1933 Act Registration No. 333-41399
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 EQUITY TRUST (Exact Name of Registrant as
Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP 1025
Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ________ pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on ________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on ________ pursuant to paragraph (a)(2) of Rule 485
Pursuant to Rule 414 under the Securities Act of 1933, by this
amendment to Registration Statement No. 333-41399 on Form N- 14 of Keystone
Growth and Income Fund (S-1), a Pennsylvania common law trust, the Registrant
hereby adopts the Registration Statement of such trust under
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the Securities Act of 1933.
<PAGE>
EVERGREEN EQUITY TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary; Comparison
of Investment Objectives and
Policies; Risks
4. Information About the Summary; Reasons for the
Transaction Reorganization; Comparative
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
7. Voting Information
Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of Keystone Growth
and Income Fund (S-1) dated
February 28,
1997, as amended
13. Additional Information Statement of Additional
about the Company Being Information of Blanchard Funds
Acquired - Blanchard Growth & Income
Fund dated February 28, 1997
14. Financial Statements Financial Statements dated
August 31, 1997 of Keystone
Growth and Income Fund (S-1);
Financial Statements of
Blanchard Growth & Income Fund
dated October 31, 1997
Item of Part C of Form N-14
Incorporated by Reference to
15. Indemnification Part A Caption - "Comparative
Information on Shareholders'
Rights - Liability and
Indemnification of Trustees"
<PAGE>
16. Exhibits
Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
BLANCHARD FUNDS
BLANCHARD GROWTH & INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January 7, 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of the Blanchard Growth & Income Fund, a series of
Blanchard Funds (the "Fund"), to inform you of a Special Shareholders' meeting
to be held on February 20, 1998. Before that meeting, I would like your vote on
the important issues affecting your Fund as described in the attached
Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes three proposals. The first proposal
requests that shareholders consider the withdrawal by the Fund of its investment
in Growth and Income Portfolio, in order to permit the current two-tier
structure of the Fund to be replaced, temporarily, by a one-tier structure
common to most mutual funds.
The second proposal requests that shareholders consider and act upon an
Agreement and Plan of Reorganization whereby all of the assets of the Fund would
be acquired by Keystone Growth and Income Fund (S-1) in exchange for Class A
shares of Keystone Growth and Income Fund (S-1) and the assumption by Keystone
Growth and Income Fund (S-1) of certain liabilities of the Fund. You will
receive shares of Keystone Growth and Income Fund (S-1) having an aggregate net
asset value equal to the aggregate net asset value of your Fund shares. Details
about Keystone Growth and Income Fund (S-1)'s investment objective, portfolio
management team, performance, etc. are contained in the attached
Prospectus/Proxy Statement. The transaction is a non-taxable event for
shareholders.
The third and final proposal requests shareholder consideration of an Interim
Investment Advisory Agreement between the Fund and Virtus Capital Management,
Inc. Information relating to the Interim Investment Advisory Agreement is
contained in the attached Prospectus/Proxy Statement.
The Board of Trustees has approved the proposals and recommends that you vote
FOR these proposals.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to
<PAGE>
familiarize yourself with the proposals presented and sign and return your proxy
card in the enclosed postage-paid envelope today.
If you have any questions about this proxy, please call our proxy solicitor,
Shareholder Communications Corporation, at 800-733-8481 ext. 437. You may also
FAX your completed and signed proxy card to 800-733-1885.
If we do not receive your completed proxy card after several weeks, you may be
contacted by our proxy solicitor, Shareholder Communications Corporation, who
will remind you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
Blanchard Funds
<PAGE>
BLANCHARD FUNDS
BLANCHARD GROWTH & INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of Blanchard Growth & Income Fund, a series of Blanchard Funds
("Growth & Income"), will be held at the offices of the Evergreen Funds, 200
Berkeley Street, 26th Floor, Boston, Massachusetts 02116, on February 20, 1998
at 2:00 p.m. for the following purposes:
1. To consider and act upon the proposal whereby Growth & Income would
withdraw its investment in Growth and Income Portfolio.
2. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of November 26, 1997, providing for the acquisition of all
of the assets of Growth & Income by the Keystone Growth and Income Fund (S-1), a
series of Evergreen Equity Trust, ("Keystone Growth and Income") in exchange for
shares of Keystone Growth and Income and the assumption by Keystone Growth and
Income of certain identified liabilities of Growth & Income. The Plan also
provides for distribution of such shares of Keystone Growth and Income to
shareholders of Growth & Income in liquidation and subsequent termination of
Growth & Income. A vote in favor of the Plan is a vote in favor of the
liquidation and dissolution of Growth & Income.
3. To consider and act upon the Interim Management Contract between
Growth & Income and Virtus Capital Management, Inc.
4. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of Blanchard Funds on behalf of Blanchard Growth & Income
Fund have fixed the close of business on December 26, 1997 as the record date
for the determination of shareholders of Growth & Income entitled to notice of
and to vote at the Meeting or any adjournment thereof.
<PAGE>
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO
NOT EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE
ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Trustees
John W. McGonigle
Secretary
January 7, 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr. John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JANUARY 7, 1998
Acquisition of Assets of
BLANCHARD GROWTH & INCOME FUND
a series of
Blanchard Funds
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
KEYSTONE GROWTH AND INCOME FUND (S-1)
a series of
Evergreen Equity Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
Blanchard Growth & Income Fund ("Growth & Income") in connection with the
proposal whereby Growth & Income would (i) withdraw its investment in the Growth
and Income Portfolio (the "Portfolio"), thereby replacing Growth & Income's
current two-tier structure with a one-tier structure currently used by Keystone
Growth and Income Fund (S-1) ("Keystone Growth and Income") (hereinafter
referred to as the "Restructuring"); and (ii) all of the assets of Growth &
Income would be acquired by Keystone Growth and Income in exchange for shares of
Keystone Growth and Income and the assumption by Keystone Growth and Income of
certain identified liabilities of Growth & Income (hereinafter referred to as
the "Reorganization").
Unlike many other mutual funds, including Keystone Growth and Income,
which directly acquire and manage their own portfolios of securities, Growth &
Income seeks to achieve its investment objective by investing all of its assets
in the Portfolio, which is a separate registered investment company with an
identical investment objective to that of Growth & Income.
The Restructuring and a proposed Agreement and Plan of Reorganization
(the "Plan") are being submitted to shareholders of Growth & Income for
consideration at a Special Meeting of Shareholders to be held on February 20,
1998 at 2:00 p.m. at the offices of the Evergreen Funds, 200 Berkeley Street,
Boston, Massachusetts 02116, and any adjournments thereof (the "Meeting").
Keystone Growth and Income and Growth & Income are sometimes
hereinafter referred to individually as the "Fund" and collectively as the
"Funds." Following the Reorganization,
<PAGE>
shares of Keystone Growth and Income will be distributed to shareholders of
Growth & Income in liquidation of Growth & Income and such Fund will be
terminated. Holders of shares of Growth & Income will receive Class A shares of
Keystone Growth and Income having the same Rule 12b-1 distribution-related fees
as the shares of Growth & Income held by such holders prior to the
Reorganization. No initial sales charge will be imposed in connection with Class
A shares of Keystone Growth and Income received by holders of shares of Growth &
Income. As a result of the proposed Reorganization, shareholders of Growth &
Income will receive that number of full and fractional shares of Keystone Growth
and Income having an aggregate net asset value equal to the aggregate net asset
value of such shareholder's shares of Growth & Income. The Reorganization is
being structured as a tax-free reorganization for federal income tax purposes.
Keystone Growth and Income is a separate series of Evergreen Equity
Trust, an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). Keystone Growth and Income
seeks the best possible growth of capital and long-term growth of income. Such
investment objective is substantially similar to that of Growth & Income which
seeks long-term capital appreciation and dividend income.
Shareholders of Growth & Income are also being asked to approve the
Interim Management Contract with Virtus Capital Management, Inc., a subsidiary
of First Union Corporation ("Virtus"), (the "Interim Advisory Agreement") with
the same terms and fees as the previous advisory agreement between Growth &
Income and Virtus. The Interim Advisory Agreement will be in effect for the
period of time between November 28, 1997, the date on which the merger of Signet
Banking Corporation with and into a wholly-owned subsidiary of First Union
Corporation was consummated, and the date of the Reorganization (scheduled for
on or about February 27, 1998). During the term of the Interim Advisory
Agreement there will be no change in the advisory fee charged to the Portfolio.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Keystone Growth and Income
that shareholders of Growth & Income should know before voting on the
Reorganization. Certain relevant documents listed below, which have been filed
with the Securities and Exchange Commission ("SEC"), are incorporated in whole
or in part by reference. A Statement of Additional Information dated January 7,
1998, relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Keystone Growth and Income dated August 31,
1997 and Growth & Income dated October 31, 1997, has
<PAGE>
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 Keystone
Growth and Income at 200 Berkeley Street, Boston, Massachusetts 02116, or by
calling toll-free 1-800-343-2898.
The Prospectus of Keystone Growth and Income dated February 28, 1997,
as amended, its Annual Report for the period ended August 31, 1997 are
incorporated herein by reference in their entirety. Shareholders of Growth &
Income will receive, with this Prospectus/Proxy Statement, copies of the
Prospectus of Keystone Growth and Income. Additional information about Keystone
Growth and Income is contained in its Statement of Additional Information of the
same date which has been filed with the SEC and which is available upon request
and without charge by writing to or calling Keystone Growth and Income at the
address or telephone number listed in the preceding paragraph.
The Prospectus of Growth & Income dated February 28, 1997 is
incorporated herein in its entirety by reference. Copies of the Prospectus and
related Statement of Additional Information dated the same date, are available
upon request without charge by writing to Growth & Income at the address listed
on the cover page of this Prospectus/Proxy Statement or by calling toll-free
1-800-829-3863.
Included as Exhibits A and B to this Prospectus/Proxy Statement are a
copy of the Plan and the Interim Advisory Agreement, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk, including
possible
loss of capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES............................................6
SUMMARY ..................................................................9
Proposed Restructuring and Plan of Reorganization.................9
Tax Consequences.................................................11
Investment Objectives and Policies of the Funds............... 12
Comparative Performance Information for each Fund................12
Management of the Funds..........................................13
Investment Advisers..............................................13
Portfolio Management.............................................15
Distribution of Shares...........................................15
Purchase and Redemption Procedures...............................16
Exchange Privileges..............................................17
Dividend Policy..................................................17
Risks ........................................................18
REASONS FOR THE REORGANIZATION............................................19
The Restructuring................................................22
Agreement and Plan of Reorganization.............................23
Federal Income Tax Consequences..................................25
Pro-forma Capitalization...................................... 27
Shareholder Information....................................... 28
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES..........................28
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS...........................30
Forms of Organization............................................30
Capitalization...................................................31
Shareholder Liability............................................31
Shareholder Meetings and Voting Rights...........................32
Liquidation or Dissolution.......................................33
Liability and Indemnification of Trustees........................33
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT......................34
Introduction.....................................................34
Comparison of the Interim Advisory Agreement and the
Previous Advisory Agreement.............................35
Information about Growth & Income's Investment
Adviser...................................................................37
ADDITIONAL INFORMATION....................................................37
VOTING INFORMATION CONCERNING THE MEETING.................................38
FINANCIAL STATEMENTS AND EXPERTS....................................... 41
<PAGE>
LEGAL MATTERS.............................................................41
OTHER BUSINESS............................................................41
APPENDIX A............................................................. 43
EXHIBIT A
EXHIBIT B
EXHIBIT C
<PAGE>
COMPARISON OF FEES AND EXPENSES
It is anticipated that on or about January 9, 1998 Keystone Growth and
Income will become a multiple class fund. As of that date the Fund will offer
Class A, Class B and Class C shares. It is further anticipated that at that time
current outstanding shares of Keystone Growth and Income will become Class B
shares of the Fund. On or before January 16, 1998, it is anticipated that any
Class B shares of Keystone Growth and Income purchased prior to January 1, 1995
will convert to Class A shares of the Fund. The amounts for shares of Keystone
Growth and Income set forth in the following tables and in the examples are
based on the expenses of Keystone Growth and Income for the fiscal year ended
August 31, 1997. The amounts for shares of Growth & Income set forth in the
following tables and in the examples are based on the expenses for Growth &
Income for the fiscal year ended October 31, 1997. These amounts include Growth
& Income's pro rata portion of the Portfolio's operational expenses. The pro
forma amounts for Class A shares of Keystone Growth and Income are based on what
the combined expenses would have been for Keystone Growth and Income for the
fiscal year ending August 31, 1997. The pro forma numbers reflect the events
described in the first paragraph of this section. All amounts are adjusted for
voluntary expense waivers.
The following tables show for Keystone Growth and Income, Growth &
Income and Keystone Growth and Income pro forma, assuming consummation of the
Reorganization, the shareholder transaction expenses and annual fund operating
expenses associated with an investment in the shares of Keystone Growth and
Income and shares of Growth & Income, as applicable.
<TABLE>
<CAPTION>
Comparison of Shares
of Keystone Growth and Income With
Shares of Growth & Income
Keystone
Keystone Growth and
Growth and Growth & Income Pro
Income Income Forma
--------- -------- --------
<S> <C> <C> <C>
Shareholder
Transaction Shares Shares Class A
Expenses ------ ------ -------
<PAGE>
Maximum Sales Load None None 4.75%
Imposed on Purchases
(as a percentage of
offering price) (1)
Maximum Sales Load None None None
Imposed on
Reinvested Dividends
(as a percentage of
offering price)
Contingent Deferred 4.00% None None
Sales Charge (as a
percentage of
original purchase
price or redemption
proceeds, whichever
is lower)
Exchange Fee None None None
Annual Fund
Operating Expenses
(as a percentage of
average daily net
assets)
Management Fee 0.65% 0.40% 0.65%
(2)
12b-1 Fees (3) 0.56% 0.00% 0.25%
Other Expenses 0.36% 1.35% 0.36%
------ ------ -----
Annual Fund 1.57% 1.75% 1.26%
Operating Expenses ------ ------ ------
(4) ------ ------ ------
</TABLE>
- ---------------
(1) The 4.75% sales load, as described in the "Examples" paragraph below,
has been waived for Growth & Income's shareholders.
(2) The management fee for Growth & Income has been reduced to reflect the
voluntary waiver by the investment adviser. The adviser can terminate
this voluntary waiver at any time in its sole discretion. The maximum
management fee is 1.10%.
<PAGE>
(3) Class A shares of Keystone Growth and Income 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. The 12b-1
fees from Growth & Income reflect the voluntary waiver by the Fund's
distributor. The maximum 12b-1 fee is 0.25%.
(4) Total Fund Operating Expenses for Growth & Income would have been 2.70%
absent the voluntary waivers. Total Fund Operating Expenses for Keystone
Growth and Income include, indirectly paid expenses which represent offset
expense arrangements with the Fund's
custodian.
Examples. The following tables show for Keystone Growth and Income and
Growth & Income, and for Keystone Growth and Income pro forma, assuming
consummation of the Reorganization, examples of the cumulative effect of
shareholder transaction expenses and annual fund operating expenses indicated
above on a $1,000 investment in each class of shares for the periods specified,
assuming a 5% annual return. In the case of Keystone Growth and Income pro
forma, the example does not reflect the imposition of the maximum 4.75% maximum
sales load on purchases since Growth & Income shareholders who receive Class A
shares of Keystone Growth and Income in the Reorganization or who purchase
additional Class A shares subsequent to the Reorganization will not incur any
sales load.
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Keystone Growth $16 $50 $86 $187
and Income
Growth & Income $18 $55 $95 $206
Keystone Growth $13 $40 $69 $152
and Income Pro
Forma
Class A
</TABLE>
The purpose of the foregoing examples is to assist Growth & Income
shareholders in understanding the various costs and expenses that an investor in
Keystone Growth and Income as a
<PAGE>
result of the Reorganization would bear directly and indirectly, as compared
with the various direct and indirect expenses currently borne by a shareholder
in Growth & Income. These examples should not be considered a representation of
past or future expenses or annual return. Actual expenses may be greater or less
than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement
and, to the extent not inconsistent with such additional information, the
Prospectus of Keystone Growth and Income dated February 28, 1997, as amended,
and the Prospectus of Growth & Income dated February 28, 1997 (which are
incorporated herein by reference), the Plan and the Interim Advisory Agreement,
forms of which are attached to this Prospectus/Proxy Statement as Exhibits A and
B, respectively.
Proposed Restructuring and Plan of Reorganization
The Board of Trustees of Blanchard Funds has voted to recommend to
shareholders of Growth & Income the approval of a proposal whereby Growth &
Income would (i) withdraw its investment in the Portfolio in order to permit the
current two-tier structure of Growth & Income to be replaced temporarily, by a
one-tier structure currently used by Keystone Growth and Income and (ii) enter
into the Plan. The Plan provides for the transfer of all of the assets of Growth
& Income in exchange for shares of Keystone Growth and Income and the assumption
by Keystone Growth and Income of certain identified liabilities of Growth &
Income. 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 Keystone Growth and Income to Growth & Income shareholders in liquidation of
Growth & Income as part of the Reorganization. As a result of the
Reorganization, the shareholders of Growth & Income will become the owners of
that number of full and fractional Class A shares of Keystone Growth and Income
having an aggregate net asset value equal to the aggregate net asset value of
the shareholders' shares of Growth & Income as of the close of business
immediately prior to the date that Growth & Income's assets are exchanged for
shares of Keystone Growth and Income. See "Reasons for the Reorganization - The
Restructuring and Agreement and Plan of Reorganization."
The Trustees of Blanchard Funds, including the Trustees who are not
"interested persons," as such term is defined in the 1940
<PAGE>
Act (the "Independent Trustees"), have concluded that the Restructuring and the
Reorganization would be in the best interests of shareholders of Growth &
Income, and that the interests of the shareholders of Growth & Income will not
be diluted as a result of the transactions contemplated by the Reorganization.
Accordingly, the Trustees have submitted the Restructuring and the Plan for the
approval of Growth & Income's shareholders.
THE BOARD OF TRUSTEES OF BLANCHARD FUNDS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF GROWTH & INCOME
OF THE RESTRUCTURING AND OF THE PLAN EFFECTING
THE REORGANIZATION.
The Trustees of Evergreen Equity Trust have also approved
the Plan and, accordingly, Keystone Growth and Income's
participation in the Reorganization.
Approval of the Restructuring and of the Reorganization on the part of
Growth & Income will require the affirmative vote of a majority of Growth &
Income's shares voted and entitled to vote, with all classes voting together as
a single class at a Meeting at which a quorum of the Fund's shares is present. A
majority of the outstanding shares entitled to vote, represented in person or by
proxy, is required to constitute a quorum at the Meeting. See "Voting
Information Concerning the Meeting."
The merger (the "Merger") of Signet Banking Corporation ("Signet") with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
has been consummated and, as a result, by law the Merger terminated the
investment advisory agreement between Virtus and Growth & Income. Prior to
consummation of the Merger, Growth & Income received an order from the SEC which
permitted the implementation, without formal shareholder approval, of a new
investment advisory agreement between the Fund and Virtus for a period of not
more than 120 days beginning on the date of the closing of the Merger and
continuing through the date the Interim Advisory Agreement is approved by the
Fund's shareholders (but in no event later than April 30, 1998). The Interim
Advisory Agreement has the same terms and fees as the previous investment
advisory agreement between Growth & Income and Virtus. The Reorganization is
scheduled to take place on or about February 27, 1998.
Approval of the Interim Advisory Agreement requires the affirmative
vote of (i) 67% or more of the shares of Growth & Income present in person or by
proxy at the Meeting, if holders of more than 50% of the shares of Growth &
Income outstanding on the record date are present, in person or by proxy, or
(ii) more
<PAGE>
than 50% of the outstanding shares of Growth & Income, whichever is less. See
"Voting Information Concerning the Meeting."
If the shareholders of Growth & Income do not vote to approve the
Restructuring and the Reorganization, the Trustees will consider other possible
courses of action in the best interests of shareholders.
Tax Consequences
As a condition to the Restructuring, Blanchard Funds will receive an
opinion of Sullivan & Worcester LLP that the Restructuring will not cause Growth
& Income or its shareholders to recognize any gain or loss under the Internal
Revenue Code of 1986, as amended (the "Code") (other than possible gain or loss
under the mark-to-market provisions of the Code). At the date of this Proxy
Statement/Prospectus, there are no circumstances which would result in gain or
loss to Growth & Income shareholders under the mark-to-market provisions of the
Code. Moreover, should the Restructuring in fact result in the recognition of
any mark-to-market gain or loss by Growth & Income shareholders, the effect of
the Restructuring would be merely to cause the acceleration of the date of
recognition of gain or loss which would otherwise have been recognized by
shareholders at the end of Growth & Income's fiscal year.
Prior to or at the completion of the Reorganization, Growth & Income will
have received an opinion of Sullivan & Worcester LLP that the Reorganization has
been structured so that no gain or loss will be recognized by the Fund or its
shareholders for federal income tax purposes as a result of the receipt of
shares of Keystone Growth and Income in the Reorganization. The holding period
and aggregate tax basis of shares of Keystone Growth and Income that are
received by Growth & Income'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 Growth & Income in
the hands of Keystone Growth and Income 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 Keystone Growth and Income upon the
receipt of the assets of the Fund in exchange for shares of Keystone Growth and
Income and the assumption by Keystone Growth and Income of certain identified
liabilities.
Investment Objectives and Policies of the Funds
The investment objectives and policies of Keystone Growth and Income
and Growth & Income are substantially similar.
<PAGE>
The investment objective of Keystone Growth and Income is to seek the
best possible growth of capital and long-term growth of income. Under normal
circumstances, the Fund will invest principally in common stocks of generally
accepted investment quality selected primarily from or similar to those found in
the Standard & Poor's 500 Index ("S&P 500"), usually with established records of
dividend payments. However, the Fund may purchase securities that are not
currently paying dividends, but show potential capital growth or future income.
In addition, the Fund will invest in quality companies with medium market
capitalizations that are smaller than those of companies typically found in the
S&P 500.
The Fund may invest up to 25% of its assets in foreign securities of
issuers located in developed countries as well as emerging market countries.
The investment objective of Growth & Income is to provide long-term
capital appreciation and dividend income. In seeking its investment objective,
Growth & Income invests all of its investable assets in the Portfolio. The
Portfolio invests in common stocks of issuers with a broad range of market
capitalizations. Under normal market conditions, the Portfolio will invest at
least 80% of its total assets in common stocks. The Portfolio may invest up to
20% of its total assets in convertible securities and up to 20% of its total
assets in foreign securities. See "Comparison of Investment Objectives and
Policies" below.
Comparative Performance Information for each Fund
Discussions of the manner of calculation of total return are contained
in the respective Prospectus and Statement of Additional Information of the
Funds. The total return of Keystone Growth and Income and Growth & Income for
the one, and if applicable, five and ten year periods ended September 30, 1997,
and for both Funds for the periods from inception through September 30, 1997 are
set forth in the table below. The calculations of total return assume the
reinvestment of all dividends and capital gains distributions on the
reinvestment date and the deduction of all recurring expenses (including sales
charges) that were charged to shareholders' accounts.
<TABLE>
<CAPTION>
Average Annual Total Return
<PAGE>
1 Year From
Ended 5 Years 10 Years Inception
September Ended Ended To
30, September September September Inception
1997 30, 1997 30, 1997 30, 1997 Date
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Keystone 32.52% 16.45% 10.32% 9/11/35
Growth and 8.94%
Income
Growth & 33.79% N/A N/A 11/1/94
Income (1) 22.77%
</TABLE>
- --------------
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the average
annual total return during the periods would have been lower.
Important information about Keystone Growth and Income is also
contained in management's discussion of Keystone Growth and Income's
performance, attached hereto as Exhibit C. This information also appears in
Keystone Growth and Income's most recent Annual Report.
Management of the Funds
The overall management of Keystone Growth and Income and of Growth &
Income is the responsibility of, and is supervised by, the Board of Trustees of
Evergreen Equity Trust and Blanchard Funds, respectively.
Investment Advisers
Keystone Investment Management Company ("Keystone") serves as
investment adviser to Keystone Growth and Income. Keystone has served as
investment adviser to the Keystone family of mutual funds since 1932. Keystone
is an indirect wholly-owned subsidiary of First Union National Bank ("FUNB").
FUNB is a subsidiary of First Union, the sixth largest bank holding company in
the United States based on total assets as of September 30, 1997. The Capital
Management Group of FUNB, Evergreen Asset Management Corp. and Keystone manage
the Evergreen Keystone family of mutual funds with assets of approximately $40
billion as of November 30, 1997. For further information regarding Keystone,
FUNB and First Union, see "Fund Management and Expenses - Investment Adviser" in
the Prospectus of Keystone Growth and Income.
<PAGE>
Keystone manages investments, provides various administrative services
and supervises the daily business affairs of Keystone Growth and Income subject
to the authority of the Evergreen Equity Trust's Board of Trustees. The Fund
pays Keystone a fee for its services at the annual rate set forth below:
Average Aggregate Net
Asset Value of the
Management Fee Shares of the Fund
- ---------------------------- -------------------------
0.70% of the first $100,000,000 plus
0.65% of the next $100,000,000 plus
0.60% of the next $100,000,000 plus
0.55% of the next $100,000,000 plus
0.50% of the next $100,000,000 plus
0.45% of the next $500,000,000 plus
0.40% of the next $500,000,000 plus
0.35% of amounts over $1,500,000,000.
Virtus serves as the investment adviser for Growth & Income. As
investment adviser, Virtus is responsible for managing the Fund and overseeing
the investment of its assets. Virtus selects, monitors and evaluates Chase
Manhattan Bank, the Portfolio's investment adviser. For its services as
investment adviser, Virtus receives a fee at an annual rate of 0.70% of the
Fund's average daily net assets and the Portfolio's investment adviser receives
0.40% per annum of the Fund's average daily net assets directly from the
Portfolio.
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Administrator
Federated Administrative Services ("FAS") provides Growth & Income with
certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to receive a fee for such services at the
following annual rates: 0.15% on the first $250 million of average daily net
assets of combined assets of the funds in the Blanchard/Virtus mutual fund
family, 0.125% on the next $250 million of such assets, 0.10% on the next $250
million of such assets, and 0.075% on assets in excess of $750 million.
<PAGE>
Portfolio Management
The portfolio manager of Keystone Growth and Income is Judith A. Warners.
Ms. Warners is currently a Vice President at Keystone and has been an equity
investment professional with Keystone since 1988. Ms. Warners has managed
Keystone Growth and Income since January 1995.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of Keystone Growth and Income's shares. EDI
distributes the Fund's shares directly or through broker-dealers, banks
(including FUNB), or other financial intermediaries. Effective on or about
January 9, 1998, Keystone Growth and Income will offer three classes of shares:
Class A, Class B and Class C. Each class has separate distribution arrangements.
(See "Distribution -Related Expenses" below.) No class bears the distribution
expenses relating to the shares of any other class.
In the proposed Reorganization, shareholders of Growth & Income will
receive Class A shares of Keystone Growth and Income. Class A shares of Keystone
Growth and Income have substantially similar arrangements with respect to the
imposition of Rule 12b-1 distribution and service fees as the shares of Growth &
Income. Because the Reorganization will be effected at net asset value without
the imposition of a sales charge, Keystone Growth and Income shares acquired by
shareholders of Growth & Income pursuant to the proposed Reorganization would
not be subject to any initial sales charge or contingent deferred sales charge
as a result of the Reorganization.
The following is a summary description of charges and fees for the
Class A shares of Keystone Growth and Income which will be received by Growth &
Income shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
the respective Keystone Growth and Income Prospectus and the Growth & Income
Prospectus and in each Fund's respective Statement of Additional Information.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees. After January 9, 1998, the Prospectus for Keystone
Growth and Income will contain a description of the initial sales charges
applicable to purchases of Class A shares. Holders of shares of Growth & Income
who receive Class A shares of Keystone Growth and Income
<PAGE>
in the Reorganization will be able to purchase additional Class A shares of
Keystone Growth and Income and of any other Evergreen fund at net asset value.
No initial sales charge will be imposed.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectus and Statement of Additional Information.
Distribution-Related Expenses. Keystone Growth and Income has adopted a
Rule 12b-1 plan with respect to its Class A shares under which the Class may pay
for distribution-related expenses at an annual rate which may not exceed 0.75%
of average daily net assets attributable to the Class. Payments with respect to
Class A shares are currently limited to 0.25% of average daily net assets
attributable to the Class, which amount may be increased to the full plan rate
for the Fund by the Trustees without shareholder approval.
Growth & Income has adopted a Rule 12b-1 plan with respect to its
shares under which such shares may pay for distribution- related expenses at an
annual rate of 0.25% of average daily net assets.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectus and Statement of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related fees is provided above. Investments in the Funds are not
insured. The minimum initial purchase requirement for Keystone Growth and Income
is $1,000 and the minimum investment for Growth & Income is $3,000 ($2,000 for
qualified pension plans). Growth & Income has a minimum investment requirement
of $200 for subsequent investments. There is no minimum for subsequent purchases
of shares of Keystone Growth and Income. Each Fund provides for telephone, mail
or wire redemption of shares at net asset value as next determined after receipt
of a redemption request on each day the New York Stock Exchange ("NYSE") is open
for trading. Additional information concerning purchases and redemptions of
shares, including how each Fund's net asset value is determined, is contained in
the respective Prospectus for each Fund. Each Fund may involuntarily redeem
shareholders' accounts that have less than $1,000 of invested funds. All funds
invested in each Fund are invested in full and fractional shares. The Funds
reserve the right to reject any purchase order.
<PAGE>
Exchange Privileges
Growth & Income currently permits shareholders to exchange such shares
for shares of another fund in the Blanchard Group of Funds or for Investment
shares of other funds managed by Virtus. Holders of shares of a class of
Keystone Growth and Income generally may exchange their shares for shares of the
same class of any other Evergreen fund. Growth & Income shareholders will be
receiving Class A shares of Keystone Growth and Income in the Reorganization
and, accordingly, with respect to shares of Keystone Growth and Income received
by Growth & Income shareholders in the Reorganization, the exchange privilege is
limited to the Class A shares of other Evergreen funds. No sales charge is
imposed on an exchange. An exchange which represents an initial investment in
another Evergreen fund must amount to at least $1,000. The current exchange
privileges, and the requirements and limitations attendant thereto, are
described in each Fund's respective Prospectus and Statement of Additional
Information.
Dividend Policy
Growth & Income declares dividends at least annually from its net
investment income. Keystone Growth and Income distributes dividends from its net
investment income quarterly. Distributions of any net realized gains of a Fund
will be made at least annually. Dividends and distributions are reinvested in
additional shares of the same class of the respective Fund, or paid in cash, as
a shareholder has elected. See the respective Prospectus of each Fund for
further information concerning dividends and distributions.
After the Reorganization, shareholders of Growth & Income who have
elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from Keystone Growth and Income
reinvested in shares of Keystone Growth and Income. Shareholders of Growth &
Income who have elected to receive dividends and/or distributions in cash will
receive dividends and/or distributions from Keystone Growth and Income in cash
after the Reorganization, although they may, after the Reorganization, elect to
have such dividends and/or distributions reinvested in additional shares of
Keystone Growth and Income.
Each of Keystone Growth and Income and Growth & Income has qualified
and intends to continue to qualify to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"). While
so qualified, so long as each Fund distributes all of its net investment company
taxable income and any net realized gains to shareholders, it is expected
<PAGE>
that a Fund will not be required to pay any federal income taxes on the amounts
so distributed. A 4% nondeductible excise tax will be imposed on amounts not
distributed if a Fund does not meet certain distribution requirements by the end
of each calendar year. Each Fund anticipates meeting such distribution
requirements.
Risks
Since the investment objectives and policies of each Fund are
substantially comparable, the risks involved in investing in each Fund's shares
are similar. For a discussion of each Fund's investment objectives and policies,
see "Comparison of Investment Objectives and Policies." There is no assurance
that investment performances will be positive and that the Funds will meet their
investment objectives. In addition, Keystone Growth and Income and the Portfolio
may employ for hedging purposes and to enhance returns the strategy of engaging
in options and futures transactions. The risks involved in these strategies are
described in the "Investment Practices and Restrictions - Risk Characteristics
of Options and Futures" section in Keystone Growth and Income's Prospectus.
Investing in companies with large market capitalizations carries less
risk than investing in small capitalization stocks because they may have broader
product lines, markets or financial resources. However, investing in medium
capitalization stocks may involve greater risk than investing in large
capitalization stocks, since they can be subject to more abrupt or erratic
movements. Such stocks tend to involve less risk than stocks of small
capitalization companies.
Both Keystone Growth and Income and the Portfolio may invest in foreign
securities. The Portfolio may invest up to 20% of its assets in securities of
issuers located in emerging or developing markets countries. Keystone Growth and
Income may invest up to 25% of its assets in securities of issuers located in
emerging or developing market countries. The Portfolio may invest in debt
securities issued or guaranteed by certain supranational entities. Investment in
foreign securities generally entails more risk than investment in domestic
issuers for the following reasons: publicly available information on issuers and
securities may be scarce; many foreign countries do not follow the same
accounting, auditing and financial reporting standards as are used in the U.S.;
market trading volumes may be smaller, resulting in less liquidity and more
price volatility compared to U.S. securities; securities markets and trading may
be less regulated; and the possibility of expropriation, confiscatory taxation,
nationalization, establishment of price controls, political or social
instability exists. Investing in securities
<PAGE>
of issuers in emerging markets countries involves exposure to economic systems
that are generally less stable than those of developed countries. Investing in
companies in emerging markets countries may involve exposure to national
policies that may restrict investment by foreigners and undeveloped legal
systems governing private and foreign investments and private property. The
typically small size of the markets for securities issued by companies in
emerging markets countries and the possibility of a low or nonexistent volume of
trading in those securities may also result in a lack of liquidity and in price
volatility of those securities.
When a Fund invests in foreign securities, they usually will be
denominated in foreign currencies, and the Fund temporarily may hold funds in
foreign securities. Thus, the value of a Fund's shares may be affected by
changes in exchange rates.
The Portfolio is a non-diversified investment company. As such, there
is no limit on the percentage of assets which can be invested in the securities
of a single issuer. An investment in the Portfolio, therefore, will entail
greater risk than would exist in a diversified investment company because the
higher percentage of investments among fewer issuers may result in greater
fluctuations in the total market value of Growth & Income's shares. Any adverse
developments affecting the value of the securities held by the Portfolio will
have a greater impact on the total value of the Portfolio than would be the case
if the Portfolio's investments were diversified among more issuers.
REASONS FOR THE REORGANIZATION
On July 18, 1997, First Union entered into an Agreement and Plan of
Merger with Signet, which provided, among other things, for the Merger of Signet
with and into a wholly-owned subsidiary of First Union. The Merger was
consummated on November 28, 1997. As a result of the Merger it is expected that
FUNB and its affiliates will succeed to the investment advisory and
administrative functions currently performed for Growth & Income by various
units of Signet and various unaffiliated parties. It is also expected that
Signet will no longer, upon completion of the Reorganization and similar
reorganizations of other funds in the Signet mutual fund family, provide
investment advisory or administrative services to investment companies.
At a meeting held on September 16, 1997, the Board of Trustees of Blanchard
Funds considered and approved the Reorganization as in the best interests of
shareholders of Growth & Income and determined that the interests of existing
shareholders of Growth & Income will not be diluted as a result of the
transactions contemplated by the Reorganization. In
<PAGE>
addition, the Trustees approved the Interim Advisory Agreement with respect to
Growth & Income.
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise Blanchard Funds. The Merger caused,
as a matter of law, termination of the investment advisory agreement between
each series of Blanchard Funds and Virtus. Blanchard Funds have received an
order from the SEC which permits Virtus to continue to act as Growth & Income's
investment adviser without shareholder approval, for a period of not more than
120 days from the date the Merger was consummated (November 28, 1997) to the
date of shareholder approval of a new investment advisory agreement.
Accordingly, the Trustees considered the recommendations of Signet in approving
the proposed Reorganization.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Keystone Growth and Income and Growth & Income. Specifically, Keystone
Growth and Income and Growth & Income have substantially identical investment
objectives and policies and comparable risk profiles. See "Comparison of
Investment Objectives and Policies" below. At the same time, the Board of
Trustees evaluated the potential economies of scale associated with larger
mutual funds and concluded that operational efficiencies may be achieved upon
the combination of Growth & Income with an Evergreen fund with a greater level
of assets. As of September 30, 1997, Keystone Growth and Income's net assets
were approximately $330 million and Growth & Income's net assets were
approximately $18 million.
In addition, assuming that an alternative to the Reorganization would
be to propose that Growth & Income continue its existence and be separately
managed by Keystone or one of its affiliates, Growth & Income would be offered
through common distribution channels with the substantially similar Keystone
Growth and Income. Growth & Income would also have to bear the cost of
maintaining its separate existence. Signet and Keystone believe that the
prospect of dividing the resources of the Evergreen mutual fund organization
between two substantially identical funds could result in each Fund being
disadvantaged due to an inability to achieve optimum size, performance levels
and the greatest possible economies of scale. Accordingly, for the reasons noted
above and recognizing that there can be no assurance that any economies of scale
or other benefits will be realized, Signet and Keystone believe that the
proposed Reorganization would be in the best interests of each Fund and its
shareholders.
<PAGE>
The Board of Trustees of Blanchard Funds met and considered the
recommendation of Signet and Keystone and, in addition, considered among other
things, (i) the terms and conditions of the Reorganization; (ii) whether the
Reorganization would result in the dilution of shareholders' interests; (iii)
expense ratios, fees and expenses of Keystone Growth and Income and Growth &
Income; (iv) the comparative performance records of each of the Funds; (v)
compatibility of their investment objectives and policies; (vi) the investment
experience, expertise and resources of Keystone; (vii) the service and
distribution resources available to the Evergreen funds and the broad array of
investment alternatives available to shareholders of the Evergreen funds; (viii)
the personnel and financial resources of First Union and its affiliates; (ix)
the fact that FUNB will bear the expenses incurred by Growth & Income in
connection with the Reorganization; (x) the fact that Keystone Growth and Income
will assume certain identified liabilities of Growth & Income; and (xi) the
expected federal income tax consequences of the Reorganization.
The Trustees also considered the benefits to be derived by shareholders
of Growth & Income from the sale of its assets to Keystone Growth and Income. In
this regard, the Trustees considered the potential benefits of being associated
with a larger entity and the economies of scale that could be realized by the
participation in such an entity by shareholders of Growth & Income.
In addition, the Trustees considered that there are alternatives
available to shareholders of Growth & Income, including the ability to redeem
their shares, as well as the option to vote against the Reorganization.
During their consideration of the Reorganization the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Equity Trust also concluded at a meeting on
September 17, 1997 that the proposed Reorganization would be in the best
interests of shareholders of Keystone Growth and Income and that the interests
of the shareholders of Keystone Growth and Income would not be diluted as a
result of the transactions contemplated by the Reorganization.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF GROWTH & INCOME APPROVE
THE PROPOSED RESTRUCTURING AND THE REORGANIZATION.
The Restructuring
<PAGE>
Unlike other mutual funds such as Keystone Growth and Income, which
directly acquire and manage their own portfolios of securities, Growth & Income
currently seeks to achieve its investment objective by investing all its assets
in the Portfolio which is a separate registered investment company with
identical investment objectives as Growth & Income. Since the Trustees of
Blanchard Funds have proposed that Growth & Income enter into the
Reorganization, it will be necessary for Growth & Income to require the
Portfolio to distribute to Growth & Income a portion of the Portfolio's assets
for transfer to Keystone Growth and Income in satisfaction of Growth & Income's
obligations under the Plan.
To accomplish the Restructuring, Growth and Income and the Portfolio will
enter into a Withdrawal Agreement pursuant to which the Portfolio will
distribute to Growth and Income on the Closing Date of the Reorganization,
portfolio securities mutually acceptable to Growth & Income and the Portfolio,
having an aggregate value equal to the net asset value of Growth & Income's
share interest in the Portfolio as of the Closing Date. The securities so
distributed to Growth and Income will conform to those permitted to be held by
Keystone Growth and Income.
The Restructuring is subject to the receipt by Blanchard Funds of an
opinion of Sullivan & Worcester LLP, that the withdrawal by Growth & Income of
its investment in the Portfolio will not cause Growth & Income or its
shareholders to recognize any gain or loss under the Code (other than possible
gain or loss under the mark-to-market provisions of the Code). At the date of
this Proxy Statement/Prospectus, there are no circumstances which would result
in gain or loss to Growth & Income shareholders under the mark-to-market
provisions of the Code. Moreover, should the Restructuring in fact result in the
recognition of any mark-to-market gain or loss by Growth & Income shareholders,
the effect of the Restructuring would be merely to cause the acceleration of the
date of the recognition of gain or loss which would otherwise have been
recognized by shareholders at the end of Growth & Income's fiscal year.
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 Keystone Growth and Income will acquire all of
the assets of Growth & Income in exchange for shares of Keystone Growth and
Income and the assumption by Keystone Growth and Income of certain identified
liabilities of Growth & Income on or about February 27, 1998 or such other date
<PAGE>
as may be agreed upon by the parties (the "Closing Date"). Prior to the Closing
Date, Growth & Income will endeavor to discharge all of its known liabilities
and obligations. Keystone Growth and Income will not assume any liabilities or
obligations of Growth & Income other than those reflected in an unaudited
statement of assets and liabilities of Growth & Income prepared as of the close
of regular trading on the NYSE, currently 4:00 p.m. Eastern time, on the
business day immediately prior to the Closing Date. The number of full and
fractional shares of each class of Keystone Growth and Income to be received by
the shareholders of Growth & Income will be determined by multiplying the
respective outstanding class of shares of Growth & Income by a factor which
shall be computed by dividing the net asset value per share of the respective
class of shares of Growth & Income by the net asset value per share of the
respective class of shares of Keystone Growth and Income. Such computations will
take place as of the close of regular trading on the NYSE on the business day
immediately prior to the Closing Date. The net asset value per share of each
class will be determined by dividing assets, less liabilities, in each case
attributable to the respective class, by the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for Keystone Growth
and Income, will compute the value of each Fund's respective portfolio
securities. The method of valuation employed will be consistent with the
procedures set forth in the Prospectus and Statement of Additional Information
of Keystone Growth and Income, 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, Growth & Income 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, Growth &
Income 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
Keystone Growth and Income received by Growth & Income. Such liquidation and
distribution will be accomplished by the establishment of accounts in the names
of the Fund's shareholders on the share records of Keystone
<PAGE>
Growth and Income's transfer agent. Each account will represent the respective
pro rata number of full and fractional shares of Keystone Growth and Income due
to the Fund's shareholders. All issued and outstanding shares of Growth &
Income, including those represented by certificates, will be canceled. The
shares of Keystone Growth and Income to be issued will have no preemptive or
conversion rights. After such distributions and the winding up of its affairs,
Growth & Income will be terminated. In connection with such termination,
Blanchard Funds will file with the SEC an application for termination as a
registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Growth & Income's shareholders,
accuracy of various representations and warranties and receipt of opinions of
counsel, including opinions with respect to those matters referred to in
"Federal Income Tax Consequences" below. Notwithstanding approval of Growth &
Income's shareholders, the Plan may be terminated (a) by the mutual agreement of
Growth & Income and Keystone Growth and Income; 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 Growth & Income in connection with the Reorganization
(including the cost of any proxy soliciting agent) will be borne by FUNB whether
or not the Reorganization is consummated. No portion of such expenses will be
borne directly or indirectly by Growth & Income or its shareholders. There are
not any liabilities or any expected reimbursements in connection with the 12b-1
Plan of Growth & Income. As a result, no 12b-1 liabilities will be assumed by
Keystone Growth and Income following the Reorganization.
If the Reorganization is not approved by shareholders of Growth &
Income, the Board of Trustees of Blanchard Funds will consider other possible
courses of action in the best interests of shareholders.
Federal Income Tax Consequences
The Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Growth & Income will receive an
opinion of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued
<PAGE>
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 Growth & Income solely in
exchange for shares of Keystone Growth and Income and the assumption by Keystone
Growth and Income of certain identified liabilities, followed by the
distribution of Keystone Growth and Income's shares by Growth & Income in
dissolution and liquidation of Growth & Income, will constitute a
"reorganization" within the meaning of section 368(a)(1)(C) of the Code, and
Keystone Growth and Income and Growth & Income 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 Growth & Income on the
transfer of all of its assets to Keystone Growth and Income solely in exchange
for Keystone Growth and Income's shares and the assumption by Keystone Growth
and Income of certain identified liabilities of Growth & Income or upon the
distribution of Keystone Growth and Income's shares to Growth & Income's
shareholders in exchange for their shares of Growth & Income;
(3) The tax basis of the assets transferred will be the same to
Keystone Growth and Income as the tax basis of such assets to Growth & Income
immediately prior to the Reorganization, and the holding period of such assets
in the hands of Keystone Growth and Income will include the period during which
the assets were held by Growth & Income;
(4) No gain or loss will be recognized by Keystone Growth and Income
upon the receipt of the assets from Growth & Income solely in exchange for the
shares of Keystone Growth and Income and the assumption by Keystone Growth and
Income of certain identified liabilities of Growth & Income;
(5) No gain or loss will be recognized by Growth & Income's
shareholders upon the issuance of the shares of Keystone Growth and Income to
them, provided they receive solely such shares (including fractional shares) in
exchange for their shares of Growth & Income; and
(6) The aggregate tax basis of the shares of Keystone Growth and
Income, including any fractional shares, received by each of the shareholders of
Growth & Income pursuant to the Reorganization will be the same as the aggregate
tax basis of the shares of Growth & Income held by such shareholder immediately
prior to the Reorganization, and the holding period of the shares of Keystone
Growth and Income, including fractional shares,
<PAGE>
received by each such shareholder will include the period during which the
shares of Growth & Income exchanged therefor were held by such shareholder
(provided that the shares of Growth & Income were held as a capital asset on the
date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Growth & Income 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 Keystone Growth and
Income shares he or she received. Shareholders of Growth & Income should consult
their tax advisers regarding the effect, if any, of the proposed Reorganization
in light of their individual circumstances. It is not anticipated that the
securities of the combined portfolio will be sold in significant amounts in
order to comply with the policies and investment practices of Keystone Growth
and Income. Since the foregoing discussion relates only to the federal income
tax consequences of the Reorganization, shareholders of Growth & Income should
also consult their tax advisers as to the state and local tax consequences, if
any, of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Keystone Growth
and Income and Growth & Income as of September 30, 1997 and the capitalization
of Keystone Growth and Income on a pro forma basis as of that date, giving
effect to the proposed acquisition of assets at net asset value and the
conversion of 7,630,569 Keystone Growth and Income Class B shares to Class A
shares. See "Comparison of Fees and Expenses." The pro forma data reflects an
exchange ratio of approximately 0.38178 Class A shares of Keystone Growth and
Income issued for each share of Growth & Income.
Capitalization of Keystone Growth and Income,
Growth & Income and Keystone
Growth and Income (Pro Forma)
<PAGE>
<TABLE>
<CAPTION>
Keystone
Growth and
Income (After
Growth & Reorgani-
Income zation)
Keystone --------- ------------
Growth and
Income
--------
<S> <C> <C> <C>
Net Assets
Class A........................ N/A $18,116,445
$258,536,290
Class B........................ $89,736,493
$330,156,338 N/A -------------
------------ ------------
Total Net
Assets....................... $330,156,338 $18,116,445
$348,272,783
Net Asset Value Per
Share
Class A........................ N/A $12.03 $31.51
Class B........................ $31.51 N/A $31.51
Shares Outstanding
Class A........................ N/A 1,506,167 8,205,599
Class B........................ 2,848,103
10,478,672 N/A -------------
------------ ------------
All Classes.................... 1,506,167 11,053,702
10,478,672
</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 December 26, 1997 (the "Record Date"), there were 1,662,417
shares of beneficial interest of Growth & Income outstanding.
As of November 30, 1997, the officers and Trustees of Blanchard Funds
beneficially owned as a group less than 1% of the outstanding shares of Growth &
Income. To Growth & Income's knowledge, the following person owned beneficially
or of record more than 5% of Growth & Income's total outstanding shares as of
November 30, 1997:
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Percentage of Shares of
No. of Shares Before Class After
Name and Address Shares Reorganization Reorganization
- ---------------- ------ -------------- --------------
<S> <C> <C> <C>
Stephens, Inc. 239,825 16.28% 1.31% Class A
111 Center Street
Little Rock, AR
72201-3507
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectus and Statement of Additional
Information of the Funds. The investment objective, policies and restrictions of
Keystone Growth and Income can be found in the Prospectus of Keystone Growth and
Income under the caption "Investment Objective and Policies." The investment
objective, policies and restrictions of Growth & Income can be found in the
Prospectus of the Fund under the captions "Fund Objective" and "Investment
Policies." Unlike the investment objective of Growth & Income, which is
fundamental, the investment objective of Keystone Growth and Income is
non-fundamental and can be changed by the Board of Trustees without shareholder
approval.
The investment objective of Keystone Growth and Income is to provide
shareholders with the best possible growth of capital and long-term growth of
income. Under normal circumstances, the Fund will invest principally in common
stocks of generally accepted investment quality selected primarily from or
similar to those found in S&P 500, usually with established records of dividend
payments. However, the Fund may purchase securities that are not currently
paying dividends, but show potential capital growth or future income.
In addition, the Fund will invest in quality companies with medium
market capitalizations that are smaller than those of companies typically found
in the S&P 500. For this purpose, companies with medium capitalizations are
generally those whose market capitalization falls within the capitalization
range of the Standard & Poor's MidCap 400 Index ("S&P MidCap 400") at the time
of the Fund's investment.
<PAGE>
In pursuing its objective, the Fund may invest up to 25% of its assets
in foreign securities issued by issuers located in developed countries as well
as emerging market countries. For this purpose, countries with emerging markets
are generally those where the per capita income is in the low to middle ranges,
as determined, from time to time, by the International Bank for Reconstruction
and Development.
The Fund may also invest in other types of securities, including other
common stocks, debt securities convertible into common stocks or having common
stock characteristics, and rights and warrants to purchase common stocks. In
addition to its other investment options, the Fund may invest in limited
partnerships, including master limited partnerships.
When market conditions warrant, the Fund may invest up to 100% of its
assets for temporary or defensive purposes in short-term obligations. Such
obligations may include master demand notes, commercial paper and notes, bank
deposits and other financial institution obligations.
Growth & Income seeks to provide long-term capital appreciation and
dividend income. The Fund seeks to achieve its objective by investing all of its
investable assets in the Portfolio. The Portfolio has an objective identical to
that of the Fund. The Portfolio invests in common stocks of issuers with a broad
range of market capitalizations. Under normal market conditions, the Portfolio
will invest at least 80% of its total assets in common stocks. The Portfolio
does not have a policy which emphasizes any particular range of market
capitalization.
The Portfolio may invest any portion of its assets not invested as
described above in high quality money market instruments and repurchase
agreements. For temporary defensive purposes, the Portfolio may invest without
limitation in these instruments as well as investment grade debt securities.
The Portfolio may also invest up to 20% of its total assets in foreign
securities and 20% of its assets in convertible securities.
Each Fund may invest in certain types of derivative instruments
including options and futures.
Keystone Growth and Income may not invest more than 5% of its assets in
securities of any one issuer or purchase more than 10% of the outstanding voting
securities of any one issuer. As a diversified portfolio under the 1940 Act, the
same restrictions apply to 75% of the assets of Keystone Growth and Income.
However, since the Portfolio is non-diversified for purposes of the 1940 Act,
these 5% restrictions apply to 50% of the assets of
<PAGE>
the Portfolio. The remaining 50% of the assets of the Portfolio may be invested
up to 25% in the securities of a single issuer. Nondiversification may increase
investment risks.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectus and Statement of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectus and Statement of Additional Information of each
Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Equity Trust and Blanchard Funds are open-end management
investment companies registered with the SEC under the 1940 Act, which
continuously offer shares to the public. Evergreen Equity Trust is organized as
a Delaware business trust and Blanchard Funds is organized as a Massachusetts
business trust. Each Trust is governed by a Declaration of Trust, By-Laws and a
Board of Trustees. Each Trust is also governed by applicable Delaware,
Massachusetts and federal law. Keystone Growth and Income is a series of
Evergreen Equity Trust and Growth & Income is a series of Blanchard Funds.
As set forth in the Supplement to the Prospectus of Keystone Growth and
Income, effective December 22, 1997, Keystone Growth and Income Fund (S-1), a
Pennsylvania common law trust, was reorganized (the "Delaware Reorganization")
into a corresponding series (Keystone Growth and Income) of Evergreen Equity
Trust. In connection with the Delaware Reorganization, the Fund's investment
objectives were reclassified from "fundamental" to "non-fundamental" and
therefore may be changed without shareholder approval; the Fund adopted certain
standardized investment restrictions; and eliminated or reclassified from
fundamental to non-fundamental certain of the Fund's other fundamental
investment restrictions. On January 9, 1998, Keystone Growth and Income will
change its name to Evergreen Blue Chip Fund.
Capitalization
The beneficial interests in Keystone Growth and Income are represented
by an unlimited number of transferable shares of beneficial interest, $.001 par
value per share. The beneficial interests in Growth & Income are represented by
an unlimited number of transferable shares of beneficial interest without par
value. The respective Declaration of Trust under which each Fund has been
established permits the Trustees to allocate shares into
<PAGE>
an unlimited number of series, and classes thereof, with rights determined by
the Trustees, all without shareholder approval. Fractional shares may be issued.
Each Fund's shares represent equal proportionate interests in the assets
belonging to the Funds. Shareholders of each Fund are entitled to receive
dividends and other amounts as determined by the Trustees. Shareholders of each
Fund vote separately, by class, as to matters, such as approval of or amendments
to Rule 12b-1 distribution plans, that affect only their particular class and by
series as to matters, such as approval of or amendments to investment advisory
agreements or proposed reorganizations, that affect only their particular
series.
Shareholder Liability
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the Declaration of Trust under which Growth & Income
was established disclaims shareholder liability for acts or obligations of the
series and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Declaration of Trust provides for indemnification out of the series property
for all losses and expenses of any shareholder held personally liable for the
obligations of the series. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered remote since it is
limited to circumstances in which a disclaimer is inoperative and the series or
the trust itself would be unable to meet its obligations.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Equity Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of a Delaware trust to liability. To guard
against this risk, the Declaration of Trust of Evergreen Equity Trust (a)
provides that any written obligation of the Trust may contain a statement that
such obligation may only be enforced against the assets of the Trust or the
particular series in question and the obligation is not binding upon the
shareholders of the Trust; however, the omission of such a disclaimer will not
operate to create personal liability for any shareholder; and (b) provides for
indemnification out of Trust property of any shareholder held personally liable
for the obligations of the Trust. Accordingly, the risk of a shareholder of
Evergreen
<PAGE>
Equity Trust incurring financial loss beyond that shareholder's investment
because of shareholder liability is limited to circumstances in which: (i) the
court refuses to apply Delaware law; (ii) no contractual limitation of liability
was in effect; and (iii) the Trust itself would be unable to meet its
obligations. In light of Delaware law, the nature of the Trust's business, and
the nature of its assets, the risk of personal liability to a shareholder of
Evergreen Equity Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Equity Trust on behalf of Keystone Growth and Income
nor Blanchard Funds on behalf of Growth & Income is required to hold annual
meetings of shareholders. However, a meeting of shareholders for the purpose of
voting upon the question of removal of a Trustee must be called when requested
in writing by the holders of at least 10% of the outstanding shares of Evergreen
Equity Trust or Blanchard Funds. In addition, each is required to call a meeting
of shareholders for the purpose of electing Trustees if, at any time, less than
a majority of the Trustees then holding office were elected by shareholders.
Each Trust currently does not intend to hold regular shareholder meetings. Each
Trust does not permit cumulative voting. Except when a larger quorum is required
by applicable law, a majority of the outstanding shares entitled to vote of each
Fund constitutes a quorum for consideration of such matter. For Keystone Growth
and Income and Growth & Income, a majority of the votes cast and entitled to
vote, is sufficient to act on a matter (unless otherwise specifically required
by the applicable governing documents or other law, including the 1940 Act).
Under the Declaration of Trust of Evergreen Equity Trust, each share of
Keystone Growth and Income is entitled to one vote for each dollar of net asset
value applicable to each share. Under the voting provisions governing Growth &
Income, each share is entitled to one vote. Over time, the net asset values of
the mutual funds which are each a series of Blanchard Funds have changed in
relation to one another and are expected to continue to do so in the future.
Because of the divergence in net asset values, a given dollar investment in a
fund which is a series of Blanchard Funds and which has a lower net asset value
will purchase more shares and under the current voting provisions of Blanchard
Funds, have more votes, than the same investment in a Blanchard Funds' series
with a higher net asset value. Under the Declaration of Trust of Evergreen
Equity Trust, voting power is related to the dollar value of a shareholder's
investment rather than to the number of shares held.
Liquidation or Dissolution
<PAGE>
In the event of the liquidation of Keystone Growth and Income and
Growth & Income, the shareholders are entitled to receive, when, and as declared
by the Trustees, the excess of the assets belonging to such Fund or attributable
to the class over the liabilities belonging to the Fund or attributable to the
class. In either case, the assets so distributable to shareholders of the Fund
will be distributed among the shareholders in proportion to the number of shares
of a class of the Fund held by them and recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declaration of Trust of Blanchard Funds provides that no Trustee
shall be liable for errors of judgment or mistakes of fact or law. No Trustee
shall be subject to liability unless such Trustee is found to have acted in bad
faith, with willful misfeasance, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
The Declaration of Trust of Blanchard Funds provides that a present or
former Trustee or officer is entitled to indemnification against liabilities and
expenses with respect to claims related to his or her position with the Trust,
provided that no indemnification shall be provided to a Trustee or officer
against any liability to the Trust or any series thereof or the shareholders of
any series by reasons of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen Equity 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
<PAGE>
independent legal counsel in a written opinion. The Trust may also advance money
for such litigation expenses provided that the Trustee undertakes to repay the
Trust if his or her conduct is later determined to preclude indemnification and
certain other conditions are met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware and Massachusetts law
and is not a complete description of those documents or law. Shareholders should
refer to the provisions of such Declarations of Trust, By-Laws, Delaware and
Massachusetts
law directly for more complete information.
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of Blanchard Funds recommends that shareholders of Growth
& Income approve the Interim Advisory Agreement. The Merger became effective on
November 28, 1997. Pursuant to an order received from the SEC all fees payable
under the Interim Advisory Agreement will be placed in escrow and paid to Virtus
if shareholders approve the contract within 120 days of its effective date. The
Interim Advisory Agreement will remain in effect until the earlier of the
Closing Date for the Reorganization or two years from its effective date. The
terms of the Interim Advisory Agreement are essentially the same as the Previous
Advisory Agreement (as defined below). The only difference between the Previous
Advisory Agreement and the Interim Advisory Agreement, if approved by
shareholders, is the length of time each Agreement is in effect. A description
of the Interim Advisory Agreement pursuant to which Virtus continues as
investment adviser to Growth & Income, as well as the services to be provided by
Virtus pursuant thereto is set forth below under "Advisory Services." The
description of the Interim Advisory Agreement in this Prospectus/Proxy Statement
is qualified in its entirety by reference to the Interim Advisory Agreement,
attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management, is an indirect wholly-owned subsidiary of
First Union. Virtus' address is 707 East Main Street, Suite 1300, Richmond,
Virginia 23219. Virtus has served as investment adviser pursuant to an
Investment Advisory Contract dated July 12, 1995. As used herein, the Investment
Advisory Agreement, as amended, for Growth & Income is referred to as the
"Previous Advisory Agreement." At a meeting of the Board of Trustees of
Blanchard Funds held on September 16, 1997,
<PAGE>
the Trustees, including a majority of the Independent Trustees, approved the
Interim Advisory Agreement for Growth & Income.
The Trustees have authorized Blanchard Funds, on behalf of Growth &
Income, to enter into the Interim Advisory Agreement with Virtus. Such Agreement
became effective on November 28, 1997. If the Interim Advisory Agreement for
Growth & Income is not approved by shareholders, the Trustees will consider
appropriate actions to be taken with respect to Growth & Income's investment
advisory arrangements at that time. The Previous Advisory Agreement was last
approved by the Trustees, including a majority of the Independent Trustees, on
May 11, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus is responsible for
managing the Fund and overseeing the investment of its assets, subject at all
times to the supervision of the Board of Trustees. Virtus selects, monitors and
evaluates the Fund's sub- adviser. Virtus periodically reviews the sub-adviser's
performance record and will make a change, if necessary, subject to approval of
the Board of Trustees and shareholders.
FAS currently acts as administrator of Growth & Income. FAS will continue
during the term of the Interim Advisory Agreement as Growth & Income's
administrator for the same compensation as currently received. An affiliate of
FAS currently performs transfer agency services for Growth & Income's
shareholders. Commencing February 9, 1998 Evergreen Service Company will provide
such transfer agency services for the same fees charged by Growth & Income's
current transfer agent. See "Summary - Administrator."
Fees and Expenses. The investment advisory fees and expense limitations for
Growth & Income under the Previous Advisory Agreement and the Interim Advisory
Agreement are identical. See "Summary - Investment Advisers and Sub-Adviser."
Expense Reimbursement. Virtus may, if it deems appropriate, assume
expenses of the Fund or class to the extent that the Fund's or classes' expenses
exceed such lower expense limitation as Virtus may, by notice to the Fund,
voluntarily declare to be effective.
<PAGE>
The Interim Advisory Agreement contains an identical provision.
Payment of Expenses and Transaction Charges. Under the Previous
Advisory Agreement, Blanchard Funds was required to pay or cause to be paid on
behalf of the Fund, all of the Fund's expenses and the Fund's allocable share of
Blanchard Funds' expenses.
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to Blanchard Funds or to the Fund or to any shareholder
for any act or omission in the course of or connected in any way with rendering
services or for any losses that may be sustained in the purchase, holding or
sale of any security.
The Interim Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Advisory Agreement provides that
it may be terminated without penalty by vote of a majority of the outstanding
voting securities of Growth & Income (as defined in the 1940 Act) or by a vote
of the Trustees of Blanchard Funds on 60 days' written notice to Virtus or by
Virtus on 60 days' written notice to Blanchard Funds. Also, the Interim Advisory
Agreement will automatically terminate in the event of its assignment (as
defined in the 1940 Act). The Previous Advisory Agreement contained identical
provisions as to termination and assignment.
Information about Growth & Income's Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, other funds of The Virtus Funds, the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus is set forth in Appendix A to this Prospectus/Proxy
Statement.
For the fiscal year ended October 31, 1997 and 1996 and the period from
July 12, 1995 to October 31, 1995, Virtus received from Growth & Income
management fees of $115,747, $85,166 and $6,416, respectively, of which all were
voluntarily waived. Virtus is currently waiving a portion of its management fee.
See "Comparison of Fees and Expenses."
<PAGE>
The Board of Trustees considered the Interim Advisory Agreement as part
of its overall approval of the Plan. The Board of Trustees considered, among
other things, the factors set forth above in "Reasons for the Reorganization."
The Board of Trustees also considered the fact that there were no material
differences between the terms of the Interim Advisory Agreement and the terms of
the Previous Advisory Agreement.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF GROWTH & INCOME APPROVE
THE INTERIM ADVISORY AGREEMENT
ADDITIONAL INFORMATION
Keystone Growth and Income. Information concerning the operation and
management of Keystone Growth and Income is incorporated herein by reference
from the Prospectus dated February 28, 1997, as amended, a copy of which is
enclosed, and Statement of Additional Information dated February 28, 1997, as
amended. A copy of such Statement of Additional Information is available upon
request and without charge by writing to Keystone Growth and Income at the
address listed on the cover page of this Prospectus/Proxy Statement or by
calling toll-free 1-800-343-2898.
Growth & Income. Information about the Fund is included in its current
Prospectus dated February 28, 1997 and in the Statement of Additional
Information of the same date, that have been filed with the SEC, all of which
are incorporated herein by reference. Copies of the Prospectus and Statement of
Additional Information are available upon request and without charge by writing
to Growth & Income at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-829-3863.
Keystone Growth and Income and Growth & Income are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information, including
proxy material and charter documents, with the SEC. These items can be inspected
and copies obtained at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices located at Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661- 2511 and Seven World Trade Center, Suite 1300, New York, New
York 10048.
VOTING INFORMATION CONCERNING THE MEETING
<PAGE>
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of Blanchard Funds to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116, and at any adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the meeting and a proxy card, is first being mailed to
shareholders of Growth & Income on or about January 7, 1998. Only shareholders
of record as of the close of business on the Record Date will be entitled to
notice of, and to vote at, the Meeting or any adjournment thereof. The holders
of a majority of the outstanding shares entitled to vote, at the close of
business on the Record Date, present in person or represented by proxy, will
constitute a quorum for the Meeting. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting, the proxies named
therein will vote the shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Restructuring, FOR the proposed Reorganization, FOR the Interim Advisory
Agreement and FOR any other matters deemed appropriate. Proxies that reflect
abstentions and "broker non- votes" (i.e., shares held by brokers or nominees as
to which (i) instructions have not been received from the beneficial owners or
the persons entitled to vote or (ii) the broker or nominee does not have
discretionary voting power on a particular matter) will be counted as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum, but will not be counted as shares voted and will have no effect on
the vote regarding the Restructuring and the Plan. However, such "broker
non-votes" will have the effect of being counted as votes against the Interim
Advisory Agreement which must be approved by a percentage of the shares present
at the Meeting or a majority of the outstanding voting securities. A proxy may
be revoked at any time on or before the Meeting by written notice to the
Secretary of Blanchard Funds, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Restructuring, FOR approval of the Plan and
the Reorganization contemplated thereby and FOR approval of the Interim Advisory
Agreement.
Approval of the Restructuring and the Plan will require the affirmative
vote of a majority of the shares voted and entitled to vote at the Meeting at
which a quorum of the Fund's shares is present. Approval of the Interim Advisory
Agreement will require the affirmative vote of (i) 67% or more of the
outstanding voting securities if holders of more than 50% of the outstanding
voting securities are present, in person or by proxy, at the Meeting, or (ii)
more than 50% of the outstanding voting securities,
<PAGE>
whichever is less. Each full share outstanding is entitled to one vote and each
fractional share outstanding is entitled to a proportionate share of one vote.
Proxy solicitations will be made primarily by mail, but proxy
solicitations may also be made by telephone, telegraph or personal solicitations
conducted by officers and employees of Keystone or Signet, their affiliates or
other representatives of Growth & Income (who will not be paid for their
soliciting activities). Shareholders Communications Corporation has been engaged
by Growth & Income to assist in soliciting proxies.
If you wish to participate in the Meeting, you may submit the proxy
card included with this Prospectus/Proxy Statement or attend in person. Any
proxy given by you is revocable.
In the event that sufficient votes to approve the Reorganization are
not received by February 20, 1998, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to the proposed Restructuring and the
Reorganization will not be entitled under either Massachusetts law or the
Declaration of Trust of Blanchard Funds to demand payment for, or an appraisal
of, his or her shares. However, shareholders should be aware that the
Restructuring and 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 Keystone Growth and Income which they receive in the transaction
at their then-current net asset value. Shares of Growth & Income may be redeemed
at any time prior to the consummation of the Reorganization. Shareholders of
Growth & Income 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.
<PAGE>
Growth & Income does not hold annual shareholder meetings. If the
Restructuring and the Reorganization are not approved, shareholders wishing to
submit proposals for consideration for inclusion in a proxy statement for a
subsequent shareholder meeting should send their written proposals to the
Secretary of Blanchard Funds at the address set forth on the cover of this
Prospectus/Proxy Statement such that they will be received by the Fund in a
reasonable period of time prior to any such meeting.
The votes of the shareholders of Keystone Growth and Income 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 Growth & Income whether other persons are beneficial owners of
shares for which proxies are being solicited and, if so, the number of copies of
this Prospectus/Proxy Statement needed to supply copies to the beneficial owners
of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Keystone Growth and Income as of August 31,
1997, and the financial statements and financial highlights for the periods
indicated therein, have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements and financial highlights of Growth & Income
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of Growth & Income for the year ended October 31, 1997 have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report, which
is incorporated herein by reference, and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The financial statements of the Portfolio as of and for the year ended
October 31, 1997 have been incorporated by reference herein in reliance upon the
report of Price Waterhouse LLP, independent accountants, given upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
<PAGE>
Certain legal matters concerning the issuance of shares of Keystone
Growth and Income will be passed upon by Sullivan & Worcester LLP, Washington,
D.C.
OTHER BUSINESS
The Trustees of Blanchard Funds do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND APPROVAL OF THE
RESTRUCTURING, THE PLAN AND THE INTERIM ADVISORY AGREEMENT AND ANY UNMARKED
PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL
OF THE RESTRUCTURING, THE PLAN AND THE INTERIM ADVISORY AGREEMENT.
January 7, 1998
<PAGE>
APPENDIX A
The names and addresses of the principal executive officers
and directors of Virtus Capital Management, Inc. are as follows:
OFFICERS:
Name Address
- ---- -------
David C. Francis, Chief First Union National Bank
Investment Officer 201 South College Street
Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Clemons Rosson, Vice Virtus Capital Management, Inc.
President, Assistant 707 East Main Street
Secretary Suite 1300
Richmond, Virginia 23219
L. Robert Cheshire, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
John E. Gray, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Dillon S. Harris, Jr., Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
J. Kellie Allen, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
<PAGE>
DIRECTORS:
Name Address
- ---- -------
First Union National Bank
201 South College
David C. Francis Street
Charlotte, North
Carolina 28288-1195
Donald A. McMullen First Union National Bank
201
South College Street
Charlotte, North Carolina 28288-
1195
William M. Ennis First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 26th day of November, 1997, by and between the Evergreen Equity Trust, a
Delaware business trust, with its principal place of business at 200 Berkeley
Street, Boston, Massachusetts 02116 (the "Trust"), with respect to the Keystone
Growth and Income Fund (S-1) series (the "Acquiring Fund"), and Blanchard Funds,
a Massachusetts business trust, with its principal place of business at
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, with respect to
its Blanchard Growth & Income Fund series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(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 shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Blanchard Funds have determined that the
Selling Fund should exchange all of its assets and certain identified
liabilities for Acquiring Fund Shares and that
<PAGE>
the interests of the existing shareholders of the Selling Fund will not be
diluted as a result of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
<PAGE>
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable time prior to the
Closing Date, furnish the Acquiring Fund with a list of its portfolio securities
and other investments. In the event that the Selling Fund holds any investments
that the Acquiring Fund may not hold, the Selling Fund, if requested by the
Acquiring Fund, will dispose of such securities prior to the Closing Date. In
addition, if it is determined that the Selling Fund and the Acquiring Fund
portfolios, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Selling Fund if requested by the Acquiring Fund will dispose of
a sufficient amount of such investments as may be necessary to avoid violating
such limitations as of the Closing Date. Notwithstanding the foregoing, nothing
herein shall require the Selling Fund to dispose of any investments or
securities if, in the reasonable judgment of the Selling Fund, such disposition
would adversely affect the tax-free nature of the Reorganization or would
violate the Selling Fund's fiduciary duty to its shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately prior
to the Reorganization the Aggregate NASD Cap of the Selling Fund immediately
prior to the Reorganization, in each case calculated in accordance with such
Rule 2830.
<PAGE>
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
<PAGE>
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectuses and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of shares of
the Selling Fund will receive Class A shares of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
<PAGE>
3.2 CUSTODIAN'S CERTIFICATE. Invesetors Bank and Trust Co., as
custodian for the Growth and Income Portfolio (the "Custodian"), shall deliver
at the Closing a certificate of an authorized officer stating that (a) the
Selling Fund's portfolio securities, cash, and any other assets shall have been
delivered in proper form to the Acquiring Fund on the Closing Date; and (b) all
necessary taxes including all applicable federal and state stock transfer
stamps, if any, shall have been paid, or provision for payment shall have been
made, in conjunction with the delivery of portfolio securities by the Selling
Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Blanchard Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
<PAGE>
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Blanchard Funds' Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected on the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or
<PAGE>
governmental body that materially and adversely affects its business or its
ability to consummate the transactions herein contemplated.
(g) The financial statements of the Selling Fund at October
31, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since October 31, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
<PAGE>
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2.1 REPRESENTATIONS OF THE ACQUIRING FUND. The
Acquiring Fund represents and warrants to the Selling Fund as
follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series
of a Delaware business trust that is registered as an investment
<PAGE>
company classified as a management company of the open-end type, and its
registration with the Commission as an investment company under the 1940 Act is
in full force and effect.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The financial statements of the Acquiring Fund at August
31, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly reflect the financial condition of the Acquiring
Fund as of such date, and there are no known contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
(g) Since August 31, 1997 there has not been any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise
<PAGE>
disclosed to and accepted by the Selling Fund. For the purposes of this
subparagraph (g), a decline in the net asset value of the Acquiring Fund shall
not constitute a material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with
<PAGE>
federal securities and other laws and regulations applicable
thereto.
(n) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Keystone
Growth and Income Fund (S-1) (the "Predecessor Fund"), a Pennsylvania common law
trust, as of the date hereof. The Acquiring Fund shall deliver to the Selling
Fund a certificate of the Predecessor Fund of even date making the
representations set forth in Section 4.2.1 with respect to the Predecessor Fund
to the extent applicable to the Predecessor Fund as of the date hereof.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. Blanchard Funds will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
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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 Peat
Marwick LLP and certified by Blanchard Funds' President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
5.8 CAPITAL LOSS CARRYFORWARDS. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause KPMG Peat Marwick LLP to issue a letter addressed to
the Acquiring Fund and the Selling Fund, in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
<PAGE>
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund, and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this
<PAGE>
Agreement are duly authorized and upon such delivery will be legally issued and
outstanding and fully paid and non-assessable. No shareholder of the Acquiring
Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which the Acquiring Fund is
a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
<PAGE>
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus and Proxy Statement and related matters
were discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus and Proxy Statement (except to the extent indicated
in paragraph (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the Trust's officers
and other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus and Proxy Statement as
of its date, as of the date of the Selling Fund Shareholders' meeting, and as of
the Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquiring Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquiring Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus and Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of Blanchard Funds and the Selling Fund. Such opinion shall contain such
other assumptions and limitations as shall be in the opinion of Sullivan &
Worcester LLP appropriate to render the opinions expressed therein.
In this paragraph 6.2, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the
<PAGE>
obligations to be performed by it hereunder on or before the Closing Date and,
in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Blanchard Funds'
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Blanchard Funds.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
<PAGE>
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Blanchard Funds' Declaration of Trust or By-laws, or any provision
of any material agreement, indenture, instrument, contract, lease or other
undertaking (in each case known to such counsel) to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
Regarding the Interim Advisory Agreement," the Interim Sub- Advisory Agreement
and the Previous Sub-Advisory Agreement, as set forth under the caption
"Information Regarding the Interim Sub-Advisory Agreement" and the description
of voting requirements applicable to approval of the Interim Advisory Agreement
and Interim Sub-Advisory Agreement, as set forth under the caption "Voting
Information Concerning the Meeting," insofar as the latter constitutes a summary
of applicable voting requirements under the Investment Company Act of 1940, as
amended, are, in each case, accurate and fairly present the information required
to be shown by the applicable requirements of Form N-14.
(g) Such counsel does not know of any legal or governmental
proceedings, insofar as they relate to the Selling Fund existing on or before
the date of mailing of the Prospectus and Proxy Statement and the Closing Date,
required to be described in the Prospectus and Proxy Statement or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and
<PAGE>
the Selling Fund is neither a party to nor subject to the provisions of any
order, decree or judgment of any court or governmental body, which materially
and adversely affects its business other than as previously disclosed in the
Prospectus and Proxy Statement.
7.3.2 The Acquiring Fund shall have received on the Closing Date an
opinion of C. Grant Anderson, Esq., Assistant Secretary of the Blanchard Funds,
in form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof has been
paid, and assuming that such shares were issued in accordance with the terms of
the Selling Fund's registration statement, or any amendment thereto, in effect
at the time of such issuance, all issued and outstanding shares of the Selling
Fund are legally issued and fully paid and non-assessable (except that, under
Massachusetts law, Selling Fund Shareholders could under certain circumstances
be held personally liable for obligations of the Selling Fund).
Mr. Anderson shall also state that he has reviewed and is familiar with
the contents of the Prospectus and Proxy Statement and, although he is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and Proxy
Statement on the basis of the foregoing, no facts have come to his attention
that lead him to believe that the Prospectus and Proxy Statement as of its date,
as of the date of the Selling Fund Shareholders' meeting, and as of the Closing
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding the Selling Fund or
necessary, in the light of the circumstances under which they were made, to make
the statements therein regarding the Selling Fund not misleading. Such opinion
may state that he does not express any opinion or belief as to the financial
statements or any financial or statistical data, or as to the information
relating to the Acquiring Fund, contained in the Prospectus and Proxy Statement
or Registration Statement.
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Massachusetts law, that as Dickstein Shapiro Morin &
Oshinsky LLP and C. Grant Anderson are not admitted to the bar of Massachusetts,
such opinions are based either upon the review of published statutes,
<PAGE>
cases and rules and regulations of the Commonwealth of Massachusetts or upon an
opinion of Massachusetts counsel.
In this paragraph 7.3, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
7.4 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Blanchard Funds'
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where
<PAGE>
failure to obtain any such consent, order, or permit would not involve a risk of
a material adverse effect on the assets or properties of the Acquiring Fund or
the Selling Fund, provided that either party hereto may for itself waive any of
such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's net investment
company taxable income for all taxable periods ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on or prior to the
Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(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 certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or
<PAGE>
constructive) of the Acquiring Fund Shares to Selling Fund Shareholders in
exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(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 data utilized in the
calculations of the
<PAGE>
projected expense ratios appearing in the Registration Statement and Prospectus
and Proxy Statement agree with underlying accounting records of the Selling Fund
or with written estimates by Selling Fund's management and were found to be
mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation,
<PAGE>
(a) expenses incurred in connection with the entering into and the carrying out
of the provisions of this Agreement; (b) expenses associated with the
preparation and filing of the Registration Statement under the 1933 Act covering
the Acquiring Fund Shares to be issued pursuant to the provisions of this
Agreement; (c) registration or qualification fees and expenses of preparing and
filing such forms as are necessary under applicable state securities laws to
qualify the Acquiring Fund Shares to be issued in connection herewith in each
state in which the Selling Fund Shareholders are resident as of the date of the
mailing of the Prospectus and Proxy Statement to such shareholders; (d) postage;
(e) printing; (f) accounting fees; (g) legal fees; and (h) solicitation costs of
the transaction. Notwithstanding the foregoing, the Acquiring Fund shall pay its
own federal and state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of
willful default, there shall be no liability for damages on the
<PAGE>
part of either the Acquiring Fund, the Selling Fund, the Trust, Blanchard Funds,
the respective Trustees or officers, to the other party or its Trustees or
officers.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of the Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
<PAGE>
13.5 It is expressly agreed that the obligations of the Selling Fund
and the Acquiring Fund hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents, or employees of Blanchard Funds or the
Evergreen Equity Trust personally, but shall bind only the trust property of the
Selling Fund and the Acquiring Fund, as provided in the Declarations of Trust of
Blanchard Funds and the Trust. The execution and delivery of this Agreement have
been authorized by the Trustees of Blanchard Funds on behalf of the Selling Fund
and the Trust on behalf of the Acquiring Fund and signed by authorized officers
of Blanchard Funds and the Trust, acting as such, and neither such authorization
by such Trustees nor such execution and delivery by such officers shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the trust property of the Selling
Fund and the Acquiring Fund as provided in the Declarations of Trust of
Blanchard Funds and the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN EQUITY TRUST
ON BEHALF OF KEYSTONE GROWTH AND
INCOME FUND (S-1) By:
Name:
Title:
BLANCHARD FUNDS
ON BEHALF OF BLANCHARD GROWTH &
INCOME FUND
By:
Name:
Title:
<PAGE>
EXHIBIT B
BLANCHARD FUNDS
INTERIM MANAGEMENT CONTRACT
This Contract is made this 28th day of November, 1997 between Virtus
Capital Management, Inc., a Maryland corporation having its principal place of
business in Richmond, Virginia (the "Manager"), and Blanchard Funds, a
Massachusetts business trust having its principal place of business in
Pittsburgh,
Pennsylvania (the "Trust").
WHEREAS the Trust is an open-end management investment company as that
term is defined in the Investment Company Act of 1940, as amended, and
is registered as such with the Securities and Exchange Commission; and
WHEREAS Manager is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The Trust hereby appoints Manager as manager for each of the
portfolios ("Funds") of the Trust which executes an exhibit to this Contract,
and Manager accepts the appointments. Subject to the direction of the Trustees
of the Trust, Manager shall provide or procure on behalf of each of the Funds
all management and administrative services. In carrying out its obligations
under this paragraph, the Manager shall: (i) provide or arrange for investment
research and supervision of the investments of the Funds; (ii) select and
evaluate the performance of each Fund's Portfolio Sub-Adviser; (iii) select and
evaluate the performance of the Administrator; and (iv) conduct or arrange for a
continuous program of appropriate sale or other disposition and reinvestment of
each Fund's assets.
2. Manager, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's investment objective and policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statements and exhibits as may be
on file with the Securities and Exchange Commission.
3. Each Fund shall pay or cause to be paid all of its own expenses and
its allocable share of Trust expenses, including, without limitation, the
expenses of organizing the Trust and continuing its existence; fees and expenses
of Trustees and officers of the Trust; fees for management services and
<PAGE>
administrative personnel and services; expenses incurred in the distribution of
its shares ("Shares"), including expenses of administrative support services;
fees and expenses of preparing and printing its Registration Statements under
the Securities Act of 1933 and the Investment Company Act of 1940, as amended,
and any amendments thereto; expenses of registering and qualifying the Trust,
the Funds, and Shares of the Funds under federal and state laws and regulations;
expenses of preparing, printing, and distributing prospectuses (and any
amendments thereto) to shareholders; interest expense, taxes, fees, and
commissions of every kind; expenses of issue (including cost of Share
certificates), purchase, repurchase, and redemption of Shares, including
expenses attributable to a program of periodic issue; charges and expenses of
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing and mailing costs, auditing, accounting, and
legal expenses; reports to shareholders and governmental officers and
commissions; expenses of meetings of Trustees and shareholders and proxy
solicitations therefor; insurance expenses; association membership dues and such
nonrecurring items as may arise, including all losses and liabilities incurred
in administering the Trust and the Funds. Each Fund will also pay its allocable
share of such extraordinary expenses as may arise including expenses incurred in
connection with litigation, proceedings, and claims and the legal obligations of
the Trust to indemnify its officers and Trustees and agents with respect
thereto.
4. Each of the Funds shall pay to Manager, for all services rendered to
each Fund by Manager hereunder, the fees set forth in the exhibits attached
hereto.
5. If, for any fiscal year, the total of all ordinary business expenses
of the Fund, including all investment advisory fees but excluding distribution
fees, taxes, interest and extraordinary expenses and certain other excludable
expenses, would exceed the most restrictive expense limits imposed by any
statute or regulatory authority of any jurisdiction in which Shares of the Fund
are offered for sale Manager shall reduce its management fee in order to reduce
such excess expenses, but will not be required to reimburse the Fund for any
ordinary business expenses which exceed the amount of its management fee for
such fiscal year. The amount of any such reduction is to be borne by the Manager
and shall be deducted from the monthly management fee otherwise payable to the
Manager during such fiscal year. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the current fiscal year which shall
have elapsed prior to the date hereof and shall include the portion of the then
current fiscal year which shall have elapsed at the date of termination of this
Agreement.
<PAGE>
6. The net asset value of each Fund's Shares as used herein will be
calculated to the nearest 1/10th of one cent.
7. The Manager may from time to time and for such periods as it deems
appropriate reduce its compensation (and, if appropriate, assume expenses of one
or more of the Funds) to the extent that any Fund's expenses exceed such lower
expense limitation as the Manger may, by notice to the Fund, voluntarily declare
to be effective.
8. This Contract shall begin for each Fund as of the date of execution
of the applicable exhibit and shall continue in effect with respect to each Fund
presently set forth on an exhibit (and any subsequent Funds added pursuant to an
exhibit during the initial term of this Contract) until the earlier of the
Closing Date defined in the Agreement and Plan of Reorganization dated as of
November 26, 1997 with respect to each Fund or for two years from the date of
this Contract set forth above and thereafter for successive periods of one year,
subject to the provisions for termination and all of the other terms and
conditions hereof if: (a) such continuation shall be specifically approved at
least annually by the vote of a majority of the Trustees of the Trust, including
a majority of the Trustees who are not parties to this Contract or interested
persons of any such party cast in person at a meeting called for that purpose;
and (b) Manager shall not have notified a Fund in writing at least sixty (60)
days prior to the anniversary date of this Contract in any year thereafter that
it does not desire such continuation with respect to that Fund. If a Fund is
added after the first approval by the Trustees as described above, this Contract
will be effective as to that Fund upon execution of the applicable exhibit and
will continue in effect until the next annual approval of the Contract by the
Trustees and thereafter for successive periods of one year, subject to approval
as described above.
9. Notwithstanding any provision in this Contract, it may be terminated
at any time with respect to any Fund, without the payment of any penalty, by the
Trustees of the Trust or by a vote of the shareholders of that Fund on sixty
(60) days' written notice to Manager.
10. This Contract may not be assigned by Manager and shall
automatically terminate in the event of any assignment. Manager may employ or
contract with such other person, persons, corporation, or corporations at its
own cost and expense as it shall determine in order to assist it in carrying out
this Contract.
<PAGE>
11. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the obligations or duties under this Contract on the
part of Manager, Manager shall not be liable to the Trust or to any of the Funds
or to any shareholder for any act or omission in the course of or connected in
any way with rendering services or for any losses that may be sustained in the
purchase, holding, or sale of any security.
12. This Contract may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by the vote of a
majority of the Trustees of the Trust, including a majority of the Trustees who
are not parties to this Contract or interested persons of any such party to this
Contract (other than as Trustees of the Trust) cast in person at a meeting
called for that purpose, and where required by Section 15(a)(2) of the Act, on
behalf of a Fund by a majority of the outstanding voting securities of such Fund
as defined in Section 2(a)(42) of the Act.
13. The Manager acknowledges that all sales literature for investment
companies (such as the Trust) are subject to strict regulatory oversight. The
Manager agrees to submit any proposed sales literature for the Trust (or any
Fund) or for itself or its affiliates which mentions the Trust (or any Fund) to
the Trust's distributor for review and filing with the appropriate regulatory
authorities prior to the public release of any such sales literature, provided,
however, that nothing herein shall be construed so as to create any obligation
or duty on the part of the Manager to produce sales literature for the Trust (or
any Fund). The Trust agrees to cause its distributor to promptly review all such
sales literature to ensure compliance with relevant requirements, to promptly
advise Manager of any deficiencies contained in such sales literature, to
promptly file complying sales literature with the relevant authorities, and to
cause such sales literature to be distributed to prospective investors in the
Trust.
14. A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees, or any of the officers,
employees, agents or shareholders of the Trust individually but are binding only
upon the assets and property of the Trust. Notice is also hereby given that the
obligations pursuant to this instrument of a particular Fund and of the Trust
with respect to that particular Fund shall be limited solely to the assets of
that particular Fund.
<PAGE>
15. This Contract shall be construed in accordance with and governed by
the laws of the Commonwealth of Pennsylvania.
16. This Contract will become binding on the parties hereto upon their
execution of the attached exhibits to this Contract.
<PAGE>
EXHIBIT A
to the
Management Contract
Blanchard Global Growth Fund
Blanchard Flexible Income Fund
Blanchard Short-Term Flexible Income Fund
Blanchard Flexible Tax-Free Bond Fund
Blanchard Growth & Income Fund
For all services rendered by Manager hereunder, the above-named Funds
of the Trust shall pay to Manager and Manager agrees to accept as full
compensation for all services rendered hereunder, an annual management fee equal
to the following percentage ("the applicable percentage") of the average daily
net assets of each Fund
Name of Fund Percentage of Net Assets
Blanchard Global Growth Fund 1% of the first $150 million
of average daily net
assets, .875% of the
Fund's average daily
net assets in excess
of $150 million but
not exceeding $300
million and .75% of
the Fund's average
daily net assets in
excess of $300
million.
Blanchard Flexible Income Fund .75%
Blanchard Growth & Income Fund 1.10% of the Fund's average
daily net assets, .40% of
which, which would otherwise
be received by Manager and
paid to the Chase Manhattan
Bank, N.A. ("Chase") for
portfolio advisory services,
shall be paid to Chase
directly by the Fund under a
separate investment advisory
agreement between Chase and
the Fund.
Blanchard Short-Term .75%
Flexible Income Fund
Blanchard Flexible Tax-Free .75%
Bond Fund
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.
The advisory fee so accrued shall be paid to Manager daily except for
the Blanchard Growth & Income Fund which shall be paid to Manager monthly.
Witness the execution hereof this 28th day of November, 1997.
Attest: Virtus Capital Management, Inc.
________________________ By: ___________________________
Secretary Executive Vice President
Attest: Blanchard Funds
________________________ By: ____________________________
Assistant Secretary Vice President
<PAGE>
EXHIBIT B
to the
Management Contract
BLANCHARD GROWTH & INCOME FUND
The Trust shall pay to Manager, on behalf of the Fund, monthly
compensation at the annual rate of 1.10% of the Fund's average daily net assets,
.40% of which, which would otherwise be received by Manager and paid to The
Chase Manhattan Bank, N.A.("Chase") for portfolio advisory services, shall be
paid to Chase directly by the Growth & Income Portfolio, under a separate
investment advisory agreement between Chase and the Growth & Income Portfolio.
The portion of the fee based upon the average daily net assets of the
Funds shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of each Fund.
Witness the due execution hereof this 28th day of November, 1997.
Attest: Virtus Capital Management, Inc.
_____________________________ By:___________________________
Assistant Secretary Senior Vice President
Attest: Blanchard Funds
_____________________________ By:___________________________
Assistant Secretary Vice President
<PAGE>
<PAGE>
EXHIBIT C
PAGE 3
A Discussion With
Your Fund Manager
[Photo of Judith A. Warners appears here]
JUDITH A. WARNERS IS PORTFOLIO MANAGER OF KEYSTONE GROWTH AND INCOME FUND
(S-1). A MEMBER OF THE SECURITY ANALYSTS SOCIETY, MS. WARNERS HAS MORE
THAN 17 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE. SHE HOLDS A BA FROM
CURRY COLLEGE AND AN MBA FROM BABSON COLLEGE. SHE IS A MEMBER OF THE
KEYSTONE GROWTH AND INCOME TEAM.
Q WHAT WAS THE ENVIRONMENT LIKE DURING THE YEAR THAT ENDED ON AUGUST 31?
A Basically, it was an environment that favored large cap stocks. In fact, while
the overall market indices recorded very substantial increases over the 12
months, much of that was due to the performance of the largest 50 stocks. We
started the fiscal year with a very supportive environment of strong economic
growth and rising corporate profits. Early in 1997, however, investors became
concerned that the growth might become too strong, and that inflation could
return. The fear was that this could cause an increase in interest rates, which
eventually would cut into corporate profits. The Federal Reserve Board did raise
short-term rates once in late March. The anticipation and reaction to this
one-time tightening of the money supply caused a sharp correction in March and
early April. However, as evidence grew at the end of the first quarter that
growth was slowing down and inflation did not appear to be a problem, the stock
market took off again, with a very strong rally from mid-April through July. In
fact, the Standard & Poors 500 Index rose 7% in July 1997 alone. Things started
cooling a little bit in August, as some blue chip companies, most notably
Gillette Co. and Coca-Cola Co., warned of earnings that will be disappointing to
Wall Street. However, if you look at the period from August 31, 1996 through
August 31, 1997, you would have to say generally that large capitalization,
industry-leading companies with national and international franchises were the
big winners in stock performance.
Q HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT?
A We concentrated, and even increased our holdings, in the high quality, growth
companies that have consistently been the core of our portfolio. If you look at
our major investments, you will see names like General Electric Co., Microsoft
Corp., IBM Corp., and Bristol-Myers Squibb Co. These are quality companies, with
histories of demonstrable earnings growth, strong managements, and visible name
brands. These blue chip companies consistently have made up 65% or more of the
portfolio, and they have been an excellent investment over the past two years.
This summer, we have increased somewhat our holdings in mid-cap companies that
also have histories of earnings growth, strong managements,
<PAGE>
PAGE 4
KEYSTONE GROWTH AND INCOME FUND (S-1)
TOP 10 STOCK HOLDINGS
AUGUST 31, 1997
<TABLE>
<CAPTION>
% OF
COMPANY NET ASSETS
<S> <C>
General Electric Co. 3.3%
Microsoft Corp. 2.1%
International Business Machines Corp. 2.1%
Bristol-Myers Squibb Co. 2.0%
Merck & Co., Inc. 1.8%
SLM Holding Corp. 1.7%
American Home Products Corp. 1.7%
Exxon Corp. 1.7%
Procter & Gamble Co. 1.6%
Intel Corp. 1.5%
</TABLE>
and leadership positions in their industries. We have added to our positions in
companies such as HBO & Co.; Kohl's Corp., a mid-western retailer; and Falcon
Drilling, a company involved in offshore energy exploration. We believe that as
the market broadens out and investors start looking for more growth niche
stocks, these companies have the potential to do very well. In fact, we have
started to see some evidence of a possible broadening out of market leadership
in late summer. These mid-cap stocks, however, are not expected to account for
more than 20-to-25% of the portfolio. The fund has been and will remain a blue
chip-oriented fund.
Q IN THE LAST REPORT, YOU DISCUSSED AN EMPHASIS ON INTEREST-RATE SENSITIVE
STOCKS, SUCH AS BANKS AND REAL ESTATE INVESTMENT TRUSTS. DO YOU STILL EMPHASIZE
THIS AREA?
A We remain heavily weighted in interest-rate sensitive stocks. While we
continue to have a heavy emphasis in real estate investment trusts, or REITs, we
have cut back there a little bit primarily because that area was such a strong
performer in 1996 and early 1997 that we decided to take some profits. We
probably have increased our overall emphasis in the finance sector, including
banks, insurance and security industries. However, we have taken some profits
from the very big bank stocks, and redeployed into some mid-cap banking stocks.
This is an area in the market that is benefiting from industry consolidation.
Among the names we have added are First Commerce Corp., First American Corp.,
and Mellon Bank Corp. As long as the economy is moving along well and interest
rates and inflation are stable, the finance sector is a good place to be.
Q IN WHAT OTHER AREAS DO YOU HAVE AN EMPHASIS?
A We have remained committed to the general pharmaceutical area, consistent with
that industry's weighting in the S&P 500. In the drug area, we tend to own
top-line growth companies with a consistent flow of new products to keep
revenues growing. We hold positions in companies such as Bristol-Myers Squibb
Co., Merck & Co., Inc., and American Home Products Corp. We are overweighted in
telecommunications, which we believe has tremendous market opportunities. We own
more integrated companies, such as Worldcom Inc., a leading Internet access
provider company; equipment companies such as Northern Telecom Ltd.; and Cisco
Systems, Inc., a systems router for telecommunications carriers. Other
telecommunications-related holdings include Motorola Inc., GTE Corp, Loral Space
and Communications, Ltd., and Iridium World Communications. The last two
companies are involved in satellite communications.
<PAGE>
PAGE 5
TOP 5 INDUSTRIES
AUGUST 31, 1997
<TABLE>
<CAPTION>
% OF
INDUSTRY NET ASSETS
<S> <C>
Healthcare Products & Services 10.8%
Finance & Insurance 10.8%
Banks 8.3%
Oil 6.6%
Telecommunications Services & Equipment 6.4%
</TABLE>
Q WHAT IS YOUR OUTLOOK?
A We continue to feel we are in a growth environment, with interest rates
trending downward and inflation still under control. We are watching closely for
signs of any pickup in inflation, but up until now productivity enhancements
have offset any potential inflationary pressures. In this environment, we remain
flexible, with a major commitment to the large cap stocks that have been market
leaders, but with an eye to see if market movement toward mid-cap stocks becomes
a sustained trend.
[Graphic appears here]
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400
CHARLOTTE, N.C. 28288-1195
<PAGE>
PAGE 6
KEYSTONE GROWTH AND INCOME FUND (S-1)
Growth of an Investment
[Graph appears below with the following information:]
Growth of an investment in
Keystone Growth and Income Fund (S-1)
(In Thousands) August 31, 1987 through August 31, 1997
Initial Investment Dividend Reinvestment
8/87 $10,000.00 $10,000.00
8/88 $ 6,952.00 $ 7,545.00
8/89 $ 9,119.00 $10,185.00
8/90 $ 8,432.00 $ 9,721.00
8/91 $ 9,225.00 $12,133.00
8/92 $ 8,509.00 $12,179.00
8/93 $ 9,335.00 $13,922.00
8/94 $ 8,524.00 $13,822.00
8/95 $ 8,439.00 $14,739.00
8/96 $ 9,199.00 $18,463.00
8/97 $10,940.00 $24,879.00
A $10,000 investment in Keystone Growth and Income Fund (S-1) made on August 31,
1987 with all distributions reinvested was worth $24,879 on August 31, 1997.
Past performance is no guarantee of future results.
[Line Graph appears below with the following information:]
Comparison of change in value of a $10,000 investment in Keystone Growth and
Income Fund (S-1), the Standard & Poor's 500 Index, and the Consumer Price Index
(In Thousands) August 31, 1987 through August 31, 1997.
Fund CPI S&P 500
8/87 $10,000.00 $10,000.00 $10,000.00
8/88 $ 7,545.00 $10,402.00 $ 8,218.00
8/89 $10,185.00 $10,891.00 $11,262.00
8/90 $ 9,721.00 $11,502.00 $10,237.00
8/91 $12,133.00 $11,939.00 $12,985.00
8/92 $12,179.00 $12,315.00 $14,013.00
8/93 $13,922.00 $12,655.00 $16,140.00
8/94 $13,822.00 $13,021.00 $17,019.00
8/95 $15,739.00 $13,363.00 $20,663.00
8/96 $18,463.00 $13,747.00 $24,531.00
8/97 $24,879.00 $14,052.00 $34,496.00
Past performance is no guarantee of future results. The Standard & Poor's 500
Index is an unmanaged market index. This index does not include transaction
costs associated with buying and selling securities nor any management fees. The
Consumer Price Index, a measure of inflation, is through August 31, 1997.
The cumulative and average annual total returns with sales charge calculations
reflect the deduction of the 3% contingent deferred sales charge (CDSC) for
those investors who sold Fund shares after one calendar year. Investors who
retained their investment earned the returns in the lines marked "w/o sales
charge."
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost. Past
performance is no guarantee of future results.
You may exchange your shares for another Keystone Classic fund by phone or in
writing. The Fund reserves the right to change or terminate the exchange offer.
<TABLE>
<CAPTION>
HISTORICAL RECORD
CUMULATIVE TOTAL RETURN
<S> <C>
1 year w/o sales charge 34.76%
1 year w/ sales charge 31.76%
5 years 104.28%
10 years 148.79%
AVERAGE ANNUAL TOTAL RETURN
1 year w/o sales charge 34.76%
1 year w/ sales charge 31.76%
5 years 15.36%
10 years 9.54%
</TABLE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
BLANCHARD GROWTH & INCOME FUND
a Series of
BLANCHARD FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
KESYTONE GROWTH AND INCOME FUND (S-1)
a Series of
EVERGREEN EQUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Blanchard Growth & Income
Fund ("Growth & Income"), a series of Blanchard Funds, to Keystone Growth and
Income Fund (S-1) ("Keystone Growth and Income"), in exchange for Class A shares
of beneficial interest, $.001 par value per share, of Keystone Growth and
Income, 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 Keystone Growth and
Income dated February 28, 1997, as amended;
(2) The Statement of Additional Information of Growth & Income
dated February 28, 1997;
(3) Annual Report of Growth & Income for the year ended October
31, 1997; and
(4) Annual Report of Keystone Growth and Income for the period
ended August 31, 1997;
<PAGE>
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Keystone Growth and Income and Growth & Income dated January 6,
1998. A copy of the Prospectus/Proxy Statement may be obtained without charge by
calling or writing to Keystone Growth and Income or Growth & Income at the
telephone numbers or addresses set forth above.
The date of this Statement of Additional Information is January 6,
1998.
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE GROWTH AND INCOME FUND (S-1)
DECEMBER 10, 1996
AS SUPPLEMENTED DECEMBER 11, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Growth and Income Fund (S-1) (the "Fund") dated December 10, 1996, as
supplemented. A copy of the prospectus may be obtained from The Fund's principal
underwriter, Evergreen Keystone Distributor, Inc., located at 230 Park Avenue,
New York, New York 10169, or your broker-dealer.
TABLE OF CONTENTS
Page
Investment Objective and Policies......................................2
Investment Restrictions................................................2
Valuation of Securities................................................4
Distributions and Taxes................................................4
Sales Charges..........................................................5
Distribution Plan......................................................7
The Trust Agreement....................................................8
Investment Adviser....................................................10
Trustees and Officers.................................................11
Principal Underwriter.................................................15
Sub-Administrator.....................................................15
Brokerage.............................................................16
Expenses..............................................................17
Standardized Total Return
and Yield Quotations...............................................19
Additional Information................................................19
Financial Statements..................................................20
Appendix.............................................................A-1
18235
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is an open-end, diversified management investment company,
commonly known as a mutual fund. The Fund's investment objective is to provide
shareholders with the best possible growth of capital and long-term growth of
income by investing its assets as fully as practicable.
Keystone Investment Management Company ("Keystone") is the Fund's
investment adviser. Evergreen Keystone Distributor, Inc. (formerly Evergreen
Funds Distributor, Inc.) ("EKD" or the "Principal Distributor") is the Fund's
principal underwriter. Evergreen Keystone Investment Services, Inc. (formerly
Keystone Investment Distributors Company) ("EKIS") is the predecessor to the
Principal Underwriter. See "Investment Adviser" and "Principal Underwriter"
below.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without a vote of the majority of the Fund's
outstanding shares (as defined in the Investment Company Act of 1940 (the "1940
Act")). Unless otherwise stated, all references to Fund assets are in terms of
current market value.
The Fund may not do any of the following:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets, determined at market or other fair value at the time
of purchase, in the securities of any one issuer, or invest in more than 10% of
the outstanding voting securities of any one issuer, all as determined
immediately after such investment; provided that these limitations do not apply
to investments in securities issued or guaranteed by the United States ("U.S.")
government or its agencies or instrumentalities;
(2) invest more than 5% of the value of its total assets in companies
which have been in operation for less than three years;
(3) borrow money, except that the Fund may (a) borrow money from banks
for temporary or emergency purposes in aggregate amounts up to 10% of the value
of the Fund's net assets (computed at cost); or (b) enter into reverse
repurchase agreements (bank borrowings and reverse repurchase agreements, in
aggregate, shall not exceed 10% of the value of the Fund's net assets);
(4) underwrite securities, except that the Fund may purchase securities
from issuers thereof or others and dispose of such securities in a manner
consistent with its other investment policies; in the
18235
2
<PAGE>
disposition of restricted securities the Fund may be deemed to be an underwriter
as defined in the Securities Act of 1933 (the "1933 Act");
(5) purchase or sell real estate or interests in real estate, except
that it may purchase and sell securities secured by real estate and securities
of companies which invest in real estate, and will not purchase or sell
commodities or commodity contracts, except that the Fund may engage in currency
or other financial futures contracts and related options transactions;
(6) invest for the primary purpose of exercising control over or
management of any issuer;
(7) make margin purchases or short sales of securities;
(8) make loans, except that the Fund may purchase money market
securities, enter into repurchase agreements, buy publicly and privately
distributed debt securities and lend limited amounts of its portfolio securities
to broker-dealers; all such investments must be consistent with the Fund's
investment objective and policies;
(9) invest more than 25% of its total assets in the securities of
issuers in any single industry, other than securities issued by banks and
savings and loan associations or securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; and
(10) purchase the securities of any other investment company except in
the open market and at customary brokerage rates and in no event more than 3% of
the voting securities of any investment company.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in the value of
a security or a decrease in Fund assets is not a violation of the limit.
The Fund has no current intention of attempting to increase its net
income by borrowing and intends to repay any borrowings made in accordance with
the third investment restriction enumerated above before it makes any additional
investments.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund intends to follow policies of the Securities and Exchange
Commission ("SEC") as they are adopted from time to time with respect to
illiquid securities, including, at this time, (1) treating as illiquid,
securities that may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment on its books and (2) limiting its holdings of such
securities to 15% of its net assets.
Portfolio securities of the Fund may not be purchased from or sold or
loaned to Keystone, or any affiliate thereof or any of its Directors, officers,
or employees.
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VALUATION OF SECURITIES
Current value for the Fund's portfolio securities is determined in the
following manner:
(1) securities traded on an established exchange are valued on the
basis of the last sales price on the exchange where the securities are primarily
traded prior to the time of the valuation;
(2) securities traded in the over-the-counter market, for which
complete quotations are readily available, are valued at the mean of the bid and
asked prices at the time of valuation;
(3) short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which, when combined with accrued interest,
approximates market;
(4) short-term investments maturing in more than sixty days are valued
at current market value;
(5) short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; and
(6) the Board of Trustees values the following securities at prices it
deems in good faith to be fair: (a) securities, including restricted securities,
for which complete quotations are not readily available; (b) listed securities
if, in the Board's opinion, the last sales price does not reflect a current
market value or if no sale occurred; and (c) other assets.
DISTRIBUTIONS AND TAXES
The Fund distributes to its shareholders dividends from net investment
income and net realized capital gains, if any, annually in shares or, at the
option of the shareholder, in cash. (Distributions of ordinary income may be
eligible in whole or in part for the corporate 70% dividends received
deduction.) Shareholders who have not opted, prior to the record date for any
distribution, to receive cash will have the number of distributed shares
determined on the basis of the Fund's net asset value per share computed at the
end of the day on the ex-dividend date after adjustment for the distribution.
Net asset value is used in computing the number of shares in both gains and
income distribution reinvestments. Account statements and/or checks, as
appropriate, will be mailed to shareholders by the 15th of the appropriate
month. Unless the Fund receives instructions to the contrary from a shareholder
before the record date, it will assume that the shareholder wishes to receive
that distribution and future gains and income distributions in shares.
Instructions continue in effect until changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder regardless of the period of time Fund shares have been held by the
shareholder. However, if such shares are held less than six months and redeemed
at a loss, the shareholder will recognize a long-term capital loss on such
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shares to the extent of the long-term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined to the best
of the Fund's ability to be taxable as ordinary income. Shareholders of the Fund
will be advised annually of the federal income tax status of distributions.
SALES CHARGES
The Fund may charge a contingent deferred sales charge (a "CDSC") when
you redeem certain of its shares within four calendar years after the month in
which you purchase the shares. The Fund charges a CDSC as reimbursement for
certain expenses, such as commissions or shareholder servicing fees, that it has
incurred in connection with the sale of its shares (see "Distribution Plan"). If
imposed, the Fund deducts the CDSC from the redemption proceeds you would
otherwise receive. CDSCs attributable to your shares are, to the extent
permitted by the National Association of Securities Dealers, Inc. ("NASD"), paid
to the Principal Underwriter or EKIS, its predecessor.
CALCULATING THE CDSC
The CDSC is a declining percentage of the lesser of (1) the net asset
value of the shares you redeemed, or (2) the total cost of such shares. The CDSC
is calculated according to the following schedule:
1. 4% of amounts redeemed during the calendar year of purchase;
2. 3% of amounts redeemed during the calendar year after the year
of purchase;
3. 2% of amounts redeemed during the second calendar year after the
year of purchase; and
4. 1% of amounts redeemed during the third calendar year after the year
of purchase.
The Fund does not charge a CDSC on shares redeemed after the third
calendar year after the year of purchase. Also, in determining whether a CDSC is
payable and, if so, the percentage charge applicable, the Fund will first redeem
shares not subject to a CDSC and will then redeem shares you have held the
longest.
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<PAGE>
CDSC WAIVERS
REDEMPTIONS. The Fund does not impose a CDSC when the amount you are
redeeming represents:
1. an increase in the value of the shares redeemed (the value of
your account with respect to shares purchased prior to January
1, 1997) above the total cost of such shares due to increases
in the net asset value per share of the Fund;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares you have held for all or part of more than four
consecutive calendar years;
4. shares that are held in the accounts of a shareholder who has
died or become disabled;
5. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
6. automatic withdrawals from the ERISA plan of a shareholder who
is a least 59 1/2 years old;
7. shares in an account that the Fund has closed because the
account has an aggregate net asset value of less than $1,000;
8. automatic withdrawals under a Systematic Income Plan of up to
1% per month of your initial account balance;
9. withdrawals consisting of loan proceeds to a retirement plan
participant;
10. financial hardship withdrawals made by a retirement plan
participant;
11. withdrawals consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
12. shares purchased by a bank or trust company in a single
account in the name of such bank or trust company as trustee
if the initial investment in shares of the Fund, any other
Fund in the Keystone Fund Family, Keystone Precious Metals
Holdings, Inc., Keystone International Fund Inc., Keystone Tax
Free Fund, Keystone Liquid Trust and/or any Keystone America
Fund, is at least $500,000 and any commission paid by the Fund
and such other fund at the time of such purchase is not more
than 1% of the amount invested.
EXCHANGES. The Fund does not charge a CDSC on exchanges of shares
between funds in the Keystone Fund Family that have adopted distribution plans
pursuant to Rule 12b-1 under the 1940 Act. If you do exchange shares of one such
fund for shares of another such fund, the Fund will deem the calendar year of
the exchange, for purposes of any future CDSC, to be the year the shares
tendered for exchange were originally purchased.
SALES. The Fund may sell shares at the public offering price, which is
equal to net asset value, without the imposition of a CDSC to:
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1. any Director, Trustee, officer, full-time employee or sales
representative of the Fund, Keystone, Keystone Investments,
the Principal Underwriter or their affiliates, who has held
such position for at least ninety days; and
2. the pension and profit-sharing plans established by such
companies and their affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees and sales
representatives.
However, we will only sell shares to these parties upon the purchaser's
written assurance that he or she is buying the shares for investment purposes
only. Such purchasers may not resell the securities except through redemption by
the Fund.
DISTRIBUTION PLAN
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear the expenses of distributing their shares if
they comply with various conditions, including the adoption of a distribution
plan containing certain provisions set forth in Rule 12b-1. The Fund bears some
of the costs of selling its shares under a Distribution Plan adopted pursuant to
Rule 12b-1 (the "Distribution Plan").
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of the average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. The National Association of Securities Dealers, Inc.
("NASD") limits such annual expenditures to 1%, of which 0.75% may be used to
pay distribution costs and 0.25% may be used to pay shareholder service fees.
The NASD also limits the aggregate amount that the Fund may pay for such
distribution costs to 6.25% of gross share sales since the inception of the
Fund's Distribution Plan plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any CDSC paid by shareholders to the Principal Underwriter
or its predecessor).
Payments under the Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others, such as
broker-dealers) (1) as commissions for Fund shares sold, (2) as shareholder
service fees in respect of shares maintained by the recipients and outstanding
on the Fund's books for specific periods and (3) as interest. Amounts paid or
accrued to the Principal Underwriter in the aggregate may not exceed the
limitation referred to above. The Principal Underwriter generally reallows to
broker-dealers or others a commission equal to 4% of the price paid for each
Fund share sold as well as a shareholder service fee at a rate of 0.25% per
annum of the net asset value of shares maintained by such recipients and
outstanding on the books of the Fund for specified periods.
If the Fund is unable to pay the Principal Underwriter a commission on
a new sale because the annual maximum (0.75% of average daily net assets) has
been reached, the Principal Underwriter intends, but is not obligated, to
continue to accept new orders for the purchase of Fund shares and to pay or
accrue commissions and service fees to dealers in excess of the amount it
currently receives from the Fund. While the Fund is under no contractual
obligation to reimburse the Principal Underwriter for advances made by the
Principal Underwriter in excess of the Distribution Plan limitation, the
Principal Underwriter intends to seek full payment of such amounts from the Fund
(together with interest at the prime rate plus one percent) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
permitted limits. If the Trustees who are not interested persons (as defined
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in the 1940 Act) of the Fund (the "Independent Trustees") authorize such
payments, the effect will be to extend the period of time during which the Fund
incurs the maximum amount of costs allowed by the Distribution Plan. If the
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above, and the amounts
and purposes of expenditures under the Distribution Plan must be reported to the
Fund's Independent Trustees quarterly. The Fund's Independent Trustees may
require or approve changes in the implementation or operation of the
Distribution Plan and may require that total expenditures by the Fund under the
Distribution Plan be kept within limits lower than the maximum amount permitted
by the Distribution Plan as stated above. If such costs are not limited by the
Independent Trustees, such costs could, for some period of time, be higher than
such costs permitted by most other plans presently adopted by other investment
companies.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
securities of the Fund.
Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on such amendment.
While the Distribution Plan is in effect, the Fund is required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plan have
benefited the Fund.
THE TRUST AGREEMENT
TRUST AGREEMENT
The Fund is a Pennsylvania common law trust established under a Trust
Agreement, as restated and amended (the "Trust Agreement"). The Trust Agreement
restructured the Fund so that its operation would be substantially similar to
that of most other mutual funds. The Trust Agreement provides for a Board of
Trustees and enables the Fund to enter into an agreement with an investment
manager and/or adviser to provide the Fund with investment advisory, management
and administrative services. A copy of the Trust Agreement is on file as an
exhibit to the Fund's Registration Statement, of which this statement of
additional information is a part. This summary is qualified in its entirety by
reference to the Trust Agreement.
DESCRIPTION OF SHARES
The Trust Agreement authorizes the issuance of an unlimited number of
shares of beneficial interest and the creation of additional series and/or
classes of series of Fund shares. Each share represents an equal proportionate
interest in the Fund with each other share of that class. Upon liquidation,
shares are entitled to a pro rata share in the net assets of their class of Fund
shares.
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Shareholders shall have no preemptive or conversion rights. Shares are
transferable. The Fund currently intends to issue only one class of shares.
SHAREHOLDER LIABILITY
Pursuant to court decisions or other theories of law, shareholders of a
Pennsylvania common law trust could possibly be held personally liable for the
obligations of the trust. The possibility of Fund shareholders incurring
financial loss under such circumstances appears to be remote, however, because
the Trust Agreement (1) contains an express disclaimer of shareholder liability
for obligations of the Fund; (2) requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Trustees; and (3) provides for indemnification out of Fund
property for any shareholder held personally liable for the obligations of the
Fund.
VOTING RIGHTS
Under the terms of the Trust Agreement, the Fund does not hold annual
meetings. At meetings called for the initial election of Trustees or to consider
other matters, shares are entitled to one vote per share. Shares generally vote
together as one class on all matters. No amendment may be made to the Trust
Agreement that adversely affects any class of shares without the approval of a
majority of the shares of that class. There shall be no cumulative voting in the
election of Trustees.
After a meeting as described above, no further meetings of shareholders
for the purpose of electing Trustees will be held, unless required by law or
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.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may cease to hold office or may be removed from office (as
the case may be) (1) at any time by a two-thirds vote of the remaining Trustees;
(2) when such Trustee becomes mentally or physically incapacitated; or (3) at a
special meeting of shareholders by a two-thirds vote of the outstanding shares.
Any Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Trust Agreement provides that a Trustee shall be liable only for
his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees, or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person; provided, however, that
nothing in the Trust Agreement shall protect a Trustee against any liability for
his willful misfeasance, bad faith, gross negligence, or reckless disregard of
his duties.
The Trustees have absolute and exclusive control over the management
and disposition of all assets of the Fund and may perform such acts as in their
sole judgment and discretion are necessary and proper for conducting the
business and affairs of the Fund or promoting the interests of the Fund and the
shareholders.
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INVESTMENT ADVISER
Subject to the general supervision of the Fund's Board of Trustees,
Keystone provides investment advice, management and administrative services to
the Fund. Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments. Keystone Investments provides accounting, bookkeeping, legal,
personnel, and general corporate services to Keystone, its affiliates, and the
Keystone Investments Families of Funds. Both Keystone and Keystone Investments
are located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, the predecessor corporation to Keystone
Investments and indirectly each subsidiary of Keystone Investments, including
Keystone, the Fund's investment adviser, were acquired (the "Acquisition") by
First Union National Bank of North Carolina ("FUNB"), a wholly-owned subsidiary
of First Union Corporation ("First Union"). The predecessor corporation to
Keystone Investments was acquired by FUNB by merger into a wholly-owned
subsidiary of FUNB, which entity then assumed the name "Keystone Investments,
Inc." and succeeded to the business of the predecessor corporation.
Contemporaneously with the Acquisition, the Fund entered into a new investment
advisory agreement with Keystone and into a principal underwriting agreement
with EKD, a wholly-owned subsidiary of Furman Selz LLC ("Furman Selz"). The new
investment advisory agreement (the "Advisory Agreement") was approved by the
shareholders of the Fund on December 9, 1996, and became effective on December
11, 1996. As a result of the above transactions, Keystone Management, Inc.
("Keystone Management"), which, prior to the Acquisition, acted as the Fund's
investment manager, no longer acts as such to the Fund. Keystone currently
provides the Fund with all the services that may previously have been provided
by Keystone Management.
Keystone Investments and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $133.9 billion in consolidated assets as of
September 30, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, together with Lieber & Company and
Evergreen Asset Management Corp., wholly-owned subsidiaries of FUNB, manage or
otherwise oversee the investment of over $50 billion in assets belonging to a
wide range of clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets; and pays all expenses of Keystone incurred in
connection with the provision of its services.
All charges and expenses, other than those specifically referred to as
being borne by Keystone, will be paid by the Fund, including, but not limited
to, custodian charges and expenses; bookkeeping and auditors' charges and
expenses; transfer agent charges and expenses; fees of Independent Trustees;
brokerage commissions, brokers' fees and expenses; issue and transfer taxes;
costs and expenses under the Distribution Plan; taxes and trust fees payable to
governmental agencies; the cost of share certificates; fees and expenses of the
registration and qualification of the Fund and its shares with the SEC or under
state or other securities laws; expenses of preparing, printing and mailing
prospectuses, statements of additional information, notices, reports and proxy
materials to shareholders of the Fund; expenses of shareholders' and Trustees'
meetings; charges and expenses of legal counsel for the Fund and for the
Independent Trustees of the Fund on matters relating to the Fund; charges and
expenses
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of filing annual and other reports with the SEC and other authorities, and all
extraordinary charges and expenses of the Fund.
The Fund pays Keystone a fee for its services at the annual rate set
forth below:
Annual Aggregate Net Asset
Management Value of the Shares
FEE OF THE FUND
- --------------------- --------------------
0.70% of the first $ 100,000,000, plus
0.65% of the next $ 100,000,000, plus
0.60% the next $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 100,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of the next $ 500,000,000, plus
0.35% of amounts over $1,500,000,000;
Keystone's fee is computed as of the close of business each business day and
payable daily.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
TRUSTEES AND OFFICERS
The Trustees and officers of the Fund, their addresses, their principal
occupations and some of their affiliations over the last five years are as
follows:
<TABLE>
<CAPTION>
<S> <C>
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other funds in the Key stone
Investments Families of Funds; Professor, Finance Department,
George Washington University; President, Amling & Company (investment advice);
and former Member, Board of Advisers, Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Trustee of all the Evergreen funds
other than Evergreen Investment Trust; real estate developer and
construction consultant; and President of Centrum Equities and
Centrum Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Investment Counselor to Appleton
Partners, Inc.; and former Managing Director, Seaward Management
Corporation (investment advice).
FOSTER BAM: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Trustee of all the Evergreen funds
other than Evergreen Investment Trust; Partner in the law firm of
Cummings & Lockwood; Director, Symmetrix, Inc. (sulphur company)
and Pet Practice, Inc. (veterinary services); and former Director,
Chartwell Group Ltd. (Manufacturer of office furnishings and
accessories), Waste Disposal Equipment Acquisition Corporation and
Rehabilitation Corporation of America (rehabilitation hospitals).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Chairman of the Board
and Trustee or Director of all other funds in the Keystone Investments
Families of Funds; Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and Chairman of its Investment
Committee); former Director and Chairman of the Board of Hartwell
Keystone; and former Chairman of the Board, Director and Chief
Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Principal, Padanaram Associates,
Inc.; and former Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; and former Director, Peoples Bank
(Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Trustee, Treasurer and Chairman
of the Finance Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine; Chairman and
President, Oldways Preservation and Exchange Trust (education);
former Chairman of the Board, Director, and Executive Vice President,
The London Harness Company; former Managing Partner, Roscommon
Capital Corp.; former Chief Executive Officer, Gifford Gifts of Fine
Foods; former Chairman, Gifford, Drescher & Associates (environmental
consulting); and former Director, Keystone Investments and Keystone.
JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Chairman and Trustee of the
Evergreen funds; former Chairman of the Distribution Foundation for
the Carolinas; and former Vice President of Lance Inc. (food
manufacturing).
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LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Chairman of the Board and Chief
Executive Officer, Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund; and
former President, Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Chairman and Of Counsel,
Keyser, Crowley & Meub, P.C.; Member, Governor's (VT) Council of Eco
nomic Advisers; Chairman of the Board and Director, Central Vermont
Public Service Corporation and Lahey Hitchcock Clinic; Director,
Vermont Yankee Nuclear Power Corporation, Grand Trunk Corporation,
Grand Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Company, Inc., and the
Investment Company Institute; former Director and President,
Associated Industries of Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow Financial Corp.; and
former Director and Chairman of the Board, Proctor Bank and Green
Mountain Bank.
GERALD M. MCDONELL: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Trustee of the Evergreen funds;
and Sales Representative with Nucor-Yamoto, Inc. (Steel producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Trustee of the Evergreen funds;
former Vice President and Director of Rexham Corporation; and former
Director of Carolina Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Trustee of the Evergreen funds;
and Partner in the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Vice Chair and former Executive
Vice President, DHR International, Inc. (executive recruitment); former
Senior Vice President, Boyden International Inc. (executive recruit
ment); and Director, Commerce and Industry Association of New Jersey,
411 International, Inc., and J&M Cumming Paper Co.
RUSSELL A.
SALTON, III MD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds; Trustee of
the Evergreen funds; Medical Director, U.S. Health Care/Aetna
Health Services; and former Managed Health Care Consultant;
former President, Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Trustee of the Evergreen funds;
and Attorney, Law Offices of Michael S. Scofield.
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RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Chairman, Environmental
Warranty, Inc. (Insurance agency); Executive Consultant, Drake Beam
Morin, Inc. (executive outplacement); Director of Connecticut Natural
Gas Corporation, Hartford Hospital, Old State House Association,
Middlesex Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees, Hartford Graduate Center;
Trustee, Greater Hartford YMCA; former Director, Vice Chairman and
Chief Investment Officer, The Travelers Corporation; former Trustee,
Kingswood-Oxford School; and former Managing Director and
Consultant, Russell Miller, Inc.
*ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other funds in the Key
stone Investments Families of Funds; Partner, Farrell, Fritz,
Caemmerer, Cleary, Barnosky & Armentano, P.C.; Adjunct Professor of
Law and former Associate Dean, St. John's University School of Law;
Adjunct Professor of Law, Touro College School of Law; and former
President, Nassau County Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and Treasurer of all other
funds in the Keystone Investments Families of Funds; President and
Treasurer of the Evergreen funds; Senior Managing Director, Furman
Selz LLC since 1992; Managing Director from 1984 to 1992; 230 Park Avenue,
Suite 910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds in the Keystone
Investments Families of Funds; Senior Vice President and Director of
Administration and Regulatory Services, BISYS Fund Services; 3435
Stelzer Road, Columbus, Ohio.
</TABLE>
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
Mr. Bissell is deemed an "interested person" of the Fund by virtue of
his ownership of stock of First Union Corporation ("First Union"), of which
Keystone is an indirect wholly-owned subsidiary. See "Investment Adviser." Mr.
Pettit and Mr. Simons may each be deemed an "interested person" as a result of
certain legal services rendered to a subsidiary of First Union by their
respective law firms, Holcomb and Pettit, P.A. and Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C. As of the date hereof, Mr. Pettit and Mr.
Simons are each applying for an exemption from the SEC which would allow them to
retain their status as an Independent Trustee.
After the transfer of EKD and its related mutual fund distribution and
administration business to BISYS, it is expected that all of the officers of the
Fund will be officers and/or employees of BISYS.
During the fiscal year ended August 31, 1996, no Trustee affiliated
with Keystone or any officer received any direct remuneration from the Fund.
Annual retainers and meeting fees paid by all funds in the Keystone Investments
Families of Funds (which includes over 30 mutual funds) for the calendar year
ended December 31, 1995, totaled approximately $450,716. On November 30, 1996,
the Fund's Trustees and officers beneficially owned less than 1% of the Fund's
then outstanding shares.
Except as set forth above, the address of all of the Fund's Trustees
and officers and the address of the Fund is 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
The Fund has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") with EKD. EKD, a wholly-owned subsidiary of Furman
Selz, which is not affiliated with First Union, is now the Principal
Underwriter. EKD replaces EKIS as the Fund's principal underwriter. EKIS may no
longer act as principal underwriter of the Fund due to regulatory restrictions
imposed by the Glass-Steagall Act upon national banks such as FUNB and their
affiliates, that prohibit such entities from acting as the underwriters of
mutual fund shares. While EKIS may no longer act as principal underwriter of the
Fund as discussed above, EKIS may continue to receive compensation from the Fund
or the Principal Underwriter in respect of underwriting and distribution
services performed prior to the termination of EKIS as principal underwriter. In
addition, EKIS may also be compensated by the Principal Underwriter for the
provision of certain marketing support services to the Principal Underwriter at
an annual rate of up to .75% of the average daily net assets of the Fund,
subject to certain restrictions. EKD is located at 230 Park Avenue, New York,
New York 10169.
The Principal Underwriter, as agent, has agreed to use its best efforts
to find purchasers for the shares. The Principal Underwriter 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 the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. In its capacity as
principal underwriter, the Principal Underwriter or EKIS, its predecessor, may
receive payments from the Fund pursuant to the Fund's Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Fund's Independent Trustees, and (ii) by vote of a majority of
the Fund'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. The Underwriting Agreement will terminate automatically upon
its "assignment," as that term is defined in the 1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of Fund shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and Fund data files.
SUB-ADMINISTRATOR
Furman Selz provides officers and certain administrative services to
the Fund pursuant to a subadministration agreement. For its services under that
agreement Furman Selz will receive from Keystone an annual fee at the maximum
annual rate of .01% of the average daily net assets of the Fund.
Furman Selz is located at 230 Park Avenue, New York, New York 10169.
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It is expected that on or about January 2, 1997, Furman Selz will
transfer EKD, and its related mutual fund distribution and administration
business, to BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
BROKERAGE
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large
block is involved;
4. the broker's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information.
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research and other statistical and
factual information from a broker, the Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement. Keystone believes that the cost, value and
specific application of such information are indeterminable and cannot be
practically allocated between the Fund and its other clients who may indirectly
benefit from the availability of such information. Similarly, the Fund may
indirectly benefit from information made available as a result of transactions
effected for Keystone's other clients. Under the Advisory Agreement, Keystone is
permitted to pay higher brokerage commissions for brokerage and research
services in accordance with Section 28(e) of the Securities Exchange Act of
1934. In the event Keystone follows such a practice, it will do so on a basis
that is fair and equitable to the Fund.
Neither the Fund nor Keystone intends on placing securities
transactions with any particular broker. The Fund's Board of Trustees has
determined, however, that the Fund may consider sales of Fund shares as a factor
in the selection of brokers to execute portfolio transactions, subject to the
requirements of best execution described above.
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<PAGE>
BROKERAGE COMMISSIONS
The Fund expects to purchase and sell its securities and temporary
instruments through principal transactions. Bonds and money market instruments
are normally purchased directly from the issuer or from an underwriter or market
maker for the securities. In general, the Fund will not pay brokerage
commissions for such purchases. Purchases from underwriters will include the
underwriting commission or concession, and purchases from dealers serving as
market makers will include a dealer's mark-up or reflect a dealer's mark-down.
Where transactions are made in the over-the-counter market, the Fund will deal
with primary market makers unless more favorable prices are otherwise
obtainable.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, the Principal Underwriter, or any of their affiliated
persons, as defined in the 1940 Act.
The Board of Trustees will, from time to time, review the Fund's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the Board
of Trustees may change, modify or eliminate any of the foregoing practices.
EXPENSES
INVESTMENT ADVISORY FEES
For each of the Fund's last fiscal year, the table below lists the
total dollar amounts paid by (1) the Fund to Keystone Management, Inc.
("Keystone Management"), the Fund's former investment manager, for services
rendered under the Management Agreement and (2) by Keystone Management to
Keystone for services rendered under the Advisory Agreement. For more
information, see "Investment Adviser."
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<PAGE>
Percent of Fund's
Fee Paid to Keystone Average Net Assets Fee Paid to
Management under Represented by Keystone under
the Management Keystone the Advisory
Fiscal Year Ended Agreement Management's Fee Agreement
August 31,
- ------------------- ---------------------- -------------------- ------------
1996 $1,492,757 O.67% $1,268,843
1995 $1,318,897 0.68% $1,121,062
1994 $1,453,310 0.67% $1,235,313
DISTRIBUTION PLAN EXPENSES
For the fiscal year ended August 31, 1996, the Fund paid $1,738,556 to
EKIS under its Distribution Plan. For more information, see "Distribution Plan."
UNDERWRITING COMMISSIONS
For each of the Fund's last three fiscal years, the table below lists
the aggregate dollar amounts of underwriting commissions (front-end sales
charges, plus distribution fees, plus CDSCs) paid with respect to the public
distribution of the Fund's shares. The table also indicates the aggregate dollar
amount of underwriting commissions retained by EKIS. For more information, see
"Principal Underwriter" and "Sales Charges."
Aggregate Dollar Amount of
Underwriting Commissions
Fiscal Year Ended Aggregate Dollar Amount of Retained by the Principal
August 31, Underwriting Commissions Underwriter
- -------------------- ---------------------------- ---------------------------
1996 $1,415,505 $334,606
1995 $1,083,702 $629,377
1994 $1,865,658 $1,215,476
BROKERAGE COMMISSIONS
Listed below are the aggregate dollar amounts paid by the Fund in
brokerage commissions for each of the last three fiscal years. For more
information, see "Brokerage."
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For the Fiscal Year Aggregate Dollar Amount of
Ended August 31, Brokerage Commissions Paid
- ---------------------------- -----------------------------------------
1996 $684,496
1995 $621,829
1994 $345,941
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
Total return quotations for the Fund as they may appear from time to
time in advertisements are calculated by finding the average annual compounded
rates of return over one, five, and ten year periods on a hypothetical $1,000
investment that would equate the initial amount invested to the ending
redeemable value. To the initial investment all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the one,
five, or ten year periods.
The cumulative total returns of the Fund for the one, five, and ten
year periods ended August 31, 1996 were 14.31% (including CDSC), 52.17%, and
148.86%, respectively. The compounded average annual rates of return for the
one, five, and ten year periods ended August 31, 1996 were 14.31% (including
CDSC), 8.76%, and 9.55%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund does not presently
intend to advertise current yield.
ADDITIONAL INFORMATION
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is custodian of all securities and cash of the Fund (the
"Custodian"). The Custodian may hold securities of some foreign issuers outside
the U.S. The Custodian performs no investment management functions for the Fund,
but in addition to its custodial services, is responsible for accounting and
related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, Certified Public Accountants, are the Fund's independent auditors.
Evergreen Keystone Service Company (formerly Keystone Investor Resource
Center, Inc.) ("EKSC"), located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, is a wholly-owned subsidiary of Keystone, and acts as transfer agent
and dividend disbursing agent for the Fund.
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<PAGE>
To the best of the Fund's knowledge, there were no shareholders who
owned 5% or more of the Fund's outstanding shares on November 30, 1996.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorize payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act to redeem for cash all shares presented for redemption by any
one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets in
any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and this statement of additional information omit
certain information contained in the registration statement filed with the
Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.
FINANCIAL STATEMENTS
The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the Commission:
Schedule of Investments as of August 31, 1996;
Financial Highlights for each of the years in the ten-year period ended
August 31, 1996;
Statement of Assets and Liabilities as of August 31, 1996;
Statement of Operations for the year ended August 31, 1996;
Statements of Changes in Net Assets for each of the years in the
two-year period ended August 31, 1996;
Notes to Financial Statements; and
Independent Auditors' Report dated September 27, 1996.
A copy of the Fund's Annual report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, or by calling EKSC toll free at 1-800-343-2898.
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A-1
APPENDIX
COMMON AND PREFERRED STOCK RATINGS
S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors,
such as product and industry position, corporate resources and financial policy,
with results that make some common stocks more highly esteemed than others,
Standard & Poor's Corporation ("S&P") believes that earnings and dividend
performance is the end result of the interplay of these factors and that, over
the long run, the record of this performance has a consid-erable bearing on
relative quality. S&P rankings, however, do not reflect all of the factors,
tangible or intangible, that bear on stock quality.
Growth and stability of earnings and dividends are deemed key elements
in establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on pershare
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these, scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
MOODY'S COMMON STOCK RANKINGS
Moody's Investors Service ("Moody's") presents a concise statement of
the important characteristics of a company and an evaluation of the grade
(quality) of its common stock. Data presented includes: (a) capsule stock
information which reveals short and long term growth and yield afforded by the
indicated dividend, based on a recent price; (b) a long term price chart which
shows patterns of monthly stock price movements and monthly trading volumes; (c)
a breakdown of a company's capital account which aids in determining the degree
of conservatism or financial leverage in a company's balance sheet; (d) interim
earnings for the current year to date, plus three previous years; (e) dividend
information; (f) company background; (g) recent corporate developments; (h)
prospects for a company in the immediate future and the next few years; and (i)
a ten year comparative statistical analysis.
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A-2
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently, and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings, and record of dividend payments.
Other considerations include conservativeness of capitalization, depth and
caliber of management, accounting practices, technological capabilities and
industry position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. AAA: An issue that is rated "AAA" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. AA: An issue that is rated "AA" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well-maintained in the foreseeable
future.
3. A: An issue that is rated "A" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater then in the
"AAA" and "AA" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
4. BAA: An issue that is rated "BAA" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
5. BA: An issue that is rated "BA" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. B: An issue that is rated "B" generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
7. CAA: An issue that is rated "CAA" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
8. CA: An issue that is rated "CA" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
9. C: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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A-3
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the United States,
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in a small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
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A-4
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. AAA - Bonds that are rated AAA are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments *I903*are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. AA - Bonds that are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in AAA securities.
3. A - Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
4. BAA - Bonds that are rated BAA are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. BA - Bonds that are rated BA are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
6. B - Bonds that 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.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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A-5
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, 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 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
and are freely exchanged on a securities exchange or in the over-the-counter
market.
MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper are limited to those rated
A-1 by S&P, PRIME-1 by Moody's or F-1 by Fitch Investors Service, Inc. These
ratings and other money market instruments are described as follows:
COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. The issuer's long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry.
The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
The rating F-1 is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its
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A-6
debt; (4) its ability to service its debt; (5) its profitability; (6) its return
on equity; (7) its alternative sources of financing; and (8) its ability to
access the capital markets. Analysis of the relative strength or weakness of
these factors and others determines whether an issuer's commercial paper is
rated F-1.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States ("U.S.")
Government include a variety of Treasury securities that differ only in their
interest rates, maturities and dates of issuance. Treasury bills have maturities
of one year or less. Treasury notes have maturities of one to ten years, and
Treasury bonds generally have maturities of greater than ten years at the date
of issuance.
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities include direct obligations of the U.S. Treasury and
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the U.S., Small Business
Administration, Government National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Banks, Federal
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, The Tennessee Valley Authority, District of
Columbia Armory Board and Federal National Mortgage Association.
Some obligations of U.S. Government agencies and instrumentalities,
such as Treasury bills and Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S.; others,
such as securities of Federal Home Loan Banks, by the right of the issuer to
borrow from the Treasury; still others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. Government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in the securities issued by such an instrumentality only when Keystone
determines that the credit risk with respect to the instrumentality does not
make its securities unsuitable investments. U.S. Government securities will not
include international agencies or instrumentalities in which the U.S.
Government, its agencies or instrumentalities participate, such as the World
Bank, the Asian Development Bank or the InterAmerican Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks, including their branches abroad, which are members
of the Federal Reserve System or the Federal Deposit Insurance Corporation, and
of U.S. branches of foreign banks, each of which have total deposits at the time
of purchase in excess of $1 billion as of the date of their most recently
published financial statements.
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S.banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
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BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Athough maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
OPTIONS TRANSACTIONS
The Fund is authorized to write (i.e., sell) covered call options and
to purchase call options to close out covered call options previously written. A
call option obligates a writer to sell, and gives a purchaser the right to buy,
the underlying security at the stated exercise price at any time until the
stated expiration date.
The Fund will only write call options which are covered, which means
that the Fund will own the underlying security (or other securities, such as
convertible securities, which are acceptable for escrow) when it writes the call
option and until the Fund's obligation to sell the underlying security is
extinguished by exercise or expiration of the call option or the purchase of a
call option covering the same underlying security and having the same exercise
price and expiration date. The Fund will receive a premium for writing a call
option, but will give up, until the expiration date, the opportunity to profit
from an increase in the underlying security's price above the exercise price.
The Fund will retain the risk of loss from a decrease in the price of the
underlying security. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk (in contrast to
the writing of naked options which the Fund will not do) but capable of
enhancing the Fund's total return.
The premium received by the Fund for writing a covered call option will
be recorded as a liability in the Fund's statement of assets and liabilities.
This liability will be adjusted daily to the option's current market value,
which will be the latest sale price at the time as of which the net asset value
per share of the Fund is computed (the close of the New York Stock Exchange),
or, in the absence of such sale, at the latest bid quotation. The liability will
be extinguished upon expiration of the option, the purchase of an identical
option in a closing transaction or delivery of the underlying security upon
exercise of the option.
Many options are traded on registered securities exchanges. Options
traded on such exchanges are issued by the Options Clearing Corporation, a
clearing corporation which assumes responsibility for the completion of options
transactions.
The Fund will purchase call options only to close out a covered call
option it has written. When it appears that a covered call option written by the
Fund is likely to be exercised, the Fund may consider it appropriate to avoid
having to sell the underlying security. Or, the Fund may wish to extinguish a
covered call option which it has written in order to be free to sell the
underlying security to realize a profit on the previously written call option or
to write another covered call option on the underlying security. In all such
instances, the Fund can close out the previously written call option by
purchasing
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a call option on the same underlying security with the same exercise price and
expiration date. (The Fund may, under certain circumstances, also be able to
transfer a previously written call option.) The Fund will realize a short-term
capital gain if the amount paid to purchase the call option plus transaction
costs is less than the premium received for writing the covered call option. The
Fund will realize a short-term capital loss if the amount paid to purchase the
call option plus transaction costs is greater than the premium received for
writing the covered call option.
A previously written call option can be closed out by purchasing an
identical call option only in a secondary market for the call option. Although
the Fund will generally write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary market
will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event it might not be possible to
effect a closing transaction in a particular option. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction, it will
not be able to sell the underlying securities until the option expires or it
delivers the underlying securities upon exercise.
If a substantial number of the call options written by the Fund are
exercised, the Fund's rate of portfolio turnover may exceed historical levels.
This would result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing of
covered call options and the purchase of call options to close out previously
written options. Such brokerage commissions are normally higher than those
applicable to purchases and sales of portfolio securities.
In the past the Fund has qualified for, and elected to receive, the
special tax treatment afforded regulated investment companies under Subchapter M
of the Internal Revenue Code. Although the Fund intends to continue to qualify
for such tax treatment, in order to do so it must, among other things, derive
less than 30% of its gross income from gains from the sale or other disposition
of securities held for less than three months. Because of this, the Fund may be
restricted in the writing of call options where the underlying securities have
been held less than three months, in the writing of covered call options which
expire in less than three months, and in effecting closing purchases with
respect to options which were written less than three months earlier. As a
result, the Fund may elect to forego otherwise favorable investment
opportunities and may elect to avoid or delay effecting closing purchases or
selling portfolio securities, with the risk that a potential loss may be
increased or a potential gain may be reduced or turned into a loss.
Under the Internal Revenue Code of 1954, as amended, gain or loss
attributable to a closing transaction and premiums received by the Fund for
writing a covered call option which is not exercised may constitute short-term
capital gain or loss. Under provisions of the Tax Reform Act of 1986, effective
for taxable years beginning after October 22, 1986, a gain on an option
transaction which qualifies as a "designated hedge" transaction under Treasury
regulations may be offset by realized or unrealized losses on such designated
transaction. The netting of gain against such losses could result in a reduction
in gross income from options transactions for purposes of the 30 percent test.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be
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acquired by the Fund. The Fund's hedging may include sales of futures as an
offset against the effect of expected increases in interest or currency exchange
rates or securities prices and purchases of futures as an offset against the
effect of expected declines in interest or currency exchange rates.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by so doing, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Fund intends to engage in options transactions on futures contracts
which are related to currency and other financial futures contracts for hedging
purposes and in connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the U.S. are The Board of Trade of
the City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
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INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
the Fund, as seller, to deliver the type of financial instrument specified in
the contract at a specified future time for a specified price. The purchase of
an interest rate futures contract creates an obligation by the Fund, as
purchaser, to accept delivery of the type of financial instrument specified at a
specified future time for a specified price. The specific securities delivered
or accepted, respectively, at settlement date, are not determined until at or
near that date. The determinaion is in accordance with the rules of the exchange
on which the futures contract sale or purchase was made.
Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
("GNMA") certificates, 90-day domestic bank certificates of deposit, 90- day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.
INDEX BASED FUTURES CONTRACTS
STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in
the index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently, stock index futures contracts can be purchased or sold on
the Standard and Poor's Corporation ("S&P") Index of 500 Stocks, the S&P Index
of 100 Stocks, the New York Stock Exchange Composite Index, the Value Line Index
and the Major Market Index. It is expected that futures contracts trading in
additional stock indices will be authorized. The standard contract size is $500
times the value of the index.
The Fund does not believe that differences between existing stock
indexes will create any differences in the price movements of the stock index
futures contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
OTHER INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts
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are developed the Fund will sell interest rate index and other index based
futures contracts to hedge against changes which are expected to affect the
Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Tresury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the 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. The margin required for a particular futures contract is set by
the exchange on which the contract is traded, and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e., on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference
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between the price at which the futures contract was sold and the price paid for
the offsetting purchase after allowance for transaction costs represents the
profit or loss to the Fund.
There can be no assurance, however, 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.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES CONTRACTS
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on currency and other financial futures contracts are similar
to options on stocks except that an option on a currency or other financial
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) rather than to purchase or
sell stock, currency or other financial instruments at a specified exercise
price at any time during the period of the option. Upon exercise of the option,
the delivery of the futures position by the writer of the option to the holder
of the option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account. This amount represents the amount by which the
market price of the futures contract at exercise exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and value of
the futures contract.
The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on commodity futures contracts
is analagous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of a call option on a currency or other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, the purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on currency or other financial futures
contracts may be purchased to hedge against an interest rate increase or a
market advance when the Fund is not fully invested.
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USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and
other financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result
thereof, more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to margin deposits on
such futures contracts.
The Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Fund owns or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by the Fund,
an amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with the Fund's Custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
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RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and
are influenced, among other things, by changes in stock prices, market
conditions, prevailing interest rates and anticipation of future stock prices,
market movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. A decision of
whether, when and how to hedge involves the exercise of skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in connection with its futures contracts
which will hold cash or cash equivalents equal in value to the current value of
the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for currency and other
financial futures contracts, there are several special risks relating to options
on futures contracts. The ability to establish and close out positions on such
options will be subject to 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. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with
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such options are not greater than the risks in connection with the futures
contracts. Compared to the use of futures contracts, the purchase of options on
such futures involves less potential risk to the Fund because the maximum amount
at risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund
invests in foreign securities they usually will be denominated in foreign
currencies and the Fund temporarily may hold funds in foreign currencies. Thus,
the Fund's share value will be affected by changes in exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Fund may engage in
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or 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 also may 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 Keystone's
ability to predict accurately the future exchange rate between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rate or exchange control regulations between foreign
currencies and the 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.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the U.S. is regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission (CFTC) and National Futures Association
(NFA). Currently, the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to engage in currency futures contracts only for
hedging purposes, and not for speculation. The Fund may enter into currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures ontracts are similar to those described above for forward
foreign currency exchange contracts.
Currently, currency futures contracts for the British pound Sterling,
Canadian dollar, Dutch guilder, Deutsche mark, Japanese yen, Mexican peso, Swiss
and French francs can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the
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pound, 125,000 for the guilder, mark and Swiss francs, C$100,000 for the
Canadian dollar, Y12,500,000 for the yen, and 1,000,000 for the peso. In
contrast to Forward Currency Exchange Contracts which can be traded at any time,
only four value dates per year are available, the third Wednesday of March,
June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a
variety of currencies in both the U.S. and Europe. On the Philadelphia Stock
Exchange, for example, contracts for half the size of the corresponding futures
contracts on the Chicago Board Options Exchange are traded with up to nine
months maturity in Marks, Sterling, Yen, Swiss Francs and Canadian Dollars.
Options can be exercised at any time during the contract life and require a
deposit subject to normal margin requirements. Since a futures contract must be
exercised, the Fund must continually make up the margin balance. As a result, a
wrong price move could result in the Fund losing more than the original
investment as it cannot walk away from the futures contract as it can an option
contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in
connection with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is
analagous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of foreign stocks or foreign debt instruments or a position in the foreign
currency upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments, the
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.
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A-17
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exposure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Fund enters into a foreign exchange contract, it faces a
risk, however small, that the counterparty will not perform under the contract.
As a result there is a credit risk, although no extension of "credit" is
intended. To limit credit risk, the Fund intends to evaluate the
creditworthiness of each other party. The Fund does not intend to trade more
than 5% of its net assets under foreign exchange contracts with one party.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign echange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone differences
between the U.S. and foreign nations. If the Fund sells sterling it generally
must pay pounds to a counterparty earlier in the day than it will be credited
with dollars in New York. In the intervening hours, the buyer can go into
bankruptcy or can be declared insolvent. Thus, the dollars may never be credited
to the Fund.
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A-18
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents or limits on inflows of investment funds from abroad. Governments take
such measures for example to improve control over the domestic banking system or
to influence the pattern of receipts and payments between residents and
foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payment interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.
Other changes in official regulations influence international
investment transactions. If one of the factors affecting the buying or selling
of a currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain) or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and control on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the
Fund may be dealing with a foreign trader whose home country is facing a
payments problem. Even though the foreign trader intends to perform on its
foreign exchange contracts, the contracts are tied to other external liabilities
the country has incurred. As a result performance may be delayed, and can result
in unanticipated cost to the Fund. This aspect of country risk is a major
element in the Fund's credit judgment as to with whom it will deal and in what
amounts.
<PAGE>
<PAGE>
SUPPLEMENT TO THE STATEMENTS
OF ADDITIONAL INFORMATION OF
Evergreen Aggressive Growth Fund, Evergreen American Retirement Fund, Evergreen
Emerging Markets Growth Fund, Evergreen Florida High Income Municipal Bond Fund,
Evergreen Foundation Fund, Evergreen Fund, Evergreen Georgia Municipal Bond
Fund, Evergreen Global Leaders Fund, Evergreen Growth and Income Fund, Evergreen
High Grade Tax Free Fund, Evergreen Income and Growth Fund, Evergreen
Intermediate Term Government Securities Fund, Evergreen International Equity
Fund, Evergreen Institutional Money Market Fund, Evergreen Institutional Tax
Exempt Money Market Fund, Evergreen Institutional Treasury Money Market Fund,
Evergreen Micro Cap Fund, Evergreen Money Market Fund, Evergreen North Carolina
Municipal Bond Fund, Evergreen Short-Intermediate Bond Fund, Evergreen
Short-Intermediate Municipal Fund, Evergreen Small Cap Equity Income Fund,
Evergreen South Carolina Municipal Bond Fund, Evergreen Tax Strategic Foundation
Fund, Evergreen U.S. Government Fund, Evergreen Utility Fund, Evergreen Value
Fund, Evergreen Virginia Municipal Bond Fund, Evergreen Capital Preservation and
Income Fund, Evergreen Fund for Total Return, Evergreen Natural Resources Fund,
Evergreen Omega Fund, Evergreen Strategic Income Fund, Evergreen California Tax
Free Fund, Evergreen Massachusetts Tax Free Fund, Evergreen Missouri Tax Free
Fund, Evergreen New York Tax Free Fund, Evergreen Pennsylvania Tax Free Fund,
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone Quality Bond Fund (B-1), Keystone Small
Company Growth Fund (S-4), Keystone Strategic Growth Fund (K- 2), Keystone
Growth and Income Fund (S-1), Evergreen Select Adjustable Rate Fund, Evergreen
Select Small Cap Growth Fund, Keystone International Fund, Keystone Precious
Metals Holdings, and Keystone Tax Free Fund (each a "Fund" and, collectively,
the "Funds")
The Statements of Additional Information of each of the Funds are
hereby supplemented as follows:
STANDARDIZED FUNDAMENTAL INVESTMENT RESTRICTIONS
Each of the above Funds, except Keystone Balanced Fund (K-1), Keystone
Diversified Bond Fund (B-2), Keystone Small Company Growth Fund (S-4), and
Keystone Tax Free Fund, has adopted the following standardized fundamental
investment restrictions. These restrictions may be changed only by a vote of
Fund shareholders.
1. Diversification of Investments
The Fund may not make any investment inconsistent with the Fund's
classification as a diversified [non-diversified] investment company
under the Investment Company Act of 1940.
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2. Concentration of a Fund's Assets in a Particular Industry. ([All Funds
other than those listed below.)
The Fund may not concentrate its investments 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 [or in the case of Money Market Funds domestic
bank money instruments]).
For Evergreen Utility Fund
The Fund will concentrate its investments in the utilities industry.
For Keystone Precious Metals Holdings
The Fund will concentrate its investments in industries related to the
mining, processing or dealing in gold or other precious metals and
minerals.
3. Issuance of Senior Securities
Except as permitted under the Investment Company Act of 1940, the Fund
may not issue senior securities.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by
applicable law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed an underwriter in connection with the
disposition of its portfolio securities.
6. Investment in Real Estate
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in (a)
securities directly or indirectly secured by real estate, or (b)
securities issued by companies that invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on
commodities except to the extent that the Fund may engage in financial
futures contracts and related options and currency contracts and
related options and may otherwise do so in accordance with
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applicable law and without registering as a commodity pool operator
under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may
lend its portfolio securities in accordance with applicable law. The
acquisition of investment instruments shall not be deemed to be the
making of a loan.
9. Investment in Federally Tax Exempt Securities
The following Funds have also adopted a standardized fundamental
investment restriction in regard to investments in federally tax-exempt
securities:
<TABLE>
<CAPTION>
<S> <C>
Evergreen Tax Strategic Foundation Fund Evergreen High Grade Tax Free Fund
Evergreen Georgia Municipal Bond Fund Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund Evergreen Virginia Municipal Bond Fund
Evergreen New York Tax Free Fund Evergreen Massachusetts Tax Free Fund
Evergreen California Tax Free Fund Evergreen Pennsylvania Tax Free Fund
Evergreen Institutional Tax Exempt Money Market Fund Evergreen Missouri Tax Free Fund
Evergreen Short-Intermediate Municipal Fund
</TABLE>
The Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for Funds with the words tax exempt, tax free or municipal in their names.
ELIMINATION OF CERTAIN NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The nonfundamental investment restrictions described below have been
eliminated by each Fund listed under such restriction:
1. PROHIBITION ON INVESTMENT IN UNSEASONED ISSUERS
Evergreen Fund, Growth and Income Fund, Income and Growth Fund,
American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Growth and Income Fund (S-1), Omega Fund, Precious
Metals Holding, Strategic Growth Fund (K- 2), High Income Bond Fund
(B-4), Capital Preservation and Income Fund, Select Adjustable Rate
Fund, Strategic Income Fund, Fund for Total Return, International Fund
2. PROHIBITION ON INVESTMENT IN COMPANIES FOR THE PURPOSE OF EXERCISING
CONTROL OR MANAGEMENT
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, Value
Fund, Intermediate Term Government Securities Fund, Foundation Fund,
American Retirement Fund, Emerging Markets Growth Fund, International
Equity Fund, Global Leaders Fund, Money Market Fund, Florida High
Income Municipal Bond Fund, Short-Intermediate Municipal Fund, Growth
and Income Fund (S-1), Precious Metals Holdings, Strategic Growth Fund
(K-2), High Income Bond Fund (B-4), Fund for Total Return,
International Fund
3. PROHIBITION ON INVESTMENT IN COMPANIES IN WHICH TRUSTEES OR OFFICERS OF
THE FUNDS ALSO HOLD SHARES ABOVE CERTAIN PERCENTAGE LEVELS
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Intermediate Term Government Securities Fund, Foundation
Fund, American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Precious Metals Holdings, Inc.
4. Prohibition on Investment of More Than 5% of a Fund's Net Assets in
Warrants, With No More Than 2% of Net Assets Being Invested in Warrants
That Are Listed NEW YORK NOR AMERICAN STOCK EXCHANGES
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund,
Short-Intermediate Municipal Fund
5. PROHIBITION ON INVESTMENT IN OIL, GAS OR OTHER MINERAL EXPLORATION OR
DEVELOPMENT PROGRAMS
Evergreen Fund, MicroCap Fund, Aggressive Growth Fund, Growth and
Income Fund, Small Cap Equity Fund, Income and Growth Fund, Value Fund,
Intermediate Term Government Securities Fund, Foundation Fund, American
Retirement Fund, Money Market Fund, Florida High Income Municipal Bond
Fund, Short-Intermediate Municipal Fund, High Grade Tax Free Fund,
Precious Metals Holdings, Inc.
6. PROHIBITION ON JOINT TRADING ACCOUNTS
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<PAGE>
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund, Florida High
Income Municipal Bond Fund
7. PROHIBITION ON INVESTMENT IN OTHER INVESTMENT COMPANIES. [Note: The
Funds may invest in such companies to the extent permitted by the
Investment Company Act of 1940 and the rules thereunder.]
Growth and Income Fund, Utility Fund, Small Cap Equity Income Fund,
Income and Growth Fund, Value Fund, Short-Intermediate Bond Fund,
Intermediate Term Government Securities Fund, Foundation Fund, Tax
Strategic Foundation Fund, American Retirement Fund, High Grade Tax
Free Fund, Growth and Income Fund (S-1), Omega Fund, Precious Metals
Holdings, Strategic Growth Fund (K-2), High Income Bond Fund (B-4),
Select Adjustable Rate Fund, Strategic Income Fund, Fund for Total
Return, Global Opportunities Fund, International Fund, Massachusetts
Tax Free Fund, New York Tax Free Fund, Pennsylvania Tax Free Fund,
California Tax Free Fund and Missouri Tax Free Fund.
RECLASSIFICATION OF ALL OTHER FUNDAMENTAL INVESTMENT RESTRICTIONS
All investment restrictions other than those described above as having been
standardized or eliminated have been reclassified from fundamental to
nonfundamental and, as, such, may be changed by the Funds' Boards of Trustees at
any time without a shareholder vote.
TRUSTEES
The Trustees and executive officers of each Trust, their ages, and
their principal occupations during the last five years are shown below:
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of
the Evergreen Group of Mutual Funds and Trustee. Retired Vice President
of Lance Inc. (food manufacturing); Chairman of the Distribution Comm.
Foundation for the Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park,
Charlotte, NC- Trustee. Medical Director, U.S. Healthcare of Charlotte,
North Carolina since 1996; President, Primary Physician Care from 1990
to 1996.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street, Suite 980, Charlotte,
NC-Trustee. Attorney, Law Offices of Michael S. Scofield since 1969.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC - Trustee.
Sales Representative with Nucor-Yamoto Inc. (steel producer) since
1988.
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<PAGE>
THOMAS L. McVERRY (58), 4419 Parkview Drive, Charlotte, NC - Trustee.
Director of Carolina Cooperative Federal Credit Union since 1990 and
Rexham Corporation from 1988 to 1990; Vice President of Rexham
Industries, Inc. (diversified manufacturer) from 1989 to 1990; Vice
President - Finance and Resources, Rexham Corporation from 1979 to
1990.
WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC - Trustee. Partner in the law firm Holcomb and Pettit,
P.A. since 1990.
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL -
Trustee. Real estate developer and construction consultant since 1980;
President of Centrum Equities since 1987 and Centrum Properties, Inc.
since 1980.
CHARLES A. AUSTIN III (61), Trustee. Investment counselor to Appleton
Partners, Inc.; former Managing Director, Seaward Management
Corporation (investment advice); and former Director, Executive Vice
President and Treasurer, State Street Research & Management Company
(investment advice).
K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and
Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chief Executive
Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher &
Associates (environmental consulting); President, Oldways Preservation
and Exchange Trust (education); and former Director, Keystone
Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund
and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
DAVID M. RICHARDSON (55) Trustee. Executive Vice President, DMR
International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of
the Evergreen Group of Mutual Funds. Chairman, Environmental Warranty,
Inc., and Consultant, Drake Beam Morin, Inc. (executive outplacement);
Director of Connecticut Natural Gas Corporation, Trust Company of
Connecticut, Hartford Hospital, Old State House Association, and
Enhance Financial Services, Inc.; Chairman, Board of Trustees, Hartford
YMCA; former Director; Executive Vice President, and Vice Chairman of
The Travelers Corporation.
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<PAGE>
EXECUTIVE OFFICERS
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY -
President and Treasurer. Consultant to BISYS Fund Services since 1996.
Senior Managing Director, Furman Selz LLC since 1992, Managing Director
from 1984 to 1992.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH - Secretary.
Senior Vice President/Director of Administration and Regulatory
Services, BISYS Fund Services since April 1995. Vice
President/Assistant General Counsel, Alliance Capital Management from
1988 to 1995.
The officers of the Trusts are officers and/or employees of The BISYS
Group, Inc. ("BISYS Group"), except for Mr. Pileggi, who is a consultant to The
BISYS Group. The BISYS Group is an affiliate of Evergreen Distributor, Inc.
("EDI"), the distributor of each class of shares of each Fund.
No officer or Trustee of the Trusts owned more than 1.0% of any class
of shares of any of the Funds as of November 30, 1997.
DISTRIBUTION PLANS
The following is added to the disclosure under the caption "Distribution Plan"
Class A and B shares are made available to employer-sponsored retirement or
savings plans ("Plans") without a sales charge if:
(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch and, on
the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the Plan has $3 million or more 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 Plan is recordkept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has $3 million or more
in assets, excluding money market funds, invested in Applicable Investments; or
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<PAGE>
(iii) the Plan has 500 or more eligible employees, as determined by the Merrill
Lynch plan conversion manager, on the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement.
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 convert to Class A shares once the Plan has reached $5 million
invested in Applicable Investments. The Plan will receive a Plan level share
conversion.
The following is added to the Statement of Additional Information of each of
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone International Fund, Keystone Precious
Metals Holdings, Keystone Quality Bond Fund (B-1), Keystone Small Company Growth
Fund (S-4), Keystone Strategic Growth Fund (K-2), Keystone Growth and Income
Fund (S-1) and Keystone Tax Free Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DISTRIBUTION PLANS AND AGREEMENTS
Distribution fees are accrued daily and paid monthly on Class A, Class
B and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B shares and Class C shares are
designed to permit an investor to purchase such shares through broker-dealers
without the assessment of a front-end sales charge, and, in the case of Class C
shares, without the assessment of a contingent deferred sales charge after the
first year following the month of purchase, while at the same time permitting
the Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares and
the Class C shares are the same as those of the front-end sales charge and
distribution fee with respect to the Class A shares in that in each case the
sales charge and/or distribution fee provide for the financing of the
distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its Class A, Class B and Class C shares (each a
"Plan" and collectively, the "Plans"), the Treasurer of each Fund reports the
amounts expended under the Plans and the purposes for which such expenditures
were made to the Trustees of the Trust for their review on a quarterly basis.
Also, each Plan provides that the selection and nomination of the disinterested
Trustees are committed to the discretion of such disinterested Trustees then in
office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the
22943
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<PAGE>
latter may in turn pay part or all of such compensation to brokers or other
persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Trust or by vote
of the holders of a majority of the outstanding voting securities of that Class
and, in either case, by a majority of the Independent Trustees of the Trust who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related thereto.
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<PAGE>
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to each Fund and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class A, Class B and Class C shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B and Class C shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class A, Class B and Class C shares.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (i) by a Fund without penalty
at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
disinterested Trustees, or (ii) by the Distributor. To terminate any
Distribution Agreement, any party must give the other parties 60 days' written
notice; to terminate a Plan only, the Fund need give no notice to the
Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
HOW THE FUNDS OFFER SHARES TO THE PUBLIC
You may buy shares of a Fund through the Funds' distributor,
broker-dealers that have entered into special agreements with the Funds'
distributor or certain other financial institutions. Each Fund offers four
classes of shares that differ primarily with respect to sales
22943
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<PAGE>
charges and distribution fees. Depending upon the class of shares, you will pay
an initial sales charge when you buy a Fund's shares, a contingent deferred
sales charge (a "CDSC") when you redeem a Fund's shares or no sales charges at
all.
Purchase Alternatives
CLASS A SHARES
With certain exceptions, when you purchase Class A shares 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 Funds will charge a CDSC
of 1.00% if you redeem during the month of your purchase and the 12-month period
following the month of your purchase. See "Calculation of Contingent Deferred
Sales Charge" below.
CLASS B SHARES
The Funds offer Class B shares at net asset value (without a front-end
load). With certain exceptions, however, the Funds will charge a CDSC of 1.00%
on shares you redeem within 72 months after the month of your purchase. The
Funds will charge CDSCs at the following rate:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase..........................5.00%
Second twelve-month period following the month of purchase...............4.00%
Third twelve-month period following the month of purchase................3.00%
Fourth twelve-month period following the month of purchase...............3.00%
Fifth twelve-month period following the month of purchase................2.00%
Sixth twelve-month period following the month of purchase................1.00%
Thereafter...............................................................0.00%
Class B shares that have been outstanding for seven years after the month of
purchase will automatically convert to Class A shares without imposition of a
front-end sales charge 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 the Underwriter. The Funds
offer Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Funds will charge a
22943
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<PAGE>
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
Evergreen Asset Management Corp. ("Evergreen Asset"), (2) certain institutional
investors and (3) investment advisory clients of the Capital Management Group of
First Union National Bank ("FUNB"), Evergreen Asset, Keystone Investment
Management Company, or their affiliates. Class Y shares are offered at net asset
value without a front-end or back-end sales charge and do not bear any Rule
12b-1 distribution expenses.
Contingent Deferred Sales Charge
The Funds charge a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plan"). If imposed, the Funds
deduct the CDSC from the redemption proceeds you would otherwise receive. The
CDSC is a percentage of the lesser of (1) the net asset value of the shares at
the time of redemption or (2) the shareholder's original net cost for such
shares. Upon request for redemption, to keep the CDSC a shareholder must pay as
low as possible, a Fund will first seek to redeem shares not subject to the CDSC
and/or shares held the longest, in that order. The CDSC on any redemption is, to
the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the Principal Underwriter or its predecessor.
SALES CHARGE WAIVERS OR REDUCTIONS
Reducing Class a Front-end Loads
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
COMBINED PURCHASES
You can reduce your sales charge by combining purchases of Class A
shares of multiple Evergreen funds. For example, if you invested $75,000 in each
of two different Evergreen funds, you would pay a sales charge based on a
$150,000 purchase (i.e., 3.75% of the offering price, rather than 4.75%).
22943
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<PAGE>
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%.
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.
Shares That Are Not Subject to a Sales Charge or CDSC
WAIVER OF SALES CHARGES
The Funds may sell their shares at net asset value without an initial
sales charge to:
1. purchases of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax
sheltered annuity or TSA plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan") or
a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust
departments and registered investment advisers;
4. investment advisers, consultants or financial planners who
place trades for their own accounts or the accounts of their
clients and who charge such clients a management, consulting,
advisory or other fee;
5. clients of investment advisers or financial planners who place
trades for their own accounts if the accounts are linked to
master accounts of such investment advisers or financial
planners on the books of the broker-dealer through whom shares
are purchased;
6. institutional clients of broker-dealers, including retirement
and deferred compensation plans and the trusts used to fund
these plans, which place trades through an omnibus account
maintained with a Fund by the broker-dealer;
22943
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<PAGE>
7. employees of FUNB, its affiliates, Evergreen Distributor,
Inc., any broker-dealer with whom Evergreen Distributor, Inc.,
has entered into an agreement to sell shares of the Funds, and
members of the immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen funds, the Distributor or their affiliates and to
the immediate families of such persons; or
9. a bank or trust company in a single account in the name of
such bank or trust company as trustee if the initial
investment in or any Evergreen fund made pursuant to this
waiver is at least $500,000 and any commission paid at the
time of such purchase is not more than 1.00% of the amount
invested.
With respect to items 8 and 9 above, each 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 Funds will not charge any
CDSC on redemptions by such purchasers.
WAIVER OF CDSCS
The Funds do not impose a CDSC when the shares you are redeeming
represent:
1. an increase in the share value above the net cost of such
shares;
2. certain shares for which 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 account of a shareholder who has died
or become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder
who is a least 59 1/2 years old;
6. shares in an account that we have closed because the account
has an aggregate net asset value of less than $1,000;
7. an automatic withdrawal under an Systematic Income Plan of up
to 1.00% per month of your initial account balance;
22943
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<PAGE>
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan
that purchased Class C shares (this waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially
all of its assets).
EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of
any other Evergreen fund, as described under the section entitled "Exchanges" in
a Fund's 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.
HOW THE FUNDS VALUE SHARES
How and When a Fund Calculates its Net Asset Value per Share ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as
described in the Prospectus. A Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of each Fund is calculated by dividing the value of a Fund's
net assets attributable to that class by all of the shares issued for that
class.
How a Fund Values the Securities it Owns
Current values for a Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or on the NMS prior to
the time of the valuation, provided that a sale has occurred.
(2) Securities traded in the over-the-counter market, other than on
NMS, are valued at the mean of the bid and asked prices at the time of
valuation.
22943
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<PAGE>
(3) Short-term investments maturing in more than sixty days for which
market quotations are readily available, are valued at current market value.
(4) Short-term investments maturing in sixty days or less (including
all master demand notes) are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market.
(5) Short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market.
(6) Securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS if, in
the Fund's opinion, the last sales price does not reflect a current market value
or if no sale occurred; and other assets are valued at prices deemed in good
faith to be fair under procedures established by the Board of Trustees.
SHAREHOLDER SERVICES
As described in the prospectus, a shareholder may elect to receive his
or her dividends and capital gains distributions in cash instead of shares.
However, ESC will automatically convert a shareholder's distribution option so
that the shareholder reinvests all dividends and distributions in additional
shares when it learns that the postal or other delivery service is unable to
deliver checks or transaction confirmations to the shareholder's address of
record. The Funds will hold the returned distribution or redemption proceeds in
a non interest-bearing account in the shareholder's name until the shareholder
updates his or her address. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
December 22, 1997
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<PAGE>
SUPPLEMENT TO THE STATEMENT OF ADDITIONAL INFORMATION OF
EVERGREEN FLORIDA MUNICIPAL BOND FUND (THE "FLORIDA FUND"), EVERGREEN GEORGIA
MUNICIPAL BOND FUND (THE "GEORGIA FUND"), EVERGREEN NORTH CAROLINA MUNICIPAL
BOND FUND (THE "NORTH CAROLINA FUND"), EVERGREEN SOUTH CAROLINA MUNICIPAL BOND
FUND (THE "SOUTH CAROLINA FUND"), EVERGREEN VIRGINIA MUNICIPAL BOND FUND (THE
"VIRGINIA FUND"), EVERGREEN FLORIDA HIGH INCOME MUNICIPAL BOND FUND (THE
"FLORIDA HIGH INCOME FUND") (EACH A "FUND"; TOGETHER, THE "FUNDS")
The Statement of Additional Information of each of the Funds is hereby
supplemented as follows:
FINANCIAL INFORMATION
Expenses
The table below shows the total dollar amounts paid by each Fund for
services rendered during the fiscal periods specified. For more information on
specific expenses, see "Investment Advisory and Other Services," "Distribution
Plans and Agreements," "Principal Underwriter" and "Purchase, Redemption and
Pricing of Shares."
<TABLE>
<CAPTION>
Aggregate
Dollar
Aggregate Amount of
Dollar Underwriting
Amount of Commissions
Advisory Class A Class B Underwriting Retained by
Fees 12b-1 Fees 12b-1 Fees Commissions EIS or EDI
====================== ============ ============ ============ ============= ==============
<S> <C> <C> <C> <C> <C>
1997 FUND EXPENSES
Florida $791,322 $275,983* $298,114 $22,335
Georgia $66,245 $5,499 $96,055 $2,488
North Carolina $305,634 $20,523 $490,164 $2,377
South Carolina $58,299 $2,271 $45,393 $710
Virginia $70,972 $7,230 $61,471 $1,596
Florida High Income $813,790 $235,662 $383,197 $34,454
- ----------------------
1996 FUND EXPENSES
- ----------------------
Florida $803,741 $240,978 $287,825 $49,589 $5,996
Georgia $63,102 $5,047 $84,596 $7,300 $875
North Carolina $306,892 $20,833 $500,469 $16,557 $154
South Carolina $40,781 $1,917 $39,896 $1,447 $2,228
Virginia $51,952 $6,048 $57,906 $20,400 $2,033
Florida High Income $477,128 $169,651 $106,733 $276,615 $29,467
- ----------------------
1995 FUND EXPENSES
- ----------------------
Florida $243,413 $59,721 $37,405 $87,755 $4,301
Georgia $32,646 $2,856 $49,968 $56,210 $4,220
North Carolina $190,284 $13,739 $319,719 $123,175 $7,843
South Carolina $13,154 $788 $20,125 $35,241 $3,595
Virginia $23,156 $3,127 $30,267 $45,713 $2,320
Florida High Income $123,320 $41,690 $2,087 $196,614 $24,672
====================== ============ ============ ============ ============= ==============
</TABLE>
*Of this amount, $191,541 was waived by the Distributor.
Advisory Fee Waivers
In accordance with voluntary expense limitations in effect during the
fiscal year or period ended August 31, 1997, CMG voluntarily reimbursed or
waived advisory fees, as follows:
Florida $81,274
Georgia $66,245
North Carolina $0
South Carolina $58,299
Virginia $70,972
Florida High Income $330,629
===================== ==========
Brokerage Commissions
The Funds paid no brokerage commissions during the fiscal year or period
ended August 31, 1997, 1996 and 1995.
Total Return
Total return quotations for a class of shares of a 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 annual total returns for each class of shares of the Funds (including
applicable sales charges) are as follows:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C> <C>
FLORIDA
Class A 3.88% 5.81% 5.92% 7.47% 5/11/88
Class B 3.06% - - 5.03% 6/30/95
Class Y 9.14% - - 7.38% 6/30/95
GEORGIA
Class A 3.57% 5.78% - 3.63% 7/2/93
Class B 2.93% 5.83% - 3.73% 7/2/93
Class Y 9.00% 7.78% - 5.73% 2/28/94
NORTH CAROLINA
Class A 3.93% 6.03% - 4.79% 1/11/93
Class B 3.30% 6.08% - 4.85% 1/11/93
Class Y 9.39% 8.03% - 5.51% 2/28/94
SOUTH CAROLINA
Class A 4.14% 7.05% - 4.06% 1/3/94
Class B 3.52% 7.12% - 3.99% 1/3/94
Class Y 9.60% 9.07% - 6.62% 2/28/94
VIRGINIA
Class A 3.87% 6.08% - 3.90% 7/2/93
Class B 3.24% 6.14% - 3.98% 7/2/93
Class Y 9.32% 8.08% - 6.06% 2/28/94
FLORIDA HIGH INCOME
Class A 5.51% 6.96% 7.33% 7.34% 6/17/92
Class B 4.95% - - 6.24% 7/10/95
Class Y 11.04% - - 8.47% 9/20/95
==================== ========= ======== ========= ============= ==============
</TABLE>
Current and Tax Equivalent Yields
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of a Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. Such yield will include
income from sources other than municipal obligations, if any. Tax equivalent
yield is, in general, the current yield divided by a factor equal to one minus a
stated income tax rate and reflects the yield a taxable investment would have to
achieve in order to equal on an after-tax basis a tax-exempt yield. For the
30-day period ended August 31, 1997, the current and tax-equivalent yields of
the Funds are shown below. Any given yield or total return quotation should not
be considered representative of the Fund's yield or total return for any future
period.
<TABLE>
<CAPTION>
30-DAY YIELD TAX-EQUIVALENT YIELD
================================= ============================================ ============================================
FUND COMBINED CLASS A CLASS B CLASS Y CLASS A CLASS B CLASS Y
FEDERAL &
STATE TAX
RATE (1)
================== ============= ============ =========== =========== =========== =========== ==============
<S> <C> <C> <C> <C> <C> <C> <C>
Florida 28% 4.94% 4.02% 5.02% 6.86% 5.58% 6.97%
Georgia 34% 4.80% 4.04% 5.05% 7.27% 6.12% 7.65%
North Carolina 28% 4.67% 3.92% 4.92% 6.49% 5.44% 6.83%
South Carolina 35% 4.65% 3.90% 4.90% 7.15% 6.00% 7.54%
Virginia 33.25% 4.78% 4.03% 5.03% 7.16% 6.04% 7.54%
Florida High 28% 5.48% 4.73% 5.73% 7.61% 6.57% 7.96%
Income
================== ============= ============= =========== =============== ============ ============ ==============
(1) Assumed for purposes of this chart. Your tax may vary.
</TABLE>
Method of Computing Offering Price for Class A Shares
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 the 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 the end
of each Fund's latest fiscal period.
<TABLE>
<CAPTION>
FUND DATE NET ASSET VALUE PER SHARE SALES OFFERING PRICE PER
CHARGE SHARE
<S> <C> <C> <C> <C>
Florida 8/31/97 $9.98 4.75% $10.48
Georgia 8/31/97 $9.90 4.75% $10.39
North Carolina 8/31/97 $10.37 4.75% $10.89
South Carolina 8/31/97 $10.08 4.75% $10.58
Virginia 8/31/97 $10.05 4.75% $10.55
Florida High Income 8/31/97 $10.89 4.75% $11.43
</TABLE>
Trustee Compensation
Listed below is the Trustee compensation for the fiscal year ended August
31, 1997.
TRUSTEE COMPENSATION FROM COMPENSATION FROM
TRUST TRUST AND FUND
COMPLEX
Laurence B. Ashkin $3,176 $56,200
Charles A.Austin III * -0- $48,200
K. Dun Gifford* -0- $39,600
James S. Howell $3,979 $89,229
Leroy Keith Jr.* -0- $45,200
Gerald M. McDonnell $3,154 $81,001
Thomas L. McVerry $3,820 $81,468
William Walt Pettit $3,483 $79,009
David M. Richardson* -0- $48,200
Russell A. Salton,III $3,501 $81,601
Michael S. Scofield $5,572 $77,501
Richard J. Shima $4,180 $58,667
*Not a Trustee of the Trust during the relevant fiscal period.
PRINCIPAL HOLDERS OF FUND SHARES
As of the date of this SAI, the officers and Trustees of the Trust owned as
a group less than 1% of the outstanding of any class of each Fund. As of the
same date, no person, to any Fund's knowledge, owned beneficially or of record
more than 5% of a class of a Fund's outstanding shares.
Set forth below is information with respect to each person who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of a
Fund's outstanding shares as of November 30, 1997.
FLORIDA FUND CLASS A
None
FLORIDA FUND CLASS B
None
FLORIDA FUND CLASS Y
First Union National Bank 98.79%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
FLORIDA HIGH INCOME FUND CLASS A
MLPF&S 9.63%
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Fl
Jacksonville, FL 32246-6484
FLORIDA HIGH INCOME FUND CLASS B
MLPF&S 10.31%
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Fl
Jacksonville, FL 32246-6484
FLORIDA HIGH INCOME FUND CLASS Y
First Union National Bank 68.58%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
First Union National Bank 19.69%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
GEORGIA FUND CLASS A
FUBS & Co. FEBO 10.09%
Lee R. Meadows and
Mary Lee Meadows
1270 Hicks Cir SW
Conyers, GA 30207-4221
FUBS & Co. FEBO 6.03%
William F. Hill Jr. and Marvin Hill
P O Box 554 Silver Creek, GA 30173-0554
FUBS & Co. FEBO 5.46%
Samuel A Barber
Velma H Barber
4852 Banner Elk Drive
Stone Mountain, GA 30083
FUBS & Co. FEBO 5.18%
Larry N Merritt
Ann C Merritt
310 Chinquapin Drive
Marietta, GA 30064-3506
FUBS & Co. FEBO 5.13%
Raiden W Dellinger
710 River Ave.
Rome, GA 30161-4773
GEORGIA FUND CLASS B
None
GEORGIA FUND CLASS Y
First Union National Bank 98.61%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
NORTH CAROLINA FUND CLASS A
None
NORTH CAROLINA FUND CLASS B
None
NORTH CAROLINA FUND CLASS Y
First Union National Bank 99.64%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
SOUTH CAROLINA FUND CLASS A
FUBS & Co. FEBO 21.96%
Charles W. Lombard Trust
Charlotte Lombard and
Warren Prout Co-tees
U/A/D 5/4/94
Boone, NC 28607
FUBS & Co. FEBO 11.87%
Warren A. Ransom Jr.
Laurie P. Ransom
1162 East Parkview Place
Mount Pleasant, SC 29464-7909
First Union Brokerage Services 10.82%
Ann D. Schwab
A/C 7448-7777
2189 Windy Oaks Rd.
Ft. Mills, SC 29715
FUBS & Co. FEBO 6.91%
Charles Dean Turner
103 Carolina Club Drive
Spartanburg, SC 29306-6601
FUBS & Co. FEBO 5.79%
Virginia C. Thomas
330 Concord St. No 7G
Charleston, SC 29401-2731
FUBS & Co. FEBO 5.05%
Virginia S. Herring
Oren L. Herring Jr. JTWROS
107 Bennett Street
Mt. Pleasant, SC 29464-4382
SOUTH CAROLINA FUND CLASS B
FUBS & Co. FEBO 5.99%
Ruby B. Motsinger and
Joseph G. Motsinger JTTENCOM
550 Brandon Rd.
Clover, SC 29710-9667
SOUTH CAROLINA FUND CLASS Y
First Union National Bank 93.13%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
First Union National Bank 6.16%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
VIRGINIA FUND CLASS A
Duff M Green 7.97%
638 Kings Highway
Fredericksburg, VA 22405-3156
FUBS & Co. FEBO 6.34%
David A. Hetzer and Iris L. Hetzer
5009 Laburch Lane
Annandale, VA 22003-6019
VIRGINIA FUND CLASS B
FUBS & Co. FEBO 6.13%
Patsy B. Williams and
Harry S. Williams
P O Box 888
Marion, VA 24354
VIRGINIA FUND CLASS Y
First Union National Bank 98.34%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
Financial Statements
The audited financial statements and the reports thereon are hereby
incorporated by reference to each Fund's Annual Report, a copy of which may be
obtained without charge from ESC, P.O. Box 2121, Boston, Massachusetts
02106-2121.
January 1, 1998
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD GROWTH & INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated February 28, 1997 (the "Prospectus"), pursuant to which
the Blanchard Growth & Income Fund (the "FUND") is offered. Please retain this
document for future reference.
To obtain a copy of the Prospectus or a paper copy of this Statement of
Additional Information, if you have received your Statement of Additional
Information electronically, please call the FUND at 1-800-829-3863.
TABLE OF CONTENTS Page
General Information and History 1
Investment Objectives, Policies and Restrictions 1
Portfolio Transactions 11
Computation of Net Asset Value 12
Performance Information 13
Additional Purchase and Redemption Information 14
Tax Matters 14
The Management of the FUND 18
Management Services 25
Administrative Services 25
Distribution Plan 26
Description of the FUND 26
Shareholder Reports 27
Appendix A 28
Appendix B 30
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
The Chase Manhattan Bank
Distributor
Federated Securities Corp.
Transfer Agent
Federated Shareholder Services Company
Independent Auditors
Deloitte & Touche LLP
Dated: February 28, 1997
FEDERATED SECURITIES CORP.
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the Blanchard Growth & Income Fund's (the "FUND")
Prospectus, the FUND is a non-diversified series of Blanchard Funds, a
Massachusetts business trust that was organized under the name "Blanchard
Strategic Growth Fund" (the "Trust"). The trustees of the Trust approved the
change in the name of the Trust on December 4, 1990.
Effective March 31, 1996, the merger of The Chase Manhattan Corporation
with and into Chemical Banking Corporation was consummated and Chemical Banking
Corporation thereupon changed its name to The Chase Manhattan Corporation. The
Chase Manhattan Corporation is now the parent of The Chase Manhattan Bank, the
adviser to the Growth & Income Portfolio (the "Portfolio").
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The FUND seeks its investment objectives by investing 100% of its net
assets in the Growth & Income Portfolio (the "Portfolio"). The Portfolio has
investment objectives identical to the FUND and invests in accordance with
investment policies and restrictions identical to those of the FUND.
The investment objectives of the FUND and the Portfolio may not be
changed except by a majority vote of shareholders.
The investment policies of the FUND and the Portfolio, as described
below, are not fundamental and may be changed without shareholder approval.
INVESTMENT POLICIES
The Prospectus sets forth the investment objective and various
investment policies of the Portfolio. This Statement of Additional Information
supplements and should be read in conjunction with the related sections of the
Prospectus. For descriptions of the securities ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("Standard & Poor's")
and Fitch Investors Service, Inc. ("Fitch"), see Appendix B.
U.S. GOVERNMENT SECURITIES - U.S. Government Securities include (1)
U.S. Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including: U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and U.S.
Treasury bonds (generally maturities of greater than ten years); and (2)
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow any
amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the agency
or instrumentality. Agencies and instrumentalities of the U.S. Government
include but are not limited to: Federal Land Banks, Federal Financing Banks,
Banks for Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association, Student Loan Marketing Association, United States
Postal Service, Chrysler Corporate Loan Guarantee Board, Small Business
Administration, Tennessee Valley Authority and any other enterprise established
or sponsored by the U.S. Government. Certain U.S. Government Securities,
including U.S. Treasury bills, notes and bonds, Government National Mortgage
Association certificates and Federal Housing Administration debentures, are
supported by the full faith and credit of the United States. Other U.S.
Government Securities are issued or guaranteed by federal agencies or government
sponsored enterprises and are not supported by the full faith and credit of the
United States. These securities include obligations that are supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of the
Federal Home Loan Banks, and obligations that are supported by the
creditworthiness of the particular instrumentality, such as obligations of the
Federal National Mortgage Association or Federal Home Loan Mortgage Corporation.
For a description of certain obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities
issue specialized types of securities, such as guaranteed notes of the Small
Business Administration, Federal Aviation Administration, Department of Defense,
Bureau of Indian Affairs and Private Export Funding Corporation, which often
provide higher yields than are available from the more common types of
government-backed instruments. However, such specialized instruments may only be
available from a few sources, in limited amounts, or only in very large
denominations; they may also require specialized capability in portfolio
servicing and in legal matters related to government guarantees. While they may
frequently offer attractive yields, the limited-activity markets of many of
these securities means that, if the Portfolio were required to liquidate any of
them, it might not be able to do so advantageously; accordingly, the Portfolio
investing in such securities normally to hold such securities to maturity or
pursuant to repurchase agreements, and would treat such securities (including
repurchase agreements maturing in more than seven days) as illiquid for purposes
of its limitation on investment in illiquid securities.
BANK OBLIGATIONS - Investments in bank obligations are limited to those
of U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation, and foreign banks (including their
U.S. branches) having total assets in excess of $10 billion (or the equivalent
in other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of United States banks or foreign banks
which are payable at a stated maturity date and bear a fixed rate of interest.
Although fixed time deposits do not have a market, there are no contractual
restrictions on the right to transfer a beneficial interest in the deposit to a
third party. Fixed time deposits subject to withdrawal penalties and with
respect to which the Portfolio cannot realize the proceeds thereon within seven
days are deemed "illiquid" for the purposes of its restriction on investments in
illiquid securities. Deposit notes are notes issued by commercial banks which
generally bear fixed rates of interest and typically have original maturities
ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations. Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation. Investors should also be aware that
securities of foreign banks and foreign branches of United States banks may
involve foreign investment risks in addition to those relating to domestic bank
obligations.
DEPOSITARY RECEIPTS - The Portfolio will limit its investment in
Depository Receipts not sponsored by the issuer of the underlying security to no
more than 5% of the value of its net assets (at the time of investment). A
purchaser of an unsponsored Depositary Receipt may not have unlimited voting
rights and may not receive as much information about the issuer of the
underlying securities as with a sponsored Depositary Receipt.
ECU OBLIGATIONS - The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Trustees do not
believe that such adjustments will adversely affect holders of ECU-denominated
securities or the marketability of such securities.
SUPRANATIONAL OBLIGATIONS - Supranational organizations, include
organizations such as The World Bank, which was chartered to finance development
projects in developing member countries; the European Community, which is a
twelve-nation organization engaged in cooperative economic activities; the
European Coal and Steel Community, which is an economic union of various
European nations steel and coal industries; and the Asian Development Bank,
which is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations of the Asian and
Pacific regions.
CORPORATE REORGANIZATIONS - In general, securities that are the subject
of a tender or exchange offer or proposal sell at a premium to their historic
market price immediately prior to the announcement of the offer or proposal. The
increased market price of these securities may also discount what the stated or
appraised value of the security would be if the contemplated action were
approved or consummated. These investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of these contingencies requires unusually broad knowledge and experience on the
part of the advisers that must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction, but also the financial resources and
business motivation of the offer or as well as the dynamics of the business
climate when the offer or proposal is in progress. Investments in reorganization
securities may tend to increase the turnover ratio of the Portfolio and increase
its brokerage and other transaction expenses.
WARRANTS AND RIGHTS - Warrants basically are options to purchase equity
securities at a specified price for a specific period of time. Their prices do
not necessarily move parallel to the prices of the underlying securities. Rights
are similar to warrants but normally have a shorter duration and are distributed
directly by the issuer to shareholders. Rights and warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
COMMERCIAL PAPER - Commercial paper consists of short-term (usually
from 1 to 270 days) unsecured promissory notes issued by corporations in order
to finance their current operations. A variable amount master demand note (which
is a type of commercial paper) represents a direct borrowing arrangement
involving periodically fluctuating rates of interest under a letter agreement
between a commercial paper issuer and an institutional lender pursuant to which
the lender may determine to invest varying amounts.
REPURCHASE AGREEMENTS - The Portfolio will enter into repurchase
agreements only with member banks of the Federal Reserve System and securities
dealers believed creditworthy, and only if fully collateralized by securities in
which the Portfolio is permitted to invest. Under the terms of a typical
repurchase agreement, the Portfolio would acquire an underlying debt instrument
for a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase the instrument and the Portfolio to
resell the instrument at a fixed price and time, thereby determining the yield
during the Portfolio's holding period. This procedure results in a fixed rate of
return insulated from market fluctuations during such period. A repurchase
agreement is subject to the risk that the seller may fail to repurchase the
security. Repurchase agreements are considered under the 1940 Act to be loans
collateralized by the underlying securities. All repurchase agreements entered
into by the Portfolio will be fully collateralized at all times during the
period of the agreement in that the value of the underlying security will be at
least equal to the amount of the loan, including the accrued interest thereon,
and the Portfolio or its custodian or sub-custodian will have possession of the
collateral, which the Board of Trustees believes will give it a valid, perfected
security interest in the collateral. Whether a repurchase agreement is the
purchase and sale of a security or a collateralized loan has not been
conclusively established. This might become an issue in the event of the
bankruptcy of the other party to the transaction. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities would not be owned by the Portfolio, but would only
constitute collateral for the seller's obligation to pay the repurchase price.
Therefore, the Portfolio may suffer time delays and incur costs in connection
with the disposition of the collateral. The Board of Trustees believes that the
collateral underlying repurchase agreements may be more susceptible to claims of
the seller's creditors than would be the case with securities owned by the
Portfolio. Repurchase agreements maturing in more than seven days are treated as
illiquid for purposes of the Portfolio's restrictions on purchases of illiquid
securities. Repurchase agreements are also subject to the risks described below
with respect to stand-by commitments.
FORWARD COMMITMENTS - In order to invest the Portfolio's assets
immediately, while awaiting delivery of securities purchased on a forward
commitment basis, short-term obligations that offer same-day settlement and
earnings will normally be purchased. When a commitment to purchase a security on
a forward commitment basis is made, procedures are established consistent with
the General Statement of Policy of the Securities and Exchange Commission
concerning such purchases. Since that policy currently recommends that an amount
of the Portfolio's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, a separate account of the
Portfolio consisting of cash, cash equivalents or high quality debt securities
equal to the amount of the Portfolio's commitments securities will be
established at the Portfolio's custodian bank. For the purpose of determining
the adequacy of the securities in the account, the deposited securities will be
valued at market value. If the market value of such securities declines,
additional cash, cash equivalents or highly liquid securities will be placed in
the account daily so that the value of the account will equal the amount of such
commitments by the Portfolio.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the Portfolio's portfolio
are subject to changes in value based upon the public's perception of the issuer
and changes, real or anticipated, in the level of interest rates. Purchasing
securities on a forward commitment basis can involve the risk that the yields
available in the market when the delivery takes place may actually be higher or
lower than those obtained in the transaction itself. On the settlement date of
the forward commitment transaction, the Portfolio will meet its obligations from
then available cash flow, sale of securities held in the separate account, sale
of other securities or, although it would not normally expect to do so, from
sale of the forward commitment securities themselves (which may have a value
greater or lesser than the Portfolio's payment obligations). The sale of
securities to meet such obligations may result in the realization of capital
gains or losses.
To the extent the Portfolio engages in forward commitment transactions,
it will do so for the purpose of acquiring securities consistent with its
investment objective and policies and not for the purpose of investment
leverage, and settlement of such transactions will be within 90 days from the
trade date.
REVERSE REPURCHASE AGREEMENTS - Reverse repurchase agreements involve
the sale of securities held by the Portfolio with an agreement to repurchase the
securities at an agreed upon price and date. The repurchase price is generally
equal to the original sales price plus interest. Reverse repurchase agreements
are usually for seven days or less and cannot be repaid prior to their
expiration dates. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities transferred may decline below the price at
which the Portfolio is obliged to purchase the securities.
STRIPPED OBLIGATIONS - The principal and interest components of United
States Treasury bonds with remaining maturities of longer than ten years are
eligible to be traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Under the STRIPS
program, the principal and interest components are separately issued by the
United States Treasury at the request of depository financial institutions,
which then trade the component parts separately. The interest component of
STRIPS may be more volatile than that of United States Treasury bills with
comparable maturities. The Portfolio has no present intention of investing more
than 5% of its net assets in STRIPS.
ILLIQUID SECURITIES - For purposes of its limitation on investments in
illiquid securities, the Portfolio may elect to treat as liquid, in accordance
with procedures established by the Board of Trustees, certain investments in
restricted securities for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the "Securities Act") and commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act ("Section 4(2) paper"). Rule 144A
provides an exemption from the registration requirements of the Securities Act
for the resale of certain restricted securities to qualified institutional
buyers. Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as the
Portfolio who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale of Section 4(2) paper by the
purchaser must be in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A and Section 4(2)
paper are liquid or illiquid for purposes of the limitation on investment in
illiquid securities. Pursuant to those policies and procedures, the Trustees
have delegated to the advisers the determination as to whether a particular
instrument is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of trades and quotes for the security, the
number of dealers willing to sell the security and the number of potential
purchasers, dealer undertakings to make a market in the security, the nature of
the security and the time needed to dispose of the security. The Trustees will
periodically review the Portfolio's purchases and sales of Rule 144A securities
and Section 4(2) paper.
STAND-BY COMMITMENTS - In a put transaction, the Portfolio acquires the
right to sell a security at an agreed upon price within a specified period prior
to its maturity date, and a stand-by commitment entitles the Portfolio to
same-day settlement and to receive an exercise price equal to the amortized cost
of the underlying security plus accrued interest, if any, at the time of
exercise. Stand-by commitments are subject to certain risks, which include the
inability of the issuer of the commitment to pay for the securities at the time
the commitment is exercised, the fact that the commitment is not marketable by
the Portfolio, and that the maturity of the underlying security will generally
be different from that of the commitment.
SECURITIES LOANS - To the extent specified in the prospectus, the
Portfolio is permitted to lend its securities to broker-dealers and other
institutional investors in order to generate additional income. Such loans of
portfolio securities may not exceed 30% of the value of the Portfolio's total
assets. In connection with such loans, the Portfolio will receive collateral
consisting of cash, cash equivalents, U.S. Government securities or irrevocable
letters of credit issued by financial institutions. Such collateral will be
maintained at all times in an amount equal to at least 102% of the current
market value plus accrued interest of the securities loaned. The Portfolio can
increase its income through the investment of such collateral. The Portfolio
continues to be entitled to the interest payable or any dividend-equivalent
payments received on a loaned security and, in addition, to receive interest on
the amount of the loan. However, the receipt of any dividend-equivalent payments
by the Portfolio on a loaned security from the borrower will not qualify for the
dividends-received deduction. Such loans will be terminable at any time upon
specified notice. The Portfolio might experience risk of loss if the
institutions with which it has engaged in portfolio loan transactions breach
their agreements with the Portfolio. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delays in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower experience financial
difficulty. Loans will be made only to firms deemed by the advisers to be of
good standing and will not be made unless, in the judgment of the advisers, the
consideration to be earned from such loans justifies the risk.
ADDITIONAL POLICIES REGARDING DERIVATIVES AND RELATED TRANSACTIONS
INTRODUCTION
As explained more fully below, the Portfolio may employ derivative and
related instruments as tools in the management of portfolio assets. Put briefly,
a "derivative" instrument may be considered a security or other instrument which
derives its value from the value or performance of other instruments or assets,
interest or currency exchange rates, or indexes. For instance, derivatives
include futures, options, forward contracts, structured notes and various
over-the-counter instruments.
Like other investment tools or techniques, the impact of using
derivatives strategies or related instruments depends to a great extent on how
they are used. Derivatives are generally used by portfolio managers in three
ways: First, to reduce risk by hedging (offsetting) an investment position.
Second, to substitute for another security particularly where it is quicker,
easier and less expensive to invest in derivatives. Lastly, to speculate or
enhance portfolio performance. When used prudently, derivatives can offer
several benefits, including easier and more effective hedging, lower transaction
costs, quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for the Portfolio.
The Portfolio may invest its assets in derivative and related
instruments subject only to the Portfolio's investment objective and policies
and the requirement that the Portfolio maintain segregated accounts consisting
of liquid assets, such as cash, U.S. Government securities, or other high-grade
debt obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset so as to avoid
leveraging the Portfolio.
The value of some derivative or related instruments in which the
Portfolio may invest may be particularly sensitive to changes in prevailing
interest rates or other economic factors, and -- like other investments of the
Portfolio -- the ability of a Portfolio to successfully utilize these
instruments may depend in part upon the ability of the advisers to forecast
interest rates and other economic factors correctly. If the advisers
inaccurately forecast such factors and have taken positions in derivative or
similar instruments contrary to prevailing market trends, the Portfolio could be
exposed to the risk of a loss. The Portfolio might not employ any or all of the
strategies described herein, and no assurance can be given that any strategy
used will succeed.
Set forth below is an explanation of the various derivatives strategies
and related instruments the Portfolio may employ along with risks or special
attributes associated with them. This discussion is intended to supplement the
Portfolio's current prospectuses as well as provide useful information to
prospective investors.
RISK FACTORS
As explained more fully below and in the discussions of particular
strategies or instruments, there are a number of risks associated with the use
of derivatives and related instruments:
o There can be no guarantee that there will be a correlation
between price movements in a hedging vehicle and in the
portfolio assets being hedged. As incorrect correlation could
result in a loss on both the hedged assets in the Portfolio
and the hedging vehicle so that the portfolio return might
have been greater had hedging not been attempted. This risk is
particularly acute in the case of "cross-hedges" between
currencies.
o The advisers may incorrectly forecast interest rates, market
values or other economic factors in utilizing a derivatives
strategy. In such a case, the Portfolio may have been in a
better position had it not entered into such strategy.
o Hedging strategies, while reducing risk of loss, can also
reduce the opportunity for gain. In other words, hedging
usually limits both potential losses as well as potential
gains.
o Strategies not involving hedging may increase the risk to the
Portfolio. Certain strategies, such as yield enhancement, can
have speculative characteristics and may result in more risk
to the Portfolio than hedging strategies using the same
instruments.
o There can be no assurance that a liquid market will exist at a
time when the Portfolio seeks to close out an option, futures
contract or other derivative or related position. Many
exchanges and boards of trade limit the amount of fluctuation
permitted in option or futures contract prices during a single
day; once the daily limit has been reached on particular
contract, no trades may be made that day at a price beyond
that limit. In addition, certain instruments are relatively
new and without a significant trading history. As a result,
there is no assurance that an active secondary market will
develop or continue to exist. Finally, over-the-counter
instruments typically do not have a liquid market. Lack of a
liquid market for any reason may prevent the Portfolio from
liquidating an unfavorable position.
o Activities of large traders in the futures and securities
markets involving arbitrage, "program trading," and other
investment strategies may cause price distortions in these
markets.
o In certain instances, particularly those involving
over-the-counter transactions or forward contracts, there is a
greater potential that a counterparty or broker may default or
be unable to perform on its commitments.
In the event of such a default, the Portfolio may experience a
loss.
o In transactions involving currencies, the value of the
currency underlying an instrument may fluctuate due to many
factors, including economic conditions, interest rates,
governmental policies and market forces.
SPECIFIC USES AND STRATEGIES
Set forth below are explanations of various strategies involving
derivatives and related instruments which may be used by the Portfolio.
OPTIONS ON SECURITIES, SECURITIES INDEXES AND DEBT INSTRUMENTS. The
Portfolio may PURCHASE, SELL or EXERCISE call and put options on:
o securities;
o securities indexes; and
o debt instruments.
Although in most cases these options will be exchange-traded, the
Portfolio may also purchase, sell or exercise over-the-counter options.
Over-the-counter options differ from exchange-traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller. As such, over-the-counter options generally have much less market
liquidity and carry the risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities the Portfolio intends to purchase pending its
ability to invest in such securities in an orderly manner. The Portfolio may
also use combinations of options to minimize costs, gain exposure to markets or
take advantage of price disparities or market movements. For example, the
Portfolio may sell put or call options it has previously purchased or purchase
put or call options it has previously sold. These transactions may result in a
net gain or loss depending on whether the amount realized on the sale is more or
less than the premium and other transaction costs paid on the put or call option
which is sold. The Portfolio may write a call or put option in order to earn the
related premium from such transactions. Prior to exercise or expiration, an
option may be closed out by an offsetting purchase or sale of a related option.
The Portfolio will not write uncovered options.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, the
Portfolio writing a covered call (i.e., where the underlying securities are held
by the Portfolio) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price.
If a put or call option purchased by the Portfolio is not sold when it
has remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in the
case of a call, remains less than or equal to the exercise price, the Portfolio
will lose its entire investment in the option. Also, where a put or call option
on a particular security is purchased to hedge against price movements in a
related security, the price of the put or call option may move more or less than
the price of the related security. There can be no assurance that a liquid
market will exist when the Portfolio seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, the Portfolio may be unable to close out a position.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase or sell:
o interest-rate futures contracts;
o futures contracts on specified instruments or indices; and
o options on these futures contracts ("futures options").
The futures contracts and futures options may be based on various
instruments or indices in which the Portfolio may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
the Portfolio may sell a futures contract -- or buy a futures option -- to
protect against a decline in value, or reduce the duration, of portfolio
holdings. Likewise, these instruments may be used where the Portfolio intends to
acquire an instrument or enter into a position. For example, the Portfolio may
purchase a futures contract -- or buy a futures option -- to gain immediate
exposure in a market or otherwise offset increases in the purchase price of
securities or currencies to be acquired in the future. Futures options may also
be written to earn the related premiums.
When writing or purchasing options, the Portfolio may simultaneously
enter into other transactions involving futures contracts or futures options in
order to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. The Portfolio may engage in cross-hedging by purchasing or
selling futures or options on a security or currency different from the security
or currency position being hedged to take advantage of relationships between the
two securities or currencies.
Investments in futures contracts and options thereon involve risks
related to those associated with options transactions discussed above. The
Portfolio will only enter into futures contracts or options or futures contracts
which are traded on a U.S. or foreign exchange or board of trade, or similar
entity, or quoted on an automated quotation system.
FORWARD CONTRACTS. The Portfolio may use foreign currency and interest-
rate forward contracts for various purposes as described below.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. The Portfolio that
may invest in securities denominated in foreign currencies may, in addition to
buying and selling foreign currency futures contracts and options on foreign
currencies and foreign currency futures, enter into forward foreign currency
exchange contracts to reduce the risks or otherwise take a position in
anticipation of changes in foreign exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be a fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
By entering into a forward foreign currency contract, the Portfolio "locks in"
the exchange rate between the currency it will deliver and the currency it will
receive for the duration of the contract. As a result, the Portfolio reduces its
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into. The
effect on the value of the Portfolio is similar to selling securities
denominated in one currency and purchasing securities denominated in another.
Transactions that use two foreign currencies are sometimes referred to as
"cross-hedges."
The Portfolio may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Portfolio's investments or
anticipated investments in securities denominated in foreign currencies. The
Portfolio may also enter into these contracts for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.
The Portfolio may also use forward contracts to hedge against changes
in interest-rates, increase exposure to a market or otherwise take advantage of
such changes. An interest-rate forward contract involves the obligation to
purchase or sell a specific debt instrument at a fixed price at a future date.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolio may employ
currency and interest rate management techniques, including transactions in
options (including yield curve options), futures, options on futures, forward
foreign currency exchange contracts, currency options and futures and currency
and interest rate swaps. The aggregate amount of the Portfolio's net currency
exposure will not exceed the total net asset value of its portfolio. However, to
the extent that the Portfolio is fully invested while also maintaining currency
positions, it may be exposed to greater combined risk.
The Portfolio will only enter into interest rate and currency swaps on
a net basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and currency swaps do not involve the delivery of
securities, the underlying currency, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and currency swaps
is limited to the net amount of interest or currency payments that the Portfolio
is contractually obligated to make. If the other party to an interest rate or
currency swap defaults, the Portfolio's risk of loss consists of the net amount
of interest or currency payments that the Portfolio is contractually entitled to
receive. Since interest rate and currency swaps are individually negotiated, the
Portfolio expects to achieve an acceptable degree of correlation between their
portfolio investments and their interest rate or currency swap positions.
The Portfolio may hold foreign currency received in connection with
investments in foreign securities when it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rate.
The Portfolio may purchase or sell without limitation as to a
percentage of its assets forward foreign currency exchange contracts when the
advisers anticipate that the foreign currency will appreciate or depreciate in
value, but securities denominated in that currency do not present attractive
investment opportunities and are not held by the Portfolio. In addition, the
Portfolio may enter into forward foreign currency exchange contracts in order to
protect against adverse changes in future foreign currency exchange rates. The
Portfolio may engage in cross-hedging by using forward contracts in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency if its advisers believe that there is a pattern of
correlation between the two currencies. Forward contracts may reduce the
potential gain from a positive change in the relationship between the U.S.
Dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Portfolio than if it had not
entered into such contracts. The use of foreign currency forward contracts will
not eliminate fluctuations in the underlying U.S. dollar equivalent value of the
prices of or rates of return on the Portfolio's foreign currency denominated
portfolio securities and the use of such techniques will subject the Portfolio
to certain risks.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, the Portfolio may not always be able to enter into foreign currency
forward contracts at attractive prices, and this will limit the Portfolio's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to the Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying the Portfolio's cross-hedges and the movements in the exchange rates
of the foreign currencies in which the Portfolio's assets that are the subject
of such cross-hedges are denominated.
The Portfolio may enter into interest rate and currency swaps to the
maximum allowed limits under applicable law. The Portfolio will typically use
interest rate swaps to shorten the effective duration of its portfolio. Interest
rate swaps involve the exchange by the Portfolio with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
STRUCTURED PRODUCTS. The Portfolio may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain other investments. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of securities ("structured products")
backed by, or representing interests in, the underlying instruments. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. The Portfolio may invest in structured products which represent
derived investment positions based on relationships among different markets or
asset classes.
The Portfolio may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate"). As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the Cost of
Funds Index. Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate. A spread trade is an investment position relating to a
difference in the prices or interest rates of two securities where the value of
the investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities. When
the Portfolio invests in notes linked to the price of an underlying instrument,
the price of the underlying security is determined by a multiple (based on a
formula) of the price of such underlying security. A structured product may be
considered to be leveraged to the extent its interest rate varies by a magnitude
that exceeds the magnitude of the change in the index rate of interest. Because
they are linked to their underlying markets or securities, investments in
structured products generally are subject to greater volatility than an
investment directly in the underlying market or security. Total return on the
structured product is derived by linking return to one or more characteristics
of the underlying instrument. Because certain structured products of the type in
which the Portfolio may invest may involve no credit enhancement, the credit
risk of those structured products generally would be equivalent to that of the
underlying instruments. The Portfolio may invest in a class of structured
products that is either subordinated or unsubordinated to the right of payment
of another class. Subordinated structured products typically have higher yields
and present greater risks than unsubordinated structured products. Although the
Portfolio's purchase of subordinated structured products would have similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the Portfolio's
fundamental investment limitation related to borrowing and leverage.
Certain issuers of structured products may be deemed to be, "investment
companies" as defined in the 1940 Act. As a result, the Portfolio's investments
in these structured products may be limited by the restrictions contained in the
1940 Act. Structured products are typically sold in private placement
transactions and there currently is no action trading market for structured
products. As a result, certain structured products in which the Portfolio
invests may be deemed illiquid and subject to its limitation on illiquid
investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.
Additional Restrictions on the Use of Futures and Option Contracts
The Portfolio is not a "commodity pool" (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the CFTC and futures contracts and futures
options will be purchased, sold or entered into only for bona fide hedging
purposes, provided that the Portfolio may enter into such transactions for
purposes other than bona fide hedging if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open contracts and options would
not exceed 5% of the liquidation value of the Portfolio's portfolio, provided,
further, that, in the case of an option that is in-the-money, the in-the-money
amount may be excluded in calculating the 5% limitation.
When the Portfolio purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with the Portfolio's custodian or sub-custodian so that the
amount so segregated, plus the initial deposit and variation margin held in the
account of its broker, will at all times equal the value of the futures
contract, thereby insuring that the use of such futures is unleveraged.
The Portfolio's ability to engage in the transactions described herein
may be limited by the current federal income tax requirement that the Portfolio
derive less than 30% of its gross income from the sale or other disposition of
stock or securities held for less than three months.
INVESTMENT RESTRICTIONS
The Portfolio has adopted the following investment restrictions which
may not be changed without approval by a "majority of the outstanding shares" of
the Portfolio which, as used in this Statement of Additional Information, means
the vote of the lesser of (i) 67% or more of the total beneficial interests of a
Portfolio present at a meeting, if the holders of more than 50% of the
outstanding total beneficial interests of a Portfolio are present or represented
by proxy, or (ii) more than 50% of the outstanding total beneficial interests of
a Portfolio.
The Portfolio may not:
(1) borrow money, except that the Portfolio may borrow money
for temporary or emergency purposes, or by engaging in reverse
repurchase transactions, in an amount not exceeding 33-1/3% of the
value of its total assets at the time when the loan is made and may
pledge, mortgage or hypothecate no more than 1/3 of its net assets to
secure such borrowings. Any borrowings representing more than 5% of the
Portfolio's total assets must be repaid before the Portfolio may make
additional investments;
(2) make loans, except that the Portfolio may: (i) purchase
and hold debt instruments (including without limitation, bonds, notes,
debentures or other obligations and certificates of deposit, bankers'
acceptances and fixed time deposits) in accordance with its investment
objectives and policies; (ii) enter into repurchase agreements with
respect to portfolio securities; and (iii) lend portfolio securities
with a value not in excess of one-third of the value of its total
assets;
(3) purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities, or repurchase agreements secured
thereby) if, as a result, more than 25% of the Portfolio's total assets
would be invested in the securities of companies whose principal
business activities are in the same industry. Notwithstanding the
foregoing, with respect to the Portfolio's permissible futures and
options transactions in U.S. government securities, positions in such
options and futures shall not be subject to this restriction;
(4) purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments but this shall
not prevent the Portfolio from (i) purchasing or selling options and
futures contracts or from investing in securities or other instruments
backed by physical commodities or (ii) engaging in forward purchase or
sales of foreign currencies or securities;
(5) purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments (but this shall not
prevent the Portfolio from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real
estate business). Investments by the Portfolio in securities backed by
mortgages on real estate or in marketable securities of companies
engaged in such activities are not hereby precluded;
(6) issue any senior security (as defined in the 1940 Act),
except that (a) the Portfolio may engage in transactions that may
result in the issuance of senior securities to the extent permitted
under applicable regulations and interpretations of the 1940 Act or an
exemptive order; (b) the Portfolio may acquire other securities, the
acquisition of which may result in the issuance of a senior security,
to the extent permitted under applicable regulations or interpretations
of the 1940 Act; and (c) subject to the restrictions set forth above,
the Portfolio may borrow money as authorized by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to
permissible options and futures transactions, including deposits of
initial and variation margin, are not considered to be the issuance of
a senior security; or
(7) underwrite securities issued by other persons except
insofar as the Portfolio may technically be deemed to be an underwriter
under the Securities Act of 1933 in selling a portfolio security.
For purposes of investment restriction (5) above, real estate includes
Real Estate Limited Partnerships. For purposes of investment restriction (3)
above, industrial development bonds, where the payment of principal and interest
is the ultimate responsibility of companies within the same industry, are
grouped together as an "industry." Supranational organizations are collectively
considered to be members of a single "industry" for purposes of restriction (3)
above.
In addition, the Portfolio is subject to the following non-fundamental
restrictions which may be changed without shareholder approval:
(1) The Portfolio may not, with respect to 50% of its assets,
hold more than 10% of the outstanding voting securities of an issuer.
(2) The Portfolio may not make short sales of securities,
other than short sales "against the box," or purchase securities on
margin except for short-term credits necessary for clearance of
portfolio transactions, provided that this restriction will not be
applied to limit the use of options, futures contracts and related
options, in the manner otherwise permitted by the investment
restrictions, policies and investment program of the Portfolio.
(3) The Portfolio may not purchase or sell interests in oil,
gas or mineral leases.
(4) The Portfolio may not invest more than 15% of its net
assets in illiquid securities.
(5) The Portfolio may not write, purchase or sell any put or
call option or any combination thereof, provided that this shall not
prevent (i) the purchase, ownership, holding or sale of warrants where
the grantor of the warrants is the issuer of the underlying securities,
(ii) the writing, purchasing or selling of puts, calls or combinations
thereof with respect to portfolio securities or (iii) with respect to
the Portfolio's permissible futures and options transactions, the
writing, purchasing, ownership, holding or selling of futures and
options positions or of puts, calls or combinations thereof with
respect to futures.
(6) The Portfolio may invest up to 5% of its total assets in
the securities of any one investment company, but may not own more than
3% of the securities of any one investment company or invest more than
10% of its total assets in the securities of other investment
companies.
It is the Portfolio's position that proprietary strips, such as CATS
and TIGRS, are United States Government securities. However, the Portfolio has
been advised that the staff of the Securities and Exchange Commission's Division
of Investment Management does not consider these to be United States Government
securities, as defined under the Investment Company Act of 1940, as amended.
For purposes of the Portfolio's investment restrictions, the issuer of
a tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
In order to permit the sale of its beneficial interests in certain
states, the Portfolio may make commitments more restrictive than the investment
policies and limitations described above and in the prospectus. Should the
Portfolio determine that any such commitment is no longer in its best interests,
it will revoke the commitment by terminating sales of its beneficial interests
in the state involved. In order to comply with certain federal and state
statutes and regulatory policies, as a matter of operating policy, the Portfolio
will not: (i) invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation, (ii)
invest in warrants valued at the lower of cost or market, in excess of 5% of the
value of its net assets, and no more than 2% of such value may be warrants which
are not listed on the New York or American Stock Exchanges, or (iii) purchase or
retain in its portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or trustee of
the Trust or Portfolio, or is an officer or director of the Adviser, if after
the purchase of the securities of such issuer by the Portfolio one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or securities,
or both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, all taken at market value.
If a percentage or rating restriction on investment or use of assets
set forth herein or in the Prospectus is adhered to at the time a transaction is
effected, later changes in percentage resulting from any cause other than
actions by the Portfolio will not be considered a violation. If the value of the
Portfolio's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for the Portfolio are
made by a portfolio manager who is an employee of the Portfolio Adviser and who
is appointed and supervised by senior officers of the Portfolio Adviser. Changes
in the Portfolio's investments are reviewed by the Board of Trustees. The
Portfolio's portfolio manager may serve other clients of the Portfolio Adviser
in a similar capacity.
The frequency of the Portfolio's portfolio transactions, the portfolio
turnover rate, will vary from year to year depending upon market conditions.
Because a high turnover rate may increase transaction costs and the possibility
of taxable short-term gains, the Portfolio Adviser will weigh the added costs of
short-term investment against anticipated gains.
The Portfolio Adviser does not anticipate that portfolio turnover will
result in adverse tax consequences. However, high portfolio turnover may result
in high transaction costs to the Portfolio. For the fiscal years ended October
31, 1996 and 1995, the portfolio turnover rate for the Portfolio was 62% and
71%, respectively.
The primary consideration in placing portfolio security transactions
with broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Portfolio Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Portfolio and
other clients of the Portfolio Adviser on the basis of their professional
capability, the value and quality of their brokerage services, and the level of
their brokerage commissions. Debt securities are traded principally in the
over-the-counter market through dealers acting on their own account and not as
brokers. In the case of securities traded in the over-the-counter market (where
no stated commissions are paid but the prices include a dealer's markup or
markdown), the Portfolio Adviser normally seeks to deal directly with the
primary market makers unless, in its opinion, best execution is available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
Portfolio Adviser on the tender of the Portfolio's portfolio securities in
so-called tender or exchange offers. Such soliciting dealer fees are in effect
recaptured for the Portfolios by the Portfolio Adviser. At present, no other
recapture arrangements are in effect.
Under Section 28(e) of the Securities Exchange Act of 1934, the
Portfolio Adviser may cause the Portfolio to pay a broker-dealer which provides
brokerage and research services to the Adviser an amount of commission for
effecting a securities transaction for the Portfolio in excess of the amount
other broker-dealers would have charged for the transaction if the Portfolio
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Portfolio Adviser's overall responsibilities to the Portfolio or to its
clients. Not all of such services are useful or of value in advising the
Portfolio.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers of
securities, furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Portfolio Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Portfolio and the Portfolio Adviser's other clients as part of
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Portfolio Adviser for
no consideration other than brokerage or underwriting commissions. Securities
may be bought or sold through such broker-dealers, but at present, unless
otherwise directed by the Portfolio, a commission higher than one charged
elsewhere will not be paid to such a firm solely because it provided Research to
the Portfolio Adviser.
The Portfolio Adviser's investment management personnel will attempt to
evaluate the quality of Research provided by brokers. Results of this effort are
sometimes used by the Portfolio Adviser as a consideration in the selection of
brokers to execute portfolio transactions. However, the Portfolio Adviser would
be unable to quantify the amount of commissions which are paid as a result of
such Research because a substantial number of transactions are effected through
brokers which provide Research but which are selected principally because of
their execution capabilities.
The management fees that the Funds pay to the Portfolio Adviser will
not be reduced as a consequence of the Adviser's receipt of brokerage and
research services. To the extent the Portfolio's portfolio transactions are used
to obtain such services, the brokerage commissions paid by the Portfolio will
exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Portfolio Adviser in serving the Portfolio and other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the Portfolio Adviser in carrying out its obligations to the
Portfolio. While such services are not expected to reduce the expenses of the
Portfolio Adviser, the Portfolio Adviser would, through use of the services,
avoid the additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
In certain instances, there may be securities that are suitable for the
Portfolio as well as one or more of the Portfolio Adviser's other clients.
Investment decisions for the Portfolio and for the Portfolio Adviser's other
clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for more
than one client or that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling that same security. Some simultaneous transactions
are inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When the Portfolio or the
Portfolio Adviser's other clients are simultaneously engaged in the purchase or
sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Portfolio is concerned. However, it is believed that the
ability of the Portfolio to participate in volume transactions will generally
produce better executions for the Portfolio.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 P.M. New York
Time, on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Portfolio will invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the FUND's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees of the
Portfolio. Portfolio securities which are traded both on an exchange and in the
over-the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
currently 4:15 P.M. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Trustees. As of the date of this Statement of Additional
Information, such securities will be valued by the latter method. Securities for
which reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith by, or
under procedures established by, the Trustees of the Portfolio.
Money market instruments with less than sixty days remaining to
maturity when acquired by the Portfolio will be valued on an amortized cost
basis by the Portfolio, excluding unrealized gains or losses thereon from the
valuation. This is accomplished by valuing the security at cost and then
assuming a constant amortization to maturity of any premium or discount. If the
Portfolio acquires a money market instrument with more than sixty days remaining
to its maturity, it will be valued at current market value until the 60th day
prior to maturity, and will then be valued on an amortized cost basis based upon
the value on such date unless the Trustees of the Portfolio determine during
such 60-day period that this amortized cost value does not represent fair market
value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
Orders to purchase or redeem Shares of the FUND received by dealers
prior to 4:00 P.M. (Eastern Time) will be confirmed at the previous offering or
redemption price computed as of the close of trading on the options exchanges
(normally 4:15 P.M New York Time), provided the order is received by the FUND's
Transfer Agent prior to 4:00 P.M. on that day. It is the responsibility of the
dealer to insure that all orders are transmitted timely to the FUND. Orders
received by dealers after 4:00 P.M. will be confirmed at the next computed
offering or redemption price.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assumes reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods or
at the end of the 1, 5 or 10 year periods (or fractional
portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
<PAGE>
The FUND's annual total return, for the fiscal year ended October 31,
1996 and from inception through October 31, 1995 was 18.77% and 17.39%,
respectively.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee, which was in effect until December, 1994, from the
initial value invested. THE FUND WILL, HOWEVER, DISCLOSE THE PRO RATA SHARE OF
THE ACCOUNT OPENING FEE AND WILL DISCLOSE THAT THE PERFORMANCE DATA DOES NOT
REFLECT SUCH NON-RECURRING CHARGE AND THAT INCLUSION OF SUCH CHARGE WOULD REDUCE
THE PERFORMANCE QUOTED. Such alternative total return information will be given
no greater prominence in such advertising than the information prescribed under
the Commission's rules.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a RIC, the FUND is not subject to federal income tax on the portion
of its net investment income (I.E., taxable interest, dividends and other
taxable ordinary income, net of expenses) and capital gain net income (I.E., the
excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (I.E., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the FUND made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
Because the FUND invests all of its assets in the Portfolio, which is classified
as a partnership for federal income tax purposes, the FUND will be deemed to own
a proportionate share of the assets and income of the Portfolio for purposes of
determining whether the FUND satisfies the requirements (described more fully
below) necessary to qualify as a regulated investment company.
In addition to satisfying the Distribution Requirement, a RIC must: (1)
derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the company's principal business of
investing in stock or securities) and other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "Income Requirement");
and (2) derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the "Short-Short Gain Test"). Because of the
Short-Short Gain Test, the FUND may have to limit the sale of appreciated
securities that it held for less than three months. However, foreign currency
gains that are directly related to the company's investment in stock or
securities are not treated as short-short gains. Similarly, the Short-Short Gain
Test will not prevent the FUND from disposing of investments at a loss, since
losses are disregarded for this purpose. Interest (including original issue
discount) received by the FUND at maturity or upon the disposition of a security
held for less than three months is not treated as gross income derived from the
sale or other disposition of a security within the meaning of the Short-Short
Gain Test. However, income attributable to realized market appreciation will be
so treated for this purpose.
In general, gain or loss recognized by the Portfolio on the disposition
of an asset (and allocated to the FUND) will be a capital gain or loss. However,
gain recognized on the disposition of a debt obligation purchased at a market
discount will be treated as ordinary income to the extent of the portion of the
discount that accrued while the Portfolio held the obligation. In addition,
under the rules of Code Section 988, a portion of gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto, and (with certain exceptions) gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, will generally
be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the FUND (through its Portfolio) on the disposition of an asset is
long-term or short-term, the holding period of the asset may be affected if (1)
the asset is used to close a "short sale" (which may include the acquisition of
a put option) or is substantially identical to another asset so used, (2) the
asset is otherwise held by the Portfolio as part of a "straddle" (as defined) or
(3) the asset is stock and the Portfolio grants an in-the-money qualified
covered call option with respect thereto. In addition, the FUND may be required
to defer the recognition of a loss on a disposition of an asset held as part of
a straddle to the extent of any unrecognized gain on the offsetting position.
Any gain allocated to the FUND on the lapse of, or any gain or loss
allocated to it from a closing transaction with respect to, an option written by
the Portfolio will be treated as a short-term capital gain or loss. For purposes
of the Short-Short Gain Test, the holding period of such an option will commence
on the date it is written and end on the date it lapses or the date a closing
transaction is entered into. Accordingly, the Portfolio may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
Regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts are subject to special tax
treatment as "Section 1256 contracts." Such contracts are treated as if they are
sold for their fair market value on the last business day of the taxable year,
even though a taxpayer's obligations (or rights) under such contracts have not
terminated as of such date. Gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any gain or loss recognized upon the actual
termination of such contracts during the year. The combined capital gain or loss
for the year with respect to Section 1256 contracts is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. (The
Portfolio may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments that are
not Section 1256 contracts.) The IRS has held in private rulings that
constructive gains arising from deemed year-end dispositions of Section 1256
contracts will not be taken into account for purposes of the Short-Short Gain
Test.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (I.E.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it were incurred in the succeeding year.
In addition to the requirements described above, the FUND must satisfy
an asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a RIC's taxable year,
at least 50% of the value of its assets must consist of cash and cash items,
U.S. Government securities, securities of other RICs, and securities of other
issuers (as to which the RIC has not invested more than 5% of the value of its
total assets in securities of such issuer and as to which it does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other RICs),
or in two or more issuers which the RIC controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put) with
respect to a security is treated as issued by the issuer of the security and not
the issuer of the option.
<PAGE>
If for any taxable year the FUND does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable to the shareholders as ordinary dividends
to the extent of the FUND's current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a RIC that fails to
distribute in each calendar year an amount equal to 98% of its ordinary taxable
income for the calendar year and 98% of its capital gain net income for the
one-year period ended on October 31 of the year. The balance of such income must
be distributed during the next calendar year.
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. The FUND
may in certain circumstances have to liquidate portfolio investments in order to
effect such distributions.
FUND Distributions
The FUND intends to distribute substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute
such gains annually. Net capital gain distributed and designated as a capital
gain dividend is taxable to shareholders as long-term capital gain, regardless
of the shareholder's holding period in his shares and the time when such gain
was recognized by the Portfolio.
If the FUND elects to retain its net capital gain, it will be taxed
thereon (except to the extent of any available capital loss carryovers) at the
35% corporate tax rate. In this case, the FUND would expect to elect to have
shareholders of record on the last day of the taxable year treated as if each
received a distribution of his pro rata share of the gain, with the result that
each would be required to report his pro rata share of such gain on his tax
return as a long-term capital gain, would receive a refundable tax credit for
his pro rata share of the tax paid by the FUND on the gain, and would increase
the tax basis for his shares by an amount equal to the deemed distribution less
the credit.
Ordinary income dividends distributed by the FUND will qualify for the
70% dividends-received deduction generally available to corporations (other than
corporations, such as S corporations, which are not eligible for the deduction)
to the extent of the portion of the distribution attributed to "qualifying
dividends" received by the Portfolio during the taxable year from domestic
corporations. A dividend received by the Portfolio will not be treated as a
qualifying dividend (1) if it was received with respect to stock that the
Portfolio held for less than 46 days (91 days in the case of certain preferred
stock), subject to the limitations of Code Sections 246(c)(3) and (4) and 246A.
Moreover, the dividends-received deduction for a corporate shareholder will also
be disallowed if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its FUND shares or the FUND fails to satisfy them
with respect to its interest in the Portfolio.
Investment income that may be received by the Portfolio from foreign
sources may be subject to foreign taxes withheld at the source. The United
States has entered into tax treaties with a number of foreign countries, which
entitle the Portfolio to reduced rates of, or exemptions from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the future mix of the Portfolio's investments in various countries
is not known.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholders' tax basis in their shares;
any excess will be treated as gain from a sale of the shares, as discussed more
fully below.
Distributions by the FUND will be treated in the manner described above
whether they are paid in cash or reinvested in additional shares of the FUND (or
of another fund). In addition, if a shareholder's cost for his shares already
reflects undistributed (realized or unrealized) income or gain, a subsequent
distribution of such amounts will be taxable to the shareholder in the manner
described above, although economically it constitutes a return of capital.
Ordinarily, shareholders are required to take distributions into
account in the year in which they are made. However, dividends declared by the
FUND in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such year if such dividends are actually paid in January of the following year.
Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of dividends and the proceeds of redemption paid to any
shareholder (1) who has provided either an incorrect tax identification number
or no number at all to the FUND, (2) who is subject to backup withholding
pursuant to a notice from the IRS for failure to report interest or dividend
income properly, or (3) who has not otherwise certified to the FUND that it is
not subject to backup withholding.
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
his shares in an amount equal to the difference between the amount realized on
the shares and his adjusted tax basis in them. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of the
FUND within 30 days before or after the disposition. In general, gain or loss
arising from a sale or redemption of FUND shares will constitute capital gain or
loss, and will be long-term capital gain or loss if the shares were held longer
than one year. However, a capital loss arising from a disposition of shares held
for six months or less will be treated as a long-term capital loss to the extent
of any amount of capital gain dividends received on the shares. For this
purpose, the special holding period rules of Code Section 246(c)(3) and (4)
(alluded to above in connection with the dividends-received deduction for
corporations) will generally apply. Capital losses in any year are deductible
only to the extent of capital gains plus, in the case of noncorporate taxpayers,
$3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income
received from the FUND is "effectively connected" with a U.S. trade or business
carried on by the shareholder.
If the income is not effectively connected in the above sense, ordinary
income dividends distributed to a foreign shareholder will be subject to U.S.
withholding tax at the rate of 30% (or a lower treaty rate, if one applies) of
the gross amount of the dividend. Such a shareholder would generally be exempt
from U.S. federal income tax on gains realized on a sale of FUND shares and
capital gain dividends.
If income from the FUND is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and gain realized upon the sale of FUND shares will be
subject to U.S. federal income tax at the rates applicable to U.S. citizens or
domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless they furnish the FUND with proper notification of their exempt
status.
The tax consequences to foreign shareholders entitled to claim the
benefits of applicable treaties may differ from one treaty to another. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the FUND, including the
applicability of any foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly alter the
conclusions expressed herein, perhaps with retroactive effect.
Rules of state and local taxation of dividends from regulated
investment companies often differ from the rules for U.S. federal income
taxation described above. Shareholders are urged to consult their tax advisers
as to the consequences of their investing in the FUND in light of their
particular circumstances.
<PAGE>
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their birthdates, addresses,
principal occupations, and present positions, including any affiliation with
Virtus Capital Management, Inc., Signet Trust Company, Federated Investors,
Federated Securities Corp., Federated Shareholder Services Company, and
Federated Administrative Services or the Funds (as defined below).
<TABLE>
<CAPTION>
<S> <C>
John F. Donahue(1)(2) CHAIRMAN AND TRUSTEE OF THE FUND; Chairman and Trustee,
Federated Investors Tower Federated Investors, Federated Advisers, Federated
Pittsburgh, PA Management, and Federated Research; Chairman and
BIRTHDATE: JULY 28, 1924 Director, Federated Research Corp. and Federated Global
Research Corp.; Chairman, Passport Research, Ltd.; Chief
Executive Officer and Director, Trustee, or Managing
General Partner of the Funds. Mr. Donahue is the father of
J. Christopher Donahue, Executive Vice President of the
Fund.
Thomas G. Bigley TRUSTEE OF THE FUND; Director, Oberg Manufacturing Co.;
28th Floor Chairman of the Board, Children's Hospital of Pittsburgh;
One Oxford Centre Director, Trustee or Managing General Partner of the Funds;
Pittsburgh, PA formerly, Senior Partner, Ernst & Young LLP.
BIRTHDATE: FEBRUARY 3, 1934
John T. Conroy, Jr.(3) TRUSTEE OF THE FUND; President, Investment Properties
John R. Wood and Associates, Inc., Realtors Corporation; Senior Vice-President, John R. Wood and
3255 Tamiami Trail North Associates, Inc., Realtors; President, Northgate Village
Naples, FL Development Corporation; Partner or Trustee in private real
BIRTHDATE: JUNE 23, 1937 estate ventures in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds; formerly, President,
Naples Property Management, Inc.
Wood/IPC Commercial Department.
William J. Copeland(3) TRUSTEE OF THE FUND; Director and Member of the Executive
One PNC Plaza - 23rd Floor Committee, Michael Baker, Inc.; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Vice
BIRTHDATE: JULY 4, 1918 Chairman and Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd(3) TRUSTEE OF THE FUND; Attorney-at-law; Director, The
571 Hayward Mill Road Emerging Germany Fund, Inc.; Director, Trustee, or
Concord, MA Managing General Partner of the Funds.
BIRTHDATE: MAY 18, 1922
Lawrence D. Ellis, M.D.(1) TRUSTEE OF THE FUND; Professor of Medicine and Member,
3471 Fifth Avenue, Suite 1111 Board of Trustees, University of Pittsburgh; Medical
Pittsburgh, PA Director, University of Pittsburgh Medical Center-
BIRTHDATE: OCTOBER 11, 1932 Downtown, Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Director, Trustee, or Managing General Partner of
the Funds.
Edward L. Flaherty, Jr.(3) TRUSTEE OF THE FUND; Attorney-at-law; Shareholder,
Miller, Miller, Ament, Henny & Kochuba Ament, Henny & Kochuba; Director, Eat'N Park Restaurants,
205 Ross Street Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds;
BIRTHDATE: JUNE 18, 1924 formerly, Counsel, Horizon Financial, F.A., Western
Region.
<PAGE>
Edward C. Gonzales(1) PRESIDENT, TRUSTEE AND TREASURER OF THE FUND; Vice
Federated Investors Tower Chairman, Treasurer, and Trustee, Federated Investors;
Pittsburgh, PA Vice President, Federated Advisers, Federated
BIRTHDATE: OCTOBER 22, 1930 Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport
Research, Ltd.; Executive Vice President and Director,
Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Chairman, Treasurer,
and Trustee, Federated Administrative Services; Trustee
or Director of some of the Funds; President, Executive
Vice President and Treasurer of some of the Funds.
Peter E. Madden TRUSTEE OF THE FUND; Consultant; State Representative,
Seacliff Commonwealth of Massachusetts; Director, Trustee, or
526 Bellevue Avenue Managing General Partner of the Funds; formerly, President,
Newport, RI State Street Bank and Trust Company and State Street Boston
BIRTHDATE: MARCH 16, 1942 Corporation.
Gregor F. Meyer TRUSTEE OF THE FUND; Attorney-at-law; Shareholder, Miller,
Miller, Ament, Henny & Kochuba Ament, Henny & Kochuba; Chairman, Meritcare, Inc.;
205 Ross Street Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.
BIRTHDATE: OCTOBER 6, 1926
John E. Murray, Jr., J.D., S.J.D. TRUSTEE OF THE FUND; President, Law Professor, Duquesne
President, Duquesne University University; Consulting Partner, Mollica, Murray and Hogue;
Pittsburgh, PA Director, Trustee or Managing Partner of the Funds.
BIRTHDATE: DECEMBER 20, 1932
Wesley W. Posvar TRUSTEE OF THE FUND; Professor, International Politics and
1202 Cathedral of Learning Management Consultant; Trustee, Carnegie Endowment for
University of Pittsburgh International Peace, RAND Corporation, Online Computer
Pittsburgh, PA Library Center, Inc., and U.S. Space Foundation; Chairman,
BIRTHDATE: SEPTEMBER 14, 1925 Czecho Management Center; Director, Trustee, or Managing
General Partner of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory
Council for Environmental Policy and Technology and Federal
Emergency Management Advisory Board.
Marjorie P. Smuts TRUSTEE OF THE FUND; Public relations/marketing consultant;
4905 Bayard Street Conference Coordinator, Non-profit entities; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds.
BIRTHDATE: JUNE 21, 1935
J. Christopher Donahue EXECUTIVE VICE PRESIDENT OF THE FUND; President and
Federated Investors Tower Trustee, Federated Investors, Federated Advisers, Federated
Pittsburgh, PA Management, and Federated Research; President and
BIRTHDATE: APRIL 11, 1949 Director, Federated Research Corp. and Federated Global
Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Shareholder Services
Company, and Federated Shareholder Services; Director, Federated
Services Company; President or Executive Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of
the Funds. Mr. Donahue is the son of John F. Donahue, Chairman
and Trustee of the Fund.
<PAGE>
John W. McGonigle EXECUTIVE VICE PRESIDENT AND SECRETARY OF THE FUND;
Federated Investors Tower Executive Vice President, Secretary, and Trustee, Federated
Pittsbugh, PA Investors; Trustee, Federated Advisers, Federated
BIRTHDATE: OCTOBER 26, 1938 Management, and Federated Research; Director, Federated
Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director,
Federated Services Company; President and Trustee,
Federated Shareholder Services; Director, Federated
Securities Corp.; Executive Vice President and Secretary of
the Funds.
Richard B. Fisher VICE PRESIDENT OF THE FUND; Executive Vice President and
Federated Investors Tower Trustee, Federated Investors; Chairman and Director,
Pittsburgh, PA Federated Securities Corp.; President or Vice President of
BIRTHDATE: MAY 17, 1923 Some of the Funds; Director or Trustee of some of the Funds.
Joseph S. Machi VICE PRESIDENT AND ASSISTANT TREASURER OF THE FUND; Vice
Federated Investors Tower President, Federated Administrative Services; Vice President
Pittsburgh, PA and Assistant Treasurer of some of the Funds.
BIRTHDATE: MAY 22, 1962
</TABLE>
(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
THE FUNDS
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
111 Corcoran Funds; Arrow Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc. ; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds; The
Starburst Funds II; The Virtus Funds; Trust for Financial Institutions; Trust
for Government Cash Reserves; Trust for Short-Term U.S. Government Securities;
Trust for U.S. Treasury Obligations; and World Investment Series, Inc.
<PAGE>
FUND OWNERSHIP
As of February 3, 1997, Officers and Trustees owned less than 1% of the
outstanding shares of the FUND.
To the best knowledge of the FUND, as of February 3, 1997, one
shareholder owned 5% or more of the outstanding shares of the FUND. Stephens
Inc., Little Rock, Arkansas, owned approximately 310,647 shares (19.54%).
The Trustees and officers of the Portfolio and their age and principal
occupations for at least the past five years are set forth below. Their titles
may have varied during that period. Asterisks indicate those Trustees who are
"interested persons" (as defined in the 1940 Act) of the Portfolio. Unless
otherwise indicated below, the address of each officer is 6 St.
James Avenue, Suite 900, Boston, Massachusetts 02116.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS YEAR FIRST BECAME
TRUSTEE AGE FOR THE LAST FIVE YEARS A TRUSTEE
<S> <C> <C> <C>
Fergus Reid, III 64 Chairman and Chief Executive Officer, 1984
Lumelite Corporation, since September
971 West Road 1985; Trustee, Morgan Stanley
Portfolios.
New Canaan, CT 06840
Richard E. Ten Haken 62 Former District Superintendent of 1984
Schools, Monroe No. 2 and Orleans
4 Barnfield Road Counties, New York; Chairman of the
Finance and the Audit and Accounting
Pittsford, NY 14534 Committees, Member of the Executive
Committee; Chairman of the Board and
President, New York State Teachers'
Retirement System.
William J. Armstrong 54 Vice President and Treasurer, 1987
Ingersoll-Rand Company.
49 Aspen Way
Upper Saddle River, NJ 07458
John R.H. Blum 67 Attorney in Private Practice; formerly 1984
a Partner in the law firm of Richards,
322 Main Street O'Neil & Allegaert; Commissioner of
Agriculture - State of Connecticut,
Lakeville, CT 06039 1992-1995.
*Joseph J. Harkins 65 Retired; Commercial Sector Executive 1990
and Executive Vice President of The
257 Plantation Circle South Chase Manhattan Bank, N.A. from 1985
through 1989. He has been employed by
Ponte Vedra Beach, FL 32082 Chase in numerous capacities and
offices since 1954. Director of
Blessings Corporation, Jefferson
Insurance Company of New York,
Monticello Insurance Company and
National.
<PAGE>
*H. Richard Vartabedian 60 Consultant, Republic Bank of New York; 1992
formerly, Senior Investment Officer,
P.O. Box 296 Division Executive of the Investment
Management Division of The Chase
Beach Road Manhattan Bank, N.A., 1980 through 1991.
Hendrick's Head
Southport, ME 04576
Stuart W. Cragin, Jr. 63 Retired; formerly President, Fairfield 1992
Testing Laboratory, Inc. He has
108 Valley Road previously served in a variety of
marketing, manufacturing and general
Cos Cob, CT 06807 management positions with Union Camp
Corp., Trinity Paper & Plastics Corp.,
and Conover Industries
Irving L. Thode 65 Retired; Vice President of Quotron 1992
Systems. He has previously served in a
80 Perkins Road number of executive positions with
Control Data Corp., including President
Greenwich, CT 06830 of its Latin American Operations, and
General Manager of its Data Services
business.
W. Perry Neff 69 Independent Financial Consultant; 1989
Director of North America Life
Trustee Assurance Co., Petroleum & Resources
Corp. and The Adams Express Co.;
RR 1 Box 102 Formerly Director and Chairman of The
Hanover Funds, Inc.; Formerly Director,
Weston, VT 05181 Chairman and President of The Hanvover
Investment Funds Inc.
Roland R. Eppley, Jr. 64 Retired; formerly President and Chief 1988
Executive Officer, Eastern States
Trustee Bankcard Association Inc. (1971-1988);
Director, Janel Hydraulics, Inc.;
105 Coventry Place Formerly, Director of The Hanover
Funds, Inc.
Palm Beach Gardens, FL 33418
W.D. MacCallan 69 Director of The Adams Express Co. and 1989
Petroleum & Resources Corp.; formerly
Trustee Chairman of the Board and Chief
Executive Officer of The Adams Express
624 East 45th Street Co. and Petroleum & Resources Corp.;
formerly Director of The Hanover Fund,
Savannah, GA 31405 Inc. and The Hanover Investment Funds,
Inc.
* Interested Trustees as defined under the 1940 Act.
</TABLE>
Remuneration of Trustees and Certain Executive Officers:
Each Trustee is reimbursed for expenses incurred in attending each
meeting of the Board of Trustees or any committee thereof. Each Trustee who is
not an affiliate of the Portfolio Adviser is compensated for his or her services
according to a fee schedule which recognizes the fact that each Trustee also
serves as a Trustee of other investment companies advised by the Portfolio
Adviser. Each Trustee receives a fee, allocated among all investment companies
for which the Trustee serves, which consists of an annual retainer component and
a meeting fee component. Effective August 21, 1995, each Trustee receives a
quarterly retainer of $12,000 and an additional per meeting fee of $1,500. Prior
to August 21, 1995, the quarterly retainer was $9,000 and the per-meeting fee
was $1,000. The Chairman of the Trustees and the Chairman of the Investment
Committee each receive a 50% increment over regular Trustee total compensation
for serving in such capacities for all the investment companies advised by the
Portfolio Adviser.
<PAGE>
OFFICERS AND TRUSTEES OF THE FUNDS COMPENSATION
<TABLE>
<CAPTION>
- -------------------------------------- ------------------------------------- -------------------------------------
NAME, POSITION AGGREGATE COMPENSATION FROM THE TOTAL COMPENSATION PAID TO TRUSTEES
FUNDS(1) FROM THE FUNDS AND FUND COMPLEX*
WITH THE FUNDS
- -------------------------------------- ------------------------------------- -------------------------------------
- -------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Trustee $117.71 $3,700 for the Fund Complex
John T. Conroy, Jr., Trustee $117.71 $4,042 for the Fund Complex
William J. Copeland, Trustee $117.71 $4,042 for the Fund Complex
James E. Dowd, Trustee $117.71 $4,042 for the Fund Complex
Lawrence D. Ellis, M.D., Trustee $107.36 $3,700 for the Fund Complex
Edward L. Flaherty, Jr., Trustee $117.71 $4,042 for the Fund Complex
Edward C. Gonzales, President, $-0- $-0- for the Fund Complex
Trustee and Treasurer
Peter E. Madden, Trustee $107.36 $3,700 for the Fund Complex
Gregory F. Meyer, Trustee $107.36 $3,700 for the Fund Complex
John E. Murray, Jr., J.D., S.J.D., $107.36 $3,700 for the Fund Complex
Trustee
Wesley W. Posvar, Trustee $107.36 $3,700 for the Fund Complex
Marjorie P. Smuts, Trustee $107.36 $3,700 for the Fund Complex
</TABLE>
(1) The aggregate compensation is provided for the Funds which was
comprised of seven portfolios on December 31, 1996. Information is
furnished for the period from May 2, 1996, date of election of
Trustees, to December 31, 1996.
* The total compensation is provided for the Fund Complex, which consists of
Blanchard Precious Metals Fund, Inc., The Virtus Funds and the Trust for the
calendar year ended December 31, 1996.
<PAGE>
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended October 31, 1996 for each Trustee of the Trust:
Growth and Pension or Total
Income Retirement Compensation
Portfolio(1) Benefits Accrued from "Fund
as Fund Expenses Complex"(2)
Fergus Reid, III, Trustee $14,393.16 0 $78,456.65
Richard E. Ten Haken, Trustee $9,595.45 0 $52,304.39
William J. Armstrong, Trustee $9,595.45 0 $46,632.34
John R.H. Blum, Trustee $9,595.45 0 $51,304.37
Joseph J. Harkins, Trustee $9,376.63 0 $52,304.39
H. Richard Vartabedian, $18,159.13 0 $74,804.44
Trustee
Stuart W. Cragin, Jr., $9,595.45 0 $52,304.39
Trustee
Irving L. Thode, Trustee $9,595.45 0 $52,304.39
(1) Prior to January 1, 1995, the Portfolio did not pay the Trustees expenses
directly. Rather, the Trustees payments accrued against the underlying Fund, the
Vista Growth and Income Fund. Data reflects Trustee compensation as if the
Portfolio had paid such expenses directly. As of January 1, 1995, Trustee
compensation will be paid by the Portfolio directly. Mr. Vartabedian received a
50% increment over regular Trustee compensation for serving as Chairman of the
Portfolio. This incremental amount was paid by the Portfolio directly.
(2) Data reflects total compensation earned during the period January 1, 1995 to
December 31, 1995 for service as a Trustee to all thirty-two (Portfolios) Funds
advised by the Portfolio Adviser.
Vista Funds Retirement Plan for Eligible Trustees
Effective August 21, 1995, the Trustees also instituted a Retirement
Plan for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is
not an employee of any of the Portfolios, the Portfolio Adviser, Administrator
or distributor or any of their affiliates) may be entitled to certain benefits
upon retirement from the Board of Trustees. Pursuant to the Plan, the normal
retirement date is the date on which the eligible Trustee has attained age 65
and has completed at least five years of continuous service with one or more of
the investment companies advised by the Portfolio Adviser (collectively, the
"Covered Portfolios"). Each Eligible Trustee is entitled to receive from the
Covered Portfolios an annual benefit commencing on the first day of the calendar
quarter coincident with or following his date of retirement equal to 10% of the
highest annual compensation received from the Covered Portfolios multiplied by
the number of such Trustee's years of service (not in excess of 10 years)
completed with respect to any of the Covered Portfolios. Such benefit is payable
to each eligible Trustee in monthly installments for the life of the Trustee.
<PAGE>
Set forth below in the table below are the estimated annual benefits
payable to an eligible Trustee upon retirement assuming various compensation and
years of service classifications. The estimated credited years of service for
Messrs. Reid, Ten Haken, Armstrong, Blum, Harkins, Vartabedian, Cragin, Thode,
Neff, Epply and MacCallan are 11, 11, 8, 11, 3, 3, 3, 6, 7 and 6, respectively.
Years of
Service Highest Annual Compensation Paid by All Vista Funds
40,000 45,000 50,000 55,000
10 40,000 45,000 50,000 55,000
9 36,000 40,500 45,000 49,500
8 32,000 36,000 40,000 44,000
7 28,000 31,500 35,000 38,500
6 24,000 27,000 30,000 33,000
5 20,000 22,500 25,000 27,500
DEFERRED COMPENSATION PLAN
Effective August 21, 1995, the Trustees instituted a Deferred
Compensation Plan for Eligible Trustees (the "Deferred Compensation Plan")
pursuant to which each Trustee (who is not an employee of any of the Funds, the
Portfolio Adviser, Administrator or Distributor or any of their affiliates) may
enter into agreements with the Funds whereby payment of the Trustees' fees are
deferred until the payment date elected by the Trustee (or the Trustee's
termination of service). The deferred amounts are deemed invested in shares of
the Fund on whose Board the Trustee sits. The deferred amounts are paid out in a
lump sum or over a period of several years as elected by the Trustee at the time
of deferral. If a deferring Trustee dies prior to the distribution of amounts
held in the deferral account, the balance of the deferral account will be
distributed to the Trustee's designated beneficiary in a single lump sum payment
as soon as practicable after such deferring Trustee's death. The following
Eligible Trustees have executed a deferred compensation agreement for the 1996
calendar year: Messrs. Ten Haken, Thode and Vartabedian.
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), a
wholly-owned subsidiary of Signet Banking Corporation. Because of the internal
controls maintained by Signet Banking Corporation to restrict the flow of
non-public information, Fund investments are typically made without any
knowledge of Signet Banking Corporation or its affiliates' lending relationships
with an issuer.
The manager shall not be liable to the Trust, the FUND, or any
shareholder of the FUND for any losses that may be sustained in the purchase,
holding, or sale of any security or for anything done or omitted by it, except
acts or omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus. For the fiscal year ended October 31, 1996, and for the period
from July 12, 1995, to October 31, 1995, the amount paid or accrued by the FUND
to VCM was $85,166 and $6,416, respectively, all of which was waived. For the
period November 1, 1994, to July 11, 1995, the amount paid or accrued by the
FUND to Sheffield Management Corporation was $14,683, all of which was waived.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus. For the fiscal year ended October 31, 1996 and
for the period from July 12, 1995 to October 31, 1995, the amount paid or
accrued by the FUND to Federated Administrative Services was $75,000 and
$23,014, respectively.
<PAGE>
Transfer Agent & Dividend Disbursing Agent
Federated Shareholder Services Company serves as transfer agent and
dividend disbursing agent for the FUND. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made by
shareholders.
Federated Shareholder Services Company also maintains FUND accounting
records. The fee paid for this service is based upon the level of the FUND's
average net assets for the period plus out-of-pocket expenses.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the FUND pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the FUND's
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the FUND and its shareholders and (ii) stimulate administrators to
render administrative support services to the FUND and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
FUND; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
Other benefits which the FUND hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the FUND with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the FUND
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the FUND in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objectives, and properly servicing these accounts, the FUND may be able
to curb sharp fluctuations in rates of redemptions and sales.
For the fiscal year ended October 31, 1996, the FUND paid $60,833 in
distribution services fees, all of which was waived.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust". Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
<PAGE>
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders received an Annual Report containing financial statements
audited by the FUND's independent accountants for the fiscal year ended October
31, 1996. The Financial Statements for the fiscal year ended October 31, 1996
are incorporated herein by reference to the Annual Report of the FUND filed with
the U.S. Securities and Exchange Commission (File Nos. 33-3165 and 811-4579). A
copy of the Annual Report may be obtained without charge by contacting the FUND
at 1-800-829-3863.
<PAGE>
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS -- are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FNMA BONDS -- are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S. Government.
FHA INSURED NOTES -- are bonds issued by the Farmers Home
Administration, the U.S. Government and are guaranteed by the U.S. Government.
GNMA CERTIFICATES -- are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees Paid to GNMA and
the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or FHA-insured
mortgages underlying the Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures may result in the return of the greater part of principal invested
far in advance of the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee. As the prepayment
rate of individual mortgage pools will vary widely, it is not possible to
accurately predict the average life of a particular issue of GNMA Certificates.
The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates. Principal which is so prepaid will be reinvested although possibly
at a lower rate. In addition, prepayment of mortgages included in the mortgage
pool underlying a GNMA Certificate purchased at a premium could result in a loss
to the Portfolio. Due to the large amount of GNMA Certificates outstanding and
active participation in the secondary market by securities dealers and
investors, GNMA Certificates are highly liquid instruments. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate. If
agency securities are purchased at a premium above principal, the premium is not
guaranteed by the issuing agency and a decline in the market value to par may
result in a loss of the premium, which may be particularly likely in the event
of a prepayment. When and if available, U.S. Government obligations may be
purchased at a discount from face value.
GNMA FHLMC BONDS and GNMA FNMA BONDS -- are mortgage-backed bonds
issued by the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association, respectively, and are guaranteed by the U.S. Government.
GSA PARTICIPATION CERTIFICATES -- are participation certificates issued
by the General Services Administration of the U.S. Government and are guaranteed
by the U.S. Government.
NEW COMMUNITIES DEBENTURES -- are debentures issued in accordance with
the provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
PUBLIC HOUSING BONDS -- are bonds issued by public housing and urban
renewal agencies in connection with programs administered by the Department of
Housing and Urban Development of the U.S. Government, the payment of which is
secured by the U.S. Government.
PENN CENTRAL TRANSPORTATION CERTIFICATES -- are certificates issued by
Penn Central Transportation and guaranteed by the U.S. Government.
SBA DEBENTURES -- are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS -- are bonds
issued by the Washington Metropolitan Area Transit Authority and are guaranteed
by the U.S. Government.
FHLMC BONDS -- are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
FEDERAL HOME LOAN BANK NOTES AND BONDS -- are notes and bonds issued by
the Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES AND BONDS --
are notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
D.C. ARMORY BOARD BONDS -- are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.
EXPORT-IMPORT BANK CERTIFICATES -- are certificates of beneficial
interest and participation certificates issued and guaranteed by the
Export-Import Bank of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of
the U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government agencies
or instrumentalities other than those listed above.
<PAGE>
APPENDIX B
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's, S&P and Fitch with
respect to bonds and commercial paper appears below.
MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality
and carry the smallest degree of investment risk. Interest payments are
protected by a large or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated "A" possess many favorable investment
qualities 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;
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 a
desirable investment. Assurance of interest and principal payments or of
maintenance and 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 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.
Moody's applies numerical modifiers "1", "2", and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from "AAA"
issues only in small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to repay principal and pay interest
for bonds in this category than for higher rated categories.
<PAGE>
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CI--Bonds rated "CI" are income bonds on which no interest is being
paid.
D--Bonds rated "D" are in default. The "D" 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 is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus
or minus to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated "Prime-1"
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 structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2"
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, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Prime-3--Issuers (or related supporting institutions) rated "Prime-3"
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 the requirement for 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.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A S&P commercial paper rating is current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded in several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1--This highest category 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 adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the bigger 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 that
such payments will be made during such grace period.
<PAGE>
FITCH BOND RATINGS
AAA--Bonds rated AAA by Fitch are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA--Bonds rated AA by Fitch are considered to be investment grade and
of very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issues
is generally rated F-1+ by Fitch.
A--Bonds rated A by Fitch are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds rated BBB by Fitch are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category. Plus and minus signs, however,
are not used in the AAA category.
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch's short-term ratings are as follows:
F-1+--Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.
F-2--Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, although near-term
adverse changes could cause these securities to be rated below investment grade.
LOC--The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
Like higher rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest. However,
such bonds may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.
After purchase by the Portfolio, a security may cease to be rated or
its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the Portfolio.
However, the Portfolio's investment manager will consider such event in its
determination of whether the Portfolio should continue to hold the security. To
the extent the ratings given by Moody's, S&P or Fitch may change as a result of
changes in such organizations or their rating systems, the Portfolio will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained the Prospectus and statement of
additional information.
G01386-07 (2/97)
093265304
PAGE 1
KEYSTONE GROWTH AND INCOME FUND (S-1)
SEEKS GROWTH OF CAPITAL AND LONG-TERM GROWTH OF INCOME.
Dear Shareholders:
We are pleased to report to you on the Keystone Growth and Income Fund (S-1) for
the fiscal year that ended on August 31, 1997. Following our letter to you, we
have included a discussion with your Fund's portfolio manager and complete
financial information.
PERFORMANCE
Keystone Growth and Income Fund (S-1) produced a total return of 34.76% for the
12 months that ended on August 31. The benchmark Standard & Poors 500 Index, an
unmanaged index generally representative of the domestic stock market, returned
40.65% during the same period.
We believe your Fund performed satisfactorily in a strong environment favoring
large capitalization "blue chip" stocks. In a year in which market leadership
tended to be confined to a relatively narrow band of the stocks of the largest
companies with leadership rotating from sector to sector, your Fund successfully
provided generous returns while seeking its objective through investments in a
broadly diversified portfolio.
ENVIRONMENT
The 12-month period was an extremely rewarding time for investments in the
stocks of the nation's largest companies. An environment of moderate growth,
restrained inflation, relatively low interest rates, and strong corporate
earnings encouraged investor confidence, and the broad market indices soared to
new highs. The market did fall into a temporary correction from late February
through early April 1997, as investors became concerned about the possibility of
an over-heated economy that potentially could lead to revived inflation and
higher interest rates. These concerns receded, however, by mid-April as reports
of strong first quarter corporate profits and modest inflation reassured
investors. The stock market resumed its ascent through the spring and early
summer before drawing back somewhat toward the close of the fiscal year in
August. Over the full 12 months, the strongest performance was turned in by many
of the nation's largest, brand name companies that enjoyed national, and even
international, leadership in their industries.
INVESTMENT STRATEGY
Throughout the period, the Keystone Growth and Income Fund (S-1) continued its
emphasis on larger capitalization, high quality growth companies that have been
at the core of the Fund's portfolio. In fact, the Fund has increased its
emphasis on companies such as General Electric and Microsoft, which have been
consistent strong performers and which have shown an ability to capitalize on
their international franchises and industry leadership to increase their
profitability. During the summer, your Fund also modestly increased its
investments in medium-size companies, consistent with the Fund's discipline of
investing in companies with strong earnings, solid managements and market
leadership. We believe these mid-cap stock investments, which accounted for
approximately 15% of net assets at the end of the fiscal year, have the
potential to enhance performance should market leadership broaden beyond the
largest capitalization stocks. The emphasis of the Fund, however, remains with
the world class, blue chip growth companies on which the Fund traditionally has
concentrated.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE GROWTH AND INCOME FUND (S-1)
OUTLOOK
We believe that as long as inflation remains subdued, interest rates can remain
relatively stable and the favorable environment for stocks should continue. The
outlook for large, blue chip stocks remains favorable, especially for those
companies that have demonstrated an ability to capitalize on their industry
leadership and strong franchises to grow their profitability. At the same time,
the stock valuations of many of these companies have approached record levels,
and it would not be unexpected if well managed, mid-sized companies show renewed
market strength.
A word of caution is in order. We believe that mutual fund investors should
moderate their expectations about future returns, and not anticipate an
indefinite continuation of the extraordinary, above-average returns that have
characterized the market for the past 12 months. Moreover, it would not be
unusual if the market experiences a major correction in stock prices. Such a
correction may be painful when it occurs, but is a normal event in a market
cycle. Investors experiencing them should remind themselves of their long-term
objectives and not be overly influenced by short-term events.
We thank you for your support of Keystone Growth and Income Fund (S-1).
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
CHAIRMAN
KEYSTONE INVESTMENT MANAGEMENT CO.
/s/ George S. Bissell
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
[Photos of Albert H. Elfner, III and George S. Bissell appear here]
<PAGE>
PAGE 3
A Discussion With
Your Fund Manager
[Photo of Judith A. Warners appears here]
JUDITH A. WARNERS IS PORTFOLIO MANAGER OF KEYSTONE GROWTH AND INCOME FUND
(S-1). A MEMBER OF THE SECURITY ANALYSTS SOCIETY, MS. WARNERS HAS MORE
THAN 17 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE. SHE HOLDS A BA FROM
CURRY COLLEGE AND AN MBA FROM BABSON COLLEGE. SHE IS A MEMBER OF THE
KEYSTONE GROWTH AND INCOME TEAM.
Q WHAT WAS THE ENVIRONMENT LIKE DURING THE YEAR THAT ENDED ON AUGUST 31?
A Basically, it was an environment that favored large cap stocks. In fact, while
the overall market indices recorded very substantial increases over the 12
months, much of that was due to the performance of the largest 50 stocks. We
started the fiscal year with a very supportive environment of strong economic
growth and rising corporate profits. Early in 1997, however, investors became
concerned that the growth might become too strong, and that inflation could
return. The fear was that this could cause an increase in interest rates, which
eventually would cut into corporate profits. The Federal Reserve Board did raise
short-term rates once in late March. The anticipation and reaction to this
one-time tightening of the money supply caused a sharp correction in March and
early April. However, as evidence grew at the end of the first quarter that
growth was slowing down and inflation did not appear to be a problem, the stock
market took off again, with a very strong rally from mid-April through July. In
fact, the Standard & Poors 500 Index rose 7% in July 1997 alone. Things started
cooling a little bit in August, as some blue chip companies, most notably
Gillette Co. and Coca-Cola Co., warned of earnings that will be disappointing to
Wall Street. However, if you look at the period from August 31, 1996 through
August 31, 1997, you would have to say generally that large capitalization,
industry-leading companies with national and international franchises were the
big winners in stock performance.
Q HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT?
A We concentrated, and even increased our holdings, in the high quality, growth
companies that have consistently been the core of our portfolio. If you look at
our major investments, you will see names like General Electric Co., Microsoft
Corp., IBM Corp., and Bristol-Myers Squibb Co. These are quality companies, with
histories of demonstrable earnings growth, strong managements, and visible name
brands. These blue chip companies consistently have made up 65% or more of the
portfolio, and they have been an excellent investment over the past two years.
This summer, we have increased somewhat our holdings in mid-cap companies that
also have histories of earnings growth, strong managements,
<PAGE>
PAGE 4
KEYSTONE GROWTH AND INCOME FUND (S-1)
TOP 10 STOCK HOLDINGS
AUGUST 31, 1997
<TABLE>
<CAPTION>
% OF
COMPANY NET ASSETS
<S> <C>
General Electric Co. 3.3%
Microsoft Corp. 2.1%
International Business Machines Corp. 2.1%
Bristol-Myers Squibb Co. 2.0%
Merck & Co., Inc. 1.8%
SLM Holding Corp. 1.7%
American Home Products Corp. 1.7%
Exxon Corp. 1.7%
Procter & Gamble Co. 1.6%
Intel Corp. 1.5%
</TABLE>
and leadership positions in their industries. We have added to our positions in
companies such as HBO & Co.; Kohl's Corp., a mid-western retailer; and Falcon
Drilling, a company involved in offshore energy exploration. We believe that as
the market broadens out and investors start looking for more growth niche
stocks, these companies have the potential to do very well. In fact, we have
started to see some evidence of a possible broadening out of market leadership
in late summer. These mid-cap stocks, however, are not expected to account for
more than 20-to-25% of the portfolio. The fund has been and will remain a blue
chip-oriented fund.
Q IN THE LAST REPORT, YOU DISCUSSED AN EMPHASIS ON INTEREST-RATE SENSITIVE
STOCKS, SUCH AS BANKS AND REAL ESTATE INVESTMENT TRUSTS. DO YOU STILL EMPHASIZE
THIS AREA?
A We remain heavily weighted in interest-rate sensitive stocks. While we
continue to have a heavy emphasis in real estate investment trusts, or REITs, we
have cut back there a little bit primarily because that area was such a strong
performer in 1996 and early 1997 that we decided to take some profits. We
probably have increased our overall emphasis in the finance sector, including
banks, insurance and security industries. However, we have taken some profits
from the very big bank stocks, and redeployed into some mid-cap banking stocks.
This is an area in the market that is benefiting from industry consolidation.
Among the names we have added are First Commerce Corp., First American Corp.,
and Mellon Bank Corp. As long as the economy is moving along well and interest
rates and inflation are stable, the finance sector is a good place to be.
Q IN WHAT OTHER AREAS DO YOU HAVE AN EMPHASIS?
A We have remained committed to the general pharmaceutical area, consistent with
that industry's weighting in the S&P 500. In the drug area, we tend to own
top-line growth companies with a consistent flow of new products to keep
revenues growing. We hold positions in companies such as Bristol-Myers Squibb
Co., Merck & Co., Inc., and American Home Products Corp. We are overweighted in
telecommunications, which we believe has tremendous market opportunities. We own
more integrated companies, such as Worldcom Inc., a leading Internet access
provider company; equipment companies such as Northern Telecom Ltd.; and Cisco
Systems, Inc., a systems router for telecommunications carriers. Other
telecommunications-related holdings include Motorola Inc., GTE Corp, Loral Space
and Communications, Ltd., and Iridium World Communications. The last two
companies are involved in satellite communications.
<PAGE>
PAGE 5
TOP 5 INDUSTRIES
AUGUST 31, 1997
<TABLE>
<CAPTION>
% OF
INDUSTRY NET ASSETS
<S> <C>
Healthcare Products & Services 10.8%
Finance & Insurance 10.8%
Banks 8.3%
Oil 6.6%
Telecommunications Services & Equipment 6.4%
</TABLE>
Q WHAT IS YOUR OUTLOOK?
A We continue to feel we are in a growth environment, with interest rates
trending downward and inflation still under control. We are watching closely for
signs of any pickup in inflation, but up until now productivity enhancements
have offset any potential inflationary pressures. In this environment, we remain
flexible, with a major commitment to the large cap stocks that have been market
leaders, but with an eye to see if market movement toward mid-cap stocks becomes
a sustained trend.
[Graphic appears here]
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400
CHARLOTTE, N.C. 28288-1195
<PAGE>
PAGE 6
KEYSTONE GROWTH AND INCOME FUND (S-1)
Growth of an Investment
[Graph appears below with the following information:]
Growth of an investment in
Keystone Growth and Income Fund (S-1)
(In Thousands) August 31, 1987 through August 31, 1997
Initial Investment Dividend Reinvestment
8/87 $10,000.00 $10,000.00
8/88 $ 6,952.00 $ 7,545.00
8/89 $ 9,119.00 $10,185.00
8/90 $ 8,432.00 $ 9,721.00
8/91 $ 9,225.00 $12,133.00
8/92 $ 8,509.00 $12,179.00
8/93 $ 9,335.00 $13,922.00
8/94 $ 8,524.00 $13,822.00
8/95 $ 8,439.00 $14,739.00
8/96 $ 9,199.00 $18,463.00
8/97 $10,940.00 $24,879.00
[Line Graph appears below with the following information:]
Fund CPI S&P 500
8/87 $10,000.00 $10,000.00 $10,000.00
8/88 $ 7,545.00 $10,402.00 $ 8,218.00
8/89 $10,185.00 $10,891.00 $11,262.00
8/90 $ 9,721.00 $11,502.00 $10,237.00
8/91 $12,133.00 $11,939.00 $12,985.00
8/92 $12,179.00 $12,315.00 $14,013.00
8/93 $13,922.00 $12,655.00 $16,140.00
8/94 $13,822.00 $13,021.00 $17,019.00
8/95 $15,739.00 $13,363.00 $20,663.00
8/96 $18,463.00 $13,747.00 $24,531.00
8/97 $24,879.00 $14,052.00 $34,496.00
The cumulative and average annual total returns with sales charge calculations
reflect the deduction of the 3% contingent deferred sales charge (CDSC) for
those investors who sold Fund shares after one calendar year. Investors who
retained their investment earned the returns in the lines marked "w/o sales
charge."
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost. Past
performance is no guarantee of future results.
You may exchange your shares for another Keystone Classic fund by phone or in
writing. The Fund reserves the right to change or terminate the exchange offer.
<TABLE>
<CAPTION>
HISTORICAL RECORD
CUMULATIVE TOTAL RETURN
<S> <C>
1 year w/o sales charge 34.76%
1 year w/ sales charge 31.76%
5 years 104.28%
10 years 148.79%
AVERAGE ANNUAL TOTAL RETURN
1 year w/o sales charge 34.76%
1 year w/ sales charge 31.76%
5 years 15.36%
10 years 9.54%
</TABLE>
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- 94.5%
<S> <C> <C> <C>
AEROSPACE & DEFENSE-- 1.0%
25,000 Boeing Co..................... $ 1,360,938
20,600 United Technologies Corp...... 1,608,087
2,969,025
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 4.3%
93,000 Federal-Mogul Corp............ 3,324,750
65,000 Ford Motor Co................. 2,795,000
40,000 Goodyear Tire & Rubber Co..... 2,465,000
75,000 * Lear Corp..................... 3,435,937
50,000 Toyota Motor Corp............. 1,304,024
13,324,711
BANKS-- 8.3%
46,000 BankAmerica Corp.............. 3,027,375
36,500 BankBoston Corp............... 3,034,062
30,081 Chase Manhattan Corp.......... 3,344,631
76,000 First American Corp........... 3,206,250
64,000 First Commerce Corp........... 3,404,000
89,000 Firstar Corp.................. 2,998,188
76,000 Mellon Bank Corp.............. 3,657,500
30,000 NationsBank Corp.............. 1,781,250
27,500 Norwest Corp.................. 1,579,531
26,032,787
BUILDING, CONSTRUCTION &
FURNISHINGS-- 0.5%
275,000 * Cemex SA...................... 1,515,706
BUSINESS EQUIPMENT &
SERVICES-- 0.5%
40,000 * USA Waste Services, Inc....... 1,680,000
CAPITAL GOODS-- 5.6%
75,000 Deere & Co.................... 4,200,000
50,000 Emerson Electric Co........... 2,734,375
167,000 General Electric Co........... 10,437,500
17,371,875
CHEMICAL & AGRICULTURAL
PRODUCTS-- 2.2%
70,000 Du Pont (E. I.) De Nemours &
Co.......................... 4,361,875
80,000 Morton International, Inc..... 2,660,000
7,021,875
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
CONSUMER PRODUCTS &
SERVICES-- 3.2%
32,000 Gillette Co................... $ 2,650,000
37,000 Procter & Gamble Co........... 4,923,312
65,400 Stewart Enterprises, Inc...... 2,579,213
10,152,525
DIVERSIFIED COMPANIES-- 2.2%
50,000 AlliedSignal, Inc............. 4,128,125
35,000 Tyco International Ltd........ 2,745,313
6,873,438
ELECTRICAL EQUIPMENT &
SERVICES-- 4.1%
90,000 * Analog Devices, Inc........... 2,981,250
52,000 Intel Corp.................... 4,782,375
40,000 Motorola, Inc................. 2,935,000
20,000 Texas Instruments, Inc........ 2,272,500
12,971,125
FINANCE & INSURANCE-- 10.0%
32,500 * American Express Co........... 2,526,875
45,000 American International Group,
Inc......................... 4,246,875
60,800 Associates First Capital
Corp........................ 3,530,200
55,000 Federal National Mortgage
Association................. 2,420,000
71,900 Greenpoint Financial Corp..... 4,426,344
65,000 Hartford Life, Inc. Cl. A..... 2,425,312
70,000 Nationwide Financial Services,
Inc. Cl. A.................. 1,942,500
40,000 SLM Holding Corp.............. 5,420,000
45,000 * Travelers Group, Inc.......... 2,857,500
22,500 Washington Mutual, Inc........ 1,345,781
31,141,387
FOOD & BEVERAGE PRODUCTS-- 3.0%
53,000 Coca Cola Co.................. 3,037,563
70,000 Pepsico, Inc.................. 2,520,000
90,000 Philip Morris Companies,
Inc......................... 3,926,250
9,483,813
</TABLE>
<PAGE>
PAGE 8
KEYSTONE GROWTH AND INCOME FUND (S-1)
SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
HEALTHCARE PRODUCTS &
SERVICES-- 10.8%
75,000 American Home Products Corp... $ 5,400,000
83,300 Bristol-Myers Squibb Co....... 6,330,800
140,000 * Healthsouth Corp.............. 3,491,250
70,000 Johnson & Johnson............. 3,968,125
33,000 Medtronic, Inc................ 2,982,375
60,000 Merck & Co., Inc.............. 5,508,750
60,000 Pfizer, Inc................... 3,322,500
66,000 SmithKline Beecham Plc ADS.... 2,858,625
33,862,425
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 0.9%
75,000 * United States Filter Corp..... 2,700,000
INFORMATION SERVICES &
TECHNOLOGY-- 4.0%
58,000 * BMC Software, Inc............. 3,628,625
30,000 * HBO & Co...................... 2,146,875
50,600 * Microsoft Corp................ 6,690,269
12,465,769
METAL PRODUCTS & SERVICES-- 2.4%
37,000 Aluminum Co. of America....... 3,043,250
25,000 Phelps Dodge Corp............. 2,010,938
110,000 Vale Do Rio Doce Navegacao
SA.......................... 2,560,249
7,614,437
OFFICE EQUIPMENT & SUPPLIES-- 2.9%
40,000 Hewlett-Packard Co............ 2,452,500
66,000 International Business
Machines Corp............... 6,657,750
9,110,250
OIL-- 6.6%
25,000 Anadarko Petroleum Corp....... 1,835,937
38,000 * British Petroleum Plc......... 3,215,750
86,000 Exxon Corp.................... 5,262,125
30,000 Mobil Corp.................... 2,182,500
92,000 Royal Dutch Petroleum Co...... 4,669,000
30,000 Texaco, Inc................... 3,457,500
20,622,812
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
OIL FIELD SERVICES-- 2.3%
47,100 Diamond Offshore Drilling,
Inc......................... $ 2,572,838
100,000 * Falcon Drilling............... 3,150,000
30,000 Halliburton Co................ 1,432,500
7,155,338
PAPER & PACKAGING-- 2.4%
50,000 * Bowater, Inc.................. 2,559,375
55,000 * Champion International Corp... 3,255,313
30,000 International Paper Co........ 1,582,500
7,397,188
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 1.6%
20,000 Disney (Walt) Co.............. 1,536,250
140,000 Westinghouse Electric Corp.... 3,605,000
5,141,250
REAL ESTATE-- 4.4%
70,000 Arden Realty, Inc. REIT....... 2,021,250
80,000 Beacon Properties REIT........ 2,880,000
45,000 Camden Property Trust REIT.... 1,327,500
80,000 First Industrial Realty Trust,
Inc. REIT................... 2,470,000
100,001 Patriot American Hospitality,
Inc. REIT................... 2,437,524
70,000 TriNet Corporate Realty Trust,
Inc. REIT................... 2,489,375
13,625,649
RETAILING & WHOLESALE-- 4.8%
52,500 * Costco Companies., Inc........ 1,891,641
42,000 * Dollar General Corp........... 1,740,375
72,000 Home Depot, Inc............... 3,397,500
45,000 * Kohls Corp.................... 3,102,187
60,000 Sears, Roebuck & Co........... 3,405,000
40,000 Wal-Mart Stores, Inc.......... 1,420,000
14,956,703
</TABLE>
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 5.5%
40,000 * Cisco Systems, Inc............ $ 3,013,750
90,000 GTE Corp...................... 4,010,625
100,000 * Iridium World Communications.. 3,581,250
33,700 Northern Telecom Ltd.......... 3,340,512
105,000 * WorldCom, Inc................. 3,146,719
17,092,856
TRANSPORTATION-- 1.0%
65,000 Canadian National Railway
Co.......................... 3,229,688
TOTAL COMMON STOCKS
(COST $235,141,913)......... 295,512,632
<CAPTION>
CONVERTIBLE PREFERRED-- 1.7%
<S> <C> <C> <C>
FINANCE & INSURANCE-- 0.8%
60,000 SunAmerica, Inc.
$3.188, PERCS............... 2,658,750
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 0.9%
50,000 Loral Space & Communications
Ltd.
6.00%, Series 144A.......... 2,693,750
TOTAL CONVERTIBLE PREFERRED
(COST $4,775,425)........... 5,352,500
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
RIGHTS-- 0.0% (B)
<S> <C> <C> <C>
METAL PRODUCTS & SERVICES-- 0.0% (B)
$ 110,000 Vale Rio Doce Cia
12/31/99.................... $ 10
TOTAL RIGHTS
(COST $0)................... 10
REPURCHASE AGREEMENT-- 3.6%
11,311,000 Keystone Joint Repurchase
Agreement, Investments in
repurchase agreements, in a
joint trading account
purchased 8/27/97, 5.5847%,
maturing 9/2/97, maturing
value $11,318,019 (a)
(cost, $11,311,000)......... 11,311,000
TOTAL INVESTMENTS--
(COST $251,228,338) 99.8% 312,176,142
OTHER ASSETS AND
LIABILITIES-- NET 0.2 759,339
NET ASSETS 100.0% $312,935,481
</TABLE>
* Non-income producing securities.
(a) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at August 31, 1997.
(b) Less than one-tenth of a percent.
144A-- Rule 144A securities are restricted as to resale to qualified
institutional investors.
ADS-- American Depository Shares.
PERCS-- Preferred Equity Redemption Cumulative Stock.
REIT-- Real Estate Investment Trust.
<PAGE>
PAGE 10
GEOGRAPHIC DIVERSIFICATION
The Fund may invest in securities principally traded in markets outside the
United States. While investments in such securities are intended to reduce risk
by providing further diversification, foreign investments involve sovereign risk
in addition to the credit and market risks normally associated with domestic
securities. Foreign investments may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations. At August 31, 1997,
the Fund had investments, excluding short-term investments, in the following
countries:
<TABLE>
<CAPTION>
MARKET PERCENTAGE OF
COUNTRY VALUE NET ASSETS
<S> <C> <C>
United States.................................................... $274,590,328 87.8%
Bermuda.......................................................... 3,581,250 1.1%
Brazil........................................................... 2,560,259 0.8%
Canada........................................................... 6,570,200 2.1%
Japan............................................................ 1,304,024 0.4%
Mexico........................................................... 1,515,706 0.5%
The Netherlands.................................................. 4,669,000 1.5%
United Kingdom................................................... 6,074,375 2.0%
$300,865,142 96.2%
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $25.05 $22.98 $23.21 $25.42 $23.17
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.15 0.12 0.25 0.16 0.11
Net gain (loss) on investments and foreign currency related
transactions 7.97 3.69 2.66 (0.35) 3.11
Total from investment operations 8.12 3.81 2.91 (0.19) 3.22
LESS DISTRIBUTIONS
From net investment income (0.15) (0.54) (0.25) (0.23) (0.11)
In excess of net investment income (0.05) (0.22) (0.11) (0.05) (0.17)
From net realized gain on investments (3.18) (0.98) (2.78) (1.74) (0.69)
Total distributions (3.38) (1.74) (3.14) (2.02) (0.97)
NET ASSET VALUE END OF YEAR $29.79 $25.05 $22.98 $23.21 $25.42
TOTAL RETURN (A) 34.76% 17.31% 13.87% (0.72%) 14.31%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.57% 1.85% 1.75% 2.07% 2.28%
Total expenses, excluding indirectly paid expenses 1.56% 1.84% N/A N/A N/A
Net investment income 0.55% 0.52% 1.09% 0.67% 0.47%
PORTFOLIO TURNOVER RATE 109% 139% 115% 73% 96%
AVERAGE COMMISSION RATE PAID PER SHARE $ 0.0598 $ 0.0635 N/A N/A N/A
NET ASSETS END OF YEAR (THOUSANDS) $312,935 $224,819 $199,456 $208,532 $234,688
YEAR ENDED AUGUST 31,
1992 1991 1990 1989 1988
NET ASSET VALUE BEGINNING OF YEAR $25.12 $22.97 $24.82 $18.93 $27.23
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.15 0.19 0.22 0.32 0.46
Net gain (loss) on investments and foreign currency related
transactions (0.11) 4.72 (1.29) 6.16 (6.77)
Total from investment operations 0.04 4.91 (1.07) 6.48 (6.31)
LESS DISTRIBUTIONS
From net investment income (0.15) (0.26) (0.65) (0.59) (0.46)
In excess of net investment income (0.17) (0.25) (0.09) 0 0
From net realized gain on investments (1.67) (2.25) (0.04) 0 (1.53)
Total distributions (1.99) (2.76) (0.78) (0.59) (1.99)
NET ASSET VALUE END OF YEAR $23.17 $25.12 $22.97 $24.82 $18.93
TOTAL RETURN (A) 0.38% 24.82% (4.56%) 34.99% (24.55%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 2.08% 2.33% 2.35% 2.05% 1.77%
Total expenses, excluding indirectly paid expense N/A N/A N/A N/A N/A
Net investment income 0.61% 0.93% 1.36% 2.16% 2.28%
PORTFOLIO TURNOVER RATE 95% 64% 47% 44% 82%
AVERAGE COMMISSION RATE PAID PER SHARE N/A N/A N/A N/A N/A
NET ASSETS END OF YEAR (THOUSANDS) $204,004 $176,985 $154,124 $187,696 $195,375
</TABLE>
(a) Excluding applicable sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 12
KEYSTONE GROWTH AND INCOME FUND (S-1)
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments, at value
(identified cost-- $251,228,338) $312,176,142
Cash 617
Receivable for investments sold 840,449
Dividends and interest receivable 480,647
Receivable for Fund shares sold 176,238
Prepaid expenses 43,781
Total assets 313,717,874
LIABILITIES
Payable for investments purchased 296,083
Payable for Fund shares redeemed 201,603
Distribution plan expense payable 201,129
Due to affiliates 10,500
Accrued expenses and other liabilities 73,078
Total liabilities 782,393
NET ASSETS $312,935,481
NET ASSETS REPRESENTED BY
Paid-in capital $214,226,655
Accumulated distributions in excess of
net investment income (16,188)
Accumulated net realized gain on investments
and foreign currency related transactions 37,777,500
Net unrealized appreciation on investments
and foreign currency related transactions 60,947,514
Total net assets applicable to outstanding
shares of beneficial interest ($29.79 per
share on 10,504,769 shares outstanding) $312,935,481
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes
of $58,633) $ 5,155,917
Interest 533,010
Total income 5,688,927
EXPENSES
Management fee $ 1,794,364
Distribution plan expenses 1,535,556
Transfer agent fees 683,706
Accounting expenses 44,985
Trustee fees and expenses 5,931
Custodian fees 136,192
Registration fees 47,804
Auditing and legal 41,471
Printing 31,980
Miscellaneous expenses 6,423
Total expenses 4,328,412
Less: Expenses paid indirectly (20,588)
Net expenses 4,307,824
Net investment income 1,381,103
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FOREIGN
CURRENCY RELATED TRANSACTIONS
Net realized gain (loss) on
Investments 42,390,850
Foreign currency related
transactions (12,863)
Net realized gain on investments
and foreign currency related
transactions 42,377,987
Net change in unrealized
appreciation on investments and
foreign currency related
transactions 35,362,301
Net realized and unrealized gain
on investments and foreign
currency related transactions 77,740,288
Net increase in net assets
resulting from operations $79,121,391
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 13
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
<S> <C> <C>
OPERATIONS
Net investment income $ 1,381,103 $ 1,158,899
Net realized gain on investments and foreign currency related transactions 42,377,987 35,400,173
Net change in unrealized appreciation (depreciation) on investments and foreign
currency related transactions 35,362,301 (2,334,533)
Net increase in net assets resulting from operations 79,121,391 34,224,539
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (1,381,103) (4,796,628)
In excess of net investment income (640,844) (1,898,638)
From net realized gain on investments (30,039,258) (8,574,523)
Total distributions to shareholders (32,061,205) (15,269,789)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 103,353,377 54,640,514
Payment for shares redeemed (89,890,447) (61,283,587)
Net asset value of shares issued in reinvestment of distributions 27,593,101 13,051,460
Net increase in net assets resulting from capital share transactions 41,056,031 6,408,387
Total increase in net assets 88,116,217 25,363,137
NET ASSETS:
Beginning of year 224,819,264 199,456,127
End of year, including undistributed (distributions in excess of) net investment
income of ($16,188) and $5,624,332, respectively $312,935,481 $224,819,264
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 14
KEYSTONE GROWTH AND INCOME FUND (S-1)
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Growth and Income Fund (S-1), (the "Fund") is a Pennsylvania trust for
which Keystone Investment Management Company ("Keystone") is the investment
adviser and manager. Keystone was formerly a wholly owned subsidiary of Keystone
Investments, Inc ("KII") and is currently a subsidiary of First Union
Corporation ("First Union").
The Fund is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as a diversified, open-end investment company. The Fund's
investment objective is growth of capital and long-term growth of income.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. VALUATION OF SECURITIES
The Fund values securities traded on a national securities exchange or included
on the NASDAQ National Market System ("NMS") at the last reported sales price on
the exchange where primarily traded. The Fund values securities traded on an
exchange or NMS for which there has been no sale and other securities traded in
the over-the-counter market at the mean between the last reported bid and asked
price.
Corporate bonds, other fixed-income securities, and mortgage and other
asset-backed securities are valued at prices provided by an independent pricing
service. In determining value for normal institutional-size transactions, the
pricing service uses methods based on market transactions for comparable
securities and analysis of various relationships between similar securities
which are generally recognized by institutional traders.
Securities for which valuations are not available from an independent pricing
service, including restricted securities, are valued at fair value as determined
in good faith according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at an amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other funds managed by Keystone, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized by
U.S. Treasury and/or Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States ("U.S.")
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses include foreign currency gains
<PAGE>
PAGE 15
and losses resulting from changes in exchange rates between trade date and
settlement date on investment securities transactions and foreign currency
transactions. Net realized foreign currency gains and losses resulting from the
difference between the amounts of interest and dividends recorded on the books
of the Fund and the amount actually received are reflected in dividend and
interest income. The portion of foreign currency gains and losses related to
fluctuations in exchange rates between the initial purchase trade date and
subsequent sale trade date is included in realized gain (loss) on investments.
D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated in
a foreign currency and to hedge certain foreign currency assets or liabilities.
Forward contracts are recorded at the forward rate and are marked-to-market
daily. Realized gains and losses arising from such transactions are included in
net realized gain (loss) on foreign currency related transactions. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract and is subject to the credit risk that the other
party will not fulfill their obligations under the contract. Forward contracts
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date.
F. FEDERAL INCOME TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund intends to avoid any excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income or excise tax is required.
G. DISTRIBUTIONS
The Fund distributes net investment income quarterly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the close
of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatment for net realized gains from foreign currency related transactions and
certain distributions received from investments in real estate investment
trusts.
2. CAPITAL SHARE TRANSACTIONS
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with a par value of $1.00. Transactions in
shares of the Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
<S> <C> <C>
Shares sold 3,800,615 2,238,539
Shares redeemed (3,349,695) (2,509,938)
Shares issued in reinvestment
of dividends and
distributions 1,079,325 568,144
Net increase 1,530,245 296,745
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the year ended August 31, 1997 were $295,493,216 and
$285,581,225, respectively.
On August 31, 1997, the cost of investments for federal income tax purposes
was $251,233,941, gross
<PAGE>
PAGE 16
KEYSTONE GROWTH AND INCOME FUND (S-1)
unrealized appreciation of investments was $61,779,044 and gross unrealized
depreciation of investments was $836,843, resulting in net unrealized
appreciation of $60,942,201 for federal income tax purposes.
4. DISTRIBUTION PLAN
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. ("BISYS") has served as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of
Keystone, served as the Fund's principal underwriter.
The Fund has adopted a Distribution Plan as allowed by Rule 12b-1 of the 1940
Act. The Distribution plan permits the fund to reimburse its principal
underwriter for costs related to selling shares of the fund and for various
other services. These costs, which consist primarily of commissions and service
fees to broker-dealers who sell shares of the fund, are paid by shareholders
through expenses called "Distribution plan expenses". The Fund pays a service
fee equal to 0.25% of its average daily net assets and a distribution fee equal
to 0.75% of its average daily net assets. Distribution Plan expenses are
calculated daily and paid monthly.
With respect to the Fund's shares, the principal underwriter may incur
distribution costs greater than the allowable annual amounts the Fund is
permitted to pay. The Fund may reimburse the principal underwriter for such
excess amounts in later years with annual interest at the prime rate plus 1.00%.
The Plan may be terminated at any time by vote of the Independent Trustees or
by vote of a majority of the outstanding voting shares of the Fund. However,
after the termination of the Plan, and subject to the discretion of the
Independent Trustees, payments to EKD and/or EKIS may continue as compensation
for services which had been earned while the Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits.
Contingent deferred sales charges paid by redeeming shareholders may be paid
to EKD or its predecessor.
5. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under the terms of the investment advisory agreement dated December 11, 1996,
Keystone serves as the investment adviser and manager to the Fund. Keystone
provides the Fund with investment advisory and management services. In return,
Keystone is paid a management fee, computed daily and paid monthly, which is
determined by applying percentage rates starting at 0.70% and declining as net
assets increase to 0.35% per annum, to the average daily net asset value of the
Fund.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a wholly owned
subsidiary of Keystone, served as investment manager to the Fund and provided
investment management and administrative services. Under the investment advisory
agreement between KMI and Keystone, Keystone served as investment adviser and
provided investment advisory and management services to the Fund. In return for
its services, Keystone received an annual fee equal to 85% of the management fee
received by KMI.
During the year ended August 31, 1997, the Fund paid or accrued $44,985 to
Keystone for certain accounting services. Additionally, Evergreen Keystone
Services Company ("EKSC") (formerly Keystone Investor Resource Center, Inc.), a
wholly-owned subsidiary of Keystone, serves as the Fund's transfer and dividend
disbursing agent.
Effective January 1, 1997, BISYS Fund Services, Inc. ("BISYS"), an affiliate
of EKD, began serving as the Fund's sub-administrator. As sub-administrator,
BISYS provides the officers of the Fund. For this service, BISYS is paid a fee
by Keystone, which is not a Fund expense.
<PAGE>
PAGE 17
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
7. DISTRIBUTIONS TO SHAREHOLDERS
A dividend of $0.05 per share was declared on September 22, 1997 from net
investment income. This dividend was payable on September 24, 1997 to
shareholders of record at the close of business on September 22, 1997. This
dividend is not reflected in these financial statements.
<PAGE>
PAGE 18
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
KEYSTONE GROWTH AND INCOME FUND (S-1)
We have audited the accompanying statement of assets and liabilities of Keystone
Growth and Income Fund (S-1), including the schedule of investments, as of
August 31, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the ten-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Growth and Income Fund (S-1) as of August 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the ten-year period then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
September 26, 1997
<PAGE>
PAGE 19
FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS
(UNAUDITED)
During the fiscal year ended August 31, 1997, The Fund paid distributions of
$32,061,205. Included in these distributions are, $22,387,749 long-term capital
gain distributions. The remaining $9,678,533 is taxable to shareholders as
ordinary income in the year in which received by them or credited to their
accounts. Of the ordinary income distributions, 42%, is eligible for the
corporate dividends received deduction. The above figures may differ from those
previously reported and those cited elsewhere in this report due to differences
in the calculation of income and capital gains for accounting (book) purposes
and internal revenue service (tax) purposes.
In January 1998, we will send you complete information on the distributions paid
during calendar year 1997 to help you in completing your federal tax return.
<PAGE>
KEYSTONE
FAMILY OF FUNDS
[Graphic appears here]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
<TABLE>
<C> <S>
NOT
FDIC MAY LOSE VALUE
INSURED NO BANK GUARANTEE
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
Evergreen KeystoneSM is a Service Mark of
Evergreen
Keystone Investment Services, Inc.
Copyright 1997.
[Graphic appears here]
</TABLE>
S1-R Rev 01
KEYSTONE
(Photo Exists in Film ONLY.
Will See on Dylux)
GROWTH AND
INCOME FUND (S-1)
[Evergreen Keystone Funds logo appears here]
ANNUAL REPORT
AUGUST 31, 1997
<PAGE>
EVERGREEN KEYSTONE FUNDS
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
200 Berkeley Street
Boston, MA 02116-5034
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, D.C.
Attn: File Room
Re: Keystone Growth & Income Fund
File No. 811-98
CCC # azz*ud8s
CIK # 0000055624
Commissioners:
Please be advised that the 8/31/97 Annual Report for the above referenced Fund
was submitted to your office on October 8, 1997, via electronic transmission
(EDGAR).
Any questions or comments about this document should be directed to the
undersigned at (617) 210-3570.
Very Truly Yours,
/s/ Doug Miller
Doug Miller
Assistant Vice President
BLANCHARD BLANCHARD
GROWTH & INCOME GROWTH &
FUND INCOME
FUND
Portfolio Adviser
The Chase Manhattan Bank
Annual
Report
October 31, 1997
Annual
The Blanchard Group of Funds are available through Signet/R/ Financial Services,
Inc., member NASD, and are advised by an affiliate, Virtus Capital Management,
Inc., which is compensated for this service.
- - ------------------------------------- Available through
Investment products are not deposits, Signet Financial
obligations of, or guaranteed by any Services, Inc.
bank. They are not insured by the
FDIC. The involve risk, including
the possible loss of principal Managed by Virtus Capital
invested. Management, Inc.
- - ------------------------------------
Federated Securities Corp. is the
distributor of the Fund.
(2235)
CUSIP 093265304
G01684-10 (12/94)
PRESIDENT'S MESSAGE
December 15, 1997
Dear Shareholder:
I am pleased to present the Annual Report for the Blanchard Growth & Income Fund
covering the fund's fiscal year, from November 1, 1996 through October 31, 1997.
The report includes a discussion by the fund's portfolio management team,
complete listing of the fund's holdings and the financial statements.
During the 12-month reporting period, the fund's high-quality stock holdings
produced a strong total return of 28.22% through dividends totaling $0.07 per
share, capital gains totaling $0.28 per share, and an increase in share price
from $9.45 to $11.69.* Assets in the fund reached $17.4 million at the end of
the reporting period.
Thank you for pursuing your long-term financial goals through the
diversification and professional management of the Blanchard Growth & Income
Fund. If you have comments or questions, please call Investors' Services at 1-
800-829-3863.
Sincerely,
[Singature of Edward C. Gonzales]
Edward C. Gonzales
President
*Performance quoted reflects past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Dear Shareholder,
We are pleased to present this Annual Report for the Blanchard Growth & Income
Fund for the fiscal year ended October 31, 1997.
The Value of a $10,000 Investment in the Blanchard Growth & Income Fund
The graph below illustrates the hypothetical investment of $10,000 in the
Blanchard Growth & Income Fund (the "Fund") from October 31, 1987 to October 31,
1997 compared to the Lipper Growth & Income Fund Index+.
Average Annual Total Returns through 10/31/87
Blanchard Growth & Income Fund*
1 Year 28.22%
5 Year 16.11%
10 Year 22.16%
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX A
*The average annual returns quoted above assume reinvestment of distributions.
Total return includes changes in principal value. Average annual return is total
return annualized and compounded. Past performance is no guarantee of future
results.
To achieve its investment objectives, the Fund invests 100% of its assets in the
Growth & Income Portfolio (the "Portfolio"), which has identical investment
objectives. The performance of the Fund, therefore, depends on the performance
of the Portfolio. Because the Fund had no performance history prior to November
1, 1994, the graph set forth above, insofar as it relates to the period prior to
November 1, 1994, presents historical performance of the Portfolio adjusted to
reflect expenses estimated at the Fund's inception to be charged to shareholders
of the Fund.
+ The Lipper Growth & Income Fund Index is an equally weighted performance index
of the 30 largest funds in Lipper's Growth & Income Fund category, adjusted for
capital gains, distributions and income dividens. Investments cannot be made in
an index.
This chart is for comparative purposes only and is not intended to reflect on
future performance of the Blanchard Growth & Income Fund or the index.
EQUITIES HIGHER
The U.S. economy, in one of the longest expansions in history, set the stage
for solid stock market gains during the reporting period. The market benefited
from corporate profit growth, low inflation and continuing inflows from both
U.S. and overseas investors. The largest U.S. stocks showed slightly higher
gains than small- and mid-capitalization issues. However, smaller issues closed
the gap later in the year as investors focused on compelling valuations and
earnings. While U.S. stocks were not immune to October's global correction
caused by economic and currency instability in Asia, prices recovered as
investors recognized the enduring strength of U.S. economic fundamentals.
U.S. BOND MARKETS
BECOME SAFE HAVEN
U.S. bond markets were driven by an acute sensitivity to whether the high
levels of economic growth would lead to a resurgence of inflation. While this
caused bond investors to react to each economic report, inflation remained
muted. As the year ended, U.S. bond markets rallied as global investors turned
to U.S. Treasury securities in light of global stock market instability.
After a three-year period in which U.S. stock prices doubled, the October
volatility served as a reminder that equity markets are inherently volatile over
the short-term. It is important for you to understand the potential risks and
returns in an investment program based on your time horizon and risk tolerance.
All of us at Blanchard look forward to continuing to help you work toward your
financial goals.
HIGHLIGHTS
. Economic expansion in the U.S. set the stage for solid stock market gains
during the reporting period.
. The stock market benefited from corporate profit growth, low inflation and
continuing inflows from U.S. and overseas investors.
. Bond markets were sensitive to whether the high levels of economic growth
would lead to a resurgence of inflation. The bond markets rallied as global
investors turned to U.S. Treasury securities in light of global stock market
instability.
PERFORMANCE
Blanchard Growth & Income Fund, which seeks to provide long-term capital
appreciation and dividend income produced a total return of 28.22%, for the
fiscal year ended October 31, 1997.
STRATEGY
The fund benefited from overweighted positions in financial stocks as interest
rates fell in response to moderating economic growth in 1996. Anticipating that
the economy would pick up in early 1997, fund management cut financial exposure
but maintained an overweighted stance in technology while adding to sectors such
as capital goods, which historically tend to do well in a growing economy.
During the period of volatility following the interest rate hike which occurred
on March 25, 1997, fund management turned to technology and health care
companies whose stocks, in its opinion, had been battered. By early summer, fund
management took a sector-neutral approach and began moving towards stronger
valuations at the lower end of the large-cap range and in mid-cap companies.
OUTLOOK
Fund management are looking for companies that they believe will maintain
earnings in a slower economy, as well as those that may benefit from expected
lower interest rates. The fund expects to maintain its overweighted stance in
mid-cap insurers, but is avoiding aggressive investments in technology until the
earnings picture of companies in that sector clears.
Sincerely,
The Investment Management Team
at Chase Manhattan Bank
Portfolio Advisers to the
Growth & Income Portfolio
BLANCHARD GROWTH & INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
- - -----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- - -------------------------------------
Investments in Portfolio, at value $17,390,821
- - -------------------------------------
Receivable for shares sold 99,575
- - -------------------------------------
Deferred organizational expense 37,219
- - ------------------------------------- -----------
Total assets 17,527,615
- - -------------------------------------
LIABILITIES:
- - ----------------------------
Payable for shares redeemed $ 7,248
- - ----------------------------
Accrued expenses 30,377
- - ---------------------------- --------
Total liabilities 37,625
- - ------------------------------------- -----------
NET ASSETS $17,489,990
- - ------------------------------------- -----------
NET ASSETS CONSIST OF:
- - -------------------------------------
Paid in capital $12,414,282
- - -------------------------------------
Net unrealized appreciation of
investments in Portfolio 2,907,011
- - -------------------------------------
Accumulated net realized gain on
investments in Portfolio 2,119,177
- - -------------------------------------
Undistributed net investment income 49,520
- - ------------------------------------- -----------
Total Net Assets $17,489,990
- - ------------------------------------- -----------
SHARES OUTSTANDING 1,495,770
- - ------------------------------------- -----------
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PROCEEDS PER SHARE:
(net assets / shares outstanding) $11.69
- - ------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROWTH & INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
- - -----------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO:
- - ----------------------------------------------------
Dividend $ 256,253
- - ----------------------------------------------------
Interest 88,136
- - ---------------------------------------------------- ----------
Expenses allocated from Portfolio (77,611)
- - ---------------------------------------------------- ----------
Net investment income allocated from Portfolio 266,778
- - ---------------------------------------------------- ----------
EXPENSES:
- - ----------------------------------------
Management fee $ 115,747
- - ----------------------------------------
Administrative personnel and services
fee 75,000
- - ----------------------------------------
Transfer and dividend disbursing agent
fees and expenses 51,024
- - ----------------------------------------
Directors'/Trustees' fees 2,034
- - ----------------------------------------
Auditing fees 11,506
- - ----------------------------------------
Legal fees 6,101
- - ----------------------------------------
Distribution services fee 42,728
- - ----------------------------------------
Share registration costs 20,492
- - ----------------------------------------
Printing and postage 42,183
- - ----------------------------------------
Insurance 2,662
- - ----------------------------------------
Amortization of organizational costs 18,167
- - ----------------------------------------
Miscellaneous 1,486
- - ---------------------------------------- ----------
Total expenses 389,130
- - ----------------------------------------
Waivers--
- - ----------------------------
Waiver of Management fee $(115,747)
- - ----------------------------
Waiver of Distribution
services fee (42,728)
- - ----------------------------
Waiver of Administrative
personnel and services fee (18,905)
- - ---------------------------- -----------
Total waivers (177,380)
- - ---------------------------------------- ----------
Net expenses 211,750
- - ---------------------------------------------------- ----------
Net investment income 55,028
- - ---------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
ALLOCATED FROM PORTFOLIO:
- - ----------------------------------------------------
Net realized gain on investment transactions 2,379,002
- - ----------------------------------------------------
Net realized gain on financial futures contracts
transactions 63,908
- - ---------------------------------------------------- ----------
Net realized gain from Portfolio 2,442,910
- - ----------------------------------------------------
Net change in unrealized appreciation of
investments in Portfolio 1,570,778
- - ---------------------------------------------------- ----------
Net realized and unrealized gain on investments
in Portfolio 4,013,688
- - ---------------------------------------------------- ----------
Change in net assets resulting from operations $4,068,716
- - ---------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROWTH & INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
1997 1996
- - ------------------------------------------------------ ----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- - ------------------------------------------------------
OPERATIONS--
- - ------------------------------------------------------
Net investment income $ 55,028 $ 100,911
- - ------------------------------------------------------
Net realized gain on investment transactions 2,379,002 931,403
- - ------------------------------------------------------
Net realized gain on financial futures contracts
transactions 63,908 25,334
- - ------------------------------------------------------
Net change in unrealized appreciation of investments
in Portfolio 1,570,778 849,993
- - ------------------------------------------------------ ----------- -----------
Change in net assets resulting from operations 4,068,716 1,907,641
- - ------------------------------------------------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- - ------------------------------------------------------
Distributions from net investment income (106,419) --
- - ------------------------------------------------------
Distributions from net realized gains (440,487) (153,889)
- - ------------------------------------------------------ ----------- -----------
Change in net assets resulting from distributions to
shareholders (546,906) (153,889)
- - ------------------------------------------------------ ----------- -----------
SHARE TRANSACTIONS--
- - ------------------------------------------------------
Proceeds from sale of shares 3,543,603 12,224,700
- - ------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 525,487 143,325
- - ------------------------------------------------------
Cost of shares redeemed (5,650,094) (5,015,878)
- - ------------------------------------------------------ ----------- -----------
Change in net assets resulting from share
transactions (1,581,004) 7,352,147
- - ------------------------------------------------------ ----------- -----------
Change in net assets 1,940,806 9,105,899
- - ------------------------------------------------------
NET ASSETS:
- - ------------------------------------------------------
Beginning of period 15,549,184 6,443,285
- - ------------------------------------------------------ ----------- -----------
End of period (including undistributed net investment
income of $49,520 and $100,911, respectively) $17,489,990 $15,549,184
- - ------------------------------------------------------ ----------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROWTH & INCOME FUND
FINANCIAL HIGHLIGHTS
- - -----------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
1997 1996 1995
- - ------------------------ ------- ------- ------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.45 $ 8.11 $ 7.00
- - ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- - ------------------------
Net investment income
(loss) 0.04 0.06 (0.03)
- - ------------------------
Net realized and
unrealized gain on
investments
and futures contracts 2.55 1.44 1.15
- - ------------------------ ------- ------- ------
Total from investment
operations 2.59 1.50 1.12
- - ------------------------ ------- ------- ------
LESS DISTRIBUTIONS
- - ------------------------
Distributions from net
investment income (0.07) -- (0.01)
- - ------------------------
Distributions from net
realized gain on
investments
and futures contracts (0.28) (0.16) --
- - ------------------------ ------- ------- ------
Total distributions (0.35) (0.16) (0.01)
- - ------------------------ ------- ------- ------
NET ASSET VALUE, END OF
PERIOD $11.69 $ 9.45 $ 8.11
- - ------------------------ ------- ------- ------
TOTAL RETURN (A) 28.22% 18.77% 16.03%
- - ------------------------
RATIOS TO AVERAGE NET
ASSETS
- - ------------------------
Expenses (b) 1.75% 1.90% 3.81%
- - ------------------------
Net investment income
(loss) 0.33% 0.83% (0.64%)
- - ------------------------
Expense
waiver/reimbursement (c) 1.07% 1.71% 0.77%
- - ------------------------
SUPPLEMENTAL DATA
- - ------------------------
Net assets, end of
period (000 omitted) $17,490 $15,549 $6,443
- - ------------------------
</TABLE>
(a) Based on net asset value.
(b) Reflects the Fund's proportionate share of the respective Portfolio's
expenses and the Fund's fee waivers and expense reimbursements by the Funds'
Manager, Distributor and Administrator.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- - -----------------------------------------------------------------------------
1. ORGANIZATION
Blanchard Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act") as an open-end, management investment company. The
Trust consists of six funds. The financial statements included herein are only
those of Blanchard Growth & Income Fund (the "Fund"). The financial statements
of the other funds are presented separately. The assets of each fund are
segregated and a shareholder's interest is limited to the fund in which shares
are held.
The Fund's investment objective is to provide long-term capital appreciation and
dividend income. The Fund seeks to achieve its investment objective by investing
all of its investable assets in Growth & Income Portfolio (the "Portfolio")
which is an open-end management investment company having the same investment
objective as the Fund. The Portfolio is advised by Chase Manhattan Corporation
N.A., its Portfolio Adviser. At October 31, 1997, the Fund owned 0.65% of the
Portfolio.
These financial statements should be read together with the accompanying
portfolio of investments and financial statements of the Portfolio.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--The Fund records its investment in the Portfolio at
value. Securities of the Portfolio are recorded at value as more fully
discussed in the Notes to those accompanying Financial Statements.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--The Fund records daily its
pro-rata share of the Portfolio's income, expenses, and realized and
unrealized gains and losses. In addition, the Fund accrues its own expenses
daily as incurred. Expenses directly attributable to the Fund are charged to
the Fund. Certain expenses for the Trust are allocated among all the Funds in
the Trust based upon their relative average net assets. Distributions to
shareholders are recorded on the ex-dividend date. The amount of dividends and
distributions from net investment income and net realized capital gains is
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. Dividends and distributions
which exceed net investment income or net realized capital gains for financial
reporting purposes, but not for tax purposes, are reported as distributions in
excess of net investment income or net realized capital gains. To the extent
they exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of capital.
BLANCHARD GROWTH & INCOME FUND
- - -----------------------------------------------------------------------------
RECLASSIFICATION OF NET ASSET ACCOUNTS--During the year ended October 31,
1997, the Fund reclassified the effects of certain differences between the
financial statement amounts and distributions determined in accordance with
income tax regulations. These differences were reclassified
(increase/(decrease)) between paid-in capital and accumulated net realized
gain/(loss) on investments:
<TABLE>
<CAPTION>
PAID-IN ACCUMULATED NET
CAPITAL REALIZED GAIN
------- ---------------
<S> <C>
$826,779 ($826,779)
</TABLE>
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code (the "Code") applicable to regulated investment
companies and to distribute to shareholders each year substantially all of its
income. Accordingly, no provisions for federal tax are necessary.
DEFERRED EXPENSES--The costs incurred by the Fund with respect to
organizational expenses and registration of its shares in its first fiscal
year, excluding the initial expense of registering its shares, have been
deferred and are being amortized over a period not to exceed five years from
the Fund's commencement date.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
3. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in shares were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
- - --------------------------------------------------------- -------- ---------
<S> <C> <C>
Shares sold 336,561 1,400,562
- - ---------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared 54,624 17,436
- - ---------------------------------------------------------
Shares redeemed (540,682) (567,216)
- - --------------------------------------------------------- -------- ---------
Net change resulting from share transactions (149,497) 850,782
- - --------------------------------------------------------- -------- ---------
</TABLE>
4. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEE--Virtus Capital Management, Inc., the Fund's manager (the
"Manager"), receives for its services an annual management fee equal to 0.70% of
the Fund's average daily net assets. The Manager may voluntarily choose to waive
any portion of its fee. The Manager can modify or terminate this voluntary
waiver at any time at its sole discretion.
BLANCHARD GROWTH & INCOME FUND
- - ------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. The fee is based on the level of
average aggregate daily net assets of the Trust for the period. The
administrative fee received during any fiscal year for the Fund shall be at
least $75,000. The administrator may voluntarily choose to waive any portion of
its fee. The administrator can modify or terminate this voluntary waiver at any
time at its sold discretion.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's shares. The Plan provides that the Fund may incur distribution
expenses up to 0.25% of the average daily net assets of the Fund, annually, to
reimburse FSC. The distributor may voluntarily choose to waive any portion of
its fee. The distributor can modify or terminate this voluntary waiver at any
time at its sole discretion.
TRANSFER AGENT FEES--Federated Services Company ("FServ"), through its
subsidiary, Federated Shareholder Services Company ("FSSC") serves as transfer
and dividend disbursing agent for the Fund for which it receives a fee. This fee
paid to FSSC is based on the size, type, and number of accounts and transactions
made by shareholders.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors of FServ, FAS and FSC.
5. SUBSEQUENT EVENT
On July 18, 1997, Signet Banking Corporation ("Signet") entered into a
definitive Agreement and Plan of Reorganization whereby Signet was acquired by
First Union Corporation ("First Union"). This merger consummated on November 28,
1997. As a result of this merger, First Union now controls Virtus Capital
Management, Inc., the Fund's investment manager.
The Board of Trustees of the Trust has approved an Agreement and Plan of
Reorganization pursuant to which, on or about February 27, 1998, all of the
assets, and certain liabilities of the Fund would be acquired in exchange for
shares of a similarly managed fund (the "Acquiring Fund") that is advised by
affiliates of First Union. The reorganization would result in the liquidation
and termination of the Fund. Pursuant to the reorganization, shareholders of the
Fund will receive, tax-free, the number of shares of the Acquiring Fund having a
value equal to the value of their shares immediately prior to the
reorganization. Consummation of the reorganization is subject to approval of the
shareholders of the Fund.
INDEPENDENT AUDITORS' REPORT
- - ------------------------------------------------------------------------------
To the Board of Trustees of BLANCHARD FUNDS and Shareholders of BLANCHARD GROWTH
& INCOME FUND:
We have audited the accompanying statement of assets and liabilities of
Blanchard Growth & Income Fund as of October 31, 1997, the related statement of
operations for the year then ended, the statements of changes in net assets for
the years ended October 31, 1997 and 1996, and the financial highlights for the
periods ended in 1997 and 1996. The financial highlights for the period ended in
1995 was audited by other auditors, whose report thereon dated December 22,
1995, expressed an unqualified opinion. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audit 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Blanchard Growth &
Income Fund as of October 31, 1997, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
As more fully described in Note 5, on November 28, 1997 the Fund entered into an
Agreement and Plan of Reorganization, pursuant to which on or about February 27,
1998, all of the assets, and certain liabilities of the Fund would be acquired
in exchange for shares of a similarly managed fund that is advised by affiliates
of First Union Corporation. The reorganization would result in the liquidation
and termination of the Fund.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
December 22, 1997
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1997
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES ISSUER VALUE
---------- -------------------------------------- --------------
<C> <S> <C>
LONG-TERM INVESTMENTS--96.4%
-------------------------------------------------
COMMON STOCK--89.1%
-------------------------------------------------
AEROSPACE--0.8%
--------------------------------------
300,000 United Technologies, Corp. $ 21,000,000
-------------------------------------- --------------
AGRICULTURAL PRODUCTION/SERVICES--1.8%
--------------------------------------
250,000 AGCO Corp. 7,250,000
--------------------------------------
450,000 Case Corp. 26,915,625
--------------------------------------
250,000 Deere & Co. 13,156,250
-------------------------------------- --------------
47,321,875
-------------------------------------- --------------
AIRLINES--1.3%
--------------------------------------
300,001 AMR Corp., Delaware* 34,931,366
-------------------------------------- --------------
AUTOMOTIVE--1.3%
--------------------------------------
245,000 General Motors 15,725,938
--------------------------------------
401,000 Lear Corp.* 19,273,063
-------------------------------------- --------------
34,999,001
-------------------------------------- --------------
BANKING--6.4%
--------------------------------------
450,000 BankAmerica Corp. 32,175,000
--------------------------------------
325,000 Comerica, Inc. 25,695,313
--------------------------------------
410,000 First Union Corp. 20,115,625
--------------------------------------
325,000 NationsBank Corp. 19,459,375
--------------------------------------
500,000 Norwest Corp. 16,031,250
--------------------------------------
65,000 Signet Banking Corp. 3,497,813
--------------------------------------
175,000 U.S. Bancorp 17,795,312
--------------------------------------
500,000 Washington Mutual Inc. 34,218,750
-------------------------------------- --------------
168,988,438
-------------------------------------- --------------
BROADCASTING--1.6%
--------------------------------------
206,000 Clear Channel Communications, Inc.* 13,596,000
--------------------------------------
500,000 Comast Corp., Special Class A 13,750,000
--------------------------------------
</TABLE>
GROWTH & INCOME PORTFOLIO
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES ISSUER VALUE
---------- ---------------------------------------- --------------
<C> <S> <C>
LONG-TERM INVESTMENTS--CONTINUED
---------------------------------------------------
COMMON STOCK--CONTINUED
---------------------------------------------------
BROADCASTING--CONTINUED
----------------------------------------
645,341 Tele-Communications, TCI Group, Class A* $ 14,802,509
---------------------------------------- --------------
42,148,509
---------------------------------------- --------------
BUSINESS SERVICES--0.5%
----------------------------------------
450,000 Equifax, Inc. 13,978,125
---------------------------------------- --------------
CHEMICALS--2.1%
----------------------------------------
450,000 Dow Chemical Co. 40,837,500
----------------------------------------
250,000 duPont (EI) deNemours 14,218,750
---------------------------------------- --------------
55,056,250
---------------------------------------- --------------
COMPUTER SOFTWARE--2.1%
----------------------------------------
150,000 Cisco Systems, Inc.* 12,304,680
----------------------------------------
550,000 Computer Associates International 41,009,375
----------------------------------------
35,000 McAfee Associates, Inc.* 1,741,250
---------------------------------------- --------------
55,055,305
---------------------------------------- --------------
COMPUTERS/COMPUTER HARDWARE--4.9%
----------------------------------------
387,500 Compaq Computer Corp.* 24,703,125
----------------------------------------
650,000 EMC Corp., Mass.* 36,400,000
----------------------------------------
338,000 International Business Machines Corp. 33,145,125
----------------------------------------
280,000 Storage Technology Corp.* 16,432,500
----------------------------------------
600,000 Sun Microsystems, Inc.* 20,550,000
---------------------------------------- --------------
131,230,750
---------------------------------------- --------------
CONSTRUCTION MACHINERY--0.8%
----------------------------------------
400,000 Caterpillar, Inc. 20,500,000
---------------------------------------- --------------
CONSUMER PRODUCTS--2.2%
----------------------------------------
275,000 Avon Products, Inc. 18,012,500
----------------------------------------
200,000 Colgate-Palmolive Co. 12,950,000
----------------------------------------
725,000 Philip Morris Companies, Inc. 28,728,125
---------------------------------------- --------------
59,690,625
---------------------------------------- --------------
</TABLE>
GROWTH & INCOME PORTFOLIO
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES ISSUER VALUE
--------- ----------------------------------------------- --------------
<C> <S> <C>
LONG-TERM INVESTMENTS--CONTINUED
---------------------------------------------------------
COMMON STOCK--CONTINUED
---------------------------------------------------------
DIVERSIFIED--4.2%
-----------------------------------------------
95,500 American Standard Companies, Inc.* $ 3,414,125
-----------------------------------------------
1,200,000 BTR Ltd. PLC, ADR (United Kingdom) 16,359,600
-----------------------------------------------
1,000,000 Canadian Pacific, Ltd. 29,812,500
-----------------------------------------------
930,000 Tyco International Ltd. 35,107,500
-----------------------------------------------
1,000,000 Westinghouse Electric Corp. 26,437,500
----------------------------------------------- --------------
111,131,225
----------------------------------------------- --------------
ELECTRONICS/ELECTRICAL EQUIPMENT--1.9%
-----------------------------------------------
400,000 Adaptec, Inc.* 19,375,000
-----------------------------------------------
200,000 Intel Corp. 15,400,000
-----------------------------------------------
150,000 Texas Instruments 16,003,125
----------------------------------------------- --------------
50,778,125
----------------------------------------------- --------------
ENTERTAINMENT/LEISURE--4.4%
-----------------------------------------------
900,000 Carnival Corp., Class A 43,650,000
-----------------------------------------------
549,700 GTECH Holdings Corp.* 17,727,825
-----------------------------------------------
269,000 MGM Grand, Inc.* 11,802,375
-----------------------------------------------
254,659 Tele-Communications TCI Ventures Group, Ser. A* 5,873,072
-----------------------------------------------
400,000 Time Warner, Inc. 23,075,000
-----------------------------------------------
500,000 Viacom, Inc., Class B* 15,125,000
----------------------------------------------- --------------
117,253,272
----------------------------------------------- --------------
FINANCIAL SERVICES--2.5%
-----------------------------------------------
650,000 Federal Home Loan Mortgage Corp. 24,618,750
-----------------------------------------------
350,000 Lehman Brothers Holding, Inc. 16,471,875
-----------------------------------------------
550,000 Morgan Stanley, Dean Witter, Discover and Co. 26,950,000
----------------------------------------------- --------------
68,040,625
----------------------------------------------- --------------
FOOD/BEVERAGE PRODUCTS--3.1%
-----------------------------------------------
850,000 ConAgra, Inc. 25,606,250
-----------------------------------------------
1,000,000 PepsiCo., Inc. 36,812,500
-----------------------------------------------
</TABLE>
GROWTH & INCOME PORTFOLIO
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES ISSUER VALUE
---------- -------------------------------------- --------------
<C> <S> <C>
LONG-TERM INVESTMENTS--CONTINUED
-------------------------------------------------
COMMON STOCK--CONTINUED
-------------------------------------------------
FOOD/BEVERAGE PRODUCTS--CONTINUED
--------------------------------------
400,000 Unilever NV, ADR (Netherlands) $ 21,350,000
-------------------------------------- --------------
83,768,750
-------------------------------------- --------------
HEALTH CARE/HEALTH CARE SERVICES--3.2%
--------------------------------------
401,000 Columbia/HCA Healthcare Corp. 11,328,250
--------------------------------------
1,750,000 HEALTHSOUTH Corp.* 44,734,375
--------------------------------------
500,000 Tenet Healthcare Corp.* 15,281,250
--------------------------------------
530,000 Vencor, Inc.* 14,310,000
-------------------------------------- --------------
85,653,875
-------------------------------------- --------------
INSURANCE--4.9%
--------------------------------------
400,000 Allstate Corp. 33,175,000
--------------------------------------
215,750 American International Group 22,019,984
--------------------------------------
330,000 Equitable Companies, Inc. 13,591,875
--------------------------------------
190,000 Loews Corp. 21,220,625
--------------------------------------
240,000 NAC Re Corp. 10,680,000
--------------------------------------
400,000 Reliastar Financial Corp. 14,950,000
--------------------------------------
225,000 Travelers Group, Inc. 15,750,000
-------------------------------------- --------------
131,387,484
-------------------------------------- --------------
MANUFACTURING--3.6%
--------------------------------------
190,100 Honeywell, Inc. 12,938,681
--------------------------------------
637,500 Ingersoll-Rand Co. 24,822,656
--------------------------------------
490,000 Johnson Controls 21,988,750
--------------------------------------
300,000 Kennametal Inc. 14,550,000
--------------------------------------
100,000 McDermott International 3,631,250
--------------------------------------
400,000 Parker Hannifin Corp. 16,725,000
-------------------------------------- --------------
94,656,337
-------------------------------------- --------------
METALS/MINING--1.9%
--------------------------------------
500,000 Aluminum Co. of America (ALCOA) 36,500,000
--------------------------------------
</TABLE>
GROWTH & INCOME PORTFOLIO
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES ISSUER VALUE
---------- -------------------------------------------- --------------
<C> <S> <C>
LONG-TERM INVESTMENTS--CONTINUED
-------------------------------------------------------
COMMON STOCK--CONTINUED
-------------------------------------------------------
METALS/MINING--CONTINUED
--------------------------------------------
370,000 Newmont Mining Corp. $ 12,950,000
-------------------------------------------- --------------
49,450,000
-------------------------------------------- --------------
OFFICE/BUSINESS EQUIPMENT--1.2%
--------------------------------------------
400,000 Xerox Corp. 31,725,000
-------------------------------------------- --------------
OIL & GAS--8.5%
--------------------------------------------
600,000 Apache Corp. 25,200,000
--------------------------------------------
250,000 British Petroleum PLC, ADR (United Kingdom) 21,937,500
--------------------------------------------
500,000 Coastal Corp. 30,062,500
--------------------------------------------
400,000 Dresser Industries, Inc. 16,850,000
--------------------------------------------
640,000 Halliburton Company 38,160,000
--------------------------------------------
470,000 Mobil Corp. 34,221,875
--------------------------------------------
525,000 Oryx Energy Co.* 14,470,313
--------------------------------------------
580,000 Texaco, Inc. 33,023,750
--------------------------------------------
364,900 USX-Marathon Group 13,045,175
-------------------------------------------- --------------
226,971,113
-------------------------------------------- --------------
PAPER/FOREST PRODUCTS--0.7%
--------------------------------------------
600,000 Willamette Industries, Inc. 19,837,500
-------------------------------------------- --------------
PHARMACEUTICALS--4.4%
--------------------------------------------
350,000 Bristol-Myers Squibb Co. 30,712,500
--------------------------------------------
575,000 Pharmacia & Upjohn, Inc. 18,256,250
--------------------------------------------
480,000 Schering-Plough Corp. 26,910,000
--------------------------------------------
850,000 SmithKline Beecham PLC, ADR (United Kingdom) 40,481,250
-------------------------------------------- --------------
116,360,000
-------------------------------------------- --------------
PIPELINES--0.0%
--------------------------------------------
25,000 Tubos de Acero de Mexico SA, ADR (Mexico)* 504,688
-------------------------------------------- --------------
PRINTING & PUBLISHING--1.4%
--------------------------------------------
675,000 New York Times Company, Class A 36,956,250
-------------------------------------------- --------------
</TABLE>
GROWTH & INCOME PORTFOLIO
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES ISSUER VALUE
---------- -------------------------------------------- --------------
<C> <S> <C>
LONG-TERM INVESTMENTS--CONTINUED
-------------------------------------------------------
COMMON STOCK--CONTINUED
-------------------------------------------------------
REAL ESTATE INVESTMENT TRUST--3.0%
--------------------------------------------
345,000 Beacon Properties Corp. $ 14,533,125
--------------------------------------------
100,000 Boston Properties, Inc.* 3,200,000
--------------------------------------------
190,000 Cali Realty Corp. 7,695,000
--------------------------------------------
655,800 Duke Realty Investments, Inc. 14,755,500
--------------------------------------------
200,000 Equity Office Properties Trust 6,112,500
--------------------------------------------
280,000 Equity Residential Properties Trust 14,140,000
--------------------------------------------
338,181 Security Capital Industrial Trust 8,306,571
--------------------------------------------
720,000 Security Capital US Realty, ADR (Luxemburg)* 10,152,000
-------------------------------------------- --------------
78,894,696
-------------------------------------------- --------------
RETAILING--6.5%
--------------------------------------------
640,000 American Stores Co. 16,440,000
--------------------------------------------
520,000 CVS Corp. 31,882,500
--------------------------------------------
450,000 Dayton-Hudson Corp. 28,265,625
--------------------------------------------
525,000 Federated Department Stores* 23,100,000
--------------------------------------------
1,155,000 Kroger Co.* 37,681,875
--------------------------------------------
350,000 Office Depot, Inc.* 7,218,750
--------------------------------------------
300,000 Safeway, Inc.* 17,437,500
--------------------------------------------
300,000 Tandy Corp. 10,312,500
-------------------------------------------- --------------
172,338,750
-------------------------------------------- --------------
TELECOMMUNICATIONS--4.2%
--------------------------------------------
450,000 Bell Atlantic Corp. 35,943,750
--------------------------------------------
650,000 BellSouth Corp. 30,753,125
--------------------------------------------
400,000 Sprint Corp. 20,800,000
--------------------------------------------
700,000 WorldCom, Inc. 23,537,500
-------------------------------------------- --------------
111,034,375
-------------------------------------------- --------------
TEXTILES--1.1%
--------------------------------------------
300,000 Liz Claiborne, Inc. 15,206,250
--------------------------------------------
</TABLE>
GROWTH & INCOME PORTFOLIO
- - ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES ISSUER VALUE
---------- ------------------------------------------------ --------------
<C> <S> <C>
LONG-TERM INVESTMENTS--CONTINUED
-----------------------------------------------------------
COMMON STOCK--CONTINUED
-----------------------------------------------------------
TEXTILES--CONTINUED
------------------------------------------------
400,000 Unifi, Inc. $ 15,375,000
------------------------------------------------ --------------
30,581,250
------------------------------------------------ --------------
UTILITIES--2.6%
------------------------------------------------
Centrais Electricas Brasileiras SA-Electrobras, 5,442,400
250,000 ADR (Brazil)
------------------------------------------------
425,000 CINergy Corp. 14,025,000
------------------------------------------------
50,000 Consolidated Edison Co. of New York, Inc. 1,712,500
------------------------------------------------
555,000 FPL Group Inc. 28,686,563
------------------------------------------------
550,000 Pinnacle West Capital Corp. 19,146,875
------------------------------------------------ --------------
69,013,338
------------------------------------------------ --------------
TOTAL COMMON STOCK (COST $1,780,499,636) 2,371,236,897
------------------------------------------------ --------------
CONVERTIBLE PREFERRED STOCK--2.3%
-----------------------------------------------------------
AIRLINES--0.4%
------------------------------------------------
10,000 Continentail Air Finance Trust, 8.50%, 12/01/20 945,570
------------------------------------------------
90,000 Continentail Air Finance Trust, 8.50%, 12/01/20# 8,510,130
------------------------------------------------ --------------
9,455,700
------------------------------------------------ --------------
AEROSPACE--0.1%
------------------------------------------------
Loral Space & Communications, Inc., 6.00%, 2,932,368
48,000 11/01/06#
------------------------------------------------ --------------
ALTERNATE ENERGY--0.2%
------------------------------------------------
86,000 Calenergy Capital Trust II, 6.25%, 02/25/12# 4,411,542
------------------------------------------------
25,000 Calenergy Capital Trust III, 6.50%# 1,213,675
------------------------------------------------ --------------
5,625,217
------------------------------------------------ --------------
ENTERTAINMENT/LEISURE--0.3%
------------------------------------------------
150,000 Time Warner Financing Trust, Hasbro, $1.24 6,487,500
------------------------------------------------ --------------
INSURANCE--0.2%
------------------------------------------------
67,000 American Bankers Insurance Group, 6.25%, Ser. B 5,293,000
------------------------------------------------ --------------
MULTI-MEDIA--0.1%
------------------------------------------------
Echostar Communications Corp. Ser. C, 6.75%, 3,000,000
60,000 12/31/49
------------------------------------------------ --------------
</TABLE>
GROWTH & INCOME PORTFOLIO
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT ISSUER VALUE
----------- ----------------------------------------------- --------------
<C> <S> <C>
LONG-TERM INVESTMENTS--CONTINUED
-----------------------------------------------------------
CONVERTIBLE PREFERRED STOCK--CONTINUED
-----------------------------------------------------------
PAPER/FOREST PRODUCTS--0.2%
-----------------------------------------------
125,000 International Paper Capital Corp., 5.25%# $ 6,136,750
----------------------------------------------- --------------
TELECOMMUNICATIONS--0.6%
-----------------------------------------------
50,000 AirTouch Communications, 4.25%, 08/16/16 3,000,000
-----------------------------------------------
TCI Pacific Communications Inc., Class A, 5.0%, 13,937,500
100,000 7/31/06
----------------------------------------------- --------------
16,937,500
----------------------------------------------- --------------
UTILITIES--0.2%
-----------------------------------------------
102,000 Houston Industries, Inc., 7.00%, 07/01/00 5,584,500
----------------------------------------------- --------------
TOTAL CONVERTIBLE PREFERRED STOCK (COST 61,452,535
$49,766,002)
----------------------------------------------- --------------
WARRANTS--0.0%
-----------------------------------------------------------
REAL ESTATE INVESTMENT TRUST--0.0%
-----------------------------------------------
15,742 Security Capital Group, Class B, 09/18/98 75,758
----------------------------------------------- --------------
CONVERTIBLE CORPORATE NOTES & BONDS--2.7%
-----------------------------------------------------------
AUTOMOTIVE--0.2%
-----------------------------------------------
$ 4,500,000 Magna International Inc., 5.0%, 10/15/02 5,723,460
----------------------------------------------- --------------
COMPUTERS/COMPUTER HARDWARE--0.2%
-----------------------------------------------
3,600,000 EMC Corp., 3.25%, 03/15/02# 4,937,220
----------------------------------------------- --------------
ELECTRONICS--0.3%
-----------------------------------------------
7,000,000 Xilinx Inc., 5.25%, 11/01/02# 6,905,500
----------------------------------------------- --------------
ENTERTAINMENT /LEISURE--0.1%
-----------------------------------------------
2,250,000 Family Golf Centers, Inc.# 5.75%, 10/15/04 2,149,695
----------------------------------------------- --------------
ENVIRONMENTAL SERVICE--0.0%
-----------------------------------------------
1,000,000 USA Waste Services Inc., 4.00%, 02/01/02 1,066,250
----------------------------------------------- --------------
GOVERNMENT ISSUE--0.2%
-----------------------------------------------
5,000,000 Republic of Italy, 5.0%, 06/28/01 5,300,000
----------------------------------------------- --------------
HEALTH CARE/HEALTH CARE SERVICES--0.5%
-----------------------------------------------
3,000,000 Alternative Living Services, 7.0%, 06/01/04# 3,960,000
-----------------------------------------------
5,000,000 Atria Communities, Inc., 5.0%, 10/15/02# 5,039,050
-----------------------------------------------
</TABLE>
GROWTH & INCOME PORTFOLIO
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ISSUER VALUE
----------- ------------------------------------------------- --------------
<C> <S> <C>
LONG-TERM INVESTMENTS--CONTINUED
-------------------------------------------------------------
CONVERTIBLE CORPORATE NOTES & BONDS--CONTINUED
-------------------------------------------------------------
HEALTH CARE/HEALTH CARE SERVICES--CONTINUED
-------------------------------------------------
$ 3,500,000 Carematrix Corp., 6.25%, 08/15/04# $ 3,749,760
------------------------------------------------- --------------
12,748,810
------------------------------------------------- --------------
HOTELS/OTHER LODGING--0.2%
-------------------------------------------------
5,000,000 Hilton Hotels Corp., 5.0%, 05/15/06 5,575,000
------------------------------------------------- --------------
PAPER/FOREST PRODUCTS--0.2%
-------------------------------------------------
6,600,000 South African Pulp & Paper Industries, BVI
Finance Ltd., 7.5%, 08/01/02 6,187,500
------------------------------------------------- --------------
RETAILING--0.6%
-------------------------------------------------
4,000,000 Federated Department Stores, 5.0%, 10/01/03 5,520,000
-------------------------------------------------
8,500,000 Rite Aide Corp., 5.25%, 09/15/02# 9,144,130
------------------------------------------------- --------------
14,664,130
------------------------------------------------- --------------
TELECOMMUNICATIONS--0.2%
-------------------------------------------------
Telefonica Europe BV, (Netherlands), 2.0%, 2,537,500
2,500,000 07/15/02#
-------------------------------------------------
3,500,000 Tel-Save Holdings Inc., 4.5%, 09/15/02# 3,701,285
------------------------------------------------- --------------
6,238,785
------------------------------------------------- --------------
TOTAL CONVERTIBLE CORPORATE NOTES & BONDS (COST 71,496,350
$65,157,500)
------------------------------------------------- --------------
U.S. TREASURY SECURITIES--2.3%
-------------------------------------------------------------
U.S. Treasury Bond, 7.25%, 08/15/22 (Cost 62,011,950
55,000,000 $60,980,313)
------------------------------------------------- --------------
TOTAL LONG-TERM INVESTMENTS (COST $1,956,403,451) 2,566,273,490
------------------------------------------------- --------------
SHORT-TERM INVESTMENTS--3.3%
-------------------------------------------------------------
U.S. TREASURY SECURITIES--0.0%
-------------------------------------------------
1,500,000 U.S. Treasury Bill, 11/20/97 (Cost $1,495,951) 1,495,951
------------------------------------------------- --------------
COMMERCIAL PAPER--1.5%
-------------------------------------------------
20,000,000 General Electric Capital Corp., 5.53%, 12/03/97 19,901,689
-------------------------------------------------
20,000,000 Household Finance Corp., 5.5%, 11/04/97 19,990,833
------------------------------------------------- --------------
TOTAL COMMERCIAL PAPER (COST $39,892,522) 39,892,522
------------------------------------------------- --------------
</TABLE>
GROWTH & INCOME PORTFOLIO
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ISSUER VALUE
----------- ------------------------------------------------- --------------
<C> <S> <C>
SHORT-TERM INVESTMENTS--CONTINUED
-------------------------------------------------------------
TIME DEPOSIT--1.8%
-------------------------------------------------
Deutsche Bank, AG (United States) 5.66%, 11/03/97 $ 47,969,000
$47,969,000 (Cost $47,969,000)
------------------------------------------------- --------------
TOTAL SHORT-TERM INVESTMENTS (COST $89,357,473) 89,357,473
------------------------------------------------- --------------
TOTAL INVESTMENTS--99.7% (COST $2,045,760,924) $2,655,630,963
------------------------------------------------- --------------
</TABLE>
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH & CAPITAL
INCOME GROWTH
PORTFOLIO PORTFOLIO
-------------- --------------
<S> <C> <C>
ASSETS:
- - ----------------------------------------------
Investment securities, at value (Note 1) $2,655,630,963 $1,299,754,510
- - ----------------------------------------------
Cash 2,918 881
- - ----------------------------------------------
Receivables:
- - ----------------------------------------------
Investment securities sold 18,219,400 20,338,534
- - ----------------------------------------------
Interest and dividends 5,747,296 462,960
- - ----------------------------------------------
Other assets 47,197 51,558
- - ---------------------------------------------- -------------- --------------
Total Assets 2,679,647,774 1,320,608,443
- - ---------------------------------------------- -------------- --------------
LIABILITIES:
- - ----------------------------------------------
Payable for investment securities purchased 15,041,996 4,413,524
- - ----------------------------------------------
Accrued Liabilities: (Note 2)
- - ----------------------------------------------
Administration fees 118,145 58,859
- - ----------------------------------------------
Investment advisory fees 944,161 470,864
- - ----------------------------------------------
Custodian 36,504 20,624
- - ----------------------------------------------
Other 196,542 171,725
- - ---------------------------------------------- -------------- --------------
Total Liabilities 16,337,348 5,135,596
- - ---------------------------------------------- -------------- --------------
NET ASSETS Applicable to Investors' Beneficial
Interests $2,663,310,426 $1,315,472,847
- - ---------------------------------------------- -------------- --------------
Cost of Investments $2,045,760,924 $ 975,694,796
- - ---------------------------------------------- -------------- --------------
</TABLE>
See Notes to financial statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH & CAPITAL
INCOME GROWTH
PORTFOLIO PORTFOLIO
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
- - --------------------------------------------------
Dividend $ 38,535,143 $ 11,201,524
- - --------------------------------------------------
Interest 13,181,160 4,663,619
- - --------------------------------------------------
Foreign taxes withheld (227,963) (315,627)
- - -------------------------------------------------- ------------ ------------
Total investment income 51,488,340 15,549,516
- - -------------------------------------------------- ------------ ------------
EXPENSES: (NOTE 2)
- - --------------------------------------------------
Investment Advisory fees 9,877,868 4,971,835
- - --------------------------------------------------
Administration fees 1,234,733 621,480
- - --------------------------------------------------
Custodian fees 163,385 98,945
- - --------------------------------------------------
Amortization of organization costs (Note 1) 7,990 7,990
- - --------------------------------------------------
Professional fees 102,521 102,519
- - --------------------------------------------------
Trustees fees and expenses 49,389 24,859
- - --------------------------------------------------
Other 170,609 138,574
- - -------------------------------------------------- ------------ ------------
Total expenses 11,605,495 5,966,202
- - -------------------------------------------------- ------------ ------------
Net investment income 39,881,845 9,583,314
- - --------------------------------------------------
------------------------------------------------- ------------ ------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
- - --------------------------------------------------
Net realized gain (loss) on:
- - --------------------------------------------------
Investments 355,973,872 141,951,607
- - --------------------------------------------------
Futures transactions 9,654,862 --
- - --------------------------------------------------
Change in net unrealized appreciation/depreciation
on investments 231,319,779 146,677,178
- - -------------------------------------------------- ------------ ------------
Net realized and unrealized gain on investments 596,948,513 288,628,785
- - -------------------------------------------------- ------------ ------------
Net increase in net assets from operations $636,830,358 $298,212,099
- - -------------------------------------------------- ------------ ------------
</TABLE>
See Notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH & INCOME PORTFOLIO CAPITAL GROWTH PORTFOLIO
------------------------------ --------------------------------
YEAR ENDED YEAR ENDED
------------------------------ --------------------------------
<S> <C> <C> <C> <C>
10/31/97 10/31/96 10/31/97 10/31/96
-------------- -------------- --------------- ---------------
INCREASE (DECREASE) IN
NET ASSETS:
- - -------------------------
FROM OPERATIONS--
- - -------------------------
Net investment income $ 39,881,845 $ 46,623,872 $ 9,583,314 $ 12,451,547
- - -------------------------
Net realized gain on
investments and futures
transactions 365,628,734 163,677,802 141,951,607 132,963,967
- - -------------------------
Change in net unrealized
appreciation/depreciation
on investments and
futures 231,319,779 163,237,283 146,677,178 71,608,504
- - ------------------------- -------------- -------------- --------------- ---------------
Increase in net assets
from operations 636,830,358 373,538,957 298,212,099 217,024,018
- - ------------------------- -------------- -------------- --------------- ---------------
TRANSACTIONS IN
INVESTORS'
BENEFICIAL INTEREST:
- - -------------------------
Contributions 788,831,006 470,616,913 936,937,099 1,114,082,444
- - -------------------------
Withdrawals (854,698,879) (605,973,572) (1,009,808,684) (1,260,399,848)
- - ------------------------- -------------- -------------- --------------- ---------------
Net increase (decrease)
from transactions in
investors'
beneficial interests (65,867,873) (135,356,659) (72,871,585) (146,317,404)
- - ------------------------- -------------- -------------- --------------- ---------------
Net increase in net
assets 570,962,485 238,182,298 225,340,514 70,706,614
- - -------------------------
NET ASSETS:
- - -------------------------
Beginning of period 2,092,347,941 1,854,165,643 1,090,132,333 1,019,425,719
- - ------------------------- -------------- -------------- --------------- ---------------
End of period $2,663,310,426 $2,092,347,941 $ 1,315,472,847 $ 1,090,132,333
- - ------------------------- -------------- -------------- --------------- ---------------
</TABLE>
See Notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- - -----------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Growth and Income Portfolio ("GIP") and Capital Growth Portfolio ("CGP"), (the
"Portfolios") are separately registered under the Investment Company Act of
1940, as amended, as non-diversified, open end management investment companies
organized as trusts under the laws of the State of New York. Each declaration of
trust permits the Trustees to issue beneficial interests in the respective
Portfolios. The GIP and the CGP commenced operations on November 19, 1993.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Portfolios:
A.VALUATION OF INVESTMENTS--Equity securities, purchased options and futures are
valued at the last sale price on the exchange on which they are primarily
traded, including the NASDAQ National Market. Securities for which sale prices
are not available and other over-the-counter securities are valued at the last
quoted bid price. Bonds and other fixed income securities (other than
short-term obligations), including listed issues, are valued on the basis of
valuations supplied by pricing services or by matrix pricing systems of a
major dealer in bonds. Short-term debt securities with 61 days or more to
maturity at time of purchase are valued, through the 61st day prior to
maturity, at market value based on quotations obtained from market makers or
other appropriate sources; thereafter, the value on the 61st day is amortized
on a straight-line basis over the remaining number of days to maturity.
Short-term investments with 60 days or less to maturity at time of purchase
are valued at amortized cost, which approximates market. Portfolio securities
for which there are no such quotations or valuations are valued at fair value
as determined in good faith by or at the direction of the Trustees.
B.REPURCHASE AGREEMENTS--It is the Portfolios' policy that repurchase agreements
are fully collateralized by U.S. Treasury and Government Agency securities.
All collateral is held by the Trusts' custodian bank, subcustodian, or a bank
with which the custodian bank has entered into a subcustodian agreement, or is
segregated in the Federal Reserve Book Entry System. In connection with
transactions in repurchase agreements, if the seller defaults and the value of
the collateral declines, or if the seller enters an insolvency proceeding,
realization of the collateral by the Trusts may be delayed or limited.
C.
FUTURES CONTRACTS--When a Portfolio enters into a futures contract, it makes
an initial margin deposit in a segregated account, either in cash or liquid
securities. Thereafter, the futures contract is marked to market and the
portfolio makes (or receives) additional cash payments daily to the broker.
Changes in the value of the contract are recorded as unrealized
appreciation/depreciation until the contract is closed or settled.
- - -----------------------------------------------------------------------------
The GIP invested a portion of its liquid assets in long stock index futures
contracts to more fully participate in the market. Use of long futures
contracts subject the Portfolio to risk of loss up to the amount of the value
of the contract.
The Portfolios may enter into futures contracts only on exchanges or boards of
trade. The exchange or board of trade acts as the counterparty to each futures
transaction, therefore, the Portfolio's credit risk is limited to failure of
the exchange or board of trade.
As of October 31, 1997, the Portfolios had no outstanding futures contracts.
D.WRITTEN OPTIONS--When a Portfolio writes an option on a futures contract, an
amount equal to the premium received by the Portfolio is included in the
Portfolio's Statement of Assets and Liabilities as an asset and corresponding
liability. The amount of the liability is adjusted daily to reflect the
current market value of the written options and the change is recorded in a
corresponding unrealized gain or loss account. When a written option expires
on its stipulated expiration date, or when a closing transaction is entered
into, the related liability is extinguished and the Portfolio realizes a gain
(or loss if the cost of the closing transaction exceeds the premium received
when the option was written).
The GIP writes options on stock index securities futures. These options are
settled for cash and subject the Portfolio to market risk in excess of the
amounts that are reflected in the Statement of Assets and Liabilities. The
Portfolio, however, is not subject to credit risk on written options as the
counterparty has already performed its obligation by paying a premium at the
inception of the contract.
As of October 31, 1997 the Portfolios had no outstanding written options.
E.SECURITY TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
accounted for on the trade date (the date the order to buy or sell is
executed). Securities gains and losses are calculated on the identified cost
basis. Interest income is accrued as earned. Dividend income is recorded on
the ex-dividend date.
F.ORGANIZATION COSTS--Organization and initial registration costs incurred in
connection with establishing the Portfolios have been deferred and are being
amortized on a straight-line basis over a sixty month period beginning at the
commencement of operations of each Portfolio.
G.FEDERAL INCOME TAXES--The Portfolios intend to continue to qualify as a
partnerships and therefore net investment income and net realized gains are
taxed to the partners. Accordingly, no tax provisions are recorded by the
Portfolios. The investors in the Portfolios must take into account their
proportionate share of the Portfolios' income, gains, losses, deductions,
credits and tax preference items in computing their federal income tax
liability, without regard to whether they have received any cash distributions
from the Portfolio. The Portfolios do not intend to distribute to investors
their net investment income or their net realized gains, if any. It is
intended that the Portfolios will be managed in such a way that investors in
the Portfolio will be able to satisfy the requirements of subchapter M of the
Internal Revenue Code to be taxed as regulated investment companies.
H.EXPENSES--Expenses directly attributable to a Portfolio are charged to that
Portfolio; other expenses are allocated on another reasonable basis.
- - ------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
A.INVESTMENT ADVISORY FEE--Pursuant to separate Investment Advisory Agreements,
The Chase Manhattan Bank ("Chase" or the "Advisor") acts as the Investment
Advisor to the Portfolios. Chase is a direct wholly-owned subsidiary of The
Chase Manhattan Corporation. As Investment Advisor, Chase supervises the
investments of the Portfolios and for such services is paid a fee.
The fee is computed daily and paid monthly at an annual rate equal to 0.40% of
each Portfolio's average daily net assets.
Chase Asset Management, Inc. ("CAM"), a registered investment advisor, is the
sub-investment advisor to each of the Portfolios pursuant to a Sub- Investment
Advisory Agreement between CAM and Chase. CAM is a wholly owned subsidiary of
Chase and is entitled to receive a fee, payable by Chase from its advisory
fee, at an annual rate equal to 0.20% of each Portfolio's average daily net
assets.
B.CUSTODIAL FEES--Chase, as Custodian provides safekeeping services for the
Portfolios' securities. Compensation for such services are presented in the
Statement of Operations as custodian fees.
C.ADMINISTRATION FEE--Pursuant to an Administration Agreement, Chase (the
"Administrator") provides certain administration services to the Trusts. For
these services and facilities, the Administrator receives from each Portfolio
a fee computed at the annual rate equal to 0.05% of the respective Portfolio's
average daily net assets.
3. INVESTMENT TRANSACTIONS
For the year ended October 31, 1997, purchases and sales of investments
(excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
GIP CGP
- - ------------------------------------- -------------- ------------
<S> <C> <C>
Purchases (excluding U.S. Government) $1,781,972,894 $863,031,652
- - -------------------------------------
Sales (excluding U.S. Government) 1,474,324,449 771,903,060
- - -------------------------------------
Purchases of U.S. Government 60,980,313 --
- - -------------------------------------
Sales of U.S. Government -- --
- - -------------------------------------
</TABLE>
The portfolio turnover rates of GIP and CGP for the year ended were 65% and 67%
respectively. The average commission rates paid per share were $.05990 and
$.0587 for GIP and CGP, respectively.
- - -----------------------------------------------------------------------------
4. RETIREMENT PLAN
The Portfolios have adopted an unfunded noncontributory defined benefit pension
plan covering all independent trustees of the Portfolios who will have served as
an independent trustee for at least five years at the time of retirement.
Benefits under this plan are based on compensation and years of service. Pension
expenses for the year ended October 31, 1997, included in Trustees Fees and
Expenses in the Statement of Operations, and accrued pension liability included
in other accrued liabilities, respectively, in the Statement of Assets and
Liabilities were as follows:
<TABLE>
<CAPTION>
ACCRUED
PENSION PENSION
EXPENSES LIABILITY
- - --- -------- ---------
<S> <C> <C>
GIP $21,526 $68,330
- - ----------------------
CGP 11,661 33,265
- - ----------------------
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
- - -----------------------------------------------------------------------------
To the Trustees and Beneficial Interest Holders of Growth and Income Portfolio
and Capital Growth Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets present fairly, in all material respects, the financial
position of Growth and Income Portfolio and Capital Growth Portfolio (the
"Portfolios") at October 31, 1997, the results of each of their operations for
the year then ended, and the changes in each of their net assets for each of the
two years in the period then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Portfolios' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 17, 1997
TRUSTEES OFFICERS
- - ------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
William J. Copeland President and Treasurer
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. John W. McGonigle
Edward C. Gonzales Executive Vice President and
Peter E. Madden Secretary
John E. Murray, Jr. Joseph S. Machi
Wesley W. Posvar Vice President and Assistant
Marjorie P. Smuts Treasurer
Richard B. Fisher
Vice President
C. Grant Anderson
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contain facts concerning
its objective and policies, management fees, expenses and other information.
Appendix for Blanchard Growth & Income Fund
A. The graphic presentation here displayed consists of a line graph titled "The
Value of a $10,000 Investment in Blanchard Growth & Income Fund." The
corresponding components of the line graph are listed underneath. The Fund is
represented by a dotted line. The Lipper Growth & Income Fund Index is
represented by a solid line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000 purchase in Blanchard
Growth & Income Fund and the Lipper Growth & Income Fund Index. The "y" axis
reflects the cost of the investment. The "x" axis reflects computation periods
from the the 10-year period from 10/31/87 through 10/31/97. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Lipper Growth & Income Fund Index; the ending values are $75,294, and
$42,357, respectively.
<PAGE>
EVERGREEN EQUITY TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust. Incorporated by reference to
Evergreen Equity Trust's Registration Statement on Form N-1A
filed on October 8, 1997 - Registration No. 333-37453 ("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 Equity Trust Articles II., III.(6)(c),
IV.(3), IV.(8), V., VI., VII. and VIII. and ByLaws Articles II., III and VIII.
6(a). Form of Investment Advisory Agreement between Keystone Investment
Management Company and Evergreen Equity Trust. Incorporated by reference to the
Form N-1A Registration Statement.
6(b). Form of Interim Management Contract. Exhibit B to
Prospectus contained in Part A of this Registration Statement.
7(a). Principal Underwriting Agreement between Evergreen Distributor, Inc. and
Evergreen Equity Trust. Incorporated by reference to the Form N-1A Registration
Statement.
7(b). Form of Dealer Agreement for Class A, Class B and Class C shares used by
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
<PAGE>
8. Deferred Compensation Plan. Incorporated by reference to the Form N-1A
Registration Statement.
9. Custody Agreement between State Street Bank and Trust Company and Evergreen
Equity Trust. Incorporated by reference to the Form N-1A Registration Statement.
10(a). Rule 12b-1 Distribution Plan. Incorporated by reference to the Form N-1A
Registration Statement.
10(b). Multiple Class Plan. Incorporated by reference to the
Form N-1A Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. Filed herewith.
13. Not applicable.
14(a). Consent of KPMG Peat Marwick LLP. Filed herewith.
14(b). Consent of Deloitte & Touche LLP. Filed herewith.
14(c). Consent of Price Waterhouse LLP. Filed herewith.
15. Not applicable.
16. Powers of Attorney. Previously filed.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who
<PAGE>
may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post- Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of Columbus and State of Ohio, on the 5th day of
January, 1998.
EVERGREEN EQUITY TRUST
By: /s/ William J. Tomko
-----------------------
Name: William J. Tomko
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Post-Effective Amendment No. 1 to the Registration Statement in the
capacities indicated on the 5th day of January, 1998.
Signatures Title
- ---------- -----
/s/William J. Tomko President and
- ------------------- Treasurer
William J. Tomko
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
<PAGE>
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
Gerald M. McDonnell
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
12 Tax Opinion and Consent of Sullivan & Worcester LLP
14(a) Consent of KPMG Peat Marwick LLP
14(b) Consent of Deloitte & Touche LLP
14(c) Consent of Price Waterhouse LLP
17 Form of Proxy
- --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 2, 1998
Evergreen Equity Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Money Market Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 17, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Keystone Growth and Income (S-1) (the "Acquiring Fund"), a series of the Trust.
We understand that the Trust is about to file Post- Effective Amendment No. 1 to
its Registration Statement on Form N-14 (Registration No. 333-41399) for the
purpose of registering shares of the Trust under the Securities Act of 1933, as
amended (the "1933 Act"), in connection with the proposed acquisition by the
Acquiring Fund of all of the assets of Blanchard Growth & Income Fund (the
"Acquired Fund"), a series of a Massachusetts business trust with transferable
shares, in exchange solely for shares of the Acquiring Fund and the assumption
by the Acquiring Fund of certain identified liabilities of the Acquired Fund
pursuant to an Agreement and Plan of Reorganization, the form of which is
included in the Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and
the District of Columbia and generally do not purport to be familiar with the
laws of the State of Delaware.
<PAGE>
To the extent that the conclusions based on the laws of the State of Delaware
are involved in the opinion set forth herein below, we have relied, in rendering
such opinions, upon our examination of Chapter 38 of Title 12 of the Delaware
Code Annotated, as amended, entitled "Treatment of Delaware Business Trusts"
(the "Delaware business trust law") and on our knowlege of interpretation of
analogous common law of The Commonwealth of Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on February 20, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 5, 1998
Blanchard Growth & Income Fund
Keystone Growth and Income Fund (S-1)
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of Blanchard Growth & Income
Fund by Keystone Growth and Income Fund (S-1)
Ladies and Gentlemen:
You have asked for our opinion as to certain Federal income tax
consequences of the transactions described below:
Parties to the Transaction. Blanchard Growth & Income Fund
("Target Fund") is a series of Blanchard Funds, a Massachusetts
business trust.
Keystone Growth and Income Fund (S-1) ("Acquiring Fund") is a series of
Evergreen Equity Trust, a Delaware business trust.
Description of Proposed Transaction. Acquiring Fund will issue its
shares to Target Fund and assume certain stated liabilities of Target Fund, in
exchange for all of the assets of Target Fund. Target Fund will then immediately
dissolve and distribute all of the Acquiring Fund shares which it holds to its
shareholders pro rata in proportion to their shareholdings in Target Fund, in
complete redemption of all outstanding shares of Target Fund.
Scope of Review and Assumptions. In rendering our opinion, we have
reviewed and relied upon the form of Agreement and Plan of Reorganization (the
"Reorganization Agreement") between Acquiring Fund and Target Fund dated as of
November 26, 1997 which is enclosed in a draft prospectus/proxy statement to be
dated January 6, 1998 which describes the proposed transaction, and on the
information provided in such prospectus/proxy statement. We have relied, without
independent verification, upon the factual statements made therein, and assume
that there will be no change in material facts disclosed therein between the
date of this letter and the date of the closing of the
<PAGE>
transaction. We further assume that the transaction will be carried out in
accordance with the Reorganization Agreement.
Representations. Written representations, copies of which are attached
hereto, have been made to us by the appropriate officers of Target Fund and of
Acquiring Fund, and we have without independent verification relied upon such
representations in rendering our opinions.
Opinions
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, we have the following opinions:
1. The acquisition by Acquiring Fund of all of the assets of Target
Fund solely in exchange for voting shares of Acquiring Fund and assumption of
certain specified liabilities of Target Fund followed by the distribution by
Target Fund of said Acquiring Fund shares to the shareholders of Target Fund in
exchange for their Target Fund shares will constitute a reorganization within
the meaning of ss. 368(a)(1)(C) of the Code, and Acquiring Fund and Target Fund
will each be "a party to a reorganization" within the meaning of ss. 368(b) of
the Code.
2. No gain or loss will be recognized to Target Fund upon the transfer
of all of its assets to Acquiring Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of certain specified liabilities
of Target Fund, or upon the distribution of such Acquiring Fund voting shares to
the shareholders of Target Fund in exchange for all of their Target Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of any liabilities of Target
Fund.
4. The basis of the assets of Target Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund
immediately prior to the transfer, and the holding period of the assets of
Target Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Target Fund.
5. The shareholders of Target Fund will recognize no gain or loss upon
the exchange of all of their Target Fund shares solely for Acquiring Fund voting
shares.
<PAGE>
6. The basis of the Acquiring Fund voting shares to be received by the
Target Fund shareholders will be the same as the basis of the Target Fund shares
surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Target Fund shareholders will include the period during which
the Target Fund shares surrendered in exchange therefor were held, provided the
Target Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in such
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Equity Trust
We consent to the use of our report dated September 26, 1997 for Keystone Growth
and Income Fund (S-1) incorporated by reference herein and to the reference to
our firm under the caption "FINANCIAL STATEMENTS AND EXPERTS" in the
prospectus/proxy statement.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
January 5, 1998
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Evergreen Equity Trust on Form N-14 of our report on Blanchard Growth & Income
Fund dated December 22, 1997 appearing in the Annual Report of Blanchard Growth
& Income Fund for the year ended October 31, 1997, and to the reference to us
under the heading "Financial Statements and Experts" in the Prospectus/Proxy
Statement, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 5, 1998
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Combined Proxy
Statement and Prospectus and the Statement of Additional Information
constituting parts of this registration statement on Form N-14 (the "N-14
Registration Statement") of our report dated December 17, 1997, relating to the
financial statements appearing in the October 31, 1997 Annual Report to
Beneficial Interest Holders of Growth and Income Portfolio (the "Report"), which
is also incorporated by reference in the N-14 Registration Statement. We also
consent to the reference to us under the heading "Financial Statements and
Experts" in the Combined Proxy Statement and Prospectus.
We also consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of Post Effective
Amendment No. 42 to the registration statement on Form N-1A (the "N-1A
Registration Statement"), which are incorporated by reference in the N-14
Registration Statement, of our report dated December 10, 1996, relating to the
financial statements of Growth and Income Portfolio and Capital Growth Portfolio
appearing in the Annual Report to Shareholders of Blanchard Growth & Income Fund
and Blanchard Capital Growth Fund.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
December 30, 1997
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
BLANCHARD GROWTH & INCOME FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints C.
Grant Anderson, Carol B. Kayworth, Terrence J. Cullen, Dorothy E. Bourassa and
Martin J. Wolin or any of them as Proxies of the undersigned, with full power of
substitution, to vote on behalf of the undersigned all shares of Blanchard
Growth & Income Fund ("Growth & Income") that the undersigned is entitled to
vote at the special meeting of shareholders of Growth & Income to be held at
2:00 p.m. on Friday, February 20, 1998 at the offices of the Evergreen Funds,
200 Berkeley Street, Boston, Massachusetts 02116, and at any adjournments
thereof, as fully as the undersigned would be entitled to vote if personally
present.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON
THIS PROXY. If joint owners, EITHER may sign this
Proxy. When signing as attorney, executor,
administrator, trustee, guardian, or custodian for a
minor, please give your full title. When signing on
behalf of a corporation or as a partner for a
partnership, please give the full corporate or
partnership name and your title, if any.
Date , 199
----------------------------------------
----------------------------------------
Signature(s) and Title(s), if applicable
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF BLANCHARD
FUNDS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTION TO
BE TAKEN ON THE FOLLOWING PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED
AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF
TRUSTEES OF BLANCHARD FUNDS RECOMMENDS A VOTE FOR THE PROPOSALS. PLEASE MARK
YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK. EXAMPLE: X
1. To approve the proposal whereby Growth & Income would withdraw its
investment in Growth and Income Portfolio.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To approve an Agreement and Plan of Reorganization whereby Keystone
Growth and Income Fund (S-1), a series of Evergreen Equity Trust, will (i)
acquire all of the assets of Growth & Income in exchange for shares of Keystone
Growth and Income Fund (S-1); and (ii) assume certain identified liabilities of
Growth & Income, as substantially described in the accompanying Prospectus/Proxy
Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
3. To approve the proposed Interim Management Contract with Virtus
Capital Management, Inc.
- ---- FOR ---- AGAINST ---- ABSTAIN
4. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
<PAGE>
