value of any foreign currency in which
Evergreen Intermediate Fund's investments are denominated declines relative to
the U.S. dollar, the value of an investment in the Fund may decline as well.
Certain foreign countries have less developed and less regulated securities
markets and accounting systems than the U.S. This may make it harder to get
accurate information about a security or company, and increase the likelihood
that an investment will not perform as well as expected.
Evergreen Intermediate Fund may engage in foreign currency transactions,
therefore the value of the Fund's shares will be affected by changes in exchange
rates. To manage this risk the Fund may enter into currency futures contracts
and forward currency exchange contracts to hedge exchange rate risk. There is no
assurance that the Fund will be successful hedging these risks or that it will
not lose money hedging.
Derivatives Risk. Each Fund may invest in derivatives, including options,
futures and options on futures. The market values of derivatives or structured
securities may vary depending upon the manner in which the investments have been
structured and may fluctuate much more rapidly and to a much greater extent than
investments in other securities. As a result, the values of such investments may
change at rates in excess of the rates at which traditional fixed income
securities change and, depending on the structure of a derivative, could change
in a manner opposite to the change in the market value of a traditional fixed
income security.
REASONS FOR THE REORGANIZATION
On November 19, 1999, EIMC, DSA, and Venture Advisors, Inc., DSA's sole general
partner, executed an Asset Purchase Agreement providing for the purchase by EIMC
of certain assets of DSA and Venture Advisors, Inc. relating to the Davis
Intermediate Fund (the "Asset Purchase Agreement"). Pursuant to the Asset
Purchase Agreement, EIMC agreed to purchase from DSA certain assets including
books and records, investment research reports and files, prepaid commissions
relating to Class B and C shares, and lists of brokers and financial advisers.
For the payment of assets other than deferred commissions, the purchase price
will be based on a formula, which when calculated, will total approximately
$357,000. For deferred commission assets, the purchase price will be based on
book value. DSA also agreed not to engage in certain activities which might be
detrimental to EIMC's continued management of Evergreen Intermediate Fund after
the Reorganization.
The Evergreen Funds trace their roots to 1932 and EIMC's predecessor launched
the first fixed-income mutual funds ever in 1935. Today, FUNB and its affiliates
manage over $80 billion in assets for more than 3 million shareholders in over
70 different mutual funds, including 33 bond funds with $12 billion in assets
(corporate bond-$5.9 billion, tax free bond-$5.0 billion, and specialty
income-$1.0 billion). Evergreen Funds offer a wide array of fixed-income funds,
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from high quality to high yield, and from taxable to tax exempt, so investors
can find well-diversified income funds whatever their goals.
The merger of Davis Intermediate Fund into Evergreen Intermediate Fund, a fund
with similar investment policies and objectives, may lead to greater economies
of scale, lower expenses and improved investment performance. The Evergreen
Funds name may be more successful in attracting continuing shareholder
investment. The resulting positive cash flows and resulting increase in net
assets from additional shareholders may lead to greater economies of scale,
lower expenses and improved investment performance. A positive cash flow from
continuing shareholder investments would contribute to the Fund's investment
performance by allowing the Fund to take advantage of investment opportunities
and invest for the long-term by meeting routine shareholder redemptions from the
sale of fund shares rather than by liquidating portfolio securities.
The Reorganization is structured to comply with the safe harbor provided by
Section 15(f) of the 1940 Act which provides that in the event of a change of
control of an investment adviser, the investment adviser or any of its
affiliated persons may receive any amount or benefit in connection therewith
under certain conditions. While the Reorganization does not involve a change in
control of DSA, following the Section 15(f) conditions provides additional
assurance that Davis Intermediate Fund shareholders will be treated fairly.
One condition imposed by Section 15(f) of the 1940 Act is that for three years
thereafter, at least 75% of the board of directors of a surviving investment
company are not "interested persons" of the company's investment adviser or of
the investment adviser of the terminating investment company. The Board of
Trustees of Evergreen Fixed Income Trust currently complies with this condition
and intends to continue to comply with this condition for a period of three
years after the Reorganization.
Another condition is that no "unfair burden" is imposed on the investment
company as a result of the transactions or any terms, conditions or
understandings applicable to them. The term "unfair burden" is considered under
the 1940 Act to include any arrangement during the two-year period after the
transaction whereby the investment adviser (or predecessor or successor adviser)
or any "interested person" of any such adviser, receives or is entitled to
receive any compensation, directly or indirectly, from the investment company or
its security holders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than fees for bona fide principal underwriting services). Davis
Intermediate Investment Grade Bond Fund Inc.'s Board of Directors has been
informed by DSA and EIMC that they were not aware of any circumstances relating
to the Reorganization that might result in the imposition of an "unfair burden"
on Davis Intermediate Fund.
Davis Intermediate Investment Grade Bond Fund, Inc.'s Board of Directors
considered the proposed Reorganization at meetings held on September 24, 1999
and December 7, 1999 at which the Directors reviewed and discussed materials
supplied by DSA and EIMC, and met with representatives of EIMC. The Directors
relied upon counsel to the Independent Directors to assist
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<PAGE>
them in their deliberations. The Board of Directors gave final approval to the
Reorganization at the December 7, 1999 meeting.
The Board of Directors, including the Independent Directors, determined that the
Reorganization is in the best interests of shareholders of Davis Intermediate
Fund and that the interests of existing shareholders of Davis Intermediate Fund
will not be diluted as a result of the transaction. The Board of Directors
evaluated the potential economies of scale associated with larger mutual funds.
As of September 30, 1999 Evergreen Intermediate Fund's net assets were
approximately $166.2 million and Davis Intermediate Fund's net assets were
approximately $41 million.
In approving the Plan, the Board of Directors of Davis Intermediate Investment
Grade Bond Fund, Inc. (including the Independent Directors voting separately)
considered the following factors, among others:
(i) The Asset Purchase arrangements;
(ii) The terms and conditions of the Reorganization;
(iii) The fact that shareholder interests will not be diluted as a result of
the Reorganization;
(iv) The expected federal income tax consequences of the Reorganization (the
Reorganization is structured to qualify as a tax-free exchange);
(v) The similarity and compatibility of the two Funds' investment objectives
and policies;
(vi) The investment advisory and other fees and expenses of Evergreen
Intermediate Fund and Davis Intermediate Fund;
(vii) The potential economies of scale associated with larger mutual funds
and the operational efficiencies that may be achieved by combining
Evergreen Intermediate Fund and Davis Intermediate Fund;
(viii) The investment experience, expertise and resources of EIMC, the
investment adviser for Evergreen Intermediate Fund;
(ix) The service and distribution resources available to the Evergreen Funds and
the broad array of investment alternatives available to shareholders of the
Evergreen Funds;
(x) The personnel and financial resources of First Union Corporation (the
parent of EIMC) and its affiliates;
(xi) The fact that EIMC has contractually agreed for a period of two years
to limit the Fund's Annual Operating Expenses (see "Comparison of Fees
and Expenses");
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<PAGE>
(xii) The fact that Evergreen Intermediate Fund will assume the identified
liabilities of Davis Intermediate Fund; and
(xiii) The fact that DSA will bear the expenses incurred by Davis Intermediate
Fund in connection with the Reorganization and that FUNB will bear the
expenses incurred by Evergreen Intermediate Fund in the Reorganization.
After consideration of the factors listed above, together with other factors and
information considered to be relevant, Davis Intermediate Investment Grade Bond
Fund, Inc.'s Board of Directors unanimously approved the Plan and directed that
the Plan be submitted to the shareholders of Davis Intermediate Fund for
approval.
THE DIRECTORS OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND,
INC. RECOMMEND THAT THE SHAREHOLDERS OF THE FUND APPROVE THE
PROPOSED REORGANIZATION.
The Trustees of Evergreen Fixed Income Trust also concluded at a meeting on
December 6, 1999 that the proposed Reorganization would be in the best interests
of shareholders of Evergreen Intermediate Fund and that the interests of the
shareholders of Evergreen Intermediate Fund would not be diluted as a result of
the transactions contemplated by the 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 Fund will acquire all of the
assets of Davis Intermediate Fund in exchange for shares of Evergreen
Intermediate Fund and the assumption by Evergreen Intermediate Fund of the
identified liabilities of Davis Intermediate Fund on or about March 17, 2000 or
such other date as may be agreed upon by the parties (the "Closing Date"). Prior
to the Closing Date, Davis Intermediate Fund will endeavor to discharge all of
its known liabilities and obligations. Evergreen Intermediate Fund will not
assume any liabilities or obligations of Davis Intermediate Fund other than
those reflected in an unaudited statement of assets and liabilities of Davis
Intermediate Fund 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 aggregate net asset value of the Evergreen Intermediate Fund
shares received will equal the aggregate net asset value of each shareholder's
Davis Intermediate Fund shares. The number of shares of each class of Evergreen
Intermediate Fund received by the shareholders of Davis Intermediate Fund will
be determined by multiplying the respective outstanding class of shares of Davis
Intermediate Fund by a figure which shall be computed by dividing the net asset
value per share of the respective class of shares of Davis Intermediate Fund by
the net asset value per share of the respective class of shares of Evergreen
Intermediate Fund. Such computations will take place as of the close of regular
trading on the NYSE on the business day immediately prior to the Closing Date.
The net asset value per share of each class will be determined by dividing
assets, less liabilities, in each case attributable to the respective class, by
the total number of outstanding shares.
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<PAGE>
State Street Bank and Trust Company, the custodian for both Funds, will compute
the value of Davis Intermediate Fund's portfolio securities. The method of
valuation employed will be consistent with the procedures set forth in the
Prospectus and Statement of Additional Information of Evergreen Intermediate
Fund, Rule 22c-1 under the 1940 Act, and with the interpretations of such Rule
by the SEC's Division of Investment Management.
At or prior to the Closing Date, Davis Intermediate Fund 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, Davis Intermediate
Fund 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 Fund received by Davis Intermediate Fund. Such
liquidation and distribution will be accomplished by the establishment of
accounts in the names of the Fund's shareholders on Evergreen Intermediate
Fund's share records of its transfer agent. Each account will represent the
respective pro rata number of full and fractional shares of Evergreen
Intermediate Fund due to the Fund's shareholders. All issued and outstanding
shares of Davis Intermediate Fund, including those represented by certificates,
will be canceled. The shares of Evergreen Intermediate Fund to be issued will
have no preemptive or conversion rights. After these distributions and the
winding up of its affairs, Davis Intermediate Fund will be terminated.
The consummation of the Reorganization is subject to the conditions set forth in
the Plan, including approval by Davis Intermediate Fund's shareholders, accuracy
of various representations and warranties and receipt of opinions of counsel and
tax advisers, including opinions with respect to those matters referred to in
"Federal Income Tax Consequences" below. Notwithstanding approval of Davis
Intermediate Fund's shareholders, the Plan may be terminated (a) by the mutual
agreement of Davis Intermediate Fund and Evergreen Intermediate Fund; or (b) at
or prior to the Closing Date by either party (i) because of a breach by the
other party of any representation, warranty, or agreement contained therein to
be performed at or prior to the Closing Date if not cured within 30 days, or
(ii) because a condition to the obligation of the terminating party has not been
met and it reasonably appears that it cannot be met.
The expenses of Davis Intermediate Fund and Evergreen Intermediate Fund in
connection with the Reorganization (including the cost of any proxy soliciting
agent) will be borne by DSA and FUNB, respectively, whether or not the
Reorganization is consummated. No portion of such expenses will be borne
directly or indirectly by Davis Intermediate Fund, or Evergreen Intermediate
Fund or their shareholders.
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<PAGE>
If the Reorganization is not approved by shareholders of Davis Intermediate
Fund, Davis Intermediate Investment Grade Bond Fund, Inc.'s Board of Directors
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, Davis Intermediate Fund will receive an opinion
of KPMG 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 Davis Intermediate Fund solely in
exchange for shares of Evergreen Intermediate Fund and the assumption by
Evergreen Intermediate Fund of the identified liabilities of Davis Intermediate
Fund, followed by the distribution of Evergreen Intermediate Fund's shares by
Davis Intermediate Fund in dissolution and liquidation of Davis Intermediate
Fund, will constitute a "reorganization" within the meaning of section
368(a)(1)(C) of the Code, and Evergreen Intermediate Fund and Davis Intermediate
Fund will each be a "party to a reorganization" within the meaning of section
368(b) of the Code;
(2) No gain or loss will be recognized by Davis Intermediate Fund on the
transfer of all of its assets to Evergreen Intermediate Fund solely in exchange
for Evergreen Intermediate Fund shares and the assumption by Evergreen
Intermediate Fund of the identified liabilities of Davis Intermediate Fund or
upon the distribution of Evergreen Intermediate Fund's shares to Davis
Intermediate Fund's shareholders in exchange for their shares of Davis
Intermediate Fund;
(3) The tax basis of the assets transferred will be the same to Evergreen
Intermediate Fund as the tax basis of such assets to Davis Intermediate Fund
immediately prior to the Reorganization, and the holding period of such assets
in the hands of Evergreen Intermediate Fund will include the period during which
the assets were held by Davis Intermediate Fund;
(4) No gain or loss will be recognized by Evergreen Intermediate Fund upon the
receipt of the assets from Davis Intermediate Fund solely in exchange for the
shares of Evergreen Intermediate Fund and the assumption by Evergreen
Intermediate Fund of the identified liabilities of Davis Intermediate Fund;
(5) No gain or loss will be recognized by Davis Intermediate Fund's shareholders
upon the issuance of the shares of Evergreen Intermediate Fund to them, provided
they receive solely such shares (including fractional shares) in exchange for
their shares of Davis Intermediate Fund; and
(6) The aggregate tax basis of the shares of Evergreen Intermediate Fund,
including any fractional shares, received by each of the shareholders of Davis
Intermediate Fund pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares of Davis Intermediate Fund held by such
shareholder immediately prior to the Reorganization. The holding period of
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<PAGE>
the shares of Evergreen Intermediate Fund, including fractional shares, received
by each such shareholder will include the period during which the shares of
Davis Intermediate Fund exchanged therefor were held by such shareholder
(provided that the shares of Davis Intermediate Fund were held as a capital
asset on the Closing Date).
Opinions of tax advisers 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 Davis Intermediate Fund
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 Fund shares he or she received. Shareholders of Davis Intermediate
Fund should consult their tax advisers regarding the effect, if any, of the
proposed Reorganization in light of their individual circumstances. Since the
foregoing discussion relates only to the federal income tax consequences of the
Reorganization, shareholders of Davis Intermediate Fund should also consult
their tax advisers as to the state and local tax consequences, if any, of the
Reorganization.
Any capital loss carryforwards of Davis Intermediate Fund will be available to
Evergreen Intermediate Fund to offset capital gains recognized after the
Reorganization, subject to limitations imposed by the Code. These limitations
provide generally that the amount of loss carryforward which may be used in any
year following the closing is an amount equal to the value of all of the
outstanding stock of Davis Intermediate Fund immediately prior to the
Reorganization, multiplied by a long-term tax-exempt bond rate determined
monthly by the Internal Revenue Service. A capital loss carryforward may
generally be used without any limit to offset gains recognized during the five
year period beginning on the date of the Reorganization on the sale of assets
transferred by Davis Intermediate Fund to Evergreen Intermediate Fund pursuant
to the Reorganization, to the extent of the excess of the value of any such
asset on the Closing Date over its tax basis.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen Intermediate
Fund and Davis Intermediate Fund as of December 31, 1999, and the capitalization
of Evergreen Intermediate Fund on a pro forma basis as of that date, giving
effect to the proposed acquisition of assets at net asset value. The pro forma
data reflects an exchange ratio of approximately 0.44, 0.44, 0.44 and 0.44 of a
Class A, B, C and Y share of Evergreen Intermediate Fund issued for each
corresponding Class A, B, C and Y share, respectively, of Davis Intermediate
Fund.
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<PAGE>
<TABLE>
<CAPTION>
Capitalization of Davis Intermediate Fund, Evergreen Intermediate Fund
and Evergreen Intermediate Fund (Pro Forma)
Evergreen
Davis Evergreen Intermediate Fund
Intermediate Intermediate (After
Fund Fund Reorganization)
-------------------- ---------------- ---------------
<S> <C> <C> <C>
Net Assets
Class A shares: $13,369,469 $88,492,103 $101,861,572
Class B shares: $15,188,073 $ 9,514,635 $ 24,702,708
Class C shares: $3,394,887 $ 4,124,255
Class Y shares: $3,750,840 $46,594,815 $ 7,519,142
-------------- --------------- $ 50,345,655
----------
------
Total Net Assets $148,725,808 $184,429,077
$35,703,269
Net Asset Value Per
Share
Class A shares: $8.33 $8.33
Class B shares: $8.33 $8.33
Class C shares: $8.33 $8.33
Class Y shares: $8.33 $8.33
$3.67
$3.64
$3.67
$3.69
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<PAGE>
Shares Outstanding
Class A shares: 10,617,592 12,220,685
Class B shares: 3,638,630 1,141,604 2,962,524
Class C shares: 494,828 902,471
Class Y shares: 4,167,103 5,590,583 6,040,480
925,251 -------------- --------------
1,015,621
------------
All Classes 9,746,605 17,844,607 22,126,160
</TABLE>
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 January 10, 2000 (the "Record Date"), the following number of each class
of shares of Davis Intermediate Fund was outstanding:
<TABLE>
<CAPTION>
Voting Power (one
Number of Net Asset Value vote for each $ of
Class of Shares Shares Per Share NAV)
- --------------- ------------- ------------------- ----
<S> <C> <C> <C>
Class A shares: 3,601,475 $3.63 13,073,354
Class B shares: $3.60 14,078,326
Class C shares: $3.62 2,567,409
Class Y shares: 3,910,646 $3.64 3,720,379
-----------
709,229
1,022,082
All Classes 9,243,432 33,439,468
</TABLE>
As of December 31, 1999, the officers and Directors of Davis Intermediate
Investment Grade Bond Fund, Inc. beneficially owned as a group less than 1% of
the outstanding shares of Davis Intermediate Fund. To Davis Intermediate Fund's
knowledge, the following persons owned
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beneficially or of record more than 5% of any class of Davis Intermediate Fund's
outstanding shares as of December 31, 1999:
<TABLE>
<CAPTION>
Percentage of Percentage of
Shares of Class Shares of
Before Class After
Name and Address No. of Shares Reorganization Reorganization
- ---------------- ------------- -------------- --------------
<S> <C> <C> <C>
Class A shares
Merrill Lynch Pierce Fenner & Smith 221,205 6.08% 1.81%
Mutual Fund Operations
4800 Deerlake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Class B shares
Merrill Lynch Pierce Fenner & Smith 28.89% 40.90%
Mutual Fund Operations 1,211,704
4800 Deerlake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Class C shares
Merrill Lynch Pierce Fenner & Smith 33.34% 34.18%
Mutual Fund Operations 308,444
4800 Deerlake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Class Y shares
Naidot & Co. 97.54% 16.40%
Bessemer Trust Company 990,669
100 Woodbridge Ctr. Drive
Woodbridge, NJ 07095-1125
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES OF THE FUNDS
The following discussion is based upon and qualified in its entirety by the
descriptions of the respective investment objectives, strategies, policies and
restrictions set forth in the respective Prospectuses and Statement of
Additional Information of the Funds.
The investment objectives, strategies, policies and restrictions of Evergreen
Intermediate Fund can be found in the Prospectus of Evergreen Intermediate Fund
under the captions "Investment Goal," "Investment Strategy" and "Other Fund
Practices" and in the
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<PAGE>
Statement of Additional Information under the captions "Investment Policies" and
"Other Securities and Practices."
The investment objectives, policies and restrictions of Davis Intermediate Fund
can be found in the Prospectus of the Fund under the caption "Investment
Objectives and Strategy" and in the Statement of Additional Information under
the captions "Investment Objectives and Policies, " "Other Investment Policies,"
and "Investment Restrictions."
The investment objectives of Davis Intermediate Fund are fundamental and may
only be changed by a vote of shareholders. The investment objectives of
Evergreen Intermediate Fund are non-fundamental and can be changed by the Board
of Trustees without shareholder approval.
The investment objectives and investment strategies of Evergreen Intermediate
Fund are similar to those of Davis Intermediate Fund. Evergreen Intermediate
Fund seeks current income by investing primarily in a broad range of investment
quality debt securities. As a secondary objective, the Fund seeks to protect
capital. Where appropriate, the Fund will take advantage of opportunities to
realize capital appreciation. Davis Intermediate Fund seeks primarily to achieve
a high level of current income. Secondarily, the Fund seeks capital growth so
long as such objective is consistent with the Fund's primary objective.
Each Fund pursues its investment objectives as follows:
Evergreen Intermediate Fund. Evergreen Intermediate Fund normally invests 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 or 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
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, the Fund expects to invest at least 65% of its
assets in bonds and debentures. The Fund will invest in investment grade
securities that, at the time of investment, are rated within the four highest
grades by S&P, Moody's or Fitch, 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
Fitch 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 may invest in foreign securities or securities denominated in or indexed to
foreign currencies.
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<PAGE>
The Fund currently expects that the dollar weighted average maturity of its
investments will range from three to seven years. However, the Fund may invest
in securities with remaining maturities of ten years or less. When purchasing
securities, the Fund considers the ratings of S&P, Moody's and Fitch, as well as
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 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
values or yield disparities.
The Fund may invest up to 20% of its assets under ordinary circumstances in high
quality money market instruments including commercial paper, notes, certificates
of deposit or bankers' acceptances, or U.S. government securities.
Davis Intermediate Fund. Under normal market conditions, the Fund invests at
least 65% of its total assets in U.S. dollar-denominated investment grade debt
securities, including corporate bonds and debt issued by the U.S. government,
its agencies and instrumentalities. The Fund invests primarily in a broad range
of investment grade corporate bonds. The Fund may also invest up to 35% of its
total assets in high yield, high risk securities.
Under normal market conditions, the Fund maintains an average maturity of five
to ten years. The Fund will also invest in securities of varying other
maturities including short-term (bonds with maturities of less than five years)
and long-term (bonds with maturities greater than ten years).
Each Fund may temporarily invest up to 100% of its assets in high quality money
market instruments in response to adverse economic, political or market
conditions. This strategy is inconsistent with the Funds' principal investment
strategies and investment goals and, if employed, could result in a lower return
and loss of market opportunity.
Because the two Funds have similar investment objectives and investment
strategies, it is not anticipated that the portfolio securities of Davis
Intermediate Fund will be sold in significant amounts in order to comply with
the policies and investment practices of Evergreen Intermediate Fund.
The characteristics of each investment policy and the associated risks are
described in the Funds' respective Prospectuses and Statements of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectuses and Statements of Additional Information of
the Funds.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
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<PAGE>
Evergreen Intermediate Fund is a series of Evergreen Fixed Income Trust, a
Delaware business trust. Davis Intermediate Fund is the only series of Davis
Intermediate Investment Grade Bond Fund, Inc., a Maryland corporation. Both
Evergreen Fixed Income Trust and Davis Intermediate Investment Grade Bond Fund,
Inc. 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 governed by its Declaration of Trust, By-Laws and a Board of
Trustees. Davis Intermediate Investment Grade Bond Fund, Inc. is governed by its
Articles of Incorporation, By-Laws, and a Board of Directors. Each entity is
also governed by applicable Delaware or Maryland and federal law.
Capitalization
The beneficial interests in Evergreen Intermediate Fund are represented by an
unlimited number of transferable shares of beneficial interest, $.001 par value
per share. The beneficial interests in Davis Intermediate Fund are represented
by 1 billion authorized shares with a par value of $0.05 per share. Both
Evergreen Fixed Income Trust's Agreement and Declaration of Trust and Davis
Intermediate Investment Grade Bond Fund Inc.'s Articles of Incorporation permit
the respective Boards to allocate shares into an unlimited number of series, and
classes thereof, with rights determined by the respective Boards, all without
shareholder approval. Fractional shares may be issued by either Fund. Each
Fund's shares represent equal proportionate interests in the assets belonging to
the Fund. Shareholders of each Fund are entitled to receive dividends and other
amounts as determined by the respective Boards. 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. Shareholders
of each Fund vote by Fund as to matters, such as approval of or amendments to
investment advisory agreements or proposed reorganizations, that affect only
their particular Fund.
Shareholder Liability
Under Delaware law, shareholders of a Delaware business trust are entitled to
the same limitation of personal liability extended to stockholders of Delaware
corporations. Other than a limited number of states, 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, it is
possible that a court may not apply Delaware law, and may thereby subject
shareholders of Evergreen Fixed Income 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 is unable to
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meet its obligations. In light of Delaware law, the nature of the Trust's
business, and the nature of its assets, the risk of personal liability to a
shareholder of Evergreen Fixed Income Trust is remote.
Under Maryland corporate law shareholders are not held personally liable for the
obligations of the corporation. Similar statutory authority limiting corporate
shareholder liability exists in every state within the United States. As a
result, shareholders in every jurisdiction should be protected against being
held personally liable for the corporation's liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Fixed Income Trust on behalf of Evergreen Intermediate Fund
nor Davis Intermediate Investment Grade Bond Fund, Inc. on behalf of Davis
Intermediate Fund is required to hold annual meetings of shareholders. However,
each is required to call a meeting of shareholders for the purpose of electing
Trustees or Directors if, at any time, less than a majority of the Trustees or
Directors then holding office were elected by shareholders. Neither Fund permits
cumulative voting, therefore, the holders of more than 50% of the voting power
of the Fund can elect all of the Trustees or Directors of the Trust or Fund,
respectively. Neither Evergreen Fixed Income Trust nor Davis Intermediate
Investment Grade Bond Fund, Inc. currently intends to hold regular shareholder
meetings.
Except when a larger quorum is required by applicable law, with respect to
Evergreen Intermediate Fund, twenty-five percent (25%) of the outstanding shares
entitled to vote, and with respect to Davis Intermediate Fund, a majority of the
outstanding voting shares entitled to vote constitutes a quorum for
consideration of such matter. For either Fund, 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).
Both Funds provide that each share of the respective Fund will be entitled to
one vote for each dollar of net asset value applicable to each share.
Liquidation
In the event of the liquidation of Davis Intermediate Fund or Evergreen
Intermediate Fund, the shareholders are entitled to receive, when and as
declared by the respective Boards, the excess of the assets belonging to such
Fund or attributable to the class over the liabilities belonging to the Fund or
attributable to the class. In either case, the assets so distributable to
shareholders of the Fund will be distributed among the shareholders in
proportion to the number of shares of a class of the Fund held by them and
recorded on the books of the Fund.
Liability and Indemnification of Directors or Trustees
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Davis Intermediate Investment Grade Bond Fund Inc.'s Articles of Incorporation
provide that a Director shall be liable only for his own willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office, and shall not be liable for errors of judgment or
mistakes of fact or law. Davis Intermediate Investment Grade Bond Fund Inc.'s
Articles of Incorporation also provide that Directors and officers are entitled
to indemnification against liabilities and expenses with respect to claims
related to their position with the corporation unless it has been determined
that such Director or officer acted with 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
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 Declaration of Trust of Evergreen Fixed Income Trust, the Articles of
Incorporation of Davis Intermediate Investment Grade Bond Fund, Inc., Delaware
and Maryland law and is not a complete description of those documents or law.
Shareholders should refer to the provisions of the Agreement and Declaration of
Trust, Articles of Incorporation, Delaware and Maryland law directly for more
complete information.
ADDITIONAL INFORMATION
Evergreen Intermediate Fund. Information concerning the operation and
management of Evergreen Intermediate Fund is incorporated herein by reference
from the Prospectus dated November 1, 1999, a copy of which is enclosed, and
Statement of Additional Information of the same date. A copy of such Statement
of Additional Information is available upon request and without charge by
writing to Evergreen Intermediate Fund at the address listed on the cover page
of this Prospectus/Proxy Statement or by calling the Fund toll-free at
1-800-343-2898.
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Davis Intermediate Fund. Information about the Fund is included in its current
Prospectuses dated August 2, 1999, 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 Prospectuses and Statement
of Additional Information are available upon request and without charge by
writing to Davis Intermediate Fund at the address listed on the cover page of
this Prospectus/Proxy Statement or by calling the Fund toll-free at
1-800-279-0279.
Evergreen Intermediate Fund and Davis Intermediate Fund 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 Room 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.
The SEC maintains a Web site (http://www.sec.gov) that contains each Fund's
Statement of Additional Information and other material incorporated by reference
herein together with other information regarding Evergreen Intermediate Fund and
Davis Intermediate Fund.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a solicitation
of proxies by the Directors of Davis Intermediate Investment Grade Bond Fund,
Inc. to be used at the Special Meeting of Shareholders to be held at 10:00 a.m.,
March 17, 2000, at the Fund's offices, 124 East Marcy Street, Santa Fe, New
Mexico, 87501, 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 Davis Intermediate Fund on or about January 28, 2000. 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 voting power (each eligible
outstanding share is entitled to one vote for each dollar of net asset value) 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 instructions marked thereon. Unmarked
proxies will be voted FOR the proposed Reorganization and FOR any other matters
deemed appropriate. Proxies that reflect abstentions and "broker non-votes"
(i.e., shares held by brokers or nominees as to which (i) instructions have not
been received from the beneficial owners or the persons entitled to vote and
(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 have the
effect of being counted as votes against the Plan which must be approved by a
majority of the outstanding voting power entitled to vote.
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Each share present and entitled to vote shall be accorded one vote for each
dollar of net asset value and each fractional share is entitled to a
proportionate share of one vote. A proxy may be revoked at any time on or before
the Meeting by written notice to the Secretary of Davis Intermediate Investment
Grade Bond Fund, Inc. at the address set forth on the cover of this
Prospectus/Proxy Statement. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby.
Approval of the Plan will require the affirmative vote of a majority of the
outstanding voting power entitled to vote, with all classes voting together as a
single class at the Meeting at which a quorum of the Fund's shares is present.
Proxy solicitations will be made primarily by mail, but proxy solicitations may
also be made by telephone or personal solicitations conducted by officers and
employees of EIMC or DSA, their affiliates or other representatives of Davis
Intermediate Fund (who will not be paid for their solicitation activities). D.F.
King & Co. and its agents have been engaged by Davis Intermediate Fund to assist
in soliciting proxies. DSA (and not the Funds) will pay for their proxy
soliciting activities.
If you wish to participate in the Meeting, you may submit the proxy card
included with this Prospectus/Proxy Statement, vote by fax, vote by telephone,
vote via the Internet (if applicable) or attend in person. Any proxy given by
you is revocable.
In the event that sufficient votes to approve the Reorganization are not
received by March 17, 2000, 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 Maryland law or the Articles of Incorporation of Davis Intermediate
Investment Grade Bond Fund, Inc. 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 Fund which they receive in the transaction at their then-current
net asset value. Shares of Davis Intermediate Fund may be redeemed at any time
prior to the consummation of the Reorganization. Shareholders of Davis
Intermediate Fund 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.
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Davis Intermediate Fund 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 Davis
Intermediate Investment Grade Bond Fund, Inc. 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 Fund 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 Davis Intermediate Fund whether other persons are beneficial
owners of shares for which proxies are being solicited and, if so, the number of
copies of this Prospectus/Proxy Statement needed to supply copies to the
beneficial owners of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report of Evergreen Intermediate Fund as of June 30, 1999 and the
financial highlights and financial statements for the periods indicated therein,
have been incorporated by reference herein and in the Registration Statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in auditing and accounting.
The Annual Report of Davis Intermediate Fund as of March 31, 1999 and the
financial highlights and financial statements for the two years then ended, have
been incorporated by reference herein and in the Registration Statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in auditing and accounting.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Intermediate Fund will be passed upon by Sullivan & Worcester LLP, Washington,
D.C.
OTHER BUSINESS
The Directors of Davis Intermediate Investment Grade Bond Fund, Inc. 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 DIRECTORS OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC. RECOMMEND
APPROVAL OF THE PLAN, AND ANY UNMARKED PROXIES
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WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE
PLAN.
January 20, 2000
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 7th day of January, 2000, by and between 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 its Evergreen
Intermediate Term Bond Fund series (the "Acquiring Fund"), and Davis
Intermediate Investment Grade Bond Fund, Inc., a Maryland corporation with its
principal place of business at 124 East Marcy Street, Santa Fe, New Mexico 87501
("Davis"), with respect to its Davis Intermediate Investment Grade Bond 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)(C) 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, Class B, Class C
and Class Y 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 the 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 or shares of common stock, as the case may be;
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 the 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 Directors of Davis have determined that the Selling Fund
should exchange all of its assets and the identified
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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, computed in the manner and as of the
time and date set forth in paragraphs 2.2 and 2.3; and (ii) to assume the
identified liabilities of the Selling Fund, as set forth in paragraph 1.3. Such
transactions shall take place on the Closing Date provided for in paragraph 3.1.
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, 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. The
Selling Fund reserves the right to sell any of such securities, but will not,
without the prior written approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest.
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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 period of time (not
less than 30 days) 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 will 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
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Fund immediately prior to the Reorganization, in each case calculated in
accordance with such Rule 2830.
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 Prospectus/Proxy
Statement on Form N-14 which has been distributed to shareholders of the Selling
Fund as described in paragraph 4.1(o).
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.
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ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
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 Class A,
Class B, Class C and Class Y shares of the Selling Fund will receive Class A,
Class B, Class C and Class Y shares, respectively, 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 of the Reorganization (the "Closing") shall
take place on or about March 17, 2000 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
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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.
3.2 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.
3.3 TRANSFER AGENT'S CERTIFICATE. State Street Bank and Trust Company,
as transfer agent for the Selling Fund at 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, to issue and deliver a
confirmation evidencing the Acquiring Fund Shares to be credited on the Closing
Date to the Secretary of Davis or provide evidence satisfactory to the Selling
Fund that such Acquiring Fund Shares have been credited to the Selling Fund's
account on the books of the Acquiring Fund. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts and other documents as such other party or its
counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Maryland.
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(b) The Selling Fund is a separate investment series of a
Maryland corporation 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 Davis' Articles of Incorporation 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 in 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 governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
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(g) The unaudited semi-annual financial statements of the
Selling Fund at September 30, 1999 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, 1999 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. 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 3.3. The Selling Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have
good and marketable title to the Selling Fund's assets to be
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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's 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 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 is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations thereunder applicable thereto.
(o) The Selling Fund has provided the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus, which
included the proxy statement of the Selling Fund (the "Prospectus/Proxy
Statement"), all of which was 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 shareholders of the Selling
Fund to approve this Agreement and the transactions contemplated hereby. The
Prospectus/Proxy Statement included in the Registration Statement (other than
information therein that relates to the Acquiring Fund) does not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring
Fund represents and warrants to the Selling Fund as follows:
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(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(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,
1999 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly
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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, 1999 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 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
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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 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 is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations applicable thereto.
(n) The Prospectus/Proxy Statement included in the
Registration Statement (only insofar as it relates to the Acquiring Fund) does
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.
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 BY SHAREHOLDERS. Davis will call a meeting of the shareholders
of the Selling Fund 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.
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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 LLP and
certified by Davis' President or Vice President and Treasurer.
5.7 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 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.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
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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 Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for
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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/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.
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/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/Proxy Statement (except to the extent indicated in
paragraph (g) of their above opinion), on the basis of the
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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/Proxy
Statement as of its date, as of the date of the meeting of the shareholders of
the Selling Fund, 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/Proxy Statement or the Registration Statement, and
that such opinion is solely for the benefit of Davis and the Selling Fund.
Such opinion shall contain such 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/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Davis' 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.
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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 Davis.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of D'Ancona & Pflaum, LLC, counsel to the Acquiring Fund, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
corporation duly organized, validly existing and in good standing under the laws
of the State of Maryland 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
Maryland corporation 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.
(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 State of Maryland 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 the Davis' Articles of Incorporation 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
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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) Only insofar as they relate to the Selling Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and government
proceedings and material contracts, if any, are accurate and fairly present the
information required to be shown.
(g) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Selling 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.
(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 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/Proxy Statement.
(i) 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.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Selling Fund at which
the contents of the Prospectus/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/Proxy Statement (except to the extent indicated in
paragraph (f) of their above opinion), on the basis of the foregoing (relying as
to materiality to a large extent upon the opinions of Davis' officers and other
representatives of the
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Selling Fund), no facts have come to their attention that lead them to believe
that the Prospectus/Proxy Statement as of its date, as of the date of the
meeting of the shareholders of the Selling Fund, 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 such counsel does not express any opinion or belief as to the
financial statements or any financial or statistical data, or as to information
relating to the Acquiring Fund, contained in the Prospectus/Proxy Statement or
Registration Statement, and that such opinion is solely for the benefit of the
Trust and the Acquiring Fund.
Such opinion shall contain such other assumptions and limitations as
shall be in the opinion of D'Ancona & Pflaum, LLC appropriate to render the
opinions expressed therein, and shall indicate, with respect to matters of
Maryland law that as D'Ancona & Pflaum, LLC are not admitted to the bar of
Maryland, such opinions are based either upon the review of published statutes,
cases and rules and regulations of the State of Maryland or upon an opinion of
Maryland counsel.
In this paragraph 7.3, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
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 Davis' Articles of
Incorporation 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 or
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the Selling Fund may waive the conditions set forth in this
paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness of the Registration
Statement 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 transactions contemplated by the Asset Purchase Agreement by and
among Evergreen Asset Management Company, Davis Selected Advisers, L.P. and
Venture Advisers, Inc. shall be completed prior to or on the Closing Date.
8.6 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 shareholders of the Selling Fund 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).
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8.7 The parties shall have received a favorable opinion of KPMG 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 the
identified liabilities of the Selling Fund followed by the distribution of the
Acquiring Fund Shares to the Selling Fund Shareholders in dissolution and
liquidation of the Selling Fund will constitute a "reorganization" within the
meaning of Section 368(a)(1)(C) 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 the identified
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 the
identified liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the
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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
8.7.
8.8 The Acquiring Fund shall have received from KPMG 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), the Capitalization Table
appearing in the Registration Statement and Prospectus/Proxy Statement has been
obtained from and is consistent with the accounting records of the Selling Fund;
(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 pro forma financial
statements that are included in the Registration Statement and Prospectus/Proxy
Statement agree to the underlying accounting records of the Acquiring Fund and
the Selling Fund or with written estimates provided by each Fund's management,
and were found to be mathematically correct; and
(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 data utilized in the
calculations of the pro forma expense ratios appearing in the Registration
Statement and Prospectus/Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by the Selling Fund's
management and were found to be mathematically correct.
In addition, unless waived by the Acquiring Fund, the Acquiring Fund
shall have received from KPMG LLP a letter addressed to the Acquiring Fund dated
on the Closing Date, in form and substance satisfactory to the Acquiring Fund,
to the
A-22
<PAGE>
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 net asset value per share of the Selling Fund as of the
Valuation Date was computed and the valuation of the portfolio was consistent
with the valuation practices of the Acquiring Fund.
8.9 The Selling Fund shall have received from KPMG LLP a letter
addressed to the Selling Fund, in form and substance satisfactory to the Selling
Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) they had performed limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards) which consisted of a reading of any
unaudited pro forma financial statements included in the Registration Statement
and Prospectus/Proxy Statement, and making inquiries of appropriate officials of
the Trust responsible for financial and accounting matters whether such
unaudited pro forma financial statements comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus/Proxy Statement has been obtained
from and is consistent with the accounting records of the Acquiring Fund; and
(d) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the pro forma
expense ratios appearing in the Registration Statement and Prospectus/Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
A-23
<PAGE>
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, whether incurred before or after the date of this Agreement,
will be borne by Davis Selected Advisers, LP (in the case of the Selling Fund)
and First Union National Bank (in the case of the Acquiring Fund). 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/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. In the event that the transactions contemplated by the Asset
Purchase Agreement referred to in paragraph 8.5 hereof are not completed, this
Agreement shall terminate. In such event, all expenses of the transactions
contemplated by this Agreement incurred by the Acquiring Fund shall be borne by
First Union National Bank and all expenses of the transactions contemplated by
this Agreement incurred by the Selling Fund shall be borne by Davis Selected
Advisers, LP.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
A-24
<PAGE>
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, Davis, the respective Trustees,
Directors or officers, to the other party or its Trustees, Directors or
officers, but each shall bear the expenses incurred by it incidental to the
preparation and carrying out of this Agreement as provided in paragraph 9.1.
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 shareholders of the Selling Fund pursuant to paragraph 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of the Acquiring Fund Shares to be issued to the Selling
Fund Shareholders under this Agreement to the detriment of such Shareholders
without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
A-25
<PAGE>
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 State of Maryland,
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 Acquiring Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or employees of the Trust personally, but shall bind only the
trust property of the Acquiring Fund, as provided in the Declaration of Trust of
the Trust. The execution and delivery of this Agreement have been authorized by
the Trustees of the Trust on behalf of the Acquiring Fund and signed by
authorized officers of 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
Acquiring Fund as provided in the Declaration of Trust of the Trust.
A-26
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
DAVIS INTERMEDIATE INVESTMENT
GRADE BOND FUND, INC. ON
BEHALF OF DAVIS INTERMEDIATE
INVESTMENT GRADE BOND FUND
By:
Name:
Title:
EVERGREEN FIXED INCOME TRUST
ON BEHALF OF EVERGREEN
INTERMEDIATE TERM BOND FUND
By:
Name:
Title:
A-27
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ACQUISITION OF ASSETS OF
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
a series of
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
124 East Marcy Street
Santa Fe, New Mexico 87501
(800) 279-0279
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 Davis Intermediate Investment
Grade Bond Fund ("Davis Intermediate Fund"), a series of Davis Intermediate
Investment Grade Bond Fund, Inc., to Evergreen Intermediate Term Bond Fund
("Evergreen Intermediate Fund"), a series of Evergreen Fixed Income Trust, in
exchange for Class A, B, C and Y shares (to be issued to holders of Class A, B,
C and Y shares, respectively, of Davis Intermediate Fund) of beneficial
interest, $.001 par value per share, of Evergreen Intermediate Fund, consists of
this cover page and the following described documents, each of which is attached
hereto and incorporated by reference herein:
(1) The Statement of Additional Information of Davis
Intermediate Fund dated August 2, 1999;
(2) The Statement of Additional Information of Evergreen
Intermediate Fund dated November 1, 1999;
(3) Annual Report of Davis Intermediate Fund for the year
ended March 31, 1999;
(4) Semi-Annual Report of Davis Intermediate Fund for the
six month period ended September 30, 1999;
-1-
<PAGE>
(5) Annual Report of Evergreen Intermediate Fund for the
year ended June 30, 1999;
(6) Pro-Forma Combining Financial Statements for June 30, 1999 and
the twelve months then ended (unaudited).
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 Fund and Davis Intermediate Fund dated
January 20, 2000. A copy of the Prospectus/Proxy Statement may be obtained
without charge by writing to Evergreen Intermediate Fund or Davis Intermediate
Fund at the addresses set forth above or by calling toll free 1-800- 645-7816.
The date of this Statement of Additional Information is January 20,
2000.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 2, 1999
DAVIS INTEMEDIATE INVESTMENT GRADE BOND FUND
AN AUTHORIZED SERIES OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
IN CONJUNCTION WITH THE CLASS A, CLASS B AND CLASS C PROSPECTUS DATED AUGUST 2,
1999 AND THE CLASS Y PROSPECTUS DATED AUGUST 2, 1999 FOR DAVIS INTERMEDIATE
INVESTMENT GRADE BOND FUND, INC. THIS STATEMENT OF ADDITIONAL INFORMATION
INCORPORATES THE PROSPECTUSES BY REFERENCE. THE PROSPECTUSES MAY BE OBTAINED
FROM THE FUND.
THE FUND'S MOST RECENT ANNUAL REPORT AND SEMI-ANNUAL REPORT TO SHAREHOLDERS ARE
SEPARATE DOCUMENTS SUPPLIED WITH THIS STATEMENT OF ADDITIONAL INFORMATION. THE
ANNUAL REPORT, ACCOMPANYING NOTES AND REPORT OF INDEPENDENT AUDITORS APPEARING
IN THE ANNUAL REPORT ARE INCORPORATED BY REFERENCE IN THIS STATEMENT OF
ADDITIONAL INFORMATION.
<PAGE>
TABLE OF CONTENTS
PAGE
Section I: Investment Strategies and Restrictions .........................4
Investment Objectives and Policies.............................4
Portfolio Securities...........................................4
Investment Grade Corporate Bonds
U.S. Government Securities
High Yield, High-Risk Debt Securities
Portfolio Composition
Foreign Securities Denominated in U.S. Dollars
Mortgage-Backed Securities
Asset-Backed Securities
Zero Coupon Securities
Taxable Municipal Obligations
Other Investment Policies.....................................13
Portfolio Transactions .......................................15
Investment Restrictions.......................................17
Section II: Key Persons...................................................19
Organization of the Company...................................19
Directors and Officers........................................20
Directors' Compensation Schedule..............................23
Certain Shareholders of the Fund..............................23
Investment Advisory Services..................................24
Distribution of Company Shares................................26
Other Important Service Providers.............................30
Section III: Purchase, Exchange and Redemption of Shares..................30
Purchase of Shares...........................................30
Alternative Purchase Arrangements..........................31
Class A Shares...........................................32
Class B Shares...........................................35
Class C Shares...........................................37
Class Y Shares...........................................38
2
<PAGE>
Special Services..............................................38
Prototype Retirement Plans.................................38
Automatic Investment Program...............................38
Dividend Diversification Program...........................39
Telephone Privilege........................................39
Exchange of Shares............................................39
General....................................................39
By Telephone...............................................40
Automatic Exchange Program.................................40
Redemption of Shares..........................................41
General....................................................41
Electronic Wire Privilege..................................42
By Telephone...............................................42
Automatic Withdrawals Plan.................................43
Involuntary Redemptions....................................43
Subsequent Repurchases.....................................43
Section IV: General Information...........................................44
Determining the Price of Shares...............................44
Year 2000 Transition Issues...................................45
Dividends and Distributions...................................45
Federal Income Taxes..........................................46
Performance Data..............................................47
Appendix A: Quality Ratings of Debt Securities.............................50
Appendix B: Term and Conditions for a Statement of Intention...............52
3
<PAGE>
Section I: Investment Strategies and Restrictions
- - --------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
Davis Intermediate Investment Grade Bond Fund, Inc. (the "Fund") seeks
primarily to achieve a high level of current income. The Fund also seeks to
achieve capital growth so long as such objective is consistent with its primary
objective. There is no assurance that the Fund will achieve its investment
objectives. An investment in the Fund may not be appropriate for all investors
and short-term investing is discouraged.
Under normal market conditions, the Fund invests at least 65% of its
total assets in U.S. dollar-denominated investment-grade debt securities.
Investment-grade corporate debt securities are issued by companies that are
established in their industries, have stable cash flows and strong balance
sheets. Other borrowers may also issue investment-grade debt, including the U.S.
Government and its agencies. The Fund may also invest in other forms of debt
securities, including up to 35% of its total assets in high yield, high-risk
corporate debt securities that are rated below investment-grade.
PORTFOLIO SECURITIES
Investors generally purchase bonds and other debt securities to
increase current income or to diversify their investment portfolios. Changes in
the value of securities held by the Fund will cause the Fund's share price to
fluctuate.
INVESTMENT-GRADE CORPORATE BONDS. Investment-grade corporate bonds
represent the debt of companies that are established in their industries, have
stable cash flows and strong balance sheets. Corporations and other issuers sell
bonds and other debt securities to borrow money. Issuers pay investors interest
and generally must repay the amount borrowed at maturity.
All debt securities, including investment-grade corporate bonds, are
subject to risks, and an investor may lose some or all of the money invested.
The most significant risk factors affecting investment-grade corporate bonds
are:
Interest rate risk. Most debt securities are subject to interest rate
risk. When prevailing interest rates fall, the values of already-issued debt
securities generally rise. When interest rates rise, the values of
already-issued debt securities generally decline. The magnitude of these
fluctuations will often be greater for longer-term debt securities than
shorter-term debt securities. The Fund seeks to limit its interest rate exposure
by maintaining, in normal market conditions, an average maturity of five to ten
years.
Changes in debt rating. If the fundamental business strength of a
company improves or deteriorates, a rating agency may increase or lower the
company's credit rating. An improved credit rating usually causes the market
value of a debt security to increase while a downgraded credit rating usually
causes the market value of a debt security to decline.
4
<PAGE>
Credit risk. Most debt securities are subject to credit risk. Credit
risk relates to the ability of the issuer of a debt security to make interest
and principal payments on the security as they become due. Generally,
higher-yielding, lower-rated bonds (the Fund may invest up to 35% of its total
assets in high yield, high-risk securities) are subject to greater credit risk
than higher-rated bonds. Securities issued or guaranteed by the U.S. Government
are subject to little, if any, credit risk. While the Adviser may rely to some
extent on credit ratings by nationally recognized rating agencies, such as
Standard & Poor's or Moody's, in evaluating the credit risk of securities
selected for the Fund's portfolio, it may also use its own or broker research
and analysis.
Prepayment risk. Many types of debt securities, including mortgage
securities and securities subject to call provisions, are subject to prepayment
risk. Prepayment risk occurs when the issuer of a security can prepay principal
prior to the security's maturity. Securities subject to prepayment risk
generally offer less potential for gains during a declining interest rate
environment, and similar or greater potential for loss in a rising interest rate
environment. In addition, the potential impact of prepayment features on the
price of a debt security may be difficult to predict and result in greater
volatility. Many bonds are subject to redemption or call provisions. If an
issuer exercises these provisions when investment rates are declining, the Fund
will likely replace such bonds with lower yielding bonds, resulting in a
decreased return.
U.S. GOVERNMENT SECURITIES. There are two basic types of U.S.
Government Securities: direct obligations of the U.S. Treasury, and obligations
issued or guaranteed by an agency or instrumentality of the U.S. Government.
U.S. Government Securities all represent debt obligations (unlike equity
securities, which represent ownership of the issuer). Obligations that the U.S.
Treasury issues or guarantees are generally considered to offer the highest
credit quality available in any security. Many securities issued by government
agencies are not fully guaranteed by the U.S. Government, and in unusual
circumstances may present credit risk.
U.S. Government Securities may include bonds and notes issued by the U.S.
Government Treasury and also government agencies such as the Federal Home Loan
Bank, Government National Mortgage Association (GNMA or "Ginnie Mae"), Federal
National Mortgage Association (FNMA or "Fannie Mae") and Student Loan Marketing
Association (SLMA or "Sallie Mae"). Treasury issues and Ginnie Maes are backed
by the full faith and credit of the U.S. Government while securities issued by
the other government agencies are not fully guaranteed by the U.S. Government,
and in unusual circumstances may present credit risk.
HIGH YIELD, HIGH-RISK DEBT SECURITIES. The Fund may invest up to 35% of
its total assets in high yield, high-risk debt securities rated BB or lower by
Standard & Poor's Corporation ("S&P"), or Ba or lower by Moody's Investors
Service ("Moody's") or unrated securities. Securities rated BB or lower by S&P,
and Ba or lower by Moody's are referred to in the financial community as "junk
bonds" and may include D-rated securities of issuers in default. Ratings
assigned by credit agencies do not evaluate market risks. The Adviser considers
the ratings assigned by S&P or Moody's as one of several factors in its
independent credit analysis of issuers. A brief description of the quality
ratings of these two services is contained in Appendix A. The Fund will not
purchase securities rated BB or Ba or lower if the securities are in default at
the time of purchase or if such purchase would then cause more than 35% of the
Fund's net assets to be invested in such lower-rated securities.
5
<PAGE>
High yield, high-risk debt securities are subject to the same risks as
investment-grade corporate bonds. In addition, high yield, high-risk debt
securities involve increased risk as to payment of principal and interest.
Issuers of such securities may be highly leveraged and may not have available to
them traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are greater than is the case
with higher-rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of high yield securities may
be more likely to experience financial stress, especially if such issuers are
highly leveraged. During such periods, such issuers may not have sufficient
revenues to meet their principal and interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
High yield, high-risk debt securities are subject to greater price
volatility than higher-rated securities, tend to decline in price more steeply
than higher-rated securities in periods of economic difficulty or accelerating
interest rates and are subject to greater risk of non-payment in adverse
economic times. There may be a thin trading market for such securities. This may
have an adverse impact on market price and the ability of the Fund to dispose of
particular issues, and may cause the Fund to incur special securities
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties. Unexpected net redemptions may force the Fund to sell
high yield, high-risk debt securities without regard to investment merit,
thereby possibly reducing return rates. Such securities may be subject to
redemptions or call provisions which, if exercised when investment rates are
declining, could result in the replacement of such securities with
lower-yielding securities, resulting in a decreased return. To the extent that
the Fund invests in debt securities that are original issue discount, zero
coupon, pay-in-kind or deferred interest bonds, the Fund may have taxable
interest income in excess of the cash actually received on these issues. In
order to avoid taxation, the Fund may have to sell portfolio securities to meet
taxable distribution requirements.
If the Fund experiences unexpectedly large net redemptions, it may be
forced to sell high yield, high-risk debt securities out of the portfolio
without regard to the investment merits of such sales. This could decrease the
Fund's net assets. Since some of the Fund's expenses are fixed, this could also
reduce the Fund's rate of return.
The Fund may have difficulty disposing of certain high yield, high-risk
debt securities because there may be a thin trading market for such securities.
Because not all dealers maintain markets in all high yield, high-risk debt
securities, the Fund anticipates that such securities could be sold only to a
limited number of dealers or institutional investors. The lack of a liquid
secondary market may have an adverse impact on market price and the ability to
dispose of particular issues, and may also make it more difficult to obtain
accurate market quotations or valuations for purposes of valuing the Fund's
assets. Market quotations generally are available on many high yield issues only
from a limited number of dealers and may not necessarily represent firm bid
prices of such dealers or prices for actual sales. In addition, adverse
publicity and investor perceptions may decrease the values and liquidity of high
yield, high-risk debt
6
<PAGE>
securities regardless of a fundamental analysis of the investment merits of such
securities. To the extent that the Fund purchases illiquid or restricted
securities, it may incur special securities registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties relating to such
securities.
Until October 6, 1998, the Fund invested primarily in high yield,
high-risk securities. On that date the Fund's Board of Directors approved
changing the Fund's investment strategy to focus upon investment-grade debt
securities. Under its current investment strategy, the Fund will not purchase
additional high yield, high-risk securities if, after giving effect to the
purchase, more than 35% of the Fund's total assets would be invested in high
yield, high-risk securities.
PORTFOLIO COMPOSITION. The table below reflects the Fund's portfolio
composition by quality rating for the year ended March 31, 1999, calculated on
the basis of the average weighted ratings of all bonds held at year end. The
table reflects the percentage of total assets represented by fixed-income
securities rated by Moody's or S&P, by unrated fixed-income securities and by
other assets. The percentages shown reflect the higher of the Moody's or S&P
rating. U.S. Government Securities, whether or not rated, are reflected as Aaa
and AAA (highest quality). Other assets may include money market instruments,
repurchase agreements, net payables and receivables and cash. The allocations in
the table are not necessarily representative of the composition of the Fund's
portfolio at other times. Portfolio quality ratings will change over time.
COMPOSITION OF
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND'S
PORTFOLIO BY QUALITY RATING AS A PERCENTAGE OF
TOTAL NET ASSETS AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
FUND'S ASSESSMENT OF GENERAL DEFINITION
MOODY'S/S&P RATING CATEGORY PERCENTAGE NON-RATED SECURITIES OF BOND QUALITY
- - ----------- ------ -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aaa/AAA ................................ 18.32% 0.63% Highest quality
Aa/AA ................................ 4.99% 0.00% High quality
A/A ................................ 27.31% 0.00% Upper medium grade
Baa/BBB ................................ 20.23% 0.00% Medium grade
Ba/BB ................................ 3.90% 0.57% Some speculative elements
B/B ................................ 14.77% 2.18% Speculative
Caa/CCC ................................ 0.00% 0.00% More speculative
Ca, C/CC, C, D.............................. 0.13% 0.75% Very speculative, may be in default
Not Rated................................... 4.13% 0.00% Not rated by Moody's or S&P
Common, Preferred Stock
and Warrants............................. 0.34% 0.00%
Short-term Investments and
Other Assets............................. 5.88% 0.00%
------ ----
100.00% 4.13%
</TABLE>
The description of each bond quality category set forth in the table
above is intended to be a general guide and not a definitive statement as to how
Moody's and S&P define such rating category. A more complete description of the
rating categories is set forth in Appendix A. The ratings of Moody's and S&P
represent their opinions as to the quality of the securities that they undertake
to rate. It should be emphasized, however, that ratings are relative and
subjective, and
7
<PAGE>
are not absolute standards of quality. There is no assurance that a rating
assigned initially will not change. The Fund may retain a security whose rating
has changed or has become unrated.
FOREIGN SECURITIES DENOMINATED IN U.S. DOLLARS. The Fund may invest
without limit in foreign issuers so long as their debt is denominated in U.S.
dollars. By restricting the Fund's investments to debt securities denominated in
U.S. dollars the Fund avoids currency risk, which is a primary risk of investing
in foreign issuers. There are other risks of foreign investing. For example,
foreign issuers are not required to use generally accepted accounting
principles. If foreign securities are not registered for sale in the U.S. under
U.S. securities laws, the issuer does not have to comply with the disclosure
requirements of our laws, which are generally more stringent than foreign laws.
The values of foreign securities investments will be affected by other factors,
including exchange control regulations or currency blockage, and possible
expropriation or nationalization of assets. There may also be changes in
governmental administration or economic or monetary policy in the U.S. or abroad
that can affect foreign investing. In addition, it is generally more difficult
to obtain court judgments outside the U.S. if the Fund has to sue a foreign
broker or issuer. Additional costs may be incurred because foreign broker
commissions are generally higher than U.S. rates, and there are additional
custodial costs associated with holding securities abroad.
Investments in foreign securities offer potential benefits not
available from investments solely in securities of domestic issuers, by offering
the opportunity to invest in foreign issuers that appear to offer growth
potential, or in foreign countries with economic policies or business cycles
different from those of the U.S., or to reduce fluctuations in portfolio value
by taking advantage of foreign bond or other markets that do not move in a
manner parallel to U.S. markets. From time to time, U.S. government policies
have discouraged certain investments abroad by U.S. investors through taxation
or other restrictions, and it is possible that such restrictions could be
reimposed. The Fund's policy of investing in foreign debt securities if they are
denominated in U.S. dollars may limit the number of foreign debt securities in
which the Fund may invest and prevent the Fund from investing in foreign issuers
which would otherwise meet the Fund's investment criteria.
The obligations of foreign governmental entities may or may not be
supported by the full faith and credit of a foreign government. Obligations of
"supranational entities" include those of international organizations designated
or supported by governmental entities to promote economic reconstruction or
development, and of international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or "stockholders," of these entities usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings. Each supranational entity's lending activities are limited
to a percentage of its total capital (including "callable capital" contributed
by members at the entity's call), reserves and net income. There is no assurance
that foreign governments will be able or willing to honor their commitments.
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MORTGAGE-BACKED SECURITIES. Certain mortgage-backed securities, whether
issued by the U.S. Government or by private issuers, "pass-through" to investors
the interest and principal payments generated by a pool of mortgages assembled
for sale by government agencies or private issuers. Pass-through mortgage-backed
securities entail the risk that principal may be repaid at any time because of
prepayments on the underlying mortgages. That may result in greater price and
yield volatility than traditional fixed-income securities that have a fixed
maturity and interest rate.
Some mortgage-backed securities are issued by private issuers, such as
commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers. Mortgage-backed
securities issued by such private issuers are not issued or guaranteed by the
U.S. Government or its agencies and are, therefore, also subject to credit risk.
Mortgage-backed securities represent participation interests in pools
of residential mortgage loans which are guaranteed by agencies or
instrumentalities of the U.S. Government. Such securities differ from
conventional debt securities which generally provide for periodic payment of
interest in fixed or determinable amounts (usually semi-annually) with principal
payments at maturity or specified call dates. Some mortgage-backed securities in
which the Fund may invest may be backed by the full faith and credit of the U.S.
Treasury (e.g., direct pass-through certificates of Government National Mortgage
Association); some are supported by the right of the issuer to borrow from the
U.S. government (e.g., obligations of Federal Home Loan Mortgage Corporation);
and some are backed by only the credit of the issuer itself, which may be a
private rather than a government entity. Those guarantees do not extend to the
value of or yield of the mortgage-backed securities themselves or to the net
asset value of the Fund's shares. Any of these government agencies may also
issue collateralized mortgage-backed obligations ("CMOs"), discussed below.
The yield on mortgage-backed securities is based on the average
expected life of the underlying pool of mortgage loans. The actual life of any
particular pool will be shortened by any unscheduled or early payments of
principal and interest. Principal prepayments generally result from the sale of
the underlying property or the refinancing or foreclosure of underlying
mortgages. The occurrence of prepayments is affected by a wide range of
economic, demographic and social factors, and accordingly, it is not possible to
predict accurately the average life of a particular pool. Yield on such pools is
usually computed by using the historical record of prepayments for that pool, or
in the case of newly issued mortgages, the prepayment history of similar pools.
The actual prepayment experience of a pool of mortgage loans may cause the yield
realized by the Fund to differ from the yield calculated on the basis of the
expected average life of the pool.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. When prevailing interest rates rise, the value of a pass-through
security may decrease as do the values of other debt securities, but when
prevailing interest rates decline, the value of a pass-through security is not
likely to rise to the extent that the value of other debt securities rise,
because of the prepayment feature of pass-through securities. The Fund's
reinvestment of scheduled principal payments and unscheduled
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prepayments it receives may occur at times when available investments offer
higher or lower rates than the original investment, thus affecting the yield of
the Fund. Monthly interest payments received by the Fund have a compounding
effect which may increase the yield to the Fund more than debt obligations that
pay interest semi-annually. Because of those factors, mortgage-backed securities
may be less effective than Treasury bonds of similar maturity at maintaining
yields during periods of declining interest rates. The Fund may purchase
mortgage-backed securities at par, at a premium, or at a discount. Accelerated
prepayments adversely affect yields for pass-through securities purchased at a
premium (i.e., at a price in excess of their principal amount) and may involve
additional risk of loss of principal because the premium may not have been fully
amortized at the time the obligation is repaid. The opposite is true for
pass-through securities purchased at a discount.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage-backed securities of GNMA that evidence an
undivided interest in a pool or pools of mortgages ("GNMA Certificates"). The
GNMA Certificates that the Fund may purchase are of the "modified pass-through"
type, which entitle the holder to receive timely payment of all interest and
principal payments due on the mortgage pool, net of fees paid to the "issuer"
and GNMA, regardless of whether the mortgagor actually makes the payments when
due.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury, if necessary, to make any payments required
under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that the Fund has
purchased the certificates at a premium in the secondary market.
FNMA Securities. The Federal National Mortgage Association ("FNMA") was
established to create a secondary market in mortgages insured by the FHA. FNMA
issues guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all interest and principal payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the U.S. Government.
FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created to promote development of a nationwide secondary market for
conventional residential mortgages. FHLMC issues two types of mortgage
pass-through certificates ("FHLMC Certificates"): mortgage participation
certificates ("PCs"); and guaranteed mortgage certificates
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("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. FHLMC guarantees timely monthly payment of interest on PCs and the
ultimate payment of principal. The FHLMC guarantee is not backed by the full
faith and credit of the U.S. Government.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately ten years. The FHLMC guarantee is not backed by the
full faith and credit of the U.S. Government.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are securities in which the principal and interest portions of the
security are separated and sold. Stripped mortgage-backed securities usually
have at least two classes, each of which receives different proportions of
interest and principal distributions on the underlying pool of mortgage assets.
One common variety of stripped mortgage-backed security has one class that
receives some of the interest and most of the principal, while the other class
receives most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest (the "interest-only" or "IO" class),
while the other class will receive all of the principal (the "principal-only" or
"PO" class). Interest-only securities are extremely sensitive to interest rate
changes and prepayments of principal on the underlying mortgage assets. An
increase in principal payments or prepayments will reduce the income available
to the IO security. In other types of CMOs, the underlying principal payments
may apply to various classes in a particular order, and therefore the value of
certain classes or "tranches" of such securities may be more volatile than the
value of the pool as a whole, and losses may be more severe than on other
classes.
Collateralized Mortgage-Backed Obligations ("CMOs"). CMOs are fully
collateralized bonds that are the general obligation of the issuer by either the
U.S. Government, a U.S. government instrumentality, or a private issuer which
may be a domestic or foreign corporation. Such bonds generally are secured by an
assignment to a trustee (under the indenture pursuant to which the bonds are
issued) of collateral consisting of a pool of mortgages. Payments with respect
to the underlying mortgages generally are made to the trustee under the
indenture. Payments of principal and interest on the underlying mortgages are
not passed through to the holders of the CMOs as such (i.e., the character of
payments of principal and interest is not passed through, and therefore payments
to holders of CMOs attributable to interest paid and principal repaid on the
underlying mortgages do not necessarily constitute income and return of capital,
respectively, to such holders), but such payments are dedicated to payment of
interest on and repayment of principal of the CMOs. CMOs often are issued in two
or more classes with different characteristics such as varying maturities and
stated rates of interest. Because interest and principal payments on the
underlying mortgages are not passed through to holders of CMOs, CMOs of varying
maturities may be secured by the same pool of mortgages, the payments on which
are used to pay interest on each class and to retire successive maturities in
sequence. Unlike other mortgage-backed securities (discussed above), CMOs are
designed to be retired as the underlying mortgages are repaid. In the event of
prepayment on such mortgages, the class of CMOs first to mature generally will
be paid down. Therefore, although in most cases the issuer of CMOs will not
supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure CMOs that remain outstanding.
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<PAGE>
ASSET-BACKED SECURITIES. The Fund may invest in "asset-backed"
securities. These represent interests in pools of consumer loans and other trade
receivables, similar to mortgage-backed securities. They are issued by trusts
and "special purpose corporations." They are backed by a pool of assets, such as
credit card or auto loan receivables, which are the obligations of a number of
different parties. The income from the underlying pool is passed through to
holders, such as the Fund. These securities may be supported by a credit
enhancement, such as a letter of credit, a guarantee, or a preference right.
However, the extent of the credit enhancement may be different for different
securities and generally applies to only a fraction of the security's value.
These securities present special risks. For example, in the case of credit card
receivables, the issuer of the security may have no security interest in the
related collateral.
The value of an asset-backed security is affected by changes in the
market's perception of the asset backing the security, the creditworthiness of
the servicing agent for the loan pool, the originator of the loans, or the
financial institution providing any credit enhancement, and is also affected if
any credit enhancement has been exhausted. The risks of investing in
asset-backed securities are ultimately dependent upon payment of consumer loans
by the individual borrowers. As a purchaser of an asset-backed security, the
Fund would generally have no recourse to the entity that originated the loans in
the event of default by a borrower. The underlying loans are subject to
prepayments, which shorten the weighted average life of asset-backed securities
and may lower their return in the same manner as described above for the
prepayments of a pool of mortgage loans underlying mortgage-backed securities.
ZERO COUPON SECURITIES. Zero coupon, pay-in-kind and deferred interest
bonds involve additional special considerations. Zero coupon bonds are debt
obligations that do not entitle the holder to any periodic payments of interest
prior to maturity or a specified cash payment date when the securities begin
paying current interest (the "cash payment date"), and therefore are issued and
traded at a discount from their face amount or par value. The market prices of
zero coupon securities are generally more volatile than the market prices of
securities that pay interest periodically, and are likely to respond to changes
in interest rates to a greater degree than do securities paying interest
currently having similar maturities and credit quality. Pay-in-kind bonds pay
interest in the form of other securities rather than cash. Deferred interest
bonds defer the payment of interest to a later date. Zero coupon, pay-in-kind or
deferred interest bonds carry additional risk in that, unlike bonds which pay
interest in cash throughout the period to maturity, the Fund will realize no
cash until the cash payment date unless a portion of such securities are sold.
There is no assurance of the value or the liquidity of securities received from
pay-in-kind bonds. If the issuer defaults, the Fund may obtain no return at all
on its investment. To the extent that the Fund invests in bonds that are
original issue discount, zero coupon, pay-in-kind or deferred interest bonds,
the Fund may have taxable interest income in excess of the cash actually
received on these issues. In order to distribute such income to avoid taxation
to the Fund, the Fund may have to sell portfolio securities to meet its taxable
distribution requirements under circumstances that could be adverse.
TAXABLE MUNICIPAL OBLIGATIONS. Taxable municipal obligations are issued
by or on behalf of states, territories, and possessions of the U.S., and their
political subdivisions, agencies, and instrumentalities, and the District of
Columbia, to obtain funds. Unlike traditional municipal
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<PAGE>
bonds, the interest earned on taxable municipal obligations is subject to
federal income tax. Taxable municipal obligations are subject to interest rate,
credit, and prepayment risks.
OTHER INVESTMENT POLICIES
TEMPORARY DEFENSIVE INVESTMENTS. For defensive purposes or to
accommodate inflows of cash awaiting more permanent investment, the Fund may
temporarily and without limitation hold high-grade short-term money market
instruments, cash and cash equivalents, including repurchase agreements. The
Fund may also invest in other investment companies which themselves invest in
temporary defensive investments. Investments in other investment companies are
limited by the Investment Company Act of 1940 ("1940 Act").
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements,
but normally will not enter into repurchase agreements maturing in more than
seven days. A repurchase agreement, as referred to herein, involves a sale of
securities to a Fund, with the concurrent agreement of the seller (a bank or
securities dealer which the Adviser or Sub-Adviser determines to be financially
sound at the time of the transaction) to repurchase the securities at the same
price plus an amount equal to accrued interest at an agreed-upon interest rate
within a specified time, usually less than one week, but, on occasion, at a
later time. The repurchase obligation of the seller is, in effect, secured by
the underlying securities. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and losses, including: (a) possible
decline in the value of the collateral during the period while the Fund seeks to
enforce its rights thereto; (b) possible loss of all or a part of the income
during this period; and (c) expenses of enforcing its rights.
The Fund will enter into repurchase agreements only when the seller
agrees that the value of the underlying securities, including accrued interest
(if any), will at all times be equal to or exceed the value of the repurchase
agreement. The Fund may enter into tri-party repurchase agreements in which a
third party custodian bank issues the cash upon purchase of the securities used
as collateral, and also holds the securities. The Fund will not enter into a
repurchase agreement maturing in more than seven days if it would cause more
than 15% of the value of its net assets to be invested in such transactions.
Repurchase agreements maturing in less than seven days are not deemed illiquid
securities for the purpose of the Fund's limitation on illiquid securities.
AVERAGE MATURITY AND MIX OF SECURITIES. The average maturity and the
mix of investments of the Fund will vary as the Adviser seeks to provide a high
level of income considering the available alternatives in the market. To limit
interest rate risk, the Adviser seeks to maintain the Fund's average maturity
from five to ten years. Since interest rates vary with changes in economic,
market, political, and other conditions, there can be no assurance that historic
interest rates are indicative of rates which may prevail in the future. Since
the values of securities in the Fund fluctuate depending upon market factors,
the credit of the issuer and inversely with current interest rate levels, the
net asset value of its shares will fluctuate. The Adviser attempts to adjust
investments as considered advisable in view of prevailing or anticipated market
and credit conditions as perceived by the Adviser. Portfolio securities may be
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<PAGE>
purchased or sold in anticipation of a rise or a decline in interest rates or a
change in credit quality.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a "when-issued" basis and may purchase or sell such securities on
a "delayed delivery" basis. These terms refer to securities that have been
created and for which a market exists, but which are not available for immediate
delivery or are to be delivered at a later date. There may be a risk of loss to
the Fund if the value of the security changes prior to the settlement date.
Although the Fund will enter into when-issued and delayed delivery
transactions for the purpose of acquiring securities for its portfolio, the Fund
may dispose of a commitment prior to settlement. When such transactions are
negotiated, the price (which is generally expressed in yield terms) is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. The Fund does not intend to make such purchases for
speculative purposes. The commitment to purchase a security for which payment
will be made on a future date may be deemed a separate security and involve a
risk of loss if the value of the security declines prior to the settlement date.
During the period between commitment by the Fund and settlement, no payment is
made for the securities purchased by the purchaser, and no interest accrues to
the purchaser from the transaction. Such securities are subject to market
fluctuation, and the value at delivery may be less than the purchase price. The
Fund will identify liquid assets on its records as segregated, of any type,
including equity and debt securities of any grade at least equal to the value of
purchase commitments, until payment is made.
The Fund may engage in when-issued transactions in order to secure what
is considered to be an advantageous price and yield at the time of entering into
the obligation. When the Fund engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure of the buyer or seller to do so may result
in the Fund losing the opportunity to obtain a price and yield considered to be
advantageous. At the time the Fund makes a commitment to purchase or sell a
security on a when-issued or forward commitment basis, it records the
transaction and reflects the value of the security purchased, or if a sale, the
proceeds to be received, in determining its net asset value. If the Fund chooses
to (i) dispose of the right to acquire a when-issued security prior to its
acquisition, or (ii) dispose of its right to deliver or receive against a
forward commitment, it may incur a gain or loss.
When-issued transactions and forward commitments allow the Fund a
technique to use against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling prices, the Fund might
sell securities in its portfolio on a forward commitment basis to attempt to
limit its exposure to anticipated falling prices. In periods of falling interest
rates and rising prices, the Fund might sell portfolio securities and purchase
the same or similar securities on a when-issued or forward commitment basis,
thereby obtaining the benefit of currently higher cash yields.
LENDING PORTFOLIO SECURITIES. The Fund may lend securities to
broker/dealers or institutional investors for their use in connection with short
sales, arbitrages, and other securities transactions. The Fund may earn interest
on cash collateral or receive a fee from broker/dealers for lending its
portfolio securities. The Fund will not lend portfolio securities unless the
loan is
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<PAGE>
secured by collateral (consisting of any combination of cash, U.S. Government
securities or irrevocable letters of credit) in an amount at least equal (on a
daily market-to-market basis) to the current market value of the securities
loaned. In the event of a bankruptcy or breach of agreement by the borrower of
the securities, the Fund could experience delays and costs in recovering the
securities loaned. The Fund will not lend securities if such a loan would cause
more than 20% of the total value of its assets to then be subject to such loans.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities which are subject to contractual restrictions on resale. The Fund's
policy is to not purchase or hold illiquid securities (which may include
restricted securities) if more than 15% of the Fund's net assets would then be
illiquid.
The restricted securities which the Fund may purchase include
securities which have not been registered under the 1933 Act but are eligible
for purchase and sale pursuant to Rule 144A ("Rule 144A Securities"). This Rule
permits certain qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not registered under
the 1933 Act. The Adviser or Sub-Adviser, under criteria established by the
Fund's Board of Directors, will consider whether Rule 144A Securities being
purchased or held by the Fund are illiquid and thus subject to the Fund's policy
limiting investments in illiquid securities. In making this determination, the
Adviser or Sub-Adviser will consider the frequency of trades and quotes, the
number of dealers and potential purchasers, dealer undertakings to make a
market, and the nature of the security and the market place trades (for example,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). The liquidity of Rule 144A Securities will also be
monitored by the Adviser and Sub-Adviser and, if as a result of changed
conditions it is determined that a Rule 144A Security is no longer liquid, the
Fund's holding of illiquid securities will be reviewed to determine what, if
any, action is required in light of the policy limiting investments in such
securities. Investing in Rule 144A Securities could have the effect of
increasing the amount of investments in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
BORROWING. The Fund may borrow money for temporary or emergency
purposes. The Fund will not borrow money with the intent of leveraging its
investments. Borrowing activities are strictly limited as described in the
section entitled "Investment Restrictions".
PORTFOLIO TRANSACTIONS
The Adviser and Sub-Adviser are responsible for the placement of
portfolio transactions, subject to the supervision of the Board of Directors.
The Fund has adopted a policy of seeking to place portfolio transactions with
brokers or dealers who will execute transactions as efficiently as possible and
at the most favorable price. Subject to this policy, research services and
placement of orders by securities firms for Fund shares may be taken into
account as a factor in placement of portfolio transactions. In seeking the
Fund's investment objectives, the Fund may trade to some degree in securities
for the short-term if the Adviser or Sub-Adviser believes that such trading is
advisable.
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<PAGE>
In placing executions and paying brokerage commissions or dealer
markups, the Adviser or Sub-Adviser considers the financial responsibility and
reputation of the broker or dealer, the range and quality of the services made
available to the Fund and the professional services rendered, including
execution, clearance procedures, wire service quotations and ability to provide
supplemental performance, statistical and other research information for
consideration, analysis and evaluation by the Adviser's or Sub-Adviser's staff.
The Fund has approved a policy which allows it to use commissions to
purchase research. The Fund will not use markups to purchase research. In
accordance with this policy, brokerage transactions may not be executed solely
on the basis of the lowest commission rate available for a particular
transaction. Research services provided to the Adviser or Sub-Adviser by or
through brokers who effect portfolio transactions for the Fund may be used in
servicing other accounts managed by the Adviser, and likewise, research services
provided by brokers used for transactions of other accounts may be utilized by
the Adviser or Sub-Adviser in performing services for the Fund. Subject to the
requirements of best execution, the placement of orders by securities firms for
shares of the Fund may be taken into account as a factor in the placement of
portfolio transactions.
On occasions when the Adviser or Sub-Adviser deems the purchase or sale
of a security to be in the best interests of a Fund as well as other fiduciary
accounts, the Adviser or Sub-Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other accounts in
order to obtain the best net price and most favorable execution. In such event,
the allocation will be made by the Adviser or Sub-Adviser in the manner
considered to be most equitable and consistent with its fiduciary obligations to
all such fiduciary accounts, including the Fund involved. In some instances,
this procedure could adversely affect a Fund but the Adviser and Sub-Adviser
deem that any disadvantage in the procedure would be outweighed by the increased
selection available and the increased opportunity to engage in volume
transactions.
The Adviser and Sub-Adviser believe that research from brokers and
dealers is desirable, although not essential, in carrying out their functions,
in that such outside research supplements the efforts of the Adviser and
Sub-Adviser by corroborating data and enabling the Adviser and Sub-Adviser to
consider the views, information and analyses of other research staffs. Such
views, information and analyses include such matters as communicating with
persons having special expertise on certain companies, industries, areas of the
economy and/or securities prices, obtaining written materials on these or other
areas which might affect the economy and/or securities prices, obtaining
quotations on securities prices and obtaining information on the activities of
other institutional investors. The Adviser and Sub-Adviser research, at their
own expense, each security included in, or being considered for inclusion in,
the Fund's portfolios. As any particular research obtained by the Adviser or
Sub-Adviser may be useful to the Fund, the Board of Directors or its Committee
on Brokerage, in considering the reasonableness of the commissions paid by the
Fund, will not attempt to allocate, or require the Adviser or Sub-Adviser to
allocate, the relative costs or benefits of research.
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Most of the Fund's transactions are made on a principal basis. The
price of such transactions may include profit for the dealer. The Fund paid the
following brokerage commissions:
Fiscal year ended March 31:
1999 1998 1997
---- ---- ----
Brokerage commissions paid: $26,016 $ 4,045 $ 1,580
Amount paid to brokers providing research: 99.42% N/A N/A
Because of the Fund's investment policies, portfolio turnover rate will
vary. At times it could be high, which could require the payment of larger
amounts in brokerage commissions. The Fund anticipates that, during normal
market conditions, its annual portfolio turnover rate will be less than 100%.
INVESTMENT RESTRICTIONS
The fundamental investment restrictions set forth below may not be
changed without the approval of the holders of the lesser of (i) 67% of the
eligible votes, if the holders of more than 50% of the eligible votes are
represented, or (ii) more than 50% of the eligible votes. All percentage
limitations set forth in these restrictions apply as of the time of an
investment without regard to later increases or decreases in the value of
securities or total or net assets.
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND FUNDAMENTAL
- - ---------------------------------------------------------
INVESTMENT RESTRICTIONS
- - -----------------------
1. Commodities. The Fund may not buy or sell commodities or commodity
contracts.
2. Real Estate. The Fund may not purchase real estate or real estate mortgages
as such, but the Fund may purchase the liquid securities of companies,
including real estate investment trusts, holding real estate or interests
(including mortgage interests) therein.
3. Voting Securities. The Fund may not buy the securities of any company if
the Fund would then own more than 10% of such company's voting securities
or any class of such company's securities. For this purpose, all debt
securities of an issuer are deemed to comprise a single class.
4. Diversification. The Fund may not buy the securities of any company if more
than 5% of the value of its total assets would then be invested in that
company; the Fund may, however, without limitation, invest in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities") and repurchase agreements
with respect thereto.
5. Concentration. The Fund may not buy the securities of companies in any one
industry if more than 25% of the value of the Fund's total assets would
then be invested in companies in that industry.
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6. Options. The Fund may not purchase or write put or call options, except
that it may write listed covered call options and make closing transactions
in respect thereof, provided that no more than 20% of the value of the
Fund's total assets would be subject to such calls.
7. Seasoned Issuers. The Fund may not buy the securities of companies in
continuous operation for less than three years (including predecessors) if
more than 5% of the value of the Fund's total assets would then be invested
in such securities.
8. Investment Companies. The Fund may not buy securities issued by other
investment companies except incident to an acquisition of assets or a
merger.
9. Selling Short, Margin, Arbitrage. The Fund may not sell short, buy on
margin or engage in arbitrage transactions.
10. Investing For Control. The Fund does not invest for the purpose of
exercising control or management of other companies.
11. Borrowing. The Fund may not borrow money except from banks for
extraordinary emergency purposes in amounts not exceeding 10% of the value
of the Fund's total assets (excluding the amount borrowed) at the time of
such borrowing. The Fund may not pledge or hypothecate any of its assets,
except in connection with permitted borrowing in amounts not exceeding 15%
of the value of its total assets (excluding the amount borrowed) at the
time of such borrowing.
12. Affiliated Securities. The Fund may not buy or continue to hold securities
if any officers or directors of the Fund, the Adviser, or the Adviser's
General Partner, own too many of the same securities. This would happen if
any of these individuals own 1/2 of 1% or more of the securities and all
such individuals who own that much or more own 5% of such securities.
13. Underwriting. The Fund does not engage in the underwriting of securities;
however, if the Fund sells "restricted" securities it may technically be
considered an "underwriter."
14. Lending. The Fund may lend its securities provided that not more than 20%
of the value of the Fund's total assets are subject to such loans. The Fund
may not lend money except through the purchase of debt obligations
(including entering into repurchase agreements) in accordance with the
Fund's investment objectives.
15. Senior Securities. The Fund may not issue senior securities nor sell short
more than 5% of its total assets. This limitation does not apply to selling
short against the box.
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NON-FUNDAMENTAL POLICIES
In addition to the foregoing restrictions, the Fund is subject to certain
non-fundamental policies which may be changed without shareholder approval.
Currently, these restrictions include:
1. Futures and Options Contracts. The Fund will not invest in futures or
options contracts. In addition, the Fund will not enter into swap
transactions or forward contracts. This restriction does not limit the
Fund's ability to purchase fixed-income securities with embedded options or
to enter into repurchase agreements which are fully collateralized with
government securities.
2. Fixed-Income Securities Denominated in U.S. Dollars. The Fund will only
purchase fixed-income securities if they are denominated in U.S. dollars.
3. High Yield, High-Risk Securities. The Fund will not invest more than 35% of
its total assets in fixed-income securities which are rated less than
investment-grade or, if unrated, judged by the Adviser to be of comparable
quality to such high yield, high-risk securities. High yield, high-risk
securities include securities rated BB, B, CCC, CC, C and D by Standard &
Poor's or Ba, B, Caa, Ca and C by Moody's.
4. Illiquid Securities. The Fund will not purchase or hold illiquid securities
if more than 15% of the Fund's net assets would then be illiquid.
5. Borrowing. In addition to the fundamental policy restricting borrowing, the
Fund may borrow money from any source for temporary purposes in an amount
not exceeding 5% of total assets. The Fund will not purchase portfolio
securities on margin and will not purchase additional portfolio securities
while borrowings exceed 5% of the total assets of the Fund.
PLEASE NOTE: Except for limitations on borrowing and illiquid securities, all
percentage restrictions, whether fundamental or non-fundamental, apply as of the
time of an investment without regard to any later fluctuations in the value of
portfolio securities or other assets.
Section II: Key Persons
ORGANIZATION OF THE COMPANY
THE COMPANY. Davis Intermediate Investment Grade Bond Fund, Inc. (the
"Company") is an open-end, diversified, management investment company
incorporated in Maryland in 1980 and registered under the 1940 Act. The Company
is a series investment company which may issue multiple series, each of which
would represent an interest in its separate portfolio. The Company currently
offers a single series, the Davis Intermediate Investment Grade Bond Fund (the
"Fund"). On October 6, 1998 the Company changed its name from Davis High Income
Fund, Inc. to Davis Intermediate Investment Grade Bond Fund, Inc.
19
<PAGE>
FUND SHARES. The Fund may issue shares in different classes. The Fund's
shares are currently divided into four classes, Class A, Class B, Class C, and
Class Y shares. The Board of Directors may offer additional series or classes in
the future and may at any time discontinue the offering of any series or class
of shares. Each share, when issued and paid for in accordance with the terms of
the offering, is fully paid and non-assessable. Shares have no preemptive or
subscription rights and are freely transferable. Each of the Fund's shares
represent an interest in the assets of the Fund issuing the share and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions as any other shares except that (i) each dollar of net asset value
per share is entitled to one vote, (ii) the expenses related to a particular
class, such as those related to the distribution of each class and the transfer
agency expenses of each class are borne solely by each such class, and (iii)
each class of shares votes separately with respect to provisions of the Rule
12b-1 Distribution Plan which pertains to a particular class, and other matters
for which separate class voting is appropriate under applicable law. Each
fractional share has the same rights, in proportion, as a full share. Shares do
not have cumulative voting rights; therefore, the holders of more than 50% of
the voting power of the Company can elect all of the Directors of the Company.
Due to the differing expenses of the classes, dividends of Class B and Class C
shares are likely to be lower than for Class A shares, and are likely to be
higher for Class Y shares than for any other class of shares. For more
information about Class Y shares, call the Distributor at 1-800-279-0279 to
obtain the Class Y prospectus.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise to the shareholders of the outstanding voting securities of an
investment company, such as the Company, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each series affected by such matter. Rule 18f-2 further
provides that a series shall be deemed to be affected by a matter unless it is
clear that the interests of each series in the matter are identical or that the
matter does not affect any interest of such series. Rule 18f-2 exempts the
selection of independent accountants and the election of Board members from the
separate voting requirements of the Rule.
In accordance with Maryland law and the Company's By-laws, the Company
does not hold regular annual shareholder meetings. Shareholder meetings are held
when they are required under the 1940 Act or when otherwise called for special
purposes. Special shareholder meetings may be called upon the written request of
shareholders of at least 25% of the voting power that could be cast at the
meeting.
DIRECTORS AND OFFICERS
The Company's Board of Directors is responsible for the management and
supervision of the Company and the Fund. The Board approves all significant
agreements between the Company, on behalf of the Fund, and those companies that
furnish services to the Fund. The names and addresses of the Directors and
officers of the Company are set forth below, together with their principal
business affiliations and occupations for the last five years. As indicated
below, certain Directors and officers of the Company hold similar positions with
the following Funds that are managed by the Adviser: Davis New York Venture
Fund, Inc., Davis
20
<PAGE>
Intermediate Investment Grade Bond Fund, Inc., Davis Tax-Free High Income Fund,
Inc., Davis Series, Inc., Davis International Series, Inc. and Davis Variable
Account Fund, Inc. (collectively the "Davis Funds"). As indicated below, certain
Directors and officers of the Company may also hold similar positions with the
following Funds that are managed by the Adviser: Selected American Shares, Inc.,
Selected Special Shares, Inc., and Selected Capital Preservation Trust
(collectively the "Selected Funds").
WESLEY E. BASS, JR. (8/21/31), 710 Walden Road, Winnetka IL 60093. Director of
the Company and each of the Davis Funds except Davis International Series, Inc.;
President, Bass & Associates (a financial consulting firm); formerly First
Deputy City Treasurer, City of Chicago, and Executive Vice President, Chicago
Title and Trust Company.
JEREMY H. BIGGS (8/16/35),* Two World Trade Center, 94th Floor, New York NY
10048. Director and Chairman of the Company and each of the Davis Funds;
Director of the Van Eck Funds; Consultant to the Adviser; Vice Chairman, Head of
Equity Research Department; Chairman of the U.S. Investment Policy Committee,
and Member of the International Investment Committee of Fiduciary Trust Company
International.
MARC P. BLUM (9/9/42), 233 East Redwood Street, Baltimore MD 21202. Director of
the Company and each of the Davis Funds except Davis International Series, Inc.;
Chief Executive Officer, World Total Return Fund, LLLP; Of Counsel to Gordon,
Feinblatt, Rothman, Hoffberger and Hollander, LLC (attorneys); Director,
Mid-Atlantic Realty Trust.
JERRY D. GEIST (5/23/34), 931 San Pedro Drive S.E., Albuquerque NM 87108.
Director of the Company and each of the Davis Funds except Davis International
Series, Inc.; Chairman, Santa Fe Center Enterprises; President and Chief
Executive Officer, Howard Energy International Utilities; Director, CH2M-Hill,
Inc.; Member, Investment Committee for Microgeneration Technology Fund, UTECH
Funds; Retired Chairman and President, Public Service Company of New Mexico.
D. JAMES GUZY (3/7/36), P.O. Box 128, Glenbrook NV 89413. Director of the
Company and each of the Davis Funds except Davis International Series, Inc.;
Chairman, PLX Technology, Inc. (a manufacturer of semi-conductor circuits);
Director, Intel Corp. (a manufacturer of semi-conductor circuits), Cirrus Logic
Corp. (a manufacturer of semi-conductor circuits), Alliance Technology Fund (a
mutual fund) and Micro Component Technology, Inc.
G. BERNARD HAMILTON (3/18/37), Avanti Partners, P.O. Box 1119, Richmond VA
23218. Director of the Company and each of the Davis Funds; Managing General
Partner, Avanti Partners, L.P.
LEROY E. HOFFBERGER (6/8/25), The Exchange - Suite 215, 1112 Kenilworth Drive,
Towson MD 21204. Director of the Company and each of the Davis Funds except
Davis International Series, Inc.; Of Counsel to Gordon, Feinblatt, Rothman,
Hoffberger and Hollander, LLC (attorneys); Chairman, Mid-Atlantic Realty Trust;
Director, Chairman and President, CPC, Inc. (a real estate company); Chairman,
Merchant Terminal Corporation; formerly Director of Equitable Bancorporation,
Equitable Bank and Maryland National Bank; and formerly Chairman and President,
O-W Fund, Inc. (a private investment fund).
LAURENCE W. LEVINE (4/9/31), Walsh & Levine 40 Wall Street, 21st Floor, New York
NY 10005. Director of the Company and each of the Davis Funds except Davis
International Series, Inc.; Partner, Bigham, Englar, Jones and Houston
(attorneys); United States Counsel to Aerolineas Argentina; Director, various
private companies.
CHRISTIAN R. SONNE (5/6/30), P.O. Box 777, Tuxedo Park NY 10987. Director of the
Company and each of the Davis Funds except Davis International Series, Inc.;
General Partner of Tuxedo Park Associates (a land holding and development firm);
President and Chief Executive Officer of Mulford Securities Corporation (a
private investment fund) until 1990; formerly Vice President of Goldman Sachs &
Company (investment banker).
21
<PAGE>
MARSHA WILLIAMS (3/28/51), 725 Landwehr Road, Northbrook IL 60062. Director of
the Company and each of the Davis Funds (except Davis International Series,
Inc.) and the Selected Funds; Chief Administrative Officer of Crate & Barrel;
Director, Modine Manufacturing, Inc.; Director, Chicago Bridge & Iron Company,
M.V.; former Treasurer, Amoco Corporation.
SHELBY M.C. DAVIS (3/20/37),** 4135 North Steers Head Road, Jackson Hole WY
83001. President of the Company and each of the Davis Funds and the Selected
Funds; Director, Chairman and Chief Executive Officer, Venture Advisers, Inc.;
Director, Davis Selected Advisers-NY, Inc.; Director, Shelby Cullom Davis
Financial Consultants, Inc.
ANDREW A. DAVIS (6/25/63),* ** 124 East Marcy Street, Santa Fe NM 87501.
Director and Vice President of the Company and each of the Davis Funds (except
Davis International Series, Inc.) and the Selected Funds; Director and
President, Venture Advisers, Inc.; Director and Vice President, Davis Selected
Advisers-NY, Inc.; former Vice President of convertible security research,
PaineWebber, Inc.
CHRISTOPHER C. DAVIS (7/13/65),* ** 609 Fifth Avenue, New York NY 10017.
Director and Vice President of the Company and each of the Davis Funds and the
Selected Funds; Director, Vice Chairman, Venture Advisers, Inc.; Director,
Chairman, Chief Executive Officer, Davis Selected Advisers-NY, Inc.; Chairman
and Director, Shelby Cullom Davis Financial Consultants, Inc.; Employee of
Shelby Cullom Davis & Co., a registered broker/dealer; Director, Kings Bay Ltd.,
an offshore investment management company.
KENNETH C. EICH (8/14/53), 124 East Marcy Street, Santa Fe NM 87501. Vice
President of the Company and each of the Davis Funds and Selected Funds; Chief
Operating Officer, Venture Advisers, Inc.; Vice President, Davis Selected
Advisers-NY, Inc.; President, Davis Distributors, LLC; former President and
Chief Executive Officer of First of Michigan Corporation; former Executive Vice
President and Chief Financial Officer of Oppenheimer Management Corporation.
SHARRA L. REED (9/25/66), 124 East Marcy Street, Santa Fe NM 87501. Vice
President, Treasurer and Assistant Secretary of the Company and each of the
Davis Funds and Selected Funds; Vice President of Venture Advisers, Inc.
THOMAS D. TAYS (3/7/57), 124 East Marcy Street, Santa Fe NM 87501. Vice
President and Secretary of the Company and each of the Davis Funds and Selected
Funds; Vice President and Secretary, Venture Advisers, Inc., Davis Selected
Advisers-NY, Inc., and Davis Distributors, LLC; former Vice President and
Special Counsel of U.S. Global Investors, Inc.
SHELDON R. STEIN (11/29/28), 111 East Wacker Drive, Suite 2800, Chicago IL
60601. Assistant Secretary of the Company and each of the Davis Funds and
Selected Funds; Member, D'Ancona & Pflaum LLC, the Company's counsel.
ARTHUR DON (9/24/53), 111 East Wacker Drive, Suite 2800, Chicago IL 60601.
Assistant Secretary of the Company and each of the Davis Funds and Selected
Funds; Member, D'Ancona & Pflaum LLC, the Company's counsel.
* Jeremy H. Biggs, Andrew A. Davis and Christopher C. Davis are considered to
be "interested persons" of the Company, as defined in the Investment
Company Act.
** Shelby M.C. Davis is the father of Andrew A. Davis and Christopher C.
Davis.
The Company does not pay salaries to any of its officers. The Adviser
performs certain services on behalf of the Company and is reimbursed by the
Company for the costs of providing these services.
22
<PAGE>
DIRECTORS' COMPENSATION SCHEDULE
During the fiscal year ended March 31, 1999, the compensation paid
to the Directors who are not considered to be interested persons of the Company
was as follows:
AGGREGATE COMPANY TOTAL
NAME COMPENSATION COMPLEX COMPENSATION*
---- ------------ ---------------------
Wesley E. Bass $ 3,400 $54,850
Marc P. Blum $ 3,225 $51,700
Jerry D. Geist $ 2,850 $47,750
D. James Guzy $ 3,200 $51,250
G. Bernard Hamilton $ 3,200 $56,250
LeRoy E. Hoffberger $ 3,200 $51,250
Laurence W. Levine $ 3,200 $51,250
Christian R. Sonne $ 3,200 $51,250
Edwin R. Werner** $ 1,480 $23,450
Marsha Williams*** $ 800 $14,500
* Complex compensation is the aggregate compensation paid, for services as a
Director, by all mutual funds with the same investment adviser. There are
nine registered investment companies in the complex.
** Mr. Werner retired as a Director December 31, 1997, but still serves in a
non-voting emeritus status.
*** Ms. Williams was elected to the Board as of January 1, 1999.
CERTAIN SHAREHOLDERS OF THE FUND
As of July 1, 1999, officers and Directors owned the following
percentages of each Class of shares issued by the Fund:
Class A Class B Class C Class Y
------- ------- ------- -------
Davis Intermediate 2.948% N/A N/A N/A
Investment Grade Bond Fund
23
<PAGE>
The following table sets forth, as of July 1, 1999, the name and
holdings of each person known by the Company to be a record owner of more than
5% of the outstanding shares of any Class of shares. The Fund is not aware of
any shareholder that beneficially owns in excess of 25% of the Fund's total
outstanding shares.
PERCENT OF CLASS
NAME AND ADDRESS OUTSTANDING
- - ---------------- -----------
CLASS A SHARES N/A
- - --------------
CLASS B SHARES
- - --------------
MLPF&S For the sole benefit 28.21%
of its customers
Attn: Fund Administrator
4800 Deerlake Drive East
2nd Floor
Jacksonville, FL 32246-6484
CLASS C SHARES
- - --------------
MLPF&S For the sole benefit 43.94%
of its customers
Attn: Fund Administrator
4800 Deerlake Drive East
2nd Floor
Jacksonville, FL 32246-6484
CLASS Y SHARES
- - --------------
Naidot & Co. 97.47%
c/o Bessemer Trust Company
100 Woodbridge Center Drive
Woodbridge, NJ 07095
INVESTMENT ADVISORY SERVICES
Davis Selected Advisers, L.P. (the "Adviser") whose principal office is
at 124 East Marcy Street, Santa Fe, New Mexico 87501, serves as the investment
adviser of the Fund. Venture Advisers, Inc. is the Adviser's sole general
partner. Shelby M.C. Davis is Chief Investment Officer of the Adviser and the
controlling shareholder of the general partner. Subject to the direction and
supervision of the Board of Directors, the Adviser manages the investment and
business operations of the Fund. Davis Distributors, LLC ("the Distributor"), a
subsidiary of the Adviser, serves as the distributor or principal underwriter of
the Fund's shares. Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly owned
subsidiary of the Adviser, performs
24
<PAGE>
investment management, research and other services for the Fund on behalf of the
Adviser under a Sub-Advisory Agreement with the Adviser. The Adviser also acts
as investment adviser for Davis New York Venture Fund, Inc., Davis Tax-Free High
Income Fund, Inc., Davis Series, Inc., Davis International Series, Inc., Davis
Variable Account Fund, Inc. (collectively with the Fund, the "Davis Funds"),
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust (collectively the "Selected Funds"). The Distributor
also acts as the principal underwriter for the Davis Funds and the Selected
Funds.
ADVISORY AGREEMENT. Pursuant to the Advisory Agreement, the Fund pays
the Adviser a fee according to a separate negotiated fee schedule. Advisory fees
are allocated among each Class of shares in proportion to each Class's relative
total net assets.
The Fund pays the Adviser a monthly fee at the annual rate of 0.55% of
average net assets. Prior to October 6, 1998, the Fund paid the Adviser a
monthly fee at the annual rate of 0.70% of average net assets to manage an
investment portfolio of high yield, high-risk securities. Prior to October 6,
1998, the Fund invested primarily in high yield, high-risk securities. At that
time the Fund and the Adviser retained Stamper Capital & Investments, Inc. to
serve as Sub-Adviser to the Fund.
The aggregate advisory fee paid by the Fund to the Adviser was:
For fiscal year ended March 31:
1999 1998 1997
---- ---- ----
Davis Intermediate Investment $416,822 $446,682 $419,844
Grade Bond Fund
These fees may be higher than those of most other mutual funds, but are
not necessarily higher than those paid by funds with similar objectives.
The Adviser has entered into a Sub-Advisory Agreement with its wholly
owned subsidiary, Davis Selected Advisers-NY, Inc. ("DSA-NY"), where DSA-NY
performs research and other services on behalf of the Adviser. Under the
Agreement, the Adviser pays all of DSA-NY' s direct and indirect costs of
operation. All of the fees paid to DSA-NY are paid by the Adviser and not the
Fund.
The Advisory Agreement also makes provisions for portfolio transactions
and brokerage policies of the Fund which are discussed above under "Portfolio
Transactions."
In accordance with the provisions of the 1940 Act, the Advisory
Agreement and Sub-Advisory Agreement will terminate automatically upon
assignment, and are subject to cancellation upon 60 days' written notice by the
Company's Board of Directors, the vote of the holders of a majority of the
Fund's outstanding shares, or the Adviser. The continuance of the Advisory
Agreement and Sub-Advisory Agreement must be approved at least annually by the
Fund's Board of Directors or by the vote of holders of a majority of the
outstanding shares of the Fund. In addition, any new agreement, or the
continuation of the existing agreement, must be approved by a majority of
Directors who are not parties to the agreements or interested persons of any
such party.
25
<PAGE>
Pursuant to the Advisory Agreement, the Adviser, subject to the
general supervision of the Fund's Board of Directors, provides management and
investment advice, and furnishes statistical, executive and clerical personnel,
bookkeeping, office space, and equipment necessary to carry out its investment
advisory functions and such corporate managerial duties as requested by the
Board of Directors of the Fund. The Fund bears all expenses other than those
specifically assumed by the Adviser under the Advisory Agreement, including
preparation of its tax returns, financial reports to regulatory authorities,
dividend determinations, transaction and accounting matters related to its
custodian bank, transfer agency, custodial and shareholder services, and
qualification of its shares under federal and state securities laws. The Fund
reimburses the Adviser for providing certain services including accounting and
administrative services, qualifying shares for sale with state agencies, and
shareholder services. Such reimbursements are detailed below:
Davis Intermediate Investment Grade Bond Fund
- - ---------------------------------------------
<TABLE>
<CAPTION>
Fiscal year ended March 31:
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Accounting and administrative services: $ 6,000 $13,001 $14,663
Qualifying shares for sale with state agencies: $ 12,996 $12,000 $12,000
Shareholder services: $ 10,947 $11,493 $ 6,713
</TABLE>
CODE OF ETHICS. The Adviser has adopted a Code of Ethics which
regulates the personal securities transactions of the Adviser's investment
personnel, other employees, and affiliates with access to information regarding
securities transactions of the Fund. The Code of Ethics requires investment
personnel to disclose personal securities holdings upon commencement of
employment and all subsequent trading activity to the Adviser's Compliance
Officer. Investment personnel are prohibited from engaging in any securities
transactions, including the purchase of securities in a private offering,
without the prior consent of the Compliance Officer. Additionally, such
personnel are prohibited from purchasing securities in an initial public
offering and are prohibited from trading in any securities (i) for which the
Fund has a pending buy or sell order, (ii) which the Fund is considering buying
or selling, or (iii) which the Fund purchased or sold within seven calendar
days.
DISTRIBUTION OF COMPANY SHARES
DISTRIBUTION PLANS. Class A, Class B, and Class C shares have each
adopted Distribution Plans under which the Fund reimburses the Distributor for
some of its distribution expenses. The Distribution Plans were approved by the
Fund's Board of Directors in accordance with Rule 12b-1 under the 1940 Act. Rule
12b-1 regulates the manner in which a mutual fund may assume costs of
distributing and promoting the sale of its shares. Payments pursuant to a
Distribution Plan are included in the operating expenses of the Class.
CLASS A SHARES. Payments under the Class A Distribution Plan are
limited to an annual rate of 0.25% of the average daily net asset value of the
Class A shares. Such payments are made to reimburse the Distributor for the fees
it pays to its salespersons and other firms for selling the Fund's Class A
shares, servicing its shareholders and maintaining its shareholder accounts.
Where a commission is paid for purchases of $1 million or more of Class A shares
and as long as the limits of the Distribution Plan have not been reached, such
payment is also made
26
<PAGE>
from 12b-1 distribution fees received from the Fund. Normally, such fees are at
the annual rate of 0.25% of the average net asset value of the accounts serviced
and maintained on the books of the Fund. Payments under the Class A Distribution
Plan may also be used to reimburse the Distributor for other distribution costs
(excluding overhead) not covered in any year by any portion of the sales charges
the Distributor retains.
CLASS B SHARES. Payments under the Class B Distribution Plan are
limited to an annual rate of 1% of the average daily net asset value of the
Class B shares. In accordance with current applicable rules, such payments are
also limited to 6.25% of gross sales of Class B shares plus interest at 1% over
the prime rate on any unpaid amounts. The Distributor pays broker/dealers up to
4% in commissions on new sales of Class B shares. Up to an annual rate of 0.75%
of the average daily net assets is used to reimburse the Distributor for these
commission payments. Most or all of such commissions are reallowed to
salespersons and to firms responsible for such sales. No commissions are paid by
the Company with respect to sales by the Distributor to officers, directors, and
full-time employees of the Fund, the Distributor, the Adviser, the Adviser's
general partner, or DSA-NY. Up to 0.25% of average net assets is used to
reimburse the Distributor for the payment of service and maintenance fees to its
salespersons and other firms for shareholder servicing and maintenance of its
shareholder accounts.
CLASS C SHARES. Payments under the Class C Distribution Plan are also
limited to an annual rate of 1% of the average daily net asset value of the
Class C shares, and are subject to the same 6.25% and 1% limitations applicable
to the Class B Distribution Plan. The entire amount of payments may be used to
reimburse the Distributor for the payments of commissions, service, and
maintenance fees to its salespersons and other firms for selling new Class C
shares, shareholder servicing and maintenance of its shareholder accounts.
CARRYOVER PAYMENTS. If, due to the foregoing payment limitations, the
Fund is unable to pay the Distributor the 4% commission on new sales of Class B
shares, or the 1% commission on new sales of Class C shares, the Distributor
intends, but is not obligated, to accept new orders for shares and pay
commissions in excess of the payments it receives from the Fund. The Distributor
intends to seek full payment from the Fund of any excess amounts with interest
at 1% over the prime rate at such future date, when and to the extent such
payments on new sales would not be in excess of the limitations. The Fund is not
obligated to make such payments; the amount (if any), timing and condition of
any such payments are solely within the discretion of the Directors of the
Company, who are not interested persons of the Distributor or the Company, and
have no direct or indirect financial interest in the Class B or C Distribution
Plans (the "Independent Directors"). If the Fund terminates its Class B share or
Class C share Distribution Plan, the Distributor will ask the Independent
Directors to take whatever action they deem appropriate with regard to the
payment of any excess amounts. As of March 31, 1999 the cumulative totals of
these carryover payments were $769,713, representing 3.58% of Class B shares net
assets.
ADDITIONAL INFORMATION CONCERNING THE DISTRIBUTION PLANS. In
addition, to the extent that any investment advisory fees paid by the Company
may be deemed to be indirectly financing any activity which is primarily
intended to result in the sale of Company shares within the meaning of Rule
12b-1, the Distribution Plans authorize the payment of such fees.
27
<PAGE>
The Distribution Plans continue annually so long as they are approved
in the manner provided by Rule 12b-1, or unless earlier terminated by vote of
the majority of the Independent Directors or a majority of the Fund's
outstanding Class of shares. The Distributor is required to furnish quarterly
written reports to the Board of Directors detailing the amounts expended under
the Distribution Plans. The Distribution Plans may be amended, provided that all
such amendments comply with the applicable requirements then in effect under
Rule 12b-1. Currently, Rule 12b-1 provides that as long as the Distribution
Plans are in effect, the Company must commit the selection and nomination of
candidates for new Independent Directors to the sole discretion of the existing
Independent Directors.
DEALER COMPENSATION. As described herein, dealers or others may receive
different levels of compensation depending on which class of shares they sell.
The Distributor may make expense reimbursements for special training of a
dealer's registered representatives or personnel of dealers and other firms who
provide sales or other services in respect to the Fund and/or its shareholders,
or to defray the expenses of meetings, advertising or equipment. Any such
amounts may be paid by the Distributor from the fees it receives under the Class
A, Class B and Class C Distribution Plans.
In addition, the Distributor may, from time to time, pay additional
cash compensation or other promotional incentives to authorized dealers or
agents who sell shares of the Fund. In some instances, such cash compensation or
other incentives may be offered only to certain dealers or agents who employ
registered representatives who have sold or may sell significant amounts of
shares of the Fund and/or the other Davis Funds managed by the Adviser during a
specified period of time.
Shares of the Fund may also be sold through banks or bank-affiliated
dealers. Any determination that such banks or bank-affiliated dealers are
prohibited from selling shares of the Fund under the Glass-Steagall Act would
have no material adverse effects on the Fund. State securities laws may require
such firms to be licensed as securities dealers in order to sell shares of the
Fund.
FUND SUPERMARKETS. The Fund participates in various "Fund Supermarkets"
in which a broker-dealer offers many mutual funds to the sponsor's clients
without charging the clients a sales charge. The Fund pays the supermarket
sponsor a negotiated fee for distributing the Fund's shares and for continuing
services provided to their shareholders.
A portion of the supermarket sponsor's fee (that portion related to
sales, marketing, or distribution of Fund shares) is paid with fees authorized
under the Distribution Plans.
A portion of the supermarket sponsor's fee (that portion related to
shareholder services such as new account set-up, shareholder accounting,
shareholder inquiries, transaction processing, and shareholder confirmations and
reporting) is paid as a shareholder servicing fee of the Fund. The Fund would
typically be paying these shareholder servicing fees directly, were it not that
the supermarket sponsor holds all customer accounts in a single omnibus account
with the Fund. The amount of shareholder servicing fees which the Fund may pay
to supermarket
28
<PAGE>
sponsors may not exceed the lesser of (a) 1/10 of 1 percent of net assets held
by such supermarket sponsors per year, or (b) the shareholder servicing costs
saved by the Fund with the omnibus account (determined in the reasonable
judgement of the Adviser).
If the supermarket sponsor's fees exceed the sum available from the
Distribution Plans and shareholder servicing fees, then the Adviser pays the
remainder out of its profits.
KRC INVESTMENT ADVISERS, LLC. KRC Investment Advisers, LLC ("KRC"), a
registered investment adviser owned and managed by members of the immediate and
extended family of LeRoy E. Hoffberger, a Director of the Company, has entered
into a service agreement (the "Services Agreement") with the Distributor which
provides payments to KRC under the Fund's Rule 12b-1 Plan. Under the Services
Agreement, KRC will provide shareholder maintenance services to clients with
respect to shares of the Company, and the Distributor will pay KRC a fee at the
annual rate of 0.25% of average net assets of the accounts of clients maintained
and serviced by KRC. Payments made by the Distributor under the Services
Agreement will be reimbursed by the Company under its Rule 12b-1 Plan. Those
payments will be made in connection with shareholder maintenance services
provided by that investment adviser to its clients who are shareholders of the
Company which include, among others, Mr. Hoffberger and members of his immediate
and extended family and trusts of which they are beneficiaries or trustees. The
cost of these services and advisory services provided by KRC are borne by the
clients. Mr. Hoffberger does not have any ownership interest in or otherwise
have any control of KRC.
THE DISTRIBUTOR. Davis Distributors, LLC ("the Distributor"), 124 East
Marcy Street, Santa Fe, New Mexico, 87501 is a wholly owned subsidiary of the
Adviser, and pursuant to a Distributing Agreement acts as principal underwriter
of the Fund's shares on a continuing basis. By the terms of the Distributing
Agreement, the Distributor pays for all expenses in connection with the
preparation, printing, and distribution of advertising and sales literature for
use in offering the Fund's shares to the public, including reports to
shareholders to the extent they are used as sales literature. The Distributor
also pays for the preparation and printing of prospectuses other than those
forwarded to existing shareholders. The continuance and assignment provisions of
the Distributing Agreement are the same as those of the Advisory Agreement.
The Distributor, or the Adviser in its capacity as distributor,
received total sales charges (which the Fund does not pay) on the sale of Class
A shares:
Fiscal year ended March 31:
1999 1998 1997
---- ---- ----
Davis Intermediate Investment Grade Bond Fund: $145,966 $207,166 $123,695
Amount reallowed to dealers: $121,498 $174,693 $104,712
The Distributor received compensation on redemptions and repurchases
of shares:
Fiscal year ended March 31, 1999:
Class A shares $ 10,597
Class B shares $ 112,821
Class C shares $ 4,897
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<PAGE>
The Distributor, or the Adviser in its capacity as distributor,
received the following amounts as reimbursements under the Distribution plans:
Fiscal year ended March 31:
1999 1998 1997
---- ---- ----
Class A shares $ 59,974 $101,590 $ 98,840
Class B shares $ 242,22 $145,416 $ 86,015
Class C shares $ 40,965 $ 10,355 N/A
OTHER IMPORTANT SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company ("State Street" or
"Custodian"), One Heritage Drive, North Quincy, Massachusetts 02171, serves as
custodian of the Company's assets. The Custodian maintains all of the
instruments representing the Company's investments and all cash. The Custodian
delivers securities against payment upon sale and pays for securities against
delivery upon purchase. The Custodian also remits the Company assets in payment
of the Fund's expenses, pursuant to instructions of officers or resolutions of
the Board of Directors. The Custodian also provides certain Fund accounting and
transfer agent services.
AUDITORS. KPMG LLP ("KPMG"), 707 17th Street, Suite 2300, Denver,
Colorado 80202, serves as independent auditors for the Fund. The auditors
consult on financial accounting and reporting matters, and meet with the Audit
Committee of the Board of Directors. In addition, KPMG reviews federal and state
income tax returns and related forms.
COUNSEL. D'Ancona & Pflaum LLC, 111 East Wacker Drive, Suite 2800,
Chicago, Illinois 60601, serves as counsel to the Company and also serves as
counsel for those members of the Board of Directors who are not affiliated with
the Adviser.
Section III: Purchase, Exchange and Redemption of Shares
PURCHASE OF SHARES
CLASS A, B, AND C SHARES. You can purchase Class A, Class B, or Class C
shares of the Fund from any dealer or other person having a sales agreement with
the Distributor. Class Y shares are offered only to certain qualified
purchasers, as described below.
There are three ways to make an initial investment of Class A, Class B,
or Class C shares in the Fund. One way is to fill out the Application Form
included in the Prospectus and mail it to State Street Bank and Trust Company
("State Street Bank and Trust") at the address on the Form. Your dealer or sales
representative will help you fill out the Form. The dealer must also sign the
Form. All purchases made by check (minimum $1,000, except $250 for retirement
plans) should be in U.S. dollars and made payable to THE DAVIS FUNDS, or, in the
case of a retirement account, to the custodian or trustee. THIRD PARTY CHECKS
WILL NOT BE ACCEPTED. When purchases are made by check, redemptions will not be
allowed until the investment being redeemed has been in the account for 15
calendar days.
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The second way to make an initial investment is to have your dealer
order and remit payment for the shares on your behalf. The dealer can also order
the shares from the Distributor by telephone or wire. You can also use this
method for additional investments of at least $1,000.
The third way to purchase shares is by wire. Shares may be purchased at
any time by wiring federal funds directly to State Street Bank and Trust. Prior
to an initial investment by wire, the shareholder should telephone Davis
Distributors, LLC at 1-800-279-0279 to advise them of the investment and class
of shares and to obtain an account number and instructions. A completed Plan
Adoption Agreement or Application Form should be mailed to State Street Bank and
Trust after the initial wire purchase. To assure proper credit, the wire
instructions should be made as follows:
State Street Bank and Trust Company,
Boston, MA 02210
Attn.: Mutual Fund Services
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
Shareholder Name,
Shareholder Account Number,
Federal Routing Number 011000028,
DDA Number 9904-606-2
After your initial investment, you can make additional investments of
at least $25. Simply mail a check payable to "The Davis Funds" to State Street
Bank and Trust Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA
02266-8406. For overnight delivery, please send your check to State Street Bank
and Trust Company, c/o The Davis Funds, 66 Brooks Drive, Braintree, MA 02184.
THIRD PARTY CHECKS WILL NOT BE ACCEPTED. The check should be accompanied by a
form which State Street Bank and Trust will provide after each purchase. If you
do not have a form, you should tell State Street Bank and Trust that you want to
invest the check in shares of the applicable Fund. If you know your account
number, you should also provide it to State Street Bank and Trust.
CERTIFICATES. The Company does not issue certificates for Class A
shares unless you request a certificate each time you make a purchase.
Certificates are not issued for Class B or Class C shares or for accounts using
the Automatic Withdrawals Plan. The Company does not issue certificates for
Class Y shares. Instead, shares purchased are automatically credited to an
account maintained for you on the books of the Company by State Street Bank and
Trust. You will receive a statement showing the details of the transaction and
any other transactions you had during the current year each time you add to or
withdraw from your account.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers four classes of shares. With certain exceptions
described below, Class A shares are sold with a front-end sales charge at the
time of purchase and are not subject to a sales charge when they are redeemed.
Class B shares are sold without a sales charge at the time of purchase, but are
subject to a deferred sales charge if they are redeemed within six years after
purchase. Class B shares will automatically convert to Class A shares eight
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. Class C shares
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<PAGE>
are purchased at their net asset value per share without the imposition of a
front-end sales charge but are subject to a 1% deferred sales charge if redeemed
within one year after purchase, and do not have a conversion feature. Class Y
shares are offered to (i) trust companies, bank trusts, pension plans,
endowments or foundations acting on behalf of their own account or one or more
clients for which such institution acts in a fiduciary capacity and investing at
least $5,000,000 at any one time ("Institutions"); (ii) any state, county, city,
department, authority or similar agency which invests at least $5,000,000 at any
one time ("Governmental Entities"); and (iii) any investor with an account
established under a "wrap account" or other similar fee-based program sponsored
and maintained by a registered broker-dealer approved by the Distributor ("Wrap
Program Investors"). Class Y shares are sold at net asset value without the
imposition of Rule 12b-1 charges.
Depending on the amount of the purchase and the anticipated length
of time of the investment, investors may choose to purchase one Class of shares
rather than another. Investors who would rather pay the entire cost of
distribution at the time of investment, rather than spreading such cost over
time, might consider Class A shares. Other investors might consider Class B or
Class C shares, in which case 100% of the purchase price is invested
immediately. The Company will not accept any purchase of Class B shares in the
amount of $250,000 or more per investor. Such purchase must be made in Class A
shares. Class C shares may be more appropriate for the short-term investor. The
Company will not accept any purchase of Class C shares when Class A shares may
be purchased at net asset value.
CLASS A SHARES. Class A shares are sold at their net asset value plus a
sales charge. The amounts of the sales charges are shown in the following table:
<TABLE>
<CAPTION>
Customary
Sales Charge Charge as Concession to Your
as Percentage Approximate Percentage Dealer as Percentage
Amount of Purchase of Offering Price of Amount Invested of Offering Price
- - ------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C>
$99,999 or less................... 4-3/4% 5.0% 4.0%
$100,000 to $249,999.............. 3-1/2% 3.6% 3.0%
$250,000 to $499,999.............. 2-1/2% 2.6% 2.0%
$500,000 to $749,999.............. 2.0% 2.0% 1-3/4%
$750,000 to $999,999.............. 1.0% 1.0% 3/4 of 1%
$1,000,000 or more................ 0.0% 0.0% 0.0%*
</TABLE>
* On purchases of $1 million or more, the investor pays no front-end sales
charge but a contingent deferred sales charge of 0.75% is imposed if shares
purchased at net asset value without a sales load are redeemed within the
first year after purchase. The Distributor may pay the financial service
firm a commission during the first year after such purchase at an annual
rate as follows:
Purchase Amount Commission
--------------- ----------
First $3,000,000...............................75%
Next $2,000,000...............................50%
Over $5,000,000...............................25%
Where a commission is paid for purchases of $1 million or more, such
payment will be made from 12b-1 distribution fees received from the Company and,
in cases where the limits of the distribution plan in any year have been
reached, from the Distributor's own resources.
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<PAGE>
REDUCTION OF CLASS A SALES CHARGE. There are a number of ways to reduce
the sales charge imposed on the purchase of the Fund's Class A shares, as
described below. These reductions are based upon the fact that there is less
sales effort and expense involved with respect to purchases by affiliated
persons and purchases made in large quantities. If you claim any reduction of
sales charges, you or your dealer must so notify the Distributor (or State
Street Bank and Trust if the investment is mailed to State Street Bank and
Trust) when the purchase is made. Enough information must be given to verify
that you are entitled to such right.
(1) FAMILY OR GROUP PURCHASES. Certain purchases made by or for more
than one person may be considered to constitute a single purchase, including (i)
purchases for family members, including spouses and children under 21, (ii)
purchases by trust or other fiduciary accounts and purchases by Individual
Retirement Accounts for employees of a single employer, and (iii) purchases made
by an organized group of persons, whether incorporated or not, if the group has
a purpose other than buying shares of mutual funds. For further information on
group purchase reductions, contact the Adviser or your dealer.
(2) STATEMENTS OF INTENTION. Another way to reduce the sales charge is
by signing a Statement of Intention ("Statement"). See Appendix B: "Terms and
Conditions of a Statement of Intention." If you enter into a Statement of
Intention you (or any "single purchaser") may state that you intend to invest at
least $100,000 in the Fund's Class A shares over a 13-month period. The amount
you say you intend to invest may include Class A shares which you already own,
valued at the offering price, at the end of the period covered by the Statement.
A Statement may be backdated up to 90 days to include purchases made during that
period, but the total period covered by the Statement may not exceed 13 months.
Shares having a value of 5% of the amount you state you intend to
invest will be held "in escrow" to make sure that any additional sales charges
are paid. If any of the Fund's shares are in escrow pursuant to a Statement and
such shares are exchanged for shares of another Davis Fund, the escrow will
continue with respect to the acquired shares.
No additional sales charge will be payable if you invest the amount you
have indicated. Each purchase under a Statement will be made as if you were
buying the total amount indicated at one time. For example, if you indicate that
you intend to invest $100,000, you will pay a sales charge of 3-1/2% on each
purchase.
If you buy additional amounts during the period to qualify for an even
lower sales charge, you will be charged such lower charge. For example, if you
indicate that you intend to invest $100,000 and actually invest $250,000, you
will, by retroactive adjustment, pay a sales charge of 2-1/2%.
If during the 13-month period you invest less than the amount you have
indicated, you will pay an additional sales charge. For example, if you state
that you intend to invest $250,000 and actually invest only $100,000, you will,
by retroactive adjustment, pay a sales charge of 3-1/2%. The sales charge you
actually pay will be the same as if you had purchased the shares in a single
purchase.
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<PAGE>
A Statement does not bind you to buy, nor does it bind the Adviser to
sell, the shares covered by the Statement.
(3) RIGHTS OF ACCUMULATION. Another way to reduce the sales charge is
under a right of accumulation. This means that the larger purchase entitled to a
lower sales charge does not have to be in dollars invested at one time. The
larger purchases that you (or any "single purchaser") make at any one time can
be determined by adding to the amount of a current purchase the value of Fund
shares (at offering price) already owned by you.
For example, if you owned $100,000 worth (at offering price) of shares
(including Class A, B and C shares of all Davis Funds), and invest $5,000 in
additional shares, the sales charge on that $5,000 investment would be 3-1/2%,
not 4-3/4%.
(4) COMBINED PURCHASES WITH OTHER DAVIS FUNDS. Your ownership or
purchase of Class A shares of other Davis Funds may also reduce your sales
charges in connection with the purchase of the Fund's Class A shares. This
applies to all three situations for reduction of sales charges discussed above.
If a "single purchaser" decides to buy the Fund's Class A shares as
well as Class A shares of any of the other Davis Funds at the same time, these
purchases will be considered a single purchase for the purpose of calculating
the sales charge. For example, a single purchaser can invest at the same time
$100,000 in Davis New York Venture Fund's Class A shares and $150,000 in the
Class A shares of Davis Investment Grade Bond Fund and pay a sales charge of
2-1/2%, not 3-1/2%.
Similarly, a Statement of Intention for the Fund's Class A shares and
for the Class A shares of the other Davis Funds may be aggregated. In this
connection, the Company's Class A shares and the Class A shares of the other
Davis Funds which you already own, valued at the current offering price at the
end of the period covered by your Statement of Intention, may be included in the
amount you have stated you intend to invest pursuant to your Statement.
Lastly, the right of accumulation also applies to the Class A, Class B
and Class C shares of the other Davis Funds which you own. Thus, the amount of
current purchases of the Fund's Class A shares which you make may be added to
the value of the Class A shares of the other Davis Funds (valued at their
current offering price) already owned by you in determining the applicable sales
charge.
In all of the above instances where you wish to assert this right of
combining the shares you own of the other Davis Funds, you or your dealer must
notify the Distributor (or State Street Bank and Trust, if the investment is
mailed to State Street Bank and Trust) of the pertinent facts. Enough
information must be given to permit verification as to whether you are entitled
to a reduction in sales charges.
(5) PURCHASES FOR EMPLOYEE BENEFIT PLANS. Trusteed or other fiduciary
accounts and Individual Retirement Accounts ("IRA") of a single employer are
treated as purchases of a single
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<PAGE>
person. Purchases of and ownership by an individual and such individual's spouse
under an IRA are combined with their other purchases and ownership.
(6) SALES AT NET ASSET VALUE. There are situations where the sales
charge will not apply to the purchase of Class A shares. A sales charge is not
imposed on these transactions either because the purchaser deals directly with
the Fund (as in employee purchases), or because a responsible party (such as a
financial institution) is providing the necessary services usually provided by a
registered representative. The sales charge will not apply to: (1) Class A
shares purchased through the automatic reinvestment of dividends and
distributions; (2) Class A shares purchased by directors, officers, and
employees of any fund for which the Adviser acts as investment adviser, or
officers and employees of the Adviser, Sub-Adviser, or Distributor, including
former directors and officers and any spouse, child, parent, grandparent,
brother or sister ("immediate family members") of all of the foregoing, and any
employee benefit or payroll deduction plan established by or for such persons;
(3) Class A shares purchased by any registered representatives, principals, and
employees (and any immediate family member) of securities dealers having a sales
agreement with the Distributor; (4) initial purchases of Class A shares totaling
at least $250,000 but less than $5,000,000, made at any one time by banks, trust
companies, and other financial institutions on behalf of one or more clients for
which such institution acts in a fiduciary capacity; (5) Class A shares
purchased by any single account covering a minimum of 250 eligible employees or
participants (the Fund may, in its discretion, waive this 250 participant
minimum; for example, the 250 participant minimum may be waived for certain
financial institutions providing transfer agent and/or administrative services,
or for fee-based mutual fund marketplace programs) and representing a defined
benefit plan, defined contribution plan, cash or deferred plan qualified under
401(a) or 401(k) of the Internal Revenue Code, or a plan established under
Section 403(b), 457 or 501(c)(9) of such Code, "rabbi trusts", or other
nonqualified plans; (6) Class A shares purchased by persons participating in a
"wrap account" or similar fee-based program sponsored and maintained by a
registered broker-dealer approved by the Fund's Distributor or by investment
advisors or financial planners who place trades for their own accounts or the
accounts of their clients and who charge a management, consulting, or other fee
for their services; and clients of such investment advisors or financial
planners who place trades for their own accounts, if the accounts are linked to
the master account of such investment advisor or financial planner on the books
and records of the broker or agent; and (7) Class A shares amounting to less
than $5,000,000 purchased by any state, county, city, department, authority or
similar agency. Investors may be charged a fee if they effect purchases in Fund
shares through a broker or agent. (8) The Fund may also issue Class A shares at
net asset value incident to a merger with or acquisition of assets of an
investment company. The Fund occasionally may be provided with an opportunity to
purchase substantially all the assets of a public or private investment company
or to merge another such company into the Fund. This offers the Fund the
opportunity to obtain significant assets. No dealer concession is involved. It
is industry practice to effect such transactions at net asset value, as it would
adversely affect the Fund's ability to do such transactions if the Fund had to
impose a sales charge.
CLASS B SHARES. Class B shares are offered at net asset value, without
a front-end sales charge. The Distributor receives and usually reallows
commissions to firms responsible for the sale of such shares. With certain
exceptions described below, the Fund imposes a deferred sales charge of 4% on
shares redeemed during the first year after purchase, 3% on shares redeemed
35
<PAGE>
during the second or third year after purchase, 2% on shares redeemed during the
fourth or fifth year after purchase and 1% on shares redeemed during the sixth
year after purchase. However, on Class B shares of the Fund which are acquired
in exchange from Class B shares of other Davis Funds which were purchased prior
to December 1, 1994, the Fund will impose a deferred sales charge of 4% on
shares redeemed during the first calendar year after purchase; 3% on shares
redeemed during the second calendar year after purchase; 2% on shares redeemed
during the third calendar year after purchase; and 1% on shares redeemed during
the fourth calendar year after purchase; and no deferred sales charge is imposed
on amounts redeemed after four calendar years from purchase. Class B shares will
be subject to a maximum Rule 12b-1 fee at the annual rate of 1% of the class's
average daily net asset value. The Fund will not accept any purchase of Class B
shares in the amount of $250,000 or more per investor.
Class B shares that have been outstanding for eight years will
automatically convert to Class A shares without imposition of a front-end sales
charge. The Class B shares so converted will no longer be subject to the higher
expenses borne by Class B shares. Because the net asset value per share of the
Class A shares may be higher or lower than that of the Class B shares at the
time of conversion, although the dollar value will be the same, a shareholder
may receive more or less Class A shares than the number of Class B shares
converted. Under a private Internal Revenue Service Ruling, such a conversion
will not constitute a taxable event under the federal income tax law. In the
event that this ceases to be the case, the Board of Directors will consider what
action, if any, is appropriate and in the best interests of the Class B
shareholders. In addition, certain Class B shares held by certain defined
contribution plans automatically convert to Class A shares based on increases of
plan assets.
CLASS B SPECIAL DISTRIBUTION ARRANGEMENTS. Class B shares of the
Fund are made available to Retirement Plan Participants such as 401K or 403B
Plans at net asset value with the waiver of Contingent Deferred Sales Charge
("CDSC") if:
(i) the Retirement Plan is recordkept on a daily valuation basis by Merrill
Lynch and, on the date the Retirement Plan sponsor signs the Merrill Lynch
Recordkeeping Service Agreement, the Retirement Plan has less than $3
million in assets invested in broker/dealer funds not advised or managed
by Merrill Lynch Asset Management, L.P. ("MLAM") that are made available
pursuant to a Services Agreement between Merrill Lynch and the Fund's
principal underwriter or distributor and in funds advised or managed by
MLAM (collectively, the "Applicable Investments"); or
(ii) the Retirement Plan is recordkept on a daily valuation basis by an
independent recordkeeper whose services are provided through a contract of
alliance arrangement with Merrill Lynch, and on the date the Retirement
Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement, the
Retirement Plan has less than $3 million in assets, excluding money market
funds, invested in Applicable Investments; or
(iii) the Retirement Plan has less than 500 eligible employees, as determined by
the Merrill Lynch plan conversion manager, on the date the Retirement Plan
Sponsor signs the Merrill Lynch Recordkeeping Service Agreement.
36
<PAGE>
Retirement Plans recordkept on a daily basis by Merrill Lynch or an
independent recordkeeper under a contract with Merrill Lynch that are currently
investing in Class B shares of the Davis Mutual Funds convert to Class A shares
once the Retirement Plan has reached $5 million invested in Applicable
Investments. The Retirement Plan will receive a Retirement Plan level share
conversion. The Fund may make similar exceptions for other financial
institutions sponsoring or administering similar benefit plans.
CLASS C SHARES. Class C shares are offered at net asset value without a
sales charge at the time of purchase. Class C shares redeemed within one year of
purchase will be subject to a 1% charge upon redemption. Class C shares do not
have a conversion feature. The Fund will not accept any purchases of Class C
shares when Class A shares may be purchased at net asset value.
The Distributor will pay a commission to the firm responsible for the
sale of Class C shares. No other fees will be paid by the Distributor during the
one-year period following purchase. The Distributor will be reimbursed for the
commission paid from 12b-1 fees paid by the Fund during the one-year period. If
Class C shares are redeemed within the one-year period after purchase, the 1%
redemption charge will be paid to the Distributor. After Class C shares have
been outstanding for more than one year, the Distributor will make quarterly
payments to the firm responsible for the sale of the shares in amounts equal to
0.75% of the annual average daily net asset value of such shares for sales fees
and 0.25% of the annual average daily net asset value of such shares for service
and maintenance fees.
CONTINGENT DEFERRED SALES CHARGES. Any contingent deferred sales charge
("CDSC") imposed upon the redemption of Class A, Class B or Class C shares is a
percentage of the lesser of (i) the net asset value of the shares redeemed, or
(ii) the original cost of such shares. No CDSC is imposed when you redeem
amounts derived from (a) increases in the value of shares redeemed above the net
cost of such shares, or (b) certain shares with respect to which the Fund did
not pay a commission on issuance, including shares acquired through reinvestment
of dividend income and capital gains distributions. Upon request for a
redemption, shares not subject to the CDSC will be redeemed first. Thereafter,
shares held the longest will be the first to be redeemed.
The CDSC on Class A, B, and C shares that are subject to a CDSC will be
waived if the redemption relates to the following: (a) in the event of the total
disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including registered joint owner) occurring
after the purchase of the shares being redeemed; (b) in the event of the death
of the shareholder (including a registered joint owner); (c) for redemptions
made pursuant to an automatic withdrawal plan in an amount, on an annual basis,
up to 12% of the value of the account at the time the shareholder elects to
participate in the automatic withdrawal plan; (d) for redemptions from a
qualified retirement plan or IRA that constitute a tax-free return of excess
contributions to avoid tax penalty; (e) on redemptions of shares sold to
directors, officers, and employees of any fund for which the Adviser acts as
investment adviser, or officers and employees of the Adviser, Sub-Adviser, or
Distributor, including former directors and officers and immediate family
members of all of the foregoing, and any employee benefit or payroll deduction
plan established by or for such persons; and (f) on redemptions pursuant to the
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<PAGE>
right of the Company to liquidate a shareholder's account if the aggregate net
asset value of the shares held in such account falls below an established
minimum amount.
CLASS Y SHARES. Class Y shares are offered through a separate
Prospectus to (i) trust companies, bank trusts, endowments, pension plans or
foundations ("Institutions") acting on behalf of their own account or one or
more clients for which such Institution acts in a fiduciary capacity and
investing at least $5,000,000 at any one time; (ii) any state, county, city,
department, authority or similar agency which invests at least $5,000,000
("Government Entities"); and (iii) any investor with an account established
under a "wrap account" or other similar fee-based program sponsored and
maintained by a registered broker-dealer approved by the Fund's Distributor
("Wrap Program Investors"). Wrap Program Investors may only purchase Class Y
shares through the sponsors of such programs who have entered into agreements
with Davis Distributors, LLC.
Wrap Program Investors should be aware that both Class A and Class Y
shares are made available by the Fund at net asset value to sponsors of wrap
programs. However, Class A shares are subject to additional expenses under the
Fund's Rule 12b-1 Plan and sponsors of wrap programs utilizing Class A shares
are generally entitled to payments under the Plan. If the sponsor has selected
Class A shares, investors should discuss these charges with their program's
sponsor and weigh the benefits of any services to be provided by the sponsor
against the higher expenses paid by Class A shareholders.
SPECIAL SERVICES
PROTOTYPE RETIREMENT PLANS. The Distributor and certain qualified
dealers have available prototype retirement plans (e.g. 401(k), profit sharing,
money purchase, Simplified Employee Pension ("SEP") plans, model 403(b) and 457
plans for charitable, educational and governmental entities) sponsored by the
Company for corporations and self-employed individuals. The Distributor and
certain qualified dealers also have prototype Individual Retirement Account
("IRA") plans (deductible IRAs, non-deductible IRAs, including "Roth IRAs", and
educational IRAs) and SIMPLE IRA plans for both individuals and employers. These
plans utilize the shares of the Company and other Davis Funds as their
investment vehicle. State Street Bank and Trust acts as custodian or trustee for
such plans, and charges the participant $10 to establish each account and an
annual maintenance fee of $10 per social security number. The maintenance fee
will be redeemed automatically at year-end from your account, unless you elect
to pay the fee directly prior to such time.
AUTOMATIC INVESTMENT PROGRAM. You may arrange for automatic monthly
investing whereby State Street Bank and Trust will be authorized to initiate a
debit to your bank account of a specific amount (minimum $25) each month which
will be used to purchase the Fund's shares. The account minimums of $1,000 for
non-retirement accounts and $250 for retirement accounts will be waived, if
pursuant to the automatic investment program the account balance will meet the
minimum investment requirements within twelve months of the initial investment.
For institutions that are members of the Automated Clearing House system (ACH),
such purchases can be processed electronically on any day of the month between
the 5th and the 28th. After each automatic investment, you will receive a
transaction confirmation, and the debit should be reflected on your next bank
statement. You may terminate the Automatic Investment Program at
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<PAGE>
any time. If you desire to utilize this program, you may use the appropriate
designation on the Application Form. Once you have established your account, you
may use the Account Service Form to establish this program. Class Y shares are
not eligible to participate in the Automatic Investment Program.
DIVIDEND DIVERSIFICATION PROGRAM. You may also establish a dividend
diversification program which allows you to have all dividends and any other
distributions automatically invested in shares of one or more of the Davis
Funds, subject to state securities law requirements and the minimum investment
requirements. You must receive a current prospectus for the other Fund or Funds
prior to investment. Shares will be purchased at the chosen Fund's net asset
value on the dividend payment date. A dividend diversification account must be
in the same registration as the distributing Fund account and must be of the
same class of shares. All accounts established or utilized under this program
must have a minimum initial value, and all subsequent investments must be at
least $25. This program can be amended or terminated at any time, upon at least
60 days' notice. If you would like to participate in this program, you may use
the appropriate designation on the Application Form. Once you have established
your account, you may use the Account Service Form to establish this program.
Class Y shares are not eligible to participate in the Dividend Diversification
Program.
TELEPHONE PRIVILEGE. Unless you have provided in your application that
the telephone privilege is not to be available, the telephone privilege is
automatically available under certain circumstances for exchanging shares and
for redeeming shares. BY EXERCISING THE TELEPHONE PRIVILEGE TO SELL OR EXCHANGE
SHARES, YOU AGREE THAT THE DISTRIBUTOR SHALL NOT BE LIABLE FOR FOLLOWING
TELEPHONE INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE. Reasonable procedures
will be employed to confirm that such instructions are genuine and if not
employed, the Company may be liable for unauthorized instructions. Such
procedures will include a request for personal identification (account or social
security number) and tape recording of the instructions. You should be aware
that during unusual market conditions we might have difficulty in accepting
telephone requests, in which case you should contact us by mail.
EXCHANGE OF SHARES
GENERAL. The exchange privilege is a convenient way to buy shares in
other Davis Funds in order to respond to changes in your goals or in market
conditions. If such goals or market conditions change, the Davis Funds offer a
variety of investment objectives that includes common stock funds, tax-exempt,
government and corporate bond funds, and a money market fund. However, the Funds
are intended as long-term investments and are not intended for short-term
trades. Shares of a particular class of a Fund may be exchanged only for shares
of the same class of another Davis Fund, except that Class A shareholders who
are eligible to purchase Class Y shares may exchange their shares for Class Y
shares of the Fund. All of the Davis Funds offer Class A, Class B, Class C and
Class Y shares. The shares to be received upon exchange must be legally
available for sale in your state. For Class A, Class B or Class C shares the net
asset value of the initial shares being acquired must meet the required minimum
of $1,000 unless such exchange is under the Automatic Exchange Program described
below. For Class Y shares the net asset value of the initial shares being
acquired must be at least $5,000,000 for Institutions and Government Entities or
minimums set by wrap program sponsors.
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Shares may be exchanged at relative net asset value without any
additional charge. However, if any shares being exchanged are subject to an
escrow or segregated account pursuant to the terms of a Statement of Intention
or a CDSC, such shares will be exchanged at relative net asset value, but the
escrow or segregated account will continue with respect to the shares acquired
in the exchange. In addition, the terms of any CDSC, or redemption fee
applicable at the time of exchange, will continue to apply to any shares
acquired upon exchange.
Before you decide to make an exchange, you must obtain the current
prospectus of the desired Fund. Call your broker or the Distributor for
information and a prospectus for any of the other Davis Funds registered in your
state. Read the prospectus carefully. If you decide to exchange your shares,
contact your broker/dealer, the Distributor, or send State Street Bank and Trust
a written unconditional request for the exchange and follow the instructions
regarding delivery of share certificates contained in the section on "Redemption
of Shares." A medallion signature guarantee is not required for such an
exchange. However, if shares are also redeemed for cash in connection with the
exchange transaction, a medallion signature guarantee may be required. A
medallion signature guarantee is a written confirmation from an eligible
guarantor institution, such as a securities broker-dealer or a commercial bank,
that the signature(s) on the account is (are) valid. Unfortunately, no other
form of signature verification can be accepted. Your dealer may charge an
additional fee for handling an exercise of the exchange privilege.
An exchange involves both a redemption and a purchase, and normally
both are done on the same day. However, in certain instances such as where a
large redemption is involved, the investment of redemption proceeds into shares
of other Davis Funds may take up to seven days. For federal income tax purposes,
exchanges between Funds are treated as a sale and purchase. Therefore, there
will usually be a recognizable capital gain or loss due to an exchange. An
exchange between different classes of the same Fund is not a taxable event.
The number of times you may exchange shares among the Davis Funds
within a specified period of time may be limited at the discretion of the
Distributor. Currently, more than four exchanges out of a Fund during a
twelve-month period are not permitted without the prior written approval of the
Distributor. The Company reserves the right to terminate or amend the exchange
privilege at any time upon 60 days' notice.
BY TELEPHONE. You may exchange shares by telephone into accounts with
identical registrations and the same share class. Please see the discussion of
procedures with respect to telephone instructions in the section entitled
"Telephone Privilege," as such procedures are also applicable to exchanges.
AUTOMATIC EXCHANGE PROGRAM. The Company also offers an automatic
monthly exchange program. All accounts established or utilized under this
program must have the same registration and the same share class, and a minimum
initial value of at least $250. All subsequent exchanges must have a value of at
least $25. Each month, shares will be simultaneously redeemed and purchased at
the chosen Fund's applicable price. If you would like to participate in this
program, you may use the appropriate designation on the Application Form.
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Once you have established your account, you may use the Account Service Form to
establish this program.
REDEMPTION OF SHARES
GENERAL. You can redeem, or sell back to the Company, all or part of
your shares at any time at net asset value less any applicable sales charges.
You can do this by sending a written request to State Street Bank and Trust
Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA 02266-8406, indicating
how many of your shares or what dollar amount you want to redeem. If more than
one person owns the shares to be redeemed, all owners must sign the request. The
signatures on the request must correspond to the account from which the shares
are being redeemed.
Sometimes State Street Bank and Trust needs more documents to verify
authority to make a redemption. This usually happens when the owner is a
corporation, partnership or fiduciary (such as a trustee or the executor of an
estate) or if the person making the request is not the registered owner of the
shares.
If shares to be redeemed are represented by a certificate, the
certificate must be signed by the owner or owners and must be sent to State
Street Bank and Trust with the request.
For the protection of all shareholders, the Company also requires that
signatures appearing on a share certificate, stock power or redemption request
where the proceeds would be more than $50,000, must be medallion
signature-guaranteed by an eligible guarantor institution, such as a securities
broker-dealer, or a commercial bank. A medallion signature guarantee is also
required in the event that any modification to the Company's application is made
after the account is established, including the selection of the Expedited
Redemption Privilege. In some situations where corporations, trusts, or estates
are involved, additional documents may be necessary to effect the redemption.
The transfer agent may reject a request from any of the foregoing eligible
guarantors, if such guarantor does not satisfy the transfer agent's written
standards or procedures, or if such guarantor is not a member or participant of
a medallion signature guarantee program. This provision also applies to
exchanges when there is also a redemption for cash. A medallion signature
guarantee on redemption requests where the proceeds would be $50,000 or less is
not required, provided that such proceeds are being sent to the address of
record and, in order to ensure authenticity of an address change, such address
of record has not been changed within the last 30 days.
Redemption proceeds are normally paid to you within seven days after
State Street Bank and Trust receives your proper redemption request. Payment for
redemptions can be suspended under certain emergency conditions determined by
the Securities and Exchange Commission, or if the New York Stock Exchange is
closed for other than customary or holiday closings. If any of the shares
redeemed were just bought by you, payment to you may be delayed until your
purchase check has cleared (which usually takes up to 15 days from the purchase
date). You can avoid any redemption delay by paying for your shares with a bank
wire or federal funds.
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Redemptions are ordinarily paid to you in cash. However, the Company's
Board of Directors is authorized to decide if conditions exist making cash
payments undesirable (although the Board has never reached such a decision). If
the Board of Directors should decide to make payments other than in cash,
redemptions could be paid in liquid securities, valued at the value used in
computing a Fund's net asset value. There would be brokerage costs incurred by
the shareholder in selling such redemption proceeds. We must, however, redeem
shares solely in cash up to the lesser of $250,000 or 1% of the Fund's net asset
value, whichever is smaller, during any 90-day period for any one shareholder.
Your shares may also be redeemed through participating dealers. Under
this method, the Distributor repurchases the shares from your dealer, if your
dealer is a member of the Distributor's selling group. Your dealer may, but is
not required to, use this method in selling back your shares and may place
repurchase request by telephone or wire. Your dealer may charge you a service
fee or commission. No such charge is incurred if you redeem your own shares
through State Street Bank and Trust rather than having a dealer arrange for a
repurchase.
ELECTRONIC WIRE PRIVILEGE. You may be eligible to have your sale
proceeds electronically transferred to a commercial bank account. This is known
as an Electronic Wire Privilege or "Expedited Redemption Privilege." Investors
may instruct State Street Bank and Trust to establish banking instructions for
the purposes of future electronic wire sale. This privilege allows the
shareholder to instruct State Street Bank and Trust to forward redemption
proceeds to their checking or savings account at their commercial bank. To sign
up for this option, simply fill out the appropriate section of the Application
Form. There is a $5 charge by State Street Bank and Trust for wire service, and
receiving banks may also charge for this service. Payment through Automated
Clearing House will usually arrive at your bank two banking days after the sale.
Payment by wire is usually credited to your bank account on the next business
day after the sale.
While State Street Bank and Trust will accept electronic wire sales by
telephone or dealer, you still need to fill out and submit the information under
the Electronic Wire Privilege section of the Application Form. If you are
currently an investor with a retirement account, you must provide written
instructions or an IRA Distribution Form to the service agent in order to
execute any sale. If you wish to execute a wire sale, all shareholders must have
their signatures medallion-guaranteed in order to establish this privilege. If
you are currently an investor with a non-retirement account and have not
previously established the Electronic Wire Privilege, you must submit a letter
of instruction or a Davis Funds Account Service Form with all shareholders'
signatures medallion-guaranteed at the time of sale. Once this privilege is
established, you may call our customer service department to execute a wire sale
by phone.
BY TELEPHONE. You can redeem shares by telephone and receive a check by
mail, but please keep in mind:
The check can only be issued for up to $25,000; The
check can only be issued to the registered owner(s); The
check can only be sent to the address of record; and
Your current address of record must have been on file
for 30 days.
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AUTOMATIC WITHDRAWALS PLAN. Under the Automatic Withdrawals Plan, you
can indicate to State Street Bank and Trust how many dollars you would like to
receive each month or each quarter. Your account must have a value of at least
$10,000 to start a plan.
When you participate in this plan, shares are sold so that you will
receive payment by one of three methods:
First, you may receive funds at the address of record provided that
this address has been unchanged for a period of not less than 30 days. These
funds are sent by check on or after the 25th of the month.
Second, you may also choose to receive funds by Automated Clearing
House (ACH) to the banking institution of your choice. You may elect an ACH
draft date between the 5th and the 28th day of the month. You must complete this
section of the Davis Funds Account Application. Once your account has been
established, you must submit a letter of instruction with a medallion signature
guarantee to execute an Automatic Withdrawals Plan by ACH.
Third, you may have funds sent by check to a third party at an address
other than the address of record. You must complete this section of the Davis
Funds Application Form. Once your account has been established you must submit a
letter of instruction with a medallion signature guarantee to designate a third
party payee.
Withdrawals involve redemption of shares and may produce gain or loss
for income tax purposes. Shares of the Fund initially acquired by exchange from
any of the other Davis Funds will remain subject to an escrow or segregated
account to which any of the exchanged shares were subject. If you utilize this
plan, any applicable CDSCs will be imposed on such shares redeemed. Purchase of
additional shares concurrent with withdrawals may be disadvantageous to you
because of tax and sales load consequences. If the amount you withdraw exceeds
the dividends on your shares, your account will suffer depletion. You may
terminate your Automatic Withdrawals Plan at any time without charge or penalty.
The Company reserves the right to terminate or modify the Automatic Withdrawals
Plan at any time. Class Y shares are not eligible for the Automatic Withdrawals
Plan.
INVOLUNTARY REDEMPTIONS. To relieve the Company of the cost of
maintaining uneconomical accounts, the Company may effect the redemption of
shares at net asset value in any account if the account, due to shareholder
redemptions, has a value of less than $250. At least 60 days prior to such
involuntary redemption, the Company will mail a notice to the shareholder so
that an additional purchase may be effected to avoid such redemption.
SUBSEQUENT REPURCHASES. After some or all of your shares are redeemed
or repurchased, you may decide to put back all or part of your proceeds into the
same Class of a Fund's shares. Any such shares will be issued without sales
charge at the net asset value next determined after you have returned the amount
of your proceeds. In addition, any applicable CDSC assessed on such shares will
be returned to the account. Shares will be deemed to have been purchased on the
original purchase date for purposes of calculating the CDSC and the
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conversion period. This can be done by sending State Street Bank and Trust or
the Distributor a letter, together with a check for the reinstatement amount.
The letter must be received, together with the payment, within 60 days after the
redemption or repurchase. You can only use this privilege once.
Section IV: General Information
DETERMINING THE PRICE OF SHARES
NET ASSET VALUE. The net asset value per share of each class is
determined daily by dividing the total value of investments and other assets,
less any liabilities, by the total outstanding shares. The net asset value of
the Fund is determined daily as of the earlier of the close of the New York
Stock Exchange (the "Exchange") or 4:00 p.m., Eastern time, on each day that the
Exchange is open for trading.
The price per share for purchases or redemptions made directly through
State Street Bank and Trust is generally the value next computed after State
Street Bank and Trust receives the purchase order or redemption request. In
order for your purchase order or redemption request to be effective on the day
you place your order with your broker-dealer or other financial institution,
such broker-dealer or financial institution must (i) receive your order before
4:00 p.m. Eastern time, and (ii) promptly transmit the order to State Street
Bank and Trust. The broker-dealer or financial institution is responsible for
promptly transmitting purchase orders or redemption requests to State Street
Bank and Trust so that you may receive the same day's net asset value. Note that
in the case of redemptions and repurchases of shares owned by corporations,
trusts, or estates, or of shares represented by outstanding certificates, State
Street Bank and Trust may require additional documents to effect the redemption
and the applicable price will be determined as of the close of the next
computation following the receipt of the required documentation or outstanding
certificates. See "Redemption of Shares."
The Company does not price its shares or accept orders for purchases or
redemptions on days when the New York Stock Exchange is closed. Such days
currently include New Year's Day, Martin Luther King, Jr. Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Certain brokers and certain designated intermediaries on their behalf
may accept purchase and redemption orders. The Distributor will be deemed to
have received such an order when the broker or the designee has accepted the
order. Customer orders are priced at the net asset value next computed after
such acceptance. Such order may be transmitted to the Fund or its agents several
hours after the time of the acceptance and pricing.
VALUATION OF PORTFOLIO SECURITIES. Portfolio securities are normally
valued using current market valuations. Securities traded on a national
securities exchange are valued at the last published sales price on the
exchange, or in the absence of recorded sales, at the average of closing bid and
asked prices on such exchange. Over-the-counter securities are valued at the
average of closing bid and asked prices. Fixed-income securities may be valued
on the basis of
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prices provided by a pricing service. Investments in short-term securities
(purchased with a maturity of one year or less) are valued at amortized cost
unless the Board of Directors determines that such cost is not a fair value.
Assets for which there are no quotations available will be valued at a fair
value as determined by or at the direction of the Board of Directors.
To the extent that the Fund's securities are traded in markets that
close at different times, events affecting portfolio values that occur between
the time that their prices are determined and the time the Fund's shares are
priced will generally not be reflected in the Fund's share price. The value of
securities denominated in foreign currencies and traded in foreign markets will
have their value converted into the U.S. dollar equivalents at the prevailing
market rate as computed by State Street Bank & Trust Company. Fluctuation in the
value of foreign currencies in relation to the U.S. dollar may affect the net
asset value of the Fund's shares even if there has not been any change in the
foreign currency price of the Fund's investments.
YEAR 2000 TRANSITION ISSUES
Like all financial service providers, the Adviser, Sub-Adviser,
Distributor, and third parties providing investment advisory, administrative,
transfer agent, custodial and other services (jointly the "Service Providers")
utilize systems that may be affected by Year 2000 transition issues.
The services provided to the Fund and the shareholders by the Service
Providers depend on the smooth functioning of their computer systems and those
of other parties they deal with. Many computer software systems in use today
cannot distinguish the year 2000 from the year 1900 because of the way dates are
encoded and calculated.
Difficulties with Year 2000 transition issues could have a negative
impact on handling securities trades, payments of interest and dividends,
pricing and account services. Although at this time there can be no assurance
that there will be no adverse impact on the Fund, the Service Providers have
advised the Fund that they have been actively working on necessary changes to
their computer systems to prepare for the Year 2000, and expect that their
systems, and those of other parties they deal with, will be adapted in time for
this event. In addition, there can be no assurance that the companies in which
the Fund invests will not experience difficulties with Year 2000 transition
issues, which may negatively affect the market value of those companies.
DIVIDENDS AND DISTRIBUTIONS
There are two sources of income, net income and realized capital gains,
paid to you by the Fund. You will receive confirmation statements for dividends
declared and shares purchased through reinvestment of dividends. You will also
receive confirmations after each purchase and after each redemption. Different
classes of shares may be expected to have different expense ratios due to
differing distribution services fees and certain other expenses. Classes with
higher expense ratios will pay correspondingly lower dividends than Classes with
lower expense ratios. For tax purposes, information concerning distributions
will be mailed annually to shareholders.
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Shareholders have the option of receiving all dividends and
distributions in cash, of having all dividends and distributions reinvested, or
of having income dividends paid in cash and capital gain distributions
reinvested. Reinvestment of all dividends and distributions is automatic for
accounts utilizing the Automatic Withdrawals Plan. The reinvestment of dividends
and distributions is made at net asset value (without any initial or contingent
deferred sales charge) on the payment date.
For the protection of the shareholder, upon receipt of the second
dividend check which has been returned to State Street Bank and Trust as
undeliverable, undelivered dividends will be invested in additional shares at
the current net asset value and the account designated as a dividend
reinvestment account.
FEDERAL INCOME TAXES
This section is not intended to be a full discussion of all the aspects
of the federal income tax law and its effects on the Fund and its shareholders.
Shareholders may be subject to state and local taxes on distributions. Each
investor should consult his or her own tax adviser regarding the effect of
federal, state, and local taxes on any investment in the Fund.
The Fund intends to continue to qualify as a regulated investment
company under the Internal Revenue Code (the "Code"), and if so qualified, will
not be liable for federal income tax to the extent its earnings are distributed,
except with respect to realization of the "built-in gains" as described below.
If, for any calendar year, the distribution of earnings required under the Code
exceeds the amount distributed, an excise tax, equal to 4% of the excess, will
be imposed on the applicable Fund. The Fund intends to make distributions during
each calendar year sufficient to prevent imposition of the excise tax.
Distributions of net investment income and net realized short-term
capital gains will be taxable to shareholders as ordinary income. Distributions
of net long-term capital gains (other than the built-in gains as discussed
below) will be taxable to shareholders as long-term capital gain regardless of
how long the shares have been held. Distributions will be treated the same for
tax purposes whether received in cash or in additional shares. Dividends
declared in the last calendar month to shareholders of record in such month and
paid by the end of the following January are treated as received by the
shareholder in the year in which they are declared. A gain or loss for tax
purposes may be realized on the redemption of shares. If the shareholder
realizes a loss on the sale or exchange of any shares held for six months or
less and if the shareholder received a capital gain distribution during that
period, then the loss is treated as a long-term capital loss to the extent of
such distribution.
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PERFORMANCE DATA
From time to time, the Fund may advertise information regarding its
performance. Such information will be calculated separately for each class of
shares. These performance figures are based upon historical results and are not
intended to indicate future performance.
CUMULATIVE TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN
The cumulative total return and the average annual total return (each
is defined below) with respect to each class of shares for the Fund for the
periods indicated below is as follows:
<TABLE>
<CAPTION>
Average Annual Cumulative
Total Return (1) Total Return (2)
-------------- --------------
<S> <C> <C>
Class A Shares
One year ended March 31, 1999 .......................................................... (14.71)% (14.71)%
Five years ended March 31, 1999 .......................................................... 3.02% 16.03%
Ten years ended March 31, 1999 .......................................................... 4.63% 57.31%
Period from May 29, 1980 through March 31, 1999 (life of class)............................ 7.61% 298.52%
Class B Shares
One year ended March 31, 1999.... ........................................................ (14.51)% (14.51)%
Period from December 5, 1994 through March 31, 1999 (life of class)........................ 3.19% 14.51%
Class C Shares
One year ended March 31, 1999 .......................................................... (12.17)% (12.17)%
Period from August 12, 1997 through March 31, 1999 (life of class)......................... (3.95)% (6.37)%
Class Y Shares
One year ended March 31, 1999 .......................................................... (10.16)% (10.16)%
Period from March 20, 1997 through March 31, 1999 (life of class).......................... (0.51)% (1.02)%
</TABLE>
(1) "Average Annual Total Return" represents the average annual compounded rate
of return for the periods presented. Periods of less than one year are not
annualized. Average annual total return measures both the net investment
income generated by, and the effect of any realized or unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio. Average annual total return is calculated separately for each
class in accordance with the standardized method prescribed by the
Securities and Exchange Commission by determining the average annual
compounded rates of return over the periods indicated, that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
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P(1+T)n = ERV
Where: P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates, and (ii)
deducts (a) the maximum front-end or applicable contingent deferred sales charge
from the hypothetical initial $1,000 investment, and (b) all recurring fees,
such as advisory fees, charged as expenses to all shareholder accounts.
(2) "Cumulative Total Return" is a measure of a Fund's performance encompassing
all elements of return. Total return reflects the change in share price over
a given period and assumes all distributions are taken in additional Fund
shares. Total return is determined by assuming a hypothetical investment at
the beginning of the period, deducting a maximum front-end or applicable
contingent deferred sales charge, adding in the reinvestment of all income
dividends and capital gains, calculating the ending value of the investment
at the net asset value as of the end of the specified time period and
subtracting the amount of the original investment, and by dividing the
original investment. This calculated amount is then expressed as a
percentage by multiplying by 100. Periods of less than one year are not
annualized.
30-DAY SEC YIELD
The 30-Day SEC Yield (defined below) with respect to each class of
shares of Davis Intermediate Investment Grade Bond Fund for the period ended
March 31, 1999, is as follows:
Class A shares 6.81%
Class B shares 6.45%
Class C shares 6.40%
Class Y shares 7.54%
"30-Day SEC Yield" is computed in accordance with a standardized method
prescribed by the rules of the Securities and Exchange Commission and is
calculated separately for each class. 30-Day SEC Yield is a measure of the net
investment income per share (as defined) earned over a specified 30-day period
expressed as a percentage of the maximum offering price of the Fund's shares at
the end of the period. Such yield figure was determined by dividing the net
investment income per share on the last day of the period, according to the
following formula:
30-Day SEC Yield = 2 [(a - b + 1) 6 - 1]
-----
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period.
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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.
Davis Intermediate Investment Grade Bond Fund's 30-Day SEC Yield will
fluctuate depending upon prevailing interest rates, quality, maturities, types
of instruments held, and operating expenses. Thus, any yield quotation should
not be considered representative of future results. If a broker-dealer charges
investors for services related to the purchase or redemption of Fund shares, the
yield will effectively be reduced.
OTHER FUND STATISTICS
In reports or other communications to shareholders and in advertising
material, the performance of the Fund may be compared to recognized unmanaged
indices or averages of the performance of similar securities. Also, the
performance of the Fund may be compared to that of other funds of comparable
size and objectives as listed in the rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc. or similar independent mutual fund rating
services, and the Fund may use evaluations published by nationally recognized
independent ranking services and publications. Any given performance comparison
should not be considered representative of the Fund's performance for any future
period.
In advertising and sales literature the Fund may publish various
statistics describing its investment portfolio such as the Fund's average Price
to Book and Price to Earnings ratios, beta, alpha, R-squared, standard
deviation, etc.
The Fund's Annual Report and Semi-Annual Report contain additional
performance information and will be made available upon request and without
charge by calling Davis Funds toll-free at 1-800-279-0279, Monday through
Friday, 7 a.m. to 4 p.m. Mountain Time.
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APPENDIX A
QUALITY RATINGS OF DEBT SECURITIES
MOODY'S CORPORATE BOND RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." 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 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 Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade-obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations, i.e.
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements as 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.
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 longer period of time, may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S CORPORATE BOND RATINGS
AAA - Debt rated `AAA' has the highest rating assigned by Standard and Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated `AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated `A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated `BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas 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.
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BB - Debt rated `BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The `BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied `BBB-' rating.
B - Debt rated `B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The `B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied `BB' or `BB-'
rating.
CCC - Debt rated `CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The `CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied `B' or `B-' rating.
CC - The rating `CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied `CCC' rating.
C - The rating `C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied `CCC-' debt rating. The `C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating `CI' is reserved for income bonds on which no interest is being
paid.
D - Debt rated `D' is in payment default. The `D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The `D' rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
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. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 (superior capacity), Prime-2 (strong capacity) and Prime-3 (acceptable
capacity). In assigning ratings to an issuer which represents that its
commercial paper obligations are supported by the credit of another entity or
entities, Moody's evaluates the financial strength of the indicated affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
The S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from `A' for the highest
quality to `D' for the lowest. Issues assigned an `A' rating are regarded as
having the greatest capacity for timely payment. Within the `A' category, the
numbers 1, 2 and 3 indicate relative degrees of safety. The addition of a plus
sign to the category A-1 denotes that the issue is determined to possess
overwhelming safety characteristics.
51
<PAGE>
APPENDIX B
TERMS AND CONDITIONS FOR A STATEMENT OF INTENTION (CLASS A SHARES ONLY)
TERMS OF ESCROW:
1. Out of my initial purchase (or subsequent purchases if necessary) 5% of the
dollar amount specified in this Statement will be held in escrow by State Street
Bank and Trust in the form of shares (computed to the nearest full share at the
public offering price applicable to the initial purchase hereunder) registered
in my name. For example, if the minimum amount specified under this statement is
$100,000 and the public offering price applicable to transactions of $100,000 is
$10 a share, 500 shares (with a value of $5,000) would be held in escrow.
2. In the event I should exchange some or all of my shares to those of another
mutual fund for which Davis Distributors, LLC, acts as distributor, according to
the terms of this prospectus, I hereby authorize State Street Bank and Trust to
escrow the applicable number of shares of the new fund, until such time as this
Statement is complete.
3. If my total purchases are at least equal to the intended purchases, the
shares in escrow will be delivered to me or to my order.
4. If my total purchases are less than the intended purchases, I will remit to
Davis Distributors, LLC, the difference in the dollar amount of sales charge
actually paid by me and the sales charge which I would have paid if the total
purchase had been made at a single time. If remittance is not made within 20
days after written request by Davis Distributors, LLC, or my dealer, State
Street Bank and Trust will redeem an appropriate number of the escrowed shares
in order to realize such difference.
5. I hereby irrevocably constitute and appoint State Street Bank and Trust my
attorney to surrender for redemption any or all escrowed shares with full power
of substitution in the premises.
6. Shares remaining after the redemption referred to in Paragraph No. 4 will be
credited to my account.
7. The duties of State Street Bank and Trust are only such as are herein
provided being purely ministerial in nature, and it shall incur no liability
whatever except for willful misconduct or gross negligence so long as it has
acted in good faith. It shall be under no responsibility other than faithfully
to follow the instructions herein. It may consult with legal counsel and shall
be fully protected in any action taken in good faith in accordance with advice
from such counsel. It shall not be required to defend any legal proceedings
which may be instituted against it in respect of the subject matter of this
Agreement unless requested to do so and indemnified to its satisfaction against
the cost and expense of such defense.
8. If my total purchases are more than the intended purchases and such total is
sufficient to qualify for an additional quantity discount, a retroactive price
adjustment shall be made for all purchases made under such Statement to reflect
the quantity discount applicable to the aggregate amount of such purchases
during the thirteen-month period.
<PAGE>
EVERGREEN FIXED INCOME TRUST
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
EVERGREEN FIXED INCOME TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
EVERGREEN SHORT AND INTERMEDIATE
TERM BOND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1999
Evergreen Capital Preservation and Income Fund ("Capital Preservation Fund")
Evergreen Intermediate Term Bond Fund ("Intermediate Bond Fund")
Evergreen Short-Intermediate Bond Fund ("Short-Intermediate Fund")
(Each a "Fund," together, the "Funds")
Each Fund is a series of an open-end
management investment company
known as Evergreen Fixed Income
Trust (the "Trust")
This Statement of Additional Information ("SAI") pertains to all
classes of shares of the Funds listed above. It is not a prospectus but should
be read in conjunction with the prospectus dated November 1, 1999 for the Fund
in which you are interested. The Funds are offered through the prospectus
offering Class A, Class B, Class C and Class Y shares. The information in Part 1
of this SAI is specific information about the Funds in the prospectus. The
information in Part 2 of this SAI contains more general information that may or
may not apply to the Fund or Class of shares in which you are interested.
Certain information may be incorporated by reference to the Funds'
Annual Report dated June 30, 1999. You may obtain a copy of the Annual Report
without charge by calling (800) 343-2898.
o:/efit-de/n-1a/sais&i.doc
<PAGE>
TABLE OF CONTENTS
PART 1
TRUST HISTORY.............................................................1-1
INVESTMENT POLICIES.......................................................1-1
OTHER SECURITIES AND PRACTICES............................................1-3
PRINCIPAL HOLDERS OF FUND SHARES..........................................1-3
EXPENSES..................................................................1-6
PERFORMANCE...............................................................1-9
COMPUTATION OF CLASS A OFFERING PRICE ...................................1-11
SERVICE PROVIDERS........................................................1-11
FINANCIAL STATEMENTS.....................................................1-13
PART 2
ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES.............2-1
PURCHASE AND REDEMPTION OF SHARES........................................2-14
SALES CHARGE WAIVERS AND REDUCTIONS......................................2-16
PRICING OF SHARES........................................................2-17
PERFORMANCE CALCULATIONS.................................................2-19
PRINCIPAL UNDERWRITER....................................................2-21
DISTRIBUTION EXPENSES UNDER RULE 12b-1...................................2-22
TAX INFORMATION..........................................................2-25
BROKERAGE................................................................2-28
ORGANIZATION.............................................................2-29
INVESTMENT ADVISORY AGREEMENT............................................2-30
MANAGEMENT OF THE TRUST..................................................2-32
CORPORATE AND MUNICIPAL BOND RATINGS.....................................2-34
ADDITIONAL INFORMATION...................................................2-46
<PAGE>
PART 1
TRUST HISTORY
The Evergreen Fixed Income Trust is an open-end management investment
company, which was organized as a Delaware business trust on September 18, 1997.
Each Fund is a diversified series of Evergreen Fixed Income 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.
INVESTMENT POLICIES
Each Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the"1940
Act"). Where necessary, an explanation beneath a fundamental policy describes
the Fund's practices with respect to that policy, as allowed by current law. If
the law governing a policy changes, the Fund's practices may change accordingly
without a shareholder vote. Unless otherwise stated, all references to the
assets of the Fund are in terms of current market value.
1. Diversification
Each Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
Further Explanation of Diversified Funds:
To remain classified as a diversified investment company under the 1940
Act, each Fund must conform with the following: With respect 75% of its total
assets, a diversified investment company may not invest more that 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 that 10% of the
outstanding voting securities 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 United States ("U.S.") government or its agencies or
instrumentalities.
2. Concentration
Each Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than securities that
are issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
Further Explanation of Concentration Policy:
Each Fund may not invest more than 25% of its total assets, taken at
market value, in the securities of issuers primarily engaged in any particular
industry (other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities).
3. Issuing Senior Securities
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
4. Borrowing
Each Fund may not borrow money, except to the extent permitted by
applicable law.
Further Explanation of Borrowing Policy:
Each Fund may borrow from banks and enter into reverse repurchase
agreements in an amount up to 33 1/3% of its total assets, taken at market
value. Each Fund may also borrow up to an additional 5% of its total assets from
banks or others. A Fund may borrow only as a temporary measure for extraordinary
or emergency purposes such as the redemption of Fund shares. A Fund may purchase
additional securities so long as borrowings do not exceed 5% of its total
assets. 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.
5. Underwriting
Each Fund may not underwrite securities of other issuers, except
insofar as a Fund may be deemed to be an underwriter in connection with the
disposition of its portfolio securities.
6. Real Estate
Each Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, a 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.
7. Commodities
Each Fund may not purchase or sell commodities or contracts on
commodities, except to the extent that a Fund may engage in financial futures
contracts 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.
8. Lending
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.
Further Explanation of Lending Policy:
To generate income and offset expenses, a Fund may lend portfolio
securities to broker-dealers and other financial institutions in an amount up to
33 1/3% of its total assets, taken at market value. While securities are on
loan, the borrower will pay the Fund any income accruing on the security. The
Fund may invest any collateral it receives 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 the 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. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
OTHER SECURITIES AND PRACTICES
For information regarding securities the Funds may purchase and
investment practices the Funds may use, see the following sections in Part 2 of
this SAI under "Additional Information on Securities and Investment Practices."
Information provided in the sections listed below expands upon and supplements
information provided in the Funds' prospectus. The list below applies to all
Funds unless otherwise noted.
Defensive Investments
U.S. Government Securities
When-Issued, Delayed-Delivery and Forward Commitment Transactions
Repurchase Agreements
Reverse Repurchase Agreements
Options
Futures Transactions
Foreign Securities (Short-Intermediate Fund and Intermediate Bond Fund only)
Foreign Currency Transactions (Short-Intermediate Fund and Intermediate Bond
Fund only)
High Yield, High Risk Bonds (Short-Intermediate Fund and Intermediate Bond Fund
only)
Illiquid and Restricted Securities
Investment in Other Investment Companies
Short Sales
Zero Coupon "Stripped" Bonds (Short-Intermediate Fund and Intermediate Bond
only)
Payment-in-kind Securities (Short-Intermediate Fund and Intermediate Bond only)
Mortgage-Backed or Asset-Backed Securities
PRINCIPAL HOLDERS OF FUND SHARES
As of September 30, 1999, the officers and Trustees of the Trust owned
as a group less than 1% of the outstanding shares of any class of each Fund.
Set forth below is information with respect to each person who, to each
Fund's knowledge, owned beneficially or of record more than 5% of the
outstanding shares of any class of each Fund as of September 30, 1999.
------------------------------------------------------
Capital Preservation Fund Class A
------------------------------------------------------
----------------------------------------- ------------
MLPF&S For the sole benefit of its 20.35%
customers
Attn: Fund Administration #977J2
4800 Deer Lake Dr. E 2nd Fl.
Jacksonville, FL 32246-6484
----------------------------------------- ------------
----------------------------------------- ------------
Dean Witter for the benefit of 5.35%
Vital Spark Foundation
P.O. Box 250
Church Street Station
New York, PA 19050-2705
----------------------------------------- ------------
------------------------------------------------------
Capital Preservation Fund Class B
------------------------------------------------------
----------------------------------------- ------------
MLPF&S For the sole benefit of its 8.12%
customers
Attn: Fund Administration #977N4
4800 Deer Lake Dr. E 2nd Fl.
Jacksonville, FL 32246-6484
----------------------------------------- ------------
------------------------------------------------------
Capital Preservation Fund Class C
------------------------------------------------------
----------------------------------------- ------------
MLPF&S For the sole benefit of its 14.70%
customers
Attn: Fund Administration #97A16
4800 Deer Lake Dr. E 2nd Fl.
Jacksonville, FL 32246-6484
----------------------------------------- ------------
----------------------------------------- ------------
Aneca Federal Credit Union 6.60%
c/o Rick Holland
P.O. Box 21734
Shreveport, LA 71151-0001
----------------------------------------- ------------
------------------------------------------------------
Intermediate Bond Fund Class A
------------------------------------------------------
----------------------------------------- ------------
None
----------------------------------------- ------------
------------------------------------------------------
Intermediate Bond Fund Class B
------------------------------------------------------
----------------------------------------- ------------
MLPF&S for the sole benefit of its 7.24%
customers
Attn: Fund Administration #97A17
4800 Deer Lake Dr. E 2nd Fl.
Jacksonville, FL 32246-6484
----------------------------------------- ------------
------------------------------------------------------
Intermediate Bond Fund Class C
------------------------------------------------------
----------------------------------------- ------------
MLPF&S for the sole benefit of its 27.85%
customers
Attn: Fund Administration #97A18
4800 Deer Lake Dr. E 2nd Fl.
Jacksonville, FL 32246-6484
----------------------------------------- ------------
----------------------------------------- ------------
NFSC FEBO #H3E-522228 6.00%
Ctr for the Advancement of Hlth
Rena Convissor
2000 Florida Ave NW
Suite 210
Washington, DC 20009
----------------------------------------- ------------
------------------------------------------------------
Intermediate Bond Fund Class Y
------------------------------------------------------
----------------------------------------- ------------
First Union National Bank 72.01%
Trust Accounts
Attn: Ginny Batten
11th Fl. CMG-1511
301 S. Tryon Street
Charlotte, NC 28202-1915
----------------------------------------- ------------
----------------------------------------- ------------
First Union National Bank 27.00%
Trust Accounts
Attn: Ginny Batten
11th Fl. CMG-1511
301 S. Tryon Street
Charlotte, NC 28202-1915
----------------------------------------- ------------
------------------------------------------------------
Short-Intermediate Fund Class A
------------------------------------------------------
----------------------------------------- ------------
None
----------------------------------------- ------------
------------------------------------------------------
Short-Intermediate Fund Class B
------------------------------------------------------
----------------------------------------- ------------
None
----------------------------------------- ------------
------------------------------------------------------
Short-Intermediate Fund Class C
------------------------------------------------------
----------------------------------------- ------------
MLPF&S for the sole benefit of its 25.31%
customers
Attn: Fund Administration #97H39
4800 Deer Lake Dr. E 2nd FL
Jacksonville, Fl 32246-6484
----------------------------------------- ------------
----------------------------------------- ------------
First Clearing Corporation 8.59%
FBO Rivero Gordimer & Co Pa
a/c 7101-8713
Ceasar Rivero & Richard Gordimer
2203 N. Lois Ave.
Tampa, FL 33607
----------------------------------------- ------------
----------------------------------------- ------------
First Clearing Corporation 6.53%
a/c 4189-0339
Eleanor O. Hogueland
526 Purchase Street
Rye, NY 10580-1811
----------------------------------------- ------------
----------------------------------------- ------------
First Clearing Corporation 6.08%
FBO Rachel W. Fort and
Edward C. Fort
2737 Stockton St.
Winston Salem, NC 27127
----------------------------------------- ------------
------------------------------------------------------
Short Intermediate Fund Class Y
------------------------------------------------------
----------------------------------------- ------------
First Union National Bank 54.83%
Trust Accounts
Attn: Ginny Batten
11th Fl. CMG-1511
301 S. Tryon Street
Charlotte, NC 28202-1915
----------------------------------------- ------------
----------------------------------------- ------------
First Union National Bank 44.03%
Trust Accounts
Attn: Ginny Batten
11th Fl CMG-1511
301 S. Tryon Street
Charlotte, NC 28202-1915
----------------------------------------- ------------
EXPENSES
Advisory Fees
Each Fund has its own investment advisor. For more information, see
"Investment Advisory Agreements" in Part 2 of this SAI.
Evergreen Investment Management Company ("EIMC") is the investment
advisor to Capital Preservation Fund and Intermediate Bond Fund. EIMC is
entitled to receive a fee from each Fund an annual fee of 2.0% of gross dividend
and interest income, plus the following:
---------------------- ---------------------
Average Daily Net Fee
Assets
---------------------- ---------------------
---------------------- ---------------------
First $100 million 0.50%
---------------------- ---------------------
---------------------- ---------------------
Next $100 million 0.45%
---------------------- ---------------------
---------------------- ---------------------
Next $100 million 0.40%
---------------------- ---------------------
---------------------- ---------------------
Next $100 million 0.35%
---------------------- ---------------------
---------------------- ---------------------
Next $100 million 0.30%
---------------------- ---------------------
---------------------- ---------------------
Over $500 million 0.25%
---------------------- ---------------------
Evergreen Investment Management ("EIM") (formerly known as Capital
Management Group or CMG), a division of First Union National Bank, is the
investment advisor to Short-Intermediate Fund. EIM is entitled to receive a fee
from Short-Intermediate Fund at the annual rate of 0.50% of the Fund's average
daily net assets.
Advisory Fees Paid
Below are the advisory fees paid by each Fund for the last three fiscal
periods.
<TABLE>
<CAPTION>
---------------------------------------------------------------- ----------------------- ======================
Fund/Fiscal Year or Period Advisory Fee Paid Advisory Fees Waived
---------------------------------------------------------------- ----------------------- ======================
===============================================================================================================
<S> <C> <C>
Year or Period Ended 1999
===============================================================================================================
---------------------------------------------------------------- ----------------------- ======================
Capital Preservation Fund $270,118 $147,381
---------------------------------------------------------------- ----------------------- ======================
---------------------------------------------------------------- ----------------------- ======================
Intermediate Bond Fund $1,196,312 $293,547
---------------------------------------------------------------- ----------------------- ======================
---------------------------------------------------------------- ----------------------- ======================
Short-Intermediate Fund $1,986,762 $0
---------------------------------------------------------------- ----------------------- ======================
===============================================================================================================
Year or Period Ended 1998
===============================================================================================================
---------------------------------------------------------------- ----------------------- ======================
Capital Preservation Fund $307,654 $212,054
---------------------------------------------------------------- ----------------------- ======================
---------------------------------------------------------------- ----------------------- ======================
Intermediate Bond Fund $574,715 $285,486
---------------------------------------------------------------- ----------------------- ======================
---------------------------------------------------------------- ----------------------- ======================
Short-Intermediate Fund $1,976,366 $0
---------------------------------------------------------------- ----------------------- ======================
===============================================================================================================
Year or Period Ended 1997
===============================================================================================================
---------------------------------------------------------------- ----------------------- ======================
Capital Preservation Fund $284,977 $245,255
---------------------------------------------------------------- ----------------------- ======================
---------------------------------------------------------------- ----------------------- ======================
Intermediate Bond Fund $987,044 $5,480
---------------------------------------------------------------- ----------------------- ======================
---------------------------------------------------------------- ----------------------- ======================
Short-Intermediate Fund $1,998,063 $0
---------------------------------------------------------------- ----------------------- ======================
</TABLE>
Brokerage Commissions
The Funds paid no brokerage commissions during fiscal years 1999, 1998
and 1997.
Underwriting Commissions
Below are the underwriting commissions paid by each Fund and the
amounts retained by the principal underwriter for the last three fiscal periods.
For more information, see "Principal Underwriter" in Part 2 of this SAI.
- - -------------------------------- -------------------- ==================
Total Underwriting Underwriting
Fund/Fiscal Year or Period Commissions Commissions
Retained
- - -------------------------------- -------------------- ==================
========================================================================
Year or Period Ended 1999
========================================================================
- - -------------------------------- -------------------- ==================
Capital Preservation Fund $120,393 $0
- - -------------------------------- -------------------- ==================
- - -------------------------------- -------------------- ==================
Intermediate Bond Fund $603,041 $47,941
- - -------------------------------- -------------------- ==================
- - -------------------------------- -------------------- ==================
Short-Intermediate Fund $228,524 $0
- - -------------------------------- -------------------- ==================
========================================================================
Year or Period Ended 1998
========================================================================
- - -------------------------------- -------------------- ==================
Capital Preservation Fund $74,609 $0
- - -------------------------------- -------------------- ==================
- - -------------------------------- -------------------- ==================
Intermediate Bond Fund $13,855 $0
- - -------------------------------- -------------------- ==================
- - -------------------------------- -------------------- ==================
Short-Intermediate Fund $22,935 $2,549
- - -------------------------------- -------------------- ==================
========================================================================
Year or Period Ended 1997
========================================================================
- - -------------------------------- -------------------- ==================
Capital Preservation Fund $305,542 $244,211
- - -------------------------------- -------------------- ==================
- - -------------------------------- -------------------- ==================
Intermediate Bond Fund $3,201 $504
- - -------------------------------- -------------------- ==================
- - -------------------------------- -------------------- ==================
Short-Intermediate Fund $52,484 $6,833
- - -------------------------------- -------------------- ==================
12b-1 Fees
Below are the 12b-1 fees paid by each Fund for the fiscal year or
period ended June 30, 1999. For more information, see "Distribution Expenses
Under Rule 12b-1" in Part 2 of this SAI.
<TABLE>
<CAPTION>
- ------------------------------- ================================= ================================== ===============================
Class A Class B Class C
================================= ================================== ===============================
---------------- ---------------- ---------------- ----------------- ---------------- ==============
Fund Distribution Service Fees Distribution Service Fees Distribution Service Fees
Fees Fees Fees
- ------------------------------- ---------------- ---------------- ---------------- ----------------- ---------------- ==============
- ------------------------------- ---------------- ---------------- ---------------- ----------------- ---------------- ==============
<S> <C> <C> <C> <C> <C> <C>
Capital Preservation Fund $0 $36,258 $156,882 $52,294 $31,166 $10,387
- ------------------------------- ---------------- ---------------- ---------------- ----------------- ---------------- ==============
- ------------------------------- ---------------- ---------------- ---------------- ----------------- ---------------- ==============
Intermediate Bond Fund $0 $296,312 $84,664 $28,221 $39,283 $13,094
- ------------------------------- ---------------- ---------------- ---------------- ----------------- ---------------- ==============
- ------------------------------- ---------------- ---------------- ---------------- ----------------- ---------------- ==============
Short-Intermediate Fund $0 $19,253 $178,960 $59,653 $10,634 $3,545
- ------------------------------- ---------------- ---------------- ---------------- ----------------- ---------------- ==============
</TABLE>
Trustee Compensation
Listed below is the Trustee compensation paid by the Trust
individually and by the Trust and the eight other trusts in the Evergreen Fund
Complex for the twelve months ended June 30, 1999. The Trustees do not receive
pension or retirement benefits from the Funds. For more information, see
"Management of the Trust" in Part 2 of this SAI.
- ------------------------- -------------------------- ===========================
Trustee Aggregate Compensation Total Compensation from
from Trust Trust and Fund Complex Paid
to Trustees*
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$1,004 $75,000
Laurence B. Ashkin
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$1,004 $75,000
Charles A. Austin, III
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$976 $74,250
K. Dun Gifford
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$1,312 $98,000
James S. Howell
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$976 $74,250
Leroy Keith Jr.
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$1,004 $75,000
Gerald M. McDonnell
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$1,173 $86,500
Thomas L. McVerry
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$976 $74,250
William Walt Pettit
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$976 $74,250
David M. Richardson
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$1,004 $78,000
Russell A. Salton, III
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$1,109 $90,502
Michael S. Scofield
- ------------------------- ------------------------- ============================
- ------------------------- ------------------------- ============================
$976 $74,250
Richard J. Shima
- ------------------------- ------------------------- ============================
*As of January 1, 2000, Michael S. Scofield will become
Chairman of the Board and James S. Howell will become Trustee
of Emeritis.
**Certain Trustees have elected to defer all or
part of their total compensation for the twelve months ended
June 30, 1999. The amounts listed below will be payable in
later years to the respective Trustees:
Austin $11,325
Howell $78,400
McDonnell $75,000
McVerry $86,500
Pettit $74,250
Salton $78,000
Scofield $30,900
PERFORMANCE
Total Return
Below are the annual total returns for each class of shares of the
Funds (including applicable sales charges) as of June 30, 1999. For more
information, see "Total Return" under "Performance Calculations" in Part 2 of
this SAI.
<TABLE>
<CAPTION>
- ----------------------- -------------------- --------------------- -------------------- =====================
Fund/Class One Year Five Years Ten Years or Since Inception Date of
Inception Class
- ----------------------- -------------------- --------------------- -------------------- =====================
=============================================================================================================
Capital Preservation Fund(a)
=============================================================================================================
- ----------------------- -------------------- --------------------- -------------------- =====================
<S> <C> <C> <C> <C> <C>
Class A 1.36% 4.95% 4.42% 12/30/1994
- ----------------------- -------------------- --------------------- -------------------- =====================
- ----------------------- -------------------- --------------------- -------------------- =====================
Class B -1.10% 4.62% 4.42% 7/1/1991
- ----------------------- -------------------- --------------------- -------------------- =====================
- ----------------------- -------------------- --------------------- -------------------- =====================
Class C 2.87% 5.00% 4.42% 2/1/1993
- ----------------------- -------------------- --------------------- -------------------- =====================
- ----------------------- -------------------- --------------------- -------------------- =====================
Class Y N/A N/A N/A 10/28/1999
- ----------------------- -------------------- --------------------- -------------------- =====================
=============================================================================================================
Intermediate Bond Fund(b)
=============================================================================================================
- - ----------------------- -------------------- --------------------- -------------------- =====================
Class A -2.17% 5.78% 6.75% 2/13/1987
- - ----------------------- -------------------- --------------------- -------------------- =====================
- - ----------------------- -------------------- --------------------- -------------------- =====================
Class B -4.46% 5.31% 6.58% 2/1/1993
- - ----------------------- -------------------- --------------------- -------------------- =====================
- - ----------------------- -------------------- --------------------- -------------------- =====================
Class C -0.64% 5.63% 6.58% 2/1/1993
- - ----------------------- -------------------- --------------------- -------------------- =====================
- - ----------------------- -------------------- --------------------- -------------------- =====================
Class Y 1.43% 6.73% 7.45% 1/26/1998
- - ----------------------- -------------------- --------------------- -------------------- =====================
=============================================================================================================
Short-Intermediate Fund(c)
=============================================================================================================
- - ----------------------- -------------------- --------------------- -------------------- =====================
Class A 0.25% 5.50% 6.45% 1/28/1989
- - ----------------------- -------------------- --------------------- -------------------- =====================
- - ----------------------- -------------------- --------------------- -------------------- =====================
Class B -2.23% 4.95% 6.24% 1/25/1993
- - ----------------------- -------------------- --------------------- -------------------- =====================
- - ----------------------- -------------------- --------------------- -------------------- =====================
Class C 1.69% 5.33% 6.36% 9/6/1994
- - ----------------------- -------------------- --------------------- -------------------- =====================
- - ----------------------- -------------------- --------------------- -------------------- =====================
Class Y 3.69% 6.32% 6.92% 1/4/1991
- - ----------------------- -------------------- --------------------- -------------------- =====================
</TABLE>
(a) Historical performance shown for Classes A, C and Y prior to their inception
is based on the performance of Class B, the original class offered. These
historical returns for Classes A and Y have not been adjusted to eliminate the
effect of the higher 12b-1 fees applicable to Class B. The Fund currently incurs
12b-1 expenses of 0.18% for Class A. This rate is based on 0.25% assessed on
assets prior to 1/1/97 and 0.10% assessed on new assets from 1/1/97. Classes B
and C each incur 12b-1 expenses of 1.00%. Class Y does not pay 12b-1 fees. If
these fees had been reflected, returns for Classes A and Y would have been
higher.
(b) Historical performance shown for Classes B, C and Y prior to their inception
is based on the performance of Class A, the original class offered. These
historical returns for Classes B and C have not been adjusted to reflect the
effect of each Class' 12b-1 fees. These fees for Class A are 0.25%, for Class B
are 1.00% and for Class C are 1.00%. If these fees had been reflected, returns
would have been lower. The historical returns for Class Y have been adjusted to
reflect the elimination of the 0.25% 12b-1 fee applicable to Class A. Class Y
does not pay a 12b-1 fee. If these fees had not been eliminated, returns for
Class Y would have been lower.
(c) Historical performance shown for Classes B, C and Y prior to their inception
is based on the performance of Class A, the original class offered. These
historical returns for Classes B, C and Y have not been adjusted to reflect the
effect of each Class' 12b-1 fees. These fees for Class A are 0.25%, for Class B
are 1.00% and for Class C are 1.00%. Class Y does not pay a 12b-1 fee. If these
fees had been reflected, returns for Classes B and C would have been lower while
returns for Class Y would have been higher.
Yields
Below are the current yields of the Funds for the 30-day period ended
June 30, 1999. For more information, see "30-Day Yield" under "Performance
Calculations" in Part 2 of this SAI.
<TABLE>
<CAPTION>
======================================================================================================
30-Day Yield
======================================================================================================
- - ------------------------------------- --------------- -------------- ----------------- ===============
Fund Class A Class B Class C Class Y
- - ------------------------------------- --------------- -------------- ----------------- ===============
- - ------------------------------------- --------------- -------------- ----------------- ===============
<S> <C> <C> <C>
Capital Preservation Fund 4.58% 3.90% 3.93% N/A
- - ------------------------------------- --------------- -------------- ----------------- ===============
- - ------------------------------------- --------------- -------------- ----------------- ===============
Intermediate Bond Fund 5.94% 5.36% 5.39% 6.40%
- - ------------------------------------- --------------- -------------- ----------------- ===============
- - ------------------------------------- --------------- -------------- ----------------- ===============
Short-Intermediate Fund 5.73% 5.02% 5.02% 6.03%
- - ------------------------------------- --------------- -------------- ----------------- ===============
</TABLE>
COMPUTATION OF CLASS A OFFERING PRICE
Class A shares are sold at the NAV plus a sales charge. Below is an
example of the method of computing the offering price of Class A shares of each
Fund. The example assumes a purchase of Class A shares of each Fund aggregating
less than $100,000 based upon the NAV of each Fund's Class A shares at June 30,
1999. For more information, see "Purchase and Redemption of Shares" and "Pricing
of Shares."
<TABLE>
<CAPTION>
- - -------------------------------------- ------------------------ -------------------- =================
Net Asset Value Per Offering Price
Fund Share Sales Charge Per Share
- - -------------------------------------- ------------------------ -------------------- =================
- - -------------------------------------- ------------------------ -------------------- =================
<S> <C> <C> <C>
Capital Preservation Fund $9.65 3.25% $9.97
- - -------------------------------------- ------------------------ -------------------- =================
- - -------------------------------------- ------------------------ -------------------- =================
Intermediate Bond Fund $8.66 3.25% $8.95
- - -------------------------------------- ------------------------ -------------------- =================
- - -------------------------------------- ------------------------ -------------------- =================
Short-Intermediate Fund $9.68 3.25% $10.01
- - -------------------------------------- ------------------------ -------------------- =================
</TABLE>
SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
Short-Intermediate Fund, subject to the supervision and control of the Trust's
Board of Trustees. EIS provides the Fund with facilities, equipment and
personnel and is entitled to receive a fee from the Fund based on the total
assets of all mutual funds for which EIS serves as administrator and a First
Union Corporation subsidiary serves as investment advisor. The fee paid to EIS
is calculated in accordance with the following schedule:
---------------------- =================
Assets Fee
---------------------- =================
---------------------- =================
First $7 billion 0.050%
---------------------- =================
---------------------- =================
Next $3 billion 0.035%
---------------------- =================
---------------------- =================
Next $5 billion 0.030%
---------------------- =================
---------------------- =================
Next $10 billion 0.020%
---------------------- =================
---------------------- =================
Next $5 billion 0.015%
---------------------- =================
---------------------- =================
Over $30 billion 0.010%
---------------------- =================
EIS also provides facilities, equipment and personnel to Capital
Preservation Fund and Intermediate Bond Fund on behalf of the investment
advisor. Capital Preservation Fund and Intermediate Bond Fund reimburse EIS for
the cost of providing such services.
Transfer Agent
Evergreen Service Company ("ESC"), a subsidiary of First Union
Corporation, is the Fund's transfer agent. ESC issues and redeems shares, pays
dividends and performs other duties in connection with the maintenance of
shareholder accounts. The transfer agent's address is P.O. Box 2121, Boston,
Massachusetts 02106-2121. The Fund pays ESC annual fees as follows:
----------------------------- --------------- ==============
Fund Type Annual Fee Annual Fee
Per Open Per Closed
Account* Account**
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Monthly Dividend Funds $25.50 $9.00
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Quarterly Dividend Funds $24.50 $9.00
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Semiannual Dividend Funds $23.50 $9.00
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Annual Dividend Funds $23.50 $9.00
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Money Market Funds $25.50 $9.00
----------------------------- --------------- ==============
*For shareholder accounts only. The Fund pays ESC cost plus 15%
for broker accounts.
**Closed accounts are maintained on the system in order to facilitate
historical and tax information.
Distributor
Evergreen Distributor, Inc. ("EDI") markets the Funds through
broker-dealers and other financial representatives. Its address is 90 Park
Avenue, New York, New York 10016.
Independent Auditors
KPMG LLP, 99 High Street, Boston, Massachusetts 02110, audits the
financial statements of each Fund.
Custodian
State Street Bank and Trust Company 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.
FINANCIAL STATEMENTS
The audited financial statements and the reports thereon are hereby
incorporated by reference to the Funds' Annual Report, a copy of which may be
obtained without charge from ESC, P.O. Box 2121, Boston, Massachusetts
02106-2121.
<PAGE>
EVERGREEN FUNDS
Statement of Additional Information ("SAI")
PART 2
ADDITIONAL INFORMATION ON SECURITIES
AND INVESTMENT PRACTICES
The prospectus describes the Fund's investment objective and the
securities in which it primarily invests. The following describes other
securities the Fund may purchase and investment strategies it may use. Some of
the information below will not apply to the Fund or the Class in which you are
interested. See the list under Other Securities and Practices in Part 1 of this
SAI to determine which of the sections below are applicable.
Defensive Investments
The Fund may invest up to 100% of its assets in high quality money
market instruments, such as notes, certificates of deposit, commercial paper,
banker's acceptances, bank deposits or U.S. government securities if, in the
opinion of the investment advisor, market conditions warrant a temporary
defensive investment strategy. Evergreen Equity Income Fund may also invest in
debt securities and high grade preferred stocks for defensive purposes when its
investment advisor determines a temporary defensive strategy is warranted.
U.S. Government Securities
The Fund may invest in securities issued or guaranteed by U.S.
Government agencies or instrumentalities.
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.
Some government agencies and instrumentalities may not receive
financial support from the U.S. Government. Examples of such agencies 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.
Securities Issued by the Government National Mortgage Association ("GNMA").
The Fund may invest in securities issued by the GNMA, a corporation
wholly-owned by the U.S. Government. GNMA securities or "certificates" represent
ownership in a pool of underlying mortgages. The timely payment of principal and
interest due on these securities is guaranteed.
Unlike conventional bonds, the principal on GNMA certificates is not
paid at maturity but over the life of the security in scheduled monthly
payments. While mortgages pooled in a GNMA certificate may have maturities of up
to 30 years, the certificate itself will have a shorter average maturity and
less principal volatility than a comparable 30-year bond.
The market value and interest yield of GNMA certificates can vary due
not only to market fluctuations, but also to early prepayments of mortgages
within the pool. Since prepayment rates vary widely, it is impossible to
accurately predict the average maturity of a GNMA pool. In addition to the
guaranteed principal payments, GNMA certificates may also make unscheduled
principal payments resulting from prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available
from other types of U.S. Government securities, they may be less effective as a
means of locking in attractive long-term rates because of the prepayment
feature. For instance, when interest rates decline, prepayments are likely to
increase as the holders of the underlying mortgages seek refinancing. As a
result, the value of a GNMA certificate is not likely to rise as much as the
value of a comparable debt security would in response to same decline. 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.
When-Issued, Delayed-Delivery and Forward Commitment Transactions
The Fund may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis.
Settlement of such transactions normally occurs within a month or more after the
purchase or sale commitment is made.
The Fund may purchase securities under such conditions only with the
intention of actually acquiring them, but may enter into a separate agreement to
sell the securities before the settlement date. Since the value of securities
purchased may fluctuate prior to settlement, the Fund may be required to pay
more at settlement than the security is worth. In addition, the purchaser is not
entitled to any of the interest earned prior to settlement.
Upon making a commitment to purchase a security on a when-issued,
delayed delivery or forward commitment basis the Fund will hold liquid assets
worth at least the equivalent of the amount due. The liquid assets will be
monitored on a daily basis and adjusted as necessary to maintain the necessary
value.
Purchases made under such conditions may involve the risk that yields
secured at the time of commitment may be lower than otherwise available by the
time settlement takes place, causing an unrealized loss to the Fund. In
addition, when the Fund engages in such purchases, it relies on the other party
to consummate the sale. If the other party fails to perform its obligations, the
Fund may miss the opportunity to obtain a security at a favorable price or
yield.
Repurchase Agreements
The Fund 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 the
investment advisor to be creditworthy. In a repurchase agreement the Fund
obtains a security and simultaneously commits to return the security to the
seller at a set price (including principal and interest) within a period of time
usually not exceeding seven days. 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.
The Fund's custodian or a third party 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 the Fund, the 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. The Fund's investment advisor 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 Fund will only enter into repurchase agreements with
banks and other recognized financial institutions, such as broker-dealers, which
are deemed by the investment advisor to be creditworthy pursuant to guidelines
established by the Board of Trustees.
Reverse Repurchase Agreements
As described herein, the Fund may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, the 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 the 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 the
Fund, in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Options
An option is a right to buy or sell a security for a specified price
within a limited time period. The option buyer pays the option seller (known as
the "writer") for the right to buy, which is a "call" option, or the right to
sell, which is a "put" option. Unless the option is terminated, the option
seller must then buy or sell the security at the agreed-upon price when asked to
do so by the option buyer.
The Fund may buy or sell put and call options on securities it holds or
intends to acquire, and may purchase put and call options for the purpose of
offsetting previously written put and call options of the same series. The Fund
may also buy and sell options on financial futures contracts. The Fund will use
options as a hedge against decreases or increases in the value of securities it
holds or intends to acquire.
The Fund may write only covered options. With regard to a call option,
this means that the Fund will own, for the life of the option, the securities
subject to the call option. The 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 the 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, resulting in a
potential loss of value to the Fund.
Futures Transactions
The Fund may enter into financial futures contracts and write options
on such contracts. The Fund intends to enter into such contracts and related
options for hedging purposes. The Fund will enter into futures on securities or
index-based futures contracts in order to hedge against changes in interest or
exchange rates or securities prices. A futures contract on securities is an
agreement to buy or sell securities at a specified price during a designated
month. A futures contract on a securities index does not involve the actual
delivery of securities, but merely requires the payment of a cash settlement
based on changes in the securities index. The Fund does not make payment or
deliver securities upon entering into a futures contract. Instead, it puts down
a margin deposit, which is adjusted to reflect changes in the value of the
contract and which continues until the contract is terminated.
The Fund may sell or purchase futures contracts. When a futures
contract is sold by the Fund, the value of the contract will tend to rise when
the value of the underlying securities declines and to fall when the value of
such securities increases. Thus, the Fund sells futures contracts in order to
offset a possible decline in the value of its securities. If a futures contract
is purchased by the Fund, the value of the contract will tend to rise when the
value of the underlying securities increases and to fall when the value of such
securities declines. The Fund intends to purchase futures contracts in order to
establish what is believed by the investment advisor to be a favorable price or
rate of return for securities the Fund intends to purchase.
The Fund also intends to purchase put and call options on futures
contracts for hedging purposes. A put option purchased by the Fund would give it
the right to assume a position as the seller of a futures contract. A call
option purchased by the Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires the Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order
to terminate a futures contract and may sell put and call options for the
purpose of closing out its options positions. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
secondary market. There is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. As a result, there
can be no assurance that the Fund will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the contract and to complete
the contract according to its terms, in which case it would continue to bear
market risk on the transaction.
Although futures and options transactions are intended to enable the
Fund to manage market, interest rate or exchange rate risk, unanticipated
changes in interest rates or market prices could result in poorer performance
than if it had not entered into these transactions. Even if the investment
advisor correctly predicts interest rate movements, a hedge could be
unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities positions may be caused by differences
between the futures and securities markets or by differences between the
securities underlying the Fund's futures position and the securities held by or
to be purchased for the Fund. The Fund's investment advisor will attempt to
minimize these risks through careful selection and monitoring of the Fund's
futures and options positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but currently
intends to write such options only to close out options purchased by the Fund.
The Fund will not change these policies without supplementing the information in
the prospectus and SAI.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss on
those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, the Fund will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
"Margin" in Futures Transactions. Unlike the purchase or sale of a security, the
Fund does not pay or receive money upon the purchase or sale of a futures
contract. Rather the 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 the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value the Fund
will mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
Foreign Securities
The Fund may invest in foreign securities or U.S. securities traded in
foreign markets. In addition to securities issued by foreign companies,
permissible investments may also 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. The Fund may also invest in Canadian commercial paper and Europaper.
These instruments may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. issuers. Such
risks include the possibility of adverse political and economic developments;
imposition of withholding taxes on interest or other income; seizure,
nationalization, or expropriation of foreign deposits; 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 Fund 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 the Fund enters into the contract. The Fund usually
will enter into these contracts to stabilize the U.S. dollar value of a security
it has agreed to buy or sell. The 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
advisor's ability to predict accurately the future exchange rates between
foreign currencies and the U.S. dollar. The value of the 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 the Fund. The Fund may also
purchase and sell options related to foreign currencies in connection with
hedging strategies.
High Yield, High Risk Bonds
The Fund may invest a portion of its assets in lower rated bonds. Bonds
rated below BBB by Standard & Poor's Ratings Services ("S&P") or Fitch IBCA,
Inc. ("Fitch") or below Baa by Moody's Investors Service, Inc. ("Moody's"),
commonly known as "junk bonds," offer high yields, but also high risk. While
investment in junk bonds provides opportunities to maximize return over time,
they are considered predominantly speculative with respect to the ability of the
issuer to meet principal and interest payments.
Investors should be aware of the following risks:
(1) The lower ratings of junk bonds 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 the issuer's inability to meet
specific 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.
(2) The value of junk bonds may be more susceptible to real or
perceived adverse economic or political events than is the case for higher
quality bonds.
(3) The value of junk bonds, 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 junk bonds, however, are generally less sensitive to interest rate
changes than the prices of higher-rated bonds, but are more sensitive to news
about an issuer or the economy which is, or investors perceive as, negative.
(4) The secondary market for junk bonds may be less liquid at certain
times than the secondary market for higher quality bonds, which may adversely
effect (a) the bond's market price, (b) the Fund's ability to sell the bond and
the Fund's ability to obtain accurate market quotations for purposes of valuing
its assets.
For bond ratings descriptions, see "Corporate and Municipal Bond
Ratings" below.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its net assets in securities
that are illiquid. A security is illiquid when the Fund cannot dispose of it in
the ordinary course of business within seven days at approximately the value at
which the Fund has the investment on its books.
The Fund may invest in "restricted" securities, i.e., securities
subject to restrictions on resale under federal securities laws. Rule 144A under
the Securities Act of 1933 ("Rule 144A") allows certain restricted securities to
trade freely among qualified institutional investors. Since Rule 144A securities
may have limited markets, the Board of Trustees will determine whether such
securities should be considered illiquid for the purpose of determining the
Fund's compliance with the limit on illiquid securities indicated above. In
determining the liquidity of Rule 144A securities, the Trustees will 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.
Investment in Other Investment Companies
The Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, the Fund may not (1) own more
than 3% of the outstanding voting stocks 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, the 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 the Fund. Investing in other investment
companies may expose a Fund to duplicate expenses and lower its value.
Short Sales
A short sale is the sale of a security the Fund has borrowed. The Fund
expects to profit from a short sale by selling the borrowed security for more
than the cost of buying it to repay the lender. After a short sale is completed,
the value of the security sold short may rise. If that happens, the cost of
buying it to repay the lender may exceed the amount originally received for the
sale by the Fund.
The Fund may engage in short sales, but it 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. The Fund may effect a short sale in connection with an
underwriting in which the Fund is a participant.
Municipal Bonds
The Fund may invest in municipal bonds of any state, territory or
possession of the United States ("U.S."), including the District of Columbia.
The Fund may also invest in municipal bonds of any political subdivision, agency
or instrumentality (e.g., counties, cities, towns, villages, districts,
authorities) of the U.S. or its possessions. Municipal bonds are debt
instruments issued by or for a state or local government to support its general
financial needs or to pay for special projects such as airports, bridges,
highways, public transit, schools, hospitals, housing and water and sewer works.
Municipal bonds may also may be issued to refinance public debt.
Municipal bonds are mainly divided between "general obligation" and
"revenue" bonds. General obligation bonds are backed by the full faith and
credit of governmental issuers with the power to tax. They are repaid from the
issuer's general revenues. Payment, however, may be dependent upon legislative
approval and may be subject to limitations on the issuer's taxing power.
Enforcement of payments due under general obligation bonds varies according to
the law applicable to the issuer. In contrast, revenue bonds are supported only
by the revenues generated by the project or facility.
The Fund may also invest in industrial development bonds. Such bonds
are usually revenue bonds issued to pay for facilities with a public purpose
operated by private corporations. The credit quality of industrial development
bonds is usually directly related to the credit standing of the owner or user of
the facilities. To qualify as a municipal bond, the interest paid on an
industrial development bond must qualify as fully exempt from federal income
tax. However, the interest paid on an industrial development bond may be subject
to the federal alternative minimum tax.
The yields on municipal bonds depend on such factors as market
conditions, the financial condition of the issuer and the issue's size, maturity
date and rating. Municipal bonds are rated by S&P, Moody's and Fitch. Such
ratings, however, are opinions, not absolute standards of quality. Municipal
bonds with the same maturity, interest rates and rating may have different
yields, while municipal bonds with the same maturity and interest rate, but
different ratings, may have the same yield. Once purchased by the Fund, a
municipal bond may cease to be rated or receive a new rating below the minimum
required for purchase by the Fund. Neither event would require the Fund to sell
the bond, but the Fund's investment advisor would consider such events in
determining whether the Fund should continue to hold it.
The ability of the Fund to achieve its investment objective depends
upon the continuing ability of issuers of municipal bonds to pay interest and
principal when due. Municipal bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors. Such
laws extend the time for payment of principal and/or interest, and may otherwise
restrict the Fund's ability to enforce its rights in the event of default. Since
there is generally less information available on the financial condition of
municipal bond issuers compared to other domestic issuers of securities, the
Fund's investment advisor may lack sufficient knowledge of an issue's
weaknesses. Other influences, such as litigation, may also materially affect the
ability of an issuer to pay principal and interest when due. In addition, the
market for municipal bonds is often thin and can be temporarily affected by
large purchases and sales, including those by the Fund.
From time to time, Congress has considered restricting or eliminating
the federal income tax exemption for interest on municipal bonds. Such actions
could materially affect the availability of municipal bonds and the value of
those already owned by the Fund. If such legislation were passed, the Trust's
Board of Trustees may recommend changes in the Fund's investment objectives and
policies or dissolution of the Fund.
Virgin Islands, Guam and Puerto Rico
The Fund may invest in obligations of the governments of the Virgin
Islands, Guam and Puerto Rico to the extent such obligations are exempt from the
income or intangibles taxes, as applicable, of the state for which the Fund is
named. The Fund does not presently intend to invest more than (a) 10% of its net
assets in the obligations of each of the Virgin Islands and Guam or (b) 25% of
its net assets in the obligations of Puerto Rico. Accordingly, the Fund may be
adversely affected by local political and economic conditions and developments
within the Virgin Islands, Guam and Puerto Rico affecting the issuers of such
obligations.
Master Demand Notes
The Fund may invest in master demand notes. These are unsecured
obligations that permit the investment of fluctuating amounts by the Fund at
varying rates of interest pursuant to direct arrangements between the Fund, as
lender, and the issuer, as borrower. Master demand notes may permit daily
fluctuations in the interest rate and daily changes in the amounts borrowed. The
Fund has the right to increase the amount under the note at any time up to the
full amount provided by the note agreement, or to decrease the amount. The
borrower may repay up to the full amount of the note without penalty. Master
demand notes permit the Fund to demand payment of principal and accrued interest
at any time (on not more than seven days' notice). Notes acquired by the Fund
may have maturities of more than one year, provided that (1) the Fund is
entitled to payment of principal and accrued interest upon not more than seven
days' notice, and (2) the rate of interest on such notes is adjusted
automatically at periodic intervals, which normally will not exceed 31 days, but
may extend up to one year. The notes are deemed to have a maturity equal to the
longer of the period remaining to the next interest rate adjustment or the
demand notice period. Because these types of notes are direct lending
arrangements between the lender and borrower, such instruments are not normally
traded and there is no secondary market for these notes, although they are
redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, the Fund`s investment advisor
considers, under standards established by the Board of Trustees, earning power,
cash flow and other liquidity ratios of the borrower and will monitor the
ability of the borrower to pay principal and interest on demand. These notes are
not typically rated by credit rating agencies. Unless rated, the Fund may invest
in them only if at the time of an investment the issuer meets the criteria
established for high quality commercial paper, i.e., rated A-1 by S&P, Prime-1
by Moody's or F-1 by Fitch.
Brady Bonds
The Fund may also invest in Brady Bonds. Brady Bonds are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructurings under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal due at maturity by U.S. Treasury zero
coupon obligations that have the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized by cash or securities
in an amount that, in the case of fixed rate bonds, is equal to at least one
year of rolling interest payments based on the applicable interest rate at that
time and is adjusted at regular intervals thereafter. Certain Brady Bonds are
entitled to "value recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments, but generally are not collateralized.
Brady Bonds are often viewed as having up to four valuation components: (1)
collateralized repayment of principal at final maturity, (2) collateralized
interest payments, (3) uncollateralized interest payments, and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments that would have then
been due on the Brady Bonds in the normal course. In addition, in light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
Obligations of Foreign Branches of United States Banks
The Fund may invest in obligations of foreign branches of U.S. banks.
These may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and by
government regulation. Payment of interest and principal upon these obligations
may also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidences of
ownership of such securities may be held outside the U.S. and the Fund may be
subject to the risks associated with the holding of such property overseas.
Examples of governmental actions would be the imposition of currency controls,
interest limitations, withholding taxes, seizure of assets or the declaration of
a moratorium. Various provisions of federal law governing domestic branches do
not apply to foreign branches of domestic banks.
Obligations of United States Branches of Foreign Banks
The Fund may invest in obligations of U.S. branches of foreign banks.
These may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and by federal
and state regulation as well as by governmental action in the country in which
the foreign bank has its head office. In addition, there may be less publicly
available information about a U.S. branch of a foreign bank than about a
domestic bank.
Payment-in-kind Securities
The Fund may invest in payment-in-kind ("PIK") securities. PIKs pay
interest in either cash or additional securities, at the issuer's option, for a
specified period. The issuer's option to pay in additional securities typically
ranges from one to six years, compared to an average maturity for all PIK
securities of eleven years. Call protection and sinking fund features are
comparable to those offered on traditional debt issues.
PIKs, like zero coupon bonds, are designed to give an issuer
flexibility in managing cash flow. Several PIKs are senior debt. In other cases,
where PIKs are subordinated, most senior lenders view them as equity
equivalents.
An advantage of PIKs for the issuer -- as with zero coupon securities
- -- is that interest payments are automatically compounded (reinvested) at the
stated coupon rate, which is not the case with cash-paying securities. However,
PIKs are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a discount.
As a group, PIK bonds trade flat (i.e., without accrued interest).
Their price is expected to reflect an amount representing accredit interest
since the last payment. PIKs generally trade at higher yields than comparable
cash-paying securities of the same issuer. Their premium yield is the result of
the lesser desirability of non-cash interest, the more limited audience for
non-cash paying securities, and the fact that many PIKs have been issued to
equity investors who do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash
flow analysis if the security (ex interest) is trading at a premium or a
discount because the realizable value of additional payments is equal to the
current market value of the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their most
costly form of capital.
Zero Coupon "Stripped" Bonds
The Fund may invest in zero coupon "stripped" bonds. These represent
ownership in serially maturing interest payments or principal payments on
specific underlying notes and bonds, including coupons relating to such notes
and bonds. The interest and principal payments are direct obligations of the
issuer. Interest zero coupon bonds of any series mature periodically from the
date of issue of such series through the maturity date of the securities related
to such series. Principal zero coupon bonds mature on the date specified
therein, which is the final maturity date of the related securities. Each zero
coupon bond entitles the holder to receive a single payment at maturity. There
are no periodic interest payments on a zero coupon bond. Zero coupon bonds are
offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the
rights and privileges of owners of the underlying coupon obligations or
principal obligations. Owners of zero coupon bonds have the right upon default
on the underlying coupon obligations or principal obligations to proceed
directly and individually against the issuer and are not required to act in
concert with other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon
bonds or interest zero coupon bonds (either initially or in the secondary
market) is treated as if the buyer had purchased a corporate obligation issued
on the purchase date with an original issue discount equal to the excess of the
amount payable at maturity over the purchase price. The purchaser is required to
take into income each year as ordinary income an allocable portion of such
discounts determined on a "constant yield" method. Any such income increases the
holder's tax basis for the zero coupon bond, and any gain or loss on a sale of
the zero coupon bonds relative to the holder's basis, as so adjusted, is a
capital gain or loss. If the holder owns both principal zero coupon bonds and
interest zero coupon bonds representing interest in the same underlying issue of
securities, a special basis allocation rule (requiring the aggregate basis to be
allocated among the items sold and retained based on their relative fair market
value at the time of sale) may apply to determine the gain or loss on a sale of
any such zero coupon bonds.
Mortgage-Backed or Asset-Backed Securities
The Fund may invest in mortgage-backed securities and asset-backed
securities. Two principal types of mortgage-backed securities are collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs"). CMOs are securities collateralized by mortgages, mortgage
pass-throughs, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Investors purchasing CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be supported
by various types of insurance, and some CMOs may be backed by GNMA certificates
or other mortgage pass-throughs issued or guaranteed by U.S. government agencies
or instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities.
In addition to mortgage-backed securities, the Fund may invest in
securities secured by other assets including company receivables, truck and auto
loans, leases, and credit card receivables. These issues may be traded
over-the-counter and typically have a short-intermediate maturity structure
depending on the pay down characteristics of the underlying financial assets
which are passed through to the security holder.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by automobile receivables permit the servicers of
such receivables to retain possession of the underlying obligations. If the
servicers were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
rated asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, the investment advisor considers
the financial strength of the guarantor or other provider of credit support, the
type and extent of credit enhancement provided as well as the documentation and
structure of the issue itself and the credit support.
Variable or Floating Rate Instruments
The Fund may invest in variable or floating rate instruments which may
involve a demand feature and may include variable amount master demand notes
which may or may not be backed by bank letters of credit. Variable or floating
rate instruments bear interest at a rate which varies with changes in market
rates. The holder of an instrument with a demand feature may tender the
instrument back to the issuer at par prior to maturity. A variable amount master
demand note is issued pursuant to a written agreement between the issuer and the
holder, its amount may be increased by the holder or decreased by the holder or
issuer, it is payable on demand, and the rate -of interest varies based upon an
agreed formula. The quality of the underlying credit must, in the opinion of the
investment advisor, be equivalent to the long-term bond or commercial paper
ratings applicable to permitted investments for the Fund. The investment advisor
will monitor, on an ongoing basis, the earning power, cash flow, and liquidity
ratios of the issuers of such instruments and will similarly monitor the ability
of an issuer of a demand instrument to pay principal and interest on demand.
Limited Partnerships
The Fund may invest in limited and master limited partnerships. A
limited partnership 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 of 1986, as amended (the "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.
PURCHASE AND REDEMPTION OF SHARES
You may buy shares of the Fund through Evergreen Distributor, Inc.
("EDI"), broker-dealers that have entered into special agreements with EDI or
certain other financial institutions. With certain exceptions, the Fund may
offer up to four different classes of shares that differ 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 the Fund's shares, a contingent
deferred sales charge (a "CDSC") when you redeem the Fund's shares or no sales
charges at all. Each Fund offers different classes of shares. Refer to the
prospectus to determine which classes of shares are offered by each Fund.
Class A Shares
With certain exceptions, when you purchase Class A shares you will pay
a maximum sales charge of 4.75%. The prospectus contains 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, the Fund will charge a CDSC of
1.00% if you redeem during the month of your purchase or the 12-month period
following the month of your purchase (see "Contingent Deferred Sales Charge"
below).
No front-end sales charges are imposed on Class A shares purchased by
(a) institutional investors, which may include bank trust departments and
registered investment advisors; (b) investment advisors, 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; (c) clients of investment advisors or financial planners who place
trades for their own accounts if the accounts are linked to the master account
of such investment advisors or financial planners on the books of the
broker-dealer through whom shares are purchased; (d) 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 the Fund by the broker-dealer; (e) shareholders of record on
October 12, 1990 in any series of Evergreen Investment Trust in existence on
that date, and the members of their immediate families; (f) current and retired
employees of First Union National Bank ("FUNB") and its affiliates, EDI and any
broker-dealer with whom EDI has entered into an agreement to sell shares of the
Fund, and members of the immediate families of such employees; and (g) upon the
initial purchase of an Evergreen fund by investors reinvesting the proceeds from
a redemption within the preceding 30 days of shares of other mutual funds,
provided such shares were initially purchased with a front-end sales charge or
subject to a CDSC.
Class B Shares
The Fund offers Class B shares at net asset value without an initial
sales charge. With certain exceptions, however, the Fund will charge a CDSC on
shares you redeem within 72 months after the month of your purchase, in
accordance with the following schedule:
REDEMPTION TIME CDSC RATE
Month of purchase and the first 12-month
period following the month of purchase. .......................5.00%
Second 12-month period following the month of purchase.........4.00%
Third 12-month period following the month of purchase..........3.00%
Fourth 12-month period following the month of purchase.........3.00%
Fifth 12-month period following the month of purchase..........2.00%
Sixth 12-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 or exchange fee. 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 EDI. The Fund offers Class C
shares at net asset value without an initial sales charge. With certain
exceptions, however, the Fund 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 Shares
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 (2)
certain institutional investors and (3) investment advisory clients of an
investment advisor of an Evergreen Fund or the advisor's 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.
INSTITUTIONAL SHARES, INSTITUTIONAL SERVICE SHARES
Each institutional class of shares is sold without a front-end sales
charge or contingent deferred sales charge. Institutional Service shares pay an
ongoing service fee. The minimum initial investment in any institutional class
of shares is $1 million, which may be waived in certain circumstances. There is
no minimum amount required for subsequent purchases.
Contingent Deferred Sales Charge
The Fund charges a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Expenses Under Rule 12b-1,"
below). Institutional and Institutional Service shares do not charge a CDSC. If
imposed, the Fund deducts 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, the 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., paid to EDI or its predecessor.
SALES CHARGE WAIVERS AND REDUCTIONS
The following information is not applicable to Institutional and
Institutional Service shares.
If you making a large purchase, there are several ways you can combine
multiple purchases of Class A shares in Evergreen Funds and take advantage of
lower sales charges. These are described below.
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, 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%.
Your account, and therefore your rights of accumulation, can be linked
to immediate family members which includes father and mother, brothers and
sisters, and sons and daughters. The same rule applies with respect to
individual retirement plans. Please note, however, that retirement plans
involving employees stand alone and do not pass on rights of accumulation.
Letter of Intent
You can, by completing 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.
Waiver of Initial Sales Charges
The Fund may sell its 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 advisors;
4. investment advisors, 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 advisors or financial planners who place
trades for their own accounts if the accounts are linked to a
master account of such investment advisors 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 the Fund by the broker-dealer;
7. employees of FUNB, its affiliates, EDI, any broker-dealer with
whom EDI, has entered into an agreement to sell shares of the
Fund, and members of the immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen Funds, EDI 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 in or any of the Evergreen Funds trust company as
Trustee if the initial investment 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, the Fund will only sell shares to
these parties upon the purchasers written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. The Fund will not charge any
CDSC on redemptions by such purchasers.
Waiver of CDSCs
The Fund does 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 the 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 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 an Systematic Income 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 the Fund for shares of the same class
of any other Evergreen fund which offers the same class of shares. Shares of any
class of the Evergreen Select Funds may be exchanged for the same class of
shares of any other Evergreen Select Fund. See "By Exchange" under "How to Buy
Shares" in the prospectus. 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.
Automatic Reinvestment
As described in the prospectus, a shareholder may elect to receive
dividends and capital gains distributions in cash instead of shares. However,
ESC will automatically reinvest 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. When a check is returned, the Fund will hold the check amount in a
no-interest account in the shareholder's name until the shareholder updates his
or her address or automatic reinvestment begins. Uncashed or returned redemption
checks will also be handled in the manner described above.
PRICING OF SHARES
Calculation of Net Asset Value
The Fund calculates its net asset value ("NAV") once daily on Monday
through Friday, as described in the prospectus. The Fund will not compute its
NAV on the days the New York Stock Exchange is closed: 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 the Fund is calculated by dividing the value of the Fund's
net assets attributable to that class by all of the shares issued for that
class.
Valuation of Portfolio Securities
Current values for the Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on an established 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 on an established securities exchange or in the
over-the-counter market for which there has been no sale and other
securities traded in the over-the-counter market are valued at the mean
of the bid and asked prices at the time of valuation.
(3) Short-term investments maturing in more than 60 days, for which
market quotations are readily available, are valued at current market
value.
(4) Short-term investments maturing in sixty days or less are valued at
amortized cost, which approximates market.
(5) Securities, including restricted securities, for which market
quotations are not readily available; listed securities or those on NMS
if, in the investment advisor's opinion, the last sales price does not
reflect an accurate current market value; and other assets are valued
at prices deemed in good faith to be fair under procedures established
by the Board of Trustees.
(6) Municipal bonds are valued by an independent pricing service at
fair value using a variety of factors which may include yield,
liquidity, interest rate risk, credit quality, coupon, maturity and
type of issue.
PERFORMANCE CALCULATIONS
Total Return
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, 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.
The following is the formula used to calculate average annual total
return:
[OBJECT OMITTED]
P = initial payment of $1,000 T = average total return N = number of
years
ERV = ending redeemable value of the initial $1,000
Yield
Described below are yield calculations the Fund may use. Yield
quotations are expressed in annualized terms and may be quoted on a compounded
basis. Yields based on these calculations do not represent the Fund's yield for
any future period.
30-Day Yield
If the Fund invests primarily in bonds, it may quote its 30-day yield
in advertisements or in reports or other communications to shareholders. It is
calculated 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:
[OBJECT OMITTED] [OBJECT OMITTED]
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
7-Day Current and Effective Yield
If the Fund invests primarily in money market instruments, it may quote
its 7-day current yield or effective yield in advertisements or in reports or
other communications to shareholders.
The current yield is calculated by determining the net change,
excluding capital changes and income other than investment income, in the value
of a hypothetical, pre-existing account having a balance of one share at the
beginning of the 7-day base period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7).
The effective yield is based on a compounding of the current yield,
according to the following formula:
[OBJECT OMITTED]
Tax Equivalent Yield
If the Fund invests primarily in municipal bonds, it may quote in
advertisements or in reports or other communications to shareholders a tax
equivalent yield, which is what an investor would generally need to earn from a
fully taxable investment in order to realize, after income taxes, a benefit
equal to the tax free yield provided by the Fund. Tax equivalent yield is
calculated using the following formula:
[OBJECT OMITTED]
The quotient is then added to that portion, if any, of the
Fund's yield that is not tax exempt. Depending on the Fund's objective, the
income tax rate used in the formula above may be federal or a combination of
federal and state.
PRINCIPAL UNDERWRITER
EDI is the principal underwriter for the Trust and with respect to each
class of shares of the Fund. The Trust has entered into a Principal Underwriting
Agreement ("Underwriting Agreement") with EDI with respect to each class of the
Fund. EDI is a subsidiary of The BISYS Group, Inc.
EDI, as agent, has agreed to use its best efforts to find purchasers
for the shares. EDI may retain and employ representatives to promote
distribution of the shares and may obtain orders from broker-dealers, and
others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that EDI 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 EDI are at the public offering
price of the 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 Fund and the Fund reserves the right, in
its sole discretion, to reject any order received. Under the Underwriting
Agreement, the Fund is not liable to anyone for failure to accept any order.
EDI has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares. EDI 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 EDI or any other person for whose acts EDI 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 Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (I) by a vote of a
majority of the Trust's Trustees who are not interested persons of the Fund, as
defined in the 1940 Act (the "Independent Trustees"), and (ii) 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 Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. The Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in EDI's judgment, it could benefit the sales of
shares, EDI may provide to selected broker-dealers promotional materials and
selling aids, including, but not limited to, personal computers, related
software, and data files.
DISTRIBUTION EXPENSES UNDER RULE 12b-1
The Fund bears some of the costs of selling its Class A, Class B, Class
C and Institutional Service shares, as applicable, including certain
advertising, marketing and shareholder service expenses, pursuant to Rule 12b-1
of the 1940 Act. These 12b-1 fees are indirectly paid by the shareholder, as
shown by the Fund's expense table in the prospectus.
Under the Distribution Plans (each a "Plan," together, the "Plans")
that the Fund has adopted for its Class A, Class B, Class C and Institutional
Service shares, as applicable, the Fund may incur expenses for 12b-1 fees up to
a maximum annual percentage of the average daily net assets attributable to a
class, as follows:
------------------------------- ---------------
Class A 0.75%*
------------------------------- ---------------
------------------------------- ---------------
Class B 1.00%
------------------------------- ---------------
------------------------------- ---------------
Class C 1.00%
------------------------------- ---------------
------------------------------- ---------------
Institutional Service 0.75%*
------------------------------- ---------------
* Currently limited to 0.25% or less to be used exclusively as
a shareholder service fee. See the expense table in the
prospectus of the Fund in which you are interested.
Of the amounts above, each class may pay under its Plan a maximum
service fee of 0.25% to compensate organizations, which may include the Fund's
investment advisor or its affiliates, for personal services provided to
shareholders and the maintenance of shareholder accounts. The Fund may not,
during any fiscal period, pay distribution or service fees greater than the
amounts above.
Amounts paid under the Plans are used to compensate EDI pursuant to
Distribution Agreements (each an "Agreement," together, the "Agreements") that
the Fund has entered into with respect to its Class A, Class B, Class C and
Institutional Service shares, as applicable. The compensation is based on a
maximum annual percentage of the average daily net assets attributable to a
class, as follows:
----------------------------- -------------
Class A 0.25%*
----------------------------- -------------
----------------------------- -------------
Class B 1.00%
----------------------------- -------------
----------------------------- -------------
Class C 1.00%
----------------------------- -------------
----------------------------- -------------
Institutional Service 0.25%*
----------------------------- -------------
*May be lower. See the expense table in the prospectus of the
Fund in which you are interested.
The Agreements provide that EDI will use the distribution fees received
from the Fund for the following purposes:
(1) to compensate broker-dealers or other persons for distributing
Fund shares;
(2) to compensate broker-dealers, depository institutions and
other financial intermediaries for providing administrative,
accounting and other services with respect to the Fund's
shareholders; and
(3) to otherwise promote the sale of Fund shares.
The Agreements also provide that EDI may use distribution fees to make
interest and principal payments in respect of amounts that have been financed to
pay broker-dealers or other persons for distributing Fund shares. EDI may assign
its rights to receive compensation under the Plans to secure such financings.
FUNB or its affiliates may finance payments made by EDI to compensate
broker-dealers or other persons for distributing shares of the Fund.
In the event the Fund acquires the assets of another mutual fund,
compensation paid to EDI under the Agreements may be paid by the Fund's
Distributor to the acquired fund's distributor or its predecessor.
Since EDI's compensation under the Agreements is not directly tied to
the expenses incurred by EDI, the compensation received by it under the
Agreements during any fiscal year may be more or less than its actual expenses
and may result in a profit to EDI. Distribution expenses incurred by EDI in one
fiscal year that exceed the compensation paid to EDI for that year may be paid
from distribution fees received from the Fund in subsequent fiscal years.
Distribution fees are accrued daily and paid at least annually on Class
B and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B 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, while at the same time permitting EDI to
compensate broker-dealers in connection with the sale of such shares.
Under the Plans, the Treasurer of the Trust 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 Independent Trustees are
committed to the discretion of such Independent Trustees then in office.
The investment advisor may from time to time from its own funds or such
other resources as may be permitted by rules of the SEC make payments for
distribution services to EDI; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Each Plan and the Agreement will continue in effect for successive
12-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.
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, Class C and
Institutional Service shares. The Plans are designed to (i) stimulate brokers to
provide distribution and administrative support services to the Fund and holders
of Class A, Class B, Class C and Institutional Service shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class A, Class B, Class C and Institutional Service 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, Class C and Institutional Service 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,
Class C and Institutional Service shares.
In the event that the Plan or Distribution Agreement is terminated or
not continued with respect to one or more classes of the Fund, (i) no
distribution fees (other than current amounts accrued but not yet paid) would be
owed by the Fund to EDI with respect to that class or classes, and (ii) the Fund
would not be obligated to pay EDI for any amounts expended under the
Distribution Agreement not previously recovered by the EDI from distribution
services fees in respect of shares of such class or classes through deferred
sales charges.
All material amendments to any Plan or 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 Independent 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 the 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 or Distribution Agreement may be
terminated (i) by the 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 Independent Trustees, or (ii) by EDI. 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
EDI. Any Distribution Agreement will terminate automatically in the event of its
assignment. For more information about 12b-1 fees, see "Expenses" in the
prospectus and "12b-1 Fees" under "Expenses" in Part 1 of this SAI.
TAX INFORMATION
Requirements for Qualifications as a Regulated Investment Company
The Fund intends to qualify for and elect the tax treatment applicable
to regulated investment companies ("RIC") under Subchapter M of the Code, as
amended. (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, the 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; and (ii) 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, the 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 the Fund to the extent it does not meet certain
distribution requirements by the end of each calendar year. The Fund anticipates
meeting such distribution requirements.
Taxes on Distributions
Unless the Fund is a municipal bond fund, 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 the 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 taxable investment income plus net
realized short-term capital gains, if any). The Fund will include dividends it
receives from domestic corporations when the Fund calculates its gross
investment income. Unless the Fund is a municipal bond fund or U.S. Treasury or
U.S. Government money market fund, it anticipates that all or a portion of the
ordinary dividends which it pays will qualify for the 70% dividends-received
deduction for corporations. The Fund will inform shareholders of the amounts
that so qualify. If the Fund is a municipal bond fund or U.S. Treasury or U.S.
Government money market fund, none of its income will consist of corporate
dividends; therefore, none of its distributions will qualify for the 70%
dividends-received deduction for corporations.
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 (i.e.,
capital gain dividends). For federal tax purposes, shareholders must include
such capital gain dividends when calculating their net long-term capital gains.
Capital gain dividends are taxable as net long-term capital gains to a
shareholder, no matter how long the shareholder has held the shares.
Distributions by the 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 may incur
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 a tax advisor to determine the state and local tax implications
of Fund distributions.
If more than 50% of the value of the Fund's total assets at the end of
a fiscal year is represented by securities of foreign corporations and the 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 the Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on the Fund's investments.
The shareholder may 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.
Special Tax Information for Shareholders of Municipal Bond Funds
The Fund expects that substantially all of its dividends will be
"exempt interest dividends," which should be treated as excludable from federal
gross income. In order to pay exempt interest dividends, at least 50% of the
value of the Fund's assets must consist of federally tax-exempt obligations at
the close of each quarter. An exempt interest dividend is any dividend or part
thereof (other than a capital gain dividend) paid by the Fund with respect to
its net federally excludable municipal obligation interest and designated as an
exempt interest dividend in a written notice mailed to each shareholder not
later than 60 days after the close of its taxable year. The percentage of the
total dividends paid by the Fund with respect to any taxable year that qualifies
as exempt interest dividends will be the same for all shareholders of the Fund
receiving dividends with respect to such year. If a shareholder receives an
exempt interest dividend with respect to any share and such share has been held
for six months or less, any loss on the sale or exchange of such share will be
disallowed to the extent of the exempt interest dividend amount.
Any shareholder of the Fund who may be a "substantial user" (as defined
by the Code, as amended.) of a facility financed with an issue of tax-exempt
obligations or a "related person" to such a user should consult his tax advisor
concerning his qualification to receive exempt interest dividends should the
Fund hold obligations financing such facility.
Under regulations to be promulgated, to the extent attributable to
interest paid on certain private activity bonds, the Fund's exempt interest
dividends, while otherwise tax-exempt, will be treated as a tax preference item
for alternative minimum tax purposes. Corporate shareholders should also be
aware that the receipt of exempt interest dividends could subject them to
alternative minimum tax under the provisions of Section 56(g) of the Code
(relating to "adjusted current earnings").
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of the Fund will not be deductible for federal income
tax purposes to the extent of the portion of the interest expense relating to
exempt interest dividends. Such portion is determined by multiplying the total
amount of interest paid or accrued on the indebtedness by a fraction, the
numerator of which is the exempt interest dividends received by a shareholder in
his taxable year and the denominator of which is the sum of the exempt interest
dividends and the taxable distributions out of the Fund's investment income and
long-term capital gains received by the shareholder.
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 12
months is generally subject to a maximum federal income tax rate of 20% for an
individual. 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 61-day period
beginning 30 days before and ending 30 days after he or she sold or exchanged
the shares. The Code will not allow a shareholder to realize a loss on the sale
of Fund shares held by the shareholder for six months or less to the extent the
shareholder received exempt interest dividends on such shares. Moreover, 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 the 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
advisors about the applicability of the backup withholding provisions.
Other Tax Considerations
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 advisors regarding specific questions
relating to federal, state and local tax consequences of investing in shares of
the Fund.
Each shareholder who is not a U.S. person should consult his or her tax
advisor regarding the U.S. and foreign tax consequences of ownership of shares
of the 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.
<PAGE>
BROKERAGE
Brokerage Commissions
If the Fund invests in equity securities, it expects to buy and sell
them through brokerage transactions for which commissions are payable. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
If the Fund invests in fixed income securities, it expects to buy and
sell them directly from the issuer or an underwriter or market maker for the
securities. Generally, the Fund will not pay brokerage commissions for such
purchases. When the Fund buys a security from an underwriter, the purchase price
will usually 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 the 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
When buying and selling portfolio securities, the advisor seeks brokers
who can provide the most benefit to the Fund. When selecting a broker, the
investment advisor will primarily look for the best price at the lowest
commission, but in the context of the broker's:
1. ability to provide the best net financial result to the Fund;
2. efficiency in handling trades;
3. ability to trade large blocks of securities;
4. readiness to handle difficult trades;
5. financial strength and stability; and
6. provision of "research services," defined as (a) reports and
analyses concerning issuers, industries, securities and
economic factors and (b) other information useful in making
investment decisions.
The Fund may pay higher brokerage commissions to a broker providing it
with research services, as defined in item 6, above. Pursuant to Section 28(e)
of the Securities Exchange Act of 1934, this practice is permitted if the
commission is reasonable in relation to the brokerage and research services
provided. Research services provided by a broker to the investment advisor do
not replace, but supplement, the services the investment advisor is required to
deliver to the Fund. It is impracticable for the investment advisor to allocate
the cost, value and specific application of such research services among its
clients because research services intended for one client may indirectly benefit
another.
When selecting a broker for portfolio trades, the investment advisor
may also consider the amount of Fund shares a broker has sold, subject to the
other requirements described above.
If the Fund is advised by EAMC, Lieber & Company, an affiliate of EAMC
and a member of the New York and American Stock Exchanges, will to the extent
practicable effect substantially all of the portfolio transactions effected on
those exchanges for the Fund.
Simultaneous Transactions
The investment advisor makes investment decisions for the Fund
independently of decisions made for its other clients. When a security is
suitable for the investment objective of more than one client, it may be prudent
for the investment advisor to engage in a simultaneous transaction, that is, buy
or sell the same security for more than one client. The investment advisor
strives for an equitable result in such transactions by using an allocation
formula. The high volume involved in some simultaneous transactions can result
in greater value to the Fund, but the ideal price or trading volume may not
always be achieved for the Fund.
ORGANIZATION
The foregoing is qualified in its entirety by reference to the
Trust's 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
the 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. 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 "NAV"applicable to such share. Shares generally vote together as one class on
all matters. Classes of shares of the 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 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 (for such reasons as electing or removing Trustees, changing fundamental
policies, and approving advisory agreements or 12b-1 plans), 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.
Banking Laws
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered, open-end investment companies such as the Trust. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment advisor, transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. FUNB and
its affiliates are subject to, and in compliance with, the aforementioned laws
and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in FUNB and its affiliates being prevented
from continuing to perform the services required under the investment advisory
contract or from acting as agent in connection with the purchase of shares of
the Fund by its customers. If FUNB and its affiliates were prevented from
continuing to provide for services called for under the investment advisory
agreement, it is expected that the Trustees would identify, and call upon the
Fund's shareholders to approve a new investment advisor. If this were to occur,
it is not anticipated that the shareholders of the Fund would suffer any adverse
financial consequences.
INVESTMENT ADVISORY AGREEMENT
On behalf of the Fund, the Trust has entered into an investment
advisory agreement with the Fund's investment advisor (the "Advisory
Agreement"). Under the Advisory Agreement, and subject to the supervision of the
Trust's Board of Trustees, the investment advisor furnishes to the Fund (unless
the Fund is Evergreen Masters 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
investment advisor pays for all of the expenses incurred in connection with the
provision of its services.
If the Fund is Evergreen Masters Fund, the Advisory Agreement is
similar to the above except that the investment advisor selects sub-advisors
(hereinafter referred to as "Managers") for the Fund and monitors each Manager's
investment program and results. The investment advisor has primary
responsibility under the multi-manager strategy to oversee the Managers,
including making recommendations to the Trust regarding the hiring, termination
and replacement of Managers.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by the investment advisor, 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) applicable costs and
expenses under the Distribution Plan (as described above) (8) taxes and trust
fees payable to governmental agencies; (9) the cost of share certificates; (10)
fees and expenses of the registration and qualification of the Fund and its
shares with the SEC or under state or other securities laws; (11) expenses of
preparing, printing and mailing prospectuses, SAIs, 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 on matters relating to the Fund; (14) charges and
expenses of filing annual and other reports with the SEC and other authorities;
and (15) all extraordinary charges and expenses of the Fund. For information on
advisory fees paid by the Fund, see "Expenses" in Part 1 of this SAI.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the 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 cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees or by a
vote of a majority of outstanding shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
Managers (Evergreen Masters Fund only)
Evergreen Masters Fund's investment program is based upon the
investment advisor's multi-manager concept. The investment advisor allocates the
Fund's portfolio assets on an equal basis among a number of investment
management organizations - currently four in number - each of which employs a
different investment style, and periodically rebalances the Fund's portfolio
among the Managers so as to maintain an approximate equal allocation of the
portfolio among them throughout all market cycles. Each Manager provides these
services under a Portfolio Management Agreement. Each Manager has discretion,
subject to oversight by the Trustees and the investment advisor, to purchase and
sell portfolio assets consistent with the Fund's investment objectives, policies
and restrictions and specific investment strategies developed by the investment
advisor. The Fund's current Managers are EAMC, MFS Institutional Advisors, Inc.,
OppenheimerFunds, Inc. and Putnam Investment Management, Inc.
The Trust and FUNB have received an order from the SEC that permits the
investment advisor to employ a "manager of managers" strategy in connection with
its management of the Fund. The exemptive order permits the investment advisor,
subject to certain conditions, and without shareholder approval, to: (a) select
new Managers who are unaffiliated with the investment advisor with the approval
of the Trust's Board of Trustees; (b) change the material terms of the Portfolio
Management Agreements with the Managers; and (c) continue the employment of a
Manager after an event which would otherwise cause the automatic termination of
a Portfolio Management Agreement. Shareholders would be notified of any Manager
changes. Shareholders have the right to terminate arrangements with a Manager by
vote of a majority of the outstanding shares of the Fund. The order also permits
the Fund to disclose the Managers' fees only in the aggregate.
Transactions Among Advisory Affiliates
The Trust has adopted procedures pursuant to Rule 17a-7 of the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit the Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union Corporation is an investment advisor. The Rule 17a-7 Procedures also allow
the Fund to buy or sell securities from other advisory clients for whom a
subsidiary of First Union Corporation is an investment advisor. The Fund may
engage in such transaction if it is equitable to each participant and consistent
with each participant's investment objective.
MANAGEMENT OF THE TRUST
The Trust is supervised by a Board of Trustees that is responsible for
representing the interest of the shareholders. The Trustees meet periodically
throughout the year to oversee the Fund's activities, reviewing, among other
things, the Fund's performance and its contractual arrangements with various
service providers. Each Trustee is paid a fee for his or her services.
See "Expenses-Trustee Compensation" in Part 1 of this SAI.
The Trust has an Executive Committee which consists of the Chairman of
the Board, James Howell, the Vice Chairman of the Board, Michael Scofield, and
Russell Salton, each of whom is an Independent Trustee. The Executive Committee
recommends Trustees to fill vacancies, prepares the agenda for Board Meetings
and acts on routine matters between scheduled Board meetings.
Set forth below are the Trustees and officers of the Trust and their
principal occupations and 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.
<TABLE>
<CAPTION>
Name Position with Trust Principal Occupations for Last Five Years
<S> <C> <C>
Laurence B. Ashkin Trustee Real estate developer and construction consultant; and
(DOB: 2/2/28) President of Centrum Equities (real estate development) and
Centrum Properties, Inc.(real estate development).
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.(investment
(DOB: 10/23/34) advice); former Director, Executive Vice President and
Treasurer, State Street Research & Management Company
(investment advice); Director, The Andover Companies
(insurance); and Trustee, Arthritis Foundation of New
England.
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance Committee,
(DOB: 10/12/38) 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 (leather goods purveyor); former
Managing Partner, Roscommon Capital Corp.; former Chief
Executive Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates (environmental
consulting).
James S. Howell* Chairman of the Board Former Chairman of the Distribution Committee, Foundation
(DOB: 8/13/24) of Trustees for the Carolinas; and former Vice President of Lance Inc.
(food manufacturing).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief Executive Officer, Carson
(DOB: 2/14/39) Products Company (manufacturing); Director of Phoenix Total
Return Fund and Equifax, Inc. (worldwide information
management); Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund;
and former President, Morehouse College; Manufacturer,
Worldwide Information Management, Co.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc. (steel
(DOB: 7/14/39) producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham Corporation
(DOB: 8/2/39) (manufacturing); and Director of Carolina Cooperative
Credit Union.
William Walt Pettit Trustee Partner in the law firm of William Walt Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President, DHR
(DOB: 9/14/41) 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.
(communications), and J&M Cumming Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health Services;
(DOB: 6/2/47) former Managed Health Care Consultant; and former
President, Primary Physician Care.
Michael S. Scofield* Vice Chairman of the Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43) Board of Trustees
Richard J. Shima Trustee Former 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 (property/
casualty insurance), and Enhance Financial Services, Inc.
(financial guaranty insurance); 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.(investment banking, specializing in the
insurance industry)
Anthony J. Fischer** President and Treasurer Vice President/Client Services, BISYS Fund Services.
(DOB:2/10/59)
Nimish S. Bhatt*** Vice President and Vice President, Tax, BISYS Fund Services; former Assistant
(DOB: 6/6/63) Assistant Treasurer Vice President, EAMC/First Union National Bank; former
Senior Tax Consulting/Acting Manager, Investment Companies
Group, PricewaterhouseCoopers LLP, New York.
Bryan Haft*** Vice President Team Leader, Fund Administration, BISYS Fund Services.
(DOB: 1/23/65)
Senior Vice President and Assistant General Counsel, First
Michael H. Koonce Secretary Union Corporation; former Senior Vice President and General
(DOB: 4/20/60) Counsel, Colonial Management Associates, Inc.
*As of January 1, 2000, Michael S. Scofield will become Chairman of the Board and James S. Howell will become Trustee of
Emeritis.
**Address: BISYS Fund Services, 90 Park Avenue, New York, New York 10016
***Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
</TABLE>
CORPORATE AND MUNICIPAL BOND RATINGS
The Fund relies on ratings provided by independent rating services to
help determine the credit quality of bonds and other obligations the Fund
intends to purchase or already owns. A rating is an opinion of an issuer's
ability to pay interest and/or principal when due. Ratings reflect an issuer's
overall financial strength and whether it can meet its financial commitments
under various economic conditions.
If a security held by the Fund loses its rating or has its rating
reduced after the Fund has purchased it, the Fund is not required to sell or
otherwise dispose of the security, but may consider doing so.
The principal rating services, commonly used by the Fund and investors
generally, are S&P and Moody's. The Fund may also rely on ratings provided by
Fitch. Rating systems are similar among the different services. As an example,
the chart below compares basic ratings for long-term bonds. The "Credit Quality"
terms in the chart are for quick reference only. Following the chart are the
specific definitions each service provides for its ratings.
COMPARISON OF LONG-TERM BOND RATINGS
- ----------------- ----------- --------- =======================================
MOODY'S S&P FITCH Credit Quality
- ----------------- ----------- --------- =======================================
- ----------------- ----------- --------- =======================================
Aaa AAA AAA Excellent Quality (lowest risk)
- ----------------- ----------- --------- =======================================
- ----------------- ----------- --------- =======================================
Aa AA AA Almost Excellent Quality (very low risk)
- ----------------- ----------- --------- =======================================
- ----------------- ----------- --------- =======================================
A A A Good Quality (low risk)
- ----------------- ----------- --------- =======================================
- ----------------- ----------- --------- =======================================
Baa BBB BBB Satisfactory Quality (some risk)
- ----------------- ----------- --------- =======================================
- ----------------- ----------- --------- =======================================
Ba BB BB Questionable Quality (definite risk)
- ----------------- ----------- --------- =======================================
- ----------------- ----------- --------- =======================================
B B B Low Quality (high risk)
- ----------------- ----------- --------- =======================================
- ----------------- ----------- --------- =======================================
Caa/Ca/C CCC/CC/C CCC/CC/C In or Near Default
- ----------------- ----------- --------- =======================================
- ----------------- ----------- --------- =======================================
D DDD/DD/D In Default
- ----------------- ----------- ---------- =======================================
CORPORATE BONDS
LONG-TERM RATINGS
Moody's Corporate Long-Term Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the 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 some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, (i.e.
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to Caa. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Corporate Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC, CC, and
C are regarded as having significant speculative characteristics. BB indicates
the least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
- - On the day an interest and/or principal payment is due and is not paid.
An exception is made if there is a grace period and S&P believes that a
payment will be made, in which case the rating can be maintained; or
- - Upon voluntary bankruptcy filing or similar action. An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Corporate Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met.
Securities rated in this category are not investment grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitment is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e. below 50%.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC.
CORPORATE SHORT-TERM RATINGS
Moody's Corporate Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics.
- -- Leading market positions in well-established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
- -- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P Corporate Short-Term Obligation Ratings
A-1 A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial commitment
on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
- - On the day an interest and/or principal payment is due and is not paid.
An exception is made if there is a grace period and S&P believes that a
payment will be made, in which case the rating can be maintained; or
- - Upon voluntary bankruptcy filing or similar action, An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Fitch Corporate Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
MUNICIPAL BONDS
LONG-TERM RATINGS
Moody's Municipal Long-Term Bond Ratings
Aaa Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds 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 risk appear somewhat larger than the Aaa securities.
A Bonds 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 some time in the future.
Baa Bonds 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.
Ba Bonds 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.
B Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa Bonds rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
Ca Bonds rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C Bonds rated 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.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category. S&P Municipal Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC,
CC, and C are regarded as having significant speculative characteristics. BB
indicates the least degree of speculation and C the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Municipal Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met.
Securities rated in this category are not investment grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. DD designates lower recovery
potential and D the lowest.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC.
SHORT-TERM MUNICIPAL RATINGS
Moody's Municipal Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidence by many of the following characteristics.
- -- Leading market positions in well-established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
- -- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Moody's Municipal Short-Term Loan Ratings
MIG 1 This designation denotes best quality. There is strong protection by
established cash flows, superior liquidity support, or demonstrated broad-based
access to the market for refinancing.
MIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3 This designation denotes favorable quality. Liquidity and cash-flow
protection may be narrow and market access for refinancing is likely to be less
well established.
SG This designation denotes speculative quality. Debt instruments in this
category may lack margins of protection.
S&P Commercial Paper Ratings
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated B are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
S&P Municipal Short-Term Obligation Ratings
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
Fitch Municipal Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, SAI or in supplemental sales literature issued by the Fund or EDI,
and no person is entitled to rely on any information or representation not
contained therein.
The Fund's prospectus and SAI omit certain information contained in the
Trust's registration statement, which you may obtain for a fee from the SEC in
Washington, D.C.
<PAGE>
ANNUAL REPORT March 31, 1999
DAVIS INTERMEDIATE
INVESTMENT GRADE
BOND FUND
[DAVIS FUNDS LOGO]
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
Dear Shareholder,
During its latest fiscal year, the Davis Intermediate Investment Grade Bond
Fund, Inc. (formerly named the Davis High Income Fund, Inc.) successfully
completed the transition from a fund that focused primarily on high-yield, lower
quality securities to one that invests in intermediate-term, investment-grade
issues (the Fund may still invest up to 35% of total assets in high-yield, lower
quality securities). We repositioned the Fund effective October 6, 1998,
because, as stewards of our shareholders' capital, we concluded that high-yield
securities involve substantially greater risks than they once did without
providing sufficient yield compensation. Such risk/reward parameters are
incompatible with the long-term Davis investment philosophy, which seeks to
provide reliable results through full market cycles.
PERFORMANCE REVIEW
In the first quarter of 1999--the first full quarter that your Fund was invested
as an intermediate investment-grade bond fund--the Fund outperformed its
benchmark. Total return for the Class A shares declined .34%(2) (based on net
asset value), which compares favorably with the average decline of .52% for the
280 funds included in Lipper Analytical Services' intermediate investment-grade
debt category(3). For the one-year period ended March 31, 1999, the Fund's Class
A shares generated a negative total return of 10.41%(2) (based on net asset
value) compared with a positive return of 5.15% for the 258 funds in the Lipper
intermediate investment-grade debt category3. Until October 6, 1998, the Fund
was categorized as a high current yield fund, the average of which had a
negative return of 1.94% for the one-year period ended March 31, 1999, according
to Lipper(3).
Continuing the trend of recent years, the demand for high-yielding issues was so
strong throughout much of 1998 that the yield advantage these bonds typically
offer over U.S. Treasury securities largely disappeared. As a result, investors
were not being fully compensated for the additional risks of purchasing
high-yield bonds. However, the investment climate changed dramatically in August
due to very real concerns regarding the health of the worldwide economy, fears
that the United States would be pushed into recession and the threat of a global
credit crunch. Even after the Federal Reserve stepped in and cut rates in the
fall, the markets continued to be gripped by volatility and illiquidity.
The transition quarter for the Fund--October through December 1998--coincided
with the flight to quality and away from risk that occurred in this uncertain
market environment. During this period, low-quality bonds became almost illiquid
and suffered steep price declines as yields widened dramatically relative to
U.S. Treasuries. This sharp reversal amply demonstrates the risks involved in
holding these securities. Unfortunately, these were the conditions under which
we were liquidating the portfolio's high-yield investments, and that adversely
affected the Fund's results in the short run.
The yield spread between low-quality and high-quality bonds that became so wide
in the aftermath of this global financial crisis has since narrowed. But the
spread remains at levels that haven't been consistently seen since 1991 even
though our economy is in good shape. If the U.S. business cycle turns down, the
number of companies defaulting on their debt could accelerate and credit-quality
spreads could widen further, meaning high-yield bonds would trade poorly.
FINDING VALUE IN INVESTMENT-GRADE BONDS
Because the risks and volatility in the high-yield market are so much greater
today, we believe the Fund's more conservative investment focus is the
appropriate approach for our shareholders. Adhering to the fundamental Davis
Funds' principle of managing risk, our strategy is to invest with a long-term
perspective primarily in intermediate-term, investment-grade debt securities
issued by well-known, publicly traded companies that are selling at value
prices. Investment-grade securities are those rated in one of the four highest
credit-quality
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
categories by nationally recognized rating organizations or which we believe to
be of comparable credit quality. Currently, the portfolio's average credit
quality is A and its average weighted length, taking into account call features
and sinking fund provisions that could shorten the life of bonds in our
portfolio, is 6 1/2 years.
Rigorous research is a key element in our investment process. Specifically we
look for corporate bonds that have the potential for credit-quality improvement.
One sector where we are finding great value--that is, higher yields relative to
credit quality--is the financial sector. As a result, we have made significant
investments in bonds of insurance carriers, securities firms and banks. For
example, the Fund bought A-rated bonds issued by Beneficial Corporation, a
consumer financial services company that has now merged with Household
International(4). These bonds are attractive because they offer the potential
for improving credit quality as well as a significant yield advantage over
Treasury securities of comparable maturity.
The energy sector is another sector that is generally inexpensive relative to
its credit quality. As an example, the Fund purchased BBB-rated bonds issued by
Enron, an oil and gas company(4). During the period we have owned these bonds,
they have outperformed comparable U.S. Treasuries, and we feel confident they
still represent good value because we expect the company's credit quality will
continue to improve.
While we have generally shifted assets into higher quality bonds, we continue to
hold certain high-yield, lower quality securities that we believe offer good
value. For example, the Fund still holds the bonds of Alliance Imaging with a
yield to maturity of over 9%(4). We have confidence in the company's ability to
make timely payments of interest and principal on its bonds because it is a
leader in an important market niche--providing hospitals with medical image
scanning equipment on a contract basis.
Our strategy going forward is to look for bonds that have the potential for
improving credit quality and that should remain liquid even under adverse market
conditions, rather than simply buying the highest-yielding securities that are
still investment-grade. Our goal is to obtain better yields than Treasury
securities of comparable maturity without assuming undue risk. We continue to
believe the best way to help our shareholders build and preserve wealth is
through strategies designed to minimize volatility and optimize long-term
risk-adjusted returns.
Sincerely,
/s/ Shelby M.C. Davis /s/ Carolyn Spolidoro
Shelby M.C. Davis Carolyn Spolidoro
Chief Investment Officer Portfolio Manager
May 7, 1999
2
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
This Annual Report is furnished to you by Davis Distributors, LLC, which acts as
the distributor for Davis Intermediate Investment Grade Bond Fund, Inc. This
Annual Report is authorized for distribution only when accompanied or preceded
by a current prospectus of Davis Intermediate Investment Grade Bond Fund, Inc.
which contains more information about fees and expenses. Please read the
prospectus carefully before investing or sending money.
(1) Davis Intermediate Investment Grade Bond Fund's current investment policy
requires it to invest at least 65% of its total assets in investment-grade
debt securities and allows it to invest up to 35% of its total assets in
high yield, high-risk debt securities, commonly known as "junk bonds." In
the past, the Fund invested primarily in high yield, high-risk debt
securities and as of March 31, 1999, 23.02% of total assets were invested
in high yield, high-risk securities.
(2) Total return assumes reinvestment of dividends and capital gain
distributions. Prior to October 6, 1998, the Fund invested primarily in
high yield, high-risk securities. Past performance is not a guarantee of
future results. Investment return and principal value will vary so that,
when redeemed, an investor's shares may be worth more or less than when
purchased.
<TABLE>
<CAPTION>
* (Without a 4.75% Sales Charge taken into consideration for the period ended March 31, 1999)
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
FUND NAME 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
<S> <C> <C> <C> <C> <C>
Davis Intermediate Investment
Grade Bond Fund "A" (10.41)% 1.93% 4.04% 5.14% 7.89% - 05/29/80
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "B" (11.20)% 1.11% NA NA 3.52% - 12/05/94
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "C" (11.34)% NA NA NA (3.95)% - 08/12/97
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "Y" (10.16)% NA NA NA (0.51)% - 03/20/97
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
<CAPTION>
** (With a 4.75% Sales Charge or any applicable contingent deferred sales charge
taken into consideration for the period ended March 31, 1999)
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
FUND NAME 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
<S> <C> <C> <C> <C> <C>
Davis Intermediate Investment
Grade Bond Fund "A" (14.71)% 0.30% 3.02% 4.63% 7.61% - 05/29/80
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "B" (14.51)% 0.30% NA NA 3.19% - 12/05/94
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "C" (12.17)% NA NA NA (3.95)% - 08/12/97
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "Y" (10.16)% NA NA NA (0.51)% - 03/20/97
- - ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
(3) Lipper Analytical Services rankings are based on total returns but do not
consider sales charges.
</TABLE>
3
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
(4) Davis Intermediate Investment Grade Bond Fund's portfolio securities as of
March 31, 1999, including the securities discussed in this letter, are
listed in the Schedule of Investments. Portfolio holdings are subject to
change.
Standard & Poor's Corporate Bond Ratings - 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.
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.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
4
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
COMPARISON OF CLASS A SHARES OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
WITH SALOMON BROTHERS LONG-TERM HIGH-YIELD INDEX AND MERRILL LYNCH U.S.
CORPORATES, 5-10 YEARS INDEX
================================================================================
Average Annual Total Return for the Periods ended March 31, 1999.
---------------------------------------------------------
CLASS A SHARES (This calculation includes an initial
sales charge of 4 3/4%.)
One Year.................................. (14.71)%
Five Years................................ 3.02%
Ten Years................................. 4.63%
---------------------------------------------------------
$10,000 invested over ten years. Let's say you invested $10,000 in Davis
Intermediate Investment Grade Bond Fund, Class A ("DIIGBF-A") shares on March
31, 1989 and paid a 4 3/4% sales charge. As the chart shows, by March 31, 1999
the value of your investment would have grown to $15,731 - a 57.31% increase on
your initial investment. For comparison, the Salomon Brothers Long-Term High
Yield Index ("Salomon") and the Merrill Lynch U.S. Corporates, 5-10 Years Index
are also presented on the chart below.
Merrill Lynch Salomon DIIGBF-A
- -------------------------------------------------------------------------------
3/31/89 $10,000 $10,000 $9,525
3/31/90 $11,168 $9,150 $8,414
3/31/91 $12,479 $10,780 $7,966
3/31/92 $14,207 $13,625 $9,761
3/31/93 $16,489 $16,068 $11,596
3/31/94 $17,053 $17,448 $12,905
3/31/95 $17,988 $18,772 $13,511
3/31/96 $20,274 $22,327 $14,852
3/31/97 $21,247 $24,274 $15,905
3/31/98 $23,829 $29,672 $17,559
3/31/99 $25,284 $31,614 $15,731
Salomon Brothers Long-Term High-Yield Index and the Merrill Lynch U.S.
Corporates, 5-10 Years Index are unmanaged indexes and have no specific
investment objective. The indexes used include interest reinvested, but does not
take into account any sales charge.
The performance data for Davis Intermediate Investment Grade Bond Fund, Inc.
contained in this report represents past performance and assumes that all
distributions were reinvested, and should not be considered as an indication of
future performance from an investment in the Fund today. The investment return
and principal value will fluctuate so that shares may be worth more or less than
their original cost when redeemed.
5
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
COMPARISON OF CLASS B SHARES OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
WITH SALOMON BROTHERS LONG-TERM HIGH-YIELD INDEX AND MERRILL LYNCH U.S.
CORPORATES, 5-10 YEARS INDEX
================================================================================
Average Annual Total Return for the Periods ended March 31, 1999.
---------------------------------------------------------
CLASS B SHARES (This calculation includes any
applicable contingent deferred sales charge.)
One Year.................................. (14.51)%
Life of Class (December 5, 1994 through
March 31, 1999) .........................3.19%
---------------------------------------------------------
$10,000 invested at inception. Let's say you invested $10,000 in Davis
Intermediate Investment Grade Bond Fund, Class B ("DIIGBF-B") shares on December
5, 1994 (inception of Class). As the chart shows, by March 31, 1999 the value of
your investment (less applicable contingent deferred sales charges) would have
grown to $11,451 - a 14.51% increase on your initial investment. For comparison,
the Salomon Brothers Long-Term High Yield Index ("Salomon") and the Merrill
Lynch U.S. Corporates, 5-10 Years Index are also presented on the chart below.
Merrill Lynch Salomon DIIGBF-B
- -------------------------------------------------------------------------------
12/5/94 $10,000 $10,000 $10,000
1995 $10,619 $10,945 $10,339
1996 $11,968 $13,018 $11,237
1997 $12,542 $14,153 $11,940
1998 $14,066 $17,301 $13,079
1999 $14,925 $18,433 $11,451
Salomon Brothers Long-Term High-Yield Index and the Merrill Lynch U.S.
Corporates, 5-10 Years Index are unmanaged indexes and have no specific
investment objective. The indexes used include interest reinvested, but does not
take into account any sales charge.
The performance data for Davis Intermediate Investment Grade Bond Fund, Inc.
contained in this report represents past performance and assumes that all
distributions were reinvested, and should not be considered as an indication of
future performance from an investment in the Fund today. The investment return
and principal value will fluctuate so that shares may be worth more or less than
their original cost when redeemed.
6
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
COMPARISON OF CLASS C SHARES OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
WITH SALOMON BROTHERS LONG-TERM HIGH-YIELD INDEX AND MERRILL LYNCH U.S.
CORPORATES, 5-10 YEARS INDEX
================================================================================
Average Annual Total Return for the Periods ended March 31, 1999.
---------------------------------------------------------
CLASS C SHARES (This calculation includes any
applicable contingent deferred sales charge.)
One Year.................................. (12.17)%
Life of Class (August 12, 1997 through
March 31, 1999)...................... (3.95)%
---------------------------------------------------------
$10,000 invested at inception. Let's say you invested $10,000 in Davis
Intermediate Investment Grade Bond Fund, Class C ("DIIGBF-C") shares on August
12, 1997. As the chart shows, by March 31, 1999 the value of your investment
would have been $9,363 - a (6.37%) decrease on your initial investment. For
comparison, the Salomon Brothers Long-Term High Yield Index ("Salomon") and the
Merrill Lynch U.S. Corporates, 5-10 Years Index are also presented on the chart
below.
Merrill Lynch Salomon DIIGBF-C
- -------------------------------------------------------------------------------
8/12/97 $10,000 $10,000 $10,000
1998 $10,627 $10,996 $10,561
1999 $11,276 $11,715 $9,363
Salomon Brothers Long-Term High-Yield Index and the Merrill Lynch U.S.
Corporates, 5-10 Years Index are unmanaged indexes and have no specific
investment objective. The indexes used include interest reinvested, but does not
take into account any sales charge.
The performance data for Davis Intermediate Investment Grade Bond Fund, Inc.
contained in this report represents past performance and assumes that all
fdistributions were reinvested, and should not be considered as an indication of
future performance from an investment in the Fund today. The investment return
and principal value will fluctuate so that shares may be worth more or less than
their original cost when redeemed.
7
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
COMPARISON OF CLASS Y SHARES OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
WITH SALOMON BROTHERS LONG-TERM HIGH-YIELD INDEX AND MERRILL LYNCH U.S.
CORPORATES, 5-10 YEARS INDEX
================================================================================
Average Annual Total Return for the Periods ended March 31, 1999.
---------------------------------------------------------
CLASS Y SHARES
One Year.................................. (10.16)%
Life of Class (March 20, 1997 through
March 31, 1999)...................... (0.51)%
---------------------------------------------------------
$10,000 invested at inception. Let's say you invested $10,000 in Davis
Intermediate Investment Grade Bond Fund, Class Y ("DIIGBF-Y") shares on March
20, 1997. As the chart shows, by March 31, 1999 the value of your investment
would have been $9,898 - a (1.02%) decrease on your initial investment. For
comparison, the Salomon Brothers Long-Term High Yield Index ("Salomon") and the
Merrill Lynch U.S. Corporates, 5-10 Years Index are also presented on the chart
below.
Merrill Lynch Salomon DIIGBF-Y
- -------------------------------------------------------------------------------
3/20/97 $10,000 $10,000 $10,000
1997 $9,932 $10,075 $9,958
1998 $11,139 $12,315 $11,017
1999 $11,819 $13,121 $9,898
Salomon Brothers Long-Term High-Yield Index and the Merrill Lynch U.S.
Corporates, 5-10 Years Index are unmanaged indexes and have no specific
investment objective. The indexes used include interest reinvested, but does not
take into account any sales charge.
The performance data for Davis Intermediate Investment Grade Bond Fund, Inc.
contained in this report represents past performance and assumes that all
distributions were reinvested, and should not be considered as an indication of
future performance from an investment in the Fund today. The investment return
and principal value will fluctuate so that shares may be worth more or less than
their original cost when redeemed.
8
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
PORTFOLIO HOLDINGS AS OF MARCH 31, 1999
================================================================================
PORTFOLIO MAKEUP (% OF FUND NET ASSETS)
- - ----------------------------------------
Cash, Common Stock, Preferred Stock,
Short-term Bonds, Warrants & Other
Assets 6.2%
Bonds & Notes 93.8%
SECTOR WEIGHTINGS (% OF BONDS/NOTES)
- - ------------------------------------
Hotels 3.3%
Automotive 4.3%
Communication 3.7%
Insurance 12.1%
Mortgage Backed Securities 2.4%
Oil & Gas 8.7%
Food Stores 3.1%
Health Services 3.0%
Other 10.7%
Security & Commodity Brokers 9.2%
Depository Institutions 4.5%
Electric, Gas and Sanitary Services 8.1%
Non Depository Institutions 3.3%
Single Family Mortgage 8.8%
Government Securities 8.2%
Executive, Legislative and General 6.6%
<TABLE>
<CAPTION>
Top 10 Holdings % of Fund Net Assets
- - -----------------------------------------------------------------------------------------------------------
<S> <C>
Paine Webber Group, Inc., Sr. Notes, Series C, 6.73%, 04/03/08 4.70%
BankBoston, N.A., Sub. Notes, 7.00%, 09/15/07 4.24%
Enron Corp., Notes, 6.725%, 11/17/08 4.12%
Liberty Financial Co., Notes, 6.75%, 11/15/08 4.09%
ReliaStar Financial Corp., Notes, 6.50%, 11/15/08 4.08%
Ryder System Inc., Notes, Series P, 6.60%, 11/15/05 3.99%
Lehman Brothers Holdings, Notes, 6.625%, 02/05/06 3.97%
Potomac Capital Invest., Notes, Series D, 6.62%, 12/05/05 3.93%
Freddie Mac, 5.54%, 10/27/08 3.88%
Federal Home Loan Bank, 5.54%, 10/15/08 3.86%
</TABLE>
9
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
- - --------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - (83.82%)
<S> <C> <C>
AGRICULTURAL PRODUCTION LIVESTOCK - (0.82%)
$ 500,000 Iowa Select Farms, L.P., Sr. Sub. Notes, 10.75%, 12/01/05 (b)................ $ 403,125
-------------
AMUSEMENT AND RECREATION SERVICES - (1.51%)
58,000 Discovery Zone Inc., Units, 13.50%, 05/01/02 ++ (c).......................... 23,490
165,000 Lancaster, TX, Combined Tax & Golf Course Park Rev. Bds., Series B,
Certificates of Obligation, MBIA Insured, 9.375%, 08/01/02................. 165,561
190,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease Rev. Bds.
(Arcade Ltd. Partnership Prj.) Series `92, 8.50%, 08/01/02................. 199,375
50,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease Rev. Bds.
(Arcade Ltd. Partnership Prj.) Series `92, 9.50%, 08/01/14................. 53,564
984,599 Underwater World Mall of America, Sr. Rev. Bds., 13.75%, 03/01/02++ (c)...... 302,764
-------------
744,754
-------------
AUTO REPAIR, SERVICES AND PARKING - (3.99%)
2,000,000 Ryder System Inc., Notes, Series P, 6.60%, 11/15/05.......................... 1,972,958
-------------
BUSINESS SERVICES - (1.22%)
750,000 Nationwide Credit, Inc., Sr. Notes, 10.25%, 01/15/08......................... 581,250
670,700 Technical Equipment Leasing Corp., Jr. Sub. Deb., Series A, 18.375%,
04/01/96++ (c)............................................................. 20,121
-------------
601,371
-------------
CHEMICALS AND ALLIED PRODUCTS - (1.81%)
863,000 Glycomed Inc., Conv. Sub. Deb., 7.50%, 01/01/03.............................. 683,928
500,000 Trikem S.A., 10.625%, 07/24/07 (c)........................................... 208,750
-------------
892,678
-------------
COMMUNICATION - (3.47%)
250,000 Nextlink Communications LLC, Sr. Notes, 12.50%, 04/15/06..................... 276,250
500,000 Pegasus Media & Communications, Sr. Sub. Notes, Series B,
12.50%, 07/01/05........................................................... 560,000
329,000 SFX Broadcasting Inc., Sr. Sub. Notes, Series B, 10.75%, 05/15/06............ 365,190
500,000 Sinclair Broadcast Group, Sr. Sub. Notes, 9.00%, 07/15/07.................... 511,250
-------------
1,712,690
-------------
DEPOSITORY INSTITUTIONS - (4.24%)
2,000,000 BankBoston, N.A., Sub. Notes, 7.00%, 09/15/07................................ 2,095,802
-------------
EDUCATIONAL SERVICES - (0.63%)
2,460,000 Wagner College, NY, G.O. Capital Appreciation Bds.,
Zero Cpn., 10/01/22 (e).................................................... 308,976
-------------
ELECTRIC, GAS, AND SANITARY SERVICES - (7.57%)
130,000 Commerce Refuse to Energy Auth., Taxable Ref. Rev. Bds., '90 Series,
10.50%, 07/01/00........................................................... 132,972
500,000 Midland Funding Corporation II, Sub. Secured Lease, 13.25%, 07/23/06......... 622,008
498,978 Panda Funding, Series A-1, 11.625%, 08/20/12................................. 511,452
2,000,000 Potomac Capital Invest., Notes, Series D, 6.62%, 12/05/05 (b)................ 1,941,846
</TABLE>
10
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
- - --------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - CONTINUED
<S> <C> <C>
ELECTRIC, GAS, AND SANITARY SERVICES - CONTINUED
$ 500,000 Statia Terminals International CDA Inc., 1st Mtg. Notes, Series B, 11.75%,
11/15/03................................................................... $ 535,000
-------------
3,743,278
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - (0.05%)
558,273 Comptronix Corp., Conv. Sub. Deb., 6.75%, 03/01/02++ (c)..................... 23,447
-------------
EXECUTIVE, LEGISLATIVE AND GENERAL - (6.15%)
670,000 Adams Cnty., CO, IDR Series A Pool Gtd. - Executive Life, 9.00%,
11/01/96+.................................................................. 6,700
1,000,000 Camden Cnty., GA, JT Dev. Auth., Taxable Rev. Bds., 7.10%, 12/01/12......... 1,049,450
620,000 Harrisburg, PA, G.O. Capital Appreciation Bds., Zero Cpn., 04/01/13 (e)...... 243,071
640,000 Los Angeles County, CA, Pension Obligation, Capital Appreciation Bds.,
Series C, MBIA Insured, Zero Cpn., 06/30/07 (e)............................ 382,118
100,000 Louisiana St. Agriculture Fin. Auth., Series `86A, 8.80%, 10/01/96++......... 1,000
20,000 Nebraska Invst. Fin. Auth., Agriculture Rev. Bds., Series A, Gtd. Executive
Life, 8.34%, 11/01/93++.................................................... 200
2,500,000 New Jersey Econ. Dev. Auth., Taxable Rev. Bds., Zero Cpn., 02/15/19 (e)...... 529,000
1,930,000 Orange County, CA, Pension Obligation, Capital Appreciation Bds.,
Series A, Zero Cpn., 09/15/13 (e).......................................... 735,870
315,000 York, PA, G.O. Capital Appreciation Bds., Series A,
Zero Cpn., 02/01/17 (e).................................................... 92,333
-------------
3,039,742
-------------
FOOD STORES - (2.93%)
690,000 Kroger Co., Lease Cert., 6.00%, 04/01/03.................................... 684,624
1,000,000 Southland Corp., Sub. Deb., Ser. B, 4.00%, 06/15/04.......................... 765,000
-------------
1,449,624
-------------
HEALTH SERVICES - (2.84%)
700,000 Connecticut St. Health & Edl. Facs. (Sheriden Woods Ctr.), Taxable Rev.
Bds., 8.73%, 11/01/17...................................................... 781,760
215,000 Illinois HFA Rev. Bds., Series C, MBIA Insured, 10.30%, 08/15/03............. 217,776
130,000 San Bernadino CA Assd. Cmntys. Fing. Auth. Health Care Ref. & ...............
Improvement Bds. (Granada) Series B, 8.80%, 05/01/17....................... 124,488
275,000 Utah St. Hsg. Fin. Agy. Taxable RHA Cmnty. Services, Series B, 9.00%,
07/01/02................................................................... 279,648
-------------
1,403,672
-------------
HOTELS AND OTHER LODGING PLACES - (3.05%)
1,448,000 Courtyard By Marriott II, L.P., Sr. Secured Notes, Series B,
10.75%, 02/01/08........................................................... 1,509,540
-------------
INDUSTRIAL MACHINERY AND EQUIPMENT - (0.96%)
500,000 Axiohm Transaction Solutions Inc., Sr. Sub. Notes, 9.75%, 10/01/07........... 456,250
1,950,000 JTS Corporation, Conv. Sub. Deb., 5.25%, 04/29/02++.......................... 19,500
-------------
475,750
-------------
</TABLE>
11
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
- - --------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - CONTINUED
<S> <C> <C>
INSTRUMENTS AND RELATED PRODUCTS - (0.50%)
$ 250,000 Alliance Imaging, Inc., Sr. Sub. Notes, 9.625%, 12/15/05..................... $ 248,750
-------------
INSURANCE CARRIERS - (11.35%)
1,500,000 American General Finance, Sr. Notes, Series D, 7.12%, 08/24/05............... 1,570,073
2,000,000 Liberty Financial Co., Notes, 6.75%, 11/15/08................................ 2,020,686
2,000,000 ReliaStar Financial Corp., Notes, 6.50%, 11/15/08............................ 2,016,500
-------------
5,607,259
-------------
JUSTICE, PUBLIC ORDER AND SAFETY - (0.53%)
250,000 Oklahoma City, OK, Airport Trust Taxable Rev. Bds. (Fed. Bureau of
Prisons), 8.40%, 11/01/14.................................................. 263,573
-------------
MULTI-FAMILY FAMILY MORTGAGE - (0.84%)
195,000 El Paso Hsg. Fin. Corp., Multi-Fam. Res. Loan Program, Securitized Multi-
fam. Hsg. Rev. Bds., Series '86A, 8.88%, 10/15/96++........................ 1,950
385,000 Illinois Hsg. Dev. Auth., Taxable Multifam. Program, Series 8, 8.52%,
09/01/31................................................................... 411,607
100,000 Louisiana Hsg. Fin. Agy., Taxable Home Mtg., Series `86A, 8.61%,
08/01/49++................................................................. 1,000
-------------
414,557
-------------
NONDEPOSITORY INSTITUTIONS - (3.09%)
1,500,000 Beneficial Corp., Sr. Notes, Series H, 6.85%, 09/11/04....................... 1,524,858
-------------
OIL AND GAS EXTRACTION - (6.18%)
2,000,000 Enron Corp., Notes, 6.725%, 11/17/08......................................... 2,035,600
1,000,000 Gerrity Oil & Gas Corp., Sr. Sub. Notes, 11.75%, 07/15/04.................... 1,021,250
-------------
3,056,850
-------------
PAPER AND ALLIED PRODUCTS - (0.06%)
2,000,000 Crown Packaging Enterprises, Ltd., Sr. Secured Disc. Notes, 0%/14.00%,
08/01/06 (c) (d)........................................................... 30,000
-------------
PETROLEUM AND COAL PRODUCTS - (1.97%)
250,000 Clark R & M Inc., Sr. Notes, 8.375%, 11/15/07................................ 224,063
250,000 Clark R & M Inc., Sr. Sub. Notes, 8.875%, 11/15/07........................... 211,250
500,000 Deeptech International, Inc., Sr. Secured Notes, 12.00%, 12/15/00............ 540,000
-------------
975,313
-------------
PRIMARY METAL INDUSTRIES - (0.19%)
100,000 EES Coke Battery Inc., Sr. Secured Notes, Series B, 9.382%, 04/15/07 (c)..... 94,613
-------------
SECURITY AND COMMODITY BROKERS - (8.66%)
2,000,000 Lehman Brothers Holdings, Notes, 6.625%, 02/05/06............................ 1,961,300
2,350,000 Paine Webber Group, Inc., Sr. Notes, Series C, 6.73%, 04/03/08.............. 2,321,121
-------------
4,282,421
-------------
SINGLE FAMILY MORTGAGE - (8.23%)
1,070,000 Adams Cnty., CO, Sngl. Fam. Taxable Mtg. Rev. Bds., Capital Appreciation,
Zero Cpn., 06/01/12 (e).................................................... 369,150
</TABLE>
12
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
- - --------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - CONTINUED
<S> <C> <C>
SINGLE FAMILY MORTGAGE - CONTINUED
$ 260,000 California Hsg. Fin. Agy. Rev. Bds., Taxable Home Mtg., Series D,
9.30%, 02/01/26............................................................ $ 267,592
700,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series G,
7.625%, 05/15/21........................................................... 728,700
75,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series H,
7.875%, 11/15/26........................................................... 79,868
675,480 Memphis, TN Hlth. Educ. & Hsg. Fac. Brd., Multi Fam. Hsg. Rev.
Securitized, Series '86A, 8.68%, 09/15/96+................................. 6,755
115,000 Missouri St., Hsg. Dev. Cmnty., Multi Fam. Hsg. Rev. Bds., FHA Insured
Mtg. Loans, 9.25%, 12/01/30................................................ 117,657
440,000 New York St. HFA Rev. Multi Fam. Mtg. Series B, Sonyma Prg.
Insurance, 8.875%, 08/15/14................................................ 476,784
318,137 Polk Cnty., FL, HFA REMIC Collateralized Mtg. Bds., Series 1, CL 2-A,
9.55%, 01/15/11............................................................ 327,490
807,000 The Southeast TX Hsg. Fin. Corp. Securitized Multi Fam. Hsg. Rev. Bds
Series '86A, 8.60%, 09/01/96+.............................................. 8,070
1,625,000 Texas St., Dept. Hsg. & Comm. Taxable Mtg. Rev. Ref. Bds., Jr. Lien,
Ser. B, 9.50%, 03/01/16.................................................... 1,685,775
-------------
4,067,841
-------------
TRANSPORTATION EQUIPMENT - (0.81%)
500,000 Simula Inc., Sr. Conv. Sub. Notes, Series C, 10.00%, 09/15/99 (c)............ 400,000
-------------
WATER TRANSPORTATION - (0.17%)
85,000 Galveston Cnty., TX, Wtr. Auth., Canal Sys. Contract Wtr. Rev. Bds.,
AMBAC Insured, 9.60%, 07/01/99............................................. 85,305
-------------
TOTAL CORPORATE AND TAXABLE MUNICIPAL BONDS
AND NOTES - (identified cost $45,867,895).................... 41,428,747
-------------
GOVERNMENT SECURITIES - (7.74%)
2,000,000 Federal Home Loan Bank, 5.54%, 10/15/08...................................... 1,907,900
2,000,000 Freddie Mac, 5.54%, 10/27/08................................................ 1,915,920
-------------
TOTAL GOVERNMENT SECURITIES - (identified cost $4,000,000)........... 3,823,820
-------------
MORTGAGE BACKED SECURITIES - (2.25%)
142,643 Chase Mortgage Finance Corp., Series '93-G-A1, REMIC, 7.00%, 04/25/01........ 143,663
24,044 CTS Home Equity Loan Trust, Asset Backed Certificates, Series `91-1-A,
8.80%, 01/15/06............................................................ 24,013
55,377 Fannie Mae, REMIC, Series `91-38, CL SA, Inverse Support Tranche,
10.1862%, 04/25/21......................................................... 59,428
</TABLE>
13
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL/SHARES/UNITS (NOTE 1)
- - ---------------------- --------
MORTGAGE BACKED SECURITIES - CONTINUED
<S> <C> <C>
$ 134,395 First Nationwide Trust, Series '89-AR4-1, 9.50%, 09/25/19.................... $ 133,998
178,758 Freddie Mac, CL 1567 A, 5.40%, 08/15/23...................................... 165,654
293,852 Freddie Mac, REMIC, CL 1668 F, 7.5875%, 02/15/14............................. 303,486
102,694 Manufacturers Hanover Mortgage Corporation, Mtg. Pass-Through
Certificates, Series A, 11.50%, 04/20/15................................... 106,324
179,000 The Prudential Mortgage Securities Company, Mtg. Pass-Through
Certificates, Series '92-038, CL A-8, Fixed Rate, 6.95%, 11/25/22.......... 177,211
-------------
TOTAL MORTGAGE BACKED SECURITIES
- (identified cost $1,047,926)............................... 1,113,777
-------------
PREFERRED STOCKS - (0.07%)
2,100 Westmoreland Coal Co., Dep. Shares Conv. Pfd., Series A, 8.50%++ ......... 37,013
-------------
TOTAL PREFERRED STOCKS - (identified cost $27,405)................... 37,013
-------------
COMMON STOCKS - (0.15%)
135,951 Canyon Resources Corporation*................................................ 29,739
260,252 Crown Packaging Enterprises Ltd.*............................................ 2,603
1,161 Nextel Communications Inc., Class A*......................................... 42,522
-------------
TOTAL COMMON STOCKS - (identified cost $391,436)..................... 74,864
-------------
WARRANTS - (0.12%)
869 Empire Gas Corp., expire 07/15/04 (c)........................................ 1,629
500 Primus Telecommunications, expire 08/01/04 (c)............................... 7,500
100 Spanish Broadcasting Systems Inc., expire 06/30/99 (c)....................... 49,000
-------------
TOTAL WARRANTS - (identified cost $18,291)............................ 58,129
-------------
SHORT TERM - (4.17%)
$ 2,060,000 State Street Bank and Trust Co. Repurchase Agreement, 4.95%, 04/01/99,
dated 03/31/99, repurchase value of $2,060,283 (collateralized by
$2,115,000 par value Federal Home Loan Bank, 5.14%, 01/29/01,
market value $2,126,188) - (identified cost $2,060,000).................... 2,060,000
-------------
TOTAL INVESTMENTS (identified cost $53,412,953) - (98.32%)(a)................ 48,596,350
OTHER ASSETS LESS LIABILITIES - (1.68%)....................................... 832,537
-------------
NET ASSETS - (100%)............................................................ $ 49,428,887
=============
</TABLE>
+ These securities are in default but have made partial payments.
++ These securities are in default and are not currently paying interest or
dividends. These securities amounted to $430,485 or 0.87% of the Fund's net
assets as of March 31, 1999.
*Non-income producing security.
14
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
(a) Aggregate cost for Federal income tax purposes is $53,412,953.
(b) These securities are subject to Rule 144A. The Board of Directors of the
Fund has determined that there is sufficient liquidity in these securities to
realize current valuations. These securities amounted to $2,344,971 or 4.74% of
the Fund's net assets as of March 31, 1999.(c)Restricted or illiquid securities.
See Note 6 of the Notes to Financial Statements. (d) Represents a step bond: a
zero coupon bond that converts to a fixed or variable interest rate at a
designated future date.
(c) Restricted or illiquid securities. See Note 6 of the Notes to Financial
Statements.
(d) Represents a step bond: a zero coupon bond that converts to a fixed or
variable interest rate at a designated future date.
(e) As of March 31, 1999, zero coupon bonds represented $2,660,518 or 5.38% of
the Fund's net assets. Because zero coupon bonds pay no interest and compound
semi-annually at the fixed rate at the time of reissuance, their value is
generally more volatile than the value of other debt securities.
At March 31, 1999, unrealized appreciation (depreciation) of securities for
Federal income tax purposes was as follows:
Unrealized appreciation......................................... $ 915,610
Unrealized depreciation......................................... (5,732,213)
--------------
Net unrealized depreciation..................................... $ (4,816,603)
==============
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value (including repurchase agreements of $2,060,000)
(identified cost $53,412,953) (See accompanying Schedule of Investments)............ $ 48,596,350
Cash ................................................................................... 39,905
Interest receivable..................................................................... 860,986
Prepaid expenses........................................................................ 31,740
---------------
Total assets................................................................... 49,528,981
---------------
LIABILITIES:
Payable for capital stock reacquired.................................................... 7,572
Accrued expenses........................................................................ 92,522
---------------
Total liabilities.............................................................. 100,094
---------------
NET ASSETS (NOTE 7).......................................................................... $ 49,428,887
===============
CLASS A SHARES
Net assets.............................................................................. $ 20,028,904
Shares outstanding...................................................................... 5,068,240
Net asset value and redemption price per share.......................................... $ 3.95
=========
Maximum offering price per share (100/95.25 of $3.95)*.................................. $ 4.15
=========
CLASS B SHARES
Net assets.............................................................................. $ 21,522,145
Shares outstanding...................................................................... 5,491,330
Net asset value, offering and redemption price per share................................ $ 3.92
=========
CLASS C SHARES
Net assets.............................................................................. $ 4,055,058
Shares outstanding...................................................................... 1,027,900
Net asset value, offering and redemption price per share................................ $ 3.94
=========
CLASS Y SHARES
Net assets.............................................................................. $ 3,822,780
Shares outstanding...................................................................... 962,492
Net asset value, offering and redemption price per share................................ $ 3.97
=========
NET ASSETS CONSIST OF:
Par value of shares of capital stock.................................................... $ 627,498
Additional paid-in capital.............................................................. 71,993,155
Net unrealized depreciation of investments.............................................. (4,816,603)
Accumulated net realized loss on investments............................................ (18,375,163)
---------------
Net assets.......................................................................... $ 49,428,887
===============
* On purchases of $100,000 or more, the offering price is reduced.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
STATEMENT OF OPERATIONS
For the year ended March 31, 1999
================================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C> <C>
Income:
Interest............................................................ $ 5,370,356
-----------
Expenses:
Management fees (Note 3)............................ 416,822
Custodian fees...................................... 30,012
Transfer agent fees
Class A........................................ 69,270
Class B........................................ 56,089
Class C........................................ 8,894
Class Y........................................ 1,525
Audit fees.......................................... 17,850
Legal fees.......................................... 15,601
Accounting fees (Note 3)............................ 6,000
Reports to shareholders............................. 57,320
Directors' fees and expenses........................ 21,124
Registration and filing fees (Note 3)............... 62,788
Miscellaneous....................................... 1,056
Payments under distribution plan (Note 4):
Class A........................................ 59,974
Class B........................................ 242,223
Class C........................................ 40,965
-------------
Total expenses............................................. 1,107,513
Expenses paid indirectly (Note 5) ........................ (1,175)
-----------
Net expenses............................................... 1,106,338
-----------
Net investment income.................................. 4,264,018
-----------
REALIZED AND UNREALIZED LOSS ON I NVESTMENTS:
Net realized loss from investment transactions.......................... (8,546,263)
Net increase in unrealized depreciation of investments.................. (3,486,498)
-----------
Net realized and unrealized loss on investments................ (12,032,761)
-----------
Net decrease in net assets resulting from operations........... (7,768,743)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31,
OPERATIONS: ------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net investment income................................................ $ 4,264,018 $ 4,442,825
Net realized gain (loss) from investment transactions................ (8,546,263) 1,600,540
Net change in unrealized appreciation (depreciation) of investment.. (3,486,498) 66,318
--------------- ---------------
Net increase (decrease) in net assets resulting from
operations............................................ (7,768,743) 6,109,683
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A........................................................ (2,252,956) (3,217,912)
Class B........................................................ (1,473,461) (913,850)
Class C........................................................ (249,000) (60,594)
Class Y........................................................ (288,601) (250,469)
Return of capital
Class A........................................................ (412,926) (760,545)
Class B........................................................ (206,334) (214,746)
Class C........................................................ (19,154) (19,800)
Class Y........................................................ (34,481) (60,064)
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets resulting from capital share
transactions (Note 7)
Class A........................................................ (17,677,428) (4,269,303)
Class B........................................................ 4,670,052 11,270,788
Class C........................................................ 2,959,671 1,948,959
Class Y........................................................ 385,554 4,120,479
---------------- ---------------
Total increase (decrease) in net assets.............................. (22,367,807) 13,682,626
NET ASSETS:
Beginning of year.................................................... 71,796,694 58,114,068
--------------- ---------------
End of year.......................................................... $ 49,428,887 $ 71,796,694
=============== ===============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
18
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
For the year ended March 31, 1999
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Davis Intermediate Investment Grade Bond Fund, Inc. (formerly Davis High
Income Fund, Inc.) (the Fund) is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. Its
primary objective is to achieve a high level of current income. The Fund also
seeks capital growth so long as such objective is consistent with its primary
objective. Until October 6, 1998, the Fund invested primarily in high yield,
high risk, low rated and unrated bonds commonly referred to as "junk bonds."
Such securities are speculative and subject to greater market fluctuations and
risk of loss of income and principal than higher rated bonds. Effective October
6, 1998, the Fund invests primarily in high-quality, investment-grade bonds. The
Fund offers shares in four classes, Class A, Class B, Class C and Class Y. The
Class A shares are sold with a front-end sales charge and the Class B and Class
C shares are sold at net asset value and may be subject to a contingent deferred
sales charge upon redemption. Class Y shares are sold at net asset value and are
not subject to any contingent deferred sales charge. Class Y shares are only
available to certain qualified investors. Income, expenses (other than those
attributable to a specific class) and gains and losses are allocated daily to
each class of shares based upon the relative proportion of net assets
represented by each class. Operating expenses directly attributable to a
specific class are charged against the operations of that class. All classes
have identical rights with respect to voting (exclusive of each Class'
distribution arrangement), liquidation and distributions. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
SECURITY VALUATION.
Portfolio securities may be valued on the basis of prices provided by an
independent pricing service or broker when such prices are believed to reflect
the fair market value of such securities. (Pricing agents generally take into
account institutional size trading in similar groups of securities). Securities
not priced in this manner will be priced at the last published sales price if
traded on that day and, if not traded, at the mean between the most recent
quoted bid and asked prices provided by investment dealers. The pricing service
and valuation procedures are reviewed and subject to approval by the Board of
Directors. If no quotations are available, securities will be valued at fair
value as determined in good faith by the Board of Directors. Short-term
obligations are valued at amortized cost, which approximates value.
FEDERAL INCOME TAXES.
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to shareholders. Therefore, no provision
for federal income or excise tax is required. At March 31, 1999, the Fund had
approximately $18,375,000 of capital loss carryovers available to offset future
capital gains, if any, which expire between 2000 and 2008.
SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME.
Securities transactions are accounted for on the trade date (date the
order to buy or sell is executed) with realized gain or loss on the sale of
securities being determined based upon identified cost. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. Discounts and premiums on debt securities are amortized over the lives of
the respective securities in accordance with the requirements of the Internal
Revenue Code.
19
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS.
Dividends and distributions to shareholders are recorded on the
ex-dividend date. The character of the distributions made during the year from
net investment income may differ from its ultimate characterization for federal
income tax purposes. Also, due to the timing of distributions, the fiscal year
in which amounts are distributed may differ from the fiscal year in which income
or gain was recorded by the Fund. The Fund adjusts the classification of
distributions to shareholders to reflect the differences between financial
statement amounts and distributions determined in accordance with income tax
regulations. Accordingly, during the year ended March 31, 1999, amounts have
been reclassified to reflect a decrease in accumulated net realized loss on
securities sold of $7,606,269 and a decrease in additional paid-in capital of
$7,606,269.
USE OF ESTIMATES IN FINANCIAL STATEMENTS.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results may differ from these estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES.
Purchases and sales of investment securities (excluding short term
securities) during the year ended March 31, 1999, were $50,335,286 and
$54,451,145, respectively.
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
The Fund pays advisory fees for investment management and advisory
services under a management agreement with Davis Selected Advisers, L.P. (the
"Adviser"). Until October 6, 1998, the management agreement provided for a fee
at the annual rate of 0.70% of the first $250 million of average net assets of
the Fund, 0.60% of the next $250 million of average net assets and 0.55% of
average net assets over $500 million. Effective October 6, 1998, the management
fee was reduced to 0.55% of all average net assets.
The Adviser is paid for registering Fund shares for sale in various
states. The fee for the year ended March 31, 1999, amounted to $12,996. Boston
Financial Data Services is the Fund's primary transfer agent. The Adviser is
also paid for certain transfer agent services. The fee for these services for
the year ended March 31, 1999, amounted to $10,947. State Street Bank & Trust
Co. is the Fund's primary accounting provider. Fees for such services are
included in the custodian fee. The Adviser is also paid for certain accounting
services; the fee for the year ended March 31, 1999, amounted to $6,000. Certain
directors and officers of the Fund are also directors and officers of the
general partner of Davis Selected Advisers, L.P.
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary
of the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly
to DSA-NY.
20
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
================================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES
CLASS A SHARES
Class A shares of the Fund are sold at net asset value plus a sales
charge and are redeemed at net asset value (without a contingent deferred sales
charge).
During the year ended March 31, 1999, Davis Distributors, LLC, the Fund's
Underwriter (the "Underwriter" or "Distributor") received $145,966 from
commissions earned on sales of Class A shares of the Fund of which $24,468 was
retained by the Underwriter and the remaining $121,498 was re-allowed to
investment dealers. The Underwriter paid the costs of prospectuses in excess of
those required to be filed as part of the Fund's registration statement, sales
literature and other expenses assumed or incurred by it in connection with such
sales.
The Underwriter is reimbursed for amounts paid to dealers as a service
fee with respect to Class A shares sold by dealers which remain outstanding
during the period. The service fee is paid at the annual rate of 1/4 of 1% of
the average net assets maintained by the responsible dealers. The Underwriter is
not reimbursed for accounts for which the Underwriter pays no service fees to
other firms. The service fee for Class A shares of the Fund for the year end
March 31, 1999, was $59,974.
CLASS B SHARES
Class B shares of the Fund are sold at net asset value and are redeemed
at net asset value less a contingent deferred sales charge if redeemed within
six years of purchase.
The Fund pays a distribution fee to reimburse the Distributor for
commission advances on the sale of the Fund's Class B shares. The National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of the
Fund's average annual net assets attributable to Class B shares which may be
used to reimburse the Distributor. The limit is 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount the Fund may pay for
distribution-related services to 6.25% of gross sales since inception of the
Rule 12b-1 plan plus interest at 1% over the prime rate on unpaid amounts. The
Distributor intends to seek full payment (plus interest at prime plus 1%) of
distribution charges that exceed the 1% annual limit in some future period or
periods when the plan limits have not been reached.
For the year ended March 31, 1999, Class B shares of the Fund made
distribution plan payments which included distribution fees of $181,666 and
service fees of $60,557.
Commission advances by the Distributor for the year ended March 31, 1999,
on the sale of Class B shares of the Fund amounted to $410,838, of which
$406,042 was reallowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the Fund
in the amount of $769,713, representing the cumulative commission advances by
the Distributor on the sale of the Fund's Class B shares, plus interest, reduced
by cumulative distribution fees paid by the Fund and cumulative contingent
deferred sales charges paid by redeeming shareholders. The Fund has no
contractual obligation to pay any such distribution charges and the amount, if
any, timing and condition of such payment are solely within the discretion of
the Directors who are not interested persons of the Fund or the Distributor.
21
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
- --------------------------------------------------------------------------------
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)
CLASS B SHARES - CONTINUED
A contingent deferred sales charge is imposed upon redemption of certain
Class B shares of the Fund within six years of the original purchase. The charge
is a declining percentage starting at 4% of the lesser of net asset value of the
shares redeemed or the total cost of such shares. For the year ended March 31,
1999 the Distributor received contingent deferred sales charges of $112,821 from
redemptions of Class B shares of the Fund.
CLASS C SHARES
Class C shares of the Fund are sold at net asset value and are redeemed at
net asset value less a contingent deferred sales charge of 1% if redeemed within
one year of purchase. The Fund pays the Distributor 1% of the Fund's average
annual net assets attributable to Class C shares, of which 0.75% may be used to
pay distribution expenses and 0.25% may be used to pay shareholder service fees.
During the year ended March 31, 1999, Class C shares of the Fund made
distribution payments of $40,965. During the year ended March 31, 1999, the
Distributor received $4,897 in contingent deferred sales charges from
redemptions of Class C shares of the Fund.
NOTE 5 - CUSTODIAN FEES
Under an agreement with the custodian bank, custodian fees are reduced for
earnings on cash balances maintained at the custodian by the Fund. Such
reductions amounted to $1,175 during the year ended March 31, 1999.
NOTE 6 - RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are not registered under the Securities Act of 1933
and may have contractual restrictions on resale. They are valued under methods
approved by the Board of Directors as reflecting fair value. Securities may be
considered illiquid if they lack a readily available market or if valuation has
not changed for a certain period of time. The aggregate value of restricted or
illiquid securities is $1,161,314, or 2.35% of the Fund's net assets as of March
31, 1999. Information concerning restricted securities is as follows:
<TABLE>
<CAPTION>
ACQUISITION COST VALUATION PER UNIT
SECURITY DATE PER UNIT AS OF MARCH 31, 1999
- - -------- ----------- -------- --------------------
<S> <C> <C> <C>
Simula Inc., Sr. Conv. Sub. Notes,
Series C, 10.00%, 09/15/99 09/17/96 $ 100.00 $ 80.00
Technical Equipment Leasing Corp.,
Jr. Sub. Deb., Series A,
18.375%, 04/01/96 06/15/84 100.00 3.00
</TABLE>
22
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
================================================================================
NOTE 7 - CAPITAL STOCK
At March 31, 1999, there were 1,000,000,000 shares of capital stock ($0.05 par
value per share) authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED
MARCH 31, 1999
----------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................................. 2,005,727 $ 8,951,909
Shares issued in reinvestment of distributions................................ 323,428 1,432,650
------------- -------------
2,329,155 10,384,559
Shares redeemed............................................................... (6,508,378) (28,061,987)
------------- -------------
Net decrease.......................................................... (4,179,223) $ (17,677,428)
============= =============
YEAR ENDED
MARCH 31, 1998
----------------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 2,266,192 $ 10,770,163
Shares issued in reinvestment of distributions................................ 509,944 2,413,253
------------- --------------
2,776,136 13,183,416
Shares redeemed............................................................... (3,686,564) (17,452,719)
------------- -------------
Net decrease.......................................................... (910,428) $ (4,269,303)
============= =============
CLASS B
YEAR ENDED
MARCH 31, 1999
----------------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 4,921,797 $ 21,526,190
Shares issued in reinvestment of distributions................................ 169,369 735,895
------------- -------------
5,091,166 22,262,085
Shares redeemed............................................................... (4,172,871) (17,592,033)
------------- -------------
Net increase.......................................................... 918,295 $ 4,670,052
============= =============
YEAR ENDED
MARCH 31, 1998
----------------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 3,357,235 $ 15,840,614
Shares issued in reinvestment of distributions................................ 114,872 540,264
------------- -------------
3,472,107 16,380,878
Shares redeemed............................................................... (1,082,952) (5,110,090)
------------- -------------
Net increase.......................................................... 2,389,155 $ 11,270,788
============= =============
</TABLE>
23
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
================================================================================
NOTE 7 - CAPITAL STOCK - (CONTINUED)
<TABLE>
<CAPTION>
CLASS C
YEAR ENDED
MARCH 31, 1999
----------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................................. 1,508,715 $ 6,727,226
Shares issued in reinvestment of distributions................................ 29,525 126,622
------------- -------------
1,538,240 6,853,848
Shares redeemed............................................................... (915,471) (3,894,177)
------------- -------------
Net increase.......................................................... 622,769 $ 2,959,671
============= =============
YEAR ENDED
MARCH 31, 1998
----------------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 823,575 3,941,412
Shares issued in reinvestment of distributions................................ 6,474 30,758
------------- -------------
830,049 3,972,170
Shares redeemed............................................................... (424,918) (2,023,211)
-------------- -------------
Net increase.......................................................... 405,131 $ 1,948,959
============= =============
CLASS Y
YEAR ENDED
MARCH 31, 1999
----------------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 21,392 $ 92,938
Shares issued in reinvestment of distributions................................ 72,773 318,206
------------- -------------
94,165 411,144
Shares redeemed............................................................... (5,628) (25,590)
------------- -------------
Net increase.......................................................... 88,537 $ 385,554
============= =============
YEAR ENDED
MARCH 31, 1998
----------------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 809,065 $ 3,818,471
Shares issued in reinvestment of distributions................................ 64,889 309,128
------------- -------------
873,954 4,127,599
Shares redeemed............................................................... (1,476) (7,120)
------------- -------------
Net increase.......................................................... 872,478 $ 4,120,479
============= =============
</TABLE>
24
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED MARCH 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........................... $ 4.76 $ 4.71 $ 4.84 $ 4.86 $ 5.14
------- -------- ------- ------- ------
Income (Loss) From Investment Operations
Net Investment Income........................ 0.28 0.34 0.39 0.43 0.46
Net Realized and Unrealized Gains or
Losses...................................... (0.75) 0.13 (0.06) 0.03 (0.24)
------- ------- ------- ------- -------
Total From Investment Operations.......... (0.47) 0.47 0.33 0.46 0.22
------- ------- ------- ------- -------
Dividends and Distributions
Dividends from Net Investment Income.......... (0.28) (0.34) (0.39) (0.43) (0.46)
Returns of Capital............................ (0.06) (0.08) (0.07) (0.05) (0.04)
------- ------- ------- ------- -------
Total Dividends and Distributions......... (0.34) (0.42) (0.46) (0.48) (0.50)
------- ------- ------- ------- -------
Net Asset Value, End of Period................... $ 3.95 $ 4.76 $ 4.71 $ 4.84 $ 4.86
======= ======= ======= ======= =======
Total Return (1)................................. (10.41)% 10.40% 7.08% 9.93% 4.69%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)...... $20,029 $44,058 $47,890 $53,816 $56,405
Ratio of Expenses to Average Net Assets....... 1.36% 1.40%(2) 1.48%(2) 1.51% 1.53%
Ratio of Net Investment Income to
Average Net Assets.......................... 6.88% 7.11% 8.13% 8.92% 9.49%
Portfolio Turnover Rate (3)................... 87.21% 71.54% 66.10% 118.34% 98.94%
</TABLE>
(1) Assumes hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends and distributions
reinvested in additional shares on the reinvestment date, and redemption at
the net asset value calculated on the last business day of the fiscal
period. Sales charges are not reflected in the total returns.
(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.39% and 1.47% for the years ended
March 31, 1998 and March 31, 1997, respectively. Prior to 1997, such
reductions were reflected in the expense ratios.
(3) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
25
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
CLASS B
DECEMBER 5, 1994
(INCEPTION
YEAR ENDED OF CLASS)
MARCH 31, THROUGH
------------------------------------- MARCH 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............... $ 4.73 $ 4.68 $ 4.81 $ 4.85 $ 4.80
-------- --------- -------- -------- --------
Income (Loss) From Investment Operations
Net Investment Income........................... 0.24 0.33 0.36 0.40 0.11
Net Realized and Unrealized Gains or Losses..... (0.75) 0.10 (0.07) -- 0.05
-------- --------- -------- -------- --------
Total From Investment Operations............ (0.51) 0.43 0.29 0.40 0.16
-------- --------- -------- -------- --------
Dividends and Distributions
Dividends from Net Investment Income............ (0.24) (0.33) (0.36) (0.40) (0.11)
Returns of Capital.............................. (0.06) (0.05) (0.06) (0.04) --
-------- --------- -------- -------- --------
Total Dividends and Distributions........... (0.30) (0.38) (0.42) (0.44) (0.11)
-------- --------- -------- -------- --------
Net Asset Value, End of Period..................... $ 3.92 $ 4.73 $ 4.68 $ 4.81 $ 4.85
======== ========= ======== ======== ========
Total Return (1).................................. . (11.20)% 9.53% 6.26% 8.68% 3.39%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)........ $21,522 $21,624 $10,217 $6,599 $1,900
Ratio of Expenses to Average Net Assets......... 2.20%(2) 2.16%(2) 2.30%(2) 2.32% 2.36%*
Ratio of Net Investment Income to
Average Net Assets........................... 6.05% 6.35% 7.28% 8.11% 8.66%*
Portfolio Turnover Rate (3)..................... 87.21% 71.54% 66.10% 118.34% 98.94%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in
the total returns. Total returns are not annualized for periods of less
than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.19%, 2.15%, and 2.29% for the years
ended March 31, 1999, March 31, 1998 and March 31, 1997, respectively.
Prior to 1997, such reductions were reflected in the expense ratios.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
26
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
CLASS C
AUGUST 12, 1997
(INCEPTION
OF CLASS)
YEAR ENDED THROUGH
MARCH 31, MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Net Asset Value,
Beginning of Period............................. $ 4.76 $ 4.71
------ -------
Income (Loss) From Investment Operations
Net Investment Income.......................... 0.24 0.16
Net Realized and Unrealized Gains or Losses..... (0.76) 0.10
------- -------
Total From Investment Operations............ (0.52) 0.26
------- -------
Dividends and Distributions
Dividends from Net Investment Income............ (0.24) (0.16)
Returns of Capital.............................. (0.06) (0.05)
------- -------
Total Dividends and Distributions........... (0.30) (0.21)
------- -------
Net Asset Value, End of Period..................... $ 3.94 $ 4.76
======= =======
Total Return (1)................................... (11.34)% 5.61%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)........ $4,055 $1,928
Ratio of Expenses to Average Net Assets......... 2.18% 2.09%(2)*
Ratio of Net Investment Income to
Average Net Assets............................ 6.06% 6.42%*
Portfolio Turnover Rate (3)..................... 87.21% 71.54%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in
the total returns. Total returns are not annualized for periods of less
than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.08% for the period ended March 31,
1998.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
27
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
CLASS Y
MARCH 20, 1997
(INCEPTION
YEAR ENDED OF CLASS)
MARCH 31, THROUGH
------------------------ MARCH 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period............................. $ 4.79 $ 4.72 $ 4.74
------ ------ -------
Income (Loss) From Investment Operations
Net Investment Income.......................... 0.29 0.34 --
Net Realized and Unrealized Gains or Losses..... (0.76) 0.14 (0.02)
------- ------- -------
Total From Investment Operations............ (0.47) 0.48 (0.02)
------- ------- -------
Dividends and Distributions
Dividends from Net Investment Income............ (0.29) (0.34) --
Returns of Capital.............................. (0.06) (0.07) --
------- ------- -------
Total Dividends and Distributions........... (0.35) (0.41) --
------- ------- -------
Net Asset Value, End of Period..................... $ 3.97 $ 4.79 $ 4.72
======= ======= =======
Total Return (1)................................... (10.16)% 10.64% (0.42)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)........ $3,823 $4,187 $7
Ratio of Expenses to Average Net Assets......... 1.00% 1.05%(2) 1.21%(2)*
Ratio of Net Investment Income to
Average Net Assets............................ 7.24% 7.46% 8.89%*
Portfolio Turnover Rate (3)..................... 87.21% 71.54% 66.10%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Total returns are not annualized
for periods of less than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.04% and 1.20% for the year ended
March 31, 1998 and for the period ended March 31, 1997, respectively.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
28
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
FOR THE YEAR ENDED MARCH 31, 1999
================================================================================
In early 2000, shareholders will receive information regarding all
dividends and distributions paid to them by the Fund during calendar year 1999.
Regulations of the U.S. Treasury Department require the Fund to report this
information to the Internal Revenue Service.
None of the dividends paid by the Fund during the year ended March 31,
1999 are eligible for the corporate dividend-received deduction.
The foregoing information is presented to assist shareholders in
reporting distributions received from the Fund to the Internal Revenue Service.
Because of the complexity of the federal regulations which may affect your
individual tax return and the many variations in state and local tax
regulations, we recommend that you consult your tax adviser for specific
guidance.
29
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
INDEPENDENT AUDITORS' REPORT
================================================================================
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
We have audited the accompanying statement of assets and liabilities of
Davis Intermediate Investment Grade Bond Fund, Inc. (formerly named the Davis
High Income Fund, Inc.), including the schedule of investments, as of March 31,
1999, and the related statement of operations for the year then ended and the
statement of changes in net assets and the financial highlights for each of the
years in the two-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the three
years ended March 31, 1997 were audited by other auditors whose report, dated
May 2, 1997, expressed an unqualified opinion on this information.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1999, 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 Davis Intermediate Investment Grade Bond Fund, Inc. as of March 31,
1999, the results of its operations, the changes in its net assets, and the
financial highlights for the year then ended, in conformity with generally
accepted accounting principles.
KPMG LLP
Denver, Colorado
May 7, 1999
30
<PAGE>
DAVIS INTERMEDIATE INVESTMENT
GRADE BOND FUND, INC.
124 East Marcy Street, Santa Fe, New Mexico 87501
================================================================================
DIRECTORS OFFICERS
Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Shelby M.C. Davis
Andrew A. Davis President
Christopher C. Davis Kenneth C. Eich
Jerry D. Geist Vice President
D. James Guzy Sharra L. Reed
G. Bernard Hamilton Vice President, Treasurer
LeRoy E. Hoffberger & Assistant Secretary
Laurence W. Levine Thomas D. Tays
Christian R. Sonne Vice President & Secretary
Marsha Williams Andrew A. Davis
Vice President
Christopher C. Davis
Vice President
Carolyn H. Spolidoro
Vice President
INVESTMENT ADVISER
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-800-279-0279
DISTRIBUTOR
Davis Distributors, LLC
124 East Marcy Street
Santa Fe, New Mexico 87501
TRANSFER AGENT & CUSTODIAN
State Street Bank & Trust Company
c/o The Davis Funds
P. O. Box 8406
Boston, MA 02266-8406
AUDITORS
KPMG LLP
707 Seventeenth Street, Suite 2300
Denver, CO 80202
COUNSEL
D'Ancona & Pflaum
111 E. Wacker Drive, Suite 2800
Chicago, Illinois 60601-4205
================================================================================
FOR MORE INFORMATION ABOUT DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.,
INCLUDING MANAGEMENT FEE, CHARGES AND EXPENSES, SEE THE CURRENT PROSPECTUS WHICH
MUST PRECEDE OR ACCOMPANY THIS REPORT.
<PAGE>
DAVIS SELECTED ADVISERS, L.P.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279
[DAVIS FUNDS LOGO]
<PAGE>
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1999
DAVIS INTERMEDIATE
INVESTMENT GRADE
BOND FUND
[DAVIS FUNDS LOGO]
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
Dear Shareholder,
A NEW PORTFOLIO MANAGER FOR THE FUND
Effective August 1, 1999, Creston A. King, Chartered Financial Analyst, has been
named the portfolio manager of the Davis Intermediate Investment Grade Bond
Fund. Prior to joining Davis Selected Advisers on June 30, 1999, he was a
portfolio manager for another mutual fund company where he received high marks
for managing their bond and money market funds.(1)
Carolyn Spolidoro, the previous portfolio manager, has retired. We would like to
express our appreciation to her for effectively serving our shareholders since
she joined Davis Selected Advisers in 1985.
PERFORMANCE REVIEW
The Davis Intermediate Investment Grade Bond Fund performed in line with its
benchmark for the six months ended September 30, 1999. The Fund's Class A shares
declined .70% (based on net asset value) versus an average decline of .61% for
the 284 funds included in Lipper Analytical Services' intermediate
investment-grade debt category.(2) For the latest one-year period, the Fund
declined 5.59% (based on net asset value) compared to a decline of 1.02% for the
267 intermediate, investment-grade bond funds tracked by Lipper.(3)
The Fund's improved six-month results reflect the ongoing repositioning that
began in October 1998 when the Fund's focus was shifted from investing primarily
in high-yield, lower quality securities to intermediate-term, investment-grade
issues. Investment-grade bonds are those rated in one of the four highest
credit-quality categories by nationally recognized rating organizations or which
we believe to be of comparable credit quality.
The Davis Intermediate Investment Grade Bond Fund purchased A-rated bonds issued
by Household Finance (a subsidiary of Household International) with a 6%
interest rate coupon and a 2004 maturity date and A-rated bonds issued by Philip
Morris with a 6 3/8% coupon and a 2006 maturity. Both issues are noncallable,
meaning they cannot be redeemed by the issuer before maturity.(4)
In addition to the bonds of Household Finance, the Fund holds large positions in
bonds issued by securities firms, banks and insurance carriers, such as
PaineWebber, Lehman Brothers, BankBoston and Liberty Financial.
BENEFITING FROM THE FLIGHT TO QUALITY
This year could turn out to be one of the worst years ever for the bond market
mainly due to rising interest rates, and most types of bonds and bond funds have
generated negative returns. In this environment, fixed-income investors have
generally looked for safety first and yield second. As a result, securities with
higher credit ratings have outperformed securities with lower credit ratings.
The Fund benefited from this flight to quality because we were raising the
portfolio's overall credit quality during this period in line with the Fund's
new focus on investment-grade securities. Currently, the portfolio's average
credit quality is A compared with an average credit quality of BBB a year ago.
Given the uncertain market climate, we have also decreased the overall maturity
of the portfolio. Bonds with shorter maturities tend to move less in price than
longer term bonds when interest rates change. Currently, the portfolio's average
weighted length, taking into account call features and sinking fund provisions
that could shorten the life of bonds we hold, is 6.44 years.
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
By concentrating on higher quality names and shorter maturities, our objective
is to limit risk in the event of further interest rate increases this year or
global financial market difficulties associated with year 2000 (Y2K) computer
disruptions.
FOCUSED ON RISK-ADJUSTED RETURNS
At the heart of our approach is the recognition that managing risk is the key to
delivering superior long-term results. Rather than simply buying the highest
yielding securities that are still investment grade, we search for bonds that
offer the potential for credit quality improvement and thus provide greater
value--that is, higher yields relative to credit quality. We also look for
issues in which we can purchase larger positions in order to improve liquidity
even under adverse market conditions. Our objective always is to help our
shareholders build and preserve wealth through strategies designed to minimize
volatility and optimize long-term, risk-adjusted returns.(5)
Sincerely,
/s/ Shelby M.C. Davis /s/ Creston A. King
- - ------------------------ ---------------------
Shelby M.C. Davis Creston A. King
Chief Investment Officer Portfolio Manager
November 12, 1999
- - ----------
This Semi-Annual Report is authorized for distribution only when accompanied or
preceded by a current prospectus of Davis Intermediate Investment Grade Bond
Fund which contains more information about risks, fees and expenses. Please read
the prospectus carefully before investing or sending money.
1 The fact that the portfolio manager was successful managing other mutual
funds is not a guarantee that he can achieve similar results with the Davis
Funds. Past performance is not a guarantee of future results.
2 Lipper Analytical Services rankings are based on total returns but do not
consider sales charges.
2
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
3 Total return assumes reinvestment of dividends and capital gain
distributions. Past performance is not a guarantee of future results.
Investment return and principal value will vary so that, when redeemed, an
investor's shares may be worth more or less than when purchased. Below are
the average annual total returns for Davis Intermediate Investment Grade Bond
Fund's Class A shares for periods ending September 30, 1999. Returns for
other classes of shares will vary from the following returns:
<TABLE>
<CAPTION>
* (Without a 4.75% sales charge taken into consideration)
- - --------------------------------------------------------------------------------------------
FUND NAME 1 YEAR 5 YEAR 10 YEAR INCEPTION
- - --------- ------ ------ ------- ---------
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Davis Intermediate Investment (5.59)% 3.71% 5.17% 7.64% - 05/29/80
Grade Bond Fund A
- - --------------------------------------------------------------------------------------------
<CAPTION>
* (With a 4.75% sales charge taken into consideration)
- - --------------------------------------------------------------------------------------------
FUND NAME 1 YEAR 5 YEAR 10 YEAR INCEPTION
- - --------- ------ ------ ------- ---------
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Davis Intermediate Investment (9.98)% 2.69% 4.67% 7.37% - 05/29/80
Grade Bond Fund A
- - --------------------------------------------------------------------------------------------
</TABLE>
4 The Fund's portfolio securities as of September 30, 1999, including the
securities discussed in this letter, are listed in the Schedule of
Investments. Portfolio holdings are subject to change.
5 There can be not guarantee that the Fund will achieve its goals.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
3
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS
At September 30, 1999 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
--------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - (79.25%)
<S> <C> <C>
AGRICULTURAL PRODUCTION LIVESTOCK - (0.96%)
$ 500,000 Iowa Select Farms, L.P., Sr. Sub. Notes, 10.75%, 12/01/05 (b).. $ 392,500
----------
AMUSEMENT AND RECREATION SERVICES - (0.55%)
58,000 Discovery Zone Inc., Units, 13.50%, 05/01/02 ++ (c)............ 6,090
150,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease
Rev. Bds. (Arcade Ltd. Partnership Prj.) Series '92, 8.50%,
08/01/02..................................................... 153,849
50,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease
Rev. Bds. (Arcade Ltd. Partnership Prj.) Series '92, 9.50%,
08/01/14 .................................................... 52,946
984,599 Underwater World Mall of America, Sr. Rev. Bds., 13.75%,
03/01/02++ (c) .............................................. 14,769
----------
227,654
----------
AUTO REPAIR, SERVICES AND PARKING - (4.64%)
2,000,000 Ryder System Inc., Notes, Series P, 6.60%, 11/15/05............ 1,901,078
----------
BUSINESS SERVICES - (1.16%)
750,000 Nationwide Credit, Inc., Sr. Notes, 10.25%, 01/15/08........... 453,750
670,700 Technical Equipment Leasing Corp., Jr. Sub. Deb., Series A,
18.375%, 04/01/96++ (c)...................................... 20,121
----------
473,871
----------
COMMUNICATION - (3.14%)
250,000 Nextlink Communications LLC, Sr. Notes, 12.50%, 04/15/06....... 263,750
500,000 Pegasus Media & Communications, Sr. Sub. Notes, Series B,
12.50%, 07/01/05............................................. 542,500
500,000 Sinclair Broadcast Group, Sr. Sub. Notes, 9.00%, 07/15/07...... 478,750
----------
1,285,000
----------
CONSUMER LOANS - (2.35%)
1,000,000 Household Finance Corp., Notes, 6.00%, 05/01/04................ 961,996
----------
DEPOSITORY INSTITUTIONS - (4.79%)
2,000,000 BankBoston, N.A., Sub. Notes, 7.00%, 09/15/07.................. 1,963,390
----------
ELECTRIC, GAS, AND SANITARY SERVICES - (7.45%)
35,000 Commerce Refuse to Energy Auth., Taxable Ref. Rev. Bds.,
'90 Series, 10.50%, 07/01/00................................. 35,351
500,000 Midland Funding Corporation II, Sub. Secured Lease, 13.25%,
07/23/06 .................................................... 597,811
496,011 Panda Funding, Series A-1, 11.625%, 08/20/12................... 498,491
2,000,000 Potomac Capital Invest., Notes, Series D, 6.62%, 12/05/05 (b).. 1,919,340
----------
3,050,993
----------
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - (0.06%)
558,273 Comptronix Corp., Conv. Sub. Deb., 6.75%, 03/01/02++ (c)....... 23,447
----------
EXECUTIVE, LEGISLATIVE AND GENERAL - (6.66%) 670,000 Adams
Cnty., CO, IDR Series A Pool Gtd. - Executive Life, 9.00%,
11/01/96+.................................................... 5,025
1,000,000 Camden Cnty., GA, JT Dev. Auth., Taxable Rev. Bds., 7.10%,
12/01/12 .................................................... 979,810
620,000 Harrisburg, PA, G.O. Capital Appreciation Bds., Zero Cpn.,
04/01/13 (e) ................................................ 232,419
</TABLE>
4
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
--------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - CONTINUED
EXECUTIVE, LEGISLATIVE AND GENERAL - CONTINUED
<S> <C> <C>
$ 640,000 Los Angeles County, CA, Pension Obligation, Capital
Appreciation Bds., Series C, MBIA Insured, Zero Cpn.,
06/30/07 (e) ................................................ $ 372,698
100,000 Louisiana St. Agriculture Fin. Auth., Series `86A, 8.80%,
10/01/96++ .................................................. 750
20,000 Nebraska Invst. Fin. Auth., Agriculture Rev. Bds., Series A,
Gtd. Executive Life, 8.34%, 11/01/93++....................... 150
1,930,000 Orange County, CA, Pension Obligation, Capital Appreciation
Bds., Series A, Zero Cpn., 09/15/13 (e)...................... 701,922
348,320 Pulaski Cnty., AR, Pub. Fac. Brd., Taxable Rev. Bds., 7.25%,
01/01/11 .................................................... 345,923
315,000 York, PA, G.O. Capital Appreciation Bds., Series A,
Zero Cpn., 02/01/17 (e)...................................... 87,894
----------
2,726,591
----------
FOOD STORES - (3.21%)
552,000 Kroger Co., Lease Cert., 6.00%, 04/01/03....................... 543,076
1,000,000 Southland Corp., Sub. Deb., Ser. B, 4.00%, 06/15/04............ 770,000
----------
1,313,076
----------
HEALTH SERVICES - (1.33%)
213,000 Illinois HFA Rev. Bds., Series C, MBIA Insured, 10.30%,
08/15/03 ................................................... 213,515
130,000 San Bernadino CA Assd. Cmntys. Fing. Auth. Health Care Ref.
& . Improvement Bds. (Granada) Series B, 8.80%, 05/01/17.... 117,081
215,000 Utah St. Hsg. Fin. Agy. Taxable RHA Cmnty. Services, Series B,
9.00%, 07/01/02.............................................. 216,189
----------
546,785
----------
HOTELS AND OTHER LODGING PLACES - (3.48%)
1,448,000 Courtyard By Marriott II, L.P., Sr. Secured Notes, Series B,
10.75%, 02/01/08............................................. 1,426,280
----------
INDUSTRIAL MACHINERY AND EQUIPMENT - (0.05%)
1,950,000 JTS Corporation, Conv. Sub. Deb., 5.25%, 04/29/02++............ 19,500
----------
INSTRUMENTS AND RELATED PRODUCTS - (0.62%)
250,000 Alliance Imaging, Inc., Sr. Sub. Notes, 9.625%, 12/15/05....... 254,063
----------
INSURANCE CARRIERS - (8.32%)
1,500,000 American General Finance, Sr. Notes, Series D, 7.12%, 08/24/05. 1,499,186
2,000,000 Liberty Financial Co., Notes, 6.75%, 11/15/08.................. 1,907,664
----------
3,406,850
----------
MULTI-FAMILY FAMILY MORTGAGE - (0.01%)
195,000 El Paso Hsg. Fin. Corp., Multi-Fam. Res. Loan Program,
Securitized Multi-Fam. Hsg. Rev. Bds., Series `86A, 8.88%,
10/15/96++ .................................................. 1,463
100,000 Louisiana Hsg. Fin. Agy., Taxable Home Mtg., Series `86A,
8.61%, 08/01/96++............................................ 750
----------
2,213
----------
</TABLE>
5
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
--------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - CONTINUED
<S> <C> <C>
NONDEPOSITORY INSTITUTIONS - (3.65%)
$ 1,500,000 Beneficial Corp., Sr. Notes, Series H, 6.85%, 09/11/04......... $1,495,751
----------
OIL AND GAS EXTRACTION - (4.67%)
2,000,000 Enron Corp., Notes, 6.725%, 11/17/08........................... 1,911,576
----------
PAPER AND ALLIED PRODUCTS - (0.07%)
2,000,000 Crown Packaging Enterprises, Ltd., Sr. Secured Disc. Notes,
0%/14.00%, 08/01/06 (c) (d).................................. 30,000
----------
PETROLEUM AND COAL PRODUCTS - (2.32%)
250,000 Clark R & M Inc., Sr. Notes, 8.375%, 11/15/07.................. 217,500
250,000 Clark R & M Inc., Sr. Sub. Notes, 8.875%, 11/15/07............. 206,250
500,000 Deeptech International, Inc., Sr. Secured Notes, 12.00%,
12/15/00 .................................................... 524,828
----------
948,578
----------
PRIMARY METAL INDUSTRIES - (0.23%)
100,000 EES Coke Battery Inc., Sr. Secured Notes, Series B, 9.382%,
04/15/07 (c) ................................................ 95,578
----------
SECURITY AND COMMODITY BROKERS - (10.09%)
2,000,000 Lehman Brothers Holdings, Notes, 6.625%, 02/05/06.............. 1,905,554
2,350,000 Paine Webber Group, Inc., Sr. Notes, Series C, 6.73%, 04/03/08 2,227,281
----------
4,132,835
----------
SINGLE FAMILY MORTGAGE - (3.60%)
700,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program,
Series G, 7.625%, 05/15/21................................... 700,672
75,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program,
Series H, 7.875%, 11/15/26................................... 74,143
675,480 Memphis, TN Hlth. Educ. & Hsg. Fac. Brd., Multi Fam. Hsg. Rev.
Securitized, Series '86A, 8.68%, 09/15/96+................... 5,066
226,733 Polk Cnty., FL, HFA REMIC Collateralized Mtg. Bds., Series 1,
CL 2-A, 9.55%, 01/15/11...................................... 230,333
807,000 The Southeast TX Hsg. Fin. Corp. Securitized Multi Fam. Hsg.
Rev. Bds. Series '86A, 8.60%, 09/01/96++..................... 6,053
450,000 Texas St., Dept. Hsg. & Comm. Taxable Mtg. Rev. Ref. Bds.,
Jr. Lien, Ser. B, 9.50%, 03/01/16............................ 458,132
----------
1,474,399
----------
TOBACCO - (2.31%)
1,000,000 Philip Morris Cos. Inc., Notes, 6.375%, 02/01/06............... 945,734
----------
TOOLS - (3.53%)
1,500,000 Black & Decker Holdings Inc., Ser. 144A, 6.55%, 07/01/07 (b)... 1,444,109
----------
TOTAL CORPORATE AND TAXABLE MUNICIPAL BONDS
AND NOTES - (identified cost $38,122,824)......... 32,453,847
-----------
</TABLE>
6
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL/SHARES/UNITS (NOTE 1)
---------------------- --------
GOVERNMENT SECURITIES - (8.85%)
<S> <C> <C>
$ 2,000,000 Federal Home Loan Bank, 5.54%, 10/15/08........................ $1,813,180
2,000,000 Freddie Mac, 5.54%, 10/27/08.................................. 1,812,980
----------
TOTAL GOVERNMENT SECURITIES - (identified cost $4,000,045). 3,626,160
----------
MORTGAGE BACKED SECURITIES - (1.76%)
28,545 First Nationwide Trust, Series `89-AR4-1, 9.50%, 09/25/19...... 28,450
160,101 Freddie Mac, CL 1567 A, 5.40%, 08/15/23........................ 141,534
293,852 Freddie Mac, REMIC, CL 1668 F, 7.5875%, 02/15/14............... 298,792
84,905 Manufacturers Hanover Mortgage Corporation, Mtg. Pass-Through
Certificates, Series A, 11.50%, 04/25/15..................... 86,623
179,000 The Prudential Mortgage Securities Company, Mtg. Pass-Through
Certificates, Series '92-038, CL A-8, Fixed Rate, 6.95%,
11/25/22 .................................................... 165,436
----------
TOTAL MORTGAGE BACKED SECURITIES
- (identified cost $684,020)....................... 720,835
----------
PREFERRED STOCKS - (0.04%)
788 Westmoreland Coal Co., Dep. Shares Conv. Pfd., Series A,
8.50%++ ..................................................... 14,480
----------
TOTAL PREFERRED STOCKS - (identified cost $10,283)........ 14,480
----------
COMMON STOCKS - (0.50%)
135,951 Canyon Resources Corporation* 59,479
260,252 Crown Packaging Enterprises Ltd.*.............................. 2,603
1,161 Nextel Communications Inc., Class A*........................... 78,767
101 Spanish Broadcasting Systems Inc.*(c).......................... 65,650
----------
TOTAL COMMON STOCKS - (identified cost $409,687).......... 206,499
----------
WARRANTS - (0.03%)
869 Empire Gas Corp., expire 07/15/04 (c) ......................... 261
500 Primus Telecommunications, expire 08/01/04 (c)................. 10,000
----------
TOTAL WARRANTS - (identified cost $41).................... 10,261
----------
</TABLE>
7
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
--------- --------
SHORT TERM - (6.45%)
<S> <C> <C>
$ 2,640,000 State Street Corp. Repurchase Agreement, 5.22%, 10/01/99,
dated 09/30/99, repurchase value of $2,640,383
(collateralized by $2,700,000 par value
Federal Home Loan Bank, 5.45%, 01/28/04, market value
$2,723,625) - (identified cost $2,640,000)................... $ 2,640,000
----------
TOTAL INVESTMENTS (identified cost $45,866,900) - (96.88%)(a).. 39,672,082
OTHER ASSETS LESS LIABILITIES - (3.12%)........................ 1,279,506
-----------
NET ASSETS - (100%)............................................ $40,951,588
===========
</TABLE>
- - ----------
+ These securities are in default but have made partial payments.
++ These securities are in default and are not currently paying interest or
dividends. These securities amounted to $107,573 or 0.26% of the Fund's net
assets as of September 30, 1999.
* Non-income producing security.
(a) Aggregate cost for Federal income tax purposes is $45,866,900.
(b) These securities are subject to Rule 144A. The Board of Directors of the
Fund has determined that there is sufficient liquidity in these securities
to realize current valuations. These securities amounted to $3,755,949 or
9.17% of the Fund's net assets as of September 30, 1999.
(c) Restricted or illiquid securities. See Note 6 of the Notes to Financial
Statements.
(d) Represents a step bond: a zero coupon bond that converts to a fixed or
variable interest rate at a designated future date.
(e) As of September 30, 1999, zero coupon bonds represented $1,394,933 or 3.41%
of the Fund's net assets. Because zero coupon bonds pay no interest and
compound semi-annually at the fixed rate at the time of reissuance, their
value is generally more volatile than the value of other debt securities.
At September 30, 1999, unrealized appreciation (depreciation) of securities for
Federal income tax purposes was as follows:
Unrealized appreciation ............................... $ 464,543
Unrealized depreciation ............................... (6,659,361)
-----------
Net unrealized depreciation............................ $(6,194,818)
===========
8
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
At September 30, 1999 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value (including repurchase agreements
of $2,640,000) (identified cost $45,866,900) (See accompanying
Schedule of Investments) ........................................... $39,672,082
Cash ................................................................... 42,553
Receivables:
Interest............................................................ 692,551
Capital stock sold.................................................. 66,419
Investments sold.................................................... 537,000
Prepaid expenses........................................................ 54,316
-----------
Total assets..................................................... 41,064,921
-----------
LIABILITIES:
Payable for capital stock reacquired.................................... 34,909
Accrued expenses........................................................ 78,424
-----------
Total liabilities................................................ 113,333
-----------
NET ASSETS (NOTE 7)......................................................... $40,951,588
===========
CLASS A SHARES
Net assets.............................................................. $15,841,675
Shares outstanding...................................................... 4,179,684
Net asset value and redemption price per share.......................... $ 3.79
=======
Maximum offering price per share (100/95.25 of $3.79)*.................. $ 3.98
=======
CLASS B SHARES
Net assets.............................................................. $17,346,078
Shares outstanding...................................................... 4,613,635
Net asset value, offering and redemption price per share................ $ 3.76
=======
CLASS C SHARES
Net assets.............................................................. $ 3,964,743
Shares outstanding...................................................... 1,047,488
Net asset value, offering and redemption price per share................ $ 3.79
=======
CLASS Y SHARES
Net assets.............................................................. $ 3,799,092
Shares outstanding...................................................... 997,315
Net asset value, offering and redemption price per share................ $ 3.81
=======
NET ASSETS CONSIST OF:
Par value of shares of capital stock.................................... $ 541,906
Additional paid-in capital.............................................. 65,526,209
Net unrealized depreciation of investments.............................. (6,194,818)
Deficit in undistributed net income .................................... (91,682)
Accumulated net realized loss on investments ........................... (18,830,027)
-----------
Net assets.......................................................... $40,951,588
===========
</TABLE>
- - ----------
* On purchases of $100,000 or more, the offering price is reduced.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
STATEMENT OF OPERATIONS
For the six months ended September 30, 1999 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest............................................................ $ 1,760,455
------------
Expenses:
Management fees (Note 3).............................. 122,967
Custodian fees......................................... 21,432
Transfer agent fees
Class A............................................. 20,253
Class B............................................. 16,216
Class C............................................. 4,639
Class Y............................................. 673
Audit fees............................................. 8,050
Legal fees............................................. 5,021
Accounting fees (Note 3)............................... 3,000
Reports to shareholders................................ 10,663
Directors' fees and expenses........................... 13,517
Registration and filing fees (Note 3).................. 27,657
Miscellaneous.......................................... 978
Payments under distribution plan (Note 4):
Class A............................................ 18,533
Class B............................................ 95,664
Class C............................................. 20,118
-----------
Total expenses............................................... 389,381
Expenses paid indirectly (Note 5) .......................... (554)
------------
Net expenses................................................. 388,827
------------
Net investment income..................................... 1,371,628
------------
REALIZED AND UNREALIZED LOSS ON I NVESTMENTS:
Net realized loss from investment transactions......................... (454,864)
Net increase in unrealized depreciation of investments.................. (1,378,215)
------------
Net realized and unrealized loss on investments.................. (1,833,079)
------------
Net decrease in net assets resulting from operations............. $ (461,451)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED
OPERATIONS: 1999 MARCH 31,
(UNAUDITED) 1999
------------- ----------
<S> <C> <C>
Net investment income................................... $ 1,371,628 $ 4,264,018
Net realized loss from investment transactions.......... (454,864) (8,546,263)
Net increase in unrealized depreciation of investments.. (1,378,215) (3,486,498)
------------ ------------
Net decrease in net assets resulting from
operations .................................. (461,451) (7,768,743)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A........................................... (612,059) (2,252,956)
Class B........................................... (593,302) (1,473,461)
Class C........................................... (120,551) (249,000)
Class Y........................................... (137,398) (288,601)
Return of capital
Class A........................................... - (412,926)
Class B........................................... - (206,334)
Class C........................................... - (19,154)
Class Y........................................... - (34,481)
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets resulting from
capital share transactions (Note 7)
Class A........................................... (3,424,963) (17,677,428)
Class B........................................... (3,339,441) 4,670,052
Class C........................................... 77,855 2,959,671
Class Y........................................... 134,011 385,554
------------ ------------
Total decrease in net assets............................ (8,477,299) (22,367,807)
NET ASSETS:
Beginning of year....................................... 49,428,887 71,796,694
------------ ------------
End of year............................................. $ 40,951,588 $ 49,428,887
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
For the six months ended September 30, 1999 (Unaudited)
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Davis Intermediate Investment Grade Bond Fund, Inc. (formerly Davis High
Income Fund, Inc.) (the Fund) is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. Its
primary objective is to achieve a high level of current income. The Fund also
seeks capital growth so long as such objective is consistent with its primary
objective. The Fund invests primarily in high-quality, investment-grade bonds.
The Fund offers shares in four classes, Class A, Class B, Class C and Class Y.
The Class A shares are sold with a front-end sales charge and the Class B and
Class C shares are sold at net asset value and may be subject to a contingent
deferred sales charge upon redemption. Class Y shares are sold at net asset
value and are not subject to any contingent deferred sales charge. Class Y
shares are only available to certain qualified investors. Income, expenses
(other than those attributable to a specific class) and gains and losses are
allocated daily to each class of shares based upon the relative proportion of
net assets represented by each class. Operating expenses directly attributable
to a specific class are charged against the operations of that class. All
classes have identical rights with respect to voting (exclusive of each Class'
distribution arrangement), liquidation and distributions. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
SECURITY VALUATION.
Portfolio securities may be valued on the basis of prices provided by an
independent pricing service or broker when such prices are believed to reflect
the fair market value of such securities. (Pricing agents generally take into
account institutional size trading in similar groups of securities). Securities
not priced in this manner will be priced at the last published sales price if
traded on that day and, if not traded, at the mean between the most recent
quoted bid and asked prices provided by investment dealers. The pricing service
and valuation procedures are reviewed and subject to approval by the Board of
Directors. If no quotations are available, securities will be valued at fair
value as determined in good faith by the Board of Directors. Short-term
obligations are valued at amortized cost, which approximates value.
FEDERAL INCOME TAXES.
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to shareholders. Therefore, no provision
for federal income or excise tax is required. At September 30, 1999, the Fund
had approximately $18,375,000 of capital loss carryovers available to offset
future capital gains, if any, which expire between 2000 and 2008.
SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME.
Securities transactions are accounted for on the trade date (date the
order to buy or sell is executed) with realized gain or loss on the sale of
securities being determined based upon identified cost. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. Discounts and premiums on debt securities are amortized over the lives of
the respective securities in accordance with the requirements of the Internal
Revenue Code.
12
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the six months ended September 30, 1999 (Unaudited)
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS.
Dividends and distributions to shareholders are recorded on the
ex-dividend date. The character of the distributions made during the year from
net investment income may differ from its ultimate characterization for federal
income tax purposes. Also, due to the timing of distributions, the fiscal year
in which amounts are distributed may differ from the fiscal year in which income
or gain was recorded by the Fund. The Fund adjusts the classification of
distributions to shareholders to reflect the differences between financial
statement amounts and distributions determined in accordance with income tax
regulations.
USE OF ESTIMATES IN FINANCIAL STATEMENTS.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results may differ from these estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES.
Purchases and sales of investment securities (excluding short term
securities) during the six months ended September 30, 1999, were $3,816,330 and
$11,354,447, respectively.
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
The Fund pays advisory fees for investment management and advisory
services under a management agreement with Davis Selected Advisers, L.P. (the
"Adviser"). The management agreement provides for a fee at the annual rate of
0.55% of all average net assets.
The Adviser is paid for registering Fund shares for sale in various
states. The fee for the six months ended September 30, 1999, amounted to $6,498.
State Street Bank & Trust Co. is the Fund's primary transfer agent. The Adviser
is also paid for certain transfer agent services. The fee for these services for
the six months ended September 30, 1999, amounted to $3,087. State Street Bank &
Trust Co. is the Fund's primary accounting provider. Fees for such services are
included in the custodian fee. The Adviser is also paid for certain accounting
services. Such fee amounted to $3,000 for the six months ended September 30,
1999. Certain directors and officers of the Fund are also directors and officers
of the general partner of Davis Selected Advisers, L.P.
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of
the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly to
DSA-NY.
13
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the six months ended September 30, 1999 (Unaudited)
================================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES
CLASS A SHARES
Class A shares of the Fund are sold at net asset value plus a sales charge
and are redeemed at net asset value (without a contingent deferred sales
charge).
During the six months ended September 30, 1999, Davis Distributors, LLC,
the Fund's Underwriter (the "Underwriter" or "Distributor") received $8,958 from
commissions earned on sales of Class A shares of the Fund of which $1,474 was
retained by the Underwriter and the remaining $7,484 was re-allowed to
investment dealers. The Underwriter paid the costs of prospectuses in excess of
those required to be filed as part of the Fund's registration statement, sales
literature and other expenses assumed or incurred by it in connection with such
sales.
The Underwriter is reimbursed for amounts paid to dealers as a service fee
with respect to Class A shares sold by dealers which remain outstanding during
the period. The service fee is reimbursed at the annual rate up to 1/4 of 1% of
the average net assets maintained by the responsible dealers. The Underwriter is
not reimbursed for accounts for which the Underwriter pays no service fees to
other firms. The service fee for Class A shares of the Fund for the six months
end September 30, 1999, was $18,533.
CLASS B SHARES
Class B shares of the Fund are sold at net asset value and are redeemed at
net asset value less a contingent deferred sales charge if redeemed within six
years of purchase.
The Fund pays a distribution fee to reimburse the Distributor for
commission advances on the sale of the Fund's Class B shares. The National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of the
Fund's average annual net assets attributable to Class B shares which may be
used to reimburse the Distributor. The limit is 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount the Fund may pay for
distribution-related services to 6.25% of gross sales since inception of the
Rule 12b-1 plan plus interest at 1% over the prime rate on unpaid amounts. The
Distributor intends to seek full payment (plus interest at prime plus 1%) of
distribution charges that exceed the 1% annual limit in some future period or
periods when the plan limits have not been reached.
For the six months ended September 30, 1999, Class B shares of the Fund
made distribution plan payments which included distribution fees of $72,218 and
service fees of $23,446.
Commission advances by the Distributor for the six months ended September
30, 1999, on the sale of Class B shares of the Fund amounted to $40,813, of
which $35,076 was reallowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the Fund in
the amount of $717,849, representing the cumulative commission advances by the
Distributor on the sale of the Fund's Class B shares, plus interest, reduced by
cumulative distribution fees paid by the Fund and cumulative contingent deferred
sales charges paid by redeeming shareholders. The Fund has no contractual
obligation to pay any such distribution charges and the amount, if any, timing
and condition of such payment are solely within the discretion of the Directors
who are not interested persons of the Fund or the Distributor.
14
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED For the six months ended September 30,
1999 (Unaudited)
================================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)
CLASS B SHARES - CONTINUED
A contingent deferred sales charge is imposed upon redemption of certain
Class B shares of the Fund within six years of the original purchase. The charge
is a declining percentage starting at 4% of the lesser of net asset value of the
shares redeemed or the total cost of such shares. For the six months ended
September 30, 1999 the Distributor received contingent deferred sales charges of
$54,221 from redemptions of Class B shares of the Fund.
CLASS C SHARES
Class C shares of the Fund are sold at net asset value and are redeemed at
net asset value less a contingent deferred sales charge of 1% if redeemed within
one year of purchase. The Fund pays the Distributor 1% of the Fund's average
annual net assets attributable to Class C shares, of which 0.75% may be used to
pay distribution expenses and 0.25% may be used to pay shareholder service fees.
During the six months ended September 30, 1999, Class C shares of the Fund
made distribution payments of 20,118. During the six months ended September 30,
1999, the Distributor received $3,791 in contingent deferred sales charges from
redemptions of Class C shares of the Fund.
NOTE 5 - CUSTODIAN FEES
Under an agreement with the custodian bank, custodian fees are reduced for
earnings on cash balances maintained at the custodian by the Fund. Such
reductions amounted to $554 during the six months ended September 30, 1999.
NOTE 6 - RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are not registered under the Securities Act of 1933
and may have contractual restrictions on resale. They are valued under methods
approved by the Board of Directors as reflecting fair value. Securities may be
considered illiquid if they lack a readily available market or if valuation has
not changed for a certain period of time. The aggregate value of restricted or
illiquid securities is $265,916, or 0.65% of the Fund's net assets as of
September 30, 1999. Information concerning restricted securities is as follows:
<TABLE>
<CAPTION>
ACQUISITION COST VALUATION PER UNIT
SECURITY DATE PER UNIT AS OF SEPTEMBER 30, 1999
- - -------- ---------- -------- ------------------------
<S> <C> <C> <C>
Technical Equipment Leasing Corp.,
Jr. Sub. Deb., Series A,
18.375%, 04/01/96 06/15/84 $100.00 $3.00
</TABLE>
15
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the six months ended September 30, 1999 (Unaudited)
================================================================================
NOTE 7 - CAPITAL STOCK
At September 30, 1999, there were 1,000,000,000 shares of capital stock ($0.05
par value per share) authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
CLASS A SIX MONTHS
ENDED
SEPTEMBER 30, 1999
(UNAUDITED)
------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................... 205,219 $ 789,046
Shares issued in reinvestment of distributions.................. 80,159 307,502
----------- ------------
285,378 1,096,548
Shares redeemed................................................. (1,173,934) (4,521,511)
----------- ------------
Net decrease............................................. (888,556) $ (3,424,963)
=========== ============
<CAPTION>
YEAR ENDED
MARCH 31, 1999
-------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................... 2,005,727 $ 8,951,909
Shares issued in reinvestment of distributions.................. 323,428 1,432,650
----------- ------------
2,329,155 10,384,559
Shares redeemed................................................. (6,508,378) (28,061,987)
----------- ------------
Net decrease............................................. (4,179,223) $(17,677,428)
=========== ============
<CAPTION>
CLASS B SIX MONTHS
ENDED
SEPTEMBER 30, 1999
(UNAUDITED)
-------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................... 836,616 $ 3,187,401
Shares issued in reinvestment of distributions.................. 61,775 235,078
----------- ------------
898,391 3,422,479
Shares redeemed................................................. (1,776,086) (6,761,920)
----------- ------------
Net decrease............................................. (877,695) $ (3,339,441)
=========== ============
<CAPTION>
YEAR EN DED
MARCH 31, 1999
-------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................... 4,921,797 $ 21,526,190
Shares issued in reinvestment of distributions.................. 169,369 735,895
----------- ------------
5,091,166 22,262,085
Shares redeemed................................................. (4,172,871) (17,592,033)
----------- ------------
Net increase............................................. 918,295 $ 4,670,052
=========== ============
</TABLE>
16
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED For the six months ended
September 30, 1999 (Unaudited)
================================================================================
NOTE 7 - CAPITAL STOCK - (CONTINUED)
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS
ENDED
SEPTEMBER 30, 1999
(UNAUDITED)
-------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................... 400,610 $1,536,016
Shares issued in reinvestment of distributions.................. 14,340 54,839
----------- -----------
414,950 1,590,855
Shares redeemed................................................. (395,362) (1,513,000)
----------- -----------
Net increase............................................. 19,588 $ 77,855
=========== ==========
<CAPTION>
YEAR ENDED
MARCH 31, 1999
------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................... 1,508,715 $ 6,727,226
Shares issued in reinvestment of distributions.................. 29,525 126,622
----------- -----------
1,538,240 6,853,848
Shares redeemed................................................. (915,471) (3,894,177)
----------- -----------
Net increase............................................. 622,769 $ 2,959,671
=========== ==========
<CAPTION>
CLASS Y
SIX MONTHS
ENDED
SEPTEMBER 30, 1999
(UNAUDITED)
-------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................... 60 $ 233
Shares issued in reinvestment of distributions.................. 34,793 133,895
----------- -----------
34,853 134,128
Shares redeemed................................................. (30) (117)
----------- -----------
Net increase............................................. 34,823 $ 134,011
=========== ==========
<CAPTION>
YEAR ENDED
MARCH 31, 1999
-------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................... 21,392 $ 92,938
Shares issued in reinvestment of distributions.................. 72,773 318,206
----------- -----------
94,165 411,144
Shares redeemed................................................. (5,628) (25,590)
----------- -----------
Net increase............................................. 88,537 $ 385,554
=========== ==========
</TABLE>
17
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
SIX MONTHS
CLASS A ENDED
SEPTEMBER 30, YEAR ENDED MARCH 31,
1999 -----------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period................. $ 3.95 $ 4.76 $ 4.71 $4.84 $ 4.86 $ 5.14
------ ------ ------ ------ ------ ------
Income (Loss) From Investment
Operations
Net Investment Income.............. 0.12 0.28 0.34 0.39 0.43 0.46
Net Realized and Unrealized Gains or
Losses............................ (0.15) (0.75) 0.13 (0.06) 0.03 (0.24)
------ ------ ------ ------ ------ ------
Total From Investment Operations (0.03) (0.47) 0.47 0.33 0.46 0.22
------ ------ ------- ------- ------ ------
Dividends and Distributions
Dividends from Net Investment Income (0.13) (0.28) (0.34) (0.39) (0.43) (0.46)
Returns of Capital.................. - (0.06) (0.08) (0.07) (0.05) (0.04)
------ ------ ------ ------ ------ ------
Total Dividends and Distributions (0.13) (0.34) (0.42) (0.46) (0.48) (0.50)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period........ $ 3.79 $ 3.95 $ 4.76 $ 4.71 $ 4.84 $ 4.86
====== ====== ====== ====== ====== ======
Total Return (1)...................... (0.70)% (10.41)% 10.40% 7.08% 9.93% 4.69%
Ratios/Supplemental Data
Net Assets, End of Period (000
omitted) .......................... $15,842 $20,029 $44,058 $47,890 $53,816 $56,405
Ratio of Expenses to Average Net
Assets ............................ 1.39%* 1.36% 1.40%(2) 1.48%(2) 1.51% 1.53%
Ratio of Net Investment Income to
Average Net Assets................ 6.49%* 6.88% 7.11% 8.13% 8.92% 9.49%
Portfolio Turnover Rate (3)........... 8.96% 87.21% 71.54% 66.10% 118.34% 98.94%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the first
day of the fiscal period, with all dividends and distributions reinvested in
additional shares on the reinvestment date, and redemption at the net asset
value calculated on the last business day of the fiscal period. Sales
charges are not reflected in the total returns. Total returns are not
annualized for periods of less than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.39% and 1.47% for the years ended
March 31, 1998 and March 31, 1997, respectively. Prior to 1997, such
reductions were reflected in the expense ratios.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
18
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
CLASS B
DECEMBER 5, 1994
SIX MONTHS (INCEPTION
ENDED OF CLASS)
SEPTEMBER 30, YEAR ENDED MARCH 31, THROUGH
1999 ------------------------------------------ MARCH 31,
(UNAUDITED) 1999 1998 1997 1996 1995
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 3.92 $ 4.73 $ 4.68 $ 4.81 $ 4.85 $ 4.80
------- ------- -------- ------- ------- -------
Income (Loss) From Investment Operations
Net Investment Income................. 0.11 0.24 0.33 0.36 0.40 0.11
Net Realized and Unrealized Gains or
Losses ............................. (0.15) (0.75) 0.10 (0.07) - 0.05
------- ------- -------- ------- ------- -------
Total From Investment Operations.. (0.04) (0.51) 0.43 0.29 0.40 0.16
------- ------- -------- ------- ------- -------
Dividends and Distributions
Dividends from Net Investment Income.. (0.12) (0.24) (0.33) (0.36) (0.40) (0.11)
Returns of Capital.................... - (0.06) (0.05) (0.06) (0.04) -
------- ------- -------- ------- ------- -------
Total Dividends and Distributions. (0.12) (0.30) (0.38) (0.42) (0.44) (0.11)
Net Asset Value, End of Period.......... $ 3.76 $ 3.92 $ 4.73 $ 4.68 $ 4.81 $ 4.85
======= ======= ======== ======= ======= =======
Total Return (1)........................ (1.11)% (11.20)% 9.53% 6.26% 8.68% 3.39%
Ratios/Supplemental Data
Net Assets, End of Period (000
omitted) ............................ $17,346 $21,522 $21,624 $10,217 $6,599 $1,900
Ratio of Expenses to Average Net
Assets ............................. 2.12%(2)* 2.20%(2) 2.16%(2) 2.30%(2) 2.32% 2.36%*
Ratio of Net Investment Income to
Average Net Assets................. 5.77%* 6.05% 6.35% 7.28% 8.11% 8.66%*
Portfolio Turnover Rate (3)........... 8.96% 87.21% 71.54% 66.10% 118.34% 98.94%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the first
day of the fiscal period (or inception of offering), with all dividends and
distributions reinvested in additional shares on the reinvestment date, and
redemption at the net asset value calculated on the last business day of the
fiscal period. Sales charges are not reflected in the total returns. Total
returns are not annualized for periods of less than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.11% for the six months ended
September 30, 1999 and 2.19%, 2.15%, and 2.29% for the years ended March 31,
1999, March 31, 1998 and March 31, 1997, respectively. Prior to 1997, such
reductions were reflected in the expense ratios.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
19
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
CLASS C
<TABLE>
<CAPTION>
AUGUST 12, 1997
SIX MONTHS (INCEPTION
ENDED OF CLASS)
SEPTEMBER 30, YEAR ENDED THROUGH
1999 MARCH 31, MARCH 31,
(UNAUDITED) 1999 1998
----------- ---- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period ....................... $ 3.94 $ 4.76 $ 4.71
------ ------ ------
Income (Loss) From Investment Operations
Net Investment Income .................... 0.11 0.24 0.16
Net Realized and Unrealized Gains or Losses (0.14) (0.76) 0.10
------ ------ ------
Total From Investment Operations ...... (0.03) (0.52) 0.26
------ ------ ------
Dividends and Distributions
Dividends from Net Investment Income ...... (0.12) (0.24) (0.16)
Returns of Capital ........................ -- (0.06) (0.05)
------ ------ ------
Total Dividends and Distributions ..... (0.12) (0.30) (0.21)
Net Asset Value, End of Period .............. $ 3.79 $ 3.94 $ 4.76
====== ====== ======
Total Return (1) ............................ (0.83)% (11.34)% 5.61%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) .. $3,965 $4,055 $1,928
Ratio of Expenses to Average Net Assets ... 2.18%* 2.18% 2.09%(2)*
Ratio of Net Investment Income to
Average Net Assets ...................... 5.70%* 6.06% 6.42%*
Portfolio Turnover Rate (3) ............... 8.96% 87.21% 71.54%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the first
day of the fiscal period (or inception of offering), with all dividends and
distributions reinvested in additional shares on the reinvestment date, and
redemption at the net asset value calculated on the last business day of the
fiscal period. Sales charges are not reflected in the total returns. Total
returns are not annualized for periods of less than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.08% for the period ended March 31,
1998.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
20
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
CLASS Y
<TABLE>
<CAPTION>
MARCH 20, 1997
SIX MONTHS (INCEPTION
ENDED YEAR ENDED OF CLASS)
SEPTEMBER 30, MARCH 31, THROUGH
1999 --------------------- MARCH 31,
(UNAUDITED) 1999 1998 1997
----------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .................... $ 3.97 $ 4.79 $ 4.72 $ 4.74
------ ------ ------ ------
Income (Loss) From Investment Operations
Net Investment Income ................. 0.13 0.29 0.34 --
Net Realized and Unrealized
Gains or Losses ...................... (0.15) (0.76) 0.14 (0.02)
------ ------ ------ ------
Total From Investment Operations ... (0.02) (0.47) 0.48 (0.02)
------ ------ ------ ------
Dividends and Distributions
Dividends from Net Investment Income ... (0.14) (0.29) (0.34) --
Returns of Capital ..................... -- (0.06) (0.07) --
------ ------ ------ ------
Total Dividends and Distributions .. (0.14) (0.35) (0.41) --
Net Asset Value, End of Period ........... $ 3.81 $ 3.97 $ 4.79 $ 4.72
====== ====== ====== ======
Total Return (1).......................... (0.47)% (10.16)% 10.64% (0.42)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $3,799 $3,823 $4,187 $7
Ratio of Expenses to Average Net Assets 0.99%* 1.00% 1.05%2 1.21%2*
Ratio of Net Investment Income to
Average Net Assets ................... 6.89%* 7.24% 7.46% 8.89%*
Portfolio Turnover Rate (3)............. 8.96% 87.21% 71.54% 66.10%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the first
day of the fiscal period (or inception of offering), with all dividends and
distributions reinvested in additional shares on the reinvestment date, and
redemption at the net asset value calculated on the last business day of the
fiscal period. Total returns are not annualized for periods of less than one
full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.04% and 1.20% for the year ended
March 31, 1998 and for the period ended March 31, 1997, respectively.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
21
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
DAVIS INTERMEDIATE INVESTMENT
GRADE BOND FUND, INC.
124 East Marcy Street, Santa Fe, New Mexico 87501
================================================================================
DIRECTORS OFFICERS
Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Shelby M.C. Davis
Andrew A. Davis President
Christopher C. Davis Kenneth C. Eich
Jerry D. Geist Vice President
D. James Guzy Sharra L. Reed
G. Bernard Hamilton Vice President, Treasurer
LeRoy E. Hoffberger & Assistant Secretary
Laurence W. Levine Thomas D. Tays
Christian R. Sonne Vice President & Secretary
Marsha Williams Andrew A. Davis
Vice President
Christopher C. Davis
Vice President
INVESTMENT ADVISER
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-800-279-0279
DISTRIBUTOR
Davis Distributors, LLC
124 East Marcy Street
Santa Fe, New Mexico 87501
TRANSFER AGENT & CUSTODIAN
State Street Bank & Trust Company
c/o The Davis Funds
P. O. Box 8406
Boston, MA 02266-8406
AUDITORS
KPMG LLP
707 Seventeenth Street, Suite 2300
Denver, CO 80202
COUNSEL
D'Ancona & Pflaum
111 E. Wacker Drive, Suite 2800
Chicago, Illinois 60601-4205
================================================================================
FOR MORE INFORMATION ABOUT DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.,
INCLUDING MANAGEMENT FEE, CHARGES AND EXPENSES, SEE THE CURRENT PROSPECTUS WHICH
MUST PRECEDE OR ACCOMPANY THIS REPORT.
<PAGE>
SEMI-ANNUAL REPORT
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-800-279-0279
[DAVIS FUNDS LOGO]
<PAGE>
Annual Report
as of June 30, 1999
Evergreen
Short and Intermediate Term
Bond Funds
[LOGO OF EVERGREEN FUNDS/SM/ APPEARS HERE]
<PAGE>
Table of Contents
Letter to Shareholders .................................................... 1
Evergreen Capital Preservation and Income Fund
Fund at a Glance ..................................................... 2
Portfolio Manager Interview .......................................... 3
Evergreen Intermediate Term Bond Fund
Fund at a Glance ..................................................... 5
Portfolio Manager Interview .......................................... 6
Evergreen Short-Intermediate Bond Fund
Fund at a Glance ..................................................... 9
Portfolio Manager Interview .......................................... 10
Financial Highlights
Evergreen Capital Preservation and Income Fund ....................... 12
Evergreen Intermediate Term Bond Fund ................................ 14
Evergreen Short-Intermediate Bond Fund ............................... 16
Schedule of Investments
Evergreen Capital Preservation and Income Fund ....................... 18
Evergreen Intermediate Term Bond Fund ................................ 19
Evergreen Short-Intermediate Bond Fund ............................... 24
Statements of Assets and Liabilities ...................................... 27
Statements of Operations .................................................. 28
Statements of Changes in Net Assets ....................................... 29
Combined Notes to Financial Statements .................................... 31
Independent Auditors' Report .............................................. 40
Other Information ......................................................... 41
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Evergreen Funds
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Evergreen Funds is one of the nation's fastest growing investment companies with
over $70 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 the 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: ARE NOT FDIC INSURED May lose value * Are not bank guaranteed
Evergreen Distributor, Inc.
Evergreen(SM) is a Service Mark of Evergreen Investment Services, Inc.
<PAGE>
Letter to Shareholders
----------------------
August 1999
William M. Ennis
Managing Director
[PHOTO OF WILLIAM M. ENNIS APPEARS HERE]
Dear Evergreen Shareholders:
We are pleased to provide the Evergreen Short and Intermediate Bond Funds annual
report, which covers the twelve-month period ended June 30, 1999.
Shift in the Interest Rate Environment
Following the Russian financial crisis in August 1998, there was a "flight to
quality" worldwide. Investors fled from risk-related securities, interest rates
fell sharply and the prices of high grade and U.S. government securities rose.
During the final six months of the period the flight to quality was reversed as
a result of actions to lower interest rates by the governments of the major
industrialized nations. Investors returned to more risky fixed income
securities, such as lower quality corporate bonds, international bonds and
emerging market bonds.
Going forward, we anticipate the possibility of one or more interest-rate hikes
by the Federal Reserve in the last half of 1999. The moderately growing domestic
economy and the solid, long-term fundamentals underlying the market lead us to a
cautiously optimistic outlook.
Year 2000 Preparation/1/
At Evergreen, we continue to prepare ourselves to provide uninterrupted service
and communication with all our shareholders throughout the end of 1999 and right
through the date change into the year 2000 and beyond. As of the end of August,
when this report was finalized, we have completed the testing of internal
systems. In March, we successfully participated in industry-wide testing with
the Securities Industry Association. We are confident that our efforts will
enable shareholders to receive the same Evergreen products and services after
December 1999 that we deliver today.
As always, we encourage all shareholders to diversify their mutual fund
portfolios and we suggest you consult with your financial advisor for an
allocation strategy that helps you meet your investment goals and objectives.
Evergreen Funds offers a wide range of funds that includes multiple investment
styles to help you find one that is appropriate in your portfolio.
Thank you for your continued investment in Evergreen Funds.
Sincerely,
/s/William Ennis
William M. Ennis
President and CEO
Evergreen Investment Company
/1/ This information constitutes Year 2000 readiness disclosure.
1
<PAGE>
EVERGREEN
Capital Preservation and Income Fund
Fund at a Glance as of June 30, 1999
In keeping with our strategy, we try to find those sectors that offer the best
relative value at any time.
Portfolio
Management
----------
[Photo of Gary E. Pzegeo Appears Here]
Gary E. Pzegeo
Tenure: April 1997
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CURRENT INVESTMENT STYLE/1/
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Morningstar's Style Box is based on a portfolio date as of 6/30/99.
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: 1999 Morningstar, Inc.
/1/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 each class. 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.
Historical performance shown for Classes A and C prior
to their inception is based on the performance of Class B, the original class
offered. The historical returns for Class A have not been adjusted to eliminate
the effect of the higher 12b-1 fees applicable to Class B. If actual 12b-1 fees
applicable to Class A had been used, returns for Class A would have been higher.
The Fund incurs 12b-1 expenses for Class A based on rates of .25% on assets
prior to 1/1/97 and .10% assessed on new assets from 1/1/97. Classes B and C
each incur 12b-1 expenses of 1.00%.
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PERFORMANCE AND RETURNS/1/
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Portfolio Inception Date: 7/1/91 Class A Class B Class C
Class Inception Date 12/30/94 7/1/91 2/1/93
...... ........................................................................
Average Annual Returns*
..............................................................................
1 year with sales charge 1.36% -1.10% 2.87%
..............................................................................
1 year w/o sales charge 4.80% 3.86% 3.86%
..............................................................................
3 years 4.42% 3.86% 4.81%
..............................................................................
5 years 4.95% 4.62% 5.00%
..............................................................................
Since Portfolio Inception 4.42% 4.42% 4.42%
..............................................................................
Maximum Sales Charge 3.25% 5.00% 1.00%
Front End CDSC CDSC
...............................................................................
30-day SEC Yield 4.58% 3.90% 3.93%
..............................................................................
12-month distributions per share $0.53 $0.46 $0.46
..............................................................................
* Adjusted for maximum applicable sales charge.
[LINE GRAPH APPEARS HERE]
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LONG TERM GROWTH
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6-Month
CPI Treasury Bill Class B
----- ------------- -------
07/31/91 10,000 10,000 10,000
06/30/92 10,294 10,464 10,572
06/30/93 10,602 10,798 10,887
06/30/94 10,866 11,186 11,027
06/30/95 11,197 11,827 11,564
06/30/96 11,501 12,452 12,209
06/30/97 11,769 13,113 12,946
06/30/98 11,968 13,801 13,519
06/30/99 12,203 14,440 14,136
Comparison of a $10,000 investment in Evergreen Capital Preservation and Income
Fund, Class B shares, versus a similar investment in a 6-Month Treasury Bill and
the Consumer Price Index (CPI).
The 6-Month Treasury Bill is an unmanaged index and does not include transaction
costs associated with buying and selling securities, nor any management fees.
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.
2
<PAGE>
EVERGREEN
Capital Preservation and Income Fund
Portfolio Manager Interview
How did the Fund perform?
The Fund did well in a challenging environment. For the 12 months ending June
30, 1999, Evergreen Capital Preservation and Income Fund Class B shares had a
total return of 3.86%. Performance is before deduction of any applicable sales
charges (compare the listed benchmark 6-month T-Bill) During the same 12-month
period, the average return of adjustable rate mortgage funds was 4.04%,
according to Lipper Inc., an independent monitor of mutual fund performance,
while the 6-month T-Bill returned 4.63%.
Portfolio
Characteristics
---------------
Total Net Assets $ 37,694,711
...............................................................................
Average Credit Quality AAA
...............................................................................
Effective Maturity 4.8 years
...............................................................................
Average Duration 1.2 years
...............................................................................
What was the investment environment like during the 12 months?
Particularly during the second six months, we started a nice rebound in the
market for adjustable rate mortgages, which the Fund emphasizes. This rebound
was from the lows of 1997 and 1998 when interest rates were extremely low and
adjustable rate mortgage prepayments tended to be extremely high. The fiscal
year didn't start out that way, however. The first six months were characterized
by declining interest rates and rising bond prices, especially for U.S.
Treasuries and particularly for securities with shorter maturities.
Fears of a potential global economic recession that could spread to developed
economies had begun because of concerns about the economic problems in Asia and
emerging markets. The resulting "flight to quality" created a rally in Treasury
bonds, but it did not spread to other parts of the bond market such as
adjustable rate mortgages. It was during this period that the central banks of
many developed economies--led by the U.S. Federal Reserve--intervened to lower
short-term rates and calm the financial markets.
The situation changed, however, during the second six months of the fiscal year.
We began to see signs of stabilization in many areas, including markets in Latin
America and Asia. In early 1999, it started to appear that conditions there
weren't as bad as they had appeared during 1998. Japan, which had been stuck in
a deep recession, began to show signs of an economic revitalization.
Domestically, the low interest rates created a very favorable environment for
the U.S. consumer and the economy continued to grow.
Given all these conditions, the U.S. Federal Reserve Board began to send out
very clear signals that it was considering ending its accommodative policies of
low, short-term interest rates. This change seemed to be justified by emerging
economic data, including a higher consumer price index and rising commodity
prices, led by energy prices. This data suggested we might be entering a period
of faster growth and higher inflation, which is generally bad for fixed-rate
bonds. While these conditions are not ideal for adjustable rate mortgages, they
certainly are better than for longer duration, fixed-rate securities.
Interest rates moved higher. Over the full 12 months, the yield on the one-year
Treasury bill--an indicator of shorter-term rates--went from 5.37% on June 30,
1998, to a low of 3.85% on October 16, 1998, and then back up to 5.06% on June
30, 1999.
3
<PAGE>
EVERGREEN
Capital Preservation and Income Fund
Portfolio Manager Interview
What was your strategy as conditions changed?
In keeping with our strategy, we try to find those sectors that offer the best
relative value at any time. We started the fiscal year back on July 1, 1998,
with a healthy weighting in fixed-rate securities, 29% of net assets. As these
bonds rallied and other sectors suffered, we began to lower the weighting in
fixed-rate securities, particularly U.S. government bonds, and moved into other
sectors that offered greater relative value, including adjustable rate mortgages
(ARMS), fixed-rate commercial mortgages and asset-backed securities. We
maintained our focus on adjustable rate mortgages, which we thought offered
attractive value.
Asset Allocation
(as a percentage of portfolio assets)
June 30, 1998 December 31, 1998 June 30, 1999
ARMs 69% 72% 68%
Fixed-rate 29% 25% 30%
Cash 2% 3% 2%
The Fund concentrates on mainly U.S. government or government agency securities,
however, it can invest up to 20% of net assets in AAA-rated non-government
securities. At the close of the fiscal year, about 16% of net assets were
invested in AAA-rated non-government securities. Average maturity of the
portfolio on June 30, 1999 was 4.8 years, while average duration was 1.2 years.
What is your outlook?
The outlook is driven by the policies of the Federal Reserve, which has started
to tighten the money supply by raising short-term interest rates. We believe the
Federal Reserve could raise rates once or twice more during the last six months
of 1999. Federal Reserve Chairman Alan Greenspan has indicated he believes the
economy can grow at an annual rate of about 3% without generating inflation. The
economy most recently has been growing at a rate of about 4% a year.
An outlook of rising short-term rates creates a favorable environment for
adjustable rate mortgages. While this outlook is similar to the movement of
interest rates for the first six months of 1999, we would caution that after a
period of strong performance, adjustable rate mortgages don't necessarily offer
as much relative value as they did earlier. As interest rates rise, however,
ARMS have the benefit of the ability to reset their coupons to meet higher
rates. At some point during the next six months, higher interest rates could cut
into the rate of economic growth. At that point, we may want to increase our
allocation to the fixed-rate sector.
4
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Fund at a Glance as of June 30, 1999
Two significant steps we took during the past six months were to invest in
European mortgage-backed securities and to reduce substantially the emphasis on
U.S. mortgage-related securities.
Portfolio
Management
----------
David J. Bowers, CFA
Tenure: January 1999
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CURRENT INVESTMENT STYLE/1/
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[GRAPHIC APPEARS HERE]
Morningstar's Style Box is based on a portfolio date as of 6/30/99.
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.
Source: 1998 Morningstar, Inc.
/1/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 each class. 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.
Historical performance shown for Classes B, C, and Y prior to their inception is
based on the performance of Class A, the original class offered. These
historical returns for Classes B and C have not been adjusted to reflect the
effect of each Class' 12b-1 fees. These fees for Class A are .25%, for Class B
are 1.00%, and for Class C are 1.00%. If these fees had been reflected, returns
for Classes B and C would have been lower. The historical returns for Class Y
have been adjusted to reflect the elimination of the .25% 12b-1 fee applicable
to Class A. Class Y does not pay a 12b-1 fee. If these fees had not been
eliminated, returns for Class Y would have been lower.
Foreign investments may contain more risk due to the inherent risks associated
with changing political climates, foreign market instability and foreign
currency fluctuations.
- -------
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PERFORMANCE AND RETURNS/1/
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Portfolio Inception Date: 2/13/87 Class A Class B Class C Class Y
Class Inception Date 2/13/87 2/1/93 2/1/93 1/26/98
Average Annual Returns*
1 year with sales charge -2.17% -4.46% -0.64% n/a
1 year w/o sales charge 1.17% 0.31% 0.31% 1.43%
3 years 5.06% 4.49% 5.39% 6.47%
5 years 5.78% 5.31% 5.63% 6.73%
10 years 6.75% 6.58% 6.58% 7.45%
Since Portfolio Inception 5.99% 5.85% 5.85% 6.71%
Maximum Sales Charge 3.25% 5.00% 1.00% n/a
Front End CDSC CDSC
30-day SEC Yield 5.94% 5.36% 5.39% 6.40%
12 month distributions per share $0.53 $0.47 $0.47 $0.56
* Adjusted for maximum applicable sales charge.
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LONG TERM GROWTH
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[LINE GRAPH APPEARS HERE]
CPI LBIGCBI/Corp Evergreen Interm Bd A
6/30/89 10,000 10,000 9,675
6/30/90 10,467 10,782 10,142
6/30/91 10,959 11,916 11,112
6/30/92 11,297 13,485 12,689
6/30/93 11,636 14,900 14,215
6/30/94 11,926 14,862 14,048
6/30/95 12,288 16,404 15,376
6/30/96 12,622 17,226 16,041
6/30/97 12,917 18,470 17,458
6/30/98 13,135 20,039 18,998
6/30/99 13,392 20,885 19,221
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 (LBIGCBI) and the Consumer Price Index (CPI).
The LBIGCBI is an unmanaged index and does not include transaction costs
associated with buying and selling securities nor any management fees. 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.
5
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Portfolio Manager Interview
How did the Fund perform?
For the 12 months ended June 30, 1999, Evergreen Intermediate Term Bond Fund
Class B shares had a return of 0.31%. Performance is before deduction of any
applicable sales charges. During the same 12-month period, the average return of
intermediate term, investment grade bond funds was 2.00%, according to Lipper,
Inc., a monitor of mutual fund performance, while the Lehman Brothers
Intermediate Government/Corporate Bond Index had a return of 4.19%.
The 12-month period encompassed different conditions in the financial markets,
making it a challenging time for the Fund with its emphasis on current income
from corporate bonds. Nevertheless, the Fund maintained a generous income
stream, with Class A shares remaining consistently in the top quartile of funds
in the Lipper category in terms of current yield.
Portfolio
Characteristics
---------------
Total Net Assets $ 178,298,361
Average Credit Quality A+
Effective Maturity 7.7 years
Average Duration 5.4 years
What was the investment environment like during the
fiscal year?
The 12-month period actually encompassed two distinctly different periods, with
very different trends affecting fixed-income investors. Generally, however, one
would say that the period was a time of volatility that proved difficult for
funds emphasizing corporate bonds and other securities that pay yield premiums
over government bonds.
The first six months were characterized principally by a flight to quality
prompted by fears that economic problems in Asia and emerging markets could lead
to a slowdown in global economic growth. During this period, investors
throughout the world preferred the highest quality bonds, U.S. Treasury bonds,
while tending to de-emphasize fixed income securities that carried credit risk.
With this as a backdrop, the U.S. Federal Reserve Board stepped in, lowering
short-term interest rates three successive times in the fall of 1998.
As 1999 began, we appeared to be returning to the situation that existed before
the recessionary fears of late 1998. Economic growth in the United States was
robust, with full employment and strong consumer spending. Internationally, the
outlook improved considerably. As evidence of this economic strength persisted,
the Federal Reserve Board began to give hints that it might raise short-term
rates to stave off inflation. The bond market anticipated a rate increase, and
interest rates tended to rise. In late June, the Federal Reserve did raise
short-term rates by one-quarter of one percent.
6
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Portfolio Manager Interview
During this period, while the stock market tended to do well, the corporate bond
market continued to disappoint investors for two principal reasons. First, a
significant supply of new corporate bonds affected supply/demand relationships,
keeping yields higher and prices lower. Second, the corporate bond market
continued to reflect uncertainty about the direction and strength of economic
trends, resulting in valuations inconsistent with the performance of the equity
market.
Over this general period, corporate bonds, including those emphasized by your
Fund, tended to underperform other, higher quality fixed income securities. As a
result, we believe significant investment value exists in corporate bonds, which
tend to be paying higher yields in relation to U.S. Treasury securities, than
one might expect in a healthy, growing economy.
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PORTFOLIO COMPOSITION*
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(as a percentage of net assets)
[PIE CHART APPEARS HERE]
Corporate Notes/Bonds -- 55.5%
CMO & Mortgage-Backed Securities -- 13.8%
Foreign Bonds -- 11.5%
U.S. Treasury/Agency -- 10.2%
Asset-Backed Securities -- 6.2%
Mutual Fund Shares -- 2.3%
Repurchase Agreements
Other Assets & Liabilities -- 0.5%
What strategies did you pursue in this environment?
We maintained the Fund's long-term strategy of emphasizing intermediate-term
corporate bonds, with the overwhelming majority rated investment grade or
higher. Consistent with our philosophy, we do not try to anticipate the
direction of interest rates by making explicit "bets" with the fund's duration
or average maturity. At the end of the period, on June 30, the Fund's duration
was 5.4 years, and effective maturity was 7.7 years.
In sector selection, we maintained a relatively defensive posture, emphasizing
domestic bonds, including securities issued in the telecommunications and
finance sectors. This has been a relatively successful tactic, particularly with
respect to bonds from the insurance and banking industries. The emphasis on
telecommunications industry bonds helped in 1998, but not in 1999, as an influx
of new supply of debt by companies such as AT&T, MCI Worldcom and Sprint held
back performance.
We maintained a consistent weighting in mortgages, concentrating on commercial
mortgage-backed securities, high quality asset-backed securities and
collaterialized mortgage obligations designed to minimize exposure to interest
rate volatility.
* Portfolio composition subject to change.
7
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Portfolio Manager Interview
Top 5 Sectors
-------------
(as a percentage of net assets, 6/30/99)
Corporate Bonds 55.3%
U.S. Treasury 9.0%
Yankee Bonds* 8.3%
Collateralized Mortgage Obligations 8.0%
Asset-Backed Securities 6.2%
At the end of the fiscal year, the Fund's high yield weighting remained at 18%
of net assets. We emphasized defensive sectors in high yield bonds, where we
believe we can gain additional yield without taking undue credit risk. The
preponderance of high yield securities were rated either BB or B, the two
highest ratings below investment grade. The Fund's average credit rating
remained relatively strong, at A+.
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CREDIT QUALITY ALLOCATION**
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(as a percentage of portfolio assets, 6/30/99)
[GRAPH APPEARS HERE]
U.S. Government/AAA -- 28%
A -- 22%
BBB -- 19%
BB or less -- 18%
AA -- 13%
What is your outlook?
We expect a more stable interest rate environment. We believe the U.S. Federal
Reserve Board, which increasingly is conscious of the international impact of
its decisions, may raise short-term rates further as it seeks to keep the
economy growing at a sustainable pace without serious inflationary pressures. In
general, we anticipate interest rates should be stable to slightly higher, with
economic growth continuing, although at a somewhat slower pace. The earnings
outlook for corporations remains positive, with full employment and strong
consumer spending. This is an environment that tends to favor corporate bonds
and other fixed income sectors with higher yields than those of government
bonds. We believe the Fund is well positioned to take advantage of this climate
of steady growth, stable interest rates, and greater certainty about the
direction of the global economy.
* Yankee Bonds are bonds issued in the United States by foreign corporations
and banks and denominated in the U.S. dollar.
** Portfolio composition subject to change.
8
<PAGE>
EVERGREEN
Short-Intermediate Bond Fund
Fund at a Glance as of June 30, 1999
The U.S. economy provided a very favorable backdrop for most fixed income
securities during the opening months of the fiscal year.
Portfolio
Management
----------
P. Michael Jones, CFA
Tenure: June 1999
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CURRENT INVESTMENT STYLE/1/
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[CHART APPEARS HERE]
Morningstar's Style Box is based on a portfolio date as of 6/30/99.
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.
Source: 1999 Morningstar, Inc.
/1/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 each class. 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.
Historical performance shown for Classes B, C, and Y prior to their inception is
based on the performance of Class A, the original class offered. These
historical returns for Classes B, C, and Y have not been adjusted to reflect the
effect of each Class' 12b-1 fees. These fees for Class A are .25%, for Class B
are 1.00%, and for Class C are 1.00%. Class Y does not pay a 12b-1 fee. If these
fees had been reflected, returns for Classes B and C would have been lower,
while returns for Class Y would have been higher.
- -------------------------------------------------------------------------------
PERFORMANCE AND RETURNS/1/
- -------------------------------------------------------------------------------
Portfolio Inception Date: 1/28/89 Class A Class B Class C Class Y
Class Inception Date 1/28/89 1/25/93 9/6/94 1/4/91
Average Annual Returns*
1 year with sales charge 0.25% -2.23% 1.69% n/a
1 year w/o sales charge 3.59% 2.66% 2.66% 3.69%
3 years 4.65% 3.94% 4.84% 5.91%
5 years 5.50% 4.95% 5.33% 6.32%
10 years 6.45% 6.24% 6.36% 6.92%
Since Portfolio Inception 6.79% 6.59% 6.71% 7.25%
Maximum Sales Charge 3.25% 5.00% 1.00% n/a
Front End CDSC CDSC
30-day SEC Yield 5.73% 5.02% 5.02% 6.03%
12-month distributions per share $0.57 $0.48 $0.48 $0.58
* Adjusted for maximum applicable sales charge.
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LONG TERM GROWTH
- -------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
Date CPI LBIGCBI Class A
-------- ------- ------- -------
06/30/89 10,000 10,000 9,675
06/30/90 10,467 10,782 10,265
06/30/91 10,959 11,916 11,306
06/30/92 11,297 13,485 12,733
06/30/93 11,636 14,900 13,937
06/30/94 11,926 14,862 13,822
06/30/95 12,288 16,404 15,096
06/30/96 12,622 17,226 15,768
06/30/97 12,917 18,470 16,835
06/30/98 13,135 20,039 18,027
06/30/99 13,392 20,885 18,674
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 (LBIGCBI) and the Consumer Price Index (CPI).
The LBIGCBI is an unmanaged index and does not include transaction costs
associated with buying and selling securities nor any management fees. 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.
9
<PAGE>
EVERGREEN
Short-Intermediate Bond Fund
Portfolio Manager Interview
How did the Fund perform during the fiscal year?
For the 12 months ended June 30, 1999, the Evergreen Short-Intermediate Bond
Fund, Class A shares, returned 3.59%. The Fund's benchmark, the Lehman Brothers
Intermediate Government/Corporate Bond Index returned 4.19% for the same period.
The Fund's performance exceeded the 3.38% average return of 101 short
intermediate investment grade funds tracked by Lipper Inc., a leading mutual
fund rating company. During the past three-year and five-year periods, the Fund
also outperformed the average return of its peer group.
Portfolio
Characteristics
---------------
Total Net Assets $378,215,808
Average Credit Quality AA1
Effective Maturity 5.0 years
Average Duration 3.5 years
What was the investing environment like for bonds during the past twelve months?
The fiscal year was broken into two markedly different periods: the first three
months during which rates declined sharply, and the final nine months in which
rates increased steadily. The yield on the bellwether 30-year Treasury Bond
started the period at 5.63%, and fell as low as 4.70% before soaring to 5.96% by
June 30.
The U.S. economy remained in overdrive throughout the twelve months, while
interest rates trended upward as fears of excessive economic growth and
inflationary pressure penetrated the market. Then, in May, the Federal Reserve
Board shifted from neutral to a tightening stance regarding monetary policy,
finally raising the Federal Funds rate by 0.25% on the final day of the fiscal
year.
- -------------------------------------------------------------------------------
PORTFOLIO MATURITY
- -------------------------------------------------------------------------------
(as a percentage of portfolio assets)
[GRAPH APPEARS HERE]
1 - 5 years -- 47.3%
5 - 10 Years -- 43.3%
0 - 1 year -- 9.4%
Which investment strategies most impacted performance?
As the yield on the 30-year Treasury Bond fell from 5.63% to 5.10% during the
first six months, our decision to maintain a duration 105% to 110% of our
benchmark helped performance. Then, as rates trended upward, we reversed this
long strategy and reduced duration from 3.79 years to 3.52 years during the
final half of the period. As interest rates rise a shorter duration adds to
performance as was the case for this six month period.
*Portfolio composition subject to change.
10
<PAGE>
EVERGREEN
Short-Intermediate Bond Fund
Portfolio Manager Interview
From a sector standpoint, we bulked up the portfolio's exposure to corporate and
mortgage-backed securities early in the period, because our research determined
these sectors to represent the greatest value. As both of these areas rebounded
from poor performances in late 1998, the portfolio's increased weighting had a
positive impact on total return.
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION*
- -------------------------------------------------------------------------------
(as a percentage of portfolio assets)
[GRAPH APPEARS HERE]
Government/Agency -- 46.3%
AAA -- 20.8%
A -- 15.0%
BBB -- 12.0%
AA -- 3.9%
NR -- 2.0%
What do you foresee for the final half of 1999?
Going forward, the portfolio will likely maintain a neutral-to-shorter duration
stance in anticipation of rising interest rates in the near term. Historically,
interest rate hikes by the Federal Reserve Board are not a one-time event, but
rather are followed up by additional increases. We feel that a tight labor
market, strong consumer spending and emerging inflationary signs will prompt the
Fed to increase rates at least one more time in the near term.
* Portfolio composition subject to change.
11
<PAGE>
EVERGREEN
Capital Preservation and Income Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended June Year Ended
30, September 30,
---------------- Period Ended ------------------
1999 1998 June 30, 1997 (a) 1996 1995 (b)
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
Net asset value,
beginning of period $ 9.73 $ 9.80 $ 9.74 $ 9.68 $ 9.51
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.53 0.57 0.46 0.61++ 0.46
Net realized and
unrealized gains or
losses on securities (0.08) (0.07) 0.03 0.01 0.14
------- ------- ------- ------- -------
Total from investment
operations 0.45 0.50 0.49 0.62 0.60
------- ------- ------- ------- -------
Less distributions
From net investment
income (0.53) (0.57) (0.43) (0.53) (0.43)
Returns of capital 0 0 0 (0.03) 0
------- ------- ------- ------- -------
Total distributions (0.53) (0.57) (0.43) (0.56) (0.43)
------- ------- ------- ------- -------
Net asset value, end of
period $ 9.65 $ 9.73 $ 9.80 $ 9.74 $ 9.68
------- ------- ------- ------- -------
Total return* 4.80% 5.24% 5.12% 6.56% 6.36%
Ratios/supplemental data
Net assets, end of
period (thousands) $18,149 $18,022 $15,751 $22,684 $19,293
Ratios to average net
assets
Expenses# 0.85% 0.87% 0.92%+ 0.91% 0.86%+
Net investment income 5.53% 5.77% 6.24%+ 6.31% 6.37%+
Portfolio turnover rate 41% 88% 52% 74% 67%
</TABLE>
<TABLE>
<CAPTION>
Year Ended June Year Ended September
30, 30,
----------------- Period Ended --------------------------
1999 1998 June 30, 1997 (a) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Net asset value,
beginning of period $ 9.74 $ 9.81 $ 9.75 $ 9.68 $ 9.62 $ 9.91
------- ------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.46++ 0.49 0.39 0.55++ 0.52 0.47
Net realized and
unrealized gains or
losses on securities (0.09) (0.07) 0.04 0.01 0.03 (0.41)
------- ------- ------- ------- ------- -------
Total from investment
operations 0.37 0.42 0.43 0.56 0.55 0.06
------- ------- ------- ------- ------- -------
Less distributions
From net investment
income (0.46) (0.49) (0.37) (0.46) (0.49) (0.35)
Returns of capital 0 0 0 (0.03) 0 0
------- ------- ------- ------- ------- -------
Total distributions (0.46) (0.49) (0.37) (0.49) (0.49) (0.35)
------- ------- ------- ------- ------- -------
Net asset value, end of
period $ 9.65 $ 9.74 $ 9.81 $ 9.75 $ 9.68 $ 9.62
------- ------- ------- ------- ------- -------
Total return* 3.86% 4.42% 4.53% 5.90% 5.81% 0.58%
Ratios/supplemental data
Net assets, end of
period (thousands) $15,618 $26,056 $32,694 $44,096 $62,998 $95,761
Ratios to average net
assets
Expenses# 1.65% 1.65% 1.67%+ 1.63% 1.53% 1.50%
Net investment income 4.72% 5.07% 5.52%+ 5.63% 5.46% 4.05%
Portfolio turnover rate 41% 88% 52% 74% 67% 34%
</TABLE>
(a) For the nine months ended June 30, 1997. The Fund changed its fiscal year
end from September 30 to June 30, effective June 30, 1997.
(b) For the period from December 30, 1994 (commencement of class operations) to
September 30, 1995.
* Excluding applicable sales charges.
+ Annualized.
++ Calculation based on average shares outstanding.
# The ratio of expenses to average net assets excludes fee credits and
includes fee waivers.
See Combined Notes to Financial Statements.
12
<PAGE>
EVERGREEN
Capital Preservation and Income Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended September 30,
--------------------- Period Ended -----------------------
1999 1998 June 30, 1997 (a) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
CLASS C SHARES
Net asset value,
beginning of period $ 9.74 $ 9.80 $ 9.74 $ 9.67 $ 9.60 $ 9.90
--------- --------- ------ ------ ------ ------
Income from investment
operations
Net investment income 0.46++ 0.49 0.40 0.54++ 0.52 0.40
Net realized and
unrealized gains or
losses on securities (0.09) (0.06) 0.03 0.02 0.04 (0.35)
--------- --------- ------ ------ ------ ------
Total from investment
operations 0.37 0.43 0.43 0.56 0.56 0.05
--------- --------- ------ ------ ------ ------
Less distributions
From net investment
income (0.46) (0.49) (0.37) (0.46) (0.49) (0.35)
--------- --------- ------ ------ ------ ------
Returns of capital 0 0 0 (0.03) 0 0
Total distributions (0.46) (0.49) (0.37) (0.49) (0.49) (0.35)
--------- --------- ------ ------ ------ ------
Net asset value, end of
period $ 9.65 $ 9.74 $ 9.80 $ 9.74 $ 9.67 $ 9.60
--------- --------- ------ ------ ------ ------
Total return* 3.86% 4.53% 4.53% 5.91% 5.93% 0.48%
Ratios/supplemental data
Net assets, end of
period (thousands) $ 3,928 $ 3,972 $4,105 $4,152 $2,755 $2,874
Ratios to average net
assets
Expenses# 1.65% 1.65% 1.67%+ 1.64% 1.53% 1.50%
Net investment income 4.72% 5.05% 5.53%+ 5.60% 5.51% 4.08%
Portfolio turnover rate 41% 88% 52% 74% 67% 34%
</TABLE>
(a) For the nine months ended June 30, 1997. The Fund changed its fiscal year
end from September 30 to June 30, effective June 30, 1997.
* Excluding applicable sales charges.
+ Annualized.
++ Calculation based on average shares outstanding.
# The ratio of expenses to average net assets excludes fee credits and
includes fee waivers.
See Combined Notes to Financial Statements.
13
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended July 31,
-------------------- Period Ended -------------------------
1999 1998 June 30, 1997 (a) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Net asset value,
beginning of period $ 9.08 $ 8.93 $ 8.73 $ 8.88 $ 8.84 $ 9.46
--------- --------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.53 0.57++ 0.54 0.59 0.63 0.57++
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.42) 0.20 0.18 (0.16) 0.02 (0.59)
--------- --------- ------- ------- ------- -------
Total from investment
operations 0.11 0.77 0.72 0.43 0.65 (0.02)
--------- --------- ------- ------- ------- -------
Less distributions
From net investment
income (0.53) (0.62) (0.52) (0.58) (0.61) (0.59)
Returns of capital 0 0 0 0 0 (0.01)
--------- --------- ------- ------- ------- -------
Total distributions (0.53) (0.62) (0.52) (0.58) (0.61) (0.60)
--------- --------- ------- ------- ------- -------
Net asset value, end of
period $ 8.66 $ 9.08 $ 8.93 $ 8.73 $ 8.88 $ 8.84
--------- --------- ------- ------- ------- -------
Total return* 1.17% 8.82% 8.40% 4.95% 7.76% (0.29%)
Ratios/supplemental data
Net assets, end of
period (thousands) $ 107,714 $ 123,723 $10,341 $12,958 $14,558 $16,036
Ratios to average net
assets
Expenses# 1.10% 1.11% 1.12%+ 1.10% 1.00% 1.00%
Net investment income 5.90% 6.00% 6.43%+ 6.57% 7.13% 6.81%
Portfolio turnover rate 170% 331% 179% 231% 149% 280%
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended July 31,
-------------------- Period Ended -------------------------
1999 1998 June 30, 1997 (a) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Net asset value,
beginning of period $ 9.09 $ 8.95 $ 8.74 $ 8.89 $ 8.85 $ 9.47
--------- --------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.47 0.48++ 0.47 0.52 0.56 0.49++
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.43) 0.21 0.20 (0.16) 0.02 (0.58)
--------- --------- ------- ------- ------- -------
Total from investment
operations 0.04 0.69 0.67 0.36 0.58 (0.09)
--------- --------- ------- ------- ------- -------
Less distributions
From net investment
income (0.47) (0.55) (0.46) (0.51) (0.54) (0.52)
Returns of capital 0 0 0 0 0 (0.01)
--------- --------- ------- ------- ------- -------
Total distributions (0.47) (0.55) (0.46) (0.51) (0.54) (0.53)
--------- --------- ------- ------- ------- -------
Net asset value, end of
period $ 8.66 $ 9.09 $ 8.95 $ 8.74 $ 8.89 $ 8.85
--------- --------- ------- ------- ------- -------
Total return* 0.31% 7.89% 7.81% 4.10% 6.87% (1.05%)
Ratios/supplemental data
Net assets, end of
period (thousands) $ 11,100 $ 10,763 $11,368 $16,034 $17,985 $17,819
Ratios to average net
assets
Expenses# 1.85% 1.86% 1.87%+ 1.85% 1.75% 1.75%
Net investment income 5.15% 5.28% 5.68%+ 5.82% 6.38% 5.48%
Portfolio turnover rate 170% 331% 179% 231% 149% 280%
</TABLE>
(a) For the eleven months ended June 30, 1997. The Fund changed its fiscal year
end from July 31 to June 30, effective June 30, 1997.
* Excluding applicable sales charges.
+ Annualized.
++ Calculation based on average shares outstanding.
# The ratio of expenses to average net assets excludes fee credits and
includes fee waivers.
See Combined Notes to Financial Statements.
14
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended July 31,
--------------------- Period Ended ------------------------
1999 1998 June 30, 1997 (a) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
CLASS C SHARES
Net asset value,
beginning of period $ 9.09 $ 8.94 $ 8.74 $ 8.89 $ 8.85 $ 9.46
--------- --------- ------ ------ ------- -------
Income from investment
operations
Net investment income 0.47++ 0.49++ 0.46 0.52 0.55 0.49++
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.43) 0.21 0.20 (0.16) 0.03 (0.57)
--------- --------- ------ ------ ------- -------
Total from investment
operations 0.04 0.70 0.66 0.36 0.58 (0.08)
--------- --------- ------ ------ ------- -------
Less distributions
From net investment
income (0.47) (0.55) (0.46) (0.51) (0.54) (0.52)
Returns of capital 0 0 0 0 0 (0.01)
Total distributions (0.47) (0.55) (0.46) (0.51) (0.54) (0.53)
--------- --------- ------ ------ ------- -------
Net asset value, end of
period $ 8.66 $ 9.09 $ 8.94 $ 8.74 $ 8.89 $ 8.85
--------- --------- ------ ------ ------- -------
Total return* 0.31% 8.01% 7.70% 4.10% 6.87% (0.95%)
Ratios/supplemental data
Net assets, end of
period (thousands) $ 4,718 $ 5,439 $7,259 $9,084 $10,185 $13,086
Ratios to average net
assets
Expenses# 1.85% 1.86% 1.87%+ 1.85% 1.75% 1.75%
Net investment income 5.15% 5.26% 5.68%+ 5.82% 6.37% 5.44%
Portfolio turnover rate 170% 331% 179% 231% 149% 280%
</TABLE>
<TABLE>
<CAPTION>
Year Ended Period Ended
June 30, 1999 June 30, 1998 (b)
<S> <C> <C>
CLASS Y SHARES
Net asset value, beginning of period $ 9.08 $ 9.09
------- -------
Income from investment operations
Net investment income 0.56 0.24++
Net realized and unrealized gains or losses
on securities and foreign currency related
transactions (0.42) (0.01)
------- -------
Total from investment operations 0.14 0.23
------- -------
Less distributions from net investment income (0.56) (0.24)
------- -------
Net asset value, end of period $ 8.66 $ 9.08
------- -------
Total return 1.43% 2.58%
Ratios/supplemental data
Net assets, end of period (thousands) $54,766 $63,721
Ratios to average net assets
Expenses# 0.85% 0.86%+
Net investment income 6.15% 6.23%+
Portfolio turnover rate 170% 331%
</TABLE>
(a) For the eleven months ended June 30, 1997. The Fund changed its fiscal year
end from July 31 to June 30, effective June 30, 1997.
(b) For the period from January 26, 1998 (commencement of class operations) to
June 30, 1998.
* Excluding applicable sales charges.
+ Annualized.
++ Calculation based on average shares outstanding.
# The ratio of expenses to average net assets excludes fee credits and
includes fee waivers.
See Combined Notes to Financial Statements.
15
<PAGE>
EVERGREEN
Short Intermediate Bond Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------- Period Ended Year Ended
1999 1998 1997 1996 June 30, 1995 (a) December 31, 1994
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Net asset value,
beginning of period $ 9.90 $ 9.83 $ 9.82 $ 10.02 $ 9.52 $ 10.42
------- ------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.57 0.61 0.63 0.63 0.32 0.65
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.22) 0.07 0.02 (0.19) 0.50 (0.91)
------- ------- ------- ------- ------- -------
Total from investment
operations 0.35 0.68 0.65 0.44 0.82 (0.26)
------- ------- ------- ------- ------- -------
Less distributions from
net investment income (0.57) (0.61) (0.64) (0.64) (0.32) (0.64)
------- ------- ------- ------- ------- -------
Net asset value, end of
period $ 9.68 $ 9.90 $ 9.83 $ 9.82 $ 10.02 $ 9.52
------- ------- ------- ------- ------- -------
Total return* 3.59% 7.08% 6.77% 4.45% 8.77% (2.57%)
Ratios/supplemental data
Net assets, end of
period (thousands) $19,127 $16,848 $17,703 $18,630 $18,898 $19,127
Ratios to average net
assets
Expenses# 0.82% 0.80% 0.72% 0.79% 0.77%+ 0.75%
Net investment incom 5.78% 6.14% 6.37% 6.35% 6.58%+ 6.46%
Portfolio turnover rate 50% 68% 45% 76% 34% 48%
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------- Period Ended Year Ended
1999 1998 1997 1996 June 30, 1995 (a) December 31, 1994
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Net asset value,
beginning of period $ 9.92 $ 9.85 $ 9.84 $ 10.04 $ 9.54 $ 10.44
------- ------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.49 0.52 0.54 0.55 0.28 0.58
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.23) 0.07 0.01 (0.19) 0.50 (0.92)
------- ------- ------- ------- ------- -------
Total from investment
operations 0.26 0.59 0.55 0.36 0.78 (0.34)
------- ------- ------- ------- ------- -------
Less distributions from
net investment income (0.48) (0.52) (0.54) (0.56) (0.28) (0.56)
------- ------- ------- ------- ------- -------
Net asset value, end of
period $ 9.70 $ 9.92 $ 9.85 $ 9.84 $ 10.04 $ 9.54
------- ------- ------- ------- ------- -------
Total return* 2.66% 6.11% 5.78% 3.62% 8.31% (3.33%)
Ratios/supplemental data
Net assets, end of
period (thousands) $22,553 $22,689 $22,237 $21,006 $17,366 $17,625
Ratios to average net
assets
Expenses# 1.72% 1.70% 1.62% 1.69% 1.67%+ 1.50%
Net investment income 4.87% 5.23% 5.48% 5.45% 5.68%+ 5.75%
Portfolio turnover rate 50% 68% 45% 76% 34% 48%
</TABLE>
(a) For the six months ended June 30, 1995. The Fund changed fiscal year end
from December 31 to June 30, effective June 30, 1995.
* Excluding applicable sales charges.
+ Annualized.
# The ratio of expenses to average net assets excludes fee credits and
includes fee waivers.
See Combined Notes to Financial Statements.
16
<PAGE>
EVERGREEN
Short Intermediate Bond Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------ Period Ended Period Ended
1999 1998 1997 1996 June 30, 1995 (a) December 31, 1994 (b)
<S> <C> <C> <C> <C> <C> <C>
CLASS C SHARES
Net asset value,
beginning of period $ 9.92 $ 9.85 $ 9.84 $10.05 $ 9.55 $9.85
------ ------ ------ ------ ------ -----
Income from investment
operations
Net investment income 0.49 0.52 0.54 0.55 0.26 0.18
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.23) 0.07 0.01 (0.20) 0.50 (0.30)
------ ------ ------ ------ ------ -----
Total from investment
operations 0.26 0.59 0.55 0.35 0.76 (0.12)
------ ------ ------ ------ ------ -----
Less distributions from
net investment income (0.48) (0.52) (0.54) (0.56) (0.26) (0.18)
------ ------ ------ ------ ------ -----
Net asset value, end of
period $ 9.70 $ 9.92 $ 9.85 $ 9.84 $10.05 $9.55
------ ------ ------ ------ ------ -----
Total return* 2.66% 6.11% 5.77% 3.51% 8.23% (1.27%)
Ratios/supplemental data
Net assets, end of
period (thousands) $1,360 $1,143 $1,029 $1,155 $ 527 $ 512
Ratios to average net
assets
Expenses# 1.72% 1.70% 1.62% 1.69% 1.67%+ 1.65%+
Net investment income 4.87% 5.25% 5.47% 5.46% 5.69%+ 5.87%+
Portfolio turnover rate 50% 68% 45% 76% 34% 48%
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------- Period Ended Year Ended
1999 1998 1997 1996 June 30, 1995 (a) December 31, 1994
<S> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES
Net asset value,
beginning of period $ 9.90 $ 9.83 $ 9.82 $ 10.02 $ 9.52 $ 10.43
-------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.58 0.62 0.64 0.64 0.33 0.65
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.22) 0.07 0.02 (0.19) 0.49 (0.91)
-------- -------- -------- -------- -------- --------
Total from investment
operations 0.36 0.69 0.66 0.45 0.82 (0.26)
-------- -------- -------- -------- -------- --------
Less distributions from
net investment income (0.58) (0.62) (0.65) (0.65) (0.32) (0.65)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 9.68 $ 9.90 $ 9.83 $ 9.82 $ 10.02 $ 9.52
-------- -------- -------- -------- -------- --------
Total return 3.69% 7.19% 6.88% 4.63% 8.80% (2.55%)
Ratios/supplemental data
Net assets, end of
period (thousands) $335,175 $348,358 $357,706 $352,095 $347,050 $345,025
Ratios to average net
assets
Expenses# 0.72% 0.70% 0.62% 0.69% 0.67%+ 0.65%
Net investment income 5.88% 6.25% 6.48% 6.45% 6.68%+ 6.56%
Portfolio turnover rate 50% 68% 45% 76% 34% 48%
</TABLE>
(a) For the six months ended June 30, 1995. The Fund changed its fiscal year
end from December 31 to June 30, effective June 30, 1995.
(b) For the period from September 6, 1994 (commencement of class operations) to
December 31, 1994.
* Excluding applicable sales charges.
+ Annualized.
# The ratio of expenses to average net assets excludes fee credits and
includes fee waivers.
See Combined Notes to Financial Statements.
17
<PAGE>
EVERGREEN
Capital Preservation and Income Fund
Schedule of Investments
June 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES - 67.5%
Federal Home Loan Mortgage Corp.: - 22.7%
$ 1,085,330 6.72%, 1/1/22.................................. $ 1,121,281
647,378 6.90%, 3/1/21.................................. 661,841
726,028 6.93%, 7/1/30.................................. 747,467
1,669,576 6.96%, 6/1/16.................................. 1,709,496
554,956 7.07%, 10/1/21................................. 580,451
891,651 7.11%, 11/1/21................................. 914,499
837,079 7.14%, 3/1/19.................................. 866,900
607,511 7.15%, 4/1/22.................................. 632,571
322,727 7.40%, 4/1/20.................................. 327,920
875,173 7.50%, 9/1/17.................................. 904,028
30,079 7.54%, 5/1/19.................................. 30,855
42,782 9.46%, 5/1/20.................................. 43,938
------------
8,541,247
------------
Federal National Mortgage
Assn.: - 44.8%
1,077,228 5.80%, 4/1/38.................................. 1,084,971
1,414,308 5.95%, 11/1/28................................. 1,411,437
997,322 6.10%, 5/1/36.................................. 1,004,802
178,870 6.45%, 1/1/22.................................. 181,301
528,254 6.58%, 3/1/19-7/1/27........................... 542,233
706,252 6.60%, 12/1/19................................. 725,233
1,644,136 6.64%, 6/1/19-5/1/22........................... 1,700,108
554,403 6.74%, 1/1/16.................................. 569,738
467,279 6.79%, 1/1/22.................................. 484,293
1,782,859 6.80%, 10/1/16-12/1/23......................... 1,832,646
2,620,095 6.85%, 9/1/21-12/1/22.......................... 2,693,869
861,060 6.86%, 10/1/17-11/1/18......................... 884,728
383,065 6.875%, 8/1/15................................. 386,953
85,795 6.89%, 2/1/17.................................. 85,849
1,529,347 6.92%, 1/1/31.................................. 1,578,577
144,224 6.99%, 7/1/19.................................. 145,148
1,080,990 7.06%, 9/1/18.................................. 1,135,213
211,353 7.16%, 11/1/17................................. 218,090
233,010 7.50%, 6/1/18.................................. 242,768
------------
16,907,957
------------
Total Adjustable Rate Mortgage Securities
(cost $25,491,992)............................ 25,449,204
------------
FIXED RATE MORTGAGES - 6.2%
Federal Home Loan Mortgage
Corp.: - 1.1%
398,899 10.50%, 4/1/04--10/1/05........................ 410,712
------------
Federal National Mortgage
Assn.: - 1.6%
169,971 9.50%, 4/15/05................................. 175,017
398,826 11.00%, 1/1/16-1/1/18.......................... 434,385
------------
609,402
------------
Government National Mortgage Assn. - 3.5%
1,280,875 10.25%, 11/15/29............................... 1,297,859
------------
Total Fixed Rate Mortgages
(cost $2,386,758)............................. 2,317,973
------------
ASSET-BACKED SECURITIES - 11.0%
1,090,000 Carco Auto Loan Master Trust, Ser. 1997-1,
Class A,
6.69%, 8/15/04................................ 1,094,022
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
ASSET-BACKED SECURITIES - (continued)
$ 1,083,661 CoreStates Home Equity Trust, Ser. 1994-1, Class A,
6.65%, 5/15/09.................................... $ 1,082,686
500,000 Delta Funding Home Equity Loan Trust, Ser. 1997-1,
Class A5, 7.74%, 4/25/29.......................... 512,377
1,303,321 Merrill Lynch Mortgage Investors, Inc., Ser. 1992-
B, Class B,
8.50%, 4/15/12.................................... 1,307,388
163,133 The Money Store Home Equity Trust, Ser.1997-B Class
A4,
6.64%, 1/15/17.................................... 163,274
------------
Total Asset-Backed Securities
(cost $4,174,004)................................. 4,159,747
------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 6.4%
441 Federal Home Loan Mortgage Corp., Ser. 11 Class C,
9.50%, 4/15/19.................................... 439
640,514 Federal Home Loan Mortgage Corp., Ser. 20, Class F,
6.03%, 7/1/29..................................... 639,914
1,000,000 Mellon Residential Funding Corp. Ser.1999-TBC1.
Class A3,
6.11%, 1/25/29.................................... 991,875
788,349 Nomura Depositor Trust,
Ser. 1998-ST1, Class A1,
5.18%, 2/15/34 (a)................................ 779,677
------------
Total Collateralized Mortgage Obligations
(cost $2,433,776)................................. 2,411,905
------------
U.S. AGENCY OBLIGATIONS - 1.3% (cost $499,805)
500,000 Federal National Mortgage Assn. 5.625%, 5/14/04.... 484,530
------------
U.S. TREASURY OBLIGATIONS - 5.3%
U.S. Treasury Notes:
600,000 4.50%, 1/31/01..................................... 591,186
600,000 4.75%, 2/15/04..................................... 577,122
825,000 5.50%, 5/31/03..................................... 818,680
------------
Total U.S. Treasury Obligations
(cost $2,010,732)................................. 1,986,988
------------
REPURCHASE AGREEMENT - 1.3% (cost $502,000)
502,000 Evergreen Joint Repurchase Agreement (5.00% dated
6/30/1999 due 7/1/1999, maturity value $502,070)
(b)............................................... 502,000
------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
Total Investments -
(cost $37,499,067)........................... 99.0% 37,312,347
Other Assets and
Liabilities - net............................ 1.0 382,364
----- -----------
Net Assets.................................... 100.0% $37,694,711
===== ===========
</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.
(b) The repurchase agreements are fully collateralized by U.S. Treasury
and/or federal agency obligations based on market prices plus accrued
interest at June 30, 1999.
18
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Schedule of Investments
June 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
ASSET-BACKED SECURITIES - 6.2% (b)
$ 2,000,000 American Express Credit Account, Ser. 1999-1 Class
B (Est. Maturity 2004), 5.85%, 11/15/06........... $ 1,935,530
1,000,000 California Infrastructure PG&E, Series 1997-1
Certificate, Class A4 (Est. Maturity 2000),
6.16%, 6/25/03.................................... 1,003,900
2,500,000 Contimortgage Home Equity Loan Trust, Ser. 1998-1
Class A6 (Est. Maturity 2003),
6.58%, 12/15/18................................... 2,431,875
CoreStates Home Equity Trust:
716,440 Ser. 1994-1 Class A (Est. Maturity 2000),
6.65%, 5/15/09.................................... 715,796
1,000,000 Ser. 1996-1 Class A4 (Est. Mat. 2002),
7.00%, 6/15/12.................................... 1,012,185
1,000,000 Southern Pacific Secured Assets Corp., Ser. 1996-3
Class A4 (Est. Maturity 2002),
7.60%, 10/25/27................................... 1,024,125
3,000,000 WFS Owner Trust,
(Est. Maturity 2001),
6.30%, 3/20/05.................................... 2,988,750
------------
Total Asset-Backed Securities
(cost $11,251,734)................................ 11,112,161
------------
CORPORATE BONDS - 55.3%
Aerospace & Defense - 5.3%
500,000 BE Aerospace, Inc., Sr. Sub Notes, 9.50%, 11/1/08.. 505,000
3,675,000 Boeing, Inc., Deb.,
8.10%, 11/15/06................................... 3,957,093
3,000,000 Lockheed Martin Corp., Notes, 7.25%, 5/15/06....... 3,002,040
2,000,000 Raytheon Co., Notes, 6.75%, 8/15/07................ 1,979,640
------------
9,443,773
------------
Automotive Equipment & Manufacturing - 1.0%
750,000 Delphi Automotive Sys. Corp.,
Notes,
6.50%, 5/1/09..................................... 707,250
200,000 Eagle Picher Inds., Inc.,
Sr. Sub. Notes,
9.375%, 3/1/08.................................... 190,000
750,000 Hayes Lemmerz Int'l., Inc.,
Sr. Sub. Notes,
8.25%, 12/15/08 (a)............................... 712,500
250,000 Mark IV Inds., Inc.,
Sr. Sub. Notes,
7.50%, 9/1/07..................................... 230,625
------------
1,840,375
------------
Banks - 7.5%
1,000,000 Amsouth Bancorp.,
Sub. Deb., Puttable 2005,
6.75%, 11/1/25 ................................... 986,380
2,500,000 Bank One Texas N.A., Sub. Notes, 6.25%, 2/15/08
(f)............................................... 2,373,525
1,250,000 Chase Manhattan Corp., Sub. Notes, 9.375%, 7/1/01.. 1,322,200
2,000,000 Fleet Fin'l. Group, Inc., Notes, 6.50%, 3/15/08
(f)............................................... 1,922,160
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
CORPORATE BONDS - continued
Banks - continued
$ 800,000 Harris BanCorp.,
Sub. Notes,
9.375%, 6/1/01.................................. $ 841,424
2,000,000 Mellon Fin'l., Co., Sr. Notes, 5.75%, 11/15/03... 1,926,940
2,000,000 NationsBank Corp., Sub. Notes, 8.125%, 6/15/02... 2,098,020
2,000,000 Suntrust Banks, Inc., Sr. Bond, 6.00%, 1/15/28... 1,888,920
------------
13,359,569
------------
Building, Construction & Furnishings - 0.8%
450,000 MDC Holdings, Inc., Sr. Notes, 8.375%, 2/1/08.... 432,000
500,000 Nortek Inc., Sr. Notes, 8.875%, 8/1/08 (a)....... 492,500
500,000 Standard Pacific Corp.,
Sr. Sub. Notes,
8.50%, 4/1/09................................... 477,500
------------
1,402,000
------------
Business Equipment &
Services - 0.5%
1,000,000 Lucent Technologies, Inc., Notes, 5.50%, 11/15/08
(f)............................................. 919,930
------------
Cable/Other Video
Distribution - 5.1%
500,000 Adelphia Communications Corp., Sr. Notes, Ser. B,
9.875%, 3/1/07.................................. 522,500
750,000 Century Communications Corp., Sr. Notes,
9.75%, 2/15/02.................................. 766,875
500,000 Charter Communications Holdings, Sr. Notes,
8.625%, 4/1/09 (a).............................. 478,750
2,000,000 Comcast Cable Communications I, Sr. Notes,
6.20%, 11/15/08................................. 1,866,600
1,000,000 Comcast Corp., Sr. Sub. Deb.: 9.375%, 5/15/05.... 1,059,440
250,000 9.50%, 1/15/08.................................. 262,500
2,000,000 CSC Holdings, Inc., Sr. Notes, 7.25%, 7/15/08.... 1,905,400
250,000 Metromedia Fiber Network, Inc., Sr. Notes,
10.00%, 11/15/08................................ 256,875
Time Warner, Inc.:
925,000 Deb., 8.11%, 8/15/06............................ 969,548
1,000,000 Notes, 9.625%, 5/1/02........................... 1,072,910
------------
9,161,398
------------
Chemical & Agricultural
Products - 1.6%
1,164,000 Dow Chemical Co., Deb., 8.625%, 4/1/06........... 1,259,413
350,000 Huntsman ICI Chemicals, Inc., Sr. Sub. Notes,
10.125%, 7/1/09 (a)............................. 353,063
300,000 Int'l. Specialty Products Holdings, Inc.,
Sr. Notes, Ser. B, 9.00%, 10/15/03.............. 300,000
</TABLE>
19
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Schedule of Investments(continued)
June 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
CORPORATE BONDS - continued
Chemical & Agricultural
Products - continued
$ 400,000 Lyondell Chemical Co.,
Sr. Sub. Notes,
10.875%, 5/1/09 (a)............................... $ 412,000
500,000 Scotts Co., Sr. Sub. Notes, 8.625%, 1/15/09 (a).... 492,500
------------
2,816,976
------------
Communication Systems &
Services - 6.1%
500,000 Ackerley Group, Inc.,
Sr. Sub. Notes, Ser. B,
9.00%, 1/15/09.................................... 490,000
2,600,000 Bell Telephone Co. of PA, Deb.,
8.35%, 12/15/30................................... 2,940,834
500,000 Bresnan Communications Group, Sr. Notes,
8.00%, 2/1/09 (a)................................. 501,250
500,000 Chancellor Media Corp., Sr. Notes,
8.00%, 11/1/08.................................... 490,000
500,000 Crown Castle Int'l. Corp., Sr. Notes,
9.00%, 5/15/11.................................... 492,500
350,000 Intermedia Communications, Inc., Sr. Disc. Notes,
Ser. B,
11.25%, 7/15/07................................... 253,750
500,000 Jordan Telecommunication Prod.,
Sr. Notes, Ser. B,
9.875%, 8/1/07.................................... 495,000
400,000 K III Communications Corp.,
Sr. Notes,
8.50%, 2/1/06..................................... 410,500
1,000,000 LCI Int'l., Inc., Sr. Notes,
7.25%, 6/15/07.................................... 981,910
1,000,000 MCI Communications Corp., Puttable and Callable @
100, 4/15/02 (Eff. Yield 6.23%) (c),
6.125%, 4/15/12................................... 993,360
500,000 Mcleod USA, Inc., Sr. Disc. Notes,
10.50%, 3/1/07.................................... 385,000
500,000 Price Communications Wireless, Inc., Sr. Secd.
Notes, Ser. B,
9.125%, 12/15/06.................................. 520,000
2,000,000 Sprint Capital Corp.,
6.375%, 5/1/09 (f)................................ 1,897,200
------------
10,851,304
------------
Consumer Products &
Services - 1.5%
500,000 Budget Group, Inc., Sr. Notes,
9.125%, 4/1/06 (a)................................ 467,500
1,164,000 General Mills, Inc., Series B, MTN,
9.00%, 12/20/02................................... 1,248,169
400,000 Nationsrent, Inc., Sr. Sub. Notes,
10.375%, 12/15/08................................. 398,000
500,000 United Rentals, Inc., Sr. Sub. Notes,
9.25%, 1/15/09.................................... 496,250
------------
2,609,919
------------
Environmental Services - 0.6%
1,000,000 Republic Services, Inc., Notes,
6.625%, 5/15/04................................... 988,610
------------
Finance & Insurance - 6.9%
1,500,000 Bear Stearns, Inc., Sr. Notes,
6.75%, 12/15/07................................... 1,455,000
1,000,000 Beneficial Corp., Series I, MTN,
6.25%, 2/18/13.................................... 985,670
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
CORPORATE BONDS - continued
Finance & Insurance - continued
$ 1,100,000 CIT Group, Inc., Class A,
5.625%, 10/15/03.................................. $ 1,059,498
2,250,000 Donaldson Lufkin & Jenrette,
Sr. Notes,
5.875%, 4/1/02.................................... 2,210,647
2,500,000 Farm Credit Systems Financial Assistance Corp.,
Bonds,
Series A-05,
8.80%, 6/10/05.................................... 2,802,725
1,000,000 Ford Motor Credit Co.,
5.80%, 1/12/09 (f)................................ 913,820
850,000 General Motors Acceptance Corp.,
8.50%, 1/1/03 (f)................................. 902,020
2,000,000 Prudential Insurance Co., Notes,
7.125%, 7/1/07 (a)................................ 2,008,740
------------
12,338,120
------------
Food & Beverage Products - 1.1%
250,000 Aurora Foods, Inc.,
Sr. Sub. Notes, Ser. B,
9.875%, 2/15/07................................... 258,750
750,000 Chiquita Brands Int'l, Inc., Sr. Notes, 9.625%,
1/15/04........................................... 748,125
1,000,000 Coca Cola Enterprises, Inc.,
5.75%, 11/1/08 (f)................................ 922,610
------------
1,929,485
------------
Gaming - 1.4%
250,000 Boyd Gaming Corp., Sr. Sub. Notes,
9.50%, 7/15/07.................................... 247,500
500,000 Circus Circus Enterprises, Inc., Deb.,
9.25%, 12/1/05.................................... 507,500
300,000 Isle Capri Casinos, Inc.,
8.75%, 4/15/09 (a)................................ 282,000
500,000 Majestic Star Casino LLC,
Sr. Secd. Notes,
10.875%, 7/1/06 (a)............................... 496,250
400,000 Mohegan Tribal Gaming Auth.,
Sr. Sub. Notes,
8.75%, 1/1/09..................................... 395,000
500,000 Station Casinos Inc., Sr. Sub. Notes,
9.75%, 4/15/07.................................... 510,000
------------
2,438,250
------------
Healthcare Products &
Services - 0.8%
1,164,000 Baxter Int'l, Inc., Notes,
7.25%, 2/15/08.................................... 1,168,295
250,000 Playtex Family Prods. Corp.,
Sr. Sub. Notes,
9.00%, 12/15/03................................... 253,750
------------
1,422,045
------------
Iron & Steel - 1.3%
500,000 AK Steel Corp.,
7.875%, 2/15/09 (a)............................... 482,500
500,000 National Steel Corp., Ser. D,
9.875%, 3/1/09.................................... 511,250
750,000 Wheeling Pittsburgh Corp.,
Sr. Notes,
9.375%, 11/15/03.................................. 798,750
500,000 WHX Corp., Sr. Notes,
10.50%, 4/15/05................................... 473,750
------------
2,266,250
------------
Oil/Energy - 1.6%
2,000,000 Transocean Offshore, Inc., Notes,
7.45%, 4/15/27.................................... 2,026,452
</TABLE>
20
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Schedule of Investments(continued)
June 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
CORPORATE BONDS - continued
Oil/Energy - continued
$ 500,000 Triton Energy Ltd., Sr. Notes, 8.75%, 4/15/02...... $ 495,000
250,000 Western Gas Resources, Inc.,
Sr. Sub. Notes,
10.00%, 6/15/09 (a)............................... 256,250
------------
2,777,702
------------
Paper & Packaging - 0.4%
500,000 Container Corp. of America,
Gtd. Sr. Notes, Series A,
11.25%, 5/1/04.................................... 518,750
200,000 Stone Container Corp.,
Sr. Sub. Notes,
11.50%, 8/15/99................................... 202,000
------------
720,750
------------
Printing, Publishing, Broadcasting
& Entertainment - 1.2%
500,000 Big Flower Press Holdings, Inc.,
Sr. Sub. Notes,
8.625%, 12/1/08................................... 462,500
500,000 Carmike Cinemas, Inc.,
Sr. Sub. Notes,
9.375%, 2/1/09 (a)................................ 486,250
500,000 Cinemark USA, Inc.,
Sr. Sub. Notes, Ser. B,
9.625%, 8/1/08.................................... 495,000
450,000 Hollinger Int'l.,
Sr. Sub. Notes,
9.25%, 2/1/06..................................... 459,000
200,000 Sinclair Broadcast Group, Inc.,
Sr. Sub. Notes,
10.00%, 9/30/05................................... 204,000
------------
2,106,750
------------
Real Estate - 1.4%
250,000 Bulong Operations Properties Ltd., Sr. Notes ,
12.50%, 12/15/08 (a).............................. 254,688
850,000 EOP Operating, Ltd., Sr. Notes, 6.375%, 2/15/03
(a)............................................... 830,756
1,000,000 Glenborough Properties. LP,
Sr. Notes,
7.625%, 3/15/05................................... 909,760
500,000 HMH Pptys., Inc.,
Sr. Notes, Ser. C,
8.45%, 12/1/08.................................... 477,500
------------
2,472,704
------------
Retailing & Wholesale - 2.2%
425,000 Ames Department Stores, Inc.,
Sr. Notes,
10.00%, 4/15/06 (a)............................... 415,437
3,000,000 CVS Corp., Notes,
5.50%, 2/15/04.................................... 2,887,335
250,000 Pathmark Stores, Inc.,
Sr. Sub. Notes,
9.625%, 5/1/03.................................... 255,625
500,000 Southland Corp.,
Sr. Sub. Deb.,
5.00%, 12/15/03................................... 432,500
------------
3,990,897
------------
Textile & Apparel - 0.5%
500,000 Polymer Group, Inc.,
Sr. Sub. Notes, Ser. B,
9.00%, 7/1/07..................................... 478,750
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
CORPORATE BONDS - continued
Textile & Apparel - continued
$ 500,000 Westpoint Stevens, Inc.,
Sr. Notes,
7.875%, 6/15/05................................... $ 488,750
------------
967,500
------------
Transportation - 2.3%
780,000 Burlington Northern Santa Fe, Notes, 6.125%,
3/15/09........................................... 729,651
1,000,000 Continental Airlines, Inc.,
Passthru Certificates,
Ser. 1999-1 Class B,
6.795%, 2/2/20.................................... 958,885
2,000,000 CSX Corp., Notes, 6.25%, 10/15/08.................. 1,869,660
500,000 Sea Containers Ltd., Sr. Notes, Ser. B,
7.875%, 2/15/08 (a)............................... 487,500
------------
4,045,696
------------
Utilities - 4.2%
500,000 AES Corp., Sr. Sub. Notes, 8.50%, 11/1/07.......... 473,750
3,000,000 Commonwealth Edison Co.,
1st Mtge., Ser. 83,
8.00%, 5/15/08.................................... 3,262,050
250,000 Echostar DBS Corp., Sr. Notes, 9.375%, 2/1/09 (a).. 255,000
600,000 El Paso Energy Corp., Sr. Notes, 6.75%, 5/15/09.... 576,180
1,000,000 Long Island Lighting Co., Deb., 7.30%, 7/15/99..... 1,000,590
1,500,000 LSP Energy LP, Sr. Secd. Notes, Ser. A,
7.164%, 6/30/13 (a)............................... 1,468,983
500,000 National Rural Util. Coop. Fin., Notes, 5.00%,
10/1/02........................................... 481,335
------------
7,517,888
------------
Total Corporate Bonds
(cost $101,449,221)............................... 98,387,891
------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 8.0% (b)
750,000 Bear Stearns Commercial Mtge. Securities, Inc.,
Series 1999- WF2
Class A2 (Est. Mat. 2009), 7.08%, 6/15/09......... 757,500
500,000 Chase Commercial Mtge.
Securities Corp.,
Series 1997-1 Class B
(Est. Maturity 2007),
7.37%, 6/19/29.................................... 518,048
782,861 Criimi Mae Finl. Corp., Series 1 Class A (Est.
Maturity 2004), 7.00%, 1/1/33..................... 782,861
DLJ Commercial Mtge. Corp.:
3,000,000 Series 1999-CG1 Class A3,
(Est. Mat. 2009), 6.77%, 4/10/23.................. 2,880,937
2,000,000 Series 1999-CG2 Class A2 (Est. Mat. 2009),
7.45%, 6/10/09.................................... 2,047,500
1,000,000 FNMA, Series 1993-248, Class SA, (Est. Maturity
2004), 4.086%, 8/25/23 (d)........................ 853,240
</TABLE>
21
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Schedule of Investments(continued)
June 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS - continued
$ 1,920,377 Independent National Mtge. Corp., Series 1997-A,
Class A (Est. Maturity 2003), 7.81%, 12/26/26
(a)............................................... $ 1,742,743
Morgan Stanley Capital I, Inc.:
700,000 Series 1997- C1 Class B
(Est. Maturity 2006),
7.69%, 2/15/20.................................... 724,209
650,000 Series 1998-HF2 Class B
(Est. Mat. 2008),
6.71%, 11/15/30................................... 652,740
432,573 PNC Mtge. Securities Corp.,
Series 1997-4 Class 2PP1
(Est. Maturity 2000),
7.50%, 7/25/27.................................... 436,122
1,171,130 Residential Funding Mtge.
Securities I, Inc.,
Series 1999-S2 Class M1
(Est. Mat. 2011),
6.50%, 1/25/29.................................... 1,091,452
Resolution Trust Corp.:
759,879 Series 1992-3 Class A2,
(Est. Maturity 1999), 6.68%, 9/25/19.............. 757,641
613,925 Series 1992-3 Class A3,
(Est. Maturity 1999), 6.83%, 5/25/21.............. 612,123
460,751 Series 1995-1 Class A2C
(Est. Maturity 1999),
7.50%, 10/25/28................................... 461,081
------------
Total Collateralized Mortgage Obligations
(cost $14,481,663)................................ 14,318,197
------------
MORTGAGE-BACKED SECURITIES - 5.8% (cost $10,715,404)
FNMA:
9,287,638 6.50%, 10/1/28 - 5/1/29........................... 8,966,374
1,469,486 7.00%, 7/1/28..................................... 1,458,465
------------
10,424,839
------------
U. S. GOVERNMENT AGENCY OBLIGATIONS - 1.2%
1,000,000 FHLB,
5.80%, 9/2/08..................................... 952,810
750,000 FHLMC,
6.70%, 1/5/07..................................... 756,795
500,000 FNMA,
5.625%, 5/14/04................................... 484,530
------------
Total U. S. Agency Obligations (cost $2,268,237)... 2,194,135
------------
U. S. TREASURY OBLIGATIONS - 9.0%
11,210,000 U.S. Treasury Notes,
4.75%, 11/15/08................................... 10,293,919
9,650,000 U.S. Treasury STRIPs,
(Eff. Yield 9.30%) (c),
0.00%, 5/15/08.................................... 5,659,918
------------
Total U. S. Treasury Obligations
(cost $16,160,953)................................ 15,953,837
------------
YANKEE OBLIGATIONS - 8.3%
675,000 Bayerische Landesbank Girozen, New York, Sr. Notes,
Series D, 6.20%, 2/9/06........................... 650,592
250,000 Great Central Mines Ltd., Sr. Notes, 8.875%,
4/1/08............................................ 236,875
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
YANKEE OBLIGATIONS - continued
$ 500,000 Gulf Canada Resources Ltd.,
Sr. Notes,
8.35%, 8/1/06..................................... $ 486,855
250,000 Imax Corp., Sr. Notes, 7.875%, 12/1/05............. 235,000
2,000,000 Manitoba Province, Canada, Notes, 8.00%, 4/15/02... 2,088,700
2,000,000 Nippon Telegraph and Telephone Corp., Notes,
6.00%, 3/25/08.................................... 1,909,780
691,909 Oslo Seismic Services, Inc.,
1st Pfd. Mtge. Notes,
8.28%, 6/1/11..................................... 717,648
1,000,000 Petroleum GEO Svcs., Notes, 7.50%, 3/31/07......... 997,760
500,000 Rogers Cablesystems Ltd., Notes, 9.625%, 8/1/02.... 523,750
1,000,000 Svenska Handelsbanken,
Sub. Notes,
8.35%, 7/15/04.................................... 1,068,630
1,500,000 TXU Eastern Funding Co., 6.75%, 5/15/09............ 1,425,244
700,000 Westpac Banking Corp.,
Sub. Deb.,
9.125%, 8/15/01................................... 736,526
2,000,000 Yorkshire Power Fin. Ltd., Gtd.
Sr. Notes,
6.496%, 2/25/08................................... 1,898,480
2,000,000 YPF Sociedad Anonima,
Sr. Notes,
7.25%, 3/15/03.................................... 1,933,420
------------
Total Yankee Obligations
(cost $15,126,440)................................ 14,909,260
------------
FOREIGN BONDS - (NON-US DOLLAR DENOMINATED) - 3.4%
35,995,000 Nykredit,
DKK 6.00%, 10/1/29.................................... 4,758,774
Realkredit Danmark, Debs.:
88,000 5.00%, 10/1/29.................................... 10,908
DKK
9,500,000 6.00%, 10/1/29.................................... 1,255,304
DKK
------------
Total Foreign Bonds -
(Non-US Dollar Denominated)
(cost $6,416,344)................................. 6,024,986
------------
<CAPTION>
Shares
<C> <S> <C>
MUTUAL FUND SHARES (cost $4,120,580) - 2.3%
4,120,580 Navigator Prime Portfolio (g)...................... 4,120,580
------------
<CAPTION>
Principal
Amount
<C> <S> <C>
REPURCHASE AGREEMENT - 3.9% (cost $7,010,000)
$7,010,000 Evergreen Joint Repurchase Agreement (5.00% dated
6/30/1999 due 7/1/1999,
maturity value $7,010,974) (e).................... 7,010,000
------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Total Investments -
(cost $189,000,576).. 103.4% 184,455,886
Other Assets and
Liabilities - net.... (3.4) (6,157,525)
------ ------------
Net Assets............ 100.0% $178,298,361
====== ============
</TABLE>
22
<PAGE>
EVERGREEN
Intermediate Term Bond Fund
Schedule of Investments(continued)
June 30, 1999
(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.
(b) The estimated maturity of a Collateralized Mortgage Obligation or
Asset-Backed Security is based on current and projected prepayment
rates. Changes in interest rates can cause the estimated maturity to
differ from the listed dates.
(c) Effective yield (calculated at the time of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(d) Inverse floater, resets monthly.
(e) The repurchase agreements are fully collateralized by U.S. Treasury
and/or federal agency obligations based on market prices plus accrued
interest at June 30, 1999.
(f) All or a portion of this security is currently on loan.
(g) Represents investment of cash collateral received for securities on
loan.
Summary of Abbreviations
DKK Danish Krone
EUR Euro Dollar
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
MTN Medium Term Note
STRIPs Separate Trading of Registered Interest and Principal Securities
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Forward Foreign Currency Exchange Contracts to Sell:
<TABLE>
<CAPTION>
Exchange U.S. Value at In Exchange Unrealized
Date Contracts to Deliver June 30, 1999 for U.S. $ Appreciation
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7/20/99 6,103,000 EUR $6,300,391 $6,543,331 $242,940
</TABLE>
See Combined Notes to Financial Statements.
23
<PAGE>
EVERGREEN
Short-Intermediate Bond Fund
Schedule of Investments
June 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
ASSET-BACKED SECURITIES - 12.1%
$2,444,799 Advanta Home Equity Loan Trust, Ser. 1992-4 Class
A1, 7.20%, 11/25/08............................... $ 2,462,952
Amresco Residential Securities Mtge. Loan Trust:
1,297,020 Ser. 1998-2 Class A1, 6.50%, 12/25/15.............. 1,296,261
3,450,000 Ser. 1998-2 Class A2, 6.25%, 4/25/22............... 3,452,053
431,094 Associates Manufactured Housing, Ser. 1997-1 Class
A3, 6.60%, 6/15/28................................ 432,570
4,000,000 Carco Auto Loan Master Trust, Ser. 1997-1 Class A,
6.69%, 8/15/04.................................... 4,009,660
1,999,985 Contimortgage Home Equity Loan Trust, Ser. 1996-1
Class A5, 6.15%, 3/15/11.......................... 2,002,175
5,495,999 Empire Funding Home Loan Owner Trust, Ser. 1998-1
Class A4, 6.64%, 12/25/12......................... 5,425,458
266,536 EQCC Home Equity Loan Trust, Ser. 1996-1 Class A2,
5.82%, 9/15/09.................................... 266,961
3,482,570 Fleetwood Credit Corp. Grantor Trust, Ser. 1993-B
Class A, 4.95%, 8/15/08........................... 3,461,622
4,121,744 Iroquois Trust, Indexed Amortization Note, Ser.
1997-3 Class A, 6.68%, 11/10/03 (a)............... 4,127,082
5,557,703 Life Fin'l. Home Loan Owner Trust, Ser. 1997-3
Class A2, 6.79%, 10/25/11......................... 5,542,836
2,499,954 Prudential Securities Secured Financing Corp.,
Ser. 1994-4 Class A1, 8.12%, 2/15/25.............. 2,548,741
2,500,000 Southern Pacific Secd. Assets Corp., Ser. 1998-1
Class A6, 7.08%, 3/25/28.......................... 2,497,363
Western Fin'l. Grantor Trust:
1,161,942 Ser. 1995-5 Class A2, 5.875%, 3/1/02............... 1,164,295
479,379 Ser. 1995-4 Class A2, 6.20%, 2/1/02................ 480,781
4,500,000 WFS Financial Owner Trust, Ser. 1997-D Class A4,
6.25%, 3/20/03.................................... 4,528,912
1,972,337 Xerox Rental Equipment Trust, Ser. 1996-A,
6.20%, 12/31/99 (a)............................... 1,967,098
------------
Total Asset-Backed Securities (cost $45,610,987)... 45,666,820
------------
CORPORATE BONDS - 21.8%
Banks - 3.7%
3,350,000 Amsouth BanCorp., Sub. Deb., 6.75%, 11/1/25........ 3,342,094
2,000,000 Bank One First Chicago NBD Corp., MTN, Ser. E,
9.20%, 12/17/01................................... 2,122,584
3,000,000 BB&T Corp., Sub. Notes, 6.375%, 6/30/05............ 2,931,789
5,000,000 First Security Corp., MTN, 6.40%, 2/10/03.......... 4,921,325
500,000 Security Pacific Corp., Notes, 10.45%, 5/8/01...... 530,456
------------
13,848,248
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
CORPORATE BONDS - continued
Finance & Insurance - 9.3%
$ 2,000,000 American Express Credit Corp., Step Bond (Eff.
Yield 5.57%) (b), 6.25%, 8/10/00 ................. $ 1,993,394
3,000,000 Associated P&C Holdings, Inc., Gtd. Sr. Notes,
6.75%, 7/15/03 (a)................................ 2,908,707
3,000,000 Bear Stearns Co., Inc., Sr. Notes, 7.625%,
4/15/00........................................... 3,032,367
1,500,000 Duke Capital Corp., Sr. Notes, Ser. A, 6.25%,
7/15/05........................................... 1,462,602
1,000,000 Horace Mann Educators Corp.,
Sr. Notes,
6.625%, 1/15/06................................... 953,918
Lehman Brothers Holdings, Inc.:
2,500,000 MTN, 6.84%, 10/7/99................................ 2,506,537
5,000,000 Sr. Notes, 6.625%, 11/15/00........................ 5,014,015
5,000,000 8.875%, 3/1/02..................................... 5,230,930
5,000,000 Metropolitan Life Insurance Co., Surplus Notes,
7.00%, 11/1/05 (a)................................ 5,023,580
7,000,000 Salomon, Inc., Sr. Notes, 7.20%, 2/1/04............ 7,111,650
------------
35,237,700
------------
Industrial Specialty Products & Services - 4.3%
7,500,000 Columbia/HCA Healthcare Corp., Notes,
6.875%, 7/15/01................................... 7,303,770
4,375,000 Johnson Controls, Inc., Notes, 6.30%, 2/1/08....... 4,172,871
5,000,000 US Airways, Inc., Ser. 1998-1 Class B, 7.35%,
1/30/18........................................... 4,888,175
------------
16,364,816
------------
Machinery - Diversified - 1.3%
5,000,000 Case Corp., Notes, Ser. B, 6.25%, 12/1/03.......... 4,881,595
------------
Telecommunication Services & Equipment - 0.5%
2,000,000 Worldcom, Inc., Sr. Notes, 6.125%, 8/15/01......... 1,991,218
------------
Transportation - 0.7%
2,393,622 Continental Airlines, Inc., 7.46%, 4/1/13.......... 2,419,413
------------
Utilities - Electric - 2.0%
5,000,000 LG&E Capital Corp., MTN, 5.75%, 11/1/01 (a)........ 4,893,415
2,700,000 Virginia Elec. & Pwr. Co., MTN, 6.30%, 6/21/01..... 2,697,000
------------
7,590,415
------------
Total Corporate Bonds (cost $82,867,979)........... 82,333,405
------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 12.8%
3,250,000 Blackrock Capital Fin., LP, 7.15%, 10/25/26........ 3,212,300
3,150,000 Chase Commercial Mtge. Securities Corp.,
Ser. 1996-2 Class C, 6.90%, 11/19/28.............. 3,096,119
590,569 CMC Securities Corp.,
Ser. 1993-D Class D3,
10.00%, 7/25/23................................... 603,909
</TABLE>
24
<PAGE>
EVERGREEN
Short-Intermediate Bond Fund
Schedule of Investments(continued)
June 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS - continued
$ 5,000,000 Credit Suisse First Boston Mtge. Securities Corp.,
Ser. 1998-C1 Class A1B,
6.48%, 5/17/08.................................... $ 4,820,925
2,795,438 Deutsche Mtge. & Asset Receiving Corp.,
6.22%, 9/15/07.................................... 2,727,188
FHLMC:
2,557,886 Ser. 1546 Class D, 5.75%, 10/15/16................. 2,554,215
2,880,914 Ser. 1991 Class PA, 6.00%, 3/15/14................. 2,882,081
3,000,000 FNMA, REMIC,
Ser. 1998-W8 Class A4,
6.02%, 9/25/28.................................... 2,914,845
4,000,000 Kidder Peabody Acceptance Corp., Ser. 1994-C1 Class
A, 6.65%, 2/1/06.................................. 4,034,540
3,000,000 Nationslink Funding Corp., Comml. Mtge.
Certificates,
Ser. 1998-C1 Class A1A1,
6.80%, 1/20/08.................................... 2,834,100
2,000,000 Painewebber Mtge. Acceptance Corp., Ser. 1996-M1
Class E, 7.66%, 1/2/12 (a)........................ 1,987,735
Potomac Gurnee Fin. Corp.:
2,410,284 Ser. 1 Class A, 6.89%, 12/21/26 (a)................ 2,397,883
2,500,000 Ser. 1 Class B 7.00%, 12/21/26 (a)................. 2,495,462
3,788,820 Prudential Home Mtge. Securities, Ser. 1993-39
Class A8, 6.50%, 10/25/08......................... 3,766,447
4,169,625 Prudential Securities Secd.
Financing Corp.,
Ser. 1998-C1 Class A1A1,
6.11%, 11/15/02................................... 4,155,302
2,423,077 RMF Commercial Mtge., Ser. 1997-1 Class A,
6.38%, 1/15/19 (a)................................ 2,421,539
1,369,505 Saxon Mtge. Securities Corp.,
Ser. 1993-8A Class 1A2, 7.375%, 9/25/23........... 1,378,866
------------
Total Collateralized Mortgage Obligations
(cost $48,872,907)................................ 48,283,456
------------
MORTGAGE-BACKED SECURITIES - 21.7%
6,727,375 FHA Insured,
7.43%, 9/1/23..................................... 6,693,738
4,063,089 FHA-Puttable Proj. Loans:
7.43%, 11/1/22.................................... 4,133,279
4,524,724 Merrill Lynch 199,
8.43%, 2/1/20..................................... 4,648,815
2,808,952 Reilly 18,
6.00%, 4/1/15 (c)................................. 2,780,862
1,526,877 Reilly 55,
7.43%, 3/1/24..................................... 1,561,285
18,717,655 Reilly 64,
7.43%, 1/1/24..................................... 19,128,975
FHLB:
3,000,000 5.45%, 10/19/05.................................... 2,875,875
3,200,000 5.467%, 2/19/04.................................... 3,140,160
FHLMC:
2,750,000 6.00%, 5/15/16..................................... 2,725,534
167,088 10.50%, 9/1/15..................................... 183,444
2,000,000 Deb.,
6.97%, 6/16/05..................................... 2,002,308
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<C> <S> <C>
MORTGAGE-BACKED SECURITIES - continued
FNMA:
$ 7,698,000 5.125%, 2/13/04.................................... $ 7,383,483
4,664,377 11.00%, 2/15/25.................................... 5,203,967
18,384 14.00%, 6/1/11..................................... 20,815
2,740,276 6.00%, 11/1/08..................................... 2,688,184
2,100,000 REMIC Trust, Ser. 1992 Class G44H, 8.00%,
11/25/06.......................................... 2,148,876
8,229,018 Ser. 1995-W1 Class A6, 8.10%, 4/25/25.............. 8,341,986
GNMA:
6,163,171 8.05%, 6/15/19-10/15/20............................ 6,414,482
------------
Total Mortgage-Backed Securities (cost
$82,308,714)...................................... 82,076,068
------------
U. S. AGENCY OBLIGATIONS - 5.5%
FHLB:
646,312 6.043%, 4/28/03.................................... 647,152
4,105,000 6.07%, 8/28/08..................................... 3,923,793
3,300,000 Consolidated Bond, 6.54%, 12/12/07................. 3,242,732
FNMA, MTN:
4,000,000 5.52%, 4/17/02..................................... 3,932,380
9,035,000 6.92%, 3/19/07..................................... 9,235,514
------------
Total U. S. Agency Obligations (cost $22,207,755).. 20,981,571
------------
U. S. TREASURY OBLIGATIONS - 18.2%
U.S. Treasury Notes:
10,000,000 5.625%, 5/15/08.................................... 9,796,880
3,500,000 5.75%, 4/30/03..................................... 3,504,375
24,525,000 6.125%, 8/15/07.................................... 24,800,906
8,000,000 6.25%, 2/15/07..................................... 8,152,504
2,500,000 6.50%, 10/15/06.................................... 2,580,470
14,000,000 6.625%, 5/15/07.................................... 14,586,250
4,980,000 7.00%, 7/15/06..................................... 5,277,246
------------
Total U. S. Treasury Obligations
(cost $70,134,355)................................ 68,698,631
------------
MUNICIPAL - 0.7% (Cost $2,885,285)
2,900,000 Virginia Hsg. Dev. Auth. Cmnwlth. Mtge. RB, Taxable
Subser. A-4, 7.00%, 1/1/14........................ 2,860,705
------------
YANKEE OBLIGATIONS - 5.8%
$ 5,000,000 Boral Ltd. Australia Co., MTN 7.90%, 11/19/99 (a).. $ 5,034,540
Korea Dev. Bank, Bond:
5,000,000 7.25%, 5/15/06..................................... 4,804,195
6,000,000 7.375%, 9/17/04.................................... 5,899,170
6,000,000 National Bank of Canada, Yankee Notes, Ser. B,
8.125%, 8/15/04................................... 6,318,966
------------
Total Yankee Obligations (cost $22,450,580)........ 22,056,871
------------
REPURCHASE AGREEMENT - 0.8% (cost $3,101,272)
3,101,272 Dresdner Bank AG, 4.75%, dated 6/30/1999, due
7/1/1999, maturity value $3,101,681 (d)........... 3,101,272
------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
Total Investments - (cost $380,439,834).............. 99.4% 376,058,799
Other Assets and
Liabilities - net................................... 0.6 2,157,009
----- ------------
Net Assets .......................................... 100.0% $378,215,808
===== ============
</TABLE>
25
<PAGE>
EVERGREEN
Short-Intermediate Bond Fund
Schedule of Investments (continued)
June 30, 1999
(a) Securities that may be sold to qualified institutional buyers under
Rule 144A or securities offered pursuant to Section 4(2) of the Secu-
rities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) Effective yield (calculated at the time of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(c) The security is valued based upon fair value determined under proce-
dures approved by the Board of Trustees.
(d) The repurchase agreement is fully collateralized by $2,880,000 U.S.
Treasury Notes, 7.50%, 2/15/2005; value including accrued interest
$3,167,567.
Summary of Abbreviations
FHA Federal Housing Authority
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
REMIC Real Estate Mortgage Investment Conduit
STRIPs Separately Traded Registered Interest and Principal Securities
See Combined Notes to Financial Statements.
26
<PAGE>
EVERGREEN
Short and Intermediate Term Bond Funds
Statements of Assets and Liabilities
June 30, 1999
<TABLE>
<CAPTION>
Capital Preservation Intermediate Bond Short Intermediate
Fund Fund Fund
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Identified cost of
securities............. $37,499,067 $189,000,576 $380,439,834
Net unrealized gains or
losses on securities... (186,720) (4,544,690) (4,381,035)
- -----------------------------------------------------------------------------------
Market value of
securities............. 37,312,347 184,455,886 376,058,799
Cash.................... 988 976 0
Receivable for
securities sold........ 291,689 0 423,289
Receivable for Fund
shares sold............ 788 617,447 507,001
Interest receivable..... 273,722 2,500,248 5,371,617
Unrealized gains on
forward foreign
currency exchange
contracts.............. 0 242,940 0
Prepaid expenses and
other assets........... 5,704 3,369 114,415
- -----------------------------------------------------------------------------------
Total assets.......... 37,885,238 187,820,866 382,475,121
- -----------------------------------------------------------------------------------
Liabilities
Distributions payable... 58,274 315,789 824,560
Payable for securities
purchased.............. 0 4,637,477 0
Payable for Fund shares
redeemed............... 91,609 250,146 3,063,641
Payable for securities
on loan................ 0 4,120,580 0
Advisory fee payable.... 8,823 91,060 157,035
Distribution Plan
expenses payable....... 21,006 54,195 8,925
Due to other related
parties................ 0 0 7,912
Accrued expenses and
other liabilities...... 10,815 53,258 197,240
- -----------------------------------------------------------------------------------
Total liabilities..... 190,527 9,522,505 4,259,313
- -----------------------------------------------------------------------------------
Net assets............... $37,694,711 $178,298,361 $378,215,808
- -----------------------------------------------------------------------------------
Net assets represented by
Paid-in capital......... $44,893,965 $198,306,946 $402,203,175
Undistributed
(overdistributed) net
investment income...... (59,566) 959,253 (460,508)
Accumulated net
realized losses on
securities and foreign
currency related
transactions........... (6,952,968) (16,664,461) (19,145,824)
Net unrealized gains or
losses on securities
and foreign currency
related transactions... (186,720) (4,303,377) (4,381,035)
- -----------------------------------------------------------------------------------
Total net assets......... $37,694,711 $178,298,361 $378,215,808
- -----------------------------------------------------------------------------------
Net assets consists of
Class A................. $18,148,805 $107,713,976 $ 19,127,186
Class B................. 15,618,016 11,100,248 22,553,329
Class C................. 3,927,890 4,718,490 1,360,369
Class Y................. 0 54,765,647 335,174,924
- -----------------------------------------------------------------------------------
Total net assets......... $37,694,711 $178,298,361 $378,215,808
- -----------------------------------------------------------------------------------
Shares outstanding
Class A................. 1,881,529 12,436,793 1,975,630
Class B................. 1,619,108 1,281,661 2,324,621
Class C................. 407,215 544,805 140,222
Class Y................. 0 6,323,383 34,618,693
- -----------------------------------------------------------------------------------
Net asset value per share
Class A................. $ 9.65 $ 8.66 $ 9.68
- -----------------------------------------------------------------------------------
Class A--Offering price
(based on sales charge
of 3.25%).............. $ 9.97 $ 8.95 $ 10.01
- -----------------------------------------------------------------------------------
Class B................. $ 9.65 $ 8.66 $ 9.70
- -----------------------------------------------------------------------------------
Class C................. $ 9.65 $ 8.66 $ 9.70
- -----------------------------------------------------------------------------------
Class Y................. 0 $ 8.66 $ 9.68
- -----------------------------------------------------------------------------------
</TABLE>
See Combined Notes to Financial Statements.
27
<PAGE>
EVERGREEN
Short and Intermediate Term Bond Funds
Statements of Operations
Year Ended June 30, 1999
<TABLE>
<CAPTION>
Capital Preservation Intermediate Bond Short Intermediate
Fund Fund Fund
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income
Interest................ $2,743,522 $13,594,176 $26,202,792
- ------------------------------------------------------------------------------------
Expenses
Advisory fee............ 270,118 1,196,312 1,986,762
Distribution Plan
expenses............... 286,987 461,574 272,045
Administrative services
fees................... 6,400 30,344 103,519
Transfer agent fee...... 70,750 416,727 505,452
Trustees' fees and
expenses............... 482 5,986 8,013
Printing and postage
expenses............... 10,344 25,825 29,129
Custodian fee........... 12,107 91,559 95,266
Registration and filing
fees................... 33,921 146,598 106,686
Professional fees....... 22,484 20,707 18,140
Other................... 2,119 4,509 9,029
- ------------------------------------------------------------------------------------
Total expenses......... 715,712 2,400,141 3,134,041
Less: Fee credits...... (1,720) (11,652) (20,012)
Fee waivers.......... (147,381) (293,547) 0
- ------------------------------------------------------------------------------------
Net expenses........... 566,611 2,094,942 3,114,029
- ------------------------------------------------------------------------------------
Net investment income... 2,176,911 11,499,234 23,088,763
- ------------------------------------------------------------------------------------
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions
Net realized gains or
losses on:
Securities............. (156,057) (1,386,233) (2,451,611)
Foreign currency
related transactions.. 0 480,542 0
- ------------------------------------------------------------------------------------
Net realized gains or
losses on securities
and foreign currency
related transactions... (156,057) (905,691) (2,451,611)
- ------------------------------------------------------------------------------------
Net change in unrealized
gains or losses on
securities and foreign
currency related
transactions........... (253,950) (7,880,924) (6,391,909)
- ------------------------------------------------------------------------------------
Net realized and
unrealized losses on
securities and foreign
currency related
transactions........... (410,007) (8,786,615) (8,843,520)
- ------------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations............. $1,766,904 $ 2,712,619 $14,245,243
- ------------------------------------------------------------------------------------
</TABLE>
See Combined Notes to Financial Statements.
28
<PAGE>
EVERGREEN
Short and Intermediate Term Bond Funds
Statements of Changes in Net Assets
Year Ended June 30, 1999
<TABLE>
<CAPTION>
Capital Preservation Intermediate Bond Short Intermediate
Fund Fund Fund
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations
Net investment income... $ 2,176,911 $ 11,499,234 $ 23,088,763
Net realized gains or
losses on securities
and foreign currency
related transactions... (156,057) (905,691) (2,451,611)
Net change in
unrealized gains or
losses on securities
and foreign currency
related transactions... (253,950) (7,880,924) (6,391,909)
- -----------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations............ 1,766,904 2,712,619 14,245,243
- -----------------------------------------------------------------------------------
Distributions to
shareholders from
Net investment income
Class A................ (992,050) (7,002,863) (1,112,528)
Class B................ (989,694) (581,636) (1,161,465)
Class C................ (195,983) (269,865) (69,077)
Class Y................ 0 (3,653,526) (20,759,994)
- -----------------------------------------------------------------------------------
Total distributions to
shareholders.......... (2,177,727) (11,507,890) (23,103,064)
- -----------------------------------------------------------------------------------
Capital share
transactions
Proceeds from shares
sold................... 19,176,521 38,089,130 156,664,560
Net asset value of
shares issued in
reinvestment of
distributions.......... 1,552,138 7,492,305 13,089,270
Payment for shares
redeemed............... (30,673,318) (62,133,153) (171,695,268)
- -----------------------------------------------------------------------------------
Net decrease in net
assets resulting from
capital share
transactions.......... (9,944,659) (16,551,718) (1,941,438)
- -----------------------------------------------------------------------------------
Total decrease in net
assets............... (10,355,482) (25,346,989) (10,799,259)
Net assets
Beginning of period..... 48,050,193 203,645,350 389,015,067
- -----------------------------------------------------------------------------------
End of period........... $ 37,694,711 $178,298,361 $ 378,215,808
- -----------------------------------------------------------------------------------
Undistributed
(overdistributed) net
investment income...... $ (59,566) $ 959,253 $ (460,508)
- -----------------------------------------------------------------------------------
</TABLE>
See Combined Notes to Financial Statements.
29
<PAGE>
EVERGREEN
Short and Intermediate Term Bond Funds
Statements of Changes in Net Assets
Year Ended June 30, 1998
<TABLE>
<CAPTION>
Capital Preservation Intermediate Bond Short Intermediate
Fund Fund Fund
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations
Net investment income... $ 2,568,924 $ 5,462,136 $ 24,446,841
Net realized gains or
losses on securities
and foreign currency
related transactions... 162,335 93,422 (1,189,957)
Net change in unrealized
gains or losses on
securities and foreign
currency related
transactions........... (474,778) 518,784 3,858,427
- ------------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations............ 2,256,481 6,074,342 27,115,311
- ------------------------------------------------------------------------------------
Distributions to
shareholders from
Net investment income
Class A................ (887,540) (2,960,648) (1,003,205)
Class B................ (1,474,326) (654,821) (1,108,182)
Class C................ (207,058) (410,056) (53,200)
Class Y................ 0 (1,652,096) (22,216,773)
- ------------------------------------------------------------------------------------
Total distributions to
shareholders.......... (2,568,924) (5,677,621) (24,381,360)
- ------------------------------------------------------------------------------------
Capital share
transactions
Proceeds from shares
sold................... 19,443,143 24,366,074 140,518,437
Net asset value of
shares issued in
reinvestment of
distributions.......... 1,756,964 3,396,992 13,099,071
Payment for shares
redeemed............... (25,657,158) (36,461,819) (166,012,044)
Net asset value of
shares issued in
acquisition of:
Blanchard Short-Term
Flexible Income Fund.. 0 116,766,103 0
Evergreen Intermediate
Term Bond Fund II..... 0 66,213,695 0
- ------------------------------------------------------------------------------------
Net increase (decrease)
in net assets
resulting from capital
share transactions.... (4,457,051) 174,281,045 (12,394,536)
- ------------------------------------------------------------------------------------
Total increase
(decrease) in net
assets............... (4,769,494) 174,677,766 (9,660,585)
Net assets
Beginning of period..... 52,819,687 28,967,584 398,675,652
- ------------------------------------------------------------------------------------
End of period........... $ 48,050,193 $203,645,350 $ 389,015,067
- ------------------------------------------------------------------------------------
Overdistributed net
investment income...... $ (81,569) $ (381,370) $ (199,106)
- ------------------------------------------------------------------------------------
</TABLE>
See Combined Notes to Financial Statements.
30
<PAGE>
Combined Notes to Financial Statements
1. ORGANIZATION
The Evergreen Short and Intermediate Bond Funds consist of Evergreen Capital
Preservation and Income Fund ("Capital Preservation Fund"), Evergreen Interme-
diate Term Bond Fund ("Intermediate Bond Fund") and Evergreen Short Intermedi-
ate Bond Fund ("Short Intermediate Fund"), (collectively, the "Funds"). Each
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").
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 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 retain their existing conversion
rights. 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 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 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.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently fol-
lowed by the Funds in the preparation of their financial statements. The poli-
cies are in conformity with generally accepted accounting principles, which re-
quire management to make estimates and assumptions that affect amounts reported
herein. 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. Se-
curities 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.
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 in a segregated account 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 mar-
ket value of the securities pledged falls below the carrying value of the re-
purchase 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 es-
tablished by the Board of Trustees.
Pursuant to an exemptive order issued by the Securities and Exchange Commis-
sion, the Capital Preservation Fund and Intermediate Bond Fund, along with cer-
tain other funds managed by Evergreen Investment
31
<PAGE>
Combined Notes to Financial Statements(continued)
Management Company ("EIMC"), (formerly Keystone Investment Management Company),
may transfer uninvested cash balances into a joint trading account. These bal-
ances are invested in one or more repurchase agreements that are fully collat-
eralized by U.S. Treasury and/or federal agency obligations.
C. Reverse Repurchase Agreements
To obtain short-term financing, the Capital Preservation Fund and Intermediate
Bond 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.) dol-
lars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, other assets and liabilities at the daily rate of
exchange; purchases and sales of investments and 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 cur-
rency exchange rates is a component of net unrealized gains or losses on secu-
rities and foreign currency related transactions. Net realized foreign currency
gain or loss on foreign currency related transactions includes foreign currency
gains and losses between trade date and settlement date on investment securi-
ties transactions, foreign currency related transactions and the difference be-
tween the amounts of interest and dividends recorded on the books of the Fund
and the amount actually received. The portion of foreign currency gains or
losses related to fluctuations in exchange rates between the initial purchase
trade date and subsequent sale trade date is included in realized gain or loss
on securities.
E. Forward Foreign Currency Exchange Contracts
The Funds may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated
in a foreign currency and to hedge certain foreign currency assets or liabili-
ties. Forward contracts are recorded at the forward rate and marked-to-market
daily. Realized gains and losses arising from such transactions are included in
net realized gain or loss on foreign currency related transactions. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract and is subject to the credit risk that the
other party will not fulfill their obligations under the contract. Forward con-
tracts involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
F. Securities Lending
In order to generate income and to offset expenses, the Funds may lend portfo-
lio securities to brokers, dealers and other financial organizations. The
Funds' investment adviser 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. A Fund will have the right to call any such loan and ob-
tain 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. A Fund may pay fees in connec-
tion with such loans.
32
<PAGE>
Combined Notes to Financial Statements(continued)
G. 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.
H. Federal Taxes
The Funds qualify as regulated investment companies under the Internal Revenue
Code of 1986, as amended (the "Code"). As such, the Funds will not incur any
federal income tax liability since they are expected to distribute all of their
net investment company taxable 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 fed-
eral 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.
I. Distributions
Distributions from net investment income for the Funds 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 differences between financial statement amounts avail-
able for distributions and distributions made in accordance with income tax
regulations are primarily due to differing treatment for mortgage paydown gains
or losses and certain repurchases of securities sold at a loss.
Certain distributions paid during previous years have been reclassified to con-
form to current year presentation.
J. 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.
3. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
EIMC, a subsidiary of First Union, is the investment advisor for the Capital
Preservation Fund and Intermediate Bond Fund. In return for providing invest-
ment management and administrative services to the Capital Preservation Fund
and Intermediate Bond Fund, the Funds pays EIMC a management fee that is calcu-
lated daily and paid monthly. The management fee is computed at an annual rate
of 2.00% of each 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 assets of each Fund.
First Union National Bank, a subsidiary of First Union, serves as the invest-
ment advisor to the Short Intermediate Fund and is paid a management fee that
is calculated daily and paid monthly at an annual rate of 0.50% of the Fund's
average daily net assets.
During the year ended June 30, 1999, the amount of investment advisory fees
waived by each Fund and the impact on each Fund's expense ratio represented as
a percentage of its average daily net assets were as follows:
<TABLE>
<CAPTION>
Fees % of Average
Waived Net Assets
<S> <C> <C>
-------------
Capital Preservation Fund..................... $147,381 0.34%
Intermediate Bond Fund........................ 293,547 0.15%
</TABLE>
33
<PAGE>
Combined Notes to Financial Statements(continued)
Evergreen Investment Services ("EIS"), a subsidiary of First Union, serves as
the administrator and The BISYS Group, Inc. ("BISYS") serves as the sub-admin-
istrator to the Funds. As administrator, EIS provides the Funds with facili-
ties, equipment and personnel. As sub-administrator to the Funds, BISYS pro-
vides the officers of the Funds. Officers of the Funds and affiliated Trustees
receive no compensation directly from the Funds.
For the Short Intermediate Fund, the administrator and sub-administrator is en-
titled to an annual fee based on the average daily net assets of the funds ad-
ministered by EIS for which First Union or its investment advisory subsidiaries
are also the investment advisors. The administration fee is calculated by ap-
plying percentage rates, which start at 0.05% and decline to 0.01% per annum as
net assets increase, to the average daily net assets of the Fund. The sub-ad-
ministration fee is calculated by applying percentage rates, which start at
0.01% and decline to 0.004% per annum as net assets increase, to the average
daily net assets of the Fund.
During the year ended June 30, 1999, the Short Intermediate Fund paid or ac-
crued $82,285 and $21,234 for administrative and sub-administrative services,
respectively.
During the year ended June 30, 1999, the Capital Preservation Fund and Interme-
diate Bond Fund reimbursed EIMC for certain administration and accounting ex-
penses as follows:
<TABLE>
<S> <C>
Capital Preservation Fund.................................... $ 6,400
Intermediate Bond Fund....................................... 30,344
</TABLE>
For the Capital Preservation Fund and Intermediate Bond Fund, the sub-adminis-
tration fee is paid by the investment advisor and is not a fund expense.
Evergreen Service Company ("ESC"), an indirectly, wholly owned subsidiary of
First Union, serves as the transfer and dividend disbursing agent for the
Funds.
4. DISTRIBUTION PLANS
Evergreen Distributor, Inc. ("EDI"), a wholly owned subsidiary of BISYS, serves
as principal underwriter to the Funds.
Each 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". Each class, except
Class Y, currently pays a service fee equal to 0.25% of the average daily net
assets of the class. Class B and Class C also pay distribution fees equal to
0.75% of the average daily net assets of the class. Distribution Plan expenses
are calculated daily and paid at least quarterly.
During the year ended June 30, 1999, amounts paid or accrued to EDI 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................ $ 36,258 $209,176 $41,553
Intermediate Bond Fund................... 296,312 112,885 52,377
Short Intermediate Fund.................. 19,253 238,613 14,179
</TABLE>
With respect to Class B and Class C shares, the principal underwriter may pay
distribution fees greater than the allowable annual amounts each Fund is per-
mitted 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.
5. ACQUISITIONS
The Intermediate Bond Fund was organized for the purpose of combining the as-
sets of the Keystone Intermediate Term Bond Fund and Evergreen Intermediate
Term Bond Fund II (formerly, the Evergreen Intermediate Term Bond Fund).
34
<PAGE>
Combined Notes to Financial Statements(continued)
On January 21, 1998, prior to the combination of assets into Intermediate Bond
Fund, Evergreen Intermediate Term Bond Fund II transferred substantially all of
its net assets related to its Class Y shares to Evergreen Select Core Bond
Fund, an institutional fund, through a redemption-in-kind in the amount of ap-
proximately $108,000,000.
Effective on the close of business on January 23, 1998, Intermediate Bond Fund
acquired all the remaining assets and assumed certain liabilities of Evergreen
Intermediate Term Bond Fund II in exchange for Class A, Class B, Class C and
Class Y shares of the Intermediate Bond Fund. Also, the Intermediate Bond Fund
acquired all the assets and assumed certain liabilities of Keystone Intermedi-
ate Term Bond Fund in exchange for Class A, Class B and Class C shares of In-
termediate Bond Fund.
Effective on the close of business on February 28, 1998, Intermediate Bond Fund
acquired all of the assets and assumed certain liabilities of Blanchard Short-
Term Flexible Income Fund, in an exchange for Class A shares of Intermediate
Bond Fund.
These acquisitions were accomplished by a tax-free exchange of the respective
shares of each Fund. The value of assets acquired, number of shares issued,
unrealized appreciation acquired and the aggregate net assets of each Fund im-
mediately after the acquisition are as follows:
<TABLE>
<CAPTION>
Value of Net Number of Unrealized Net Assets
Acquiring Fund Acquired Fund Assets Acquired Shares Issued Appreciation After Acquisition
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Intermediate Bond
Fund............... Evergreen Intermediate Term Bond Fund II $ 66,213,695 7,287,484 $ 616,992 $ 93,235,040
Intermediate Bond
Fund............... Blanchard Short-Term Flexible Income Fund 116,766,103 12,856,531 2,511,574 211,601,433
</TABLE>
6. CAPITAL SHARE TRANSACTIONS
The Funds have an unlimited number of shares of beneficial interest with $0.001
par value 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>
Year Ended Year Ended
June 30, 1999 June 30, 1998
------------------------ ------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A
Shares sold............... 1,254,468 $ 12,119,775 1,684,678 $ 16,480,670
Shares issued in
reinvestment of
distributions............ 73,376 709,511 62,340 609,698
Shares redeemed........... (1,297,623) (12,552,673) (1,502,907) (14,712,976)
- -----------------------------------------------------------------------------
Net increase.............. 30,221 276,613 244,111 2,377,392
- -----------------------------------------------------------------------------
Class B
Shares sold............... 501,298 4,841,798 212,637 2,082,936
Shares issued in
reinvestment of
distributions............ 69,855 676,249 99,464 974,126
Shares redeemed........... (1,626,086) (15,731,870) (998,736) (9,785,685)
- -----------------------------------------------------------------------------
Net decrease.............. (1,054,933) (10,213,823) (686,635) (6,728,623)
- -----------------------------------------------------------------------------
Class C
Shares sold............... 229,112 2,214,948 89,775 879,537
Shares issued in
reinvestment of
distributions............ 17,206 166,378 17,696 173,140
Shares redeemed........... (247,073) (2,388,775) (118,346) (1,158,497)
- -----------------------------------------------------------------------------
Net decrease.............. (755) $ (7,449) (10,875) $ (105,820)
- -----------------------------------------------------------------------------
</TABLE>
35
<PAGE>
Combined Notes to Financial Statements(continued)
Intermediate Bond Fund
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1999 June 30, 1998
------------------------ ------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A
Shares sold............... 2,341,785 $ 21,107,529 955,523 $ 8,660,565
Shares issued in
acquisition of:
Evergreen Intermediate
Term Bond Fund II........ 0 0 349,314 3,173,762
Blanchard Short-Term
Flexible Income Fund..... 0 0 12,856,531 116,766,103
Shares issued in
reinvestment of
distributions............ 656,382 5,911,817 263,979 2,392,256
Shares redeemed........... (4,185,680) (37,633,504) (1,958,558) (17,753,140)
- -------------------------------------------------------------------------------
Net increase (decrease)... (1,187,513) $(10,614,158) 12,466,789 $113,239,546
- -------------------------------------------------------------------------------
Class B
Shares sold............... 487,096 $ 4,402,183 150,439 $ 1,368,742
Shares issued in
acquisition of Evergreen
Intermediate Term Bond
Fund II.................. 0 0 129,724 1,180,255
Shares issued in
reinvestment of
distributions............ 36,260 326,694 36,150 328,759
Shares redeemed........... (425,314) (3,846,878) (403,520) (3,667,231)
- -------------------------------------------------------------------------------
Net increase (decrease)... 98,042 $ 881,999 (87,207) $ (789,475)
- -------------------------------------------------------------------------------
Class C
Shares sold............... 110,653 $ 1,004,240 243,096 $ 2,208,772
Shares issued in
acquisition of Evergreen
Intermediate Term Bond
Fund II.................. 0 0 5,677 51,630
Shares issued in
reinvestment of
distributions............ 20,784 187,535 30,163 274,457
Shares redeemed........... (184,849) (1,673,579) (492,378) (4,464,809)
- -------------------------------------------------------------------------------
Net decrease.............. (53,412) $ (481,804) (213,442) $ (1,929,950)
- -------------------------------------------------------------------------------
<CAPTION>
January 26,1998
(Commencement of
Year Ended Class Operations) to
June 30, 1999 June 30, 1998
------------------------ ------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class Y
Shares sold............... 1,284,724 $ 11,575,178 1,335,378 $ 12,127,995
Shares issued in
acquisition of Evergreen
Intermediate Term Bond
Fund II.................. 0 0 6,802,769 61,808,048
Shares issued in
reinvestment of
distributions............ 118,332 1,066,259 44,309 401,520
Shares redeemed........... (2,096,933) (18,979,192) (1,165,196) (10,576,639)
- -------------------------------------------------------------------------------
Net increase (decrease)... (693,877) $ (6,337,755) 7,017,260 $ 63,760,924
- -------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Combined Notes to Financial Statements(continued)
Short Intermediate Fund
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1999 June 30, 1998
-------------------------- --------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A
Shares sold............. 1,565,164 $ 15,513,691 500,922 $ 4,955,344
Shares issued in
reinvestment of
distributions.......... 85,182 844,657 76,079 752,038
Shares redeemed......... (1,377,037) (13,580,265) (674,862) (6,681,274)
- -------------------------------------------------------------------------------
Net increase
(decrease)............. 273,309 $ 2,778,083 (97,861) $ (973,892)
- -------------------------------------------------------------------------------
Class B
Shares sold............. 1,844,479 $ 18,346,490 1,023,010 $ 10,138,464
Shares issued in
reinvestment of
distributions.......... 83,118 826,279 78,547 778,080
Shares redeemed......... (1,890,855) (18,756,863) (1,071,136) (10,623,170)
- -------------------------------------------------------------------------------
Net increase............ 36,742 $ 415,906 30,421 $ 293,374
- -------------------------------------------------------------------------------
Class C
Shares sold............. 65,400 $ 652,800 64,686 $ 642,818
Shares issued in
reinvestment of
distributions.......... 6,017 59,815 4,490 44,480
Shares redeemed......... (46,468) (460,730) (58,395) (579,321)
- -------------------------------------------------------------------------------
Net increase............ 24,949 $ 251,885 10,781 $ 107,977
- -------------------------------------------------------------------------------
Class Y
Shares sold............. 12,293,584 $ 122,151,579 12,608,737 $ 124,781,811
Shares issued in
reinvestment of
distributions.......... 1,145,478 11,358,519 1,165,985 11,524,473
Shares redeemed......... (14,015,864) (138,897,410) (14,971,442) (148,128,279)
- -------------------------------------------------------------------------------
Net decrease............ (576,802) $ (5,387,312) (1,196,720) $ (11,821,995)
- -------------------------------------------------------------------------------
</TABLE>
7. 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, 1999:
<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> <C>
Capital Preservation
Fund................... $ 15,398,737 $ 1,627,469 $ 22,115,467 $ 4,933,889
Intermediate Bond Fund.. 156,553,374 161,978,984 156,578,260 184,149,304
Short Intermediate
Fund................... 143,335,404 52,167,556 113,305,257 76,183,400
</TABLE>
During the year ended June 30, 1999, the following Funds entered into reverse
repurchase agreements as follows:
<TABLE>
<CAPTION>
Average Weighted
Daily Average Maximum
Balance Interest Amount
Outstanding Rate Outstanding*
---------------------------
<S> <C> <C> <C>
Capital Preservation Fund..................... $ 402,895 5.52% $ 500,380
Intermediate Bond Fund........................ 1,016,524 5.48% 5,302,459
</TABLE>
- ------
* The Maximum Amount Outstanding under reverse repurchase agreements includes
accrued interest.
At June 30, 1999, there were no reverse repurchase agreements outstanding.
The Intermediate Bond Fund loaned securities during the year ended June 30,
1999 to certain brokers who paid the Fund a negotiated lenders' fee. These fees
are included in interest income. At June 30, 1999, the value of securities on
loan and the value of collateral amounted to $4,041,106 and $4,120,580, respec-
tively. During the year ended June 30, 1999, the Intermediate Bond Fund earned
$8,758 in income from securities lending.
37
<PAGE>
Combined Notes to Financial Statements(continued)
On June 30, 1999, 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 Gross
Unrealized Unrealized Net Unrealized
Tax Cost Appreciation Depreciation Depreciation
<S> <C> <C> <C> <C>
---------------------------------------------------
Capital
Preservation
Fund........... $ 37,510,779 $ 77,528 $ (275,960) $ (198,432)
Intermediate
Bond Fund...... 185,192,183 1,089,377 (5,946,254) (4,856,877)
Short
Intermediate
Fund........... 380,507,963 2,301,212 (6,750,376) (4,449,164)
</TABLE>
As of June 30, 1999, the Funds had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
Capital Expiration
Loss -----------------------------------------------------------------------------------
Carryover 2000 2001 2002 2003 2004 2005 2006 2007
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Preservation
Fund.................. $ 6,812,000 0 $5,685,000 $ 197,000 $642,000 $ 254,000 0 0 $ 34,000
Intermediate Bond
Fund.................. 14,296,000 $417,000 2,688,000 8,725,000 907,000 358,000 $1,201,000 0 0
Short Intermediate
Fund.................. 18,087,000 0 0 6,021,000 0 4,049,000 4,374,000 $1,743,000 1,901,000
</TABLE>
The capital loss carryovers include $2,185,000 and $11,560,000 that were ac-
quired through fund mergers by Capital Preservation Fund and Intermediate Bond
Fund, respectively. The Funds' ability to offset future realized gains against
these capital loss carryovers is limited in accordance with Federal Tax regula-
tions.
In addition to capital loss carryovers, net capital losses incurred after Octo-
ber 31, 1998 through the end of the fiscal year may be deemed to have occurred
on the first day of the following fiscal year for federal income tax purposes.
Capital Preservation Fund, Intermediate Bond Fund and Short Intermediate Fund
incurred and have elected to defer $128,917, $1,813,498 and $991,090 of such
post-October losses, respectively.
8. EXPENSE OFFSET ARRANGEMENTS
The Funds have entered into expense offset arrangements with ESC and their cus-
todian whereby credits realized as a result of uninvested cash balances were
used to reduce a portion of each 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 fee credits received by
each Fund and the impact on each Fund's expense ratio represented as a percent-
age of its average net assets were as follows:
<TABLE>
<CAPTION>
Total Fee % of Average
Credits Received Net Assets
------------------------------
<S> <C> <C>
Capital Preservation Fund............. $ 1,720 0.00%
Intermediate Bond Fund................ 11,652 0.01%
Short Intermediate Fund............... 20,012 0.01%
</TABLE>
9. DEFERRED TRUSTEES' FEES
Each Independent Trustee of each 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 recorded in the Fund's Trustees' fees and
expenses. Trustees will be paid either in one lump sum or in quarterly install-
ments 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.
10. FINANCING AGREEMENTS
Certain Evergreen Funds, State Street Bank and Trust Company ("State Street")
and a group of banks (collectively, the "Banks") entered into a financing
agreement dated December 22, 1997, as amended on November 20, 1998. Under this
agreement, the Banks provided an unsecured credit facility in the aggregate
amount of $400 million ($275 million committed and $125 million uncommitted).
The credit facility was allocated, under the terms of the financing agreement,
among the Banks. The credit facility was accessed by the Funds for temporary or
emergency purposes only and was subject to each Fund's borrowing restrictions.
Borrowings
38
<PAGE>
Combined Notes to Financial Statements (continued)
under this facility bear interest at 0.50% per annum above the Federal Funds
rate. A commitment fee of 0.065% per annum will be incurred on the unused por-
tion of the committed facility, which was allocated to all funds. For its as-
sistance in arranging this financing agreement, the Capital Market Group of
First Union was paid a one-time arrangement fee of $27,500. State Street serves
as administrative agent for the Banks, and as administrative agent is entitled
to a fee of $20,000 per annum which is allocated to all of the funds.
This agreement was amended and renewed on December 22, 1998. The amended fi-
nancing agreement became effective on December 22, 1998 among all of the Ever-
green Funds, State Street and The Bank of New York ("BONY"). Under this agree-
ment, State Street and BONY provide an unsecured credit facility in the aggre-
gate amount of $150 million ($125 million committed and $25 million uncommit-
ted). The remaining terms and conditions of the agreement are unaffected.
During the year ended June 30, 1999, the Funds had no borrowings under these
agreements.
39
<PAGE>
Independent Auditors' Report
The Trustees and Shareholders
Evergreen Fixed Income Trust
We have audited the accompanying statements of assets and liabilities, includ-
ing the schedules of investments of Evergreen Capital Preservation and Income
Fund, Evergreen Intermediate Term Bond Fund and Evergreen Short Intermediate
Bond Fund, portfolios of Evergreen Fixed Income Trust, as of June 30, 1999, and
the related statements of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended
and financial highlights for each of the years or periods described on pages 12
to 17. These financial statements and financial highlights are the responsibil-
ity 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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights 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, 1999 by correspondence with the custodian and brokers. An audit also in-
cludes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presenta-
tion. 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 Capital Preservation and Income Fund, Evergreen Intermediate Term Bond
Fund and Evergreen Short Intermediate Bond Fund as of June 30, 1999, the re-
sults of their operations, changes in their net assets and financial highlights
for each of the years or periods described above in conformity with generally
accepted accounting principles.
[KPMG SIGNATURE APPEARS HERE]
Boston, Massachusetts
August 6, 1999
40
<PAGE>
Other Information
YEAR 2000 (UNAUDITED)
Like other investment companies, the Funds could be adversely affected if the
computer systems used by the Funds' investment advisors and the Funds' other
service providers are not able to perform their intended functions effectively
after 1999 because of the inability of computer software to distinguish the
year 2000 from the year 1900. The Funds' investment advisors are taking steps
to address this potential year 2000 problem with respect to the computer sys-
tems that they use and to obtain satisfactory assurances that comparable steps
are being taken by the Funds' other major service providers. At this time, how-
ever, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Funds from this problem.
41
<PAGE>
Evergreen Funds
Money Market
Treasury Money Market Fund
Money Market Fund
Municipal Money Market Fund
Florida Municipal Money Market Fund
New Jersey Municipal Money Market Fund
Pennsylvania Municipal Money Market Fund
Tax Advantaged
Short Intermediate Municipal Fund
High Grade Municipal Bond Fund
Municipal Bond Fund
Connecticut Municipal Bond Fund
Florida Municipal Bond Fund
Florida High Income Municipal Bond Fund
Georgia Municipal Bond Fund
Maryland Municipal Bond Fund
New Jersey Municipal Bond Fund
North Carolina Municipal Bond Fund
Pennsylvania Municipal Bond Fund
South Carolina Municipal Bond Fund
Virginia Municipal Bond Fund
Income
Capital Preservation and Income Fund
Short-Intermediate Bond Fund
Intermediate Term Bond Fund
U.S. Government Fund
Diversified Bond Fund
Strategic Income Fund
High Yield Bond Fund
Balanced
Balanced Fund
Tax Strategic Foundation Fund
Foundation Fund
Growth & Income
Utility Fund
Income and Growth Fund
Equity Income Fund
Value Fund
Blue Chip Fund
Growth and Income Fund
Small Cap Value Fund
Domestic Growth
Tax Strategic Equity Fund
Strategic Growth Fund
Stock Selector Fund
Evergreen Fund
Masters Fund
Omega Fund
Small Company Growth Fund
Aggressive Growth Fund
Global International
Global Leaders Fund
International Growth Fund
Global Opportunities Fund
Precious Metals Fund
Emerging Markets Growth Fund
Latin America Fund
Express Line
800.346.3858
Investor Services
800.343.2898
www.evergreen-funds.com
53732 541496 08/99
BULK RATE
U.S. POSTAGE
PAID
PERMIT NO. 19
[LOGO OF EVERGREEN FUNDS/SM/ APPEARS HERE] HUDSON, MA
200 Berkeley Street
Boston, MA 02116
<PAGE>
Evergreen Intermediate Term Bond Fund
Pro Forma Combining Financial Statements (unaudited)
Statement of Assets and Liabilities
June 30, 1999
<TABLE>
<CAPTION>
Davis
Evergreen Intermediate Evergreen Intermediate
Intermediate Term Investment Term Bond Fund Pro Forma
Bond Grade Fund Adjustments Combined
- ------------------------------------------ ---------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
ASSETS
Identified cost of securities $189,000,576 $49,631,189 $238,631,765
Net unrealized gains or losses on
securities (4,544,690) (5,885,083) (10,429,773)
- ------------------------------------------ ---------------------- ------------------ ----------------- ------------------
Market value of securities 184,455,886 43,746,106 228,201,992
Cash 976 43,107 44,083
Interest receivable 2,500,248 885,689 3,385,937
Receivable for Fund shares sold 617,447 17,499 634,946
Unrealized Gains on forward foreign
currency exchange contracts 242,940 0 242,940
Prepaid expenses and other assets 3,369 0 3,369
Total Assets 187,820,866 44,692,401 232,513,267
- ------------------------------------------ ---------------------- ------------------ ----------------- ------------------
LIABILITIES
Payable for securities purchased 4,637,477 0 4,637,477
Distributions payable 315,789 0 315,789
Payable for securities on loan 4,120,580 0 4,120,580
Payable for Fund shares redeemed 250,146 335,626 585,772
Advisory fee payable 91,060 0 91,060
Distribution fees payable 54,195 0 54,195
Accrued expenses and other liabilities 53,258 12,296 65,554
Total Liabilities 9,522,505 347,922 9,870,427
NET ASSETS $178,298,361 $44,344,479 $222,642,840
- ------------------------------------------ ---------------------- ------------------ ----------------- ------------------
Net assets represented by:
Paid-in capital $198,306,946 $68,843,297 $267,150,243
Undistributed (overdistributed)
investment income 959,253 (25,115) 934,138
Accumulated net realized gains or
losses on securities (16,664,461) (18,588,620) (35,253,081)
Net realized gains on securities and
futures contacts (4,303,377) (5,885,083) (10,188,460)
NET ASSETS $178,298,361 $44,344,479 $222,642,840
- ------------------------------------------ ---------------------- ------------------ ----------------- ------------------
Class A Shares
Net Assets $107,713,976 $17,340,274 $125,054,250
Shares of Beneficial Interest
Outstanding 12,436,793 4,510,560 2,000,063 a 14,436,856
Net Asset Value $8.66 $3.84 $8.66
Maximum Offering Price (3.25% and
4.75%, respectively. $8.95 $4.03 $8.95
Class B Shares
Net Assets $11,100,248 $19,214,393 $30,314,641
-1-
<PAGE>
Shares of Beneficial Interest
Outstanding 1,281,661 5,039,610 2,217,197 a 3,498,858
Net Asset Value $8.66 $3.81 $8.66
Class C Shares
Net Assets $4,718,490 $4,005,352 $8,723,842
Shares of Beneficial Interest
Outstanding 544,805 1,043,942 462,903 a 1,007,708
Net Asset Value $8.66 $3.84 $8.66
Class Y Shares
Net Assets $54,765,647 $3,784,460 $58,550,107
Shares of Beneficial Interest
Outstanding 6,323,383 979,530 436,603 a 6,759,986
Net Asset Value $8.66 $3.86 $8.66
</TABLE>
(a) Reflects the impact of converting shares of target fund into shares of the
survivor fund.
See Combined Notes to Financial Statements.
-2-
<PAGE>
Evergreen Intermediate Term Bond Fund
Proforma Combining Financial Statements (Unaudited)
Schedule of Investments
June 30, 1999
<TABLE>
<CAPTION>
Evergreen Intermediate
Term Bond Fund
Coupon/Maturity Principal Market Value
- ----------------------------------------------------------- ------------------------------ ------------------ ---------------------
<S> <C> <C> <C>
ASSET-BACKED SECURITIES - 5.1%(B)
American Express Credit Account, Ser. 1999-1 5.85%, 11/15/2006 2,000,000 1,935,530
Class B
California Infrastructure PG&E, Ser. 1997-1 6.16%, 6/25/2003 1,000,000 1,003,990
Certificate, Class A4
Continmortgage Home Equity Loan Trust, Ser. 6.58%, 12/15/2018 2,500,000 2,431,875
1998-1 Class A6
CoreStates Home Equity Trust, Ser. 1994-1 6.65%, 5/15/2009 716,440 715,796
Class A
Ser. 1996-1 Class A4 7.00%, 6/15/2012 1,000,000 1,012,185
Southern Pacific Secd. Assets Corp., Ser. 1996- 7.60%, 10/25/2027 1,000,000 1,024,125
3 Class A4
WFS Owner Trust 6.30%, 3/20/2005 3,000,000 2,988,750
First Nationwide Trust, Ser. '89-AR4-1 9.50%, 9/25/2019
Manufacturers Hanover Mtge. Corp., Mtge. 11.50%, 4/25/2015
Pass-Through Certificates, Ser. A
The Prudential Mtge. Securities Co., Mtge. Pass- 6.95%, 11/25/2022
Through Certificates, Ser. '92-038, Class A-8
-----------------
TOTAL ASSET-BACKED SECURITIES 11,112,161
-----------------
CORPORATE BONDS - 58.3%
AEROSPACE & DEFENSE - 4.2%
BE Aerospace, Inc., Sr. Sub Notes 9.50%, 11/1/2008 500,000 505,000
Boeing, Inc., Deb. 8.10%, 11/15/2006 3,675,000 3,957,093
Lockheed Martin Corp., Notes 7.25%, 5/15/2006 3,000,000 3,002,040
Raytheon Co., Notes 6.75%, 8/15/2007 2,000,000 1,979,640
---------------
9,443,773
---------------
AUTOMOTIVE EQUIPMENT &
MANUFACTURING - 1.7%
Delphi Automotive Sys. Corp. 6.50%, 5/1/2009 750,000 707,250
Eagle Picher Inds., Inc., Sr. Sub. Notes 9.375%, 3/1/2008 200,000 190,000
Hayes Lemmerz Int'l., Inc., Sr. Sub. Notes, (a) 8.25%, 12/15/2008 750,000 712,500
Mark IV Inds., Inc., Sr. Sub. Notes 7.50%, 9/1/2007 250,000 230,625
Ryder System Inc., Notes, Ser. P 6.60%, 11/15/2005
-3-
<PAGE>
---------------
1,840,375
---------------
BANKS - 6.9%
Amsouth Bancorp., Sub. Deb., Puttable 2005 6.75%, 11/1/2025 1,000,000 986,380
Bank One Texas N.A., Sub. Notes, (f) 6.25%, 2/15/2008 2,500,000 2,373,525
Chase Manhattan Corp., Sub. Notes 9.375%, 7/1/2001 1,250,000 1,322,200
Fleet Fin'l. Group, Inc., Notes, (f) 6.50%, 3/15/2008 2,000,000 1,922,160
Harris BanCorp., Sub. Notes 9.375%, 6/1/2001 800,000 841,424
Mellon Fin'l., Co., Sr. Notes 5.75%, 11/15/2003 2,000,000 1,926,940
NationsBank Corp., Sub. Notes 8.125%, 6/15/2002 2,000,000 2,098,020
Suntrust Banks, Inc., Sr. Bond 6.00%, 1/15/2028 2,000,000 1,888,920
BankBoston, N.A., Sub. Notes 7.00%, 9/15/2007
-----------------
13,359,569
-----------------
BUILDING, CONSTRUCTION & FURNISHINGS -
0.6%
MDC Holdings, Inc., Sr. Notes 8.375%, 2/1/2008 450,000 432,000
Nortek Inc., Sr. Notes (a) 8.875%, 8/1/2008 500,00 492,500
Standard Pacific Corp., Sr. Sub. Notes 8.50%, 4/1/2009 500,00 477,500
JTS Corp., Conv. Sub. Deb. ++ 5.25%, 4/29/2002
---------------
1,402,000
---------------
BUSINESS EQUIPMENT & SERVICES - 0.7%
Lucent Technologies, Inc., Notes, (f) 5.50%, 11/15/2008 1,000,000 919,930
Nationwide Credit, Inc., Sr. Notes 10.25%, 1/15/2008
Technical Equipment Leasing Corp., Jr. Sub. 18.375%, 4/10/1996
Deb., Ser. A (h) ++
------------
919,930
------------
CABLE/OTHER VIDEO DISTRIBUTION - 4.1%
Adelphia Communications Corp., Sr. Notes, Ser. 9.875%, 3/1/2007 500,000 522,500
B
Century Communications Corp., Sr. Notes 9.75%, 2/15/2002 750,000 766,875
Charter Communications Holdings, Sr. Notes, (a) 8.625%, 4/1/2009 500,000 478,750
Comcast Cable Communications I, Sr. Notes 6.20%, 11/15/2008 2,000,000 1,866,600
Comcast Corp., Sr. Sub. Deb. 9.375%, 5/15/2005 1,000,000 1,059,440
Comcast Corp., Sr. Sub. Deb. 9.50%, 1/15/2008 250,000 262,500
CSC Holdings, Inc., Sr. Notes 7.25%, 7/15/2008 2,000,000 1,905,400
Metromedia Fiber Network, Inc., Sr. Notes 10.00%, 11/15/2008 250,000 256,875
-4-
<PAGE>
Time Warner, Inc., Deb. 8.11%, 8/15/2006 925,000 969,548
Time Warner, Inc., Notes 9.625%, 5/1/2002 1,000,000 1,072,910
---------------
9,161,398
---------------
CHEMICAL & AGRICULTURAL PRODUCTS -
1.6%
Dow Chemical Co., Deb. 8.625%, 4/1/2006 1,164,000 1,259,413
Huntsman ICI Chemicals, Inc., Sr. Sub. Notes, 10.125%, 7/1/2009 350,000 353,063
(a)
Int'l. Specialty Products Holdings, Inc., Sr. 9.00%, 10/15/2003 300,000 300,000
Notes, Ser. B
Lyondell Chemical Co., Sr. Sub. Notes, (a) 10.875%, 5/1/2009 400,000 412,000
Scotts Co., Sr. Sub. Notes, (a) 8.625%, 1/15/2009 500,000 492,500
Glycomed Inc., Conv. Sub. Deb. 7.50%, 1/1/2003
---------------
2,816,976
---------------
COMMUNICATION SYSTEMS & SERVICES -
5.6%
Ackerley Group, Inc., Sr. Sub. Notes, Ser. B 9.00%, 1/15/2009 500,000 490,000
Bell Telephone Co. of PA, Deb. 8.35%, 12/15/2030 2,600,000 2,940,834
Bresnan Communications Group, Sr. Notes, (a) 8.00%, 2/1/2009 500,000 501,250
Chancellor Media Corp., Sr. Notes 8.00%, 11/1/2008 500,000 490,000
Crown Castle Int'l. Corp., Sr. Notes 9.00%, 5/15/2011 500,000 492,500
Intermedia Communications, Inc., Sr. Disc. 11.25%, 7/15/2007 350,000 253,750
Notes, Ser. B
Jordan Telecommunication Prod., Sr. Notes, Ser. 9.875%, 8/1/2007 500,000 495,000
B
K III Communications Corp., Sr. Notes 8.50%, 2/1/2006 400,000 410,500
LCI Int'l., Inc., Sr. Notes 7.25%, 6/15/2007 1,000,000 981,910
MCI Communications Corp., Notes, (Eff. Yield 6.125%, 4/15/2012 1,000,000 993,360
6.23%), (c)
Mcleod USA, Inc., Sr. Disc. Notes 10.50%, 3/1/2007 500,000 385,000
Price Communications Wireless, Inc., Sr. Secd. 9.125%, 12/15/2006 500,000 520,000
Notes, Ser. B
Sprint Capital Corp., (f) 6.375%, 5/1/2009 2,000,000 1,897,200
Nextlink Communications LLC, Sr. Notes 12.50%, 4/15/2006
Pegasus Media & Communications, Sr. Sub. 12.50%, 7/1/2005
Notes, Ser. B
SFX Broadcasting Inc., Sr. Sub. Notes, Ser. B 10.75%, 5/15/2006
Sinclair Broadcast Group, Sr. Sub. Notes 9.00%, 7/15/2007
Comptronix Corp., Conv. Sub. Deb. (h) ++ 6.75%, 3/1/2002
-5-
<PAGE>
-----------------
10,851,304
-----------------
CONSUMER PRODUCTS & SERVICES - 1.2%
Budget Group, Inc., Sr. Notes, (a) 9.125%, 4/1/2006 500,000 467,500
General Mills, Inc., Ser. B, MTN 9.00, 12/20/2002 1,164,000 1,248,169
Nationsrent, Inc., Sr. Sub. Notes 10.375%, 12/15/2008 400,000 398,000
United Rentals, Inc., Sr. Sub. Notes 9.25%, 1/15/2009 500,000 496,250
---------------
2,609,919
---------------
ENVIRONMENTAL SERVICES - 0.4%
Republic Services, Inc., Notes 6.625%, 5/15/2004 1,000,000 988,610
FINANCE & INSURANCE - 10.5%
Bear Stearns, Inc., Sr. Notes 6.75%, 12/15/2007 1,500,000 1,455,000
Beneficial Corp., Ser. I, MTN 6.25%, 2/18/2013 1,000,000 985,670
CIT Group, Inc., Class A 5.625%, 10/15/2003 1,100,000 1,059,498
Donaldson Lufkin & Jenrette, Sr. Notes 5.875%, 4/1/2002 2,250,000 2,210,647
Farm Credit Systems Finl. Assistance Corp., 8.80%, 6/10/2005 2,500,000 2,802,725
Bonds, Ser. A-05
Ford Motor Credit Co. 5.80%, 1/12/2009 1,000,000 913,820
GMAC, (f) 8.50%, 1/1/2003 850,000 902,020
Prudential Insurance Co., Notes, (a) 7.125%, 7/1/2007 2,000,000 2,008,740
Beneficial Corp., Sr. Notes, Ser. H 6.85%, 9/10/2004
American General Fin., Sr. Notes, Ser. D 7.12%, 8/24/2005
Liberty Finl., Co., Notes 6.75%, 11/15/2008
ReliaStar Finl. Corp., Notes 6.50%, 11/15/2008
Lehman Brothers Holdings, Notes 6.625%, 2/05/2006
Paine Webber Group, Inc., Sr. Notes, Ser. C 6.75%, 4/3/2008
-----------------
12,338,120
-----------------
FOOD & BEVERAGE PRODUCTS - 1.5%
Aurora Foods, Inc., Sr. Sub. Notes, Ser. B 9.875%, 2/15/2007 250,000 258,750
Chiquita Brands Int'l, Inc., Sr. Notes 9.625%, 1/15/2004 750,000 748,125
Coca Cola Enterprises, Inc., (f) 5.75%, 11/1/2008 1,000,000 922,610
Kroger Co., Lease Certificates 6.00%, 4/1/2003
Southland Corp., Sub. Deb., Ser. B 4.00%, 6/15/2004
---------------
1,929,485
---------------
GAMING - 1.1%
-6-
<PAGE>
Boyd Gaming Corp., Sr. Sub. Notes 9.50%, 7/15/2007 250,000 247,500
Circus Circus Enterprises, Inc., Deb. 9.25%, 12/1/2005 500,000 507,500
Isle Capri Casinos, Inc., (a) 8.75%, 4/15/2009 300,000 282,000
Majestic Star Casino LLC, Sr. Secd. Notes, (a) 10.875%, 7/1/2006 500,000 496,250
Mohegan Tribal Gaming Auth., Sr. Sub. Notes 8.75%, 1/1/2009 400,000 395,000
Station Casinos Inc., Sr. Sub. Notes 9.75%, 4/15/2007 500,000 510,000
---------------
2,438,250
---------------
HEALTHCARE PRODUCTS & SERVICES - 0.8%
Baxter Int'l, Inc., Notes 7.25%, 2/15/2008 1,164,000 1,168,295
Playtex Family Prods. Corp., Sr. Sub. Notes 9.00%, 12/15/2003 250,000 253,750
Alliance Imaging, Inc., Sr. Sub. Notes 9.625%, 12/15/2005
---------------
1,422,045
---------------
HOTELS AND LODGING - 0.7%
Courtyard By Marriott II, L.P., Sr. Secd. Notes, 10.75%, 2/1/2008
Ser. B
IRON & STEEL - 1.1%
AK Steel Corp., (a) 7.875%, 2/15/2009 500,000 482,500
Natl. Steel Corp., Ser. D 9.875%, 3/1/2009 500,000 511,250
Wheeling Pittsburgh Corp., Sr. Notes 9.375%, 11/15/2003 750,000 798,750
WHX Corp., Sr. Notes 10.50%, 4/15/2005 500,000 473,750
EES Coke Battery Inc., Sr. Secd. Notes, Ser. B 9.382%, 4/15/2007
(h)
---------------
2,266,250
---------------
OIL/ENERGY - 3.0%
Transocian Offshore, Inc., Notes 7.45%, 4/15/2027 2,000,000 2,026,452
Triton Energy Ltd., Sr. Notes 8.75%, 4/15/2002 500,000 495,000
Western Gas Resources, Inc., Sr. Sub. Notes, 10.00%, 6/15/2009 250,000 256,250
(a)
Enron Corp., Notes 6.725%, 11/17/2008
Gerrity Oil & Gas Corp., Sr. Sub. Notes 11.75%, 7/15/2004
Clark R & M Inc., Sr. Notes 8.375%, 11/15/2007
Clark R & M Inc., Sr. Sub. Notes 8.875%, 11/15/2007
Deeptech Int'l, Inc., Sr. Secd. Notes 12.00%, 12/15/2000
---------------
2,777,702
---------------
-7-
<PAGE>
PAPER & PACKAGING - 0.3%
Container Corp. of America, Gtd. Sr. Notes, Ser. 11.25%, 5/1/2004 500,000 518,750
A
Stone Container Corp., Sr. Sub. Notes 11.50%, 8/15/1999 200,000 202,000
Crown Packaging Enterprises, Ltd., Sr. Secd. 0%-14.00%, 8/1/2006
Disc. Notes (h)
------------
720,750
------------
PRINTING, PUBLISHING, BROADCASTING &
ENTERTAINMENT - 1.0%
Big Flower Press Holdings, Inc., Sr. Sub. Notes 8.625%, 12/1/2008 500,000 462,500
Carmike Cinemas, Inc., Sr. Sub. Notes, (a) 9.375%, 2/1/2009 500,000 486,250
Cinemark USA, Inc., Sr. Sub. Notes, Ser. B 9.625%, 8/1/2008 500,000 495,000
Hollinger Int'l., Sr. Sub. Notes 9.25%, 2/1/2006 450,000 459,000
Sinclair Broadcast Group, Inc., Sr. Sub. Notes 10.00%, 9/30/2005 200,000 204,000
---------------
2,106,750
---------------
RECREATION - 0.3%
Iowa Select Farms, L.P., Sr. Sub. Notes 10.75%, 12/1/2005
Underwater World Mall of America, Sr. RB (h) 13.75%, 3/1/2002
++
Discover Zone Inc. (h) ++ 13.50%, 5/1/2002
REAL ESTATE - 1.1%
Bulong Operations Properties Ltd., Sr. Notes, (a) 12.50%, 12/15/2008 250,000 254,688
EOP Operating, Ltd., Sr. Notes, (a) 6.375%, 2/15/2003 850,000 830,756
Glenborough Properties, LP, Sr. Notes 7.625%, 3/15/2005 1,000,000 909,760
HMH Pptys., Inc., Sr. Notes, Ser. C 8.45%, 12/1/2008 500,000 477,500
---------------
2,472,704
---------------
RETAILING & WHOLESALE - 2.5%
Ames Dept. Stores, Inc., Sr. Notes, (a) 10.00%, 4/15/2006 425,000 415,437
CVS Corp., Notes 5.50%, 2/15/2004 3,000,000 2,887,335
Pathmark Stores, Inc., Sr. Sub. Notes 9.625%, 5/1/2003 250,000 255,625
Southland Corp., Sr. Sub. Deb. 5.00%, 12/15/2003 500,000 432,500
Black & Decker Holdings, Inc., (a) 6.55%, 7/1/2007
---------------
3,990,897
---------------
TEXTILE & APPAREL - 0.4%
-8-
<PAGE>
Polymer Group, Inc., Sr. Sub. Notes, Ser. B 9.00%, 7/1/2007 500,000 478,750
Westpoint Stevens, Inc., Sr. Notes 7.875%, 6/15/2005 500,000 488,750
------------
967,500
------------
TRANSPORTATION - 2.0%
Burlington Northern Santa Fe, Notes 6.125%, 3/15/2009 780,000 729,651
Continental Airlines, Inc., Passthru Certificates, 6.795%, 2/2/2020 1,000,000 958,885
Ser. 1999-1 Class B
CSX Corp., Notes 6.25%, 10/15/2008 2,000,000 1,869,660
Sea Containers Ltd., Sr. Notes, Ser. B. (a) 7.875%, 2/15/2008 500,000 487,500
Simula Inc., Sr. Conv. Sub. Notes, Ser. C (h) 10.00%, 9/15/1999
---------------
4,045,696
---------------
UTILITIES - 5.0%
AES Corp., Sr. Sub. Notes 8.50%, 11/1/2007 500,000 473,750
Commonwealth Edison Co., 1st Mtge., Ser. 83 8.00%, 5/15/2008 3,000,000 3,262,050
Long Island Lighting Co., Deb. 7.30%, 7/15/1999 1,000,000 1,000,590
Natl. Rural Util. Coop. Fin., Notes 5.00%, 10/1/2002 500,000 481,335
EchoStar DBS Corp., Sr. Notes, (a) 9.375%, 2/1/2009 250,000 255,000
El Paso Energy Corp., Sr. Notes 6.75%, 5/15/2009 600,000 576,180
LSP energy LP, Sr. Secd. Notes, Ser. A, (a) 7.164%, 6/20/2013 1,500,000 1,468,983
Commerce Refuse to Energy Auth., Taxable Ref. 10.50%, 7/1/2000
RB
Midland Funding Corp. II, Sub. Secd. Lease 13.25%, 7/23/2006
Panda Funding, Ser. A-1 11.625%, 8/20/2012
Potomac Capital Investors, Notes, Ser. D (a) 6.62%, 12/05/2005
Statia Terminals Int'l. CDA Inc., 1st Mtge. 11.75%, 11/15/2003
Notes, Ser. B
---------------
7,517,888
---------------
TOTAL CORPORATE BONDS 98,387,891
MUNICIPAL OBLIGATIONS - 3.3%
CALIFORNIA - 0.5%
Los Angeles County, CA, Pension Obl., Capital 0.00%, 6/30/2007
Appreciation Bds., Ser. C, (MBIA)
Orange County, CA, Pension Obl., Capital 0.00%, 9/1/2013
Appreciation Bds., Ser. A
San Bernadino, CA Assd. Cmntys. Fin. Auth. 8.80%, 5/1/2017
Healthcare Ref. & Impt. Bds., Ser. B
-9-
<PAGE>
COLORADO - 0.0%
Adams Cnty., CO, IDR Ser. A Pool Gtd. + 9.00%, 11/1/2000
CONNECTICUT - 0.7%
Connecticut Health & Edl. Facs. (Sheriden 8.73%, 11/1/2017
Woods Ctr.), Taxable RB
Connecticut HFA, Taxable Hsg. Mtge. Program, 7.625%, 5/15/2021
Ser. G
Connecticut HFA, Taxable Hsg. Mtge, program, 7.875%, 11/15/2026
Ser. H
FLORIDA - 0.1%
Polk Cnty., FL, HFA REMIC Collateralized Mtge. 9.55%, 1/15/2011
Bds., Ser. 1, CL 2-A
GEORGIA - 0.5%
Camden Cnty., GA, JT Dev. Auth., Taxable RB 7.10%, 12/1/2012
ILLINOIS - 0.3%
Illinois HFA RB, Ser. C, (MBIA) 10.30%, 8/15/2003
Illinois Hsg. Dev. Auth., Taxable Multifam. 8.52%, 9/1/2031
Program, Ser. 8
LOUISIANA - 0.0%
Louisiana Agriculture Fin. Auth., Ser. '86A++ 8.80%, 10/1/1996
Louisiana Hsg. Fin. Agy., Taxable Home Mtge., 8.61%, 8/1/1996
Ser. 86A++
MARYLAND - 0.1%
Mayor and city Council of Baltimore, Econ. Dev. 8.50%, 8/1/2002
Taxable Lease RB Ser. '92
Mayor and City Council of Baltimore, Econ. Dev. 9.50%, 8/1/2014
Taxable Lease RB Ser. '92
NEBRASKA - 0.0%
Nebraska Invst. Fin. Auth., Agriculture RB, Ser. 8.34%, 11/1/1993
A, Gtd.
NEW JERSEY - 0.2%
New Jersey EDA, Taxable RB 0.00%, 2/15/2019
NEW YORK - 0.2%
New York St. HFA Rev. Multifamily Mtge. Ser. 8.875%, 8/15/2014
B, Sonyma Prg. Insurance
OKLAHOMA - 0.1%
Oklahoma City, OK, Airport Trust Taxable RB 8.40%, 11/1/2014
-10-
<PAGE>
PENNSYLVANIA - 0.1%
Harrisburg, PA, G.O. Capital Appreciation Bds. 0.00%, 4/1/2013
York, PA, G.O. Capital Appreciation Bds., Ser. A 0.00%, 2/1/2017
TENNESSEE - 0.0%
Memphis, TN Hlth. Ed. & Hsg. Fac. Brd., 8.68%, 9/15/1996
Multifamily Hsg. Rev. Securitized, Ser. '86A+
TEXAS - 0.3%
El Paso Hsg. Fin. Corp., Multifamily Res. Loan 8.88%, 10/15/1996
Program, Securitized MFHRB, Ser. '86A++
Lancaster, TX, Combined Tax & Golf Course 9.375%, 8/1/2002
Park RB, Ser. B, Certificates of Obl., (MBIA)
The Southeast TX Hsg. Fin. Corp. Securitized 8.60%, 9/1/1996
MFHRB Ser. '86A+
Texas, Dept. Hsg. & Comm. Taxable Mtge. RRB, 9.50%, 3/1/2016
Jr. Lien, Ser. B
Galveston Cnty., TX, Wtr. Auth., Canal Sys. 9.60%, 7/1/1999
Contract Wtr. RB, (AMBAC)
UTAH - 0.1%
Utah HFA, Taxable RHA Cmnty. Services, Ser. B 9.00%, 7/1/2002
TOTAL MUNICIPAL OBLIGATIONS
COLLATERALIZED MORTGAGE OBLIGATIONS -
6.4% (B)
Bear Stearns Comml. Mtge. Securities, Inc., Ser. 7.08%, 6/15/2009 750,000 757,500
1999-WF2 Class A2
Chase Comml. Mtge. Securities Corp., Ser. 7.37%, 6/19/2029 500,000 518,048
1997-1 Class B
Criimi Mae Finl. Corp., Ser. 1 Class A 7.00%, 1/1/2033 782,861 782,861
DLJ Comml. Mtg. Corp., Ser. 1999-CG1 Class 6.77%, 4/10/2023 3,000,000 2,880,937
A3
Ser. 1999-CG2 Class A2 7.45%, 6/10/2009 2,000,000 2,047,500
FNMA, Ser. 1993-248, Class SA, (d) 4.086%, 8/25/2023 1,000,000 853,240
Independent Natl. Mtge. Corp., Ser. 1997-A, 7.81%, 12/26/2026 1,920,377 1,742,743
Class A, (a)
Morgan Stanley Capital I, Inc., Ser. 1997-C1 7.69%, 2/15/2020 700,000 724,209
Class B
Morgan Stanley Capital I, Inc., Ser. 1998-HF2 6.71%, 11/15/2030 650,000 652,740
Class B
PNC Mtge. Securities Corp., Ser. 1997-4 Class 7.50%, 7/25/2027 432,573 436,122
2PP1
Residental Funding Mtge. Securities I, Inc., Ser. 6.50%, 1/25/2029 1,171,130 1,091,452
1999-S2 Class M1
-11-
<PAGE>
Resolution Trust Corp., Ser. 1992-3 Class A2 6.68%, 9/25/2019 759,879 757,641
Resolution Trust Corp., Ser. 1992-3 Class A3 6.83%, 5/25/2021 613,925 612,123
Resolution Trust Corp., Ser. 1995-1 Class A2C 7.50%, 10/25/2028 460,751 461,081
TOTAL COLLATERALIZED MORTGAGE -----------------
OBLIGATIONS 14,318,197
-----------------
MORTGAGE-BACKED SECURITIES - 4.7%
FNMA 6.50%, 9,287,638 8,966,374
10/1/2028-5/1/2029
FNMA 7.00%, 7/1/2028 1,469,486 1,458,465
-----------------
TOTAL MORTGAGE-BACKED SECURITIES 10,424,839
-----------------
U.S. AGENCY OBLIGATIONS - 2.9%
FHLB 5.80%, 9/2/2008 1,000,000 952,810
FHLB 5.54%, 10/15/2008
FHLMC 5.54%, 10/27/2008
FHLMC 6.70%, 1/5/2007 756,795 756,795
FHLMC, Class 1567 A 5.40%, 8/15/2023
FHLMC, REMIC, Class 1668 F 7.5875%, 2/15/2014
FNMA 5.625%, 5/14/2004 500,000 484,530
---------------
TOTAL U.S. AGENCY OBLIGATIONS 2,194,135
---------------
U.S. TREASURY OBLIGATIONS - 7.2%
U.S. Treasury Notes 4.75%, 11/15/2008 11,210,000 10,293,919
U.S. Treasury STRIPs, (Eff. Yield 9.30%)(C) 0.00, 5/15/2008 9,650,000 5,659,918
-----------------
TOTAL U.S. TREASURY OBLIGATIONS 15,953,837
-----------------
YANKEE OBLIGATIONS - 6.7%
Bayerische Landesbank Girozen, New York, Sr. 6.20%, 2/9/2006 675,000 650,592
Notes, Ser. D
Great Central Mines Ltd., Sr. Notes 8.875%, 4/1/2008 250,000 236,875
Imax Corp., Sr. Notes 7.875%, 12/1/2005 250,000 235,000
Manitoba Province, Canada, Notes 8.00%, 4/15/2002 2,000,000 2,088,700
Nippon Telegraph and Telephone Corp., Notes 6.00%, 3/25/2008 2,000,000 1,909,780
Oslo Seismic Services, Inc., 1st Pfd. Mtge. 8.28%, 6/1/2011 691,909 717,648
Notes
Petroleum GEO Svcs., Notes 7.50%, 3/31/2007 1,000,000 997,760
Rogers Cablesystems Ltd., Notes 9.625%, 8/1/2002 500,000 523,750
Svenska Handelsbanken, Sub. Notes 8.35%, 7/15/2004 1,000,000 1,068,630
TXU Eastern Funding Co. 6.75%, 5/15/2009 1,500,000 1,425,244
-12-
<PAGE>
Westpac Banking Corp., Sub. Deb. 9.125%, 8/15/2001 700,000 736,526
Yorkshire Pwr. Fin. Ltd., Gtd. Sr. Notes 6.496%, 2/25/2008 2,000,000 1,898,480
YPF Sociedad Anonima, Sr. Notes 7.25%, 3/15/2003 2,000,000 1,933,420
Gulf Canada Resources Ltd., Sr. Notes 8.35%, 8/1/2006 500,000 486,855
-----------------
TOTAL YANKEE OBLIGATIONS 14,909,260
-----------------
FOREIGN BOND - (NON-US DOLLAR
DENOMINATED) - 2.7%
Nykredit 6.00%, 10/1/2029 35,995,000 4,758,774
dkk
Realkredit Danmark, Debs. 5.00%, 10/1/2029 88,000 10,908
6.00%, 10/1/2029 9,500,000 1,255,304
dkk
TOTAL FOREIGN BOND - (NON-US DOLLAR ---------------
DENOMINATED) 6,024,986
---------------
EQUITIES - 0.1%
COMMON STOCK - 0.05%
Crown Packaging Enterprises Ltd.*
Canyon Resources Corp.*
Nextel Communications Inc., Class A*
PREFERRED STOCK - 0.0%
Westmoreland Coal Co., Dep. Shares Conv. 8.50%
Pfd., Ser. A++
WARRANTS - 0.05% Empire Gas Corp.
Spanish Broadcasting Systems Inc.
Primus Telecommunications
TOTAL EQUITIES
MUTUAL FUND SHARES - 1.9%
---------------
Navigator Prime Portfolio (g) 4,120,580 4,120,580
---------------
REPURCHASE AGREEMENT -3.3%
Evergreen Joint Repurchase Agreement, 5.00% 7,010,000 7,010,000
dated 6/30/1999 due 7/1/1999 maturity value
$7,010,974 (cost $7,010,000), (e)
-13-
<PAGE>
SSBT Repurchase Agreement, 4.85% dated 06/30/99 due 7/1/1999 maturity value
$378,051 (cost $378,000), (e)
-------------
TOTAL REPURCHASE AGREEMENTS 7,010,00
-------------
TOTAL INVESTMENTS (cost $189,000,576, 184,455,886
$49,631,189 and $238,631,765 respectively)
OTHER ASSETS AND LIABILITIES - NET (6,157,525)
--------------------
NET ASSETS $178,298,361
---------------------
---------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Evergreen Intermediate Term Bond Fund
Davis Intermediate Proforma Combined
Investment Grade Bond
Fund
Principal Market Value Principal Market Value
- ------------------------------------------------------- --------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES - 5.1%(B)
American Express Credit Account, Ser. 1999- 2,000,000 1,935,530
1 Class B
California Infrastructure PG&E, Ser. 1997-1 1,000,000 1,003,900
Certificate, Class A4
Continmortgage Home Equity Loan Trust, 2,500,000 2,431,875
Ser. 1998-1 Class A6
CoreStates Home Equity Trust, Ser. 1994-1 716,440 715,796
Class A
Ser. 1996-1 Class A4 1,000,000 1,012,185
Southern Pacific Secd. Assets Corp., Ser. 1,000,000 1,024,125
1996-3 Class A4
WFS Owner Trust 3,000,000 2,988,750
First Nationwide Trust, Ser. '89-AR4-1 28,766 28,676 28,766 28,676
Manufacturers Hanover Mtge. Corp., Mtge. 91,573 93,627 91,573 93,627
Pass-Through Certificates, Ser. A
The Prudential Mtge. Securities Co., Mtge. 179,000 168,282 179,000 168,282
Pass-Through Certificates, Ser. '92-038,
Class A-8
------------ ----------------
TOTAL ASSET-BACKED SECURITIES 290,585 11,402,746
------------ -----------------
-14-
<PAGE>
CORPORATE BONDS - 58.3%
AEROSPACE & DEFENSE - 4.2%
BE Aerospace, Inc., Sr. Sub Notes 500,000 505,000
Boeing, Inc., Deb. 3,675,000 3,957,093
Lockheed Martin Corp., Notes 3,000,000 3,002,040
Raytheon Co., Notes 2,000,000 1,979,640
---------------
9,443,773
AUTOMOTIVE EQUIPMENT &
MANUFACTURING - 1.7%
Delphi Automotive Sys. Corp. 750,000 707,250
Eagle Picher Inds., Inc., Sr. Sub. Notes 200,000 190,000
Hayes Lemmerz Int'l., Inc., Sr. Sub. Notes, 750,000 712,500
(a)
Mark IV Inds., Inc., Sr. Sub. Notes 250,000 230,625
Ryder System Inc., Notes, Ser. P 2,000,000 1,907,392 2,000,000 1,907,392
--------------- ---------------
1,907,392 3,747,767
BANKS - 6.9%
Amsouth Bancorp., Sub. Deb., Puttable 2005 1,000,000 986,380
Bank One Texas N.A., Sub. Notes, (f) 2,500,000 2,373,525
Chase Manhattan Corp., Sub. Notes 1,250,000 1,322,200
Fleet Fin'l. Group, Inc., Notes, (f) 2,000,000 1,922,160
Harris BanCorp., Sub. Notes 800,000 841,424
Mellon Fin'l., Co., Sr. Notes 2,000,000 1,926,940
NationsBank Corp., Sub. Notes 2,000,000 2,098,020
Suntrust Banks, Inc., Sr. Bond 2,000,000 1,888,920
BankBoston, N.A., Sub. Notes 2,000,000 1,992,018 2,000,000 1,992,018
---------------- -----------------
1,992,018 15,351,587
BUILDING, CONSTRUCTION & FURNISHINGS
- - 0.6%
MDC Holdings, Inc., Sr. Notes 450,000 432,000
Nortek Inc., Sr. Notes (a) 500,000 492,500
Standard Pacific Corp., Sr. Sub. Notes 500,000 477,500
JTS Corp., Conv. Sub. Deb. ++ 1,950,000 19,500 1,950,000 19,500
----------- ---------------
19,500 1,421,500
----------- ---------------
BUSINESS EQUIPMENT & SERVICES - 0.7%
Lucent Technologies, Inc., Notes, (f) 1,000,000 919,930
-15-
<PAGE>
Nationwide Credit, Inc., Sr. Notes 750,000 521,250 750,000 521,250
Technical Equipment Leasing Corp., Jr. Sub. 670,700 20,121 670,700 20,121
Deb., Ser. A (h) ++
------------- ---------------
541,371 1,461,301
------------- ---------------
CABLE/OTHER VIDEO DISTRIBUTION - 4.1%
Adelphia Communications Corp., Sr. Notes, 5000,000 522,500
Ser. B
Century Communications Corp., Sr. Notes 750,000 766,875
Charter Communications Holdings, Sr. Notes, 500,000 478,750
(a)
Comcast Cble Communications I, Sr. Notes 2,000,000 1,866,600
Comcast Corp., Sr. Sub. Deb. 1,000,000 1,059,440
Comcast Corp., Sr. Sub. Deb. 250,000 262,500
CSC Holdings, Inc., Sr. Notes 2,000,000 1,905,400
Metromedia Fiber Network, Inc., Sr. Notes 250,000 256,875
Time Warner, Inc., Deb. 925,000 969,548
Time Warner, Inc., Notes 1,000,000 1,072,910
---------------
9,161,398
---------------
CHEMICAL & AGRICULTURAL PRODUCTS -
1.6%
Dow Chemical Co., Deb. 1,164,000 1,259,413
Huntsman ICI Chemicals, Inc., Sr. Sub. 350,000 353,063
Notes, (a)
Int'l. Specialty Products Holdings, Inc., Sr. 300,000 300,000
Notes, Ser. B
Lyondell Chemical Co., Sr. Sub. Notes, (a) 400,000 412,000
Scotts Co., Sr. Sub. Notes, (a) 500,000 492,500
Glycomed Inc., Conv. Sub. Deb. 863,000 702,266 863,000 702,266
-------------- ---------------
702,266 3,519,242
------------- ---------------
COMMUNICATION SYSTEMS & SERVICES -
5.6%
Ackerley Group, Inc., Sr. Sub. Notes, Ser. B 500,000 490,000
Bell Telephone Co. of PA, Deb. 2,600,000 2,940,834
Bresnan Communications Group, Sr. Notes, 500,000 501,250
(a)
Chancellor Media Corp., Sr. Notes 500,000 490,000
-16-
<PAGE>
Crown Castle Int'l. Corp., Sr. Notes 500,000 492,500
Intermedia Communications, Inc., Sr. Disc. 350,000 253,750
Notes, Ser. B
Jordan Telecommunication Prod., Sr. Notes, 500,000 495,000
Ser. B
K III Communications Corp., Sr. Notes 400,000 410,500
LCI Int'l., Inc., Sr. Notes 1,000,000 981,910
MCI Communications Corp., Notes, (Eff. Yield 1,000,000 993,360
6.23%), (C)
Mcleod USA, Inc., Sr. Disc. Notes 500,000 385,000
Price Communications Wireless, Inc., Sr. 500,000 520,000
Secd. Notes, Ser. B
Sprint Capital Corp., (f) 2,000,000 1,897,200
Nextlink Communications LLC, Sr. Notes 250,000 267,500 250,000 267,500
Pegasus Media & Communications, Sr. Sub. 500,000 555,000 500,000 555,000
Notes, Ser. B
SFX Broadcasting Inc., Sr. Sub. Notes, Ser. B 329,000 358,610 329,000 358,610
Sinclair Broadcast Group, Sr. Sub. Notes 500,000 496,250 500,000 496,250
Comptronix Corp., Conv. Sub. Deb. (h) ++ 558,273 23,447 558,273 23,447
--------------- -----------------
1,700,807 12,552,111
--------------- -----------------
CONSUMER PRODUCTS & SERVICES - 1.2%
Budget Group, Inc., Sr. Notes, (a) 500,000 467,500
General Mills, Inc., Ser. B, MTN 1,164,000 1,248,169
Nationsrent, Inc., Sr. Sub. Notes 400,000 398,000
United Rentals, Inc., Sr. Sub. Notes 500,000 496,250
---------------
2,609,919
---------------
ENVIRONMENTAL SERVICES - 0.4%
--------------
Republic Services, Inc., Notes 1,000,000 988,610
--------------
FINANCE & INSURANCE - 10.5%
Bear Stearns, Inc., Sr. Notes 1,500,000 1,455,000
Beneficial Corp., Ser. I, MTN 1,000,000 985,670
CIT Group, Inc., Class A 1,100,000 1,059,498
Donaldson Lufkin & Jenrette, Sr. Notes 2,250,000 2,210,647
Farm Credit Systems Finl. Assistance Corp., 2,500,000 2,802,725
Bonds, Ser. A-05
Ford Motor Credit Co. 1,000,000 913,820
-17-
<PAGE>
GMAC, (f) 850,000 902,020
Prudential Insurance Co., Notes, (a) 2,000,000 2,008,740
Beneficial Corp., Sr. Notes, Ser. H 1,500,000 1,499,272 1,500,000 1,499,272
American General Fin., Sr. Notes, Ser. D 1,500,000 1,509,810 1,500,000 1,509,810
Liberty Finl., Co., Notes 2,000,000 1,941,932 2,000,000 1,941,932
ReliaStar Finl. Corp., Notes 2,000,000 1,906,722 2,000,000 1,906,722
Lehman Brothers Holdings, Notes 2,000,000 1,916,372 2,000,000 1,916,372
Paine Webber Group, Inc., Sr. Notes, Ser. C 2,350,000 2,251,695 2,350,000 2,251,695
----------------- ----------------
11,025,803 23,363,923
----------------- -----------------
FOOD & BEVERAGE PRODUCTS - 1.5%
Aurora Foods, Inc., Sr. Sub. Notes, Ser. B 250,000 258,750
Chiquita Brands Int'l, Inc., Sr. Notes 750,000 748,125
Coca Cola Enterprises, Inc., (f) 1,000,000 922,610
Kroger Co., Lease Certificates 552,000 543,308 552,000 543,308
Southland Corp., Sub. Deb., Ser. B 1,000,000 765,000 1,000,000 765,000
---------------- ---------------
1,308,308 3,237,793
---------------- ---------------
GAMING - 1.1%
Boyd Gaming Corp., Sr. Sub. Notes 250,000 247,500
Circus Circus Enterprises, Inc., Deb. 500,000 507,500
Isle Capri Casinos, Inc., (a) 300,000 282,000
Majestic Star Casino LLC, Sr. Secd. Notes, 500,000 496,250
(a)
Mohegan Tribal Gaming Auth., Sr. Sub. Notes 400,000 395,000
Station Casinos Inc., Sr. Sub. Notes 500,000 510,000
---------------
2,438,250
---------------
HEALTHCARE PRODUCTS & SERVICES -
0.8%
Baxter Int'l, Inc., Notes 1,164,000 1,168,295
Playtex Family Prods. Corp., Sr. Sub. Notes 250,000 253,750
Alliance Imaging, Inc., Sr. Sub. Notes 250,000 240,625 250,000 240,625
------------- ----------------
240,625 1,662,670
------------ ----------------
HOTELS AND LODGING - .7%
-18-
<PAGE>
Courtyard By Marriott II, L.P., Sr. Secd. ---------------- ----------------
Notes, Ser. B 1,448,000 1,484,200 1,448,000 1,484,200
--------------- ----------------
IRON & STEEL - 1.1%
AK Steel Corp., (a) 500,000 482,500
Natl. Steel Corp., Ser. D 500,000 511,250
Wheeling Pittsburgh Corp., Sr. Notes 750,000 798,750
WHX Corp., Sr. Notes 500,000 473,750
EES Coke Battery Inc., Sr. Secd. Notes, Ser. 100,000 96,151 100,000 96,151
B (h)
-------------- ---------------
96,151 2,362,401
-------------- ---------------
OIL/ENERGY - 3.0%
Transocian Offshore, Inc., Notes 2,000,000 2,026,452
Triton Energy Ltd., Sr. Notes 500,000 495,000
Western Gas Resources, Inc., Sr. Sub. Notes, 250,000 256,250
(a)
Enron Corp., Notes 2,000,000 1,948,252 2,000,000 1,948,252
Gerrity Oil & Gas Corp., Sr. Sub. Notes 1,000,000 1,046,250 1,000,000 1,046,250
Clark R & M Inc., Sr. Notes 250,000 229,687 250,000 229,687
Clark R & M Inc., Sr. Sub. Notes 250,000 220,938 250,000 220,938
Deeptech Int'l, Inc., Sr. Secd. Notes 500,000 529,940 500,000 529,940
--------------- ----------------
3,975,067 6,752,769
--------------- ----------------
PAPER & PACKAGING - 0.3%
Container Corp. of America, Gtd. Sr. Notes, 500,000 518,750
Ser. A
Stone Container Corp., Sr. Sub. Notes 200,000 202,000
Crown Packaging Enterprises, Ltd., Sr. Secd. 2,000,000 30,000 2,000,000 30,000
Disc. Notes (h)
------------ -------------
30,000 750,750
----------- -------------
PRINTING, PUBLISHING, BROADCASTING &
ENTERTAINMENT - 1.0%
Big Flower Press Holdings, Inc., Sr. Sub. 500,000 462,500
Notes
Carmike Cinemas, Inc., Sr. Sub. Notes, (a) 500,000 486,250
Cinemark USA, Inc., Sr. Sub. Notes, Ser. B 500,000 495,000
-19-
<PAGE>
Hollinger Int'l., Sr. Sub. Notes 450,000 459,000
Sinclair Broadcast Group, Inc., Sr. Sub. Notes 200,000 204,000
---------------
2,106,750
---------------
RECREATION - 0.3%
Iowa Select Farms, L.P., Sr. Sub. Notes 500,000 418,125 500,000 418,125
Underwater World Mall of America, Sr. RB (h) 984,599 334,764 984,599 334,764
++
Discover Zone Inc. (h) ++ 58,000 12,470 58,000 12,470
------------ ------------
765,359 765,359
------------ ------------
REAL ESTATE - 1.1%
Bulong Operations Properties Ltd., Sr. Notes, 250,000 254,688
(a)
EOP Operating, Ltd., Sr. Notes, (a) 850,000 830,756
Glenborough Properties, LP, Sr. Notes 1,000,000 909,760
HMH Pptys., Inc., Sr. Notes, Ser. C 500,000 477,500
---------------
2,472,704
---------------
RETAILING & WHOLESALE - 2.5%
Ames Dept. Stores, Inc., Sr. Notes, (a) 425,000 415,437
CVS Corp., Notes 3,000,000 2,887,335
Pathmark Stores, Inc., Sr. Sub. Notes 250,000 255,625
Southland Corp., Sr. Sub. Deb. 500,000 432,500
Black & Decker Holdings, Inc., (a) 1,500,000 1,470,120 1,500,000 1,470,120
---------------- ---------------
1,470,120 5,461,017
---------------- ---------------
TEXTILE & APPAREL - 0.4%
Polymer Group, Inc., Sr. Sub. Notes, Ser. B 500,000 478,750
Westpoint Stevens, Inc., Sr. Notes 500,000 488,750
------------
967,500
------------
TRANSPORTATION - 2.0%
Burlington Northern Santa Fe, Notes 780,000 729,651
-20-
<PAGE>
Continental Airlines, Inc., Passthru 1,000,000 958,885
Certificates, Ser. 1999-1 Class B
CSX Corp., Notes 2,000,000 1,869,660
Sea Containers Ltd., Sr. Notes, Ser. B. (a) 500,000 487,500
Simula Inc., Sr. Conv. Sub. Notes, Ser. C (h) 500,000 407,500 500,000 407,500
------------ ---------------
407,500 4,453,196
------------ ---------------
UTILITIES - 5.0%
AES Corp., Sr. Sub. Notes 500,000 473,750
Commonwealth Edison Co., 1st Mtge., Ser. 3,000,000 3,262,050
83
Long Island Lighting Co., Deb. 1,000,000 1,000,590
Natl. Rural Util. Coop. Fin., Notes 500,000 481,335
EchoStar DBS Corp., Sr. Notes, (a) 250,000 255,000
El Paso Energy Corp., Sr. Notes 600,000 576,180
LSP energy LP, Sr. Secd. Notes, Ser. A, (a) 1,500,000 1,468,983
Commerce Refuse to Energy Auth., Taxable 130,000 131,979 130,000 131,979
Ref. RB
Midland Funding Corp. II, Sub. Secd. Lease 500,000 604,440 500,000 604,440
Panda Funding, Ser. A-1 498,978 511,451 498,978 511,451
Potomac Capital Investors, Notes, Ser. D (a) 2,000,000 1,869,198 2,000,000 1,869,198
Statia Terminals Int'l. CDA Inc., 1st Mtge. 500,000 538,750 500,000 538,750
Notes, Ser. B
--------------- -----------------
3,655,818 11,173,706
---------------- ------------------
TOTAL CORPORATE BONDS 31,322,305 129,710,196
MUNICIPAL OBLIGATIONS - 3.3%
CALIFORNIA - 0.5%
Los Angeles County, CA, Pension Obl., 640,000 370,521 640,000 370,521
Capital Appreciation Bds., Ser. C, (MBIA)
Orange County, CA, Pension Obl., Capital 1,930,000 703,582 1,930,000 703,582
Appreciation Bds., Ser. A
San Bernadino, CA Assd. Cmntys. Fin. Auth. 130,000 118,522 130,000 118,522
Healthcare Ref. & Impt. Bds., Ser. B
--------------- ---------------
1,192,625 1,192,625
--------------- ---------------
COLORADO - 0.0% --------------- ---------------
Adams Cnty., CO, IDR Ser. A Pool Gtd. + 670,000 5,025 670,000 5,025
--------------- ---------------
-21-
<PAGE>
CONNECTICUT - 0.7%
Connecticut Health & Edl. Facs. (Sheriden 700,000 743,939 700,000 743,939
Woods Ctr.), Taxable RB
Connecticut HFA, Taxable Hsg. Mtge. 700,000 683,529 700,000 683,529
Program, Ser. G
Connecticut HFA, Taxable Hsg. Mtge, 75,000 75,350 75,000 75,350
program, Ser. H
--------------- ---------------
1,502,818 1,502,818
--------------- ---------------
FLORIDA - 0.1%
Polk Cnty., FL, HFA REMIC Collateralized -------------- --------------
Mtge. Bds., Ser. 1, CL 2-A 286,540 292,253 286,540 292,253
-------------- --------------
GEORGIA - 0.5%
Camden Cnty., GA, JT Dev. Auth., Taxable -------------- --------------
RB 1,000,000 998,210 1,000,000 998,210
-------------- --------------
ILLINOIS - 0.3%
Illinois HFA RB, Ser. C, (MBIA) 215,000 215,851 215,000 215,851
Illinois Hsg. Dev. Auth., Taxable Multifam. 385,000 395,276 385,000 395,276
Program, Ser. 8
------------ ------------
611,127 611,127
------------ ------------
LOUISIANA - 0.0%
Louisiana Agriculture Fin. Auth., Ser. 100,000 750 100,000 750
'86A++
Louisiana Hsg. Fin. Agy., Taxable Home 100,000 750 100,000 750
Mtge., Ser. 86A++
----------- -----------
1,500 1,500
----------- -----------
MARYLAND - 0.1%
Mayor and city Council of Baltimore, Econ. 190,000 195,812 190,000 195,812
Dev. Taxable Lease RB Ser. '92
Mayor and City Council of Baltimore, Econ. 50,000 52,879 50,000 52,879
Dev. Taxable Lease RB Ser. '92
-22-
<PAGE>
------------ ------------
248,691 248,691
------------ ------------
NEBRASKA - 0.0%
Nebraska Invst. Fin. Auth., Agriculture RB, ------------- -----------
Ser. A, Gtd. 20,000 150 20,000 150
------------- -----------
NEW JERSEY - 0.2% ------------ -------------
New Jersey EDA, Taxable RB 2,500,000 536,550 2,500,000 536,550
------------ ------------
NEW YORK - 0.2%
New York St. HFA Rev. Multifamily Mtge. ------------- ---------------
Ser. B, Sonyma Prg. Insurance 440,000 464,376 440,000 464,376
------------- ---------------
OKLAHOMA - 0.1% ------------- -------------
Oklahoma City, OK, Airport Trust Taxable RB 250,000 250,183 250,000 250,183
------------- -------------
PENNSYLVANIA - 0.1%
Harrisburg, PA, G.O. Capital Appreciation 620,000 232,829 620,000 232,829
Bds.
York, PA, G.O. Capital Appreciation Bds., 315,000 87,768 315,000 87,768
Ser. A
------------- -------------
320,597 320,597
------------- -------------
TENNESSEE - 0.0%
Memphis, TN Hlth. Ed. & Hsg. Fac. Brd., ----------- ----------
Multifamily Hsg. Rev. Securitized, Ser. 675,480 5,066 675,480 5,066
'86A+ ----------- ----------
TEXAS - 0.3%
El Paso Hsg. Fin. Corp., Multifamily Res. Loan 195,000 1,463 195,000 1,463
Program, Securitized MFHRB, Ser. '86A++
Lancaster, TX, Combined Tax & Golf Course 165,000 165,508 165,000 165,508
Park RB, Ser. B, Certificates of Obl., (MBIA)
The Southeast TX Hsg. Fin. Corp. Securitized 807,000 6,053 807,000 6,053
MFHRB Ser. '86A+
Texas, Dept. Hsg. & Comm. Taxable Mtge. 450,000 461,515 450,000 461,515
RRB, Jr. Lien, Ser. B
-23-
<PAGE>
Galveston Cnty., TX, Wtr. Auth., Canal Sys. 85,000 85,010 85,000 85,010
Contract Wtr. RB, (AMBAC)
------------ ------------
719,549 719,549
------------ ------------
UTAH - 0.1%
Utah HFA, Taxable RHA Cmnty. Services, ------------ ------------
Ser. B 275,000 276,996 275,000 276,996
------------ ------------
--------------- ---------------
7,425,716 7,425,716
TOTAL MUNICIPAL OBLIGATIONS --------------- ---------------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 6.4% (B)
Bear Stearns Comml. Mtge. Securities, Inc., 750,000 757,500
Ser. 1999-WF2 Class A2
Chase Comml. Mtge. Securities Corp., Ser. 500,000 518,048
1997-1 Class B
Criimi Mae Finl. Corp., Ser. 1 Class A 782,861 782,861
DLJ Comml. Mtg. Corp., Ser. 1999-CG1 3,000,000 2,880,937
Class A3
Ser. 1999-CG2 Class A2 2,000,000 2,047,500
FNMA, Ser. 1993-248, Class SA, (d) 1,000,000 853,240
Independent Natl. Mtge. Corp., Ser. 1997-A, 1,920,377 1,742,743
Class A, (a)
Morgan Stanley Capital I, Inc., Ser. 1997-C1 700,000 724,209
Class B
Morgan Stanley Capital I, Inc., Ser. 1998- 650,000 652,740
HF2 Class B
PNC Mtge. Securities Corp., Ser. 1997-4 432,573 436,122
Class 2PP1
Residental Funding Mtge. Securities I, Inc., 1,171,130 1,091,452
Ser. 1999-S2 Class M1
Resolution Trust Corp., Ser. 1992-3 Class A2 759,879 757,641
Resolution Trust Corp., Ser. 1992-3 Class A3 613,925 612,123
Resolution Trust Corp., Ser. 1995-1 Class 460,751 461,081
A2C
-----------------
TOTAL COLLATERALIZED MORTGAGE 14,318,197
OBLIGATIONS -----------------
MORTGAGE-BACKED SECURITIES - 4.7%
-24-
<PAGE>
FNMA 9,287,638 8,966,374
FNMA 1,469,486 1,458,465
-----------------
TOTAL MORTGAGE-BACKED SECURITIES 10,424,839
-----------------
U.S. AGENCY OBLIGATIONS - 2.9%
FHLB 1,000,000 952,810
FHLB 2,000,000 1,853,180 2,000,000 1,853,180
FHLMC 2,000,000 1,853,400 2,000,000 1,853,400
FHLMC 750,000 756,795
FHLMC, Class 1567 A 166,558 151,343 166,558 151,343
FHLMC, REMIC, Class 1668 F 293,852 304,182 293,852 304,182
FNMA 500,000 484,530
---------------- ---------------
TOTAL U.S. AGENCY OBLIGATIONS 4,162,105 6,356,240
---------------- ---------------
U.S. TREASURY OBLIGATIONS - 7.2%
U.S. Treasury Notes 11,210,000 10,293,919
U.S. Treasury STRIPs, (Eff. Yield 9.30%)(C) 9,650,000 5,659,918
-----------------
TOTAL U.S. TREASURY OBLIGATIONS 15,953,837
-----------------
YANKEE OBLIGATIONS - 6.7%
Bayerische Landesbank Girozen, New York, 675,000 650,592
Sr. Notes, Ser. D
Great Central Mines Ltd., Sr. Notes 250,000 236,875
Imax Corp., Sr. Notes 250,000 235,000
Manitoba Province, Canada, Notes 2,000,000 2,088,700
Nippon Telegraph and Telephone Corp., Notes 2,000,000 1,909,780
Oslo Seismic Services, Inc., 1st Pfd. Mtge. 691,909 717,648
Notes
Petroleum GEO Svcs., Notes 1,000,000 997,760
Rogers Cablesystems Ltd., Notes 500,000 523,750
Svenska Handelsbanken, Sub. Notes 1,000,000 1,068,630
TXU Eastern Funding Co. 1,500,000 1,425,244
Westpac Banking Corp., Sub. Deb. 700,000 736,526
Yorkshire Pwr. Fin. Ltd., Gtd. Sr. Notes 2,000,000 1,898,480
YPF Sociedad Anonima, Sr. Notes 2,000,000 1,933,420
Gulf Canada Resources Ltd., Sr. Notes 500,000 486,855
------------------
TOTAL YANKEE OBLIGATIONS 14,909,260
------------------
-25-
<PAGE>
FOREIGN BOND - (NON-US DOLLAR
DENOMINATED) - 2.7%
Nykredit 35,995,000 4,758,774
dkk
Realkredit Danmark, Debs. 88,000 10,908
9,500,000 1,255,304
dkk
TOTAL FOREIGN BOND - (NON-US DOLLAR ---------------
DENOMINATED) 6,024,986
---------------
EQUITIES - 0.1%
COMMON STOCK - 0.05%
Crown Packaging Enterprises Ltd.* 260,252 2,604 260,252 2,604
Canyon Resources Corp.* 135,951 21,243 135,951 21,243
Nextel Communications Inc., Class A* 1,161 58,305 1,161 58,305
----------- ------------
82,152 82,152
----------- ------------
PREFERRED STOCK - 0.0%
Westmoreland Coal Co., Dep. Shares Conv. ------------ ------------
Pfd., Ser. A++ 788 14,382 788 14,382
------------ ------------
WARRANTS - 0.05%
Empire Gas Corp. 869 261 869 261
Spanish Broadcasting Systems Inc. 101 60,600 101 60,600
Primus Telecommunications 500 10,000 500 10,000
------------ -----------
70,861 70,861
------------ -----------
------------- -------------
TOTAL EQUITIES 167,395 167,395
------------- -------------
MUTUAL FUND SHARES - 1.9%
----------------
Navigator Prime Portfolio (g) 4,120,580 4,120,580
----------------
REPURCHASE AGREEMENT -3.3%
-26-
<PAGE>
Evergreen Joint Repurchase Agreement, 7,010,000 7,010,000
5.00% dated 6/30/1999 due 7/1/1999
maturity value $7,010,974 (cost
$7,010,000), (e)
SSBT Repurchase Agreement, 4.85% dated 378,000 378,000 378,000 378,000
06/30/99 due 7/1/1999 maturity value
$378,051 (cost $378,000), (e)
------------- ---------------
TOTAL REPURCHASE AGREEMENTS 378,000 7,388,000
------------- ---------------
TOTAL INVESTMENTS (cost $189,000,576, 43,746,106 102.5% 228,201,992
$49,631,189 and $238,631,765
respectively)
OTHER ASSETS AND LIABILITIES - NET 598,373 -2.5% (5,559,152)
------------------ ------------------ ------------------
NET ASSETS 44,344,479 100.0% 222,642,840
----------------- ------------ ------------------
----------------- ------------ ------------------
</TABLE>
-27-
<PAGE>
Evergreen Intermediate Term Bond Fund
Notes to Pro Forma Combining Financial Statements (Unaudited)
June 30, 1999
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 ("Pro Forma
Statements"), reflect the accounts of Evergreen Intermediate Term Bond
Fund ("Evergreen Intermediate Bond Fund") and Davis Intermediate
Investment Grade Bond Fund ("Davis Investment Grade Fund") at June 30,
1999 and for the respective periods then ended.
The Pro Forma Statements give effect to the proposed Agreement and Plan
of Reorganization (the "Reorganization") to be submitted to
shareholders of Davis Investment Grade Fund. The Reorganization
provides for the acquisition of all assets and the identified
liabilities of Davis Investment Grade Fund by Evergreen Intermediate
Bond Fund, in exchange for Class A, Class B, Class C and Class Y shares
of Evergreen Intermediate Bond Fund. Thereafter, there will be a
distribution of Class A, Class B, Class C and Class Y shares of
Evergreen Intermediate Bond Fund to the Class A, Class B, Class C and
Class Y shareholders of Davis Investment Grade Fund in liquidation and
subsequent termination thereof. As a result of the Reorganization, the
Class A, Class B, Class C and Class Y shareholders of Davis Investment
Grade Fund will become the owners of that number of full and fractional
Class A, Class B, Class C and Class Y shares, respectively of Evergreen
Intermediate Bond Fund having an aggregate net asset value equal to the
aggregate net asset value of their shares of Davis Investment Grade
Fund as of the close of business immediately prior to the date that
Davis Investment Grade Fund Class A, Class B, Class C and Class Y net
assets are exchanged for Class A, Class B, Class C and Class Y shares
of Evergreen Intermediate Bond Fund.
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 respective periods presented.
The information contained herein is based on the experience of each
Fund for the respective periods then ended and is designed to permit
shareholders of the consolidating mutual funds to evaluate the
financial effect of the proposed Reorganization. The expenses of Davis
Investment Grade Fund in connection with the Reorganization (including
the cost of any proxy soliciting agents) will be borne by Davis
Selected Advisors, LP. 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 Bond Fund.
-28-
<PAGE>
The Pro Forma Statements should be read in conjunction with the
historical financial statements of each Fund 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, Class B, Class C and Class Y shares of
Evergreen Intermediate Bond Fund which would have been issued at June 30,
1999 in connection with the proposed Reorganization. Class A, Class B,
Class C and Class Y shareholders of Davis Investment Grade Fund would
receive Class A, Class B, Class C and Class Y shares of Evergreen
Intermediate Bond Fund based on conversion ratios determined on June 30,
1999. The conversion ratios are calculated by dividing the Class A, Class
B, Class C and Class Y net asset value of Davis Investment Grade Fund by
the net asset value per share of Class A, Class B, Class C and Class Y of
Evergreen Intermediate Bond Fund.
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 each Fund's 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 combined pro forma expenses
were calculated by determining the expense rates based on the combined
average net assets of the two funds and applying those rates to the average
net assets of the Evergreen Intermediate Bond Fund for the twelve months
ended June 30, 1999 and to the average net assets of the Davis Investment
Grade Fund for the twelve months ended June 30, 1999. The adjustments
reflect those amounts needed to adjust the combined expenses to these
rates.
-29-
<PAGE>
(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.
(b) The estimated maturity of a Collateralized Mortgage Obligation or Asset
Backed Security is based on current and projected prepayment rates.
Changes in interest rates can cause the estimated maturity to differ
from the listed dates.
(c) Effective yield (calculated at the time of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(d) Inverse floater, resets monthly.
(e) The repurchase agreements are fully collateralized by U.S. Treasury
and/or federal agency obligations based on market prices plus accrued
interest at June 30, 1999.
(f) All or a portion of htis security is on loan.
(g) Represents investment of cash collateral received for securities on loan.
(h) Restricted or illiquid securities.
+ These securities are in default but have made partial payments.
++ These securities are in default and are not currently paying interest
or dividends. These securities amount to $427,647 or 0.19% of the
Fund's combined net assets as of June 30, 1999.
* Non-Income producing security.
Summary of Abbreviations
DKK Danish Krone
EUR Euro Dollar
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
STRIPs Separate Trading of Registered Interest and Principal Securities
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS Forward Foreign Currency Exchange
Contracts to Sell:
-30-
<PAGE>
<TABLE>
<CAPTION>
Contracts to U.S. Value at In Exchange for Unrealized
Exchange Date Deliver June 30, 1999 U.S. $ Appreciation
- ----------------------- ----------------------- ----------------------- ----------------------- ------------------
<S> <C> <C> <C> <C>
7/20/99 6,103,000 EUR $6,300,391 $6,543,331 $242,940
</TABLE>
-2-
<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
Evergreen Fixed Income Trust's Registration Statement on Form
N-1A filed on December 12, 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 of Evergreen Fixed Income Trust
Articles II., III.6(c), IV.(3), IV.(8), V., VI., VII., and VIII
and By-Laws Articles II., III. and VIII.
6. Form of Investment Advisory Agreement between Evergreen
Investment Management Company and Evergreen Fixed Income Trust.
Incorporated by reference to the Form N-1A Registration
Statement.
7(a). Principal Underwriting Agreements between Evergreen
Fixed Income Trust and Evergreen Distributor, Inc. 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.
8. Form of Deferred Compensation Plan. Incorporated by
reference to the Form N-1A Registration Statement.
-1-
<PAGE>
9. Form of Custody Agreement between State Street Bank and
Trust Company and Evergreen Fixed Income Trust. Incorporated by
reference to Form N-1A Registration Statement.
10(a). Rule 12b-1 Distribution Plans. 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.
Previously filed.
12. Tax opinion and consent of KPMG LLP.
Filed herewith.
13. Not applicable.
14(a). Consent of KPMG LLP (with respect to Evergreen
Intermediate Term Bond Fund). Previously filed.
14(b). Consent of KPMG LLP (with respect to Davis Intermediate
Investment Grade Bond Fund). Previously filed.
15. Not applicable.
16. Powers of Attorney. Incorporated by reference to the
Form N-1A Registration Statement.
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 of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining
-2-
<PAGE>
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-
<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 New York and State of New York, on the 27th day of
January, 2000.
EVERGREEN FIXED INCOME TRUST
By: /s/Anthony J. Fischer
-----------------------
Name: Anthony J. Fischer
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 27th day of January, 2000.
Signatures Title
- ---------- -----
/s/Anthony J. Fischer President and
- ------------------- Treasurer
Anthony J. Fischer
/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/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
-4-
<PAGE>
- ----------------------
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
/s/Arnold H. Dreyfuss Trustee
- ---------------------
Arnold H. Dreyfuss
/s/Louis W. Moelchert, Jr. Trustee
- --------------------------
Louis W. Moelchert, Jr.
- ----------------------- Trustee
Richard Wagner
* By: /s/Catherine E. Foley
-------------------
Attorney-in-Fact
Catherine E. Foley, by signing her name
hereto, does hereby sign this document on behalf of each of the
-5-
<PAGE>
above-named individuals pursuant to powers of attorney duly executed by such
persons and included as Exhibit 16 to this Registration Statement.
-6-
<PAGE>
KPMG
Financial Services
757 Third Avenue
New York, NY 10017
January 28, 2000
Evergreen Fixed Income Trust
200 Berkeley Street
Boston, Massachusetts 02116
Davis Intermediate Investment Grade Bond Fund, Inc.
124 East Marcy Street
Santa Fe, New Mexico 87501
Ladies & Gentlemen:
REORGANIZATION OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND
FUND INTO EVERGREEN INTERMEDIATE TERM BOND FUND - UNITED STATES
FEDERAL INCOME TAX CONSIDERATIONS
You have requested the opinion of KPMG LLP ("KPMG") as to certain U.S. federal
income tax consequences in connection with the Agreement and Plan of
Reorganization, dated as of January 7. 2000 (the "Plan"), by and between Davis
Intermediate Investment Grade Bond Fund, Inc. ("Davis") for itself and on behalf
of its series, Davis Intermediate Investment Grade Bond Fund (the "Target
Fund"), and Evergreen Fixed Income Trust ("Evergreen") for itself and on behalf
of its series, Evergreen Intermediate Term Bond Fund (the "Acquiring Fund")
pursuant to which: (i) Target Fund will transfer all of its assets to Acquiring
Fund solely in exchange for voting shares of Acquiring Fund; (ii) Acquiring Fund
will assume the identified liabilities of Target Fund as listed on Target Fund's
Statement of Net Assets as of March 17, 2000 (i.e., the "Closing Date" of this
transaction); (iii) Target Fund will distribute to its shareholders all of the
voting shares received from Acquiring Fund; and (iv) Target Fund will be
liquidated (the aforementioned items (i), (ii), (iii), and (iv) hereinafter
collectively referred to as the
<PAGE>
"Transaction"). Except as otherwise provided, all terms not defined herein shall
have the meanings ascribed to them (or defined by reference) in the Plan. In
connection with the rendering of this opinion KPMG has reviewed the Registration
Statement of Evergreen on Form N-14 relating to the Transaction (the
"Registration Statement") and the Plan. In addition, KPMG has reviewed and
relied upon the representations made by Target Fund and Acquiring Fund in their
respective Representation Letters, dated January 26, 2000 (collectively, the
"Representations").
FACTS AND ASSUMPTIONS
Target Fund is a series of a Maryland corporation organized on April 26, 1980.
Acquiring Fund is a series of a Delaware business trust organized on September
18, 1997. Both Target Fund and Acquiring Fund have individually qualified and
are expected to qualify as regulated investment companies ("RICs") within the
meaning of Section 851 of the Internal Revenue Code of 1986, as amended (the
"Code") for the current year and all prior years.
For what has been represented by management of Davis and Evergreen to be valid
business reasons, the following transaction is proposed:
1. Target Fund will transfer all of its assets to Acquiring Fund solely in
exchange for voting shares of Acquiring Fund and the assumption by
Acquiring Fund of the liabilities of Target Fund; and
2. Target Fund will liquidate and distribute the voting shares of
Acquiring Fund received in the exchange to its shareholders in exchange
for their shares in Target Fund.
REPRESENTATIONS
The following representations have been made in connection with the Transaction:
<PAGE>
(a) Each shareholder of Target Fund will receive in the Transaction solely
voting shares of Acquiring Fund in exchange for shares of Target Fund.
(b) The fair market value of the voting shares of Acquiring Fund received
by each shareholder of Target Fund will be equal to the fair market
value of the shares of Target Fund exchanged therefor.
(c) Neither Acquiring Fund nor any person related to Acquiring Fund, as
defined in Section 1.368-1(e)(3) of the Income Tax Regulations (the
"Regulations"), has or will have (at the time of the Transaction) a
plan or intention to acquire or redeem any of the Acquiring Fund shares
issued in the Transaction either directly or through any transaction,
agreement, or arrangement with any other person (other than redemptions
made pursuant to Section 22(e) of the Investment Company Act of 1940,
as amended (the "1940 Act")).
(d) During the five-year period ending at the time of the Transaction, neither
Target Fund nor any person related to Target Fund (as defined in Section
1.368-1(e)(3) of the Regulations and without regard to Section
1.368-1(e)(3)(i)(A) of the Regulations) will have directly or through any
transaction, agreement or arrangement with any other person, (1) acquired
Target Fund shares with consideration other than solely voting shares of
Acquiring Fund or Target Fund (other than redemptions made with shares of
Target Fund pursuant to Section 22(e) of the 1940 Act, or (2) made
distributions with respect to Target Fund shares (except for distributions
made in the ordinary course of business by Target Fund pursuant to the 1940
Act).
(e) During the five years prior to the Transaction, and in the Transaction,
neither Acquiring Fund nor any person related to Acquiring Fund (as
defined in Section 1.368-1(e)(3) of the Regulations) will have
acquired, directly or through any transaction, agreement or arrangement
with any other person, Target Fund shares with consideration other than
voting shares of Acquiring Fund.
<PAGE>
(f) Acquiring Fund will acquire at least 90 percent of the fair market value of
the net assets and at least 70 percent of the fair market value of the
gross assets held by Target Fund immediately prior to the Transaction. For
purposes of this representation, (1) amounts paid by Target Fund out of the
assets of Target Fund to Target Fund shareholders in redemption of Target
Fund shares (other than redemptions made pursuant to Section 22(e) of the
1940 Act), or as distributions with respect to Target Fund shares (except
for distributions made in the ordinary course of business by Target Fund
pursuant to the 1940 Act), and (2) amounts used by Target Fund to pay its
Transaction expenses will be included as assets of Target Fund held
immediately prior to the Transaction.
(g) Target Fund will distribute the voting shares of Acquiring Fund it receives
in the Transaction in pursuance of the Plan.
(h) Acquiring Fund will have no plan or intention to sell or otherwise
dispose of any of the assets of the Target Fund acquired in the
Transaction, except for dispositions made in the ordinary course of
business or transfers described in Section 368(a)(2)(C) of the Code.
(i) Acquiring Fund will assume all of Target Fund's liabilities identified
on Target Fund's Statement of Net Assets as of the Closing Date, and
such liabilities were or will have been incurred by Target Fund in the
ordinary course of business. No other person related to Acquiring Fund
will assume any Target Fund liability in the Transaction.
(j) The liabilities of Target Fund to be assumed by Acquiring Fund and the
liabilities to which the transferred assets of the Target Fund will be
subject will have been incurred by Target Fund in the ordinary course
of its business and be associated with the assets transferred to
Acquiring Fund.
<PAGE>
(k) Following the Transaction, Acquiring Fund will continue the historical
business of Target Fund or use a significant portion of the Target
Fund's historical business assets in a business.
(l) Target Fund shareholders will pay their own expenses, if any, incurred in
connection with the Transaction. Acquiring Fund will pay its expenses, if
any, incurred in connection with the Transaction. It will pay no expenses
of Target Fund or of Target Fund shareholders. The expenses incurred by
Target Fund that are solely and directly related to the Transaction will be
borne by Davis Selected Advisers, L.P., whether or not the Transaction is
consummated. The expenses incurred by Acquiring Fund that are solely and
directly related to the Transaction will be borne by First Union National
Bank, whether or not the Transaction is consummated. For purposes of this
representation, the term "expenses that are solely and directly related to
the Transaction" include, but are not limited to legal and accounting
expenses, appraisal fees, administrative costs directly related to the
Transaction such as those incurred for printing, clerical work, telephone
and telegraph, security underwriting and registration fees and expenses,
transfer taxes, and transfer agent fees and expenses. The same term will
not include any expense which, if paid, would prohibit the Transaction from
being solely for voting shares of Acquiring Fund as described in Rev. Rul.
73-54, 1973-1 C.B. 187. Examples of such prohibited expenses are fees
incurred for investment or estate planning advice and those incurred by an
individual shareholder, or group of shareholders, for legal, accounting or
investment advice or counsel pertaining to participation in, or action with
respect to, the Transaction.
(m) There will be no intercorporate indebtedness existing at the time of
the Transaction between Acquiring Fund and Target Fund that will have
been issued, acquired, or settled at a discount.
(n) The fair market value of the assets of Target Fund transferred to
Acquiring Fund will equal or exceed the sum of the liabilities assumed
by Acquiring Fund plus the amount of liabilities, if any, to which the
transferred assets are subject.
<PAGE>
(o) Each of Acquiring Fund and Target Fund has qualified, and will qualify
at the time of the Transaction, as a regulated investment company
within the meaning of Section 851 of the Code.
(p) Neither Acquiring Fund nor Target Fund will not have acquired any
options, warrants, or rights with respect to Target Fund shares
pursuant to the Transaction.
(q) Target Fund is not and will not be under the jurisdiction of a court in
a title 11 or similar case within the meaning of Section 368(a)(3)(A)
of the Code.
(r) Target Fund will have at the time of the Transaction no options,
warrants or rights outstanding with respect to its shares. Target Fund
will not have redeemed any options, warrants, or rights with respect to
its shares pursuant to the Transaction.
(s) Target Fund has not filed an election pursuant to Notice 88-19, 1988-1
C.B. 486, to be subject to rules similar to the rules of Section 1374
of the Code with respect to any net built-in gain on any assets
acquired from another corporation.
SCOPE OF OPINION
The opinions expressed herein are rendered only with respect to the specific
matters discussed herein. We express no opinion with respect to any other
federal or state income tax or legal aspect of the Transaction and no inference
should be drawn with respect to any matter not expressly opined upon.
Our opinions are based upon the Facts and Assumptions and Representations set
forth above. If any of the above-stated facts, assumptions, or Representations
are not entirely complete or accurate, it is imperative that we be informed
immediately, as the inaccuracy or incompleteness could have a material effect on
our conclusions. In rendering our opinions, we are relying upon the relevant
provisions of the Code, the regulations thereunder, and
<PAGE>
judicial and administrative interpretations thereof, all as of the date of this
letter. However, all the foregoing authorities are subject to change or
modification by subsequent legislative, regulatory, administrative, or judicial
decisions that can be retroactive in effect and, therefore, could also affect
our opinions. We assume no responsibility to update our opinions for any such
change or modification. The opinions contained herein are not binding upon the
Internal Revenue Service, any other tax authority or any court, and no assurance
can be given that a position contrary to that expressed herein will not be
asserted by a tax authority and ultimately sustained by a court.
To the best of our knowledge (including such due diligence as we have
performed), our opinions are not based on unreasonable factual or legal
assumptions (including assumptions as to future events) and we have not
unreasonably relied on the Representations, statements, findings, or agreements
of any person.
In connection with the rendering of these opinions we have reviewed the
Registration Statement including the Plan. We have not made any independent
investigation of these representations or the facts and circumstances involved
in the Transaction discussed herein. We have not examined any agreement to
determine whether it complies with applicable federal, state, or local law. We
have assumed that all actions required to effect the Transaction are effectuated
in accordance with applicable federal, state, and local law and the terms of any
relevant agreements.
The opinions expressed herein are for the exclusive benefit of Target Fund,
Acquiring Fund, and their respective shareholders and may not be relied upon for
any other purpose, or used, circulated, quoted or relied upon by any other
person or entity without our prior written consent.
OPINIONS
Based upon the FACTS AND ASSUMPTIONS and REPRESENTATIONS as set forth above, and
subject to the conditions and limitations included in the portion of this letter
<PAGE>
entitled SCOPE OF OPINION, it is the opinion of KPMG that the following federal
income tax consequences will result from the Transaction:
(1) The acquisition by Acquiring Fund of substantially all of the assets of
Target Fund, solely in exchange for the Acquiring Fund shares and the
assumption of the identified liabilities of Target Fund by Acquiring
Fund, followed by the distribution by Target Fund of the shares of
Acquiring Fund in complete liquidation to the shareholders of Target
Fund in exchange for their Target Fund shares, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Code.
Target Fund and Acquiring Fund will each a "party to a reorganization"
within the meaning of Section 368(b) of the Code
(2) Target Fund's shareholders will recognize no gain or loss solely on
their receipt of voting shares of Acquiring Fund in exchange for the
voting shares of Target Fund pursuant to the Transaction in accordance
with Section 354(a)(1) of the Code.
(3) Target Fund will not recognize gain or loss on the transfer of all of
its assets to Acquiring Fund solely in exchange for voting shares of
Acquiring Fund and the assumption by Acquiring Fund of Target Fund
liabilities pursuant to the Transaction in accordance Sections 357(a)
and 361(a) of the Code.
(4) Target Fund will not recognize gain or loss on its distribution of
voting shares of Acquiring Fund to its shareholders pursuant to the
liquidation of Target Fund in accordance with Section 361(c) of the
Code.
(5) Acquiring Fund will not recognize gain or loss on its acquisition of all of
the assets of Target Fund solely in exchange for voting shares of Acquiring
Fund and the assumption by Acquiring Fund of Target Fund's liabilities in
accordance with Section 1032(a) of the Code.
(6) The basis of each of the voting shares of Acquiring Fund received by Target
Fund's shareholders pursuant to the Transaction will equal the basis of the
voting
<PAGE>
shares of Target Fund surrendered in exchange therefor in accordance with
Section 358(a)(1) of the Code.
(7) The holding period of the voting shares of Acquiring Fun received by Target
Fund's shareholders pursuant to the Transaction will include the period
that the shareholders held the voting shares of Target Fund exchanged
therefor, provided that the shareholder held such shares as a capital asset
on the date of the Transaction in accordance with Section 1223(1) of the
Code.
(8) Acquiring Fund's basis in the assets of Target Fund received pursuant to
the Transaction will equal Target Fund's basis in the assets immediately
before the Transaction in accordance with Section 362(b) of the Code.
(9) Acquiring Fund's holding period in Target Fund assets received pursuant to
the Transaction will include the period during which Target Fund held the
assets in accordance with Section 1223(2) of the Code.
(10) Acquiring Fund will succeed to and take into account the items of Target
Fund described in Section 381(c) of the Code, including the earnings and
profits, or deficit in earnings and profits, of Target Fund as of the date
of the Transaction. Acquiring Fund will take these items into account
subject to the conditions and limitations specified in Sections 381, 382,
383 and 384 of the Code and applicable Regulations thereunder.
Very truly yours,
KPMG LLP
/s/Jeffrey S. Sion
- ----------------------
Jeffrey S. Sion
Managing Director
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
The undersigned, revoking all Proxies heretofore given, hereby appoints Kenneth
Eich, Sharra Reed, and Thomas Tays or any of them as Proxies of the undersigned,
with full power of substitution, to vote on behalf of the undersigned all shares
of Davis Intermediate Investment Grade Bond Fund ("Davis Intermediate Fund"), a
series of Davis Intermediate Investment Grade Bond Fund, Inc., that the
undersigned is entitled to vote at the special meeting of shareholders of Davis
Intermediate Fund to be held at 10:00 a.m. on Friday, March 17, 2000 at the
offices of the Fund, 124 East Marcy Street, Santa Fe, New Mexico 87501 and at
any adjournments thereof, as fully as the undersigned would be entitled to vote
if personally present.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF DAVIS
INTERMEDIATE INVESTMENT GRADE BOND FUND, INC. THIS PROXY WILL BE VOTED AS
SPECIFIED HEREON 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.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
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.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- -------------------------- -------------------------
- -------------------------- -------------------------
- -------------------------- -------------------------
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
CONTROL NUMBER:
RECORD DATE SHARES:
Review the Instructions for Proxy Card Endorsement outlined within the enclosed
proxy materials or the note on the reverse side of this card. Please be sure to
sign and date this Proxy.
-1-
<PAGE>
Date:
Shareholder sign here:
Co-owner sign here:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
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 Davis Intermediate Fund in exchange for shares of
Evergreen Intermediate Term Bond Fund; and (ii) assume the identified
liabilities of Davis Intermediate Fund, as substantially described in the
accompanying Prospectus/Proxy Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To consider and vote upon such other matters as may properly come before said
meeting or any adjournments thereof.
- ---- FOR ---- AGAINST ---- ABSTAIN
MARK BOX AT RIGHT IF AN ADDRESS CHANGE OR COMMENT HAS BEEN NOTED
ON THE REVERSE SIDE OF THIS CARD [ ]
- --------------------------------------------------------------------------------
DETACH CARD DETACH CARD
Vote by Telephone
It's fast, convenient, and immediate!
Call Toll-Free on a Touch-Tone Phone
Follow these four easy steps:
1. Read the accompanying Proxy Statement and Proxy
Card.
2. Call the toll-free number
1-877-PRX-VOTE (1-877-779-8683). For
shareholders residing outside the United States
call collect on a touch-tone phone 1-201-536-
8073.
There is NO CHARGE for this call.
3. Enter your Control Number located on your Proxy
Card.
-2-
<PAGE>
4. Follow the recorded instructions.
Your vote is important!
Call 1-877-PRX-VOTE anytime!
Do not return your Proxy Card if you are voting by Telephone.
-3-
<PAGE>
