UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [ ] Post-Effective
Amendment No. Amendment No.
EVERGREEN INVESTMENT TRUST
(Exact name of registrant as specified in charter)
Area Code and Telephone Number: (914) 694-2020
2500 Westchester Avenue
Purchase, New York 10577
(Address of principal executive offices)
James P. Wallin, Esq.
Evergreen Asset Management Corp.
2500 Westchester Avenue
Purchase, New York 10577
(Name and address of agent for service)
Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Section 24(f) of the Investment Company Act
of 1940 (File No. 33-31803); accordingly, no fee is payable herewith. Pursuant
to Rule 429 under the Securities Act of 1933, this Registration Statement
relates to the aforementioned registration on Form N-1A. A Rule 24f-2 Notice for
the Registrant's most recent fiscal year ended June 30, 1996 was filed with the
Commission on or about August 29, 1996.
It is proposed that this filing will become effective thirty days after
filing pursuant to Rule 488 under the Securities Act of 1933.
<PAGE>
EVERGREEN INVESTMENT 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 Statement Cross Reference Sheet; Cover Page
and Outside Front Cover Page of
Prospectus
2. Beginning and Outside Back Cover Page Table of Contents
of Prospectus
3. Fee Table, Synopsis Information and Comparison of Fees and Expenses;
Risk Factors Summary; Comparison of Investment
Objectives and Policies; Risks
4. Information About the Transaction Summary; Reasons for the
Reorganization; Comparative
Information on Shareholders' Rights;
Exhibit A (Agreement and Plan of
Reorganization)
5. Information about the Registrant Cover Page; Summary; Risks;
Comparison of Investment Objectives
and Policies; Comparative
Information on Shareholders' Rights;
Additional Information
6. Information about the Company Cover Page; Summary; Risks;
Being Acquired Comparison of Investment Objectives
and Policies; Comparative
Information on Shareholders' Rights;
Additional Information
7. Voting Information Cover Page; Summary; Voting
Information Concerning the Meeting
8. Interest of Certain Persons Financial Statements and Experts;
and Experts Legal Matters
9. Additional Information Required for Inapplicable
Reoffering by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. Additional Information About the Statement of Additional Information
Registrant of the U.S. Government Fund
dated August 30, 1996
<PAGE>
13. Additional Information about Statement of Additional Information
the Company Being Acquired of Keystone Government Securities
Fund dated November 29, 1996, as
Supplemented January 1, 1997
14. Financial Statements Incorporated by reference
Item of Part C of Form N-14
15. Indemnification Incorporated by Reference to Part A
Caption - "Comparative Information
on Shareholders' Rights - Liability
and Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
PART A
<PAGE>
[EVERGREEN KEYSTONE LOGO]
May, 1997
Dear Shareholder:
We are pleased to announce that the combination of the Evergreen and Keystone
organizations is well underway, and with the combined power of Evergreen
Keystone we will be able to bring our investment and service capabilities to a
new level. One of the areas we are focusing on is merging funds with similar
objectives to maximize the potential for greater operating efficiencies and
lower overall fees and expenses.
The enclosed Prospectus/Proxy Statement contains our proposal to combine the
Keystone Government Securities Fund with the Evergreen U.S. Government Fund.
This proposal is scheduled to be voted on at a special meeting of shareholders
of the Keystone Government Securities Fund on July 14, 1997.
The reorganization has been structured as a tax-free transaction for
shareholders. We believe it will result in one combined fund with lower
management fees and operating expenses and greater efficiencies than two
separate funds. This reorganization is not expected to affect the total value of
your investment.
SUMMARY OF BENEFITS
o Lower management fees and operating expenses
o Potential for greater operating efficiencies
The Fund's Trustees have very carefully reviewed this proposed reorganization
and believe it is in the best interests of shareholders. They recommend you vote
FOR the proposal, which is described in detail in the attached Prospectus/Proxy
Statement.
VOTING INSTRUCTIONS
This package contains the materials you will need to vote. To vote, please sign
the attached proxy card and return it today in the postage-paid envelope. It is
extremely important that you vote, no matter how many shares you own. This is an
opportunity to voice your opinion on an important matter affecting your
investment.
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If you have any questions regarding the proposed transaction or if you would
like additional information about the Evergreen Keystone family of mutual funds,
please telephone your financial adviser or Evergreen Keystone at 1-800-xxx-xxxx.
Albert H. Elfner, III George S. Bissell
CHAIRMAN CHAIRMAN OF THE BOARD
Keystone Investment Management Company Keystone Funds
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KEYSTONE GOVERNMENT SECURITIES FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
--------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 14, 1997
--------------------------------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Meeting") of Shareholders
of Keystone Government Securities Fund will be held at the offices of the Fund,
200 Berkeley Street, Boston, Massachusetts on Thursday, July 14, 1997 at 3:00
p.m., Eastern Time, for the following purposes:
1. To approve or disapprove an Agreement and Plan of Reorganization (the
"Plan"), providing for the acquisition of all of the assets of the
Keystone Government Securities Fund by the Evergreen U.S. Government
Fund in exchange for shares of the Evergreen U.S. Government Fund, and
the assumption by the Evergreen U.S. Government Fund of [_________]
liabilities of the Keystone Government Securities Fund. The Plan also
provides for distribution of such shares of the Evergreen U.S.
Government Fund to shareholders of the Keystone Government Securities
Fund in liquidation and subsequent termination of the Keystone
Government Securities Fund. A vote in favor of the Plan is a vote in
favor of the liquidation and dissolution of the Keystone Government
Securities Fund.
2. To transact any other business which may properly come before the
Meeting or any adjournment thereof.
The Trustees of Keystone Government Securities Fund have fixed the close of
business on May 16, 1997 as the record date for the determination of
shareholders of the Keystone Government Securities Fund entitled to notice of
and to vote at the Meeting or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED TO SIGN AND RETURN THE ENCLOSED PROXY
WITHOUT DELAY 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
George O. Martinez
May [ ___ ], 1997 SECRETARY
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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, Jr. John B. Smith, Jr., Executor
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<PAGE>
PROSPECTUS/PROXY STATEMENT DATED MAY [ ___ ], 1997
Acquisition of Assets of
KEYSTONE GOVERNMENT SECURITIES FUND
200 Berkeley Street
Boston, Massachusetts 02116
By and in Exchange for Shares of
EVERGREEN U.S. GOVERNMENT FUND
a series of
Evergreen Investment Trust
2500 Westchester Avenue
Purchase, New York 10577
This Prospectus/Proxy Statement is being furnished to shareholders of Keystone
Government Securities Fund (the "Keystone Government Fund") in connection with a
proposed Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of the Keystone Government Fund for consideration at a Special
Meeting of Shareholders to be held on July 14, 1997 at 3:00 p.m. at the offices
of the Fund, 200 Berkeley Street, Boston, Massachusetts, and any adjournments
thereof (the "Meeting"). The Plan provides for all of the assets of the Keystone
Government Fund to be acquired by Evergreen U.S. Government Fund in exchange for
shares of the Evergreen U.S. Government Fund and the assumption by the Evergreen
U.S. Government Fund of [_________] liabilities of the Keystone Government Fund
(hereinafter referred to as the "Reorganization"). Following the Reorganization,
shares of the Evergreen U.S. Government Fund will be distributed to shareholders
of the Keystone Government Fund in liquidation of the Keystone Government Fund
and the Keystone Government Fund will be terminated. Holders of shares of the
Keystone Government Fund will receive shares of the class of Evergreen U.S.
Government Fund (the "Corresponding Shares") having the same letter designation
and the same distribution-related fees, shareholder servicing-related fees and
contingent deferred sales charges ("CDSCs"), if any, as the shares of the class
of the Keystone Government Fund held by them prior to the Reorganization. As a
result of the proposed Reorganization, shareholders of the Keystone Government
Fund will receive that number of full and fractional Corresponding Shares of the
Evergreen U.S. Government Fund having an aggregate net asset value equal to the
aggregate net asset value of such shareholder's shares of the Keystone
Government Fund. The Reorganization is being structured as a tax-free
reorganization for federal income tax purposes.
The Evergreen U.S. Government Fund is a separate series of Evergreen Investment
Trust, an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Evergreen U.S. Government
Fund seeks a high level of current income consistent with stability of
principal.
This Prospectus/Proxy Statement, which should be retained for future reference,
sets forth concisely the information about the Evergreen U.S. Government Fund
that shareholders of the Keystone Government Fund should know before voting on
the Reorganization. Certain relevant documents listed below, which have been
filed with the Securities and Exchange Commission ("SEC"), are
19249
<PAGE>
incorporated in whole or in part by reference. A Statement of Additional
Information dated May [ __ ], 1997, relating to this Prospectus/Proxy Statement
and the Reorganization, which includes the financial statements of the Evergreen
U.S. Government Fund dated June 30, and December 31, 1996 and the financial
statements of the Keystone Government Fund dated July 31, 1996 and January 31,
1997, has been filed with the SEC and is incorporated by reference in its
entirety into this Prospectus/Proxy Statement. A copy of such Statement of
Additional Information is available upon request and without charge by writing
to the Evergreen U.S. Government Fund at 2500 Westchester Avenue, Purchase, New
York 10577 or by calling toll-free 1-800-807-2940.
The Prospectus of the Evergreen U.S. Government Fund relating to Class A, Class
B and Class C shares dated August 30, 1996 and its Annual and Semi Annual
Reports for the fiscal year ended June 30, 1996 and the semi annual period ended
December 31, 1996, respectively, are incorporated herein by reference in their
entirety, insofar as they relate to the Evergreen U.S. Government Fund only, and
not to any other fund described therein. Shareholders of the Keystone Government
Fund will receive, with this Prospectus/Proxy Statement, copies of the
Prospectus of the Evergreen U.S. Government Fund. Additional information about
the Evergreen U.S. Government Fund is contained in its Statement of Additional
Information of the same date which has been filed with the SEC and which is
available upon request and without charge by writing or calling to the Evergreen
U.S. Government Fund at the address or telephone number listed in the preceding
paragraph.
The Prospectus of the Keystone Government Fund dated November 29, 1996, as
supplemented January 1, 1997, is incorporated herein in its entirety by
reference. Copies of the Prospectus and a Statement of Additional Information
dated the same date are available upon request without charge by writing to the
Keystone Government Fund at 200 Berkeley Street, Boston, Massachusetts 02116 or
by calling toll-free 1-800-343-2898.
Included as Exhibit A of this Prospectus/Proxy Statement is a copy of the Plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS OR
OBLIGATIONS OF FIRST UNION CORPORATION ("FIRST UNION") OR ANY OF ITS
SUBSIDIARIES, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION OR ANY OF ITS
SUBSIDIARIES, AND ARE NOT INSURED OR OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
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<PAGE>
TABLE OF CONTENTS
PAGE
COMPARISON OF FEES AND EXPENSES.............................................4
SUMMARY ...................................................................7
PROPOSED PLAN OF REORGANIZATION....................................7
TAX CONSEQUENCES...................................................8
INVESTMENT OBJECTIVES AND POLICIES OF
THE EVERGREEN U.S. GOVERNMENT FUND
AND THE KEYSTONE GOVERNMENT FUND .........................8
COMPARATIVE PERFORMANCE INFORMATION OF EACH FUND...................8
MANAGEMENT OF THE FUNDS............................................9
INVESTMENT ADVISERS ...............................................9
PORTFOLIO MANAGEMENT..............................................10
DISTRIBUTION OF SHARES............................................11
PURCHASE AND REDEMPTION PROCEDURES................................12
EXCHANGE PRIVILEGES...............................................13
DIVIDEND POLICY...................................................13
RISKS ..................................................................13
REASONS FOR THE REORGANIZATION.............................................14
AGREEMENT AND PLAN OF REORGANIZATION..............................15
FEDERAL INCOME TAX CONSEQUENCES...................................17
PRO-FORMA CAPITALIZATION..........................................18
SHAREHOLDER INFORMATION...........................................19
COMPARISON OF INVESTMENT OBJECTIVE AND POLICIES............................21
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS ...........................22
FORM OF ORGANIZATION..............................................22
CAPITALIZATION....................................................22
SHAREHOLDER LIABILITY.............................................23
SHAREHOLDER MEETINGS AND VOTING RIGHTS............................23
LIQUIDATION OR DISSOLUTION........................................23
LIABILITY AND INDEMNIFICATION OF TRUSTEES.........................24
RIGHTS OF INSPECTION..............................................24
ADDITIONAL INFORMATION.....................................................24
VOTING INFORMATION CONCERNING THE MEETING .................................25
FINANCIAL STATEMENTS AND EXPERTS...........................................27
.
LEGAL MATTERS..............................................................27
OTHER BUSINESS.............................................................27
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<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class A, Class B, and Class C shares of the Evergreen U.S.
Government Fund set forth in the following tables and examples are based on the
expenses for the fiscal year ended June 30, 1996. The amounts for Class A, Class
B, and Class C shares of the Keystone Government Fund set forth in the following
tables and in the examples are based on the expenses for the Keystone Government
Fund's fiscal year ending July 31, 1996. All amounts are adjusted for voluntary
expense waivers. The amounts for the Evergreen U.S. Government Fund pro forma
are based on what the combined expenses would have been for the twelve months
ending December 31, 1996.
The following tables show for the Evergreen U.S. Government Fund and the
Keystone Government Fund the shareholder transaction expenses and annual fund
operating expenses associated with an investment in the Class A, Class B, and
Class C shares of each Fund.
<TABLE>
<CAPTION>
COMPARISON OF CLASS A, CLASS B AND CLASS C SHARES OF THE EVERGREEN U.S. GOVERNMENT FUND
WITH CORRESPONDING SHARES OF THE KEYSTONE GOVERNMENT FUND
EVERGREEN U.S. GOVERNMENT FUND KEYSTONE GOVERNMENT FUND
Shareholder Transaction Expenses CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on 4.75% None None 4.75% None None
Purchases (as a percentage of offering
price)
Maximum Sales Load Imposed on None None None None None None
Reinvested Dividends (as a percentage
of offering price)
Contingent Deferred Sales Charge (as a None 5.00% in the 1.00% in the None 5.00% in the 1.00% in the
percentage of original purchase price first year, first year first year, first year and
or redemption proceeds, whichever is declining to and 0.00% declining to 0.00%
lower) 1.00% in the thereafter 1.00% in the thereafter
sixth year sixth year
and 0.00% and 0.00%
thereafter thereafter
Exchange Fee None None None None None None
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Advisory Fees 0.50% 0.50% 0.50% 0.65% 0.65% 0.65%
12b-1 Fees 0.25% (1) 1.00% (1) 1.00% (1) 0.24% 1.00% 1.00%
Other Expenses 0.24% 0.24% 0.24% 0.25% 0.24% 0.24%
----- ----- ----- ----- ----- -----
Annual Fund Operating Expenses 0.99% 1.74% 1.74% 1.14%(2) 1.89%(2) 1.89%(2)
</TABLE>
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<TABLE>
<CAPTION>
EVERGREEN U.S. GOVERNMENT FUND PRO-FORMA
Shareholder Transaction Expenses Class A Class B Class C
-------------- ------------------- ------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as 4.75% None None
a percentage of offering price)
Maximum Sales Load Imposed on Reinvested None None None
Dividends (as a percentage of offering price)
Contingent Deferred Sales Charge (as a None 5.00% in the 1.00% in the
percentage of original purchase price or first year, first year and
redemption proceeds, whichever is lower) declining to 0.00%
1.00% in the thereafter
sixth year and
0.00% thereafter
Exchange Fee None None None
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Advisory Fees 0.50% 0.50% 0.50%
12b-1 Fees (1) 0.25% 1.00% 1.00%
Other Expenses 0.22% 0.22% 0.22%
----- ----- -----
Annual Fund Operating Expenses 0.97% 1.72% 1.72%
</TABLE>
- --------------------
(1) Class A shares can pay up to .75 of 1% of average net assets as a 12b-1 fee.
For the foreseeable future, the Class A 12b-1 fees will be limited to .25 of 1%
of average net assets. For Class B and Class C shares of Evergreen U.S.
Government Fund, a portion of the 12b-1 fees equivalent to .25 of 1% of average
net assets will be shareholder servicing-related. Distribution-related 12b-1
fees will be limited to .75 of 1% of average net assets as permitted under the
rules of the National Association of Securities Dealers, Inc.
(2) Reflects agreement by Keystone Investment Management Company to voluntarily
reimburse the Keystone Government Fund for expenses which exceed 1.15%, 1.90%
and 1.90%,respectively, of Class A, Class B and Class C shares's average daily
net assets. Keystone Investment Management Company may cease or modify these
reimbursements at any month end. Absent such agreement, the operating expenses
of Keystone Government Fund for the year ended July 31, 1996, were as follows:
Class A Class B Class C
-------------- ------------- -------------
Keystone Government 1.41% 2.17% 2.17%
Fund
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<PAGE>
EXAMPLES. The following tables show for each Fund, and for the Evergreen U.S.
Government Fund, proforma assuming consummation of the Reorganization, examples
of the cumulative effect of shareholder transaction expenses and annual fund
operating expenses indicated above on a $1,000 investment in each Class of
shares for the periods specified, assuming (i) a 5% annual return, and (ii)
redemption at the end of such period, and additionally for Class B and Class C
shares, no redemption at the end of each period.
<TABLE>
<CAPTION>
EVERGREEN U.S. GOVERNMENT FUND KEYSTONE GOVERNMENT FUND
One Three Five Ten One Three Five Ten
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $57 $78 $100 $163 $59 $82 $107 $180
Class B
Assuming redemption at end of period $68 $85 $114 $176 $69 $89 $122 $192
Class B
Assuming no redemption at end of period $18 $55 $94 $176 $19 $59 $102 $192
Class C
Assuming redemption at end of period $28 $55 $94 $205 $29 $59 $102 $221
Class C $18 $55 $94 $205 $19 $59 $102 $221
Assuming no redemption at end of period
</TABLE>
EVERGREEN U.S. GOVERNMENT FUND PRO-
FORMA
One Three Five Ten
YEAR YEARS YEARS YEARS
Class A $57 $77 $99 $161
Class B $67 $84 $113 $174
Assuming redemption at end of period
Class B $17 $54 $93 $174
Assuming no redemption at end of period
Class C $27 $54 $93 $203
Assuming redemption at end of period
Class C $17 $54 $93 $203
Assuming no redemption at end of period
The purpose of the foregoing examples is to assist Keystone Government Fund
shareholder in understanding the various costs and expenses that an investor in
the Evergreen U.S. Government Fund as a result of the Reorganization would bear
directly and indirectly, as compared with the various direct and indirect
expenses currently borne by a shareholder in the Keystone Government Fund. These
examples should not be considered a representation of past or future expenses or
annual returns. Actual expenses may be greater or less than those shown.
Moreover, while the example assumes a 5% annual return, a fund's actual
performance will vary and may result in actual returns greater or less than 5%.
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<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ADDITIONAL
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, THE
PROSPECTUS OF THE EVERGREEN U.S. GOVERNMENT FUND DATED AUGUST 30, 1996 AND THE
PROSPECTUS OF THE KEYSTONE GOVERNMENT FUND DATED NOVEMBER 29, 1996, AS
SUPPLEMENTED JANUARY 1, 1997 (WHICH ARE INCORPORATED HEREIN BY REFERENCE) AND
THE PLAN, A FORM OF WHICH IS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS
EXHIBIT A.
PROPOSED PLAN OF REORGANIZATION
The Plan provides for the transfer of all of the assets of the Keystone
Government Fund in exchange for shares of the Evergreen U.S. Government Fund and
the assumption by the Evergreen U.S. Government Fund of [__________] liabilities
of the Keystone Government Fund. (The Keystone Government Fund and the Evergreen
U.S. Government Fund each may also be referred to in this Prospectus/Proxy
Statement as a "Fund" and together, as the "Funds"). The Plan also calls for the
distribution of shares of the Evergreen U.S. Government Fund to Keystone
Government Fund shareholders in liquidation of the Keystone Government Fund as
part of the Reorganization. As a result of the Reorganization, the shareholders
of the Keystone Government Fund will become the owners of that number of full
and fractional Corresponding Shares of Evergreen U.S. Government Fund having an
aggregate net asset value equal to the aggregate net asset value of the
shareholder's shares of the Keystone Government Fund as of the close of business
immediately prior to the date that the Keystone Government Fund's assets are
exchanged for shares of the Evergreen U.S. Government Fund.
The Trustees of the Keystone Government Fund, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of the Keystone Government Fund and that the interests
of the shareholders of the Keystone Government Fund will not be diluted as a
result of the transactions contemplated by the Reorganization. Accordingly, the
Trustees have submitted the Plan for the approval of Keystone Government Fund's
shareholders. THE BOARD OF TRUSTEES OF THE KEYSTONE GOVERNMENT FUND RECOMMENDS
APPROVAL BY SHAREHOLDERS OF THE KEYSTONE GOVERNMENT FUND OF THE PLAN EFFECTING
THE REORGANIZATION.
The Trustees of the Evergreen U.S. Government Fund have also approved the Plan,
and accordingly, the Evergreen U.S. Government Fund's participation in the
Reorganization.
Approval of the Reorganization on the part of the Keystone Government Fund will
require the affirmative vote of a majority of the shares present and entitled to
vote, with all classes voting together as a single class, at a meeting at which
a quorum is present. A majority of the outstanding shares of the Fund,
represented in person or by proxy is required to constitute a quorum at the
meeting. See "Voting Information Concerning the Meeting." The Reorganization is
scheduled to take place on or about July 31, 1997.
If the shareholders of the Keystone Government Fund do not vote to approve the
Reorganization, the Trustees of the Keystone Government Fund will consider other
possible courses of action in the best interests of shareholders.
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<PAGE>
TAX CONSEQUENCES
Prior to or at the completion of the Reorganization, the Keystone Government
Fund will have received an opinion of counsel that the Reorganization has been
structured so that no gain or loss will be recognized by the Keystone Government
Fund or its shareholders for federal income tax purposes as a result of the
receipt of shares of the Evergreen U.S. Government Fund in the Reorganization.
The holding period and aggregate tax basis of the Corresponding Shares of the
Evergreen U.S. Government Fund that are received by Keystone Government Fund
shareholders will be the same as the holding period and aggregate tax basis of
shares of the Keystone Government Fund previously held by such shareholders,
provided that shares of the Keystone Government Fund are held as capital assets.
In addition, the holding period and tax basis of the assets of the Keystone
Government Fund in the hands of the Evergreen U.S. Government Fund as a result
of the Reorganization will be the same as in the hands of the Keystone
Government Fund immediately prior to the Reorganization and no gain or loss will
be recognized by the Evergreen U.S. Government Fund upon the receipt of the
assets of the Keystone Government Fund in exchange for shares of the Evergreen
U.S. Government Fund and the assumption by the Evergreen U.S. Government Fund of
[__________] liabilities of the Keystone Government Fund.
INVESTMENT OBJECTIVES AND POLICIES OF THE EVERGREEN U.S. GOVERNMENT FUND AND THE
KEYSTONE GOVERNMENT FUND
The investment objective of the Evergreen U.S. Government Fund is to achieve a
high level of current income consistent with stability of principal. The
Evergreen U.S. Government Fund invests in debt instruments issued or guaranteed
by the U.S. Government, its agencies, or instrumentalities ("U.S. Government and
Agency Securities"). In pursuing its objective, the Evergreen U.S. Government
Fund invests at least 80% of its assets under ordinary circumstances in U.S.
Government and Agency Securities. The investment objective of the Keystone
Government Fund is to seek the highest level of current income consistent with
the safety of principal, and maintenance of liquidity, by investing primarily in
securities that are issued, or guaranteed as to principal and interest by the
full faith and credit of the U.S. Government ("U.S. Government Securities"). In
pursuing this objective, the Keystone Government Fund invests at least 65% of
its assets under ordinary circumstances in U.S. Government Securities. See
"Comparison of Investment Objectives and Policies" below.
COMPARATIVE PERFORMANCE INFORMATION OF EACH FUND
Discussions of the manner of calculation of total return are contained in the
respective Prospectuses and Statements of Additional Information of the Funds.
The average annual total return of the Class A, Class B and Class C shares of
Evergreen U.S. Government Fund for the one year and since inception periods
ended March 31, 1997 and for Keystone Government Fund for the one year, five
year and since inception periods ended March 31, 1997 are set forth in the table
below. The calculations of total return assume the reinvestment of all dividends
and capital gains distributions on the reinvestment date and the deduction of
all recurring expenses (including sales charges) that were charged to
shareholders' accounts.
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<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
5 Years Ended
1 Year Ended March 31, Since Inception
March 31, 1997 1997 To March 31, 1997 Inception Date
<S> <C> <C> <C> <C>
Evergreen U.S. Government Fund
Class A shares -0.71% NA 4.03% 1/12/93
Class B shares -1.41% NA 4.17% 1/12/93
Class C shares 2.49% NA 5.83% 9/2/94
Keystone Government Fund (1) -0.87% (1) 5.47% 6.99% 4/14/87
Class A shares
Class B shares -0.61% (1) NA 3.88% (1) 2/1/93
Class C shares 3.29% (1) NA 4.28% (1) 2/1/93
</TABLE>
- --------------------
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the average annual total
return during the period would have been lower.
Important information about the Evergreen U.S. Government Fund is also contained
in Management's Discussion of the Evergreen U.S. Government Fund's Performance,
attached hereto as Exhibit B. This information also appears in the Evergreen
U.S. Government Fund's most recent Annual Report.
MANAGEMENT OF THE FUNDS
The overall management of the Evergreen U.S. Government Fund and of the Keystone
Government Fund is the responsibility of, and is supervised by, their respective
Board of Trustees.
INVESTMENT ADVISERS
EVERGREEN U.S. GOVERNMENT FUND. The Capital Management Group of First Union
National Bank of North Carolina ("FUNB") serves as investment adviser to the
Evergreen U.S. Government Fund. FUNB is a subsidiary of First Union Corporation
("First Union"), the sixth largest bank holding company in the United States.
The Capital Management Group of FUNB and Evergreen Asset Management Corp.
("Evergreen Asset"), an affiliated investment adviser, manage the Evergreen
family of mutual funds with assets of approximately $19 billion as of February
28, 1997. For further information regarding FUNB, Evergreen Asset and First
Union, see "Management of the Funds -- Investment Adviser" in the Prospectus of
the Evergreen U.S. Government Fund.
FUNB manages investments and supervises the daily business affairs of the
Evergreen U.S. Government Fund subject to the authority of the Trustees. FUNB is
entitled to receive from the Evergreen U.S. Government Fund an annual fee equal
to .50 of 1% of the average daily net assets of Evergreen U.S. Government Fund.
Evergreen Keystone Investment Services, Inc., a wholly-owned
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subsidiary of FUNB ("EKIS"), provides administrative services to the Evergreen
U.S. Government Fund and is entitled to receive from the Evergreen U.S.
Government Fund an annual fee based on the average daily net assets of the
Evergreen U.S. Government Fund at a rate based on the total assets of the mutual
funds administered by EKIS for which FUNB or affiliates serve as investment
adviser calculated in accordance with the following schedule: .050% of the first
$7 billion; .035% on the next $3 billion; .030% on the next $5 billion; .020% on
the next $10 billion; .015% on the next $5 billion; and .010% on assets in
excess of $30 billion. The BISYS Group Inc., an affiliate of Evergreen Keystone
Distributor, Inc., distributor for the Evergreen Keystone group of mutual funds,
serves as sub-administrator for both Funds and is entitled to receive a fee from
each Fund calculated on the average daily net assets of each Fund at a rate
based on the total assets of the mutual funds administered by EKIS for which
FUNB or affiliates serve as investment adviser calculated in accordance with the
following schedule: .0100% of the first $7 billion; .0075% on the next $3
billion; .0050% on the next $15 billion; and .0040% on assets in excess of $25
billion. The total assets of the mutual funds administered by EKIS for which
FUNB and affiliates serve as investment adviser were approximately $29.2 billion
as of February 28, 1997.
KEYSTONE GOVERNMENT FUND. Keystone Investment Management Company ("Keystone")
serves as the investment adviser for the Keystone Government Fund. Keystone
manages the investment and reinvestment of the Fund's assets, supervises the
operation of the Fund and provides all necessary office space, facilities and
equipment.
The Fund pays Keystone a fee for its services at the annual rate set forth
below:
AVERAGE AGGREGATE NET
ASSET VALUE
ANNUAL MANAGEMENT FEE INCOME OF THE SHARES OF THE FUND
- ---------------------- --------------------------- -------------------------
2.00% of Gross Dividend
and Interest Income, plus
--------------------------- -------------------------
0.50% of the first $ 100,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000.
PORTFOLIO MANAGEMENT
The portfolio manager of the Evergreen U.S. Government Fund is Rollin C.
Williams, who is a Vice President of FUNB. Mr. Williams has served as the Fund's
portfolio manager since its inception in 1992.
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DISTRIBUTION OF SHARES
Evergreen Keystone Distributor, Inc. ("EKD"), an indirect, wholly owned
subsidiary of The BISYS Group, Inc., acts as underwriter of each Fund's shares.
EKD distributes each Fund's shares directly or through broker-dealers, banks
(including FUNB), or other financial intermediaries. The Evergreen U.S.
Government Fund offers four classes of shares: Class A, Class B, Class C and
Class Y. The Keystone Government Fund offers three classes of shares: Class A,
Class B and Class C. Each class has separate distribution arrangements. (See
"Distribution-Related and Shareholder Servicing-Related Expenses" below.) No
Class bears the distribution expenses relating to the shares of any other Class.
In the proposed Reorganization, shareholders of the Keystone Government Fund
will receive the corresponding Class of shares of the Evergreen U.S. Government
Fund which they currently hold in the Keystone Government Fund. The Class A,
Class B and Class C shares of the Evergreen U.S. Government Fund have identical
arrangements with respect to the imposition of initial sales charges, CDSCs and
distribution and service fees as the comparable class of shares of the Keystone
Government Fund. The Keystone Government Fund does not have Class Y shares.
Because the Reorganization will be effected at net asset value without the
imposition of a sales charge, Evergreen U.S. Government Fund shares acquired by
shareholders of the Keystone Government Fund pursuant to the proposed
Reorganization would not be subject to any initial sales charge or contingent
deferred sales charge ("CDSC") as a result of the Reorganization. However,
holders of Evergreen U.S. Government Fund shares acquired as a result of the
Reorganization would continue to be subject to a CDSC upon subsequent
redemptions to the same extent as if they had continued to hold their shares of
the Keystone Government Fund.
The following is a summary description of charges and fees for each of the
different Classes of shares of each Fund. More detailed descriptions of the
distribution arrangements applicable to the Classes of shares are contained in
the respective Evergreen U.S. Government Fund Prospectus and Keystone Government
Fund 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 shareholder servicing-related
fees.
CLASS B SHARES. Class B shares are sold without any front-end sales charges but
are subject to a CDSC which changes from 5% to 1%, if shares are redeemed during
the month of purchase and the first six years after the month of purchase and
which declines to 0% thereafter. In addition, Class B shares are subject to
distribution-related fees and shareholder servicing-related fees as described
below. Class B shares issued in the Reorganization will automatically convert to
Class A in accordance with the conversion schedule in effect at the time the
Keystone Government Fund shares were originally purchased.
Until Class B shares convert to Class A shares they are subject to higher
distribution-related fees than the corresponding Class A shares of each Fund on
which a front-end sales charge is imposed. The higher fees mean a higher expense
ratio, so Class B shares pay correspondingly lower dividends and may have a
lower net asset value than Class A shares of either Fund.
CLASS C SHARES. Class C shares are sold without an initial sales charge, but as
indicated below, are subject to distribution-related and shareholder
servicing-related fees. Class C shares are subject to a 1% CDSC if such shares
are redeemed during the month of purchase and the 12-month period
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<PAGE>
following the month of purchase. No CDSC is imposed on amounts redeemed
thereafter. Class C shares incur higher distribution and/or shareholder service
fees than Class A shares but, unlike Class B shares, do not convert to any other
class of shares.
The amount of the CDSCs applicable to redemptions of Class B and Class C shares
are charged as a percentage of the lesser of the then current net asset value or
original cost. The CDSC is deducted from the amount of the redemption and is
paid to the respective Fund's distributor or its predecessor, as the case may
be. Shares of each Fund acquired through dividend or distribution reinvestment
are not subject to a CDSC. For purposes of determining the schedule of CDSCs,
and the time of conversion to Class A shares, applicable to shares of Evergreen
U. S. Government Fund received by Keystone Government Fund shareholders in the
Reorganization, Evergreen U.S. Government Fund will treat such shares as having
been sold on the date the shares of the Keystone Government Fund were originally
purchased by the Keystone Government Fund shareholder. Additional information
regarding the Classes of shares of each Fund is included in its respective
Prospectus and Statement of Additional Information.
DISTRIBUTION-RELATED AND SHAREHOLDER SERVICING-RELATED EXPENSES. Each Fund has
adopted a Rule 12b- 1 plan with respect to its Class A shares under which the
Class may pay for distribution-related expenses at an annual rate which may not
exceed .75 of 1% of average daily net assets attributable to the Class, which
amount may be increased to the full plan rate for such Fund by the Trustees
without shareholder approval. The current annual rate of fees for Class A shares
is .25 of 1.00% of average daily net assets.
Each Fund has also adopted a Rule 12b-1 plan with respect to its Class B and
Class C shares under which the Class may pay for distribution related and
shareholder servicing related expenses at an annual rate which may not exceed
1.00% of average daily net assets attributable to the Class.
The Class B and Class C Rule 12b-1 plans provide for the payment in respect of
"shareholder services," at an annual rate which may not exceed .25 of 1% (making
total Rule 12b-1 fees for Class B and Class C shares payable at a maximum annual
rate of 1.00%). Consistent with the requirements of Rule 12b-1 and the
applicable rules of the National Association of Securities Dealers, Inc.,
following the Reorganization the Evergreen U.S. Government Fund may make
distribution-related and shareholder servicing-related payments with respect to
Keystone Government Fund shares sold prior to the Reorganization, including
payments the Keystone Government Fund's former underwriter.
Additional information regarding the Rule 12b-1 plans adopted by each Fund is
included in its respective Prospectus and Statement of Additional Information.
PURCHASE AND REDEMPTION PROCEDURES
Information concerning applicable sales charges, distribution-related fees and
shareholder servicing-related fees are described above. Investments in the Funds
are not insured. The minimum initial purchase requirement for each Fund is
$1,000. There is no minimum for subsequent purchases of shares of either Fund.
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. The Evergreen U.S. Government Fund and the Keystone
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<PAGE>
Government Fund each may involuntarily redeem shareholders' accounts that have
less than $1,000 of invested funds. All funds invested in each Fund are invested
in full and fractional shares. The Funds reserve the right to reject any
purchase order.
EXCHANGE PRIVILEGES
Each Fund currently has identical exchange privileges. No sales charge is
imposed on an exchange. An exchange which represents an initial investment in
another fund must amount to at least $1,000. The current exchange privileges,
and the requirements and limitations attendant thereto, are described in the
Funds' respective Prospectuses and Statements of Additional Information.
DIVIDEND POLICY
Each Fund distributes its investment company taxable income monthly and net
long-term capital gains, if any, at least annually. The Keystone Government Fund
declares and pays its income and short term gains dividends monthly. The
Evergreen Government Fund declares such dividends daily and pays them monthly.
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 Funds' respective Prospectuses for further information concerning dividends
and distributions.
After the Reorganization, shareholders of the Keystone Government Fund that have
elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from the Evergreen U.S. Government Fund
reinvested in shares of the Evergreen U.S. Government Fund. Shareholders of the
Keystone Government Fund that have elected to receive dividends and/or
distributions in cash will receive dividends and/or distributions from the
Evergreen U.S. Government Fund in cash after the Reorganization, although they
may, after the Reorganization, elect to have such dividends and/or distributions
reinvested in additional shares of the Evergreen U.S. Government Fund.
Each Fund 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
investment company taxable income and any net realized gains to shareholders, it
is expected that a Fund will not be required to pay any federal income taxes on
the amounts so distributed. A 4% nondeductible excise tax will be imposed on
amounts not distributed if a Fund does not meet certain distribution
requirements by the end of each calendar year. Each Fund anticipates meeting
such distribution requirements.
RISKS
Since the investment objectives and policies of each Fund are substantially
comparable, the risks involved in investing in each Fund's shares are similar
except that at least 65% of the assets of the Keystone Government Securities
Fund are invested in U.S. Government Securities, while at least 80% of the
assets of the Evergreen U.S. Government Fund are invested in U.S. Government and
Agency Securities. In addition, the Keystone Government Fund may invest up to
35% of its assets in U.S. Government and Agency Securities, commercial paper
rated the highest grade by Standard & Poor's Corporation ("S&P") or Moody's
Investors Services, Inc. ("Moody's") or if not rated issued by a company that
had an outstanding issue rated A or better by S & P or Moody's, obligations of
banks having $1 billion in assets and corporate obligations rated A or better by
S&P or Moody's ("Keystone
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<PAGE>
Other Eligible Securities"). In contrast the Evergreen U.S. Government Fund may
invest up to 20% of its total assets in certain short term collateralized
mortgage obligations ("CMO's") and short term commercial paper as long as such
obligations are rated high quality by two nationally recognized statistical
rating organizations, and debt securities rated Baa or higher by Moody's or BBB
or higher by S&P or which if unrated, are considered to be of comparable quality
("Evergreen Other Eligible Securities"). Bonds rated Baa by Moody's or BBB by
S&P are investment grade, and have speculative characteristics. (A description
of the rating categories is contained in each Fund's Statement of Additional
Information.) There is no assurance that investment performances will be
positive and that the Funds will meet their investment objectives.
While guaranteed U.S. Government and Agency Securities are guaranteed as to
principal and interest, the market value of such securities is not guaranteed.
Generally, the market value of U.S. Government and Agency Securities, like other
fixed income securities, will vary inversely with changes in interest rates. For
example, if interest rates increase after the Fund purchases a U.S. Government
or Agency Security, and the Fund sells the security before it matures, the Fund
may incur a loss on the sale. The longer the maturity of the security, the
greater the exposure to market price fluctuation.
To the extent that investments are made in Keystone or Evergreen Other Eligible
Securities, such investments, despite favorable credit ratings, are subject to
some risk of default.
DERIVATIVES. The market value of derivatives or structured securities in which
both Funds may invest may vary depending upon the manner in which the
investments have been structured and may fluctuate much more rapidly and to a
much greater extent. As a result, the value of such investments may change at a
rate in excess of the rate at which traditional fixed income securities change
and, depending on the structure of the derivative, may change in a manner
opposite to the change in the market value of a traditional fixed income
security. See each Fund's Prospectus and Statement of Additional Information for
a further discussion of the risks inherent in the use of derivatives.
REASONS FOR THE REORGANIZATION
At a regular meeting held on March 12, 1997, the Board of Trustees of the
Keystone Government Fund considered and approved the Reorganization as in the
best interests of the Fund and its shareholders and determined that the
interests of existing shareholders of the Keystone Government Fund will not be
diluted as a result of the transactions contemplated by the Reorganization.
In approving the Plan, the Trustees reviewed various factors about the Funds and
the proposed Reorganization. There are substantial similarities between the
Evergreen U.S. Government Fund and the Keystone Government Fund. Specifically,
the Evergreen U.S. Government Fund and the Keystone Government Fund have
substantially similar investment objectives and policies, and comparable risk
profiles. See "Comparison of Investment Objectives and Policies" below. At the
same time, the Board of Trustees evaluated the potential economies of scale
associated with larger mutual funds and concluded that operational efficiencies
may be achieved upon a reorganization with another Evergreen Keystone fund with
a greater level of assets. As of February 28, 1997, the Evergreen U.S.
Government Fund's assets were approximately $296 million and the Keystone
Government Fund's assets were approximately $45 million.
In addition, assuming that an alternative to the Reorganization would be to
propose that the Keystone Government Fund continue its existence, the Keystone
Government Fund would be offered through
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<PAGE>
common distribution channels with the substantially identical Evergreen U.S.
Government Fund. The Keystone Government Fund would also have to bear the cost
of maintaining its separate existence. Keystone and FUNB believe that the
prospect of dividing the resources of the Evergreen Keystone mutual fund
organization between two substantially identical funds could result in the
Keystone Government 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, both
Keystone and FUNB believe that the proposed Reorganization would be in the best
interest of each Fund and its shareholders.
The Board of Trustees of the Keystone Government Fund met and considered the
recommendation of Keystone and FUNB, 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 shareholder interests; (iii)
expense ratios, fees and expenses of the Keystone Government Fund and the
Evergreen U.S. Government Fund; (iv) the comparative performance records of each
of the Funds; (v) compatibility of their investment objectives and policies;
(vi) service features available to shareholders in the respective Funds; (vii)
the investment experience, expertise and resources of FUNB; (viii) the fact that
FUNB will bear the expenses incurred by Keystone Government Fund in connection
with the Reorganization; (ix) the fact that Evergreen U.S. Government Fund will
assume [_________] liabilities of the Keystone Government Fund; and (x) the
expected federal income tax consequences of the Reorganization.
The Trustees also considered the benefits to be derived by shareholders of the
Keystone Government Fund from the sale of its assets to the Evergreen U.S.
Government Fund. In this regard, the Trustees considered the potential benefits
of being associated with a larger entity and the economies of scale that could
be realized by the participation by shareholders of the Keystone Government Fund
in the combined Fund. In addition, the Trustees considered that there are
alternatives available to shareholders of the Keystone Government Fund,
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 the Evergreen U.S. Government Fund also concluded at a
regular meeting on March 11, 1997 that the proposed Reorganization would be in
the best interests of the Evergreen U.S. Government Fund and its shareholders
and that the interests of the existing shareholders of the Evergreen U.S.
Government Fund will not be diluted as a result of the transactions contemplated
by the Reorganization.
THE TRUSTEES OF THE KEYSTONE GOVERNMENT FUND RECOMMEND THAT THE SHAREHOLDERS OF
THE KEYSTONE GOVERNMENT FUND APPROVE THE PROPOSED REORGANIZATION.
AGREEMENT AND PLAN OF REORGANIZATION
The following summary is qualified in its entirety by reference to the Plan
(Exhibit A hereto).
The Plan provides that the Evergreen U.S. Government Fund will acquire all of
the assets of the Keystone Government Fund in exchange for shares of the
Evergreen U.S. Government Fund and the assumption by the Evergreen U.S.
Government Fund of [__________] liabilities of the Keystone
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Government Fund on or about July 31, 1997 or such other date as may be agreed
upon by the parties (the "Closing Date"). Prior to the Closing Date, the
Keystone Government Fund will endeavor to discharge all of its known liabilities
and obligations. [______________________________________ _______________.] The
number of full and fractional shares of each class of the Evergreen U.S.
Government Fund to be received by the shareholders of the Keystone Government
Fund will be determined by dividing the value of the assets of the Keystone
Government Fund to be acquired by the ratio of the net asset value per share of
each respective class of the Evergreen U.S. Government Fund and each class of
the Keystone Government Fund, computed 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 both Funds, will compute
the value of the Funds' 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 the Evergreen U.S. Government Fund, Rule
22c-1 under the 1940 Act, and with the interpretations of such rule by the SEC's
Division of Investment Management.
At or prior to the Closing Date, the Keystone Government Fund shall 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 Keystone Government Fund's shareholders (in shares of the
Keystone Government Fund, or in cash, as the shareholder has previously elected)
all of the Keystone Government Fund's investment company taxable income for the
taxable year 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 years ending on or prior to the Closing Date (after reductions for
any capital loss carry forward).
As soon after the Closing Date as conveniently practicable, the Keystone
Government Fund will liquidate and distribute pro rata to shareholders of record
as of the close of business on the Closing Date the full and fractional
Corresponding Shares of the Evergreen U.S. Government Fund received by the
Keystone Government Fund. Such liquidation and distribution will be accomplished
by the establishment of accounts in the names of the Keystone Government Fund's
shareholders on the share records of the Evergreen U.S. Government Fund's
transfer agent. Each account will represent the respective pro rata number of
full and fractional Corresponding Shares of the Evergreen U.S. Government Fund
due to the Keystone Government Fund's shareholders. All issued and outstanding
shares of the Keystone Government Fund, including those represented by
certificates, will be canceled. The Evergreen U.S. Government Fund does not
issue share certificates to shareholders. The shares of the Evergreen U.S.
Government Fund to be issued will have no preemptive or conversion rights, other
than the right of Class B shares to convert to Class A shares after a specified
period. After such distribution and the winding up of its affairs, the Keystone
Government Fund will be terminated, and expects to file with the SEC an
application for deregistration as a regulated investment company.
The consummation of the Reorganization is subject to the conditions set forth in
the Plan, including approval by the Keystone Government Fund's shareholders,
accuracy of various representations and warranties and receipt of opinions of
counsel, including opinions with respect to those matters referred to in
"Federal Income Tax Consequences" below. Notwithstanding approval of the
Keystone Government Fund's shareholders, the Plan may be terminated (a) by the
mutual agreement of the Keystone Government Fund and the Evergreen U.S.
Government Fund; or (b) at or prior to the Closing
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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 the Keystone Government Fund in connection with the
Reorganization (including the cost of any proxy soliciting agents) and the
expenses of the Evergreen U.S. Government Fund will be borne by FUNB whether or
not the Reorganization is consummated.
If the Reorganization is not approved by shareholders of the Keystone Government
Fund, the Board of Trustees of the Keystone Government Fund 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, the Keystone Government Fund will receive an
opinion of counsel to the effect that, on the basis of the existing provisions
of the Code, U.S. Treasury regulations issued thereunder, current administrative
rules, pronouncements and court decisions, for federal income tax purposes, upon
consummation of the Reorganization:
(1) The transfer of all of the assets of the Keystone Government Fund solely in
exchange for shares of the Evergreen U.S. Government Fund and the assumption by
the Evergreen U.S. Government Fund of [_________] liabilities of the Keystone
Government Fund, followed by the distribution of the Evergreen U.S. Government
Fund's shares by the Keystone Government Fund in dissolution and liquidation of
the Keystone Government Fund, will constitute a "reorganization" within the
meaning of section 368(a)(1)(C) of the Code, and the Evergreen U.S. Government
Fund and the Keystone Government Fund will each be a "party to a reorganization"
within the meaning of section 368(b) of the Code;
(2) No gain or loss will be recognized by the Keystone Government Fund on the
transfer of all of its assets to the Evergreen U.S. Government Fund solely in
exchange for the Evergreen U.S. Government Fund's shares and the assumption by
the Evergreen U.S. Government Fund of [__________] liabilities of the Keystone
Government Fund or upon the distribution of the Evergreen U.S. Government Fund's
shares to the Keystone Government Fund's shareholders in exchange for their
shares of the Keystone Government Fund;
(3) The tax basis of the assets transferred will be the same to the Evergreen
U.S. Government Fund as the tax basis of such assets to the Keystone Government
Fund immediately prior to the Reorganization, and the holding period of such
assets in the hands of the Evergreen U.S. Government Fund will include the
period during which the assets were held by the Keystone Government Fund;
(4) No gain or loss will be recognized by the Evergreen U.S. Government Fund
upon the receipt of the assets from the Keystone Government Fund solely in
exchange for the shares of the Evergreen U.S. Government Fund and the assumption
by the Evergreen U.S. Government Fund of [__________] liabilities of the
Keystone Government Fund;
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(5) No gain or loss will be recognized by the Keystone Government Fund's
shareholders upon the issuance of the shares of the Evergreen U.S. Government
Fund to them, provided they receive solely such shares (including fractional
shares) in exchange for their shares of the Keystone Government Fund; and
(6) The aggregate tax basis of the shares of the Evergreen U.S. Government Fund,
including any fractional shares, received by each of the shareholders of the
Keystone Government Fund pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares of the Keystone Government Fund held by such
shareholder immediately prior to the Reorganization, and the holding period of
the shares of the Evergreen U.S. Government Fund, including fractional shares,
received by each such shareholder will include the period during which the
shares of the Keystone Government Fund exchanged therefor were held by such
shareholder (provided that the shares of the Keystone Government Fund were held
as a capital asset on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service or the
courts. If the Reorganization is consummated but does not qualify as a tax-free
reorganization under the Code, each Keystone Government Fund shareholder would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Keystone Government Fund shares and the fair market value of
the Evergreen U.S. Government Fund shares he or she received. Shareholders of
the Keystone Government Fund should consult their tax advisers regarding the
effect, if any, of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion relates only to the federal income
tax consequences of the Reorganization, shareholders of the Keystone Government
Fund should also consult their tax advisers as to state and local tax
consequences, if any, of the Reorganization.
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 the Evergreen U.S. Government Fund.
PRO-FORMA CAPITALIZATION
The following table sets forth the capitalization of the Evergreen U.S.
Government Fund and the Keystone Government Fund as of February 28, 1997 and on
a pro-forma basis as of that date, giving effect to the proposed acquisition of
assets at net asset value. The pro-forma data reflects a pro-forma exchange
ratio of 1.005, 1.005, and 1.006 Class A, Class B and Class C shares,
respectively, of the Evergreen U.S. Government Fund issued for each Class A,
Class B and Class C share, respectively, of the Keystone Government Fund.
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<PAGE>
CAPITALIZATION OF THE EVERGREEN U.S. GOVERNMENT FUND
AND KEYSTONE GOVERNMENT FUND
Evergreen U.S. Keystone Pro-forma
Government Government Combined After
Fund Fund Reorganization
--------------------- ------------------- --------------
Total Net Assets
Class A $ 18,136,885 $22,758,615 $ 40,895,500
Class B 150,459,179 15,616,226 166,075,405
Class C 698,644 6,632,730 7,331,374
Class Y 126,885,307 N/A 126,885,307
------------ --------------- ------------
Total $296,180,015 $45,007,571 $341,187,586
============ =========== ============
Net Asset Value Per
Share
Class A $9.46 $9.51 $9.46
Class B 9.46 9.51 9.46
Class C 9.46 9.52 9.46
Class Y 9.46 N/A 9.46
Shares Outstanding
Class A 1,916,347 2,392,905 4,322,120
Class B 15,898,767 1,642,123 17,549,531
Class C 73,844 696,694 774,978
Class Y 13,407,518 N/A 13,407,518
---------- --------- ----------
All Classes 31,296,476 4,731,722 36,054,147
The table set forth above should not be relied on to reflect the number of
shares to be received by Keystone Government Fund shareholders 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 May 16, 1997, there were the following number of each Class of shares of
beneficial interest of the Keystone Government Fund and the Evergreen U.S.
Government Fund outstanding:
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Evergreen U.S. Keystone Government
Class of Shares Government Fund Fund
- ------------------- -------------------------- -------------------------------
Class A
Class B [to come]
Class C
Class Y
All Classes
As of May 16, 1997, the officers and Trustees of the Keystone Government Fund
beneficially owned as a group less than 1% of the outstanding shares of the
Keystone Government Fund. To the Keystone Government Fund's knowledge, the
following persons owned beneficially or of record more than 5% of the Keystone
Government Fund's total outstanding shares as of May 16, 1997:
[table to come]
As of May 16, 1997, the officers and Trustees of the Evergreen U.S. Government
Fund beneficially owned as a group less than 1% of the outstanding shares of the
Evergreen U.S. Government Fund. To the Evergreen U.S. Government Fund's
knowledge, the following persons owned beneficially or of record more than 5% of
the Evergreen U.S. Government Fund's total outstanding shares as of the May 16,
1997:
[to come]
<TABLE>
<CAPTION>
Number Percentage Percentage of
[NAME AND ADDRESS CLASS OF SHARES of Class Total Shares
OUTSTANDING Before Outstanding After
REORGANIZATION REORGANIZATION
<S> <C> <C> <C> <C>
Charles Schwab & Co. Inc. A
101 Montgomery Street
San Francisco, CA 94104-4122
First Union National Bank/EB
Reinvest Account
Attn: Trust Operations Fund Group
401 S. Tryon Street
3rd Floor, CMG 1151
Charlotte, NC 28202-1911
Mac & Co.
c/o Lieber & Co.
A/C 195-6432
c/o Mellon Bank NA
Mutual Funds
P.O.Box 320
Pittsburgh, PA 15230-0320]
</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 Prospectuses and Statements of Additional
Information of the Funds. The investment objectives, policies and restrictions
of the Evergreen U.S. Government Fund can be found in the Prospectus of the
Evergreen U.S. Government Fund under the caption "Investment Objectives and
Policies." The Evergreen U.S. Government Fund's Prospectus also offers
additional funds advised by FUNB. These additional funds are not involved in the
Reorganization, their investment objectives, policies and restrictions are not
discussed in this Prospectus/Proxy Statement and their shares are not offered
hereby. The investment objectives, policies and restrictions of the Keystone
Government Fund can be found in the Prospectus of the Keystone Government Fund
under the caption "Investment Objective and Policies."
The investment objective of the Evergreen U.S. Government Fund is to achieve a
high level of current income consistent with stability of principal. The
Evergreen U.S. Government Fund's investment objective is fundamental and cannot
be changed without shareholder approval.
The Evergreen U.S. Government Fund seeks to achieve its objectives by investing
at least 80% of its assets in U.S. Government and Agency Securities. In
addition, the Evergreen U.S. Government Fund may invest in securities
representing ownership interests in mortgage pools, in a pool of assets or in
CMOs. The Evergreen U.S. Government Fund may invest up to 20% of its assets in
CMOs, high quality commercial paper rated A-1 or A-2 by S&P, Prime 1 or Prime 2
by Moody's or F-1 or F-2 by Fitch Investors Services, LLP., and debt securities
rated at least Baa by Moody's or BBB by S&P. As a result, subject to its general
limitations on below-investment grade debt securities, 20% of the Evergreen U.S.
Government Fund's investments could, from time to time, consist of investment
grade debt securities which have speculative characteristics. In comparison,
none of the Keystone Government Fund's investments may be rated below A by
Moody's or S&P. (See the description of the rating categories contained in the
Evergreen U.S. Government Fund's Statement of Additional Information.) The
Evergreen U.S. Government Fund expects to maintain an average weighted portfolio
maturity of five to fifteen years.
The Keystone Government Fund seeks the highest possible level of current income
consistent with the safety of principal and maintenance of liquidity by
investing primarily in U.S. Government Securities. The Keystone Government
Fund's objective is fundamental and cannot be changed without the shareholder
approval. To achieve its objective, the Keystone Government Fund invests at
least 65% of its assets in U.S. Government Securities. The Fund may also invest
up to 35% of its assets in U.S. Government and Agency Securities and certain
high grade money market instruments, including (1) commercial paper of high
quality (rated no lower than A-1 by S&P or Prime-1 by Moody's or, if not rated,
issued by companies which have an outstanding long-term debt issue rated A or
better by S&P or Moody's; and (2) obligations, including certificates of deposit
and bankers' acceptances, of banks or savings and loan associations having at
least $1 billion in assets as of the date of their most recently published
financial statements that are members of the Federal Deposit Insurance
Corporation, including U.S. branches of foreign banks and foreign branches of
U.S. banks; and (3) corporate
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<PAGE>
obligations that at the date of investment are rated A or better by S&P or
Moody's.
While the Keystone Government Fund may invest in securities of any maturity, it
is currently expected that, under normal circumstances, the Fund will not hold
securities (other than Keystone Other Eligible Securities) with maturities of
more than 30 years or less than 5 years. The Keystone Government Fund may also
invest in certain types of CMOs including inverse floating rate CMOs and
interest only ("IO") and principal only ("PO") stripped mortgage obligations,
all of whose underlying securities are U.S. Government Securities. [In contrast,
while the Evergreen Government Fund may invest in CMOs, such CMOs are basic
mortgaged backed obligations and do not include IOs, POs or interest rate
swaps.]
Both Funds may enter into repurchase agreements, may engage in when issued and
delayed delivery or forward transactions, may enter into financial futures and
options transactions, may lend portfolio securities and may invest in certain
derivatives instruments and structured securities, including interest rate
swaps, and interest rate caps and floors.
If any security held in by either Fund loses its rating or has its rating
reduced after the Fund has purchased it, the Fund is not required to sell or
otherwise dispose of the security, but may consider doing so.
The characteristics of each investment policy and the associated risks are
described in the Prospectus and Statement of Additional Information of each
Fund. Each of the Evergreen U.S. Government Fund and the Keystone Government
Fund have other investment policies and restrictions which are also set forth in
its Prospectus and Statement of Additional Information.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
FORM OF ORGANIZATION
The Keystone Government Fund and the Evergreen Investment Trust are open-end
management investment companies registered with the SEC under the 1940 Act,
which continuously offer shares to the public. Each is organized as a
Massachusetts business trust and is governed by a Declaration of Trust, By-Laws
and Board of Trustees. Both are also governed by applicable Massachusetts and
Federal law. The Evergreen U.S. Government Fund is a series of Evergreen
Investment Trust.
CAPITALIZATION
The beneficial interests in the Evergreen U.S. Government Fund are represented
by an unlimited number of transferable shares of beneficial interest with a
$.0001 par value per share. The beneficial interests in the Keystone Government
Fund are represented by an unlimited number of transferable shares of beneficial
interest with no par value. The respective Declarations of Trust under which
each Fund has been established permit the respective Trustees to allocate shares
into an unlimited number of series, and classes thereof, with rights determined
by the Trustees, all without shareholder approval. Fractional shares may be
issued. Each Fund's shares have equal voting rights with respect to matters
affecting shareholders of all classes of each Fund, and in the case of the
Evergreen U.S. Government Fund, each series of the Evergreen Investment Trust,
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 Keystone Government Fund's Trustees or Evergreen Investment
Trust's
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<PAGE>
Trustees. Shareholders of each Fund vote separately, by class, as to matters,
such as approval or amendments of Rule 12b-1 distribution plans that affect only
their particular class and, in the case of the Evergreen U.S. Government Fund,
which is a series of the Evergreen Investment Trust, by series as to matters,
such as approval or amendments of 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 respective Declarations of Trust under which the Funds were
established disclaim shareholder liability for acts or obligations of the series
and require that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Funds or the Trustees.
The Declarations of Trust provide for indemnification out of the series'
property for all losses and expenses of any shareholder held personally liable
for the obligations of the series. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote since it
is limited to circumstances in which a disclaimer is inoperative and the series
or the trust itself would be unable to meet its obligations. A substantial
number of mutual funds in the United States are organized as Massachusetts
business trusts.
SHAREHOLDER MEETINGS AND VOTING RIGHTs
Neither the Keystone Government Fund nor Evergreen Investment Trust, on behalf
of the Evergreen U.S. Government Fund or any of its other series, 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% or 25% of the outstanding
shares of Keystone Government Fund or Evergreen Investment Trust, respectively.
In addition, each Fund 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. If Trustees of the
Evergreen U.S. Government Trust fail or refuse to call a meeting as required by
its By-laws after a request in writing by shareholders holding an aggregate of
at least 25% of the shares outstanding, then shareholders holding said 25% may
call and give notice of such meeting. Evergreen Investment Trust and the
Keystone Government Fund currently do not intend to hold regular shareholder
meetings. Neither permits cumulative voting. A majority of shares outstanding
and entitled to vote on a matter constitutes a quorum for consideration of such
matter. In either case, a majority of the shares voting is sufficient to act on
a matter (unless otherwise specifically required by the applicable governing
documents or other law, including the 1940 Act).
LIQUIDATION OR DISSOLUTION
In the event of the liquidation of a Fund 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 the Fund held by them and
recorded on the books of the Fund.
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<PAGE>
LIABILITY AND INDEMNIFICATION OF TRUSTEES
The Declaration of Trust of the Evergreen Investment Trust provides that no
Trustee or officer shall be liable to the Fund or to any shareholder, Trustee,
officer, employee or agent of the Fund for any action or failure to act except
for his or her own bad faith, willful misfeasance, gross negligence or reckless
disregard of his or her duties. The By-laws of Evergreen Investment Trust
provide that present and former Trustees or officers are generally entitled to
indemnification against liabilities and expenses with respect to claims related
to their position with the Fund unless, in the case of any liability to the Fund
or its shareholders, it shall have been determined that such Trustee or officer
is liable by reason of his or her willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties involved in the conduct of
his or her office.
The Declaration of Trust of the Keystone Government Fund provides that a Trustee
will not be liable for errors of judgment or mistake or fact or law, but nothing
in the Declaration of Trust protects a Trustee against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of his duties involved in the conduct of his
office. The Declaration of Trust provides that a Trustee or officer is entitled
to indemnification against liabilities and expenses with respect to claims
related to his or her position with the Keystone Government Fund, unless such
Trustee or officer shall have been adjudicated to have acted with bad faith,
willful misfeasance, or gross negligence, or in reckless disregard of his or her
duties, or not to have acted in good faith in the reasonable belief that his or
her action was in the best interest of the Keystone Government Fund, or, in the
event of settlement, unless there has been a determination that such Trustee or
officer has not engaged in willful misfeasance, bad faith, gross negligence, or
reckless disregard of his or her duties.
RIGHTS OF INSPECTION
Shareholders of the respective Funds have the same right to inspect in
Massachusetts the governing documents, records of meetings of shareholders,
shareholder lists, share transfer records, accounts and books of the Fund as are
permitted shareholders of a corporation under the Massachusetts corporation law.
The purpose of inspection must be for interests of shareholders relative to the
affairs of the Fund.
The foregoing is only a summary of certain characteristics of the operations of
the Declarations of Trust, By-Laws and Massachusetts law and is not a complete
description of those documents or law. Shareholders should refer to the
provisions of such respective Declarations of Trust, By-Laws, and Massachusetts
law directly for more complete information.
ADDITIONAL INFORMATION
EVERGREEN U.S. GOVERNMENT FUND. Information concerning the operation and
management of the Evergreen U.S. Government Fund is incorporated herein by
reference from the Prospectus dated August 30, 1996, a copy of which is
enclosed, and the Statement of Additional Information dated August 30, 1996. A
copy of such Statement of Additional Information is available upon request and
without charge by writing to the Evergreen U.S. Government Fund, at the address
listed on the cover page of this Prospectus/Proxy Statement or by calling
toll-free 1-800-807-2940.
KEYSTONE GOVERNMENT FUND. Information about the Keystone Government Fund is
included in its
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<PAGE>
current Prospectus dated November 29, 1996, as supplemented January 1, 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, Statement of Additional Information and the Fund's Semi-Annual
Report dated January 31, 1997, are available upon request and without charge by
writing to the address listed on the cover page of this Prospectus/Proxy
Statement or by calling toll-free 1-800-343-2898.
The Evergreen Investment Trust and the Keystone Government Fund are each subject
to the informational requirements of the Securities Exchange Act of 1934 and the
1940 Act, and in accordance therewith file reports and other information
including proxy material, and charter documents with the SEC. These items can be
inspected and copies obtained at the Public Reference Facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices located at Northwest Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York,
New York 10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a solicitation
of proxies by the Board of Trustees of the Keystone Government Fund to be used
at the Special Meeting of Shareholders to be held at 3:00 p.m., July 14, 1997,
at the offices of the Keystone Government Fund, 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 on or about May [ __ ], 1997. Only shareholders of record
as of the close of business on the Record Date will be entitled to notice of,
and to vote at, the Meeting or any adjournment thereof. The holders of a
majority of the shares outstanding at the close of business on the Record Date
present in person or represented by proxy will constitute a quorum for the
Meeting. If the enclosed form of proxy is properly executed and returned in time
to be voted at the Meeting, the proxies named therein will vote the shares
represented by the proxy in accordance with the instructions marked thereon.
Unmarked proxies will be voted FOR the proposed Reorganization and FOR any other
matters deemed appropriate. Proxies that reflect abstentions and "broker
non-votes" (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or the persons
entitled to vote 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 have no effect on the outcome of the vote to approve the Plan. A proxy may
be revoked at any time on or before the Meeting by written notice to the
Secretary of the Keystone Government Fund, 200 Berkeley Street, Boston,
Massachusetts 02116. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby.
Approval of the Plan will require the affirmative vote of a majority of the
shares present and entitled to vote, with all classes voting together as a
single class. Each full share outstanding is entitled to one vote and each
fractional share outstanding is entitled to a proportionate share of one vote.
Proxy solicitations will be made primarily by mail, but proxy solicitations may
also be made by telephone, telegraph or personal solicitations conducted by
officers and employees of FUNB or Keystone, their affiliates or other
representatives of the Keystone Government Fund (who will not be paid for their
solicitation activities). Corporate Investors Communications, Inc. ("CIC") has
been engaged by the Keystone Government Fund to assist in soliciting proxies,
and may contact certain
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<PAGE>
shareholders of the Keystone Government Fund over the telephone. Shareholders
that are contacted by CIC may be asked to cast their vote by telephonic proxy.
Such proxies will be recorded in accordance with the procedures set forth below.
The Keystone Government Fund believes these procedures are reasonably designed
to ensure that the identity of the shareholder casting the vote is accurately
determined and that the voting instructions of the shareholder are accurately
reflected. The Keystone Government Fund has received an opinion of Sullivan &
Worcester LLP that addresses the validity, under the applicable law of The
Commonwealth of Massachusetts, of a proxy given orally. The opinion given by
concludes that a Massachusetts court would find that there is no Massachusetts
law or Massachusetts public policy against the acceptance of proxies signed by
an orally-authorized agent.
In all cases where a telephonic proxy is solicited, the CIC representative will
ask you for your full name, address, social security or employer identification
number, title (if you are authorized to act on behalf of an entity, such as a
corporation), and number of shares owned. If the information solicited agrees
with the information provided to CIC by the transfer agent to the Keystone
Government Fund, then the CIC representative will explain the process, read the
proposals listed on the proxy card and ask for your instructions on each
proposal. The CIC representative, although he or she will answer questions about
the process, will not recommend to the shareholder how he or she should vote,
other than to read any recommendations set forth in the proxy statement. Within
72 hours, CIC will send you a letter or mailgram to confirm your vote and ask
you to call immediately if your instructions are not correctly reflected in the
confirmation.
It is expected that the cost of retaining CIC to assist in the proxy
solicitation process will not exceed $[ ], which cost will be borne by FUNB.
If you wish to participate in the Meeting, but do not wish to give your proxy by
telephone, you may still submit the proxy card included with this
Prospectus/Proxy Statement or attend in person. Any proxy given by you, whether
in writing or by telephone, is revocable.
In the event that sufficient votes to approve the Reorganization are not
received by July 14, 1997, 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 outstanding shares present in person or by proxy and entitled to
vote at the Meeting. The persons named as proxies will vote upon such
adjournment after consideration of all circumstances which may bear upon a
decision to adjourn the Meeting.
A shareholder who objects to the proposed Reorganization will not be entitled
under either Massachusetts law or the Declaration of Trust of the Keystone
Government Fund to demand payment for, or an appraisal of, his or her shares.
However, shareholders should be aware that the Reorganization as proposed is not
expected to result in recognition of gain or loss to shareholders for federal
income tax purposes and that, if the Reorganization is consummated, shareholders
will be free to redeem the shares of the Evergreen U.S. Government Fund which
they receive in the transaction at their then-current net asset value subject to
any applicable CDSC. Shares of the Keystone Government Fund may be redeemed at
any time prior to the consummation of the Reorganization. Keystone Government
Fund shareholders may wish to consult their tax advisers as to any differing
consequences of redeeming Keystone Government Fund shares prior to the
Reorganization or exchanging such shares
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<PAGE>
in the Reorganization.
The Keystone Government Fund does not hold annual shareholder meetings. If the
Reorganization is not approved, shareholders wishing to submit proposals for
consideration for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of the Keystone
Government Fund at the address set forth on the cover of this Prospectus/Proxy
Statement such that they will be received by the Keystone Government Fund in a
reasonable period of time prior to any such meeting.
The votes of the shareholders of the Evergreen U.S. Government Fund are not
being solicited by this Prospectus/Proxy Statement and are not required to carry
out the Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise the Keystone Government Fund whether other persons are beneficial
owners of shares for which proxies are being solicited and, if so, the number of
copies of this Prospectus/Proxy Statement needed to supply copies to the
beneficial owners of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The annual and semi-annual reports of the Keystone Government Fund as of July
31, 1996 (audited) and January 31, 1997 (unaudited) have been incorporated by
reference into this Prospectus/Proxy Statement. The financial statements as of
July 31, 1996 have been incorporated by reference into this Prospectus/Proxy
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of the Evergreen U.S. Government Fund as of June 30,
1996 (audited) and December 31, 1996 (unaudited) have been incorporated by
reference into this Prospectus/Proxy Statement. The financial statements as of
June 30, 1996 have been incorporated by reference into this Prospectus/Proxy
Statement in reliance on the report of KPMG Peat Marwick, LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the Evergreen U.S.
Government Fund will be passed upon by Sullivan & Worcester LLP, Washington,
D.C.
OTHER BUSINESS
The Trustees of the Keystone Government Fund 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 BOARD OF TRUSTEES OF THE KEYSTONE GOVERNMENT FUND, INCLUDING THE INDEPENDENT
TRUSTEES, RECOMMENDS APPROVAL OF THE PLAN. ANY UNMARKED PROXIES WITHOUT
INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN.
May [ __ ] , 1997
<PAGE>
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of this
day of , 1997, by and between Evergreen Investment Trust, a Massachusetts
business trust, with its principal place of business at 2500 Westchester Avenue,
Purchase, New York 10577, with respect to its Evergreen U.S. Government Fund
series (the "Acquiring Fund"), and Keystone Government Securities Fund, a
Massachusetts business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Selling Fund").
This Agreement is intended to be, and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368 (a)(1)(C) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of (i) the transfer of all of the assets of the
Selling Fund in exchange solely for Class A, Class B and Class C shares of
beneficial interest, without par value, of the Acquiring Fund (the "Acquiring
Fund Shares"); (ii) the assumption by the Acquiring Fund of [__________]
liabilities of the Selling Fund; (iii) and the distribution, after the Closing
Date hereinafter referred to, of the Acquiring Fund Shares to the shareholders
of the Selling Fund in liquidation of the Selling Fund as provided herein, all
upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are a registered investment
company and a separate investment series of an open-end, registered investment
company of the management type, respectively, and the Selling Fund owns
securities that generally are assets of the character in which the Acquiring
Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of beneficial
interest;
WHEREAS, the Trustees of the Evergreen Investment Trust have determined that the
exchange of all of the assets of the Selling Fund for Acquiring Fund Shares and
the assumption of [__________] 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 and that the interests of the existing
shareholders of the Acquiring Fund will not be diluted as a result of the
transactions contemplated herein;
WHEREAS, the Trustees of the Selling Fund have determined that the Selling Fund
should exchange all of its assets and [__________] liabilities for Acquiring
Fund Shares and that the interests of the existing shareholders of the Selling
Fund will not be diluted as a result of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants and
19990
<PAGE>
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 [__________] liabilities of the Selling Fund, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided for in
paragraph 3.1 (the "Closing Date").
1.2 Assets to be Acquired. The assets of the Selling Fund to be acquired by the
Acquiring Fund shall consist of all property, including, without limitation, all
cash, securities, commodities, and futures interests and dividends or interest
receivables, that is owned by the Selling Fund and any deferred or prepaid
expenses shown as an asset on the books of the Selling Fund on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent audited
financial statements, which contain a list of all of Selling Fund's assets as of
the date thereof. The Selling Fund hereby represents that as of the date of the
execution of this Agreement there have been no changes in its financial position
as reflected in said financial statements other than those occurring in the
ordinary course of its business in connection with the purchase and sale of
securities and the payment of its normal operating expenses. The Selling Fund
reserves the right to sell any of such securities, but will not, without the
prior written approval of the Acquiring Fund, acquire any additional securities
other than securities of the type in which the Acquiring Fund is permitted to
invest.
The Acquiring Fund will, within a reasonable time prior to the Closing Date,
furnish the Selling Fund with a statement of the Acquiring Fund's investment
objectives, policies, and restrictions and a list of the securities, if any, on
the Selling Fund's list referred to in the second sentence of this paragraph
that do not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. In the event that the Selling Fund holds any investments that the
Acquiring Fund may not hold, the Selling Fund will dispose of such securities
prior to the Closing Date. In addition, if it is determined that the Selling
Fund and the Acquiring Fund portfolios, when
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aggregated, would contain investments exceeding certain percentage limitations
imposed upon the Acquiring Fund with respect to such investments, the Selling
Fund if requested by the Acquiring Fund will dispose of a sufficient amount of
such investments as may be necessary to avoid violating such limitations as of
the Closing Date.
1.3 Liabilities to be Assumed. The Selling Fund will endeavor to discharge all
of its known liabilities and obligations prior to the Closing Date.
In addition, upon completion of the Reorganization for purposes of calculating
the maximum amount permitted to be charged to the Acquiring Fund under the
National Association of Securities Dealers, Inc. Conduct Rule 2830 minus the
amount of the sales charges paid or accrued (including asset based sales
charges), plus permitted interest ("Aggregate NASD Cap"), the Acquiring Fund
will add to its Aggregate NASD Cap existing immediately prior to the
Reorganization the Aggregate NASD Cap of the Selling Fund immediately prior to
the Reorganization.
1.4 Liquidation and Distribution. On or soon after the Closing Date as is
conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Valuation Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1; and (b) the Selling Fund will thereupon proceed to dissolve as
set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund to open accounts
on the share records of the Acquiring Fund in the names of the Selling Fund
Shareholders and representing the respective pro rata number of the Acquiring
Fund Shares due such shareholders. All issued and outstanding shares of the
Selling Fund will simultaneously be cancelled 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
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Closing Date and the making of all distributions pursuant to paragraph 1.4.
ARTICLE II
VALUATION
2.1 Valuation of Assets. The value of the Selling Fund's assets to be acquired
by the Acquiring Fund hereunder shall be the value of such assets computed as of
the close of business on the New York Stock Exchange on the business day next
preceding the Closing Date (such time and date being hereinafter called the
"Valuation Date"), using the valuation procedures set forth in the Evergreen
Investment Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 Valuation of Shares. The net asset value per share of the Acquiring Fund
Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Evergreen Investment Trust's Declaration
of Trust and the Acquiring Fund's then current prospectus and statement of
additional information.
2.3 Shares to be Issued. The number of the Acquiring Fund Shares of each class
to be issued (including fractional shares, if any) in exchange for the Selling
Fund's assets shall be determined by multiplying the shares outstanding of each
class of the Selling Fund by the ratio computed by dividing the net asset value
per share of the Selling Fund attributable to each of its classes by the net
asset value per share of the respective classes of the Acquiring Fund determined
in accordance with paragraph 2.2.
2.4 Determination of Value. All computations of value shall be made by State
Street Bank and Trust Company in accordance with its regular practice in pricing
the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 Closing Date. The Closing (the "Closing") shall take place on July 31, 1997
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 Keystone Investment Management Company, 200 Berkeley Street, Boston,
MA 02116, or at such other time and/or place as the parties may agree.
3.2 Custodian's Certificate. State Street Bank and Trust Company, as custodian
for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets shall have been delivered in
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proper form to the Acquiring Fund on the Closing Date; and (b) all necessary
taxes including all applicable Federal and state stock transfer stamps, if any,
shall have been paid, or provision for payment shall have been made, in
conjunction with the delivery of portfolio securities by the Selling Fund.
3.3 Effect of Suspension in Trading. In the event that on the Valuation Date (a)
the New York Stock Exchange or another primary trading market for portfolio
securities of the Acquiring Fund or the Selling Fund shall be closed to trading
or trading thereon shall be restricted; or (b) trading or the reporting of
trading on said Exchange or elsewhere shall be disrupted so that accurate
appraisal of the value of the net assets of the Acquiring Fund or the Selling
Fund is impracticable, the Valuation Date shall be postponed until the first
business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 Transfer Agent's Certificate. Evergreen Keystone Service Company, as
transfer agent for the Selling Fund as of the Closing Date ("EKSC"), shall
deliver at the Closing a certificate of an authorized officer stating that its
records contain the names and addresses of the Selling Fund Shareholders and the
number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue and
deliver or cause EKSC, its transfer agent as of the Closing Date, to issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited on
the Closing Date to the Secretary of the Selling Fund, or provide evidence
satisfactory to the Selling Fund that such Acquiring Fund Shares have been
credited to the Selling Fund's account on the books of the Acquiring Fund. At
the Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts and other documents as such
other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations of the Selling Fund. The Selling Fund represents and
warrants to the Acquiring Fund as follows:
(a) The Selling Fund is the sole investment series of a Massachusetts
business trust duly organized, validly existing, and in good standing
under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is the sole investment series of a registered
investment company classified as a management company of the open-end
type, and its registration with the Securities and Exchange Commission
(the "Commission") as an investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), is in full force and
effect.
(c) The current prospectus and statement of additional information of the
Selling Fund conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact
or
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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
a violation of any provision of the Selling Fund's Declaration of Trust
or By-Laws or of any material agreement, indenture, instrument,
contract, lease, or other undertaking to which the Selling Fund is a
party or by which it is bound.
(e) The Selling Fund has no material contracts or other commitments (other
than this Agreement) that will be terminated with liability to it prior
to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted by the
Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Selling Fund or any
of its properties or assets, which, if adversely determined, would
materially and adversely affect its financial condition, the conduct of
its business, or the ability of the Selling Fund to carry out the
transactions contemplated by this Agreement. The Selling Fund knows of
no facts that might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated.
(g) The financial statements of the Selling Fund at January 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 January 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
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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.
(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
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material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not misleading.
4.2 Representations of the Acquiring Fund. The Acquiring Fund represents and
warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a Massachusetts
business trust duly organized, validly existing and in good standing
under the laws of The Commonwealth of Massachusetts.
(b) The Acquiring 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 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 a violation of the Evergreen
Investment 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 December 31, 1996 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.
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(g) Since December 31, 1996, there has not been any material adverse change
in the Acquiring Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Acquiring Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by the Selling
Fund. For the purposes of this subparagraph (g), a decline in the net
asset value of the Acquiring Fund shall not constitute a material
adverse change.
(h) At the Closing Date, all Federal and other tax returns and reports of
the Acquiring Fund required by law then to be filed by such dates shall
have been filed, and all Federal and other taxes shown due on said
returns and reports shall have been paid or provision shall have been
made for the payment thereof. To the best of the Acquiring Fund's
knowledge, no such return is currently under audit, and no assessment
has been asserted with respect to such returns.
(i) For each fiscal year of its operation the Acquiring Fund has met the
requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each
such year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable (except that, under Massachusetts law,
shareholders of the Acquiring Fund could, under certain circumstances,
be held personally liable for obligations of the Acquiring Fund). 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
(except that, under Massachusetts law, shareholders of the Acquiring
Fund could, under certain circumstances, be held personally liable for
obligations of the Acquiring Fund).
(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
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with the transactions contemplated hereby shall be accurate and
complete in all material respects and shall comply in all material
respects with Federal securities and other laws and regulations
applicable thereto.
(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.
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. The Selling Fund will call a meeting of its
Shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 Investment Representation. The Selling Fund covenants that the Acquiring
Fund Shares to be issued hereunder are not being acquired for the purpose of
making any distribution thereof other than in accordance with the terms of this
Agreement.
5.4 Additional Information. The Selling Fund will assist the Acquiring Fund in
obtaining such information as the Acquiring Fund reasonably requests concerning
the beneficial ownership of the Selling Fund shares.
5.5 Further Action. Subject to the provisions of this Agreement, the Acquiring
Fund and the Selling Fund will each take, or cause to be taken, all action, and
do or cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement,
including any actions required to be taken after the Closing Date.
5.6 Statement of Earnings and Profits. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Selling Fund shall furnish
the Acquiring Fund, in such form as is reasonably satisfactory to the Acquiring
Fund, a statement of the earnings and profits of the Selling Fund for Federal
income tax purposes that will be carried over by the Acquiring Fund as a result
of Section 381 of the Code, and which will be certified by
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the Selling Fund's President, its Treasurer, and its independent auditors.
5.7 Preparation of Form N-14 Registration Statement. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions provided for
herein shall be subject, at its election, to the performance by the Acquiring
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date, and, in addition thereto, the following further conditions:
6.1 All representations, covenants, and warranties of the Acquiring Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Evergreen Investment 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 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 Acquiring 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
Acquiring Fund, and, assuming that the Prospectus and Proxy Statement,
and Registration Statement comply with the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and, assuming due
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authorization, execution and delivery of this Agreement by the Selling
Fund, is a valid and binding obligation of the Acquiring Fund
enforceable against the Acquiring Fund in accordance with its terms,
subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium, and other laws relating to or affecting creditors' rights
generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the net asset
value thereof has been paid, the Acquiring Fund Shares to be issued and
delivered to the Selling Fund on behalf of the Selling Fund
Shareholders as provided by this Agreement are duly authorized and upon
such delivery will be legally issued and outstanding and fully paid and
non-assessable (except that, under Massachusetts law, shareholders of
the Acquiring Fund could, under certain circumstances, be held
personally liable for obligations of the Acquiring Fund), and no
shareholder of the Acquiring Fund has any preemptive rights in respect
thereof.
(e) The Registration Statement, to such counsel's knowledge, has been
declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such
counsel, no consent, approval, authorization or order of any court or
governmental authority of the United States or The Commonwealth of
Massachusetts is required for consummation by the Acquiring Fund of the
transactions contemplated herein, except such as have been obtained
under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions provided for
herein shall be subject, at its election, to the performance by the Selling Fund
of all the obligations to be performed by it hereunder on or before the Closing
Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund contained
in this Agreement shall be true and correct as of the date hereof and as of the
Closing Date with the same force and effect as if made on and as of the Closing
Date, and the Selling Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by the Selling Fund's President
or Vice President and its 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 the Selling Fund.
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7.3 The Acquiring Fund shall have received on the Closing Date an opinion of
Sullivan & Worcester LLP, counsel to the Selling Fund, in a form satisfactory to
the Acquiring Fund covering the following points:
(a) The Selling Fund is the sole investment series of a 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 the sole investment series of a Massachusetts
business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission
as an investment company under the 1940 Act is in full force and
effect.
(c) This Agreement has been duly authorized, executed and delivered by the
Selling Fund, and, assuming that the Prospectus and Proxy Statement,
and Registration Statement comply with the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution, and delivery of this Agreement by the
Acquiring Fund, is a valid and binding obligation of the Selling Fund
enforceable against the Selling Fund in accordance with its terms,
subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights
generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval, authorization
or order of any court or governmental authority of the United States or
The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as
have been obtained under the 1933 Act, the 1934 Act and the 1940 Act,
and as may be required under state securities laws.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the Closing
Date with respect to the Selling Fund or the Acquiring Fund, the other party to
this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Selling Fund in accordance with the provisions of the Selling Fund's Declaration
of Trust and By-Laws and certified copies of the resolutions evidencing such
approval shall have been delivered to the Acquiring Fund. Notwithstanding
anything herein to the contrary, neither the Acquiring Fund nor the Selling Fund
may waive the conditions set forth in this paragraph 8.1.
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8.2 On the Closing Date, the Commission shall not have issued an unfavorable
report under Section 25(b) of the 1940 Act, nor instituted any proceeding
seeking to enjoin the consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act and no action, suit or other
proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents, orders, and
permits of Federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky securities authorities, including any
necessary "no-action" positions of and exemptive orders from such Federal and
state authorities) to permit consummation of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order, or permit would not involve a risk of a material adverse effect
on the assets or properties of the Acquiring Fund or the Selling Fund, provided
that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which, together
with all previous such dividends, shall have the effect of distributing to the
Selling Fund Shareholders all of the Selling Fund's investment company taxable
income for all taxable years ending on or prior to the Closing Date (computed
without regard to any deduction for dividends paid) and all of its net capital
gain realized in all taxable years 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
[_________] 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
[_________] liabilities of the Selling Fund.
(c) No gain orloss will be recognized by the Selling Fund upon the transfer
19990
<PAGE>
of the Selling Fund assets to the Acquiring Fund in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of
[__________] liabilities of the Selling Fund or upon the distribution
(whether actual or constructive) of the Acquiring Fund Shares to
Selling Fund Shareholders in exchange for their shares of the Selling
Fund.
(d) No gain or loss will be recognized by Selling Fund Shareholders upon
the exchange of their Selling Fund shares for the Acquiring Fund Shares
in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares received by each
Selling Fund Shareholder pursuant to the Reorganization will be the
same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding
period of the Acquiring Fund Shares to be received by each Selling Fund
Shareholder will include the period during which the Selling Fund
shares exchanged therefor were held by such shareholder (provided the
Selling Fund shares were held as capital assets on the date of the
Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the Acquiring Fund
will be the same as the tax basis of such assets to the Selling Fund
immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will
include the period during which those assets were held by the Selling
Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a letter
addressed to the Acquiring Fund, in form and substance satisfactory to the
Acquiring Fund, to the effect that
(a) they are independent certified public accountants with respect to the
Selling Fund within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of
appropriate officials of the Selling Fund responsible for financial and
accounting matters, nothing came to their attention that caused them to
believe that such unaudited pro forma financial statements do not
comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the published rules and
regulations thereunder;
(c) on the basis of limited procedures agreed upon by the Acquiring Fund
and
19990
<PAGE>
described in such letter (but not an examination in accordance with
generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy
Statement has been obtained from and is consistent with the accounting
records of the Selling Fund;
(d) on the basis of limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and
Prospectus and Proxy Statement were prepared based on the valuation of
the Selling Fund's assets in accordance with the Evergreen Investment
Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information pursuant to
procedures customarily utilized by the Acquiring Fund in valuing its
own assets; and
(e) on the basis of limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratio appearing in the
Registration Statement and Prospectus and Proxy Statement agree with
underlying accounting records of the Selling Fund or to written
estimates by Selling Fund's management and were found to be
mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a letter
addressed to the Selling Fund, in form and substance satisfactory to the Selling
Fund, to the effect that
(a) they are independent certified public accountants with respect to the
Acquiring Fund within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the Selling Fund and
described in such letter (but not an examination in accordance with
generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of
appropriate officials of the Evergreen Investment Trust responsible for
financial and accounting matters, nothing came to their attention that
caused them to believe that such unaudited pro forma financial
statements do not comply as to form in all material respects with the
19990
<PAGE>
applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the Selling Fund and
described in such letter (but not an examination in accordance with
generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy
Statement has been obtained from and is consistent with the accounting
records of the Acquiring Fund; and
(d) on the basis of limited procedures agreed upon by the Selling Fund (but
not an examination in accordance with generally accepted auditing
standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus
and Proxy Statement agree with underlying accounting records of the
Acquiring Fund or to written estimates by each Fund's management and
were found to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received from KPMG
Peat Marwick LLP a letter addressed to the Acquiring Fund and the Selling Fund,
dated on the Closing Date in form and substance satisfactory to the Funds,
setting forth the Federal income tax implications relating to capital loss
carryforwards (if any) of the Selling Fund and the related impact, if any, of
the proposed transfer of all of the assets of the Selling Fund to the Acquiring
Fund and the ultimate dissolution of the Selling Fund, upon the shareholders of
the Selling Fund.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the transactions
contemplated by this Agreement incurred by the Selling Fund and the Acquiring
Fund will be borne by First Union National Bank of North Carolina. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation cost of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own Federal and
state registration fees.
19990
<PAGE>
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party has made
any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Acquiring
Fund and the Selling Fund. In addition, either the Acquiring Fund or the Selling
Fund may at its option terminate this Agreement at or prior to the Closing Date
because
(a) of a breach by the other of any representation, warranty, or
agreement contained herein to be performed at or prior to the Closing
Date, if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the obligations of the
terminating party has not been met and it reasonably appears that it
will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful default,
there shall be no liability for damages on the part of either the Acquiring
Fund, the Selling Fund, Evergreen Investment Trust, or their respective Trustees
or officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
This Agreement may be amended, modified, or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the Selling
Fund and the Acquiring Fund; provided, however, that following the meeting of
the Selling Fund Shareholders called by the Selling Fund pursuant to paragraph
5.2 of this Agreement, no such amendment may have the effect of changing the
provisions for determining the number of the Acquiring Fund Shares to be issued
to the Selling Fund Shareholders under this Agreement to the detriment of such
shareholders without their further approval.
19990
<PAGE>
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 Commonwealth of Massachusetts, without giving effect to the
conflicts of laws provisions thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by any party
without the written consent of the other party. Nothing herein expressed or
implied is intended or shall be construed to confer upon or give any person,
firm, or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund and the
Acquiring Fund hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents, or employees of the Evergreen
Investment Trust or the Selling Fund, personally, but bind only the trust
property of the Selling Fund and the Acquiring Fund, as provided in the
Declarations of Trust of the Evergreen Investment Trust and the Selling Fund.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Selling Fund on its behalf of the Selling Fund, and the
Evergreen Investment Trust on behalf of the Acquiring Fund and signed by
authorized officers of the Selling Fund and the Evergreen Investment 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 Evergreen
Investment Trust as provided in their respective Declarations of Trust.
19990
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN INVESTMENT TRUST
on behalf of Evergreen U.S. Government
Fund
By:
Name:
Title:
KEYSTONE GOVERNMENT SECURITIES FUND
By:
Name:
Title:
19990
<PAGE>
Exhibit B to Prospectus/Proxy Statement
EVERGREEN U.S. GOVERNMENT FUND --
CLASS A SHARES
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained
in its Annual Report, which will be made available upon request and without
charge.
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1996 1995# 1994
________ __________ __________
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............................................ $9.65 $9.07 $10.05
________ __________ __________
Income (loss) from investment operations:
Net investment income......................................................... .63 .33 .66
Net realized and unrealized gain (loss) on investments........................ (.23 ) .58 (.98)
________ __________ __________
Total from investment operations............................................ .40 .91 (.32)
________ __________ __________
Less distributions to shareholders from net investment income................... (.63 ) (.33) (.66)
________ __________ __________
Net asset value, end of period.................................................. $9.42 $9.65 $9.07
======== ========== ==========
TOTAL RETURN+................................................................... 4.3% 10.2% (3.2%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................................... $20,345 $22,445 $23,706
Ratios to average net assets:
Expenses...................................................................... .99% 1.04%++** .96%**
Net investment income......................................................... 6.61% 7.07%++** 6.97%**
Portfolio turnover rate......................................................... 23% 0% 19%
<CAPTION>
JANUARY 11,
1993*
THROUGH
DECEMBER 31,
1993
___________
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............................................ $10.00
________
Income (loss) from investment operations:
Net investment income......................................................... .68
Net realized and unrealized gain (loss) on investments........................ .05
________
Total from investment operations............................................ .73
________
Less distributions to shareholders from net investment income................... (.68)
________
Net asset value, end of period.................................................. $10.05
========
TOTAL RETURN+................................................................... 7.4%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................................... $38,851
Ratios to average net assets:
Expenses...................................................................... .68%++**
Net investment income......................................................... 6.93%++**
Portfolio turnover rate......................................................... 39%
</TABLE>
# The Fund changed its fiscal year end from December 31 to June 30.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets would have been
the following:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1995# 1994
__________ __________
<S> <C> <C>
Expenses..................................................................................... 1.05% 1.00%
Net investment income........................................................................ 7.06% 6.93%
<CAPTION>
JANUARY 11,
1993*
THROUGH
DECEMBER 31,
1993
___________
<S> <C>
Expenses..................................................................................... .99%
Net investment income........................................................................ 6.62%
</TABLE>
See accompanying notes to financial statements.
36
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND --
CLASS B AND CLASS C SHARES
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained
in its Annual Report, which will be made available upon request and without
charge.
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
JANUARY 11, SIX
YEAR SIX MONTHS 1993* YEAR MONTHS
ENDED ENDED YEAR ENDED THROUGH ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1996 1995# 1994 1993 1996 1995#
________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.................... $9.65 $9.07 $10.05 $10.00 $9.65 $9.07
_____ _____ ______ ______ _____ _____
Income (loss) from investment operations:
Net investment income................................. .56 .29 .61 .63 .56 .29
Net realized and unrealized gain (loss) on
investments......................................... (.23) .58 (.98) .05 (.23) .58
_____ _____ ______ ______ ______ _____
Total from investment operations.................... .33 .87 (.37) .68 .33 .87
_____ _____ ______ ______ ______ _____
Less distributions to shareholders from net
investment income..................................... (.56) (.29) (.61) (.63) (.56) (.29)
_____ _____ _____ _______ ______ _____
Net asset value, end of period.......................... $9.42 $9.65 $9.07 $10.05 $9.42 $9.65
===== ===== ===== ====== ====== =====
TOTAL RETURN+........................................... 3.5% 9.8% (3.8%) 6.9% 3.5% 9.8%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............... $165,988 $192,490 $195,571 $236,696 $649 $350
Ratios to average net assets:
Expenses.............................................. 1.74% 1.79%++** 1.54%** 1.19%++** 1.74% 1.79%++**
Net investment income................................. 5.85% 6.32%++** 6.42%** 6.44%++** 5.87% 6.36%++**
Portoflio turnover rate................................. 23% 0% 19% 39% 23% 0%
<CAPTION>
SEPTEMBER 2,
1994*
THROUGH
DECEMBER 31,
1994
____________
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period.................... $9.39
____
Income (loss) from investment operations:
Net investment income................................. .20
Net realized and unrealized gain (loss) on
investments......................................... (.32)
_____
Total from investment operations.................... (.12)
_____
Less distributions to shareholders from net
investment income..................................... (.20)
_____
Net asset value, end of period.......................... $9.07
=====
TOTAL RETURN+........................................... (1.3%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............... $266
Ratios to average net assets:
Expenses.............................................. 1.71%++**
Net investment income................................. 6.70%++**
Portoflio turnover rate................................. 19%
</TABLE>
# The Fund changed its fiscal year end from December 31 to June 30.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charges are not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets would have been
the following:
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C
JANUARY 11, SHARES
SIX MONTHS 1993* SIX MONTHS
ENDED YEAR ENDED THROUGH ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
1995# 1994 1993 1995#
__________________________________________________
<S> <C> <C> <C> <C>
Expenses................................................................ 1.80% 1.58% 1.50% 1.80%
Net investment income................................................... 6.31% 6.38% 6.13% 6.34%
<CAPTION>
SEPTEMBER 2,
1994*
THROUGH
DECEMBER 31,
1994
__________
<S> <C>
Expenses................................................................ 1.75%
Net investment income................................................... 6.66%
</TABLE>
See accompanying notes to financial statements.
37
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND --
CLASS Y SHARES
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained
in its Annual Report, which will be made available upon request and without
charge.
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1996 1995# 1994
__________________________________
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................................... $9.65 $9.07 $10.05
_____ _____ ______
Income (loss) from investment operations:
Net investment income................................................................. .66 .34 .69
Net realized and unrealized gain (loss) on investments................................ (.23) .58 (.98)
_____ _____ _______
Total from investment operations.................................................... .43 .92 (.29)
_____ _____ _______
Less distributions to shareholders from net investment income........................... (.66) (.34) (.69)
_____ _____ _______
Net asset value, end of period.......................................................... $9.42 $9.65 $9.07
===== ===== =======
TOTAL RETURN+........................................................................... 4.5% 10.3% (2.9%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................................... $121,569 $16,934 $15,595
Ratios to average net assets:
Expenses.............................................................................. .74% .79%++** .71%**
Net investment income................................................................. 6.86% 7.31%++** 7.27%**
Portfolio turnover rate................................................................. 23% 0% 19%
<CAPTION>
SEPTEMBER 2,
1993*
THROUGH
DECEMBER 31,
1993
____________
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................................... $10.25
______
Income (loss) from investment operations:
Net investment income................................................................. .25
Net realized and unrealized gain (loss) on investments................................ (.20)
______
Total from investment operations.................................................... .05
______
Less distributions to shareholders from net investment income........................... (.25)
______
Net asset value, end of period.......................................................... $10.05
======
TOTAL RETURN+........................................................................... .5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................................... $14,486
Ratios to average net assets:
Expenses.............................................................................. .48%++**
Net investment income................................................................. 7.20%++**
Portfolio turnover rate................................................................. 39%
</TABLE>
# The Fund changed its fiscal year end from December 31 to June 30.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets would have been
the following:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1995# 1994
________________________
<S> <C> <C>
Expenses....................................................................................... .80% .75%
Net investment income.......................................................................... 7.30% 7.23%
<CAPTION>
SEPTEMBER 2,
1993*
THROUGH
DECEMBER 31,
1993
____________
<S> <C>
Expenses....................................................................................... .79%
Net investment income.......................................................................... 6.89%
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
(photo appears here)
A REPORT FROM YOUR
PORTFOLIO MANAGER
ROLLIN WILLIAMS
Evergreen U.S. Government Fund had a total return of 4.28%
for Class A shares at net asset value (NAV) and 4.54% for (photo of
Class Y, no-load shares, for the 12 months ended June 30, Rollin Williams
1996*. These returns put the Fund in the top quartile of appears here)
Lipper's General U.S. Government Funds category of the 169
general U.S. Government funds tracked by Lipper Analytical
Services during that time**. The total returns for the Fund's
Class B and Class C shares at NAV were each 3.50%, which
ranked them in the 50th percentile in the Lipper category for
that time. (For additional performance information, please see
page 31.)
The period from June 30, 1995, to June 30, 1996, provided interest rates
and market participants a continuation of the roller coaster rid witnessed in
1993 and 1994. At the end of 1994, the 30-Treasury was yielding 7.88%. By June
30, 1995 the rate had fallen to 6.62%, a decline of 126 basis points, and by the
end of 1995, a further fall to 5.95% another 67 basis points. From the December
1995 low, rates had risen steadily to a 6.89% 30-year bond at the end of June
1996.
The first quarter of 1996 saw a dramatic reversal in investor expectations
for the economy and interest rates. Bond market participants closed 1995
considering the possibility that the economy could roll-over into a recession.
By the end of the first quarter, recession concerns had been replaced by
concerns about the strength of the economic recovery and rising inflation.
Throughout this period, it was our view that the economy, despite periods of
acceleration and deceleration, would continue its slow growth, low inflation
course. The Fund's solid relative performance during this volatile period
reflects our staying the course and capturing selected opportunities as they
were presented
In January, the Federal Reserve reduced the Fed Funds rate by 25 basis points
(from 5.5% to 5.25%). There was some discussion at the time about whether this
action was necessary. With the employment report in early March reflecting
705,000 new jobs, investors discounted the likelihood of further Federal Reserve
rate reductions and shifted their focus to the underlying strength of the
economy.
Interest rates continued their rise in the second quarter of 1996 as
investors watched the economic releases and tried to anticipate the actions of
the Federal Reserve. As rates increased, the duration of the portfolio was
gradually lengthened. At June 30, the Fund's duration was 4.94 years, up from
4.54 years at December 1995.
The most recent portfolio activity was the sale of Treasuries maturing in
1997 and 1998 and purchases of higher yielding, attractively priced, seasoned
Government National Mortgage Association (GNMA) 8's. The asset allocation was
also changed slightly in the second quarter to place slightly more emphasis on
the higher yielding mortgage backed sector of the portfolio. At the end of June,
mortgages were 50.3% of the Fund's net assets versus 46.5% at March 1996.
Looking forward, we believe the economy should slow as the year progresses.
The ebb and flow pattern which we've seen year to date will, however, continue.
Interest rate increases of the magnitude which we have seen never failed to slow
the economy. On the other hand, if the economic numbers do not indicate a
slowing economy, the Federal Reserve will raise short-term interest rates to
keep economic growth at an acceptable level.
The overall strategy of the Fund continues to be to provide the investor with
a high quality portfolio that has attractive income characteristics without the
use of toxic or exotic derivative securities. Thank you for your investment in
the Fund.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
* CLASS A SHARES ARE SUBJECT TO A MAXIMUM 4.75% FRONT END SALES CHARGE, CLASS B
SHARES ARE SUBJECT TO A MAXIMUM 5% CONTINGENT DEFERRED SALES CHARGE, AND CLASS C
SHARES ARE SUBJECT TO A 1% CONTINGENT DEFERRED SALES CHARGE WITHIN THE FIRST
YEAR OF PURCHASE. SALES CHARGES ARE NOT REFLECTED IN THE PERFORMANCE FIGURES
ABOVE, AND IF REFLECTED, PERFORMANCE WOULD BE LOWER.
INCEPTION DATES: CLASS Y SHARES 9/2/93, CLASS A SHARES 1/11/93, CLASS B SHARES
1/11/93, CLASS C SHARES 9/2/94
- -.68%, -1.38%, AND 2.52% WERE THE 12-MONTH TOTAL RETURNS ENDED 6/30/96 FOR THE
FUND'S CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES, RESPECTIVELY, WITH
THE MAXIMUM SALES CHARGES RESPECTIVE TO THOSE SHARE CLASSES.
PERFORMANCE FIGURES INCLUDE REINVESTMENT OF INCOME DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE. INVESTORS'
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
** SOURCE: LANA (LIPPER ANALYTICAL NEW APPLICATIONS) LIPPER ANALYTICAL SERVICES
INC., IS AN INDEPENDENT MUTUAL FUNDS PERFORMANCE MONITOR. LIPPER AVERAGE DOES
NOT INCLUDE SALES CHARGES, AND IF INCLUDED PERFORMANCE MAY BE LOWER AND THE
FUND'S PERCENTILE RANKINGS MAY BE DIFFERENT.
30
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
(photo appears here)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN U.S. GOVERNMENT FUND
The graphs below compare a $10,000 investment in the Evergreen U.S.
Government Fund (Class A, Class B, Class C and Class Y Shares) with a similar
investment in the Lehman Brothers Intermediate Term Government Bond Index
("LBIGBI Index").
(Class A Graph appears here (Class B Graph appears here
and its plotting points are as follows) and its plotting points are as follows)
(Class A Average Annual Total Return) (Class B Average Annual Total Return)
ONE YEAR=0.7% ONE YEAR=1.4%
SINCE INCEPTION=3.8% SINCE INCEPTION=3.9%
- -- 1/12/93* $ -- 1/12/93* $
- -- 6/30/93 $ -- 6/30/93 $
- -- 6/30/94 $ -- 6/30/94 $
- -- 6/30/95 $ -- 6/30/95 $
- -- 6/30/96 $ -- 6/30/96 $
(Class C Graph appears here (Class Y Graph appears here
and its plotting points are as follows) and its plotting points are as follows)
(Class C Average Annual Total Return) (Class Y Average Annual Total Return)
ONE YEAR=2.5% ONE YEAR=4.5%
SINCE INCEPTION=6.5% SINCE INCEPTION=4.2%
- -- 9/02/94* $ -- 8/25/93* $
- -- 12/31/94 $ -- 12/31/93 $
- -- 6/30/95 $ -- 6/30/94 $
- -- 12/31/95 $ -- 12/31/95 $
- -- 6/30/96 $ -- 6/30/96 $
(Legend)
- -- Evergreen U.S. Government == Lehman Brothers Intermediate
Bond Fund Term Government Index
(footnote)
* Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. MUTUAL FUNDS ARE
NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
and Class C Shares, assuming full redemption on June 30, 1996; (c) all recurring
fees (including investment advisory fees) were deducted; and (d) all dividends
and distributions were reinvested.
The LBIGBI Index is an unmanaged index and includes the reinvestment of
income, but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund.
<PAGE>
PART B
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
KEYSTONE GOVERNMENT SECURITIES FUND
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
By and In Exchange For Shares of
EVERGREEN U.S. GOVERNMENT FUND
A Series of
EVERGREEN INVESTMENT TRUST
2500 Westchester Avenue
Purchase, New York 10577
(800) 807-2940
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of the Keystone Government
Securities Fund (the "Keystone Government Fund") to Evergreen U.S. Government
Fund (the "Evergreen Government Fund"), a series of the Evergreen Investment
Trust, in exchange for Class A, Class B and Class C Shares of beneficial
interest, no par value, of the Evergreen Government Fund, consists of this cover
page and the following described documents, each of which is attached hereto and
incorporated by reference herein:
(1) The Statement of Additional Information of the Evergreen Government
Fund dated August 30, 1996;
(2) The Statement of Additional Information of the Keystone Government
Fund dated November 29, 1996, as supplemented January 1, 1997;
(3) Annual Report of the Evergreen Government Fund for the year ended
June 30, 1996;
(4) Semi-annual Report (unaudited) of the Evergreen Government Fund for
the six-month period ended December 31, 1996;
(5) Annual Report of the Keystone Government Fund for the year ended July
31, 1996;
(6) Semi-annual Report (unaudited) of the Keystone Government Fund for
the six-month period ended January 31, 1997; and
(7) Pro-Forma Combining Financial Statements (unaudited) dated December
31, 1996.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Proxy Statement/
Prospectus of the Evergreen Government Fund and Keystone Government Fund dated
__________, 1997. A copy of the Proxy Statement/Prospectus may by obtained
without charge by calling or writing to the Evergreen Government Fund or
Keystone Government Fund at the telephone numbers or addresses set forth above.
The date of this Statement of Additional Information is ____________, 1997.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 30, 1996
THE EVERGREEN INCOME FUNDS
2500 Westchester Avenue, Purchase, New York 10577
800-807-2940
Evergreen U.S. Government Fund (formerly First Union U.S. Government Portfolio)
("U.S.Government")
Evergreen Short Intermediate Bond Fund (formerly Evergreen Fixed
Income Fund) ("Short Intermediate Bond")
Evergreen Intermediate Term Bond Fund (formerly The FFB Lexicon Fund - Fixed
Income Fund) ("Intermediate Term Bond")
Evergreen Intermediate Term Government Securities Fund (formerly The FFB
Lexicon Fund - Intermediate Term Government
Securities Fund ("Intermediate Term Government")
This Statement of Additional Information pertains to all classes of
shares of the Funds listed above. It is not a prospectus and should be read in
conjunction with the Prospectus dated August 30, 1996 for the Fund in which you
are making or contemplating an investment. The Evergreen Income Funds are
offered through two separate prospectuses: one offering Class A, Class B and
Class C shares of U.S. Government, Short Intermediate Bond, Intermediate Term
Bond and Intermediate Term Government, and a separate prospectus offering Class
Y shares of each Fund. Copies of each Prospectus may be obtained without charge
by calling the number listed above.
TABLE OF CONTENTS
Investment Objectives and Policies................................2
Investment Restrictions...........................................11
Certain Risk Considerations.......................................16
Management........................................................16
Investment Adviser................................................23
Distribution Plans................................................27
Allocation of Brokerage...........................................30
Additional Tax Information........................................31
Net Asset Value...................................................33
Purchase of Shares................................................34
General Information About the Funds...............................45
Performance Information...........................................47
Financial Statements..............................................51
Appendix A - Description of Bond, Municipal Note and Commercial Paper
Ratings - 51
1
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INVESTMENT OBJECTIVES AND POLICIES (See also "Description of the
Funds Investment Objectives and Policies" in each Fund's Prospectus)
The investment objective of each Fund and a description of the securities
in which each Fund may invest is set forth under "Description of the Funds
Investment Objectives and Policies" in the relevant Prospectus. The investment
objectives of each Fund are fundamental and cannot be changed without the
approval of shareholders. The following expands the discussion in the Prospectus
regarding certain investments of each Fund.
Types of Investments
U.S. Government Obligations (All Funds)
The types of U.S. Government obligations in which the Funds may invest
generally include obligations issued or guaranteed by U.S. Government agencies
or instrumentalities.
These securities are backed by:
(1) the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities; or
(2) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive
financial support from the U.S. Government are:
(i) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association;
(vi) Government National Mortgage Association; and
(vii) Student Loan Marketing Association
GNMA Securities. The Funds may invest in securities issued by the Government
National Mortgage Association ("GNMA"), a wholly-owned U.S. Government
corporation, which guarantees the timely payment of principal and interest, but
not premiums paid to purchase these instruments. The market value and interest
yield of these instruments can vary due to market interest rate fluctuations and
early prepayments of underlying mortgages. These securities represent ownership
in a pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to
2
<PAGE>
accurately predict the average maturity of a particular GNMA pool. The scheduled
monthly interest and principal payments relating to mortgages in the pool will
be "passed through" to investors. GNMA securities differ from conventional bonds
in that principal is paid back to the certificate holders over the life of the
loan rather than at maturity. As a result, there will be monthly scheduled
payments of principal and interest. In addition, there may be unscheduled
principal payments representing prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available from
other types of U.S. Government securities, GNMA certificates may be less
effective than other types of securities as a means of "locking in" attractive
long-term rates because of the prepayment feature. For instance, when interest
rates decline, the value of a GNMA certificate likely will not rise as much as
comparable debt securities due to the prepayment feature. In addition, these
prepayments can cause the price of a GNMA certificate originally purchased at a
premium to decline in price to its par value, which may result in a loss.
Mortgage-Backed or Asset-Backed Securities. U.S. Government, Short Intermediate
Bond and Intermediate Term Bond may invest in mortgage-backed securities and
asset-backed securities. Two principal types of mortgage-backed securities are
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"). CMOs are securities collateralized by mortgages, mortgage
pass-throughs, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be supported
by various types of insurance, and some CMOs may be backed by GNMA certificates
or other mortgage pass-throughs issued or guaranteed by U.S. Government agencies
or instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
In addition to mortgage-backed securities, U.S. Government, Short
Intermediate Bond and Intermediate Term Bond may invest in securities secured by
other assets including company receivables, truck and auto loans, leases, and
credit card receivables. These issues may be traded over-the-counter and
typically have a short-intermediate maturity structure depending on the paydown
characteristics of the underlying financial assets which are passed through to
the security holder.
3
<PAGE>
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by automobile receivables permit the servicers of
such receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
rated asset- backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, the Adviser (as hereinafter
defined)considers the financial strength of the guarantor or other provider of
credit support, the type and extent of credit enhancement provided as well as
the documentation and structure of the issue itself and the credit support.
Restricted and Illiquid Securities (All Funds)
The ability of the Board of Trustees of either Evergreen Investment
Trust, in the case of Short Intermediate Bond and U.S. Government, or The
Evergreen Lexicon Trust, in the case of Intermediate Term Bond and Intermediate
Term Government ("Trustees") to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for sale under the Rule. The Funds
which invest in Rule 144A securities believe that the Staff of the SEC has left
the question of determining the liquidity of all restricted securities (eligible
for resale under the Rule) for determination by the Trustees. The Trustees
consider the following criteria in determining the liquidity of certain
restricted securities:
(i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace trades.
4
<PAGE>
Variable or Floating Rate Instruments.
Certain of the investments of Intermediate Term Bond and Intermediate Term
Government may include variable or floating rate instruments which may involve a
demand feature and may include variable amount master demand notes which may or
may not be backed by bank letters of credit. Variable or floating rate
instruments bear interest at a rate which varies with changes in market rates.
The holder of an instrument with a demand feature may tender the instrument back
to the issuer at par prior to maturity. A variable amount master demand note is
issued pursuant to a written agreement between the issuer and the holder, its
amount may be increased by the holder or decreased by the holder or issuer, it
is payable on demand, and the rate of interest varies based upon an agreed
formula. The quality of the underlying credit must, in the opinion of each
Fund's Adviser, be equivalent to the long-term bond or commercial paper ratings
applicable to permitted investments for each Fund. The Adviser will monitor, on
an ongoing basis, the earning power, cash flow, and liquidity ratios of the
issuers of such instruments and will similarly monitor the ability of an issuer
of a demand instrument to pay principal and interest on demand.
When-Issued and Delayed Delivery Securities (All Funds)
The Funds may enter into securities transactions on a when-issued
basis. These transactions involve the purchase of debt obligations on a
when-issued basis, in which case delivery and payment normally take place within
45 days after the date of commitment to purchase. The Funds will only make
commitments to purchase obligations on a when-issued basis with the intention of
actually acquiring the securities, but may sell them before the settlement date.
The when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case
there could be an unrealized loss at the time of delivery.
Segregated accounts will be established with the custodian, and the Funds will
maintain liquid assets in an amount at least equal in value to a Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, a Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments. The Funds do not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause segregation of more than 20%
of the total value of their assets.
Lending of Portfolio Securities (All Funds)
The Funds may lend securities pursuant to agreements requiring that the loans be
continuously secured by cash, securities of the U.S. Government or its agencies,
or any combination of cash and such securities, as collateral equal at all times
to 100% of the market value of the securities lent. The collateral received when
a Fund lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the lending Fund. During the time portfolio securities are on
loan, the borrower pays the Fund any dividends or interest paid on such
5
<PAGE>
securities. Loans are subject to termination at the option of the Fund or the
borrower. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or equivalent collateral to the borrower or placing broker. A Fund
does not have the right to vote securities on loan, but would terminate the loan
and regain the right to vote if that were considered important with respect to
the investment. Any loan may be terminated by either party upon reasonable
notice to the other party. There may be risks of delay in receiving additional
collateral or risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans are made only to borrowers deemed by the Adviser to be of good
standing and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risk.
Such loans will not be made if, as a result, the aggregate amount of all
outstanding securities loans for U.S. Government, Intermediate Term Bond and
Intermediate Term Government exceed one-third of the value of a Fund's total
assets taken at fair market value. Loans of securities by Short Intermediate
Bond are limited to 15% of its total assets.
Reverse Repurchase Agreements
As described herein, U.S. Government and Short Intermediate Bond may also
enter into reverse repurchase agreements. These transactions are similar to
borrowing cash. In a reverse repurchase agreement, a Fund transfers possession
of a portfolio instrument to another person, such as a financial institution,
broker, or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
Options and Futures Transactions
Options which Short Intermediate Bond trades must be listed on national
securities exchanges.
Purchasing Put and Call Options on Financial Futures Contracts
Short Intermediate Bond and U.S. Government may purchase listed put and call
options on financial futures contracts for U.S. Government securities. U.S.
Government may buy and sell financial futures contracts and options on financial
futures contracts and may buy and sell put and call options on U.S. Government
securities. Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at an undetermined price,
the purchase of a put option on a futures contract entitles (but does not
6
<PAGE>
obligate) its purchaser to decide on or before a future date whether to assume a
short position at the specified price.
A Fund may purchase put and call options on futures to protect portfolio
securities against decreases in value resulting from an anticipated increase in
market interest rates. Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures contracts will also
decrease in value and the put option will increase in value. In such an event, a
Fund will normally close out its option by selling an identical put option. If
the hedge is successful, the proceeds received by the Fund upon the sale of the
put option plus the realized decrease in value of the hedged securities.
Alternately, a Fund may exercise its put option to close out the position.
To do so, it would enter into a futures contract of the type underlying the
option. If the Fund neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and the premium paid for the
contract will be lost.
Purchasing Options
Short Intermediate Bond and U.S. Government may purchase both put and
call options on their portfolio securities. These options will be used as a
hedge to attempt to protect securities which a Fund holds or will be purchasing
against decreases or increases in value. A Fund may purchase call and put
options for the purpose of offsetting previously written call and put options of
the same series. If the Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, the Fund will not be able to
sell the underlying securities or dispose of assets held in a segregated account
until the options expire or are exercised.
Short Intermediate Bond intends to purchase put and call options on
currency and other financial futures contracts for hedging purposes. A put
option purchased by the Fund would give it the right to assume a position as the
seller of a futures contract. A call option purchased by the Fund would give it
the right to assume a position as the purchaser of a futures contract. The
purchase of an option on a futures contract requires the Fund to pay a premium.
In exchange for the premium, the Fund becomes entitled to exercise the benefits,
if any, provided by the futures contract, but is not required to take any action
under the contract. If the option cannot be exercised profitably before it
expires, the Fund's loss will be limited to the amount of the premium and any
transaction costs.
Short Intermediate Bond and U.S. Government currently do not intend to
invest more than 5% of their net assets in options transactions.
A Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the purchase of such futures contracts is unleveraged.
7
<PAGE>
Purchasing Call Options on Financial Futures Contracts
An additional way in which U.S. Government may hedge against decreases in
market interest rates is to buy a listed call option on a financial futures
contract for U.S. Government securities. When the Fund purchases a call option
on a futures contract, it is purchasing the right (not the obligation) to assume
a long futures position (buy a futures contract) at a fixed price at any time
during the life of the option. As market interest rates fall, the value of the
underlying futures contract will normally increase, resulting in an increase in
value of the Fund's option position. When the market price of the underlying
futures contract increases above the strike price plus premium paid, the Fund
could exercise its option and buy the futures contact below market price.
Prior to the exercise or expiration of the call option, the Fund could sell
an identical call option and close out its position. If the premium received
upon selling the offsetting call is greater than the premium originally paid,
the Fund has completed a successful hedge.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, a Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve the
borrowing of funds by a Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, a Fund
will mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
U.S. Government will not maintain open positions in futures contracts it
has sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close out a sufficient
number of open contracts to bring its open futures and options positions within
this limitation.
Purchasing and Writing Put and Call Options on U.S. Government Securities
U.S. Government may purchase put and call options on U.S. Government
securities to protect against price movements in particular securities. A put
8
<PAGE>
option gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of the
option. A call option gives the Fund, in return for a premium, the right to buy
the underlying security from the seller.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
Section 4(2) Commercial Paper
U.S. Government and Short Intermediate Bond may invest in commercial paper
issued in reliance on the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to institutional
investors, such as the Funds, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors like the Funds through or with
the assistance of the issuer or investment dealers who make a market in Section
4(2) commercial paper, thus providing liquidity. The Funds believe that Section
4(2) commercial paper and possibly certain other restricted securities which
meet the criteria for liquidity established by the Trustees are quite liquid.
The Funds intend, therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Trustees, including Section 4(2)
commercial paper, as determined by each Fund's Adviser, as liquid and not
subject to the investment limitation applicable to illiquid securities. In
addition, because Section 4(2) commercial paper is liquid, the Funds do not
intend to subject such paper to the limitation applicable to restricted
securities.
Repurchase Agreements (All Funds)
Repurchase Agreements. Certain of the investments of the Funds may include
repurchase agreements which are agreements by which a person (e.g., a portfolio)
obtains a security and simultaneously commits to return the security to the
seller (a member bank of the Federal Reserve System or recognized securities
dealer) at an agreed upon price (including principal and interest) on an agreed
upon date within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or maturity of the
underlying security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value of the underlying security.
A Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
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<PAGE>
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Foreign Securities.
Short Intermediate Bond may invest up to 20% of its assets in foreign securities
or U.S. securities traded in foreign markets and Intermediate Term Bond may
invest in U.S. dollar denominated obligations or securities of foreign issuers.
Permissible investments may consist of obligations of foreign branches of U.S.
banks and of foreign banks, including European Certificates of Deposit, European
Time Deposits, Canadian Time Deposits and Yankee Certificates of Deposit, and
investments in Canadian Commercial Paper, foreign securities and Europaper.
These instruments may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. domestic
issuers. Such risks include future adverse political and economic developments,
the possible imposition of withholding taxes on interest or other income,
possible seizure, nationalization, or expropriation of foreign deposits, the
possible establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Such investments may also entail
higher custodial fees and sales commissions than domestic investments. Foreign
issuers of securities or obligations are often subject to accounting treatment
and engage in business practices different from those respecting domestic
issuers of similar securities or obligations. Foreign branches of U.S. banks and
foreign banks may be subject to less stringent reserve requirements than those
applicable to domestic branches of U.S. banks.
Foreign Currency Transactions
As one way of managing exchange rate risk, Short Intermediate Bond may enter
into forward currency exchange contracts (agreements to purchase or sell
currencies at a specified price and date). The exchange rate for the transaction
(the amount of currency the Fund will deliver and receive when the contract is
completed) is fixed when the Fund enters into the contract. The Fund usually
will enter into these contracts to stabilize the U.S. dollar value of a security
it has agreed to buy or sell. The Fund intends to use these contracts to hedge
the U.S. dollar value of a security it already owns, particularly if the Fund
expects a decrease in the value of the currency in which the foreign security is
denominated. Although the Fund will attempt to benefit from using forward
contracts, the success of its hedging strategy will depend on the Adviser's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strengths of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between
10
<PAGE>
foreign currencies and the U.S. dollar. Changes in foreign currency exchange
rates also may affect the value of dividends and interest earned, gains and
losses realized on the sale of securities and net investment income and gains,
if any, to be distributed to shareholders by the Fund. The Fund may also
purchase and sell options related to foreign currencies in connection with
hedging strategies.
The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the Fund's assets denominated in
that currency, but as consistent with its other investment policies, is not
otherwise limited in its ability to use this strategy.
Other Investments
The Funds are not prohibited from investing in obligations of banks which
are clients of the Distributor (as herein after defined). However, the purchase
of shares of the Funds by such banks or by their customers will not be a
consideration in determining which bank obligations the Funds will purchase. The
Funds will not purchase obligations of its Adviser or its affiliates.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
Except as noted, the investment restrictions set forth below are
fundamental and may not be changed with respect to each Fund without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
Where an asterisk (*) appears after a Fund's name, the relevant policy is
non-fundamental with respect to that Fund and may be changed by each Fund's
Adviser without shareholder approval, subject to review and approval by the
Trustees. As used in this Statement of Additional Information and in the
Prospectus, "a majority of the outstanding voting securities of the Fund" means
the lesser of (1) the holders of more than 50% of the outstanding shares of
beneficial interest of the Fund or (2) 67% of the shares present if more than
50% of the shares are present at a meeting in person or by proxy.
1........Concentration of Assets in Any One Issuer
Diversification of Investments
With respect to 75% of the value of its assets, a Fund will not
purchase securities of any one issuer (other than cash, cash items or securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities)
if as a result more than 5% of the value of its total assets would be invested
in the securities of the issuer. U.S. Government, Intermediate Term Bond and
Intermediate Term Government will not acquire more than 10% of the outstanding
voting securities of any one issuer.
2........Purchase of Securities on Margin
.........No Fund will purchase securities on margin, except that each Fund may
obtain such short-term credits as may be necessary for the clearance of
transactions. A deposit or payment by a Fund of initial or variation margin in
connection with financial futures contracts or related options transactions is
not considered the purchase of a security on margin.
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3........Unseasoned Issuers
.........Neither Short Intermediate Bond* nor U.S. Government* may invest
more than 5% of its total assets in securities of unseasoned issuers that have
been in continuous operation for less than three years, including operating
periods of their predecessors.
4........Underwriting
.........The Funds will not underwrite any issue of securities except as they
may be deemed an underwriter under the Securities Act of 1933 in connection with
the sale of securities in accordance with their investment objectives, policies
and limitations.
5........Interests in Oil, Gas or Other Mineral Exploration or Development
Programs.
Short Intermediate Bond*, Intermediate Term Bond and Intermediate Term
Government will not purchase interests in oil, gas or other mineral exploration
or development programs or leases, although each Fund may purchase the
securities of other issuers which invest in or sponsor such programs.
6........Concentration in Any One Industry
.........Short Intermediate Bond and U.S. Government not will invest more
than 25% of the value of its total assets in any one industry except either Fund
may invest more than 25% of its total assets in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities.
7........Warrants
........ Short Intermediate Bond*, Intermediate Term Bond* and Intermediate Term
Government* will not invest more than 5% of their assets in warrants, including
those acquired in units or attached to other securities. To comply with certain
state restrictions, each Fund will limit its investment in such warrants not
listed on the New York Stock Exchange or the American Stock Exchange to 2% of
its net assets. (If state restrictions change, this latter restriction may be
changed without notice to shareholders.) For purposes of this restriction,
warrants acquired by the Funds in units or attached to securities may be deemed
to be without value.
8.......Ownership by Trustees/Officers
None of Short Intermediate Bond*, U.S. Government*, Intermediate Term
Bond or Intermediate Term Government may purchase or retain the securities of
any issuer if (i) one or more officers or Trustees of a Fund or its investment
adviser individually owns or would own, directly or beneficially, more than 1/2
of 1% of the securities of such issuer, and (ii) in the aggregate, such persons
own or would own, directly or beneficially, more than 5% of such securities.
9.......Short Sales
.........Short Intermediate Bond will not make short sales of securities or
maintain a short position, unless at all times when a short position is open it
owns an equal amount of such securities or of securities which, without payment
of any further consideration are convertible into or exchangeable for securities
12
<PAGE>
of the same issue as, and equal in amount to, the securities sold short. The use
of short sales will allow a Fund to retain certain bonds in its portfolio longer
than it would without such sales. To the extent that the Fund receives the
current income produced by such bonds for a longer period than it might
otherwise, the Fund's investment objective is furthered.
.........U.S. Government, Intermediate Term Bond and Intermediate Term
Government will not sell any securities short.
10.......Lending of Funds and Securities
.........U.S. Government will not lend any of its assets except portfolio
securities in accordance with its investment objectives, policies and
limitations. Short Intermediate Bond will not lend portfolio securities valued
at more than 15% of its total assets to broker-dealers.
.........Intermediate Term Bond and Intermediate Term Government may not make
loans, except that (a) a Fund may purchase or hold debt instruments in
accordance with its investment objective and policies; (b) a Fund may enter into
repurchase agreements, and (c) the Funds may engage in securities lending as
described in the Prospectus and in this Statement of Additional Information.
11.......Commodities
.........Neither of Short Intermediate Bond or U.S. Government will purchase or
sell commodities or commodity contracts; however, each Fund may enter into
futures contracts on financial instruments or currency and sell or buy options
on such contracts. Intermediate Term Bond and Intermediate Term Government may
not purchase commodities or commodities contracts. However, subject to their
permitted investments, any Fund may invest in companies which invest in
commodities and commodities contracts.
12.......Real Estate
.........Short Intermediate Bond and U.S. Government may not buy or sell real
estate although each Fund may invest in securities of companies whose business
involves the purchase or sale of real estate or in securities which are secured
by real estate or interests in real estate.
.........Intermediate Term Bond and Intermediate Term Government may not
purchase or sell real estate, real estate limited partnership interests, and
interests in a pool of securities that are secured by interests in real estate.
However, subject to their permitted investments, any Fund may invest in
companies which invest in real estate.
13.......Borrowing, Senior Securities, Reverse Repurchase Agreements
.........Intermediate Term Bond and Intermediate Term Government will not
borrow money except as a temporary measure for extraordinary or emergency
purposes in an amount up to one-third of the value of total assets, including
the amounts borrowed. Any borrowing will be done from a bank and to the extent
such borrowing exceeds 5% of the value of a Fund's total assets, asset coverage
of at least 300% is required. In the event that such asset coverage shall at any
time fall below 300%, the Fund shall within three days thereafter or such longer
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<PAGE>
period as the Securities and Exchange Commission may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. This borrowing
provision is included soley to facilitate the orderly sale of portfolio
securities to accommodate heavy redemption requests if they should occur and is
not for investment purposes. All borrowings will be repaid before making
additional investments and any interest paid on such borrowings will reduce
income.
U.S. Government will not issue senior securities. However, U.S. Government may
borrow money directly or through reverse repurchase agreements as a temporary
measure for extraordinary or emergency purposes in an amount up to one-third of
the value of its total assets, including the amounts borrowed. Short
Intermediate Bond may borrow only in amounts not in excess of 5% of the value of
its total assets in order to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The entry
by Short-Intermediate Bond into futures contracts shall be deemed a borrowing.
Any such borrowings need not be collateralized. Short Intermediate Bond and U.S.
Government will not purchase any securities while borrowings in excess of 5% of
the value of their total assets are outstanding.
14.......Pledging Assets
..............No Fund will mortgage, pledge or hypothecate any assets except to
secure permitted borrowings. In these cases, Short Intermediate Bond may pledge
assets having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets at the time of borrowing and
Intermediate Term Bond and Intermediate Term Government may do so in amounts up
to 10% of their total assets. Margin deposits for the purchase and sale of
financial futures contracts and related options and segregation or collateral
arrangements made in connection with options activities are not deemed to be a
pledge.
15.......Investing in Securities of Other Investment Companies
..............Short Intermediate Bond and U.S. Government* will purchase
securities of investment companies only in open-market transactions involving
customary broker's commissions. Intermediate Term Bond and Intermediate Term
Government may only purchase securities of other investment companies which are
money market funds and CMOs and REMICs deemed to be investment companies. In
each case the Funds will only make such purchases to the extent permitted by the
Investment Company Act of 1940 and the rules and regulations thereunder.
However, these limitations are not applicable if the securities are acquired in
a merger, consolidation or acquisition of assets. It should be noted that
investment companies incur certain expenses such as management fees and
therefore any investment by a Fund in shares of another investment company would
be subject to such duplicate expenses.
It is the position of the SEC's Staff that certain nongovernmental issuers
of CMOs and REMICs constitute investment companies pursuant to the Investment
Company Act of 1940 and either (a) investments in such instruments are subject
to the limitations set forth above or (b) the issuers of such instruments have
received orders from the SEC's exempting such instruments from the definition of
investment company.
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16.......Restricted Securities
.........Short Intermediate Bond and U.S. Government* will not invest more
than 10% of their net assets (total assets in the case of U.S. Government) in
securities subject to restrictions on resale under the Securities Act of 1933
(except for, in the case of U.S. Government, certain restricted securities which
meet criteria for liquidity established by the Trustees). For U.S. Government,
the restriction is not applicable to commercial paper issued under Section 4(2)
of the Securities Act of 1933.
17........Illiquid Securities
..........Short Intermediate Bond, Intermediate Term Bond* and Intermediate
Term Government* will not invest more than 10% and U.S. Government* will not
invest more than 15% of their net assets in illiquid securities, including
repurchase agreements providing for settlement in more than seven days after
notice and certain securities determined by the Trustees not to be liquid.
18........Options
..........Intermediate Term Bond and Intermediate Government Term may not write
or purchase puts, calls, options or combinations thereof.
19........Control
..........Intermediate Term Bond and Intermediate Government Term may not invest
in companies for the purpose of exercising control.
20.......Other
.........In order to comply with certain state blue sky limitations Short
Intermediate Bond* will not invest in real estate limited partnerships.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Funds did not borrow money, sell securities short, invest in reverse
repurchase agreements in excess of 5% of the value of their net assets, or
invest more than 5% of their net assets in the securities of other investment
companies in the last fiscal year, and have no present intent to do so during
the coming year.
For purposes of their policies and limitations, the Funds consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings and loan association, having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment, to be
"cash items".
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CERTAIN RISK CONSIDERATIONS
There can be no assurance that a Fund will achieve its investment
objectives and an investment in the Fund involves certain risks which are
described under "Description of the Funds - Investment Objectives and Policies"
in the Prospectus.
MANAGEMENT
The age, address and principal occupation of the Trustees and executive
officers of the Evergreen Investment Trust (formerly First Union Funds) and The
Evergreen Lexicon Fund (formerly The FFB Lexicon Fund) (each a "Trust" and
collectively the "Trusts"), during the past five years is set forth below:
James S. Howell (72), 4124 Crossgate Road, Charlotte, NC-Chairman and Trustee.
Retired Vice President of Lance Inc. (food manufacturing); Chairman of the
Distribution Comm. Foundation for the Carolinas from 1989 to 1993.
Laurence B. Ashkin (68), 180 East Pearson Street, Chicago, IL- Trustee. Real
estate developer and construction consultant since 1980; President of Centrum
Equities since 1987 and Centrum Properties, Inc. since 1980.
Foster Bam (69), 2 Greenwich Plaza, Greenwich, CT-Trustee. Partner in the law
firm of Cummings and Lockwood since 1968.
Gerald M. McDonnell (57) 209 Harris Drive, Norfolk, NE-Trustee. Sales
Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
Thomas L. McVerry (58), 4419 Parkview Drive, Charlotte, NC-Trustee. Director of
Carolina Cooperative Federal Credit Union since 1990 and Rexham Corporation from
1988 to 1990; Vice President of Rexham Industries, Inc. (diversified
manufacturer) from 1989 to 1990; Vice President-Finance and Resources, Rexham
Corporation from 1979 to 1990.
William Walt Pettit*(41), Holcomb and Pettit, P.A., 207 West Trade St.,
Charlotte, NC-Trustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990.
Russell A. Salton, III, M.D. (49), 205 Regency Executive Park, Charlotte, NC-
Trustee. Medical Director, U.S. Healthcare of the Charlotte, NC Carolinas 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 prior to 1989.
Robert J. Jeffries (73), 2118 New Bedford Drive, Sun City Center, FL- Trustee
Emeritus. Corporate consultant since 1967.
John J. Pileggi (37), 230 Park Avenue, Suite 910, New York, NY-President and
Treasurer. Senior Managing Director, Furman Selz LLC since 1992, Managing
Director from 1984 to 1992.
Joan V. Fiore (40), 230 Park Avenue, Suite 910, New York, NY-Secretary. Managing
Director and Counsel, Furman Selz LLC since 1991; Staff Attorney, Securities and
Exchange Commission from 1986 to 1991.
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The officers listed above hold the same positions with thirteen
investment companies offering a total of thirty-eight investment funds within
the Evergreen mutual fund complex. Messrs. Howelll, Salton and Scofield are
Trustees of all thirteen investment companies. Messrs. McDonnell, McVerry and
Pettit are Trustees of twelve of the investment companies (excluded is Evergreen
Variable Trust). Messrs. Ashkin, Bam and Jeffries are Trustees of eleven of the
investment companies (excluded are Evergreen Variable Trust and Evergreen
Investment Trust).
- --------
* Mr. Pettit may be deemed to be an "interested person" within the meaning
of the Investment Company Act of 1940, as amended (the "1940 Act").
The officers of each Trust are all officers and/or employees of Furman Selz
LLC. Furman Selz LLC is an affiliate of Evergreen Funds Distributor, Inc., the
distributor of each Class of shares of each Fund.
The Funds do not pay any direct remuneration to any officer or Trustee who
is an "affiliated person" of either First Union National Bank of North Carolina
or Evergreen Asset Management Corp. or their affiliates. See "Investment
Adviser". Currently, none of the Trustees is an "affiliated person" as defined
in the 1940 Act. Evergreen Investment Trust pays each Trustee who is not an
"affiliated person" an annual retainer and a fee per meeting attended, plus
expenses. The Evergreen Lexicon Fund pays each Trustee who is not an "affiliated
person" a fee per meeting attended, plus expenses, as follows:
Name of Fund Annual Retainer Meeting Fee
Evergreen Investment Trust - $15,000** $2,000**
U.S. Government
Short Intermediate Bond
The Evergreen Lexicon Fund - -0-
Intermediate Term Bond $ 100
Intermediate Term Government $ 100
In addition:
(1) Each non-affiliated Trustee is paid a fee of $500 for each special
telephonic meeting in which he participates, regardless of the number
of Funds for which the meeting is called.
(2) The Chairman of the Board of the Evergreen group of mutual funds is
paid an annual retainer of $5,000, and the Chairman of the Audit
Committee is paid an annual retainer of $2,000. These retainers are
allocated among all the funds in the Evergreen group of mutual funds,
based upon assets.
(3) Each member of the Audit Committee is paid an annual retainer of $500.
(4) Any individual who has been appointed as a Trustee Emeritus of one or
more funds in the Evergreen group of mutual funds is paid one-half of
the fees that are payable to regular Trustees.
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- --------------------
** The annual retainer and the per meeting fee paid by Evergreen Investment
Trust to each Trustee are allocated among its fourteen series.
Set forth below for each of the Trustees is the aggregate compensation (and
expenses) paid to such Trustees by The Evergreen Investment Trust for the fiscal
year ended June 30, 1996, and by Evergreen Lexicon Fund for the period from
January 19, 1996(the date of their election as such Trustees) through June 30,
1996:
Aggregate Compensation From Each Trust
Total Compensation
Evergreen From Trust
Name of Evergreen Lexicon & Fund Complex
Trustee Investment Trust Fund Paid To Trustees
James S. Howell
Laurence B. Ashkin
Foster Bam
Gerald M. McDonnell
Thomas L. McVerry
William Walt Pettit
Russell A. Salton, III, M.D.
Michael S. Scofield
Robert Jeffries*
- --------------------
* Robert J. Jeffries has been serving as a Trustee Emeritus since January 1,
1996.
No officer or Trustee of the Trusts owned shares of any Fund as of the date
hereof.
Set forth below is information with respect to each person, who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of
each Fund's total outstanding shares and their aggregate ownership of the Fund's
total outstanding shares as of July 31, 1996.
Name of % of
Name and Address Fund/Class No. of Shares Class/Fund
- ---------------- ---------- ------------- ----------
Fubs & Co. Febo U.S. Government/C 11,037 12.12%/.03%
Helen G. Bender
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C/O First Union National Bank of NC
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo U.S. Government/C 4,583 5.03%/.01%
Douglas H. Thompson, Sr.
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO U.S. Government/C 10,132 11.13%/.03%
William F. Daly Trust and
William F. Daly TTEE
UAD 09/02/77
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union Natl Bank-NJ C/F U.S. Government/C 22,039 24.21%/.07%
Kenneth Friedland IRA
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank U.S. Government/Y 1,352,544 10.23%/4.13%
Trust Accounts
Attn: Ginny Batten
11th FL CMG-151
301 S. Tyron Street
Charlotte, NC 28288
First Union National Bank U.S. Government/Y 4,029,653 30.47%/12.30%
Trust Accounts
Attn: Ginny Batten
11th FL CMG-151
301 S. Tyron Street
Charlotte, NC 28288
Wachovia Bank of Georgia U.S. Government/Y 6,060,653 45.83%/18.50%
Directed Trustee for First Union
Non-Qualified Retirement Plan
U/A Dtd 8/31/94 Investment Act
301 N. Main St. MC-MC 31051
Winston Salem NC 27150
Wachovia Bank of Georgia Trustee U.S. Government/Y 1,483,295 11.22%/4.53%
First Union Corp Retirement Trust
For Non Employee Directors 10/24/94
301 N Main St. MC-NC 31051
Winston Salem, NC 27150
Fubs & Co. Febo Short Intermediate Bond/C 8,054 6.89%/.02%
Kerry D. Fitzgerald GDH
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<PAGE>
Christina Griffin
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Short Intermediate Bond/C 10,277 8.79%/.03%
Lucile L. Murray
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Short Intermediate Bond/C 6,591 5.64%/.02%
Edward C. Fort and
Rachel W. Fort
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Short Intermediate Bond/C 10,729 9.18%/.03%
Dreamland Skating Rink, Inc.
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank* Short Intermediate Bond/Y 11,112,917 31.47%/28.11%
Trust Accounts
Attn: Ginny Batten
11th FL CMG-151
301 S. Tyron Street
Charlotte, NC 28288
First Union National Bank* Short Intermediate Bond/Y 23,795,321 67.39%/60.19%
Trust Accounts
Attn: Ginny Batten
11th FL CMG-151
301 S. Tyron Street
Charlotte, NC 28288
First Union Natl Bank-NY C/F** Intermediate Term Bond/B 3,673 8.17%/.02%
Dorothy G. Beck IRA
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO Intermediate Term Bond/B 2,404 5.35%/.01%
Marie Wilder
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO Intermediate Term Bond/B 3,001 6.67%/.02%
Julia C. Beers
301 S. Tryon Street
Charlotte, NC 28288-0001
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<PAGE>
Fubs & Co. FEBO Intermediate Term Bond/B 7,650 17.01%/.05%
Mary Louise Chatman
Flora Louise Chatman Wages POA
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO Intermediate Term Bond/B 9,745 21.67%/.06%
Frances E. Clyma Rev Trust
Frances E. Clyma Trustee
U/A/D 01/25/96
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union Natl Bank-NC C/F** Intermediate Term Bond/B 3,053 6.79%/.02%
Charles I Allred IRA
301 S. Tryon Street
Charlotte, NC 28288-0001
Margaret S. Collins Intermediate Term Bond/C 1,994 80.56%/.01%
C/O FUNB
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO Intermediate Term Bond/C 453 18.30%/.0%
Chris J. Thigpen
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank** Intermediate Term Bond/Y 4,028,239 25.36%/24.85%
Trust Accounts
Attn: Ginny Batten
301 S. Tryon Street-11th floor
Charlotte, NC 28288-0001
First Union National Bank** Intermediate Term Bond/Y 11,831,720 74.50%/72.97%
Trust Accounts
Attn Ginny Batten
301 S. Tryon Street-11th floor
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/A 4,755 9.29%/.05%
Ignaz Keglovits & Securities
Mary Keglovits Jtten
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/A 2,874 5.62%/.03%
Alice T. Brophy Securities
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
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Fubs & Co. Febo*** Intermediate Term Gov/A 4,412 8.62%/.05%
Doris Mack Securities
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/A 4,967 9.72%/.06%
NJ State Fireman's Assoc. Securities
of Morris Township
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/A 6,810 13.30%/.08%
Upper Saucon Volunteer Fire Securities
Company C/O Joe Hoffstetter
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/B 9,921 26.36%/.11%
Carmela M. Woodruff Securities
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Fidelity Bank C/F Intermediate Term Gov/B 2,547 6.77%/.03%
Kenneth Vanzile IRA Securities
301 S. Tryon St.
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/B 3,038 8.07%/.03%
Attn: Howard J. Carroll Securities
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/B 9,833 26.13%/.11%
Frances E. Clyma Rev Trust Securities
Frances E. Clyma Trustee
U/A/D 01/25/96
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/B 4,433 11.78%/.05%
Frank Decrescenzo and Securities
Anna M. Decrescenzo
301 S. Tryon Street
Charlotte, NC 28288-0001
Paine Webber For the Benefit of Intermediate Term Gov/C 2,914 99.01%/.03%
Robert L. Southwell TTEE Securities
Southwell Family Trust
UAD 12/5/86 as amended
22
<PAGE>
301 S. Tryon St.
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/Y 1,065,448 12.30%/12.17%
Attn: Ginny Batten Securities
Trust Accounts
301 S. Tryon Street-CMG 1151
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/Y 7,593,941 87.65%/86.73%
Attn: Ginny Batten Securities
Trust Accounts
301 S. Tryon Street-CMG 1151
Charlotte, NC 28288-0001
- ---------------------------------
* Acting in various capacities for numerous accounts. As a result of its
ownership of 88.3% of Short-Intermediate Bond on July 31, 1996, First Union
National Bank of North Carolina may be deemed to "control" the Fund as that term
is defined in the 1940 Act.
** Acting in various capacities for numerous accounts. As a result of its
ownership of 97.86% of Intermediate Term Bond on July 31, 1996, First Union
National Bank of North Carolina may be deemed to "control" the Fund as that term
is defined in the 1940 Act.
***Acting in various capacites for numerous accounts. As a result of its
ownership of 99.47% of Intermediate Term Government on July 31, 1996, FUBS & CO.
may be deemed to "control" the Fund as that term is defined in the 1940 Act.
INVESTMENT ADVISER
(See also "Management of the Funds" in each Fund's Prospectus) The
investment adviser of each Fund is First Union National Bank of North Carolina
("FUNB" or the "Adviser") which, in turn, is a subsidiary of First Union
Corporation ("First Union"), a bank holding company headquartered in Charlotte,
North Carolina. FUNB provides investment advisory services through its Capital
Management Group. Prior to January 19, 1996, First Fidelity Bank, N.A. ("First
Fidelity") acted as investment adviser to Intermediate Term Bond and
Intermediate Term Government. On June 18, 1995, First Union, entered into an
Agreement and Plan of Merger with First Fidelity Bancorporation ("FFB"), the
corporate parent of First Fidelity which provided, among other things, for the
merger (the "Merger") of FFB with and into a wholly-owned subsidiary of First
Union. The Merger was consummated on January 19, 1996. As a result of the
Merger, FUNB and its wholly-owned subsidiary, Evergreen Asset Management Corp.,
succeeded to the investment advisory and administrative functions currently
performed by various units of First Fidelity.
Under its Investment Advisory Agreement with each Fund, the Adviser has
agreed to furnish reports, statistical and research services and recommendations
with respect to each Fund's portfolio of investments. In addition, the Adviser
provides office facilities to the Funds and performs a variety of administrative
23
<PAGE>
services. Each Fund pays the cost of all of its other expenses and liabilities,
including expenses and liabilities incurred in connection with maintaining their
registration under the Securities Act of 1933, as amended, and the 1940 Act,
printing prospectuses (for existing shareholders) as they are updated, state
qualifications, mailings, brokerage, custodian and stock transfer charges,
printing, legal and auditing expenses, expenses of shareholder meetings and
reports to shareholders. Notwithstanding the foregoing, the Adviser will pay the
costs of printing and distributing prospectuses used for prospective
shareholders.
The method of computing the investment advisory fee for each Fund is
described in such Fund's Prospectus. The advisory fees paid by each Fund for the
three most recent fiscal periods reflected in its registration statement are set
forth below:
Six Months
U.S. GOVERNMENT Year Ended Ended Year Ended
6/30/96 6/30/95 12/31/94
-------- -------- --------
Advisory Fee $1,507,281 $575,771 $1,355,420
--------- -------- ---------
Waiver ___ ( 7,399) ( 105,523)
Net Advisory Fee $1,507,281 $568,372 $1,249,897
========= ========= =========
Six Months
SHORT INTERMEDIATE Year Ended Ended Year Ended
BOND 6/30/96 6/30/95 12/31/94
---------- -------- --------
Advisory Fee $1,951,949 $961,697 $2,022,773
========= ========= =========
INTERMEDIATE Ten Months Year Ended Year Ended
TERM BOND Ended 6/30/96 8/31/95 8/31/94
------------ -------- --------
Advisory Fee $600,081 $544,577 $561,696
---------- -------- ========
Waiver ( 64,983) ( 128,003) (266,241)
Net Advisory Fee $535,098 $416,554 $298,455
========= ========= =========
INTERMEDIATE Ten Months Year Ended Year Ended
TERM GOVERNMENT Ended 6/30/96 8/31/95 8/31/94
----------- ------- -------
Advisory Fee $506,065 $634,185 $708,958
--------- --------- --------
Waiver ( 61,160) (144, 507) (321,751)
Net Advisery Fee $444,905 $489,678 $387,207
========= ========= =========
24
<PAGE>
Expense Limitations
The Adviser's fee will be reduced by, or the Adviser will reimburse the
Funds for any amount necessary to prevent such expenses (exclusive of taxes,
interest, brokerage commissions and extraordinary expenses, but inclusive of the
Adviser's fee) from exceeding the most restrictive of the expense limitations
imposed by state securities commissions of the states in which the Funds' shares
are then registered or qualified for sale. Reimbursement, when necessary, will
be made monthly in the same manner in which the advisory fee is paid. Currently
the most restrictive state expense limitation is 2.5% of the first $30,000,000
of a Fund's average daily net assets, 2% of the next $70,000,000 of such assets
and 1.5% of such assets in excess of $100,000,000.
The Investment Advisory Agreements are terminable, without the payment of
any penalty, on sixty days' written notice, by a vote of the holders of a
majority of each Fund's outstanding shares, or by a vote of a majority of the
Trust's Trustees or by the Adviser. The Investment Advisory Agreements will
automatically terminate in the event of their assignment. Each Investment
Advisory Agreement provides in substance that the Adviser shall not be liable
for any action or failure to act in accordance with its duties thereunder in the
absence of wilful misfeasance, bad faith or gross negligence on the part of the
Adviser or of reckless disregard of its obligations thereunder. With respect to
U.S. Government and Short Intermediate Bond, the Investment Advisory Agreement
dated February 28, 1985 and amended from time to time thereafter was last
approved by the Trustees on February 8, 1996 and it will continue from year to
year with respect to each Fund provided that such continuance is approved
annually by a vote of a majority of the Trustees including a majority of those
Trustees who are not parties thereto or "interested persons" of any such party
cast in person at a meeting duly called for the purpose of voting on such
approval or by a vote of a majority of the outstanding voting securities of each
Fund. With respect to Intermediate Term Bond and Intermediate Term Government,
the Investment Advisory Agreements dated December 31, 1995 were first approved
by the shareholders of each Fund on December 12, 1995 and will continue until
December 31, 1997 and from year to year with respect to each Fund provided that
such continuance is approved annually by a vote of a majority of the Trustees
including a majority of those Trustees who are not parties thereto or
"interested persons" of any such party cast in person at a meeting duly called
for the purpose of voting on such approval or by a vote of a majority of the
outstanding voting securities of each Fund.
Certain other clients of the Adviser may have investment objectives and
policies similar to those of the Funds. The Adviser may, from time to time, make
recommendations which result in the purchase or sale of a particular security by
its other clients simultaneously with a Fund. If transactions on behalf of more
than one client during the same period increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price or quantity. It is the policy of the Adviser to allocate advisory
recommendations and the placing of orders in a manner which is deemed equitable
by the Adviser to the accounts involved, including the Funds. When two or more
clients of the Adviser (including one or more of the Funds) are purchasing or
selling the same security on a given day from the same broker-dealer, such
transactions may be averaged as to price.
25
<PAGE>
Although the investment objectives of the Funds are not the same, and
their investment decisions are made independently of each other, they rely upon
the same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, the Adviser
attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to
permit purchase and sales transactions to be effected between each Fund and the
other registered investment companies for which either Evergreen Asset
Management Corp., a subsidiary of FUNB ("Evergreen Asset"), or FUNB act as
investment adviser or between the Fund and any advisory clients of Evergreen
Asset, FUNB or their affiliates. Each Fund may from time to time engage in such
transactions but only in accordance with these procedures and if they are
equitable to each participant and consistent with each participant's investment
objectives.
Prior to July 1, 1995, Federated Administrative Services, a subsidiary of
Federated Investors, provided legal, accounting and other administrative
personnel and support services to each of the portfolios of Evergreen Investment
Trust. The Trust paid a fee for such services at the following annual rate: .15%
on the first $250 million average daily net assets of the Trust; .125% on the
next $250 million; .10% on the next $250 million and .075% on assets in excess
of $750 million. For the fiscal year ended June 30, 1996, the fiscal period
ended June 30, 1995, and the fiscal year ended December 31, 1994 U.S.
Government, incurred $159,046, $95,122 and $228,590, respectively, in
administrative service costs of which $0, $0 and $30,827, respectively,
were voluntarily waived. For the fiscal year ended June 30, 1996, the fiscal
period ended June 30, 1995 and the fiscal year ended December 31, 1994 Short
Intermediate Bond incurred $205,938, $159,002 and $341,243, respectively, in
administrative service costs.
Prior to January 19, 1996, SEI Financial Management Company acted as
administrator for Intermediate Term Bond and Intermediate Term Government. For
the ten months ended June 30, 1996, and the fiscal years ended August 31, 1995
and 1994 Intermediate Term Bond incurred $97,364, $154,291 and $159,990,
respectively, in administrative service costs. For ten months ended June 30,
1996 and the fiscal years ended August 31, 1995 and 1994 Intermediate Term
Government incurred $91,283, $179,686 and $200,870, respectively, in
administrative service costs.
Commencing July 8, 1995, in the case of Evergreen Investment Trust, and on
January 19, 1996, in the case of the Evergreen Lexicon Fund, Evergreen Asset has
been providing administrative services to each of the portfolios of the Trusts
for a fee based on the average daily net assets of each Fund administered by
Evergreen Asset for which Evergreen Asset or FUNB also serve as investment
adviser, calculated daily and payable monthly at the following annual rates:
.050% on the first $7 billion; .035% on the next $3 billion; .030% on the next
$5 billion; .020% on the next $10 billion; .015% on the next $5 billion; and
26
<PAGE>
.010% on assets in excess of $30 billion. Furman Selz LLC, an affiliate of
Evergreen Funds Distributor, Inc., distributor for the Evergreen group of mutual
funds (the "Distributor"), serves as sub-administrator to U.S. Government, Short
Intermediate Bond, Intermediate Term Bond and Intermediate Term Government and
is entitled to receive a fee from each Fund calculated on the average daily net
assets of each Fund at a rate based on the total assets of the mutual funds
administered by Evergreen Asset for which FUNB or Evergreen Asset also serve as
investment adviser, calculated in accordance with the following schedule: .0100%
of the first $7 billion; .0075% on the next $3 billion; .0050% on the next $15
billion; and .0040% on assets in excess of $25 billion. The total assets of
mutual funds administered by Evergreen Asset for which Evergreen Asset or FUNB
serves as investment adviser as of July 31, 1996 were approximately $15 billion.
DISTRIBUTION PLANS
Reference is made to "Management of the Funds - Distribution Plans and
Agreements" in the Prospectus of each Fund for additional disclosure regarding
the Funds' distribution arrangements. Distribution fees are accrued daily and
paid monthly on the Class A, B and 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 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 Funds' shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by the Funds
with respect to each of their 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 Plan 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 Trustees who are not
"interested persons" of the Trust (as defined in the 1940 Act) are committed to
the discretion of such disinterested Trustees then in office.
The Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Prior to July 7, 1995, Federated Securities Corp., a subsidiary of
Federated Investors, served as the distributor for U.S. Government and Short
Intermediate Bond as well as other portfolios of Evergreen Investment Trust. The
Distribution Agreements between Evergreen Investment Trust and the Distributor
pursuant to which distribution fees are paid under the Plans by U.S. Government
and Short Intermediate Bond with respect to their Class A, Class B and Class C
shares were approved on April 20, 1995 by the unanimous vote of the Trustees
27
<PAGE>
including the disinterested Trustees voting separately. In the case of The
Evergreen Lexicon Fund, with respect to the Intermediate Term Bond and
Intermediate Term Government, SEI Financial Services Company served as
distributor prior to January 19, 1996. The Distribution Agreements between The
Evergreen Lexicon Fund and the Distributor pursuant to which distribution fees
are paid under the Plans by Intermediate Term Bond and Intermediate Term
Government with respect to their Class A, Class B and Class C shares were
approved on January 19, 1996 by the unanimous vote of the Trustees including the
disinterested Trustees voting separately. 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 (as defined in the 1940 Act) of that Class, and, in either case, by a
majority of the Trustees of the Trust who are not parties to the Distribution
Agreement or interested persons, as defined in the 1940 Act, of any such party
(other than as Trustees of the Trust) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related
thereto.
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services 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 the Funds and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Funds 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 Funds reasonably request for their Class A, Class B and Class C
shares.
In addition to the Plans, the Funds have each adopted a Shareholder
Services Plan whereby shareholder servicing agents may receive fees from the
Funds for providing services which include, but are not limited to, distributing
prospectuses and other information, providing shareholder assistance, and
communicating or facilitating purchases and redemptions of Class B and Class C
shares of the Fund.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
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<PAGE>
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. Amendments to the Shareholder
Services Plan require a majority vote of the disinterested Trustees but do not
require a shareholders vote. Any Plan, Shareholder Services Plan or Distribution
Agreement may be terminated (a) 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 Trustees who are not
"interested persons" as defined in the 1940 Act, or (b) 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.
Fees Paid Pursuant to Distribution Plans: The Funds incurred the following
distribution services fees:
U.S. Government. For the fiscal periods ended June 30, 1995 and 1996, $28,081
and $53,238, respectively, on behalf of Class A shares; and $718,711 and
$1,374,856, respectively, on behalf of Class B shares. For the period from
September 7, 1994 (commencement of operations) to June 30, 1995, and the fiscal
period ended June 30, 1996, $1,194 and $3,646, respectively, on behalf of Class
C shares.
Short-Intermediate Bond. For the fiscal periods ended June 30, 1995 and 1996,
$9,479 and $18,291, respectively, on behalf of Class A shares; and $63,900 and
$143,100, respectively, on behalf of Class B shares. For the period from
September 6, 1994 (commencement of operations) to June 30, 1995, and the fiscal
period ended June 30, 1996, $1,927 and $6,662, respectively, on behalf of Class
C shares.
Intermediate Term Bond. For the ten months ended June 30, 1996(commencement of
operations), $1,055 on behalf of Class A shares; $436 on behalf of Class B
shares; and $26 on behalf of Class C shares.
Intermediate Term Government. For the ten months ended June 30, 1996
(commencement of operations), $ 596 on behalf of Class A shares; $ 419 on behalf
of Class B shares; and $48 on behalf of Class C shares.
Fees Paid Pursuant to Shareholder Services Plans. The Funds incurred the
following shareholder services fees:
U.S. Government. For the fiscal periods ended June 30, 1995 and 1996, $239,571
and $458,285, respectively, on behalf of Class B shares; and $398 and $1,215,
respectively, on behalf of Class C shares.
Short-Intermediate Bond. For the fiscal periods ended June 30, 1995 and 1996,
$21,000 and $47,700, respectively, on behalf of Class B shares; and $643 and
$2,221,
29
<PAGE>
respectively, on behalf on Class C shares.
Intermediate Term Bond. For the ten months ended June 30, 1996 (commencement of
operations), $146 on behalf of Class B shares; and $9 on behalf of Class C
shares.
Intermediate Term Government. For the ten months ended June 30, 1996
(commencement of operations), $140 on behalf of Class B shares; and $16 on
behalf of Class C shares.
ALLOCATION OF BROKERAGE
Decisions regarding each Fund's portfolio are made by its Adviser,
subject to the supervision and control of the Trustees. Orders for the purchase
and sale of securities and other investments are placed by employees of the
Adviser. In general, the same individuals perform the same functions for the
other funds managed by the Adviser. A Fund will not effect any brokerage
transactions with any broker or dealer affiliated directly or indirectly with
the Adviser unless such transactions are fair and reasonable, under the
circumstances, to the Fund's shareholders. Circumstances that may indicate that
such transactions are fair or reasonable include the frequency of such
transactions, the selection process and the commissions payable in connection
with such transactions.
A portion of any transactions in equity securities for each Fund will
occur on domestic stock exchanges. Transactions on stock exchanges involve the
payment of brokerage commissions. In transactions on stock exchanges in the
United States, these commissions are negotiated, whereas on many foreign stock
exchanges these commissions are fixed. In the case of securities traded in the
foreign and domestic over-the-counter markets, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup.
Over-the-counter transactions will generally be placed directly with a principal
market maker, although the Fund may place an over-the-counter order with a
broker-dealer if a better price (including commission) and execution are
available.
It is anticipated that most of each Fund's purchase and sale
transactions involving fixed income securities will be with the issuer or an
underwriter or with major dealers in such securities acting as principals. Such
transactions are normally on a net basis and generally do not involve payment of
brokerage commissions. However, the cost of securities purchased from an
underwriter usually includes a commission paid by the issuer to the underwriter.
Purchases or sales from dealers will normally reflect the spread between bid and
ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Fund shall be prompt execution at the most favorable
price. A Fund will also consider such factors as the price of the securities and
the size and difficulty of execution of the order. If these objectives may be
met with more than one firm, the Fund will also consider the availability of
statistical and investment data and economic facts and opinions helpful to the
Fund. The extent of receipt of such services would tend to reduce the expenses
of the Adviser or its affiliates.
30
<PAGE>
U.S. Government, Short Intermediate Bond, Intermediate Term Bond and
Intermediate Term Government did not pay any commissions to affiliated brokers.
For the fiscal year ended June 30, 1996, the six month ended June 30, 1995, and
the fiscal year ended December 31, 1994, U.S. Government paid $ -0-, $10 and
$180, respectively, in commissions on brokerage transactions. For the fiscal
year ended June 30, 1996, the six month period ended June 30, 1995, and the
fiscal year ended December 31, 1994, Short-Intermediate paid $-0-, $-0- and
$9.198, respectively, in commissions on brokerage transactions. For the ten
month period ended June 30, 1996, and for the fiscal years ended August 31, 1995
and 1994, Intermeditate Term Bond and Intermediate Term Government did not pay
commission on brokerage transactions.
ADDITIONAL TAX INFORMATION
(See also " Other Information - Dividends, Distributions,
and Taxes" in the Prospectus)
Each Fund has qualified and intends to continue to qualify for and
elect the tax treatment applicable to regulated investment companies ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). (Such qualification does not involve supervision of management or
investment practices or policies by the Internal Revenue Service.) In order to
qualify as a regulated investment company, a Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to proceeds from securities loans, gains from the sale or other
disposition of securities or foreign currencies and other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in such securities; (b) derive less than 30% of its gross
income from the sale or other disposition of securities, options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the RIC's principal business of investing in securities (or
options and futures with respect thereto) held for less than three months; and
(c) diversify its holdings so that, at the end of each quarter of its taxable
year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash, U.S. government securities and other securities limited in
respect of any one issuer, to an amount not greater than 5% of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities and securities of other
regulated investment companies). By so qualifying, a Fund is not subject to
Federal income tax if it timely distributes its investment company taxable
income and any net realized capital gains. A 4% nondeductible excise tax will be
imposed on a Fund to the extent it does not meet certain distribution
requirements by the end of each calendar year.
Each Fund anticipates meeting such distribution requirements.
Dividends paid by a Fund from investment company taxable income
generally will be taxed to the shareholders as ordinary income. Investment
company taxable income includes net investment income and net realized
short-term gains (if any). Any dividends received by a Fund from domestic
31
<PAGE>
corporations will constitute a portion of the Fund's gross investment income. It
is anticipated that this portion of the dividends paid by a Fund (other than
distributions of securities profits) will qualify for the 70% dividends-received
deduction for corporations. Shareholders will be informed of the amounts of
dividends which so qualify.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders (who are not exempt from
tax) as long-term capital gain, regardless of the length of time the shares of a
Fund have been held by such shareholders. Short-term capital gains distributions
are taxable to shareholders (who are not exempt from tax) as ordinary income.
Such distributions are not eligible for the dividends-received deduction. Any
loss recognized upon the sale of shares of a Fund held by a shareholder for six
months or less will be treated as a long-term capital loss to the extent that
the shareholder received a long-term capital gain distribution with respect to
such shares.
Distributions of investment company taxable income and any net
short-term capital gains will be taxable as ordinary income as described above
to shareholders (who are not exempt from tax), whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for Federal income tax purposes in each share so
received equal to the net asset value of a share of a Fund on the reinvestment
date.
Distributions by each Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would be taxable as
ordinary income or capital gain as described above to shareholders (who are not
exempt from tax), even though, from an investment standpoint, it may constitute
a return of capital. In particular, investors should be careful to consider the
tax implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive
what is in effect a return of capital upon the distribution which will
nevertheless be taxable to shareholders subject to taxes.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gain or loss
will be treated as a capital gain or loss if the shares are capital assets in
the investor's hands and will be a long-term capital gain or loss if the shares
have been held for more than one year. Generally, any loss realized on a sale or
exchange will be disallowed to the extent shares disposed of are replaced within
a period of sixty-one days beginning thirty days before and ending thirty days
after the shares are disposed of. Any loss realized by a shareholder on the sale
of shares of the Fund held by the shareholder for six months or less will be
disallowed to the extent of any exempt interest dividends received by the
shareholder with respect to such shares, and will be treated for tax purposes as
a long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her Federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
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Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% Federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisers regarding specific questions relating to Federal,
state and local tax consequences of investing in shares of a Fund. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 31% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
NET ASSET VALUE
The following information supplements that set forth in each Prospectus
under the subheading "How to Buy Shares - How the Funds Value Their Shares" in
the Section entitled "Purchase and Redemption of Shares".
The public offering price of shares of a Fund is its net asset value,
plus, in the case of Class A shares, a sales charge which will vary depending on
the purchase alternative chosen by the investor, as more fully described in the
Prospectus. See "Purchase of Shares - Class A Shares - Front-End Sales Charge
"Alternative". On each Fund business day on which a purchase or redemption order
is received by a Fund and trading in the types of securities in which a Fund
invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Declaration of
Trust and By-Laws governing each Fund as of the next close of regular trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time)
by dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any weekday,
exclusive of national holidays on which the Exchange is closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic or
foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked price and portfolio bonds are presently valued by
a recognized pricing service when such prices are believed to reflect the fair
value of the security. Over-the-counter securities not included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one or more brokers. If accurate quotations are not available,
securities will be valued at fair value determined in good faith by the Board of
Trustees.
The respective per share net asset values of the Class A, Class B,
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Class C and Class Y shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the Class B
and Class C shares may be lower than the per share net asset value of the Class
A shares (and, in turn, that of Class A shares may be lower than Class Y shares)
as a result of the greater daily expense accruals, relative to Class A and Class
Y shares, of Class B and Class C shares relating to distribution services fees
and shareholder service fee and, to the extent applicable, transfer agency fees
and the fact that Class Y shares bear no additional distribution, shareholder
service or transfer agency related fees. While it is expected that, in the event
each Class of shares of a Fund realizes net investment income or does not
realize a net operating loss for a period, the per share net asset values of the
four classes will tend to converge immediately after the payment of dividends,
which dividends will differ by approximately the amount of the expense accrual
differential among the Classes, there is no assurance that this will be the
case. In the event one or more Classes of a Fund experiences a net operating
loss for any fiscal period, the net asset value per share of such Class or
Classes will remain lower than that of Classes that incurred lower expenses for
the period.
To the extent that any Fund invests in non-U.S. dollar denominated
securities, the value of all assets and liabilities will be translated into
United States dollars at the mean between the buying and selling rates of the
currency in which such a security is denominated against United States dollars
last quoted by any major bank. If such quotations are not available, the rate of
exchange will be determined in accordance with policies established by the Fund.
The Trustees will monitor, on an ongoing basis, a Fund's method of valuation.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York. In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York. Furthermore, trading takes place in
various foreign markets on days which are not business days in New York and on
which the Fund's net asset value is not calculated. Such calculation does not
take place contemporaneously with the determination of the prices of the
majority of the portfolio securities used in such calculation. Events affecting
the values of portfolio securities that occur between the time their prices are
determined and the close of the Exchange will not be reflected in a Fund's
calculation of net asset value unless the Trustees deem that the particular
event would materially affect net asset value, in which case an adjustment will
be made. Securities transactions are accounted for on the trade date, the date
the order to buy or sell is executed. Dividend income and other distributions
are recorded on the ex-dividend date, except certain dividends and distributions
from foreign securities which are recorded as soon as the Fund is informed after
the ex-dividend date.
PURCHASE OF SHARES
The following information supplements that set forth in each Prospectus
under the heading "Purchase and Redemption of Shares - How To Buy Shares".
General
Shares of each Fund will be offered on a continuous basis at a price
equal to their net asset value plus an initial sales charge at the time of
purchase (the "front-end sales charge alternative"), with a contingent deferred
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sales charge (the deferred sales charge alternative"), or without any front-end
sales charge, but with a contingent deferred sales charge imposed only during
the first year after purchase (the "level-load alternative"), as described
below. Class Y shares which, as described below, are not offered to the general
public, are offered without any front-end or contingent sales charges. Shares of
each Fund are offered on a continuous basis through (i) investment dealers that
are members of the National Association of Securities Dealers, Inc. and have
entered into selected dealer agreements with the Distributor ("selected
dealers"), (ii) depository institutions and other financial intermediaries or
their affiliates, that have entered into selected agent agreements with the
Distributor ("selected agents"), or (iii) the Distributor. The minimum for
initial investments is $1,000; there is no minimum for subsequent investments.
The subscriber may use the Share Purchase Application available from the
Distributor for his or her initial investment. Sales personnel of selected
dealers and agents distributing a Fund's shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Investors may purchase shares of a Fund in the United States either
through selected dealers or agents or directly through the Distributor. A Fund
reserves the right to suspend the sale of its shares to the public in response
to conditions in the securities markets or for other reasons.
Each Fund will accept unconditional orders for its shares to be
executed at the public offering price equal to the net asset value next
determined (plus for Class A shares, the applicable sales charges), as described
below. Orders received by the Distributor prior to the close of regular trading
on the Exchange on each day the Exchange is open for trading are priced at the
net asset value computed as of the close of regular trading on the Exchange on
that day (plus for Class A shares the sales charges). In the case of orders for
purchase of shares placed through selected dealers or agents, the applicable
public offering price will be the net asset value as so determined, but only if
the selected dealer or agent receives the order prior to the close of regular
trading on the Exchange and transmits it to the Distributor prior to its close
of business that same day (normally 5:00 p.m. Eastern time). The selected dealer
or agent is responsible for transmitting such orders by 5:00 p.m. If the
selected dealer or agent fails to do so, the investor's right to that day's
closing price must be settled between the investor and the selected dealer or
agent. If the selected dealer or agent receives the order after the close of
regular trading on the Exchange, the price will be based on the net asset value
determined as of the close of regular trading on the Exchange on the next day it
is open for trading.
Following the initial purchase of shares of a Fund, a shareholder may
place orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Share Purchase Application. Payment for
shares purchased by telephone can be made only by Electronic Funds Transfer from
a bank account maintained by the shareholder at a bank that is a member of the
National Automated Clearing House Association ("ACH"). If a shareholder's
telephone purchase request is received before 3:00 p.m. Eastern time on a Fund
business day, the order to purchase shares is automatically placed the same Fund
business day for non-money market funds, and two days following the day the
order is received for money market funds, and the applicable public offering
price will be the public offering price determined as of the close of business
on such business day. Full and fractional shares are credited to a subscriber's
account in the amount of his or her subscription. As a convenience to the
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subscriber, and to avoid unnecessary expense to a Fund, stock certificates
representing shares of a Fund are not issued. This facilitates later redemption
and relieves the shareholder of the responsibility for and inconvenience of lost
or stolen certificates.
Alternative Purchase Arrangements
Each Fund issues four classes of shares: (i) Class A shares, which are
sold to investors choosing the front-end sales charge alternative; (ii) Class B
shares, which are sold to investors choosing the deferred sales charge
alternative; (iii) Class C shares, which are sold to investors choosing the
level-load sales charge alternative; and (iv) Class Y shares, which are offered
only to (a) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (b) certain investment advisory clients
of the Evergreen Asset, FUNB and their affiliates, and (c) institutional
investors. The four classes of shares each represent an interest in the same
portfolio of investments of the Fund, have the same rights and are identical in
all respects, except that (I) only Class A, Class B and Class C shares are
subject to a Rule 12b-1 distribution fee, (II) only Class B and Class C shares
are subject to a shareholder service fee, (III) Class A shares bear the expense
of the front-end sales charge and Class B and Class C shares bear the expense of
the deferred sales charge, (IV) Class B shares and Class C shares each bear the
expense of a higher Rule 12b-1 distribution services fee and applicable
shareholder service fee than Class A shares and, in the case of Class B shares,
higher transfer agency costs, (V) with the exception of Class Y shares, each
Class of each Fund has exclusive voting rights with respect to provisions of the
Rule 12b-1 Plan pursuant to which its distribution services (and, to the extent
applicable, shareholder service) fee is paid which relates to a specific Class
and other matters for which separate Class voting is appropriate under
applicable law, provided that, if the Fund submits to a simultaneous vote of
Class A, Class B and Class C shareholders an amendment to the Rule 12b-1 Plan
that would materially increase the amount to be paid thereunder with respect to
the Class A shares, the Class A shareholders and the Class B and Class C
shareholders will vote separately by Class, and (VI) only the Class B shares are
subject to a conversion feature. Each Class has different exchange privileges
and certain different shareholder service options available.
The alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the accumulated distribution services and
shareholder service fees (if applicable) and contingent deferred sales charges
on Class B shares prior to conversion, or the accumulated distribution services
and shareholder service fees (if applicable) on Class C shares, would be less
than the front-end sales charge and accumulated distribution services fee on
Class A shares purchased at the same time, and to what extent such differential
would be offset by the higher return of Class A shares. Class B and Class C
shares will normally not be suitable for the investor who qualifies to purchase
Class A shares at the lowest applicable sales charge. For this reason, the
Distributor will reject any order (except orders for Class B shares from certain
retirement plans) for more than $2,500,000 for Class B or Class C shares.
Class A shares are subject to a lower distribution services fee and no
shareholder service fee and, accordingly, pay correspondingly higher dividends
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per share than Class B shares or Class C shares. However, because front-end
sales charges are deducted at the time of purchase, investors purchasing Class A
shares would not have all their funds invested initially and, therefore, would
initially own fewer shares. Investors not qualifying for reduced front-end sales
charges who expect to maintain their investment for an extended period of time
might consider purchasing Class A shares because the accumulated continuing
distribution and shareholder service charges on Class B shares or Class C shares
may exceed the front-end sales charge on Class A shares during the life of the
investment. Again, however, such investors must weigh this consideration against
the fact that, because of such front-end sales charges, not all their funds will
be invested initially.
Other investors might determine, however, that it would be more
advantageous to purchase Class B shares or Class C shares in order to have all
their funds invested initially, although remaining subject to higher continuing
distribution services and applicable shareholder service fees and, in the case
of Class B shares, being subject to a contingent deferred sales charge for a
seven-year period. For example, based on current fees and expenses, an investor
subject to the 4.75% front-end sales charges imposed by the Evergreen Equity or
Long-Term Bond Funds(U.S. Government) or the 3.25% front-end sales charges
imposed by the Evergreen Intermediate and Short-Term Bond Funds
(Short-Intermediate Bond, Intermediate-Term Bond or Intermediate-Term
Government), would have to hold his or her investment approximately seven years
for the Class B and Class C distribution services and shareholders service fees
to exceed the front-end sales charges plus the accumulated distribution services
fees of Class A shares. In this example, an investor intending to maintain his
or her investment for a longer period might consider purchasing Class A shares.
This example does not take into account the time value of money, which further
reduces the impact of the Class B and Class C distribution services and
applicable shareholder service fees on the investment, fluctuations in net asset
value or the effect of different performance assumptions.
Those investors who prefer to have all of their funds invested
initially but may not wish to retain Fund shares for the seven year period
during which Class B shares are subject to a contingent deferred sales charge
may find it more advantageous to purchase Class C shares.
With respect to each Fund, the Trustees have determined that currently
no conflict of interest exists between or among the Class A, Class B, Class C
and Class Y shares. On an ongoing basis, the Trustees, pursuant to their
fiduciary duties under the 1940 Act and state laws, will seek to ensure that no
such conflict arises.
Front-end Sales Charge Alternative--Class A Shares
The public offering price of Class A shares for purchasers choosing the
front-end sales charge alternative is the net asset value plus a sales charge as
set forth in the Prospectus for each Fund.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are not subject to any sales charges.
The Fund receives the entire net asset value of its Class A shares sold to
investors. The Distributor's commission is the sales charge set forth in the
Prospectus for each Fund, less any applicable discount or commission "reallowed"
to selected dealers and agents. The Distributor will reallow discounts to
selected dealers and agents in the amounts indicated in the table in the
Prospectus. In this regard, the Distributor may elect to reallow the entire
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sales charge to selected dealers and agents for all sales with respect to which
orders are placed with the Distributor.
Set forth below is an example of the method of computing the offering
price of the Class A shares of each Fund. The example assumes a purchase of
Class A shares of a Fund aggregating less than $100,000 subject to the schedule
of sales charges set forth in the Prospectus at a price based upon the net asset
value of Class A shares of each Fund at the end of each Fund's latest fiscal
year.
Net Per Share Offering
Asset Sales Price
Value Charge Date Per Share
U.S. Government $ 9.42 $.47 6/28/96 $ 9.89
Short Intermediate $ 9.82 $.33 6/28/96 $ 10.15
Bond
Intermediate Term $ 10.10 $.34 6/28/96 $ 10.44
Bond
Intermediate Term $ 9.99 $.34 6/28/96 $ 10.33
Government
With respect to U.S. Government and Short-Intermediate Bond, the
following commissions were paid to and amounts were retained by Federated
Securities Corp., through July 7, 1995, which until such date was the principal
underwriter of portfolios of The Evergreen Lexicon Fund. For the period from
July 8, 1995 through June 30, 1996, commissions were paid to and amounts were
retained by the current Distributor as noted below.
Period from Seven Days Six Months
7/8/95 to 6/30/96 Ended 7/8/95 Ended Year Ended
6/30/95 12/31/94
U.S. GOVERNMENT:
Commissions Received $159,666 __ $104,303 $450,000
Commissions Retained $ 16,558 __ $ 3,599 $10,000
Six Months
Ended Year Ended
SHORT-INTERMEDIATE BOND: 6/30/95 12/31/94
Commissions Received $74,999.18 __ $39,906 $247,000
Commissions Retained 9,559.73 __ $1,334 $21,000
With respect to Intermediate Term Bond and Intermediate Term
Government, the following commissions were paid to and amounts were retained by
SEI Financial
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Securities Company, through January 19, 1996, which until such date was the
principal underwriter of portfolios of Evergreen Investment Trust. For the
period from January 20, 1996 through June 30, 1996, commissions were paid to and
amounts were retained by the current Distributor as noted below.
Period from Period from Period from
1/20/96 to 6/30/96 9/1/95 to 1/19/96 5/2/95 to 8/31/95
INTERMEDIATE TERM BOND
Commissions Received
Commissions Retained
INTERMEDIATE TERM GOVERNMENT
Commissions Received
Commissions Retained
Investors choosing the front-end sales charge alternative may under
certain circumstances be entitled to pay reduced sales charges. The
circumstances under which such investors may pay reduced sales charges are
described below.
Combined Purchase Privilege. Certain persons may qualify for the sales
charge reductions by combining purchases of shares of one or more Evergreen
mutual funds other than money market funds into a single "purchase", if the
resulting "purchase" totals at least $100,000. The term "purchase" refers to:
(i) a single purchase by an individual, or to concurrent purchases, which in the
aggregate are at least equal to the prescribed amounts, by an individual, his or
her spouse and their children under the age of 21 years purchasing shares for
his, her or their own account(s); (ii) a single purchase by a trustee or other
fiduciary purchasing shares for a single trust, estate or single fiduciary
account although more than one beneficiary is involved; or (iii) a single
purchase for the employee benefit plans of a single employer. The term
"purchase" also includes purchases by any "company", as the term is defined in
the 1940 Act, but does not include purchases by any such company which has not
been in existence for at least six months or which has no purpose other than the
purchase of shares of a Fund or shares of other registered investment companies
at a discount. The term "purchase" does not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit card holders of a company, policy holders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
A "purchase" may also include shares, purchased at the same time through a
single selected dealer or agent, of any Evergreen mutual fund. Currently, the
Evergreen mutual funds include:
Evergreen Trust
The Evergreen Fund
Evergreen Aggressive Growth Fund
The Evergreen Total Return Fund
The Evergreen Limited Market Fund, Inc.
The Evergreen Growth and Income Fund
The Evergreen Money Market Fund
The Evergreen American Retirement Trust
The Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
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The Evergreen Municipal Trust:
Evergreen Short-Intermediate Municipal Fund
Evergreen Short-Intermediate Municipal Fund-CA
Evergreen Tax Exempt Money Market Fund
Evergreen Florida High Income Municipal Bond Fund
Evergreen Equity Trust
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
Evergreen Foundation Trust:
Evergreen Tax Strategic Foundation Fund
Evergreen Foundation Fund
Evergreen Investment Trust
Evergreen Emerging Markets Growth Fund*
Evergreen International Equity Fund*
Evergreen Balanced Fund*
Evergreen Utility Fund*
Evergreen Value Fund*
Evergreen Short-Intermediate Bond Fund*
(formerly Evergreen Fixed-Income Fund)
Evergreen U.S. Government Fund*
Evergreen Treasury Money Market Fund*
Evergreen Florida Municipal Bond Fund*
Evergreen Georgia Municipal Bond Fund*
Evergreen North Carolina Municipal Bond Fund*
Evergreen South Carolina Municipal Bond Fund*
Evergreen Virginia Municipal Bond Fund*
Evergreen High Grade Tax Free Fund*
The Evergreen Lexicon Fund
Evergreen Intermediate-Term Bond Fund**
Evergreen Intermediate-Term Government Securities Fund**
Evergreen Tax Free Trust
Evergreen Pennsylvania Tax Free Money Market Fund***
Evergreen New Jersey Tax-Free Income Fund***
Evergreen Variable Trust
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
* Prior to July 7,1995,each Fund was named "First Union" instead of "Evergreen"
** Prior to January 19, 1996, each Fund was a series of The FFB Lexicon Fund.
***Prior to January 19, 1996, each Fund was a series of FFB Fund Trust.
Prospectuses for the Evergreen mutual funds may be obtained without charge
by contacting the Distributor or the Adviser at the telephone number shown on
the front cover of this Statement of Additional Information.
Cumulative Quantity Discount (Right of Accumulation). An investor's
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purchase of additional Class A shares of a Fund may qualify for a Cumulative
Quantity Discount.
The applicable sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the
previous day) of (a) all Class A, Class B and Class C
shares of the Fund held by the investor and (b) all
such shares of any other Evergreen mutual fund held by
the investor; and
(iii) the net asset value of all shares described in paragraph
(ii) owned by another shareholder eligible to combine his
or her purchase with that of the investor into a
single "purchase" (see above).
For example, if an investor owned Class A, B or C shares of an Evergreen
mutual fund worth $200,000 at their then current net asset value and ,
subsequently, purchased Class A shares worth an additional $100,000, the sales
charge for the $100,000 purchase, in the case of any of the Evergreen Group of
Evergreen Intermediate or Short-Term Bond Fund (Short-Intermediate Bond,
Intermediate-Term Bond, and Intermediate Government), would be at the 2.00% rate
applicable to a single $300,000 purchase rather than the 2.50% rate or, in the
case of any Evergreen Equity or Long-Term Bond Fund (U.S. Government), at the
2.50% rate applicable to a single $300,000 purchase rather than the 3.75% rate.
To qualify for the Combined Purchase Privilege or to obtain the Cumulative
Quantity Discount on a purchase through a selected dealer or agent, the investor
or selected dealer or agent must provide the Distributor with sufficient
information to verify that each purchase qualifies for the privilege or
discount.
Statement of Intention. Class A investors may also obtain the reduced sales
charges shown in the Prospectus by means of a written Statement of Intention,
which expresses the investor's intention to invest not less than $100,000 within
a period of 13 months in Class A shares (or Class A, Class B and/or Class C
shares) of the Fund or any other Evergreen mutual fund. Each purchase of shares
under a Statement of Intention will be made at the public offering price or
prices applicable at the time of such purchase to a single transaction of the
dollar amount indicated in the Statement of Intention. At the investor's option,
a Statement of Intention may include purchases of Class A, B or C shares of the
Fund or any other Evergreen mutual fund made not more than 90 days prior to the
date that the investor signs a Statement of Intention; however, the 13-month
period during which the Statement of Intention is in effect will begin on the
date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege described above
may purchase shares of the Evergreen mutual funds under a single Statement of
Intention. For example, if at the time an investor signs a Statement of
Intention to invest at least $100,000 in Class A shares of a Fund, the investor
and the investor's spouse each purchase shares of the Fund worth $20,000 (for a
total of $40,000), it will only be necessary to invest a total of $60,000 during
the following 13 months in shares of the Fund or any other Evergreen mutual
fund, to qualify for the 3.75% sales charge applicable to
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purchases in any of Evergreen Equity or Long-Term Bond Fund (U.S.
Government), or 2.50% applicable to purchases in an Evergreen Intermediate or
Short-Term Bond Fund (Short-Intermediate Bond, Intermediate-Term Bond or
Intermediate-Term Government), on the total amount being invested (the sales
charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Statement of Intention is 5% of such amount. Shares purchased with the first 5%
of such amount will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge applicable to the
shares actually purchased if the full amount indicated is not purchased, and
such escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow. When the full
amount indicated has been purchased, the escrow will be released. To the extent
that an investor purchases more than the dollar amount indicated on the
Statement of Intention and qualifies for a further reduced sales charge, the
sales charge will be adjusted for the entire amount purchased at the end of the
13-month period. The difference in sales charge will be used to purchase
additional shares of the Fund subject to the rate of sales charge applicable to
the actual amount of the aggregate purchases.
Investors wishing to enter into a Statement of Intention in conjunction
with their initial investment in Class A shares of a Fund should complete the
appropriate portion of the Purchase Application found in the Prospectus
while current Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting a Fund at the address or telephone number
shown on the cover of this Statement of Additional Information.
Investments Through Employee Benefit and Savings Plans. Certain qualified
and non-qualified benefit and savings plans may make shares of the Evergreen
mutual funds available to their participants. Investments made by such employee
benefit plans may be exempt from any applicable front-end sales charges if they
meet the criteria set forth in the Prospectus under "Class A Shares- Front End
Sales Charge Alternative". The Adviser may provide compensation to organizations
providing administrative and recordkeeping services to plans which make shares
of the Evergreen mutual funds available to their participants.
Reinstatement Privilege. A Class A shareholder, who has caused any or all
of his or her shares of a Fund to be redeemed or repurchased, may reinvest all
or any portion of the redemption or repurchase proceeds in Class A shares of the
Fund at net asset value without any sales charge, provided that such
reinvestment is made within 30 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net asset value next
determined as described above. A reinstatement pursuant to this privilege will
not cancel the redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for Federal tax purposes except that no loss will
be recognized to the extent that the proceeds are reinvested in shares of the
Fund. The reinstatement privilege may be used by the shareholder only once,
irrespective of the number of shares redeemed or repurchased, except that the
privilege may be used without limit in connection with transactions whose sole
purpose is to transfer a shareholder's interest in the Fund to his or her
individual retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written request sent to
the Fund at the address shown on the cover of this Statement of Additional
Information.
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Sales at Net Asset Value. In addition to the categories of investors set
forth in the Prospectus, each Fund may sell its Class A shares at net asset
value, i.e., without any sales charge, to: (i) certain investment advisory
clients of Evergreen Asset, FUNB or their affiliates; (ii) officers and present
or former Trustees of the Trusts; present or former trustees of other investment
companies managed by the Adviser; present or retired full-time employees of the
Adviser; officers, directors and present or retired full-time employees of the
Adviser, the Distributor, and their affiliates; officers, directors and present
and full-time employees of selected dealers or agents; or the spouse, sibling,
direct ancestor or direct descendant (collectively "relatives") of any such
person; or any trust, individual retirement account or retirement plan account
for the benefit of any such person or relative; or the estate of any such person
or relative, if such shares are purchased for investment purposes (such shares
may not be resold except to the Fund); (iii) certain employee benefit plans for
employees of the Adviser, the Distributor and their affiliates; (iv) persons
participating in a fee-based program, sponsored and maintained by a registered
broker-dealer and approved by the Distributor, pursuant to which such persons
pay an asset-based fee to such broker-dealer, or its affiliate or agent, for
service in the nature of investment advisory or administrative services. These
provisions are intended to provide additional job-related incentives to persons
who serve the Funds or work for companies associated with the Funds and selected
dealers and agents of the Funds. Since these persons are in a position to have a
basic understanding of the nature of an investment company as well as a general
familiarity with the Fund, sales to these persons, as compared to sales in the
normal channels of distribution, require substantially less sales effort.
Similarly, these provisions extend the privilege of purchasing shares at net
asset value to certain classes of institutional investors who, because of their
investment sophistication, can be expected to require significantly less than
normal sales effort on the part of the Funds and the Distributor.
Deferred Sales
Charge Alternative--Class B Shares
Investors choosing the deferred sales charge alternative purchase Class B
shares at the public offering price equal to the net asset value per share of
the Class B shares on the date of purchase without the imposition of a sales
charge at the time of purchase. The Class B shares are sold without a front-end
sales charge so that the full amount of the investor's purchase payment is
invested in the Fund initially.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used by the Distributor to defray the expenses of the
Distributor related to providing distribution-related services to the Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to selected dealers and agents for selling Class B shares. The
combination of the contingent deferred sales charge and the distribution
services fee and the applicable shareholder service fee enables the Fund to sell
the Class B shares without a sales charge being deducted at the time of
purchase. The higher distribution services fee and the applicable shareholder
service fee incurred by Class B shares will cause such shares to have a higher
expense ratio and to pay lower dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
seven years of purchase will be subject to a contingent deferred sales charge at
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the rates set forth in the Prospectus charged as a percentage of the dollar
amount subject thereto. The charge will be assessed on an amount equal to the
lesser of the cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed on increases in
net asset value above the initial purchase price. In addition, no contingent
deferred sales charge will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The amount of the contingent deferred
sales charge, if any, will vary depending on the number of years from the time
of payment for the purchase of Class B shares until the time of redemption of
such shares.
In determining the contingent deferred sales charge applicable to a
redemption, it will be assumed, that the redemption is first of any Class A
shares or Class C shares in the shareholder's Fund account, second of Class B
shares held for over seven years or Class B shares acquired pursuant to
reinvestment of dividends or distributions, and third of Class B shares held,
longest during the seven-year period.
To illustrate, assume that an investor purchased 100 Class B shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B shares upon dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 Class B shares, 10 Class B
shares will not be subject to charge because of dividend reinvestment. With
respect to the remaining 40 Class B shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net asset value of $2
per share. Therefore, of the $600 of the shares redeemed $400 of the redemption
proceeds (40 shares x $10 original purchase price) will be charged at a rate of
4.0% (the applicable rate in the second year after purchase for a contingent
deferred sales charge of $16).
The contingent deferred sales charge is waived on redemptions of shares (i)
following the death or disability, as defined in the Code, of a shareholder, or
(ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Conversion Feature. At the end of the period ending seven years after the
end of the calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A shares and will
no longer be subject to a higher distribution services fee and the applicable
shareholder service fee imposed on Class B shares. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose of the conversion
feature is to reduce the distribution services fee paid by holders of Class B
shares that have been outstanding long enough for the Distributor to have been
compensated for the expenses associated with the sale of such shares.
For purposes of conversion to Class A, Class B shares purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares in
a shareholder's account will be considered to be held in a separate sub-account.
Each time any Class B shares in the shareholder's account (other than those in
the sub-account) convert to Class A, an equal pro-rata portion of the Class B
shares in the sub-account will also convert to Class A.
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The conversion of Class B shares to Class A shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee and applicable shareholder
service fee and transfer agency costs with respect to Class B shares does not
result in the dividends or distributions payable with respect to other Classes
of a Fund's shares being deemed "preferential dividends" under the Code, and
(ii) the conversion of Class B shares to Class A shares does not constitute a
taxable event under Federal income tax law. The conversion of Class B shares to
Class A shares may be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, no further conversions of Class
B shares would occur, and shares might continue to be subject to the higher
distribution services fee and applicable shareholder services fee for an
indefinite period which may extend beyond the period ending eight years after
the end of the calendar month in which the shareholder's purchase order was
accepted.
Level-Load Alternative--Class C Shares
Investors choosing the level load sales charge alternative purchase Class C
shares at the public offering price equal to the net asset value per share of
the Class C shares on the date of purchase without the imposition of a front-end
sales charge. However, you will pay a 1.0% contingent deferred sales charge if
you redeem shares during the first year after purchase. No charge is imposed in
connection with redemptions made more than one year from the date of purchase.
Class C shares are sold without a front-end sales charge so that the Fund will
receive the full amount of the investor's purchase payment and after the first
year without a contingent deferred sales charge so that the investor will
receive as proceeds upon redemption the entire net asset value of his or her
Class C shares. The Class C distribution services fee and applicable shareholder
service fee enables the Fund to sell Class C shares without either a front-end
or contingent deferred sales charge. However, unlike Class B shares, Class C
shares do not convert to any other class shares of the Fund. Class C shares
incur higher distribution services fees and applicable shareholder service fees
than Class A shares, and will thus have a higher expense ratio and pay
correspondingly lower dividends than Class A shares.
Class Y Shares
Class Y shares are not offered to the general public and are available only
to (i) persons who at or prior to December 30, 1994 owned shares in a mutual
fund advised by Evergreen Asset, (ii) certain investment advisory clients of
Evergreen Asset, FUNB and their affiliates, and (iii) institutional investors.
Class Y shares do not bear any Rule 12b-1 distribution expenses and are not
subject to any front-end or contingent deferred sales charges.
GENERAL INFORMATION ABOUT THE FUNDS
(See also "Other Information - General Information" in each Fund's Prospectus)
Capitalization and Organization
The Evergreen U.S. Government Fund and Evergreen Short Intermediate Bond
Fund(formerly Evergreen Fixed Income Fund), which prior to July 7, 1995 were
known as the First Union U.S. Government Portfolio and First Union Fixed Income
Portfolio respectively, are each separate series of Evergreen Investment Trust,
a Massachusetts business trust. On July 7, 1995, First Union Funds changed its
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name to Evergreen Investment Trust. On December 14, 1992, The Salem Funds
changed its name to First Union Funds. The Trust is governed by a Board of
Trustees.
Evergreen Intermediate Term Bond Bond Fund and Evergreen Intermediate Term
Government Securities Fund, which prior to January 19, 1996, were known as the
Fixed Income Fund and the Intermediate Term Government Securities Fund,
respectively, are each separate series of The Evergreen Lexicon Fund, a
Massachusetts business trust. On January 19, 1996, The FFB Lexicon Fund changed
its name to The Evergreen Lexicon Fund.
Each Fund may issue an unlimited number of shares of beneficial interest
with a $0.0001 par value. All shares of these Funds have equal rights and
privileges. Each share is entitled to one vote, to participate equally in
dividends and distributions declared by the Funds and on liquidation to their
proportionate share of the assets remaining after satisfaction of outstanding
liabilities. Shares of these Funds are fully paid, nonassessable and fully
transferable when issued and have no pre-emptive, conversion or exchange rights.
Fractional shares have proportionally the same rights, including voting rights,
as are provided for a full share.
Under each Trust's Declaration of Trust, each Trustee will continue in
office until the termination of the Trust or his or her earlier death,
incapacity, resignation or removal. Shareholders can remove a Trustee upon a
vote of two-thirds of the outstanding shares of beneficial interest of the
Trust. Vacancies will be filled by a majority of the remaining Trustees, subject
to the 1940 Act. As a result, normally no annual or regular meetings of
shareholders will be held, unless otherwise required by the Declaration of Trust
of each Trust or the 1940 Act.
Shares have noncumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of Trustees can elect 100%
of the Trustees if they choose to do so and in such event the holders of the
remaining shares so voting will not be able to elect any Trustees.
The Trustees of each Trust are authorized to reclassify and issue any
unissued shares to any number of additional series without shareholder approval.
Accordingly, in the future, for reasons such as the desire to establish one or
more additional portfolios of a Trust with different investment objectives,
policies or restrictions, additional series of shares may be created by one or
more Funds. Any issuance of shares of another series or class would be governed
by the 1940 Act and the law of the Commonwealth of Massachusetts. If shares of
another series of the Trust were issued in connection with the creation of
additional investment portfolios, each share of the newly created portfolio
would normally be entitled to one vote for all purposes. Generally, shares of
all portfolios would vote as a single series on matters, such as the election of
Trustees, that affected all portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of the Investment
Advisory Agreement and changes in investment policy, shares of each portfolio
would vote separately.
In addition any Fund may, in the future, create additional classes of
shares which represent an interest in the same investment portfolio. Except for
the different distribution related and other specific costs borne by such
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additional classes, they will have the same voting and other rights described
for the existing classes of each Fund.
Procedures for calling a shareholders meeting for the removal of the
Trustees of each Trust, similar to those set forth in Section 16(c) of the 1940
Act will be available to shareholders of each Fund. The rights of the holders of
shares of a series of a Fund may not be modified except by the vote of a
majority of the outstanding shares of such series.
An order has been received from the SEC permitting the issuance and sale of
multiple classes of shares representing interests in each Fund. In the event a
Fund were to issue additional Classes of shares other than those described
herein, no further relief from the SEC would be required.
Distributor
Evergreen Funds Distributor, Inc. (the "Distributor"), 230 Park Avenue,
New York, New York 10169, serves as each Fund's principal underwriter, and as
such may solicit orders from the public to purchase shares of any Fund. The
Distributor is not obligated to sell any specific amount of shares and will
purchase shares for resale only against orders for shares. Under the agreement
between the Fund and the Distributor, the Fund has agreed to indemnify the
Distributor, in the absence of its willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations thereunder, against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
Counsel
Sullivan & Worcester LLP, Washington, D.C., serves as counsel to the
Funds.
Independent Auditors
KPMG Peat Marwick LLP has been selected to be the independent auditors of
the Funds.
PERFORMANCE INFORMATION
Total Return
From time to time a Fund may advertise its "total return". Computed
separately for each class, the Fund's "total return" is its average annual
compounded total return for recent one, five, and ten-year periods (or the
period since the Fund's inception). The Fund's total return for such a period is
computed by finding, through the use of a formula prescribed by the Securities
and Exchange Commission, the average annual compounded rate of return over the
period that would equate an assumed initial amount invested to the value of such
investment at the end of the period. For purposes of computing total return,
income dividends and capital gains distributions paid on shares of the Fund are
assumed to have been reinvested when paid and the maximum sales charge
applicable to purchases of Fund shares is assumed to have been paid. The Fund
will include performance data for Class A, Class B, Class C and Class Y shares
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in any advertisement or information including performance data of the Fund.
With respect to Intermediate Term Bond and Intermediate Term
Government, Class B and Class C shares were not being offered as of August 31,
1995. The average annual compounded total return for each Class of shares
offered by the Funds for the most recently completed one, five and ten year
fiscal periods is set forth in the table below.
U.S. GOVERNMENT 1 Year From
Ended (inception)*
6/30/96 to 6/30/96
Class A (.68%) 3.80%
Class B (1.38%) 3.87%
Class C 2.52% 6.45%
Class Y 4.54% 4.20%
SHORT INTERMEDIATE 1 Year 5 Years From
BOND Ended Ended (inception)**
6/30/96 6/30/96 to 6/30/95
Class A 1.05% 6.18% 7.20%
Class B (1.28%) -- 3.43%
Class C 2.53% -- 5.70%
Class Y 4.63% 7.06% 7.04%
Ten Months From
Ended (inception)***
INTERMEDIATE TERM 6/28/96 to 6/28/96
BOND
Class A (.62%) 3.85%
Class B -- (8.34%)
Class C -- (.68%)
Class Y 2.28% 7.16%
Ten Months From
Ended (inception)+
INTERMEDIATE TERM 6/28/96 to 6/28/96
GOVERNMENT
Class A (.35%) 3.01%
Class B -- (6.89)
Class C -- (.12%)
Class Y 3.00% 5.77%
* Inception date: Class A - January 11, 1993; Class B - January 11, 1993; Class
C - September 2, 1994; Class Y - September 2, 1993.
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** Inception date: Class A - January 31, 1989; Class B - January 25, 1993; Class
C - September 6, 1994; Class Y - December 31, 1990.
***Inception date: Class A - May 2, 1995; Class B - January 30, 1996; Class C-
April 29, 1996; Class Y - November 1, 1991;
+ Inception date: Class A - May 2, 1995; Class B February 9, 1996; Class C -
April 10, 1996; Class Y -November 1, 1991.
A Fund's total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and quality of the
securities in a Fund's portfolio and its expenses. Total return information is
useful in reviewing a Fund's performance but such information may not provide a
basis for comparison with bank deposits or other investments which pay a fixed
yield for a stated period of time. An investor's principal invested in a Fund is
not fixed and will fluctuate in response to prevailing market conditions.
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other communications to shareholders. Yield quotations are expressed
in annualized terms and may be quoted on a compounded basis. Yields are computed
by dividing the Fund's interest income (as defined in the Securities and
Exchange Commission's yield formula) for a given 30-day or one month period, net
of expenses, by the average number of shares entitled to receive distributions
during the period, dividing this figure by the Fund's net asset value per share
at the end of the period and annualizing the result (assuming compounding of
income) in order to arrive at an annual percentage rate. The formula for
calculating yield is as follows:
YIELD = 2[(a-b% cd + 1]
Where a = Interest earned during the period
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of shares outstanding during the period
that were entitled to receive dividends
d = The maximum offering price per share on the last day of the period
Income is calculated for purposes of yield quotations in accordance
with standardized methods applicable to all stock and bond funds. Gains and
losses generally are excluded from the calculation. Income calculated for
purposes of determining a Fund's yield differs from income as determined for
other accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yields quoted for
a Fund may differ from the rate of distributions a Fund paid over the same
period, or the net investment income reported in a Fund's financial statements.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
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fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Funds'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of the Fund's investments, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite can be expected to occur.
The yield of each Fund for the thirty-day period ended June 28, 1996
for each Class of shares offered by the Funds is set forth in the table below:
U.S. Government Intermediate Term Bond
Class A - 6.73% Class A - 5.70%
Class B - 5.99% Class B - 4.71%
Class C - 5.99% Class C - 4.71%
Class Y - 6.98% Class Y - 5.69%
Short Intermediate Bond Intermediate Term Government Class
Class A - 6.50% Class A - 5.59%
Class B - 5.67% Class B - 4.71%
Class C - 5.67% Class C - 4.50%
Class Y - 6.65% Class Y - 5.59%
Non-Standardized Performance
In addition to the performance information described above, a Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
GENERAL
From time to time, a Fund may quote its performance in advertising and
other types of literature as compared to the performance of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, Lehman
Brothers Intermediate Government Bond Index, or any other commonly quoted index
of common stock and bond prices. The Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average and the Lehman Brothers Intermediate
Government Bond Index are unmanaged indices of selected common stock and bond
prices. A Fund's performance may also be compared to those of other mutual funds
having similar objectives. This comparative performance would be expressed as a
ranking prepared by Lipper Analytical Services, Inc. or similar independent
services monitoring mutual fund performance. A Fund's performance will be
calculated by assuming, to the extent applicable, reinvestment of all capital
gains distributions and income dividends paid. Any such comparisons may be
useful to investors who wish to compare a Fund's past performance with that of
its competitors. Of course, past performance cannot be a guarantee of future
results.
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Additional Information
Any shareholder inquiries may be directed to the shareholder's broker or to
the Adviser at the address or telephone number shown on the front cover of this
Statement of Additional Information. This Statement of Additional Information
does not contain all the information set forth in the Registration Statement
filed by the Trusts with the SEC under the Securities Act of 1933. Copies of the
Registration Statement may be obtained at a reasonable charge from the SEC or
may be examined, without charge, at the offices of the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Each Fund's financial statements appearing in their most current fiscal
year Annual Report to shareholders and the report thereon of KPMG Peat Marwick
LLP the independent auditors appearing therein are incorporated by reference in
this Statement of Additional Information. The Annual Reports to Shareholders for
each Fund, which contain the referenced statements, are available upon request
and without charge.
APPENDIX A - DESCRIPTION OF BOND, MUNICIPAL NOTE AND COMMERCIAL
PAPER RATINGS
APPENDIX "A"
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Service. A Standard & Poor's corporate or
municipal bond rating is a current assessment of the credit worthiness of an
obligor with respect to a specific obligation. This assessment of credit
worthiness may take into consideration obligers such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
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terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or their arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay interest and
repay any principal.
AA - Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest and repay principal is very strong and in the majority
of instances they differ from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
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is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate and municipal issues. The ratings
measure the credit worthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
rating symbols Moody's Investors Service, Inc. and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
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protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible
risk factors; AA -- high credit quality, with strong protection factors and
modest risk, which may vary very slightly from time to time because of economic
conditions; A-- average credit quality with adequate protection factors, but
with greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating categories.
Fitch Investors Service Inc.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA --very high
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credit quality, with very strong ability to pay interest and repay principal; A
- -- high credit quality, considered strong as regards principal and interest
protection, but may be more vulnerable to adverse changes in economic conditions
and circumstances. The indicators "+" and "-" to the AA, A and BBB categories
indicate the relative position of credit within those rating categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
o Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.) Note rating symbols
are as follows:
o SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
o SP-2 Satisfactory capacity to pay principal and interest.
o SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for state and
municipal short-term obligations will be designated Moody's Investment Grade
(MIG). This distinction is in recognition of the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the borrower
are uppermost in importance in short-term borrowing, while various factors of
major importance in bond risk are of lesser importance over the short run.
Rating symbols and their meanings follow:
o MIG 1 - This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
o MIG 2 - This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
o MIG 3 - This designation denotes favorable quality. All security elements
are accounted for but this is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
o MIG 4 - This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
55
<PAGE>
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.: Commercial paper rated "Prime" carries the
smallest degree of investment risk. The modifiers 1, 2, and 3 are used to denote
relative strength within this highest classification.
Standard & Poor's Ratings Service: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service Inc.: F-1+ -- denotes exceptionally strong
credit quality given to issues regarded as having strongest degree of assurance
for timely payment; F-1 -- very strong, with only slightly less degree of
assurance for timely payment than F-1+; F-2 -- good credit quality, carrying a
satisfactory degree of assurance for timely payment.
56
<PAGE>
KEYSTONE GOVERNMENT SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 29, 1996
AS SUPPLEMENTED JANUARY 1, 1997
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Government Securities Fund (the "Fund") dated November 29, 1996, as
supplemented. You may obtain a copy of the prospectus from the Fund's principal
underwriter, Evergreen Keystone Distributor, Inc., or your broker-dealer.
Evergreen Keystone Distributor, Inc. is located at 230 Park Avenue, New York,
New York 10169.
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TABLE OF CONTENTS
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Page
The Fund ............................................................... 2
Investment Policies .................................................... 2
Investment Restrictions ................................................ 3
Distributions And Taxes ................................................ 5
Valuation of Securities ................................................ 5
Brokerage .............................................................. 6
Sales Charges .......................................................... 8
Distribution Plans ..................................................... 10
Trustees And Officers .................................................. 13
Investment Adviser ..................................................... 16
Principal Underwriter .................................................. 18
Sub-administrator ...................................................... 19
Declaration of Trust ................................................... 20
Standardized Total Return And Yield Quotations ......................... 21
Additional Information ................................................. 22
Financial Statements ................................................... 24
Appendix ............................................................... A-1
<PAGE>
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THE FUND
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The Fund is an open-end, diversified management investment company
commonly known as a mutual fund. The Fund was formed as a Massachusetts business
trust on October 24, 1986.
Keystone Investment Management Company ("Keystone") is the Fund's
investment adviser. Evergreen Keystone Distributor, Inc. (formerly Evergreen
Funds Distributor, Inc.) ("EKD" or the "Principal Underwriter") 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.
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INVESTMENT POLICIES
- --------------------------------------------------------------------------------
The National Housing Act authorizes the Government National Mortgage
Association ("GNMA") to guarantee the timely payment of principal and interest
on securities backed by a group (or pool) of mortgages insured by the Federal
Housing Administration ("FHA") or the Farmers' Home Administration ("FMHA"), or
guaranteed by the Veteran's Administration ("VA"). The GNMA guarantee is backed
by the full faith and credit of the U.S. government. GNMA is also empowered to
borrow without limitation from the U.S. Treasury if necessary to make any
payments required under its guarantee.
LIFE OF GNMA CERTIFICATES
The average life of GNMA certificates 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 will usually
result in the return of the greatest part of principal invested well before the
maturity of the mortgages in the pool. (Note: Due to the GNMA guarantee,
foreclosures impose no risk to principal investment.)
Because prepayment rates of individual mortgage pools will vary widely,
it is not possible to accurately predict the average life of a particular issue
of GNMA certificates. However, statistics published by the FHA are normally used
as an indicator of the expected average life of GNMA certificates. These
statistics indicate that the average life of single-family dwelling mortgages
with 25-30 years maturities, the type of mortgages backing the vast majority of
GNMA certificates, is approximately 12 years. For this reason, it is standard
practice to treat GNMA certificates as 30-year mortgage-backed securities that
prepay fully in the twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES
The coupon rate of interest of GNMA certificates is lower than the
interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying the
certificates, but only by the amount of the fee paid to GNMA and the issuer. For
the most common type of mortgage pool, containing single family dwelling
mortgages, GNMA receives an annual fee based on the outstanding principal for
providing its guarantee, and the issuer is paid an annual fee for assembling the
mortgage pool and for passing through monthly payments of interest and principal
to certificate holders.
For the following reasons, the coupon rate by itself is not indicative
of the yield that will be earned on the certificates:
1. certificates may be issued at a premium or discount, rather than at
par;
2. after issuance, certificates may trade in the secondary market at a
premium or discount;
3. interest is earned monthly, rather than semi-annually as for
traditional bonds, and monthly compounding has the effect of raising the
effective yield earned on GNMA certificates; and
4. the actual yield of each GNMA certificate is influenced by the
prepayment experience of the mortgage pool underlying the certificate; i.e., if
mortgagors pay off their mortgages early, the principal returned to certificate
holders may be reinvested at more or less favorable rates.
In determining yields for GNMA certificates, the standard practice is
to assume that the certificates will have a 12-year life. Compared on this
basis, GNMA certificates have historically yielded more than high grade
corporate bonds and U.S. government and U.S. government agency bonds. As the
life of individual pools may vary widely, however, the actual yield earned on
any issue of GNMA certificates may differ significantly from the yield estimated
on the assumption of a 12-year life.
MARKET FOR GNMA CERTIFICATES
Since the inception of the GNMA mortgage-backed securities program in
1970, the amount of GNMA certificates outstanding has grown rapidly. The size of
the market and the active participation in the secondary market by securities
dealers and many types of investors make the GNMA certificate a highly liquid
instrument. 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 the certificate.
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund has adopted the fundamental investment restrictions set forth
below. These restrictions may not be changed without the vote of a majority of
the Fund's outstanding voting shares (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), which means the lesser of (1) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (2) more than 50% of the outstanding shares). Unless
otherwise stated, all references to the assets of the Fund are in terms of
current market value. The Fund may not do the following:
1. purchase any security (other than U.S. government securities) of any
issuer if as a result more than 5% of its total assets would be invested in
securities of the issuer, except that up to 25% of its total assets may be
invested without regard to this limit;
2. purchase securities on margin, except that it may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities;
3. make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or of securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short;
4. borrow money or enter into reverse repurchase agreements, except
that the Fund may enter into reverse repurchase agreements or borrow money from
banks for temporary or emergency purposes in aggregate amounts up to one-third
of the value of the Fund's net assets; provided that while borrowings exceed 5%
of the Fund's net assets, any such borrowings will be repaid before additional
investments are made;
5. pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis or collateral
arrangement with respect to the writing of options on securities are not deemed
to be a pledge of assets;
6. issue senior securities; the purchase or sale of securities on a
"when issued" basis or collateral arrangement with respect to the writing of
options on securities are not deemed to be the issuance of a senior security;
7. make loans, except that the Fund may (a) purchase or hold debt
securities consistent with its investment objective, (b) lend portfolio
securities valued at not more than 15% of its total assets to broker-dealers,
and (c) enter into repurchase agreements;
8. purchase any security if more than 25% of its total assets would be
invested in securities of issuers in a single industry except that (a) there is
no restriction with respect to obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities; (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; (c)
the industry classification of utilities will be determined according to their
services (for example, gas, gas transmission, electric and telephone will each
be considered a separate industry); and (d) the industry classification of
medically related industries will be determined according to their services (for
example, management, hospital supply, medical equipment and pharmaceuticals will
each be considered a separate industry);
9. invest more than 10% of its total assets in securities with legal or
contractual restrictions on resale or in securities for which market quotations
are not readily available or in repurchase agreements maturing in more than
seven days;
10. invest more than 5% of its total assets in securities of any
company having a record, together with its predecessors, of less than three
years of continuous operation;
11. purchase securities of other investment companies except in
connection with a merger, consolidation, reorganization, purchase of assets or
similar transaction;
12. purchase or sell commodities or commodity contracts or real estate,
except that the Fund may purchase securities and sell securities secured by real
estate and securities of companies which invest in real estate; and may engage
in currency or other financial futures contracts and related options
transactions; and
13. underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund will make distributions to its shareholders from net
investment income monthly and net capital gains, if any, annually in shares or,
at the option of the shareholder, in cash. Shareholders who have not opted,
prior to the record date for any distribution, to receive cash will receive a
number of distributed shares determined on the basis of the amount of the
distribution and 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 within seven days after the Fund pays the
distribution. Unless the Fund receives instructions to the contrary 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.
Distributions are taxable whether received in cash or additional
shares. Distributed long-term capital gains are taxable as such to the
shareholder, regardless of how long the shareholder has held the Fund shares. If
such shares are held for less than six months and redeemed at a loss, however,
the shareholder will recognize a long-term capital loss on such shares to the
extent of the long-term capital gain distribution received in connection with
such shares. If the net asset value of the Fund's shares is reduced below a
shareholder's cost by a capital gains distribution, such distribution, to the
extent of the reduction, would be a return of investment though taxable as
stated above. Since distributions of capital gains depend upon profits actually
realized from the sale of securities by the Fund, they may or may not occur. The
foregoing comments relating to the taxation of dividends and distributions paid
on the Fund's shares relate solely to federal income taxation.
Such dividends and distributions may also be subject to state and local taxes.
When the Fund makes a distribution, it intends to distribute only 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.
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VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined as
follows:
(1) securities traded in the over-the-counter market are valued at the
mean of the bid and asked prices at the time of valuation, provided that a sale
has occurred and that this price reflects current market value according to
standards established by the Fund's Board of Trustees;
(2) short-term investments maturing in or with remaining maturities of
sixty days or less are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount), plus either
accrued interest or amortized discount;
(3) all other securities for which market quotations are readily
available are valued at current market value; and
(4) securities, including restricted securities, for which
market quotations are not readily available and other assets are valued at
prices deemed in good faith to be fair under procedures established by the
Fund's Board of Trustees.
The Fund believes that reliable market quotations are generally not
readily available for purposes of valuing U.S. Government Guaranteed Securities,
other than Treasury bills, and certain Other Eligible Securities. As a result,
it is likely that most of the valuations for such securities will be based upon
their fair value determined under procedures that have been approved by the
Fund's Board of Trustees. The Fund's Board of Trustees has authorized the use of
a pricing service to determine the fair value of such securities.
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BROKERAGE
- --------------------------------------------------------------------------------
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large
block is involved;
4. the broker`s readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker; 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 (as defined below). 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.
BROKERAGE COMMISSIONS
The Fund may seek to maximize the rate of return on its portfolio by
engaging in short-term trading consistent with its investment objective. Such
trading will occur primarily in anticipation of or in response to market
developments, including a rise or fall in interest rates. In addition, a
security may be sold and another purchased at approximately the same time to
take advantage of what Keystone believes to be a temporary disparity in the
normal yield relationship between the two securities. Yield disparities may
occur for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, due to such things as changes
in the overall demand for, or supply of, various types of U.S. Government
Guaranteed Securities (as defined in the Fund's prospectus) and Other Eligible
Securities (as defined in the Fund's prospectus) or changes in the investment
objectives of investors. This policy of short-term trading may result in a
higher portfolio turnover and increased expenses.
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.
The Fund paid no brokerage commissions during the fiscal years ended
July 31, 1994, 1995 and 1996.
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SALES CHARGES
- --------------------------------------------------------------------------------
The Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, the Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. 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 Plans"). If imposed, the Fund deducts CDSCs 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 its predecessor.
See the prospectus for additional information on a particular class.
CLASS DISTINCTIONS
Class A Shares
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
Class B Shares
The Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
the Fund charges a CDSC on shares redeemed as follows:
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 purchased after January 1, 1997, 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 Evergreen Keystone Service
Company (formerly Keystone Investor Resource Center, Inc.) ("EKSC") the Fund's
transfer and dividend disbursing agent.)
Class C Shares
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Fund
offers Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Fund will charge a CDSC of 1.00%, if you redeem
shares purchased after January 1, 1997, 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.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares. Upon request for redemption, the
Fund will redeem shares not subject to the CDSC first. Thereafter, the Fund will
redeem shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
Exchanges
The Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, the Fund will compute any
future CDSC based upon the date you originally purchased the shares you tendered
for exchange.
Waiver of Sales Charges
Purchases of the Fund's Class A shares made after January 1, 1997, (i)
in the amount of $1 million or more; (ii) by 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"); or (iii) by (a) institutional investors, which may
include bank trust departments and registered investment advisers; (b)
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; (c) clients of investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisers or
financial planners on the books of the broker-dealer through whom shares are
purchased; (d) institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with the Fund by the broker-dealer;
and (e) employees of First Union National Bank of North Carolina ("FUNB") and
its affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
Shares of the Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations, or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
Keystone, the Principal Underwriter, and certain of their affiliates who have
been such for not less than ninety days, and to members of the immediate
families of such persons; (2) a pension and profit-sharing plan established by
such companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees, and sales representatives;
or (3) a registered representative of a firm with a dealer agreement with the
Principal Underwriter; provided, however, that all such sales are made upon the
written assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No initial sales charge or CDSC is imposed on purchases or redemptions
of shares of the Fund 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 or any fund in the Keystone Investments Family of Funds, purchased
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 Class C shares purchased by a Qualifying Plan, no CDSC
will be imposed on any redemptions made specifically by an individual
participant in the Qualifying Plan. This waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund
in the event of (1) death or disability of the shareholder; (2) a lump-sum
distribution from a benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of an
account having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under a Systematic Income Plan of up to 1.0% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
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DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").
The Fund's Class A, B, and C Distribution Plans have been approved by
the Fund's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees").
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1.00% of the aggregate average daily net asset
value of its shares, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the Distribution Plan, plus interest at
the prime rate plus 1% on such amounts (less any CDSCs paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is currently limited to 0.25% of the Fund's
average daily net asset value attributable to Class A shares, to finance any
activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to the
Principal Underwriter of the Fund to enable the Principal Underwriter to pay or
to have paid to others who sell Class A shares a service or other fee, at any
such intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans provide that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class B shares sold since inception of a Distribution Plan; (2) to enable the
Principal Underwriter to pay or to have paid to others a service fee, at such
intervals as the Principal Underwriter may determine, in respect of Class B
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share
sold. The broker-dealer or other party may also receive service fees at an
annual rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient and outstanding on the books of the Fund for
specified periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with the Class B
Distribution Plans that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund ("Advances"). The Principal
Underwriter intends to seek full reimbursement of such Advances from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
reimbursements of Advances, the effect would be to extend the period of time
during which the Fund incurs the maximum amount of costs allowed by the Class B
Distribution Plans.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to the
Principal Underwriter sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning approximately June 1, 1995 through
November 30, 1996. The Fund has agreed not to reduce the rate of payment of
12b-1 fees in respect of such Class B shares unless it terminates such shares'
Distribution Plan completely. If it terminates such Distribution Plans, the Fund
may be subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to
compensate broker-dealers or other persons for distributing shares of the Fund
will be provided by FUNB or its affiliates.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class C shares sold since inception of the Distribution Plan; (2) to enable
the Principal Underwriter to pay or to have paid to others a service fee, at
such intervals as the Principal Underwriter may determine, in respect of Class C
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, broker-dealers or others receive a commission at an
annual rate of 0.75% (subject to NASD rules) plus service fees at the annual
rate of 0.25%, respectively, of the average daily net asset value of each Class
C share maintained by the recipient and outstanding on the books of the Fund for
specified periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Trustees to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a 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 each amendment.
While a Distribution Plan is in effect, the Fund will be 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 Plans have
benefited the Fund.
For the fiscal year ended July 31, 1996, the Fund paid the Principal
Underwriter $66,218, $197,134 ($150,440 with respect to Class B shares sold
prior to June 1, 1995 and $46,694 with respect to Class B shares sold on or
after June 1, 1995) and $86,726, respectively, pursuant to its Class A, Class B
and Class C Distribution Plans.
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TRUSTEES AND OFFICERS
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Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone 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 Keystone 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 Keystone 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 Keystone 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, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, Chief
Executive Officer 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 Keystone 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 Keystone 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 Keystone 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 Keystone 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).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone 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 Keystone Investments Families of Funds;
Chairman and Of Counsel, Keyser, Crowley & Meub,
P.C.; Member, Governor's (VT) Council of Economic
Advisers; Chairman of the Board and Director, Central
Vermont Public Service Corporation and 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 Keystone 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 Keystone 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 Keystone 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 Keystone Investments Families of Funds;
Vice Chair and former Executive Vice President, DHR
International, Inc. (executive recruitment); former
Senior Vice President, Boyden International Inc.
(executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
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 Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Attorney, Law
Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone 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 Keystone 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.
* 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. See "Sub-administrator."
During the fiscal year ended July 31, 1996, no Trustee or 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 more than thirty mutual funds) for the calendar year ended December 31,
1995 totaled approximately $450,716. As of October 31, 1996, the Trustees and
officers beneficially owned less than 1% of the Fund's then outstanding Class A,
Class B and Class C shares, respectively.
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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INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, 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, were acquired (the "Acquisition") by 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 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 investment manager to the Fund, 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. The fee rate paid by the
Fund for the services provided by Keystone and its affiliates has not changed as
a result of the Acquisition.
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. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees of Independent
Trustees; (5) brokerage commissions, brokers' fees and expenses; (6) issue and
transfer taxes; (7) costs and expenses under the Distribution Plan; (8) taxes
and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for the Fund and for the Independent Trustees of
the Fund on matters relating to the Fund; (14) charges and expenses 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 of:
Net Asset Value
Management of the Shares
Fee Income of the Fund
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2.0% of Gross Dividend
and Interest Income,
plus
0.50% of the first $ 100,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000
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.
During the fiscal year ended July 31, 1996, the Fund paid or accrued to
Keystone Management, the Fund's former investment manager, investment management
and administrative services fees of $365,012 (0.65% of the Fund's average daily
net asset value). Of such amount, $310,260 was paid to Keystone for its
investment advisory services to the Fund.
During the fiscal year ended July 31, 1995, the Fund paid or accrued to
Keystone Management, the Fund's former investment manager, investment management
and administrative services fees of $404,773 (0.66% of the Fund's average daily
net asset value). Of such amount, $344,057 was paid to Keystone for its
investment advisory services to the Fund.
During the fiscal year ended July 31, 1994, the Fund paid or accrued to
Keystone Management, the Fund's former investment manager, investment management
and administrative services fees of $498,981 (0.64% of the Fund's average daily
net asset value). Of such amount, $424,134 was paid to Keystone for its
investment advisory services to the Fund.
Keystone voluntarily limits expenses of Class A shares to 1.15% of
average net assets annually and has limited expenses of each of Class B and
Class C shares to 1.90% of average net assets annually. Keystone currently
intends to continue these expense limitations on a calendar month-by-month
basis. Keystone will periodically evaluate these expense limits and may modify
or terminate them in the future. In accordance with expense limitations in
effect for the fiscal year ended July 31, 1996, Keystone reimbursed the Fund
$74,053, $54,565 and $24,301 for Class A, Class B and Class C shares,
respectively. In any event, Keystone would not be required to make such
reimbursement to the extent that it would result in the Fund's inability to
qualify as a regulated investment company under the Code.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, 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.
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 Agreements provide that the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. The Principal
Underwriter or EKIS, its predecessor, may receive payments from the Fund
pursuant to the Fund's Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the public offering price of the shares, which is determined in accordance
with the provisions of the Fund's Declaration of Trust, By-Laws, current
prospectuses and statement of additional information. All orders are subject to
acceptance by the Fund and the Fund reserves the right, in its sole discretion,
to reject any order received. Under the Underwriting Agreements, the Fund is not
liable to anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
The Principal Underwriter has agreed that it will, in all respects,
duly conform with all state and federal laws applicable to the sale of the
shares. The Principal Underwriter has also agreed that it will indemnify and
hold harmless the Fund and each person who has been, is, or may be a Trustee or
officer of the Fund against expenses reasonably incurred by any of them in
connection with any claim, action, suit, or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
Each 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.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each 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.
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SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
Furman Selz provides officers and certain administrative services to
the Fund pursuant to a sub-administration 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.
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.
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated October 24, 1986 (the "Declaration of Trust"). The
Fund is similar in most respects to a business corporation. The principal
distinction between the Fund and a corporation relates to the shareholder
liability described below. A copy of the Declaration of Trust is on file as an
exhibit to the Registration Statement of which this statement of additional
information is a part. This summary is qualified in its entirety by reference to
the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund is
authorized to issue additional classes or series of shares. The Fund currently
issues Class A, B, and C shares, but may issue additional classes or series of
shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Fund were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because the
Fund's Declaration of Trust (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 the Fund's property for any shareholder held personally liable for the
obligations of the Fund.
VOTING RIGHTS
Under the terms of the Declaration of Trust, 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. Classes of shares of the
Fund have equal voting rights except that each class of shares has exclusive
voting rights with respect to its respective Distribution Plan. No amendment may
be made to the Declaration of Trust that adversely affects any class of shares
without the approval of a majority of the shares of that class. Shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of the Trustees to
be elected at a meeting and, in such event, the holders of the remaining 50% or
less of the shares voting will not be able to elect any Trustees.
After an initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law or until such time as less than a majority of the Trustees holding office
have been elected by shareholders, at which time the Trustees then in office
will call a shareholders' meeting for 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 be removed from or cease to hold office (as the case may
be) (1) at any time by 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 Fund's outstanding shares.
Any Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
The Trustees have absolute and exclusive control over the management
and disposition of 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.
- --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
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Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment, all dividends and distributions are added and the maximum sales
charge deducted 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 compounded average annual rate of return for Class A for the period
April 14, 1987 through July 31, 1996 was 7.10%. The compounded average annual
rate of return for Class A for the five year and one year periods ended July 31,
1996 was 6.12% and (0.45%), respectively. The compounded average annual rate of
return for the Fund's Class B and Class C for the period from February 1, 1993
(commencement of operations) through July 31, 1996 was 3.43% and 4.17%,
respectively. The compounded average annual rate of return for the Fund's Class
B and Class C for the one year period ended July 31, 1996 was (0.29%) and 3.62%,
respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund's current yield for
Class A, Class B and Class C for the 30-day period ended July 31, 1996 was
6.01%, 5.55% and 5.55%, respectively.
<PAGE>
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ADDITIONAL INFORMATION
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REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized 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
GENERAL
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian of all securities and cash of the Fund
(the "Custodian"). The Custodian performs no investment management functions for
the Fund, but, in addition to its custodial services, is responsible for
accounting and related record keeping on behalf of the Fund.
EKSC, located at 200 Berkeley Street, Boston, MA 02116-5034, is a
wholly-owned subsidiary of Keystone, and serves as transfer agent and dividend
disbursing agent for the Fund.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the Fund's independent auditors.
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.
As of October 31, 1996, Merrill, Lynch, Pierce, Fenner & Smith, 4800
Dear Lake Drive, E., Jacksonville, FL 32245-6484, owned 17.968% of the Fund's
outstanding Class A shares, 18.110% of the Fund's outstanding Class B shares,
and 17.015% of the Fund's outstanding Class C shares. Additional persons owning
more than 5.00% of the Fund's outstanding Class C shares and the percentage
owned by each are as follows: Dale R. Kremer, John H. Bausch, Jr. Execs U/W
Eleanor L. Deutsch, P.O.Box 372, Danville, PA 17821-0372, 12.389%; First Federal
Savings and Loan Association, ATTN: Robert Schneidler, 212 N. Franklin Street,
Greensburg, IN 47240-1735, 12.086%; and Donaldson Lufkin & Jenrette Securities
Corp., Mutual Funds Dept-5th Floor, P.O. Box 2052, Jersey City, NJ 07303-2052,
6.060%.
The Fund's prospectus and 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.
The Fund is one of 16 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
In addition to the Fund, the Keystone America Funds consist of the following
funds having the various investment objectives described below:
KEYSTONE BALANCED FUND II - Seeks current income and capital appreciation
consistent with the preservation of capital.
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities (up to
50%).
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND (formerly Keystone Strategic
Development Fund) - Seeks long-term capital growth by investing primarily in
equity securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long-term capital growth by
investing primarily in equity securities with small market capitalizations.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of five separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds.
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
<PAGE>
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FINANCIAL STATEMENTS
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The following financial statements of the Fund are incorporated by
reference herein to the Fund's Annual Report, as filed with the
Commission:
Schedule of Investments and Statement of Assets and Liabilities as of
July 31, 1996;
Statement of Operations for the year ended July 31, 1996;
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1996;
Financial Highlights for each of the years in the nine-year period
ended July 31, 1996 and the period from February 13, 1987
(commencement of operations) to July 31, 1987 for Class A shares;
Financial Highlights for each of the years in the three-year period
ended July 31, 1996, and for the period from February 1, 1993 (date of
initial public offering) to July 31, 1993 for Class B and for Class C
shares;
Notes to Financial Statements; and
Independent Auditors' Report dated September 6, 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.
<PAGE>
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APPENDIX
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MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes) and obligations
issued or guaranteed by the United States ("U.S.") government, its agencies or
instrumentalities, some of which may be subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper will consist of issues rated at the time of purchase
A-1 by Standard & Poor's Corporation ("S&P") or PRIME-1 by Moody's Investors
Service, Inc. ("Moody's") or F-1 by Fitch Investors Services, Inc. ("Fitch's");
or, if not rated, will be issued by companies which have an outstanding debt
issue rated at the time of purchase Aaa, Aa or A by Moody's, or AAA, AA or A by
S&P, or will be determined by Keystone to be of COMPARABLE QUALITY.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
2. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated PRIME-1 (or related supporting institutions) are
deemed to have a superior capacity for repayment of short term promissory
obligations. Repayment capacity of Prime-1 issuers is normally evidenced by the
following characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate reliance on
debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial charges and
high internal cash generation; and
5) well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
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 United States banks, including their branches abroad, and of
United States branches of foreign banks, which are members of the Federal
Reserve System or the Federal Deposit Insurance Corporation, and have at least
$1 billion in assets 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.
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. Although 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 assets at the time of purchase in excess of $1 billion and must be payable
in U.S.
dollars.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and securities issued by the GNMA. 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. GNMA securities include GNMA mortgage
pass-through certificates. Such securities are supported by the full faith and
credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the U.S.,
Small Business Administration, 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 securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. 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 under standards established by the Board of Trustees that the credit
risk with respect to the instrumentality does not make its securities unsuitable
investments. U.S. government securities do not include international agencies or
instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the Interamerican Development Bank, or issues insured by Federal Deposit
Insurance Corporation.
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 U.S., 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 "AA and "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
6. CI - The rating CI is reserved for income bonds on which no interest
is being paid.
7. D - Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
3. A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
4. Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. Ba - Bonds which are rated Ba are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
7. Caa - Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
8. Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
market shortcomings.
9. C - Bonds which are rated as C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 AND 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund writes only covered options. Options
written by the Fund will normally have expiration dates of not more than nine
months from the date written. The exercise price of the options may be below,
equal to, or above the current market values of the underlying securities at the
times the options are written.
Unless the option has been exercised, the Fund may close out an option
it has written by effecting a closing purchase transaction, whereby it purchases
an option covering the same underlying security and having the same exercise
price and expiration date ("of the same series") as the one it has written. If
the Fund desires to sell a particular security on which it has written a call
option, it will effect a closing purchase transaction prior to or concurrently
with the sale of the security. If the Fund is able to enter into a closing
purchase transaction, the Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option.
An option position may be closed out only in a secondary market for an
option of the same series. 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.
Because the Fund intends to qualify as a regulated investment company
under the Internal Revenue Code, the extent to which the Fund may write covered
call options and enter into so-called "straddle" transactions involving put and
call options may be limited.
Many options are traded on registered securities exchanges. Options
traded on such exchanges are issued by the Options Clearing Corporation ("OCC"),
a clearing corporation which assumes responsibility for the completion of
options transactions.
PURCHASING PUT AND CALL OPTIONS. The Fund can close out a put option it
has purchased by effecting a closing sale transaction; for example, the Fund may
close out a put option it has purchased by selling a put option. If, however, a
secondary market does not exist at a time the Fund wishes to effect a closing
sale transaction, the Fund will have to exercise the option to realize any
profit. In addition, in a transaction in which the Fund does not own the
security underlying a put option it has purchased, the Fund would be required,
in the absence of a secondary market, to purchase the underlying security before
it could exercise the option. In each such instance, the Fund would incur
additional transaction costs.
The Fund may also purchase call options for the purpose of offsetting
previously written call options of the same series.
The Fund will not purchase a put option if, as a result of such
purchase, more than 10% of its total assets would be invested in premiums for
such options. The Fund's ability to purchase put and call options may be limited
by the Internal Revenue Code's requirements for qualification as a regulated
investment company.
OPTION WRITING AND RELATED RISKS
The Fund may write covered call and put options. A call option gives
the purchaser of the option the right to buy, and the writer the obligation to
sell, the underlying security at the exercise price during the option period.
Conversely, a put option gives the purchaser the right to sell, and the writer
the obligation to buy, the underlying security at the exercise price during the
option period.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time as the writer effects a closing purchase
transaction by purchasing an option of the same series as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. For options traded on national securities exchanges
("Exchanges"), to secure the obligation to deliver the underlying security in
the case of a call option, the writer of the option is required to deposit in
escrow the underlying security or other assets in accordance with the rules of
the OCC, an institution created to interpose itself between buyers and sellers
of options. Technically, the OCC assumes the order side of every purchase and
sale transaction on an Exchange and by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. In return for the premium,
the covered call option writer has given up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
the option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of a premium, so long as the price of the underlying security remains above the
exercise price, but assumes an obligation to purchase the underlying security
from the buyer of the put option at the exercise price, even though the price of
the security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes again in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. In addition, the premium paid for the put effectively increases the
cost of the underlying security, thus reducing the yield otherwise available
from such securities.
Because the Fund can write only covered options, it may at times be
unable to write additional options unless it sells a portion of its portfolio
holdings to obtain new debt securities against which it can write options. This
may result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, in a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss in the transaction.
OPTIONS TRADING MARKETS
Options which the Fund will trade are generally listed on Exchanges.
Exchanges on which such options currently are traded are the Chicago Board
Options Exchange and the American, New York, Pacific, and Philadelphia Stock
Exchanges. Options on some securities may not be listed on any Exchange but
traded in the over-the-counter market. Options traded in the over-the-counter
market involve the additional risk that securities dealers participating in such
transactions would fail to meet their obligations to the Fund. The use of
options traded in the over-the-counter market may be subject to limitations
imposed by certain state securities authorities. In addition to the limits on
its use of options discussed herein, the Fund is subject to the investment
restrictions described in the prospectus and the statement of additional
information.
The staff of the Commission currently is of the view that the premiums
which the Fund pays for the purchase of unlisted options and the value of
securities used to cover unlisted options written by the Fund are considered to
be invested in illiquid securities or assets for the purpose of calculating
whether the Fund is in compliance with its fundamental investment restriction
prohibiting it from investing more than 10% of its total assets (taken at
current value) in any combination of illiquid assets and securities. The Fund
intends to request that the Commission staff reconsider its current view. It is
the intention of the Fund to comply with the staff's current position and the
outcome of such reconsideration.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in U.S. Treasury
bonds and notes tends to center on the most recently auctioned issues, new
series of options with expirations to replace expiring options on particular
issues will not be introduced indefinitely. Instead, the expirations introduced
at the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each series of bonds
or notes will thus be phased out as new options are listed on the more recent
issues, and a full range of expiration dates will not ordinarily be available
for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable U.S. Treasury bill changes
from week to week, writers of U.S. Treasury bill call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long position in
U.S. Treasury bills with a principal amount corresponding to the option contract
size, the Fund may be hedged from a risk standpoint. In addition, the Fund will
maintain in a segregated account with its Custodian liquid assets maturing no
later than those which would be deliverable in the event of an assignment of an
exercise notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. Options on GNMA certificates are not currently
traded on any Exchange. However, the Fund may purchase and write such options in
the over-the-counter market or, should they commence trading, on any Exchange.
Since the remaining principal balance of GNMA certificates declines
each month as a result of mortgage payments, the Fund, as a writer of a covered
GNMA call holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered.
A GNMA certificate held by the Fund to cover an option position in any
but the nearest expiration month may cease to present cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA certificate with a certificate
which represents cover. When the Fund closes its position or replaces the GNMA
certificate, it may realize an unanticipated loss and incur transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be
closed out only in a secondary market for an option of the same series. Although
the Fund will generally purchase or 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 closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize any
profit and might incur transaction costs in connection therewith. If the Fund as
a covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the
following: (i) insufficient trading interest in certain options; (ii)
restrictions imposed on transactions (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an Exchange
or by a broker; (v) inadequacy of the facilities of an Exchange, the OCC or a
broker to handle current trading volume; or (vi) a decision by one or more
Exchanges or a broker to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market in that class
or series of options would cease to exist, although outstanding options that had
been issued as a result of trades would generally continue to be exercisable in
accordance with their terms.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to engage in 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 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 doing so, 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 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 United States 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").
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 determination 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, 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 on 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
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
indices 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 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. Treasury 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 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
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 commodity futures are similar to options on stocks except
that an option on a commodity 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, 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 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 currency or other financial
futures contracts is analogous 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, 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 commodity futures contracts may be
purchased to hedge against an interest rate increase or a market advance when
the Fund is not fully invested.
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 the 90% 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.
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. In addition
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. 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 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 SECURITIES
Investment in foreign securities may involve more risk than investment
solely in securities of domestic issuers for the following reasons: (1) there
may be less public information available about foreign companies than is
available about U.S. companies; (2) foreign companies are not generally subject
to the uniform accounting, auditing and financial reporting standards and
practices applicable to U.S. companies; (3) foreign stock markets have less
volume than the U.S. market, and the securities of some foreign companies are
less liquid and more volatile than the securities of comparable U.S. companies;
(4) there may be less government regulation of stock exchanges, brokers, listed
companies and banks in foreign countries than in the U.S.; (5) the Fund may
incur fees on currency exchanges when it changes investments from one country to
another; (6) the Fund's foreign investments could be affected by expropriation,
confiscatory taxation, nationalization of bank deposits, establishment of
exchange controls, political or social instability or diplomatic developments;
and (7) fluctuations in foreign exchange rates will affect the value of the
Fund's portfolio securities, the value of dividends and interest earned, gains
and losses realized on the sale of securities, net investment income and
unrealized appreciation or depreciation of investments.
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 value of a Fund share 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 rates between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative 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 United States is regulated under the Commodity Exchange Act by
the CFTC and 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 engage in 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 contracts 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
Franc, and French Franc 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 Pound, 125,000 for the Guilder, Mark and Swiss and French
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 United States 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
analogous 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,
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.
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 exchange 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.
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
payments 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 controls 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>
EVERGREEN U.S. GOVERNMENT FUND
(photo appears here)
STATEMENT OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<S> <C> <C>
MORTGAGE-BACKED SECURITIES -- 50.3%
FEDERAL HOME LOAN MORTGAGE CORP. -- 7.3%
$ 6,139 8.0%, 7/1/17-4/1/22.................. $ 6,237,194
4,340 8.5%, 2/1/17-10/1/17................. 4,480,326
4,709 9.0%, 11/1/96-4/1/21................. 4,928,943
1,636 9.5%, 9/1/20......................... 1,745,689
2,474 10.0%, 12/1/19-8/1/21................ 2,678,084
2,287 10.5%, 12/1/19....................... 2,505,123
22,575,359
FEDERAL NATIONAL MORTGAGE ASSN. -- 16.7%
5,381 6.5%, 1/1/24......................... 5,039,175
18,731 7.0%, 8/1/25......................... 18,046,426
13,265 7.5%, 7/1/23-7/1/25.................. 13,111,933
12,943 8.0%, 8/1/25......................... 13,066,906
2,116 9.5%, 6/1/22......................... 2,254,098
51,518,538
GOVERNMENT NATIONAL MORTGAGE
ASSN. -- 26.3%
16,047 7.0%, 12/15/22-11/15/23.............. 15,409,857
11,720 7.5%, 2/15/22-3/15/23................ 11,562,734
22,719 8.0%, 2/15/23-8/15/24................ 23,006,736
13,542 8.5%, 12/15/21-7/15/24............... 13,951,617
6,982 9.0%, 1/15/20-6/15/21................ 7,313,563
7,727 9.5%, 1/15/19-2/15/21................ 8,265,111
1,500 10.0%, 12/15/18...................... 1,636,238
81,145,856
TOTAL MORTGAGE-BACKED SECURITIES
(COST $158,407,825)................ 155,239,753
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 48.1%
UNITED STATES TREASURY BONDS -- 21.7%
$ 17,930 8.125%, 8/15/19...................... $ 20,115,219
8,100 8.50%, 2/15/20....................... 9,444,082
3,650 8.75%, 11/15/08...................... 4,056,062
3,080 8.75%, 8/15/20....................... 3,683,483
14,010 8.875%, 8/15/17...................... 16,816,357
10,300 9.25%, 2/15/16....................... 12,743,016
66,858,219
UNITED STATES TREASURY NOTES -- 26.4%
12,000 7.75%, 11/30/99...................... 12,498,732
9,800 7.75%, 1/31/00....................... 10,219,548
6,570 7.875%, 4/15/98...................... 6,767,100
21,500 7.875%, 11/15/99..................... 22,467,500
14,500 8.25%, 7/15/98....................... 15,080,000
13,700 9.25%, 8/15/98....................... 14,526,260
81,559,140
TOTAL U.S. TREASURY OBLIGATIONS
(COST 156,947,103)................. 148,417,359
REPURCHASE AGREEMENT -- .3%
1,035 Donaldson, Lufkin and Jenrette
Securities Corp., 5.40%, dated
6/28/96, due 7/1/96 collateralized by
$1,080,000 U.S. Treasury Notes,
5.125%, due 11/30/98; value,
including accrued interest --
$1,060,508
(COST $1,035,000).................... 1,035,000
</TABLE>
<TABLE>
<S> <C> <C> <C>
TOTAL INVESTMENTS --
(COST $316,389,928)........ 98.7% 304,692,112
OTHER ASSETS AND
LIABILITIES -- NET...... 1.3 3,858,632
NET ASSETS --.............. 100.0% $308,550,744
</TABLE>
See accompanying notes to financial statements.
32
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
(photo appears here)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $316,389,928)........................................................... $304,692,112
Cash.......................................................................................................... 111
Interest receivable........................................................................................... 4,720,695
Receivable for Fund shares sold............................................................................... 448,306
Prepaid expenses.............................................................................................. 57,595
Total assets............................................................................................ $309,918,819
LIABILITIES:
Distributions payable......................................................................................... 483,100
Payable for Fund shares repurchased........................................................................... 416,877
Accrued advisory fee.......................................................................................... 249,569
Distribution fee payable...................................................................................... 113,634
Accrued expenses.............................................................................................. 75,328
Payable for administration fee................................................................................ 29,567
Total liabilities....................................................................................... 1,368,075
NET ASSETS....................................................................................................... $308,550,744
NET ASSETS CONSIST OF:
Paid-in capital............................................................................................... $334,564,654
Accumulated net realized loss on investment transactions...................................................... (14,316,094)
Net unrealized depreciation of investments.................................................................... (11,697,816)
Net assets.............................................................................................. $308,550,744
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($20,344,622/2,159,052 shares of beneficial interest outstanding).............................. $ 9.42
Sales charge -- 4.75% of offering price....................................................................... .47
Maximum offering price..................................................................................... $ 9.89
Class B Shares ($165,987,744/17,615,107 shares of beneficial interest outstanding)............................ $ 9.42
Class C Shares ($649,482/68,918 shares of beneficial interest outstanding).................................... $ 9.42
Class Y Shares ($121,568,896/12,901,205 shares of beneficial interest outstanding)............................ $ 9.42
</TABLE>
See accompanying notes to financial statements.
33
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
(photo appears here)
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest....................................................................................... $22,884,665
EXPENSES:
Advisory fee................................................................................... $1,507,281
Administrative personnel and services fees..................................................... 159,046
Distribution fee -- Class A Shares............................................................. 53,238
Distribution fee -- Class B Shares............................................................. 1,374,856
Shareholder services fee -- Class B Shares..................................................... 458,285
Distribution fee -- Class C Shares............................................................. 3,646
Shareholder services fee -- Class C Shares..................................................... 1,215
Transfer agent fee............................................................................. 215,204
Custodian fee.................................................................................. 138,256
Registration and filing fees................................................................... 66,356
Reports and notices to shareholders............................................................ 56,306
Professional fees.............................................................................. 45,212
Trustees' fees and expenses.................................................................... 7,532
Miscellaneous.................................................................................. 31,744
Total expenses........................................................................... 4,118,177
Net investment income............................................................................. 18,766,488
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investment transactions................................................... (3,731,984)
Net change in unrealized depreciation of investments........................................... (3,860,415)
Net loss on investments........................................................................... (7,592,399)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............................................. $11,174,089
</TABLE>
See accompanying notes to financial statements.
34
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
(photo appears here)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1996 1995*
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income..................................................................... $ 18,766,488 $ 7,438,980
Net realized loss on investments.......................................................... (3,731,984) (2,084,111)
Net change in unrealized appreciation (depreciation) of investments....................... (3,860,415) 16,345,873
Net increase in net assets resulting from operations................................... 11,174,089 21,700,742
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares......................................................................... (1,406,673) (794,337)
Class B Shares......................................................................... (10,727,964) (6,054,489)
Class C Shares......................................................................... (28,511) (10,127)
Class Y Shares......................................................................... (6,603,340) (580,027)
Total distributions to shareholders....................................................... (18,766,488) (7,438,980)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold................................................................. 138,179,343 8,321,751
Proceeds from shares issued in acquisition of Evergreen U.S. Government Securities Fund... 5,739,713 --
Proceeds from reinvestment of distributions............................................... 11,871,813 3,745,065
Payment for shares redeemed............................................................... (71,866,685) (29,247,163)
Net increase (decrease) resulting from Fund share transactions......................... 83,924,184 (17,180,347)
Net increase (decrease) in net assets.................................................. 76,331,785 (2,918,585)
NET ASSETS:
Beginning of period....................................................................... 232,218,959 235,137,544
End of period............................................................................. $308,550,744 $232,218,959
</TABLE>
*The Fund changed its fiscal year end from December 31 to June 30, resulting in
a six-month period.
See accompanying notes to financial statements.
35
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND --
CLASS A SHARES
(photo appears here)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............................................ $9.65 $9.07 $10.05
Income (loss) from investment operations:
Net investment income......................................................... .63 .33 .66
Net realized and unrealized gain (loss) on investments........................ (.23 ) .58 (.98)
Total from investment operations............................................ .40 .91 (.32)
Less distributions to shareholders from net investment income................... (.63 ) (.33) (.66)
Net asset value, end of period.................................................. $9.42 $9.65 $9.07
TOTAL RETURN+................................................................... 4.3% 10.2% (3.2%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................................... $20,345 $22,445 $23,706
Ratios to average net assets:
Expenses...................................................................... .99% 1.04%++** .96%**
Net investment income......................................................... 6.61% 7.07%++** 6.97%**
Portfolio turnover rate......................................................... 23% 0% 19%
<CAPTION>
JANUARY 11,
1993*
THROUGH
DECEMBER 31,
1993
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............................................ $10.00
Income (loss) from investment operations:
Net investment income......................................................... .68
Net realized and unrealized gain (loss) on investments........................ .05
Total from investment operations............................................ .73
Less distributions to shareholders from net investment income................... (.68)
Net asset value, end of period.................................................. $10.05
TOTAL RETURN+................................................................... 7.4%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................................... $38,851
Ratios to average net assets:
Expenses...................................................................... .68%++**
Net investment income......................................................... 6.93%++**
Portfolio turnover rate......................................................... 39%
</TABLE>
# The Fund changed its fiscal year end from December 31 to June 30.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets would have been
the following:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1995# 1994
<S> <C> <C>
Expenses..................................................................................... 1.05% 1.00%
Net investment income........................................................................ 7.06% 6.93%
<CAPTION>
JANUARY 11,
1993*
THROUGH
DECEMBER 31,
1993
<S> <C>
Expenses..................................................................................... .99%
Net investment income........................................................................ 6.62%
</TABLE>
See accompanying notes to financial statements.
36
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND --
CLASS B AND CLASS C SHARES
(photo appears here)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
JANUARY 11, SIX
YEAR SIX MONTHS 1993* YEAR MONTHS
ENDED ENDED YEAR ENDED THROUGH ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1996 1995# 1994 1993 1996 1995#
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.................... $9.65 $9.07 $10.05 $10.00 $9.65 $9.07
Income (loss) from investment operations:
Net investment income................................. .56 .29 .61 .63 .56 .29
Net realized and unrealized gain (loss) on
investments......................................... (.23) .58 (.98) .05 (.23) .58
Total from investment operations.................... .33 .87 (.37) .68 .33 .87
Less distributions to shareholders from net
investment income..................................... (.56) (.29) (.61) (.63) (.56) (.29)
Net asset value, end of period.......................... $9.42 $9.65 $9.07 $10.05 $9.42 $9.65
TOTAL RETURN+........................................... 3.5% 9.8% (3.8%) 6.9% 3.5% 9.8%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............... $165,988 $192,490 $195,571 $236,696 $649 $350
Ratios to average net assets:
Expenses.............................................. 1.74% 1.79%++** 1.54%** 1.19%++** 1.74% 1.79%++**
Net investment income................................. 5.85% 6.32%++** 6.42%** 6.44%++** 5.87% 6.36%++**
Portoflio turnover rate................................. 23% 0% 19% 39% 23% 0%
<CAPTION>
SEPTEMBER 2,
1994*
THROUGH
DECEMBER 31,
1994
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period.................... $9.39
Income (loss) from investment operations:
Net investment income................................. .20
Net realized and unrealized gain (loss) on
investments......................................... (.32)
Total from investment operations.................... (.12)
Less distributions to shareholders from net
investment income..................................... (.20)
Net asset value, end of period.......................... $9.07
TOTAL RETURN+........................................... (1.3%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............... $266
Ratios to average net assets:
Expenses.............................................. 1.71%++**
Net investment income................................. 6.70%++**
Portoflio turnover rate................................. 19%
</TABLE>
# The Fund changed its fiscal year end from December 31 to June 30.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charges are not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets would have been
the following:
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C
JANUARY 11, SHARES
SIX MONTHS 1993* SIX MONTHS
ENDED YEAR ENDED THROUGH ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
1995# 1994 1993 1995#
<S> <C> <C> <C> <C>
Expenses................................................................ 1.80% 1.58% 1.50% 1.80%
Net investment income................................................... 6.31% 6.38% 6.13% 6.34%
<CAPTION>
SEPTEMBER 2,
1994*
THROUGH
DECEMBER 31,
1994
<S> <C>
Expenses................................................................ 1.75%
Net investment income................................................... 6.66%
</TABLE>
See accompanying notes to financial statements.
37
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND --
CLASS Y SHARES
(photo appears here)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................................... $9.65 $9.07 $10.05
Income (loss) from investment operations:
Net investment income................................................................. .66 .34 .69
Net realized and unrealized gain (loss) on investments................................ (.23) .58 (.98)
Total from investment operations.................................................... .43 .92 (.29)
Less distributions to shareholders from net investment income........................... (.66) (.34) (.69)
Net asset value, end of period.......................................................... $9.42 $9.65 $9.07
TOTAL RETURN+........................................................................... 4.5% 10.3% (2.9%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................................... $121,569 $16,934 $15,595
Ratios to average net assets:
Expenses.............................................................................. .74% .79%++** .71%**
Net investment income................................................................. 6.86% 7.31%++** 7.27%**
Portfolio turnover rate................................................................. 23% 0% 19%
<CAPTION>
SEPTEMBER 2,
1993*
THROUGH
DECEMBER 31,
1993
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................................... $10.25
Income (loss) from investment operations:
Net investment income................................................................. .25
Net realized and unrealized gain (loss) on investments................................ (.20)
Total from investment operations.................................................... .05
Less distributions to shareholders from net investment income........................... (.25)
Net asset value, end of period.......................................................... $10.05
TOTAL RETURN+........................................................................... .5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................................... $14,486
Ratios to average net assets:
Expenses.............................................................................. .48%++**
Net investment income................................................................. 7.20%++**
Portfolio turnover rate................................................................. 39%
</TABLE>
# The Fund changed its fiscal year end from December 31 to June 30.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets would have been
the following:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1995# 1994
<S> <C> <C>
Expenses....................................................................................... .80% .75%
Net investment income.......................................................................... 7.30% 7.23%
<CAPTION>
SEPTEMBER 2,
1993*
THROUGH
DECEMBER 31,
1993
<S> <C>
Expenses....................................................................................... .79%
Net investment income.......................................................................... 6.89%
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
The Evergreen Income Funds (the "Funds") are each a separate series of
open-end management companies registered under the Investment Company Act of
1940, as amended (the "Act"). The Evergreen Income Funds consist of Evergreen
Intermediate-Term Bond Fund ("Intermediate-Term Bond"), Evergreen
Intermediate-Term Government Securities Fund ("Intermediate-Term Government"),
Evergreen Short-Intermediate Bond Fund ("Short-Intermediate") and Evergreen U.S.
Government Fund ("U.S. Government"), collectively referred to as the Funds.
The investment objective of Intermediate-Term Bond is to maximize current
yield consistent with the preservation of capital. The investment objective of
Intermediate-Term Government is to preserve principal value and maintain a high
degree of liquidity while providing current income. Short-Intermediate's
investment objective is to attain a high level of current income, with capital
growth as a secondary objective, through investment in a broad range of
investment grade debt securities. U.S. Government's investment objective is to
achieve a high level of current income consistent with stability of principal.
Effective at the close of business on July 7, 1995, U.S. Government Fund
acquired substantially all of the net assets of Evergreen U.S. Government
Securities Fund through the issuance of 590,505 of its Class Y shares in
exchange for Evergreen U.S. Government Securities Fund's net assets valued at
$5,739,713. The aggregate net assets immediately after the acquisition was
$233,475,732. The acquired net assets, in this non-taxable transaction,
consisted primarily of portfolio securities with unrealized appreciation of
$24,133.
Effective January 1, 1996, First Union Corporation, the corporate parent of
First Union National Bank of North Carolina ("First Union"), each Fund's current
investment adviser, consummated a merger (the "Bank Merger") with First Fidelity
Bancorporation, the corporate parent of First Fidelity Bank, N.A. ("FFB"),
Intermediate-Term Bond and Intermediate-Term Government's prior investment
adviser. Effective January 19, 1996, each of the FFB Lexicon Funds, open-end
management investment companies registered under the Act, including FFB Lexicon
Fixed Income Fund and FFB Lexicon Intermediate-Term Government Securities Fund
(the "Lexicon Funds"), joined the Evergreen Funds (the "Fund Combinations"). FFB
Lexicon Fixed Income Fund was renamed Evergreen Intermediate-Term Bond Fund. FFB
Lexicon Intermediate-Term Government Securities Fund was renamed Evergreen
Intermediate-Term Government Securities Fund. Shares of each of the Lexicon
Fund's class previously known as the Institutional Class were redesignated as
each respective Fund's Class Y Shares. Shares of each of the Lexicon Fund's
class previously known as the Investor Class were redesignated as each
respective Fund's Class A Shares. See Note 5 for a description of each of the
classes.
Effective at the close of business on February 29, 1996, Intermediate-Term
Bond acquired substantially all of the net assets of Evergreen Managed Bond Fund
through the issuance of 7,674,423 of its Class Y shares in exchange for Managed
Bond's net assets valued at $79,773,557. The aggregate net assets immediately
after the acquisition was $158,097,520. The acquired net assets, in this
non-taxable transaction, consisted primarily of portfolio securities with
unrealized appreciation of $1,789,417.
Effective January 7, 1996, Short-Intermediate changed its name from
Evergreen Fixed Income Fund.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements. These policies are
in conformity with generally accepted accounting principles.
SECURITY VALUATIONS -- U.S. government obligations are valued at the mean
between the over-the-counter bid and ask price as furnished by an independent
pricing service. Corporate bonds (and other fixed income and asset-backed
securities) are valued at the last sale price reported on national securities
exchanges on that day, if available. Otherwise, corporate bonds
39
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- continued
and asset-backed securities are valued at the mean between the over-the-counter
bid and ask price provided by an independent pricing service. Short-term
securities when purchased with remaining maturities of sixty days or less are
stated at amortized cost which approximates market value.
SECURITY TRANSACTIONS -- Security transactions are accounted for on the
date purchased or sold. Net realized gains or losses are determined on the
identified cost basis.
INVESTMENT INCOME AND EXPENSES -- Interest income and expenses are accrued
daily. Premiums and discounts paid on securities are amortized or accreted into
interest income as required by the Internal Revenue Code, as amended, (the
"Code").
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by the Federal Reserve Bank and are designated as being held
on each Fund's behalf by its custodian under a book-entry system. Each Fund
monitors the adequacy of the collateral on a daily basis and can require the
seller to provide additional collateral in the event the market value of the
securities pledged falls below the carrying value of the repurchase agreement,
including accrued interest. Each Fund will only enter into repurchase agreements
with banks and other financial institutions which are deemed by the investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.
DIVIDENDS TO SHAREHOLDERS -- Dividends from net investment income for U.S.
Government are declared daily and paid monthly. Dividends from net investment
income are declared and paid monthly for Intermediate-Term Bond, Intermediate-
Term Government and Short-Intermediate. Dividends from net realized capital
gains on investments, if any, will be distributed at least annually. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from the amounts available under
generally accepted accounting principles. To the extent these differences are
permanent in nature, such amounts are reclassified within the components of net
assets.
ALLOCATION OF EXPENSES -- Expenses specifically indentifiable to a class of
shares are charged to that class. Expenses common to a Trust as a whole are
allocated to the funds in that Trust. Investment income, net of expenses (other
than class specific expenses) and realized and unrealized gains and losses are
allocated daily to each class of shares based upon the relative proportion of
net assets of each class.
INCOME TAXES -- It is each Fund's policy to meet the requirements of the
Code applicable to regulated investment companies and to distribute
substantially all of its taxable net income to its shareholders. Accordingly, no
provisions for Federal income or excise taxes are necessary. To the extent that
realized capital gains can be offset by capital loss carryforwards, it is each
Fund's policy not to distribute such gains. Capital losses incurred after
October 31 within each Funds fiscal year are deemed to arise on the first
business day of the following fiscal year for tax purposes.
At June 30, 1996, the Funds had capital loss carryforwards as follows:
<TABLE>
<CAPTION>
EXPIRATION
2001 2002 2003 2004
<S> <C> <C> <C> <C>
Intermediate-Term Bond $1,440,454 $ 788,954 $ 117,850 $ 211,288
Intermediate-Term Government -- -- 955,860 1,140,365
Short Intermediate -- 6,020,616 -- 3,372,152
U.S. Government 1,978,402 6,521,597 -- 2,973,341
</TABLE>
The Funds had post October loss deferals as follows:
<TABLE>
<S> <C> <C> <C> <C>
Intermediate-Term Bond $ --
Intermediate-Term Government --
Short Intermediate 3,921,854
U.S. Government 2,842,754
</TABLE>
40
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- continued
As a result of Fund acquisitions (See Note 1) Intermediate Term Bond and
U.S. Government acquired tax capital loss carryovers of $2,475,730 and
$1,053,217, respectively. These losses have been reclassed at June 30, 1996 from
paid in capital to accumulated net realized losses on investment transactions.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Funds record
when-issued or delayed delivery transactions on the trade date and maintain
security positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on
the settlement date.
DEFERRED ORGANIZATIONAL EXPENSES -- The costs incurred with respect to
Intermediate-Term Bond's and Intermediate-Term Government's organization have
been deferred and are being amortized using the straight-line method not to
exceed a period of 60 months from each Fund's commencement of operations.
USE OF ESTIMATES -- 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.
Actual results could differ from those estimates.
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AGREEMENT -- Prior to the Bank Merger described in Note
1, FFB served as the Lexicon Funds' investment adviser and was entitled to an
annual investment advisory fee of .60 of 1% of average daily net assets. FFB
also acted as these Funds' custodian. Fees paid to FFB for custody services were
included as part of the investment advisory fees.
Effective January 1, 1996, the date of the Bank Merger, First Union became
investment adviser. First Union is entitled to an annual fee of .60 of 1% of
average daily net assets for investment advisory services. For Intermediate-Term
Bond and Intermediate-Term Government, First Union and its predecessor FFB,
voluntarily waived $64,983 and $61,160, respectively, of their advisory fee for
the ten-month period ended June 30, 1996. First Union can modify or terminate
these voluntary waivers at any time.
Effective January 19, 1996, the date of the Fund Combinations, custody
services for Intermediate-Term Bond and Intermediate-Term Government were moved
to State Street Bank and Trust Company. Accordingly, after the date of the Fund
Combinations, custody services were billed separately and ceased to be
incorporated with the investment advisory fee.
First Union is also Short-Intermediate's and U.S. Government's investment
adviser, and is entitled to receive an annual fee of .50 of 1% of these Fund's
average daily net assets.
ADMINISTRATIVE AGREEMENT -- Through the date of the Fund Combinations, SEI
Financial Management Corporation ("SEI") served as the Lexicon Funds'
administrator. Pursuant to its administration agreement, SEI was entitled to an
annual fee of .17 of 1% of average daily net assets. SEI also served as transfer
agent for the Institutional Class of shares of the Funds. SEI's administration
fee included the amounts due for transfer agent services.
41
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
After the date of the Fund Combinations, Evergreen Asset Management Corp.
("Evergreen Asset"), a wholly owned subsidiary of First Union, became
Intermediate-Term Bond's and Intermediate-Term Government's administrator and
Furman Selz LLC ("Furman Selz") became sub-administrator. Evergreen Asset and
Furman Selz are also administrator and sub-administrator, respectively, for
Short-Intermediate and U.S. Government. As sub-administrator, Furman Selz
provides the officers for the Funds. Evergreen Asset's and Furman Selz' fees are
based on the average daily net assets of all of the funds administered by
Evergreen Asset for which either First Union or Evergreen Asset is also the
investment adviser. This fee is calculated at the following annual rates:
<TABLE>
<CAPTION>
ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<S> <C>
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% in excess of $30 billion
<CAPTION>
SUB-ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<S> <C>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% in excess of $25 billion
</TABLE>
At June 30, 1996, net assets for which Evergreen Asset was the
administrator for which either Evergreen Asset or First Union was the investment
adviser totalled approximately $15.2 billion.
PLAN OF DISTRIBUTION AND SHAREHOLDER SERVICING -- Prior to the date of the
Fund Combinations, SEI Financial Services Company served as the distributor for
the Lexicon Funds. The Lexicon Funds had adopted a Distribution Plan pursuant to
Rule 12b-1 under the Act for their Investor shares pursuant to which the
Investor shares would bear distribution expenses and related service fees at the
annual rate of .50 of 1% of each Fund's Investor class assets. Prior to the date
of the Fund Combinations, all fees were waived under this plan.
Subsequent to the Fund Combinations, for their Class B and Class C shares,
Intermediate-Term Bond and Intermediate-Term Government Funds have adopted a
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Funds may incur distribution expenses up to an annual fee of
.75 of 1% of the average daily net assets of the Class B and Class C shares. In
addition, subsequent to the Fund Combinations, $980 and $579 for Class A rule
12b-1 fees for Intermediate-Term Bond and Intermediate-Term Government,
respectively, were waived.
Short-Intermediate and U.S. Government, for their Class A, Class B and
Class C shares, have also adopted a Distribution Plan (the "Plan") pursuant to
Rule 12b-1 under the Act. The Plan provides that the Funds may incur
distribution expenses up to an annual fee of .75 of 1% of the average daily net
assets of the Class A, Class B and Class C shares. For the year ended June 30,
1996, the payments for Class A shares were limited to .25 of 1% of Class A
shares average daily net assets for U.S. Government and .10 of 1% of Class A
shares average daily net assets for Short-Intermediate.
In connection with their Plans, the Funds have entered into distribution
agreements with Evergreen Funds Distributor, Inc. ("EFD"), a subsidiary of
Furman Selz. Under their agreements, the Funds will compensate EFD for its
services at an annual fee of .25 of 1% of Class A share's average daily net
assets and .75 of 1% of their Class B and Class C average daily net assets. For
the period ended June 30, 1996, EFD voluntarily limited its Class A distribution
fees to .10% for Intermediate-Term Bond, Intermediate-Term Government and
Short-Intermediate, respectively. Under the terms of a Shareholder Services
42
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
Agreement with First Union Brokerage Services ("FUBS"), each of the Funds will
pay FUBS up to .25 of 1% of average daily net assets of the Funds' Class B and
Class C shares. This fee is designed to obtain certain services for shareholders
and to maintain the shareholder accounts.
EFD has advised the Funds that it has retained the following amounts from
front-end sales charges resulting from sales of Class A shares during the period
ended June 30, 1996:
<TABLE>
<CAPTION>
FRONT-END
SALES CHARGES
<S> <C>
Intermediate-Term Bond.................... $ --
Intermediate-Term Government.............. 212
Short-Intermediate........................ 26,528
U.S. Government........................... 31,583
</TABLE>
ORGANIZATIONAL EXPENSES -- U.S. Government's organizational expenses were
borne initially by a prior administrator. As a result of the change in the
administration agreement, First Union purchased the remaining unreimbursed
initial organizational expenses from the prior administrator. U.S. Government
will reimburse First Union during the five-year period following its
commencement of operations. Pursuant to these arrangements, as of and for the
year ended June 30, 1996, U.S. Government has paid and has a remaining liability
of $11,688 and $28,385, respectively.
NOTE 4 -- INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from sales of investments, excluding
short-term securities, for the period ended June 30, 1996 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
<S> <C> <C> <C> <C>
Intermediate-Term Bond.................................... $ 49,109,694 $10,010,491 $ 49,575,656 $23,405,311
Intermediate-Term Government.............................. 27,710,156 -- 43,688,187 --
Short-Intermediate........................................ 202,124,883 81,733,953 189,227,311 65,574,200
U.S. Government........................................... 151,080,199 -- 44,437,093 --
</TABLE>
On June 30, 1996, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal tax purposes was as follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION NET TAX COST
<S> <C> <C> <C> <C>
Intermediate-Term Bond............................................. $2,462,587 $ 2,864,690 $ (402,103) $157,804,849
Intermediate-Term Government....................................... 905,766 570,180 335,586 86,053,052
Short-Intermediate................................................. 3,481,215 7,318,458 (3,837,243) 410,049,754
U.S. Government.................................................... 436,598 12,134,414 (11,697,816) 316,389,928
</TABLE>
NOTE 5 -- SHARES OF BENEFICIAL INTEREST
The Funds have an unlimited number of $0.0001 par shares authorized. Each
of the funds are divided into four classes which are designated Class A, Class
B, Class C and Class Y shares. Class A shares are offered with a front-end sales
charge of up to 3.25% for Intermediate-Term Bond, Intermediate-Term Government
and Short-Intermediate and up to 4.75% for U.S. Government. Class B shares are
offered with a contingent deferred sales charge payable when shares are redeemed
which would decline from 5% to zero over a six-year period. Class C shares are
sold with a contingent deferred sales charge of 1% for shares redeemed during
the first year after purchase. Class Y shares are sold without a sales charge
and are available only to investment advisory clients of First Union and its
affiliates, certain institutional investors and Class Y shareholders of record
of other funds managed by First Union and its affiliates as of December 30,
1994. All classes have identical voting,
43
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- SHARES OF BENEFICIAL INTEREST -- continued
dividend, liquidation and other rights, except that certain classes bear
different distribution expenses (see Note 3) and have exclusive voting rights
with respect to their distribution plan.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEAR ENDED
JUNE 30, 1996* AUGUST 31, 1995**
INTERMEDIATE-TERM BOND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold...................................................... 292,734 $ 2,962,857 24,799 $ 255,892
Shares issued on reinvestment of distributions................... 3,368 34,080 209 2,134
Shares redeemed.................................................. (20,323 ) (206,789) (9,442) (96,968)
Net increase..................................................... 275,779 2,790,148 15,566 161,058
CLASS B
Shares sold...................................................... 40,844 415,640 -- --
Shares issued on reinvestment of distributions................... 228 2,296 -- --
Shares redeemed.................................................. (1,244 ) (12,553) -- --
Net increase..................................................... 39,828 405,383 -- --
CLASS C
Shares sold...................................................... 2,450 24,797 -- --
Shares issued on reinvestment of distributions................... 16 167 -- --
Net increase..................................................... 2,466 24,964 -- --
CLASS Y
Shares sold...................................................... 3,399,442 35,128,164 1,606,066 16,021,590
Shares issued in acquisition of Evergreen Managed Bond Fund...... 7,674,423 79,773,557 -- --
Shares issued on reinvestment of distributions................... 438,427 4,507,655 498,736 4,954,965
Shares redeemed.................................................. (5,208,789 ) (54,641,619) (2,018,177) (20,054,880)
Net increase..................................................... 6,303,503 64,767,757 86,625 921,675
Total net increase resulting from Fund
share transactions............................................. 6,621,576 67,988,252 102,191 1,082,733
</TABLE>
* For Class B Shares, the Fund share transaction activity reflects the period
January 30, 1996 (commencement of class operations) to June 30, 1996. For
Class C Shares, the Fund share transaction activity reflects the period April
29, 1996 (commencement of class operations) to June 30, 1996.
** For Class A Shares, the fund share transaction activity reflects the period
May 2, 1995 (commencement of class operations) to August 31, 1995.
44
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEAR ENDED
JUNE 30, 1996* AUGUST 31, 1995**
INTERMEDIATE-TERM GOVERNMENT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold...................................................... 64,791 $ 663,129 879 $ 8,925
Shares issued on reinvestment of distributions................... 1,503 15,239 -- --
Shares redeemed.................................................. (17,382) (175,816) -- --
Net increase..................................................... 48,912 502,552 879 8,925
CLASS B
Shares sold...................................................... 35,925 359,696 -- --
Shares issued on reinvestment of distributiions.................. 67 666 -- --
Shares redeemed.................................................. (2) (23) -- --
Net increase..................................................... 35,990 360,339 -- --
CLASS C
Shares sold...................................................... 3,551 35,538 -- --
Shares issued on reinvestment of distributions................... 26 254 -- --
Shares redeemed.................................................. (324) (3,205) -- --
Net increase..................................................... 3,253 32,587 -- --
CLASS Y
Shares sold...................................................... 1,257,974 12,770,139 1,999,051 19,833,912
Shares issued on reinvestment of distributions................... 402,054 4,079,359 526,254 5,214,391
Shares redeemed.................................................. (3,404,763) (34,447,480) (2,799,781) (27,796,468)
Net decrease..................................................... (1,744,735) (17,597,982) (274,476) (2,748,165)
Total net decrease resulting from Fund
share transactions............................................. (1,656,580) ($16,702,504) (273,597) ($ 2,739,240)
</TABLE>
* For Class B Shares, the Fund share transaction activity reflects the period
February 9, 1996 (commencement of class operations) to June 30, 1996. For
Class C Shares, the Fund share transaction activity reflects the period April
10, 1996 (commencement of class operations) to June 30, 1996.
** For Class A Shares, the fund share transaction activity reflects the period
May 2, 1995 (commencement of class operations) to August 31, 1995.
45
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
SHORT-INTERMEDIATE SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold...................................................... 417,422 $ 4,161,754 229,181 $ 2,246,501
Shares issued on reinvestment of distributions................... 91,045 906,558 51,319 500,703
Shares redeemed.................................................. (498,266) (4,979,754) (403,087) (3,946,036)
Net increase (decrease)........................................ 10,201 88,558 (122,587) (1,198,832)
CLASS B
Shares sold...................................................... 844,991 8,456,439 101,244 987,765
Shares issued on reinvestment of distributions................... 74,101 739,247 34,321 335,572
Shares redeemed.................................................. (512,788) (5,128,366) (252,818) (2,457,608)
Net increase (decrease)........................................ 406,304 4,067,320 (117,253) (1,134,271)
CLASS C
Shares sold...................................................... 94,089 944,432 2,424 23,946
Shares issued on reinvestment of distributions................... 3,083 30,731 594 5,816
Shares redeemed.................................................. (32,296) (321,263) (4,260) (41,852)
Net increase (decrease)........................................ 64,876 653,900 (1,242) (12,090)
CLASS Y
Shares sold...................................................... 15,667,603 156,775,980 6,633,965 64,819,418
Shares issued on reinvestment of distributions................... 1,726,865 17,202,491 1,084,829 10,581,894
Shares redeemed.................................................. (16,165,702) (161,849,781) (9,328,176) (91,429,481)
Net increase (decrease)........................................ 1,228,766 12,128,690 (1,609,382) (16,028,169)
Total net increase (decrease) resulting from Fund
share transactions............................................. 1,710,147 $ 16,938,468 (1,850,464) ($18,373,362)
</TABLE>
46
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
U.S. GOVERNMENT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold........................................................ 786,564 $ 7,560,325 129,542 $1,230,340
Shares issued on reinvestment of distributions..................... 78,565 755,991 38,627 363,779
Shares redeemed.................................................... (1,032,918) (9,892,163) (455,148) (4,253,390)
Net decrease..................................................... (167,789) (1,575,847) (286,979) (2,659,271)
CLASS B
Shares sold........................................................ 1,702,353 16,401,640 361,937 3,402,126
Shares issued on reinvestment of distributions..................... 533,686 5,138,748 310,078 2,918,499
Shares redeemed.................................................... (4,576,583) (43,960,576) (2,281,908) (21,266,740)
Net decrease..................................................... (2,340,544) (22,420,188) (1,609,893) (14,946,115)
CLASS C
Shares sold........................................................ 43,395 420,990 21,067 197,099
Shares issued on reinvestment of distributions..................... 1,437 13,783 377 3,563
Shares redeemed.................................................... (12,168) (117,297) (14,514) (136,177)
Net increase..................................................... 32,664 317,476 6,930 64,485
CLASS Y
Shares sold........................................................ 11,801,163 113,796,388 370,297 3,492,186
Shares issued in acquisition of Evergreen U.S. Government
Securities Fund.................................................. 590,505 5,739,713 -- --
Shares issued on reinvestment of distributions..................... 620,463 5,963,291 48,784 459,225
Shares redeemed.................................................... (1,866,525) (17,896,649) (383,032) (3,590,857)
Net increase..................................................... 11,145,606 107,602,743 36,049 360,554
Total net increase (decrease) resulting from Fund
share transactions............................................... 8,669,937 $ 83,924,184 (1,853,893) ($17,180,347)
</TABLE>
NOTE 6 -- RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon
registration under federal securities laws or in transactions exempt from such
registration. The Funds' restricted securities are valued at the price provided
by dealers in the secondary market or, if no market prices are available, at the
fair value as determined by the Funds' pricing committee. Additional information
on each restricted security held at June 30, 1996 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
FUND SECURITY DATE COST
<S> <C> <C> <C>
Intermediate-Term Bond CenFed Financial Corp. 12/15/94 $ 500,000
Intermediate-Term Bond Goldman Sachs Group 7/8/94 922,280
Intermediate-Term Bond Jet Equipment Trust 12/9/94 2,000,000
Intermediate-Term Bond Progress Capital Holdings 9/6/91 1,998,060
Short-Intermediate Associated P&C Holdings, Inc. 7/15/93 2,972,350
Short-Intermediate CenFed Financial Corp. 12/15/94 3,000,000
Short-Intermediate Metropolitan Life Insurance Co. 10/28/93 4,986,800
Short-Intermediate Metropolitan Life Insurance Co. 11/8/95 4,998,400
</TABLE>
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS OF
EVERGREEN INCOME FUNDS:
We have audited the statement of assets and liabilities, including the
statements of investments for the Evergreen Income Funds, listed below, as of
June 30, 1996, and the related statements of operations, changes in net assets,
and the financial highlights for each of the periods listed below:
Evergreen Intermediate-Term Bond Fund (formerly FFB Lexicon Fixed Income
Fund) -- statements of operations and changes in net assets and financial
highlights for the ten-month period ended June 30, 1996.
Evergreen Intermediate-Term Government Securities Fund (formerly FFB
Lexicon Intermediate-Term Government Securities Fund) -- statements of
operations and changes in net assets and financial highlights for the
ten-month period ended June 30, 1996.
Evergreen Short-Intermediate Bond Fund (formerly Evergreen Fixed Income
Fund) -- statement of operations for the year ended June 30, 1996,
statements of changes in net assets for the year ended June 30, 1996 and
for the six-month period ended June 30, 1995, and the financial highlights
for each of the years or periods from January 1, 1992 through June 30,
1996.
Evergreen U.S. Government Fund -- statement of operations for the year
ended June 30, 1996, statements of changes in net assets for the year ended
June 30, 1996 and the six-month period ended June 30, 1995, and the
financial highlights for each of the years or periods from January 1, 1993
(commencement of operations) through June 30, 1996.
These financial statements and financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
accompanying financial statements and financial highlights of Evergreen
Intermediate-Term Bond Fund and Evergreen Intermediate-Term Government
Securities Fund for the years or periods from November 1, 1991 through August
31, 1995 were audited by other auditors whose report dated October 6, 1995
expressed an unqualified opinion on those statements and financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to gain
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 and financial highlights. Our procedures included confirmation of
securities owned as of June 30, 1996, 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 of the
Evergreen Short-Intermediate Bond Fund and Evergreen U.S. Government Fund
referred to above and the 1996 financial statements and financial highlights of
the Evergreen Intermediate-Term Bond Fund and Evergreen Intermediate-Term
Government Securities Fund present fairly, in all material respects, the
financial position of each of the four funds constituting Evergreen Income Funds
as of June 30, 1996, and the results of their operations, changes in their net
assets, and the financial highlights for each of the periods listed in the third
preceding paragraph above, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
August 26, 1996
48
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
STATEMENT OF INVESTMENTS
(photo of Capitol)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
MORTGAGE BACKED SECURITIES -- 53.2%
FEDERAL HOME LOAN MORTGAGE CORP. -- 11.4%
$ 15,000 6.50%, 4/1/26........................ $ 14,363,682
5,755 8.00%, 7/1/17 - 4/1/22............... 5,922,744
4,059 8.50%, 2/1/17 - 1/1/17............... 4,236,883
3,801 9.00%, 11/1/19 - 4/1/21.............. 4,064,017
1,463 9.50%, 9/1/20........................ 1,583,182
2,247 10.00%, 12/1/19 - 8/1/21............. 2,464,034
1,883 10.50%, 12/1/19...................... 2,081,124
34,715,666
FEDERAL NATIONAL MORTGAGE ASSN. -- 16.5%
5,115 6.50%, 1/1/24........................ 4,886,866
18,215 7.00%, 8/1/25 - 9/1/25............... 17,844,749
12,568 7.50%, 7/1/23 - 7/1/25............... 12,580,108
12,348 8.00%, 8/1/25........................ 12,597,976
1,903 9.50%, 6/1/22........................ 2,055,373
49,965,072
GOVERNMENT NATIONAL MORTGAGE ASSN. -- 25.3%
15,323 7.00%, 12/15/22 - 11/15/23........... 15,011,886
11,141 7.50%, 2/15/22 - 3/15/23............. 11,162,249
21,725 8.00%, 2/15/23 - 8/15/24............. 22,270,032
12,362 8.50%, 12/15/21 - 7/15/24............ 12,856,954
6,191 9.00%, 1/15/20 - 6/15/21............. 6,531,802
6,709 9.50%, 1/15/19 - 2/15/21............. 7,256,314
1,457 10.00%, 12/15/18..................... 1,599,547
76,688,784
TOTAL MORTGAGE BACKED SECURITIES
(COST $162,566,794)............. 161,369,522
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
U. S. TREASURY OBLIGATIONS -- 45.1%
U.S. TREASURY BONDS -- 22.7%
$ 17,930 8.125%, 8/15/19...................... $ 20,725,950
8,100 8.50%, 2/15/20....................... 9,722,527
3,650 8.75%, 11/15/08...................... 4,100,545
3,080 8.75%, 8/15/20....................... 3,793,211
14,010 8.875%, 8/15/17...................... 17,297,965
10,300 9.25%, 2/15/16....................... 13,071,339
68,711,537
U.S. TREASURY NOTES -- 22.4%
12,000 7.75%, 11/30/99...................... 12,536,244
9,800 7.75%, 1/31/00....................... 10,259,375
21,500 7.875%, 11/15/99..................... 22,534,687
8,050 8.25%, 7/15/98....................... 8,324,199
13,700 9.25%, 8/15/98....................... 14,393,563
68,048,068
TOTAL U. S. TREASURY OBLIGATIONS
(COST $142,348,034)............. 136,759,605
REPURCHASE AGREEMENT -- .6%
1,868 Donaldson, Lufkin & Jenrette
Securities Corp., 6.50% dated
12/31/96, due 1/2/97, --
collateralized by $1,759,000 U.S.
Treasury Notes, 8.00%, due 5/15/01;
value, including accrued interest
$1,906,836
(COST $1,868,175)............... 1,868,175
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS --
(COST $306,783,003).... 98.9% 299,997,302
OTHER ASSETS AND
LIABILITIES -- NET... 1.1 3,367,285
NET ASSETS............. 100.0% $303,364,587
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
(photo of Capitol)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $306,783,003)........................................................... $299,997,302
Interest receivable........................................................................................... 4,418,903
Receivable for Fund shares sold............................................................................... 155,949
Prepaid expenses.............................................................................................. 20,910
Total assets............................................................................................ 304,593,064
LIABILITIES:
Distributions payable......................................................................................... 488,668
Payable for Fund shares repurchased........................................................................... 335,834
Accrued expenses.............................................................................................. 151,151
Accrued advisory fee.......................................................................................... 127,405
Distribution fee payable...................................................................................... 112,391
Payable for administration fee................................................................................ 13,028
Total liabilities....................................................................................... 1,228,477
NET ASSETS....................................................................................................... $303,364,587
NET ASSETS CONSIST OF:
Paid-in capital............................................................................................... $326,001,924
Accumulated net realized loss on investment transactions...................................................... (15,851,636)
Net unrealized depreciation of investments.................................................................... (6,785,701)
Net assets.............................................................................................. $303,364,587
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($18,986,757 divided by 1,993,236 shares of beneficial interest outstanding)................... $ 9.53
Sales charge -- 4.75% of offering price....................................................................... .48
Maximum offering price..................................................................................... $ 10.01
Class B Shares ($155,899,972 divided by 16,366,013 shares of beneficial interest outstanding)................. $ 9.53
Class C Shares ($712,588 divided by 74,810 shares of beneficial interest outstanding)......................... $ 9.53
Class Y Shares ($127,765,270 divided by 13,412,292 shares of beneficial interest outstanding)................. $ 9.53
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS
(photo of Capitol)
SIX MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest......................................................................................... $11,634,902
EXPENSES:
Advisory fee..................................................................................... $772,308
Administrative personnel and services fees....................................................... 71,525
Distribution fee -- Class A Shares............................................................... 24,744
Distribution fee -- Class B Shares............................................................... 607,145
Shareholder services fee -- Class B Shares....................................................... 202,382
Distribution fee -- Class C Shares............................................................... 2,842
Shareholder services fee -- Class C Shares....................................................... 947
Transfer agent fee............................................................................... 108,190
Custodian fee.................................................................................... 69,961
Registration and filing fees..................................................................... 33,359
Reports and notices to shareholders.............................................................. 28,307
Professional fees................................................................................ 22,729
Trustees' fees and expenses...................................................................... 3,787
Miscellaneous.................................................................................... 16,142
Total expenses............................................................................. 1,964,368
Net investment income............................................................................... 9,670,534
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions..................................................... (1,535,542)
Net decrease in unrealized depreciation of investments........................................... 4,912,115
Net gain on investments............................................................................. 3,376,573
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................ $13,047,107
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
(photo of Capitol)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
DECEMBER 31, ENDED
1996 JUNE 30,
(UNAUDITED) 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income..................................................................... $ 9,670,534 $ 18,766,488
Net realized loss on investments.......................................................... (1,535,542) (3,731,984)
Net change in unrealized depreciation of investments...................................... 4,912,115 (3,860,415)
Net increase in net assets resulting from operations................................... 13,047,107 11,174,089
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares............................................................................ (648,707) (1,406,673)
Class B Shares............................................................................ (4,698,473) (10,727,964)
Class C Shares............................................................................ (22,000) (28,511)
Class Y Shares............................................................................ (4,301,354) (6,603,340)
Total distributions to shareholders.................................................... (9,670,534) (18,766,488)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold................................................................. 14,615,215 138,179,343
Proceeds from shares issued in acquisition of Evergreen U.S. Government Securities Fund... -- 5,739,713
Proceeds from reinvestment of distributions............................................... 6,496,044 11,871,813
Payment for shares redeemed............................................................... (29,673,989) (71,866,685)
Net increase (decrease) resulting from Fund share transactions......................... (8,562,730) 83,924,184
Net increase (decrease) in net assets............................................... (5,186,157) 76,331,785
NET ASSETS:
Beginning of period....................................................................... 308,550,744 232,218,959
End of period............................................................................. $303,364,587 $308,550,744
</TABLE>
See accompanying notes to financial statements.
32
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND --
CLASS A AND CLASS B SHARES
(photo of Capitol)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
SIX MONTHS JANUARY 11, SIX MONTHS
ENDED YEAR SIX MONTHS 1993* ENDED YEAR SIX MONTHS
DECEMBER 31, ENDED ENDED YEAR ENDED THROUGH DECEMBER 31, ENDED ENDED
1996 JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1996 JUNE 30, JUNE 30,
(UNAUDITED) 1996 1995# 1994 1993 (UNAUDITED) 1996 1995#
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of
period......................... $9.42 $9.65 $9.07 $10.05 $10.00 $9.42 $9.65 $9.07
Income (loss) from investment
operations:
Net investment income.......... .31 .63 .33 .66 .68 .28 .56 .29
Net realized and unrealized
gain (loss) on investments... .11 (.23) .58 (.98) .05 .11 (.23) .58
Total from investment
operations................. .42 .40 .91 (.32) .73 .39 .33 .87
Less distributions to
shareholders from net
investment income.............. (.31) (.63) (.33) (.66) (.68) (.28) (.56) (.29)
Net asset value, end of period... $9.53 $9.42 $9.65 $9.07 $10.05 $9.53 $9.42 $9.65
TOTAL RETURN+.................... 4.6% 4.3% 10.2% (3.2%) 7.4% 4.2% 3.5% 9.8%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted)....................... $18,987 $20,345 $22,445 $23,706 $38,851 $155,900 $165,988 $192,490
Ratios to average net assets:
Expenses....................... .98%++ .99% 1.04%++** .96%** .68%++** 1.73%++ 1.74% 1.79%++**
Net investment income.......... 6.55%++ 6.61% 7.07%++** 6.97%** 6.93%++** 5.80%++ 5.85% 6.32%++**
Portfolio turnover rate.......... 5% 23% 0% 19% 39% 5% 23% 0%
<CAPTION>
JANUARY 11,
1993*
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of
period......................... $10.05 $10.00
Income (loss) from investment
operations:
Net investment income.......... .61 .63
Net realized and unrealized
gain (loss) on investments... (.98) .05
Total from investment
operations................. (.37) .68
Less distributions to
shareholders from net
investment income.............. (.61) (.63)
Net asset value, end of period... $9.07 $10.05
TOTAL RETURN+.................... (3.8%) 6.9%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted)....................... $195,571 $236,696
Ratios to average net assets:
Expenses....................... 1.54%** 1.19%++**
Net investment income.......... 6.42%** 6.44%++**
Portfolio turnover rate.......... 19% 39%
</TABLE>
# The Fund changed its fiscal year end from December 31 to June 30.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets would have been
the following:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
JANUARY 11,
SIX MONTHS 1993* SIX MONTHS
ENDED YEAR ENDED THROUGH ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1995# 1994 1993 1995# 1994
<S> <C> <C> <C> <C> <C>
Expenses............................................. 1.05% 1.00% .99% 1.80% 1.58%
Net investment income................................ 7.06% 6.93% 6.62% 6.31% 6.38%
<CAPTION>
JANUARY 11,
1993*
THROUGH
DECEMBER 31,
1993
<S> <C>
Expenses............................................. 1.50%
Net investment income................................ 6.13%
</TABLE>
See accompanying notes to financial statements.
33
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND --
CLASS C AND CLASS Y SHARES
(photo of Capitol)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C SHARES CLASS Y SHARES
SIX MONTHS SEPTEMBER 2, SIX MONTHS
ENDED YEAR SIX MONTHS 1994* ENDED YEAR SIX MONTHS
DECEMBER 31, ENDED ENDED THROUGH DECEMBER 31, ENDED ENDED
1996 JUNE 30, JUNE 30, DECEMBER 31, 1996 JUNE 30, JUNE 30,
(UNAUDITED) 1996 1995# 1994 (UNAUDITED) 1996 1995#
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of
period........................ $9.42 $9.65 $9.07 $9.39 $9.42 $9.65 $9.07
Income (loss) from investment
operations:
Net investment income......... .28 .56 .29 .20 .32 .66 .34
Net realized and unrealized
gain (loss) on
investments................. .11 (.23) .58 (.32) .11 (.23) .58
Total from investment
operations................ .39 .33 .87 (.12) .43 .43 .92
Less distributions to
shareholders from net
investment income............. (.28) (.56) (.29) (.20) (.32) (.66) (.34)
Net asset value, end of
period........................ $9.53 $9.42 $9.65 $9.07 $9.53 $9.42 $9.65
TOTAL RETURN+................... 4.2% 3.5% 9.8% (1.3%) 4.7% 4.5% 10.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted)...................... $713 $649 $350 $266 $127,765 $121,569 $16,934
Ratios to average net assets:
Expenses...................... 1.73%++ 1.74% 1.79%++** 1.71%++** .73%++ .74% .79%++**
Net investment income......... 5.81%++ 5.87% 6.36%++** 6.70%++** 6.80%++ 6.86% 7.31%++**
Portoflio turnover rate......... 5% 23% 0% 19% 5% 23% 0%
<CAPTION>
SEPTEMBER 2,
1993*
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of
period........................ $10.05 $10.25
Income (loss) from investment
operations:
Net investment income......... .69 .25
Net realized and unrealized
gain (loss) on
investments................. (.98) (.20)
Total from investment
operations................ (.29) .05
Less distributions to
shareholders from net
investment income............. (.69) (.25)
Net asset value, end of
period........................ $9.07 $10.05
TOTAL RETURN+................... (2.9%) .5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted)...................... $15,595 $14,486
Ratios to average net assets:
Expenses...................... .71%** .48%++**
Net investment income......... 7.27%** 7.20%++**
Portoflio turnover rate......... 19% 39%
</TABLE>
# The Fund changed its fiscal year end from December 31 to June 30.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charges are not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets would have been
the following:
<TABLE>
<CAPTION>
CLASS C SHARES CLASS Y SHARES
SEPTEMBER 2,
SIX MONTHS 1994* SIX MONTHS
ENDED THROUGH ENDED YEAR ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1995# 1994 1995# 1994
<S> <C> <C> <C> <C>
Expenses....................................................... 1.80% 1.75% .80% .75%
Net investment income.......................................... 6.34% 6.66% 7.30% 7.23%
<CAPTION>
SEPTEMBER 2,
1993*
THROUGH
DECEMBER 31,
1993
<S> <C>
Expenses....................................................... .79%
Net investment income.......................................... 6.89%
</TABLE>
See accompanying notes to financial statements.
34
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
The Evergreen Income Funds (the "Funds") are each a separate series of
open-end management companies registered under the Investment Company Act of
1940, as amended (the "Act"). The Evergreen Income Funds consist of Evergreen
Intermediate-Term Bond Fund ("Intermediate-Term Bond"), Evergreen
Intermediate-Term Government Securities Fund ("Intermediate-Term Government"),
Evergreen Short-Intermediate Bond Fund ("Short-Intermediate") and Evergreen U.S.
Government Fund ("U.S. Government"), collectively referred to as the Funds.
The investment objective of Intermediate-Term Bond is to maximize current
yield consistent with the preservation of capital. The investment objective of
Intermediate-Term Government is to preserve principal value and maintain a high
degree of liquidity while providing current income. Short-Intermediate's
investment objective is to attain a high level of current income, with capital
growth as a secondary objective, through investment in a broad range of
investment grade debt securities. U.S. Government's investment objective is to
achieve a high level of current income consistent with stability of principal.
Effective at the close of business on July 7, 1995, U.S. Government
acquired substantially all of the net assets of Evergreen U.S. Government
Securities Fund through the issuance of 590,505 of its Class Y shares in
exchange for Evergreen U.S. Government Securities Fund's net assets valued at
$5,739,713. The aggregate net assets immediately after the acquisition was
$233,475,732. The acquired net assets, in this non-taxable transaction,
consisted primarily of portfolio securities with unrealized appreciation of
$24,133.
Effective January 1, 1996, First Union Corporation, the corporate parent of
First Union National Bank of North Carolina ("First Union"), each Fund's current
investment adviser, consummated a merger (the "Bank Merger") with First Fidelity
Bancorporation, the corporate parent of First Fidelity Bank, N.A. ("FFB"),
Intermediate-Term Bond and Intermediate-Term Government's prior investment
adviser. Effective January 19, 1996, each of the FFB Lexicon Funds, open-end
management investment companies registered under the Act, including FFB Lexicon
Fixed Income Fund and FFB Lexicon Intermediate-Term Government Securities Fund
(the "Lexicon Funds"), joined the Evergreen Funds (the "Fund Combinations").FFB
Lexicon Fixed Income Fund was renamed Evergreen Intermediate-Term Bond Fund. FFB
Lexicon Intermediate-Term Government Securities Fund was renamed Evergreen
Intermediate-Term Government Securities Fund. Shares of each of the Lexicon
Fund's class previously known as the Institutional Class were redesignated as
each respective Fund's Class Y Shares. Shares of each of the Lexicon Fund's
class previously known as the Investor Class were redesignated as each
respective Fund's Class A Shares. See Note 5 for a description of each of the
classes.
Effective at the close of business on February 29, 1996, Intermediate-Term
Bond acquired substantially all of the net assets of Evergreen Managed Bond Fund
through the issuance of 7,674,423 of its Class Y shares in exchange for Managed
Bond's net assets valued at $79,773,557. The aggregate net assets immediately
after the acquisition was $158,097,520. The acquired net assets, in this
non-taxable transaction, consisted primarily of portfolio securities with
unrealized appreciation of $1,789,417.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements. These policies are
in conformity with generally accepted accounting principles.
SECURITY VALUATIONS -- U.S. government obligations are valued at the mean
between the over-the-counter bid and ask price as furnished by an independent
pricing service. Corporate bonds (and other fixed income and asset-backed
securities) are valued at the last sale price reported on national securities
exchanges on that day, if available. Otherwise, corporate bonds
35
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- continued
and asset-backed securities are valued at the mean between the over-the-counter
bid and ask price provided by an independent pricing service. Short-term
securities when purchased with remaining maturities of sixty days or less are
stated at amortized cost which approximates market value.
SECURITY TRANSACTIONS -- Security transactions are accounted for on the
date purchased or sold. Net realized gains or losses are determined on the
identified cost basis.
INVESTMENT INCOME AND EXPENSES -- Interest income and expenses are accrued
daily. Premiums and discounts paid on securities are amortized or accreted into
interest income as required by the Internal Revenue Code, as amended, (the
"Code").
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by the Federal Reserve Bank and are designated as being held
on each Fund's behalf by its custodian under a book-entry system. Each Fund
monitors the adequacy of the collateral on a daily basis and can require the
seller to provide additional collateral in the event the market value of the
securities pledged falls below the carrying value of the repurchase agreement,
including accrued interest. Each Fund will only enter into repurchase agreements
with banks and other financial institutions which are deemed by the investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.
DIVIDENDS TO SHAREHOLDERS -- Dividends from net investment income for U.S.
Government are declared daily and paid monthly. Dividends from net investment
income are declared and paid monthly for Intermediate-Term Bond, Intermediate-
Term Government and Short-Intermediate. Dividends from net realized capital
gains on investments, if any, will be distributed at least annually. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from the amounts available under
generally accepted accounting principles. To the extent these differences are
permanent in nature, such amounts are reclassified within the components of net
assets.
ALLOCATION OF EXPENSES -- Expenses specifically indentifiable to a class of
shares are charged to that class. Expenses common to a Trust as a whole are
allocated to the funds in that Trust. Investment income, net of expenses (other
than class specific expenses) and realized and unrealized gains and losses are
allocated daily to each class of shares based upon the relative proportion of
net assets of each class.
INCOME TAXES -- It is each Fund's policy to meet the requirements of the
Code applicable to regulated investment companies and to distribute
substantially all of its taxable net income to its shareholders. Accordingly, no
provisions for Federal income or excise taxes are necessary. To the extent that
realized capital gains can be offset by capital loss carryforwards, it is each
Fund's policy not to distribute such gains. Capital losses incurred after
October 31 within each Funds fiscal year are deemed to arise on the first
business day of the following fiscal year for tax purposes.
At June 30, 1996, each Fund's most recent fiscal year end, the Funds had
capital loss carryforwards as follows:
<TABLE>
<CAPTION>
EXPIRATION
2001 2002 2003 2004
<S> <C> <C> <C> <C>
Intermediate-Term Bond $1,440,454 $ 788,954 $117,850 $ 211,288
Intermediate-Term Government -- -- 955,860 1,140,365
Short Intermediate -- 6,020,616 -- 3,372,152
U.S. Government 1,978,402 6,521,597 -- 2,973,341
</TABLE>
At June 30, 1996, Short Intermediate and U.S. Government had post October
loss deferrals of $3,921,854 and $2,842,754, respectively.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Funds record
when-issued or delayed delivery transactions on the trade date and maintain
security positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on
the settlement date.
36
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- continued
DEFERRED ORGANIZATIONAL EXPENSES -- The costs incurred with respect to
Intermediate-Term Bond's and Intermediate-Term Government's organization have
been deferred and are being amortized using the straight-line method not to
exceed a period of 60 months from each Fund's commencement of operations.
USE OF ESTIMATES -- 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.
Actual results could differ from those estimates.
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AGREEMENT -- First Union is each Fund's investment
adviser and is entitled to receive an annual fee based on each Fund's average
daily net assets as follows:
<TABLE>
<S> <C>
Intermediate-Term Bond.................. .60%
Intermediate-Term Government............ .60%
Short Intermediate...................... .50%
U.S. Government......................... .50%
</TABLE>
For Intermediate-Term Bond and Intermediate-Term Government, First Union
voluntarily waived $61,436 and $45,816, respectively, of its advisory fee for
the six-month period ended December 31, 1996. First Union may modify or
terminate these voluntary waivers at any time.
ADMINISTRATIVE AGREEMENT -- Evergreen Asset Management Corp. ("Evergreen
Asset"), a wholly owned subsidiary of First Union, is each Fund's administrator
and Furman Selz LLC ("Furman Selz") was sub-administrator through December 31,
1996. As sub-administrator, Furman Selz provided the officers for the Funds.
Evergreen Asset's and Furman Selz' fees were based on the average daily net
assets of all of the funds administered by Evergreen Asset for which either
First Union or Evergreen Asset was also the investment adviser. This fee was
calculated at the following annual rates:
<TABLE>
<CAPTION>
ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<S> <C>
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% in excess of $30 billion
<CAPTION>
SUB-ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<S> <C>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% in excess of $25 billion
</TABLE>
At December 31, 1996, net assets for which Evergreen Asset was the
administrator for which either Evergreen Asset or First Union was the investment
adviser totalled approximately $17.0 billion.
Effective January 1, 1997, Bisys Group, Inc. ("Bisys") acquired Furman
Selz' mutual fund unit and accordingly, Bisys Fund Services became
sub-administrator. The administration fee structure has remained unchanged.
PLANS OF DISTRIBUTION AND SHAREHOLDER SERVICING -- The Funds have adopted
distribution plans ("Plans") pursuant to Rule 12b-1 under the Act for their
Class A, Class B and Class C shares. Under the terms of the Plans, each Fund may
incur distribution-related expenses which may not exceed an annual rate of .75
of 1% of the average daily net assets attributable to
37
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
the Class A, Class B, and Class C shares of Short Intermediate and U.S.
Government, .50 of 1% of the average daily net assets of the Class A shares of
Intermediate-Term Bond and Intermediate-Term Government and 1% of the average
daily net assets of Class B and C shares of Intermediate-Term Bond and
Intermediate-Term Government. Payments under the Plans adopted with respect to
Class A shares are currently voluntarily limited to, (as a percentage of average
daily net assets attributable to Class A shares), .10 of 1% for
Short-Intermediate and .25 of 1% for Intermediate-Term Bond, Intermediate-Term
Government and U.S. Government. The Plans provide that a portion of the fee
payable for Class B and Class C shares may constitute a shareholder servicing
fee to be used for providing ongoing personal services and/or the maintenance of
shareholder accounts. Short-Intermediate and U.S. Government have also adopted a
shareholder service plan with respect to their Class B and Class C shares which
permits each of these Funds to incur a fee of up to .25 of 1% of the average
daily net assets attributable to the Class B and Class C shares for ongoing
personal services and/or the maintenance of shareholder accounts.
Each Fund has entered into a distribution agreement with Evergreen Keystone
Distributor, Inc. ("EKD") (formerly Evergreen Funds Distributor, Inc.), a
subsidiary of Furman Selz. Under their agreements, each Fund will compensate EKD
for its services at a rate which may not exceed an annual rate of .25 of 1% of
its average daily net assets attributable to Class A shares, Short-Intermediate
and U.S. Government will compensate EKD at an annual rate of .75 of 1% of its
average daily net assets attributable to their Class B and Class C shares and
Intermediate-Term Bond and Intermediate-Term Government will compensate EKD at
an annual rate of 1% of its average daily net assets. The distribution
agreements provide that EKD will use the distribution fees to promote sale of
shares of the Funds. A portion of Intermediate-Term Bond's and Intermediate-Term
Government's fees up to .25 of 1% of average daily net assets constitutes a
shareholder services fee. For the six-month period ended December 31, 1996, EKD
voluntarily limited its Class A distribution fees for Intermediate-Term Bond,
Intermediate-Term Government and Short-Intermediate to .04 of 1%, .04 of 1% and
.10 of 1% of average daily net assets, respectively.
Short Intermediate and U.S. Government have entered into a Shareholder
Services agreement with First Union Brokerage Services ("FUBS"), an affiliate of
First Union, whereby they will compensate FUBS up to an annual rate of .25 of 1%
of its Class B and Class C shares average daily net assets for certain services
provided to shareholders and/or maintenance of shareholder accounts.
With the acquisition of Furman Selz' mutual fund unit by Bisys effective
January 1, 1997, EKD became a subsidiary of Bisys.
EKD has advised the Funds that it has retained the following amounts from
front-end sales charges resulting from sales of Class A shares during the
six-month period ended December 31, 1996:
<TABLE>
<CAPTION>
FRONT-END
SALES CHARGES
<S> <C>
Intermediate-Term Bond.................... $ 209
Intermediate-Term Government.............. 281
Short-Intermediate........................ 4,968
U.S. Government........................... 2,292
</TABLE>
ORGANIZATIONAL EXPENSES -- U.S. Government's organizational expenses were
borne initially by a prior administrator. As a result of the change in the
administration agreement, First Union purchased the remaining unreimbursed
initial organizational expenses from the prior administrator. U.S. Government
will reimburse First Union during the five-year period following its
commencement of operations. Pursuant to these arrangements, as of and for the
six-month period ended December 31, 1996, U.S. Government has paid and has a
remaining liability of $11,688 and $16,697, respectively.
38
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
OTHER SERVICES WITH AFFILIATES -- State Street Bank & Trust Company ("State
Street") is the transfer agent, dividend disbursing agent and shareholder
servicing agent for the Funds. For certain accounts in Intermediate-Term Bond,
Short Intermediate and U.S. Government, First Union has been sub-contracted by
State Street to maintain shareholder sub-account records, take fund purchase and
redemption orders and answer inquiries. For each account, First Union is
entitled to a monthly fee which totaled $14,245, $80,228, and $53,131 for
Intermediate-Term Bond, Short Intermediate and U.S. Government, respectively,
for the six months ended December 31, 1996.
NOTE 4 -- INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from sales of investments, excluding
short-term securities, for the six-month period ended December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
PURCHASES SALES
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
<S> <C> <C> <C> <C>
Intermediate-Term Bond.................................... $63,011,061 $ 3,410,225 $55,942,786 $ 3,740,869
Intermediate-Term Government.............................. 24,874,628 -- 25,734,891 957,762
Short-Intermediate........................................ 59,121,027 32,634,255 23,815,449 33,263,282
U.S. Government........................................... 14,549,997 -- 23,454,555 --
</TABLE>
On December 31, 1996, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal tax purposes was as follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION NET TAX COST
<S> <C> <C> <C> <C>
Intermediate-Term Bond.............................................. $3,847,829 $1,579,551 $2,268,278 $162,937,491
Intermediate-Term Government........................................ 984,901 375,447 609,454 85,352,905
Short-Intermediate.................................................. 5,142,341 5,358,601 (216,260) 401,340,986
U.S. Government..................................................... 1,047,337 7,833,038 (6,785,701) 306,783,003
</TABLE>
NOTE 5 -- SHARES OF BENEFICIAL INTEREST
The Funds have an unlimited number of $0.0001 par shares authorized. Each
of the funds are divided into four classes which are designated Class A, Class
B, Class C and Class Y shares. Class A shares are offered with a front-end sales
charge of up to 3.25% for Intermediate-Term Bond, Intermediate-Term Government
and Short-Intermediate and up to 4.75% for U.S. Government. Class B shares are
offered with a contingent deferred sales charge payable when shares are redeemed
which would decline from 5% to zero depending on the period of time the shares
are held. Class B shares will automatically convert to Class A shares seven
years after the date of purchase. Class C shares are sold with a contingent
deferred sales charge of 1% for shares redeemed during the first year after
purchase. Class Y shares are sold without a sales charge and are available only
to investment advisory clients of First Union and its affiliates, certain
institutional investors and Class Y shareholders of record of other funds
managed by First Union and its affiliates as of December 30, 1994. All classes
have identical voting, dividend, liquidation and other rights, except that
certain classes bear different distribution expenses (see Note 3) and have
exclusive voting rights with respect to their distribution plan.
39
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- SHARES OF BENEFICIAL INTEREST -- continued
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 TEN MONTHS ENDED
(UNAUDITED) JUNE 30, 1996*
INTERMEDIATE-TERM BOND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold......................................................... 44,808 $ 456,239 292,734 $ 2,962,857
Shares issued on reinvestment of distributions...................... 8,696 88,265 3,368 34,080
Shares redeemed..................................................... (38,547) (392,639) (20,323) (206,789)
Net increase........................................................ 14,957 151,865 275,779 2,790,148
CLASS B
Shares sold......................................................... 37,854 385,431 40,844 415,640
Shares issued on reinvestment of distributions...................... 876 8,904 228 2,296
Shares redeemed..................................................... (1,662) (16,881) (1,244) (12,553)
Net increase........................................................ 37,068 377,454 39,828 405,383
CLASS C
Shares sold......................................................... -- -- 2,450 24,797
Shares issued on reinvestment of distributions...................... 60 623 16 167
Net increase........................................................ 60 623 2,466 24,964
CLASS Y
Shares sold......................................................... 2,222,641 22,572,892 3,399,442 35,128,164
Shares issued in acquisition of Evergreen Managed Bond Fund......... -- -- 7,674,423 79,773,557
Shares issued on reinvestment of distributions...................... 339,194 3,440,408 438,427 4,507,655
Shares redeemed..................................................... (2,177,340) (22,195,387) (5,208,789) (54,641,619)
Net increase........................................................ 384,495 3,817,913 6,303,503 64,767,757
Total net increase resulting from Fund
share transactions................................................ 436,580 $ 4,347,855 6,621,576 $ 67,988,252
</TABLE>
* For Class B Shares, the Fund share transaction activity reflects the period
January 30, 1996 (commencement of class operations) to June 30, 1996. For
Class C Shares, the Fund share transaction activity reflects the period April
29, 1996 (commencement of class operations) to June 30, 1996.
40
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 TEN MONTHS ENDED
(UNAUDITED) JUNE 30, 1996*
INTERMEDIATE-TERM GOVERNMENT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold............................................................ 10,568 $ 105,314 64,791 $ 663,129
Shares issued on reinvestment of distributions......................... 1,169 12,052 1,503 15,239
Shares redeemed........................................................ (2,157) (21,801) (17,382) (175,816)
Net increase........................................................... 9,580 95,565 48,912 502,552
CLASS B
Shares sold............................................................ 29,530 295,565 35,925 359,696
Shares issued on reinvestment of distributions......................... 593 6,116 67 666
Shares redeemed........................................................ (104) (1,053) (2) (23)
Net increase........................................................... 30,019 300,628 35,990 360,339
CLASS C
Shares sold............................................................ 1,718 17,173 3,551 35,538
Shares issued on reinvestment of distributions......................... 55 696 26 254
Shares redeemed........................................................ (1,913) (19,197) (324) (3,205)
Net increase (decrease)................................................ (140) (1,328) 3,253 32,587
CLASS Y
Shares sold............................................................ 569,305 5,338,629 1,257,974 12,770,139
Shares issued on reinvestment of distributions......................... 207,196 2,524,165 402,054 4,079,359
Shares redeemed........................................................ (980,110) (9,873,553) (3,404,763) (34,447,480)
Net decrease........................................................... (203,609) (2,010,759) (1,744,735) (17,597,982)
Total net decrease resulting from Fund
share transactions................................................... (164,150) ($1,615,894) (1,656,580) ($16,702,504)
</TABLE>
* For Class B Shares, the Fund share transaction activity reflects the period
February 9, 1996 (commencement of class operations) to June 30, 1996. For
Class C Shares, the Fund share transaction activity reflects the period April
10, 1996 (commencement of class operations) to June 30, 1996.
41
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
SHORT-INTERMEDIATE SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold..................................................... 331,347 $ 3,286,067 417,422 $ 4,161,754
Shares issued on reinvestment of distributions.................. 47,574 468,795 91,045 906,558
Shares redeemed................................................. (269,901) (2,673,493) (498,266) (4,979,754)
Net increase.................................................. 109,020 1,081,369 10,201 88,558
CLASS B
Shares sold..................................................... 299,763 2,960,585 844,991 8,456,439
Shares issued on reinvestment of distributions.................. 42,954 423,948 74,101 739,247
Shares redeemed................................................. (193,875) (1,915,176) (512,788) (5,128,366)
Net increase.................................................. 148,842 1,469,357 406,304 4,067,320
CLASS C
Shares sold..................................................... 23,280 232,354 94,089 944,432
Shares issued on reinvestment of distributions.................. 2,199 21,713 3,083 30,731
Shares redeemed................................................. (30,373) (300,440) (32,296) (321,263)
Net increase (decrease)....................................... (4,894) (46,373) 64,876 653,900
CLASS Y
Shares sold..................................................... 5,459,795 53,958,263 15,667,603 156,775,980
Shares issued on reinvestment of distributions.................. 734,989 7,232,226 1,726,865 17,202,491
Shares redeemed................................................. (5,018,608) (49,497,159) (16,165,702) (161,849,781)
Net increase.................................................. 1,176,176 11,693,330 1,228,766 12,128,690
Total net increase resulting from Fund
share transactions............................................ 1,429,144 $ 14,197,683 1,710,147 $ 16,938,468
</TABLE>
42
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
U.S. GOVERNMENT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold........................................................ 74,664 $ 707,976 786,564 $ 7,560,325
Shares issued on reinvestment of distributions..................... 36,835 349,011 78,565 755,991
Shares redeemed.................................................... (277,315) (2,626,266) (1,032,918) (9,892,163)
Net decrease..................................................... (165,816) (1,569,279) (167,789) (1,575,847)
CLASS B
Shares sold........................................................ 505,154 4,785,735 1,702,353 16,401,640
Shares issued on reinvestment of distributions..................... 242,605 2,298,899 533,686 5,138,748
Shares redeemed.................................................... (1,996,853) (18,926,307) (4,576,583) (43,960,576)
Net decrease..................................................... (1,249,094) (11,841,673) (2,340,544) (22,420,188)
CLASS C
Shares sold........................................................ 25,861 242,940 43,395 420,990
Shares issued on reinvestment of distributions..................... 905 8,567 1,437 13,783
Shares redeemed.................................................... (20,874) (196,610) (12,168) (117,297)
Net increase..................................................... 5,892 54,897 32,664 317,476
CLASS Y
Shares sold........................................................ 940,916 8,878,564 11,801,163 113,796,388
Shares issued in acquisition of Evergreen U.S. Government
Securities Fund.................................................. 590,505 5,739,713
Shares issued on reinvestment of distributions..................... 405,107 3,839,567 620,463 5,963,291
Shares redeemed.................................................... (834,936) (7,924,806) (1,866,525) (17,896,649)
Net increase..................................................... 511,087 4,793,325 11,145,606 107,602,743
Total net increase (decrease) resulting from Fund
share transactions............................................... (897,931) ($ 8,562,730) 8,669,937 $ 83,924,184
</TABLE>
43
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 6 -- FINANCING AGREEMENT
Effective July 3, 1996, a financing agreement was put in place with all of
the Evergreen Funds and State Street. Under this agreement, State Street
provided an unsecured line of credit facility, in the aggregate amount of $100
million ($50 million committed and $50 million uncommitted), to be accessed by
the Funds for temporary or emergency purposes only and is subject to each
participating Fund's borrowing restrictions. Effective October 31, 1996, a new
financing agreement was put in place with all of the Evergreen Funds and State
Street, Societe Generale and ABN AMRO Bank N.V. (collectively, the "Banks").
Under this agreement, the Banks provide an unsecured credit facility in the
aggregate amount of $225 million ($112.5 million committed and $112.5 million
uncommitted) allocated evenly between the Banks. Borrowings under these
facilities bear interest at .75% per annum above the Federal Funds rate. A
commitment fee of .10% per annum will be incurred on the unused portion of the
committed facility which would be allocated to all participating funds.
The Funds has no borrowings under the financing agreements during the
six-month period ended December 31, 1996.
NOTE 7 -- DEFERRED TRUSTEE'S FEES
Each Trustee may defer any or all compensation related to performance of
duties as a Trustee of the Funds. Each Trustee's deferred balances are allocated
to deferral accounts which are included in the accrued expenses for each Fund.
The investment performance of the deferral accounts are based on the investment
performance of certain Evergreen Funds. Any gains earned or losses incurred in
the deferral accounts are reported in each Fund's Trustee's fees and expenses.
Trustees will be paid either in one lump sum or in quarterly installments for up
to ten years at their election, not earlier than either the year in which the
Trustee ceases to be a member of the Trustees or January 1, 2000. As of December
31, 1996, the value of the Trustees' deferral accounts was $2,908, $2,900,
$10,079 and $7,463 for Intermediate-Term Bond, Intermediate-Term Government,
Short Intermediate and U.S. Government, respectively.
44
<PAGE>
Page 9
- -----------------------------------
Keystone Government Securities Fund
SCHEDULE OF INVESTMENTS--July 31, 1996
<TABLE>
<CAPTION>
Coupon Maturity Par Market
Rate Date Value Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT ISSUES (45.2%)
U.S. Treasury Bonds 7.875% 2021 $7,520,000 $ 8,188,603
U.S. Treasury Bonds 6.875 2025 1,200,000 1,178,628
U.S. Treasury Notes 7.750 1999 2,750,000 2,857,415
U.S. Treasury Notes 6.750 2000 4,000,000 4,031,880
U.S. Treasury Notes 7.750 2001 1,250,000 1,308,013
U.S. Treasury Notes 6.625 2001 2,000,000 2,004,380
U.S. Treasury Notes 7.500 2002 1,000,000 1,042,810
U.S. Treasury Notes 6.500 2005 500,000 491,170
U.S. Treasury Notes 6.875 2006 1,800,000 1,810,116
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT ISSUES (Cost--$23,824,790) 22,913,015
- ---------------------------------------------------------------------------------------------------------
GNMA (15.9%)
GNMA Pool #163934 9.000 2016 13,908 14,704
GNMA Pool #165633 9.000 2016 85,520 90,410
GNMA Pool #192803 9.500 2016 155,027 166,798
GNMA Pool #204238 9.500 2017 248,670 267,395
GNMA Pool #208850 9.500 2017 173,608 186,680
GNMA Pool #212897 9.500 2017 129,579 139,418
GNMA Pool #213635 9.500 2017 87,227 93,796
GNMA Pool #221645 9.500 2017 231,949 249,561
GNMA Pool #224848 9.500 2017 35,689 38,376
GNMA Pool #226032 9.500 2017 226,578 243,639
GNMA Pool #229824 9.500 2017 15,152 16,293
GNMA Pool #223682 9.500 2018 147,924 158,971
GNMA Pool #305224 9.500 2021 59,135 63,551
GNMA Pool #414739 6.500 2025 3,810,672 3,539,161
GNMA Pool #268164 10.250 2029 2,590,967 2,777,206
- ---------------------------------------------------------------------------------------------------------
TOTAL GNMA (Cost--$7,903,373) 8,045,959
- ---------------------------------------------------------------------------------------------------------
FHA (12.1%)
FHA Pool #2343143 9.125 2034 3,380,032 3,527,909
FHA Pool #2343143 10.250 2034 2,504,208 2,613,767
- ---------------------------------------------------------------------------------------------------------
TOTAL FHA (Cost--$6,227,919) 6,141,676
- ---------------------------------------------------------------------------------------------------------
FNMA (11.4%)
FNMA Pool #002497 11.000 2016 1,323,230 1,462,182
FNMA Pool #250407 7.000 2025 1,008,321 968,301
FNMA Pool #337532 7.000 2026 1,507,031 1,445,801
FNMA Pool #298163 7.000 2026 996,566 956,076
FNMA Pool #334520 7.000 2026 1,008,024 967,068
- ---------------------------------------------------------------------------------------------------------
TOTAL FNMA (Cost--$5,776,503) 5,799,428
- ---------------------------------------------------------------------------------------------------------
<PAGE>
Page 10
- -----------------------------------
Keystone Government Securities Fund
SCHEDULE OF INVESTMENTS--July 31, 1996
Coupon Maturity Par Market
Rate Date Value Value
- ---------------------------------------------------------------------------------------------------------
FHLMC (7.4%)
FHLMC Pool #430438 10.500% 2009 $ 57,675 $ 62,325
FHLMC Pool #607352 7.971 2022 3,528,673 3,669,079
- ---------------------------------------------------------------------------------------------------------
TOTAL FHLMC (Cost--$3,733,240) 3,731,404
- ---------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (6.2%)
FNMA Series 93-248 5A (Est. Mat. 2004) (c) 3.258 2023 1,250,000 844,141
FNMA GT 95-T5A (Est. Mat. 2001) (c) 7.000 2035 845,186 801,342
Resolution Trust Corp. Series 95-1 A2C (Est. Mat. 2000)
(c) 7.500 2028 1,490,625 1,480,843
- ---------------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$3,162,839) 3,126,326
- ---------------------------------------------------------------------------------------------------------
Maturity
Value
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.5%) (Cost--$269,000)
Keystone Joint Repurchase Agreement (Investments in
repurchase agreements, in a joint trading account,
purchased 7/31/96) (b) 5.687 8/1/96 $ 269,042 269,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$50,897,664) (a) 50,026,808
OTHER ASSETS AND LIABILITIES--NET (1.3%) 645,344
- ---------------------------------------------------------------------------------------------------------
NET ASSETS--(100.0%) $50,672,152
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost of investments for federal income tax purposes is $50,946,234.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at July 31, 1996 are as follows:
Gross unrealized appreciation $ 241,659
Gross unrealized
depreciation (1,161,085)
-----------
Net unrealized depreciation $ (919,426)
===========
(b) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at
July 31, 1996.
(c) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected prepayment rates. Changes in interest rates
can cause the estimated maturity to differ from the listed dates.
These estimated maturity dates are unaudited.
Legend of Portfolio Abbreviations
FHA--Federal Housing Association
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
See Notes to Financial Statements.
<PAGE>
Page 11
- -----------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1995 1994(c) 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value beginning
of year $ 9.61 $ 9.48 $10.45 $10.58 $10.18
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.61 0.67 0.57 0.68 0.68
Net realized and
unrealized gain (loss)
on investments (0.18) 0.11 (0.63) 0.46 0.55
- -------------------------------------------------------------------------------
Total from investment
operations 0.43 0.78 (0.06) 1.14 1.23
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.60) (0.65) (0.57) (0.68) (0.69)
In excess of net
investment income (0.03) 0 (0.02) (0.06) (0.04)
Tax basis return of
capital 0 0 (0.06) 0 0
Net realized gain on
investments 0 0 0 (0.53) (0.10)
In excess of net realized
gain on investments 0 0 (0.26) 0 0
- -------------------------------------------------------------------------------
Total distributions (0.63) (0.65) (0.91) (1.27) (0.83)
- -------------------------------------------------------------------------------
Net asset value end of
year $ 9.41 $ 9.61 $ 9.48 $10.45 $10.58
- -------------------------------------------------------------------------------
Total return (a) 4.51% 8.64% (0.71%) 11.51% 12.45%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.14%(b) 1.00% 1.00% 1.41% 1.93%
Total expenses excluding
reimbursement 1.41% 1.42% 1.35% 1.73% 1.93%
Net investment income 6.27% 7.11% 5.97% 6.49% 6.44%
Portfolio turnover rate 176% 182% 230% 189% 93%
Net assets end of year
(thousands) $24,685 $29,776 $38,541 $50,594 $47,892
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
February 13, 1987
(Commencement of
Operations) to
1991 1990 1989 1988 July 31, 1987
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value beginning
of year $ 10.01 $ 10.11 $ 9.74 $ 10.22 $10.00
- ---------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.76 0.76 0.75 0.75 0.14
Net realized and
unrealized gain (loss)
on investments 0.17 (0.10) 0.35 (0.40) 0.22
- ---------------------------------------------------------------------------------------
Total from investment
operations 0.93 0.66 1.10 0.35 0.36
- ---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.76) (0.76) (0.73) (0.83) (0.14)
In excess of net
investment income 0 0 0 0 0
Tax basis return of
capital 0 0 0 0 0
Net realized gain on
investments 0 0 0 0 0
In excess of net realized
gain on investments 0 0 0 0 0
- ---------------------------------------------------------------------------------------
Total distributions (0.76) (0.76) (0.73) (0.83) (0.14)
- ---------------------------------------------------------------------------------------
Net asset value end of
year $ 10.18 $ 10.01 $ 10.11 $ 9.74 $10.22
- ---------------------------------------------------------------------------------------
Total return (a) 9.62% 6.84% 11.89% 3.55% 3.60%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.92% 1.91% 1.90% 1.30% 1.00%(d)
Total expenses excluding
reimbursement 1.92% 1.91% 1.90% 1.30% 1.00%(d)
Net investment income 7.46% 7.61% 7.68% 7.29% 5.74%(d)
Portfolio turnover rate 72% 58% 171% 206% 60%
Net assets end of year
(thousands) $55,597 $61,744 $68,493 $73,757 $3,479
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets for the year ended July 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.13% for the year ended July 31, 1996.
(c) Calculation based on average shares outstanding.
(d) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
See Notes to Financial Statements.
<PAGE>
Page 12
- -----------------------------------
Keystone Government Securities Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended July 31, Public Offering) to
1996 1995 1994(c) July 31, 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 9.61 $ 9.48 $ 10.45 $10.32
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.53 0.59 0.50 0.26
Net realized and unrealized gain (loss)
on investments (0.18) 0.12 (0.63) 0.22
- ----------------------------------------------------------------------------------------------
Total from investment operations 0.35 0.71 (0.13) 0.48
- ----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.53) (0.58) (0.49) (0.26)
In excess of net investment income (0.03) 0 (0.03) (0.09)
Tax basis return of capital 0 0 (0.06) 0
In excess of net realized gain on
investments 0 0 (0.26) 0
- ----------------------------------------------------------------------------------------------
Total distributions (0.56) (0.58) (0.84) (0.35)
- ----------------------------------------------------------------------------------------------
Net asset value end of year $ 9.40 $ 9.61 $ 9.48 $10.45
- ----------------------------------------------------------------------------------------------
Total return (a) 3.63% 7.81% (1.44%) 4.69%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.89%(b) 1.75% 1.75% 1.72%(d)
Total expenses excluding reimbursement 2.17% 2.09% 2.12% 2.28%(d)
Net investment income 5.52% 6.40% 5.32% 5.46%(d)
Portfolio turnover rate 176% 182% 230% 189%
Net assets end of year (thousands) $17,694 $18,064 $15,386 $9,223
- ----------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets for the year ended July 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.88% for the year ended July 31, 1996.
(c) Calculation based on average shares outstanding.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
Page 13
- -----------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended July 31, Public Offering) to
1996 1995 1994(c) July 31, 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 9.62 $ 9.49 $ 10.46 $ 10.32
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.54 0.61 0.50 0.25
Net realized and unrealized gain (loss)
on investments (0.19) 0.10 (0.63) 0.24
- ----------------------------------------------------------------------------------------------
Total from investment operations 0.35 0.71 (0.13) 0.49
- ----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.53) (0.58) (0.50) (0.25)
In excess of net investment income (0.03) 0 (0.02) (0.10)
Tax basis return of capital 0 0 (0.06) 0
In excess of net realized gain on
investments 0 0 (0.26) 0
- ----------------------------------------------------------------------------------------------
Total distributions (0.56) (0.58) (0.84) (0.35)
- ----------------------------------------------------------------------------------------------
Net asset value end of year $ 9.41 $ 9.62 $ 9.49 $ 10.46
- ----------------------------------------------------------------------------------------------
Total return (a) 3.62% 7.81% (1.44%) 4.79%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.89%(b) 1.75% 1.75% 1.71%(d)
Total expenses excluding reimbursement 2.17% 2.17% 2.12% 2.17%(d)
Net investment income 5.53% 6.32% 5.32% 5.31%(d)
Portfolio turnover rate 176% 182% 230% 189%
Net assets end of year (thousands) $8,293 $9,101 $17,505 $13,286
- ----------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets for the year ended July 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.88% for the year ended July 31, 1996.
(c) Calculation based on average shares outstanding.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
Page 14
- -----------------------------------
Keystone Government Securities Fund
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets (Notes 1 and 5)
Investments at market value
(identified cost--$50,897,664) $50,026,808
Cash 446
Receivable for:
Investments sold 64,853
Fund shares sold 10,658
Interest 723,982
Due from investment adviser 16,959
Prepaid expenses and other assets 8,874
- ---------------------------------------------------------------
Total assets 50,852,580
- ---------------------------------------------------------------
Liabilities (Notes 2, 4 and 5)
Payable for:
Fund shares redeemed 43,604
Distributions to shareholders 94,763
Distribution fee payable 1,667
Accrued transfer agent fees 863
Accrued reimbursable expenses 2,000
Other accrued expenses 37,531
- ---------------------------------------------------------------
Total liabilities 180,428
- ---------------------------------------------------------------
Net assets $50,672,152
- ---------------------------------------------------------------
Net assets represented by (Note 1)
Paid-in capital $56,162,952
Accumulated distributions in excess of net
investment income (94,763)
Accumulated net realized loss on investments (4,525,181)
Net unrealized depreciation on investments (870,856)
- ---------------------------------------------------------------
Total net assets $50,672,152
- ---------------------------------------------------------------
Net asset value per share (Note 2)
Class A Shares
Net assets of $24,684,810 / 2,624,480 shares
outstanding $ 9.41
Offering price per share ($9.41 / 0.9525)
(based on a sales charge of 4.75% of the
offering price at July 31, 1996) $ 9.88
Class B Shares
Net assets of $17,693,939 / 1,881,535 shares
outstanding $ 9.40
Class C Shares
Net assets of $8,293,403 / 880,989 shares
outstanding $ 9.41
- ---------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
Year Ended July 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Investment income (Note 1)
Interest $4,163,554
- ------------------------------------------------------------
Expenses (Notes 4 and 5)
Management fee $ 365,012
Transfer agent fees 124,611
Accounting, auditing and legal
fees 54,966
Custodian fees 50,196
Distribution Plan expenses 350,078
Registration fees 45,479
Miscellaneous 18,595
Reimbursement from investment
advisor (152,919)
- ------------------------------------------------------------
Total expenses 856,018
Less: Expenses paid indirectly
(Note 6) (8,794)
- ------------------------------------------------------------
Net expenses 847,224
- ------------------------------------------------------------
Net investment income 3,316,330
- ------------------------------------------------------------
Net realized and unrealized loss on investments (Notes 1 and 3)
Net realized loss on investments (1,599)
Net change in unrealized
depreciation on investments (990,037)
- ------------------------------------------------------------
Net realized and unrealized loss
on investments (991,636)
- ------------------------------------------------------------
Net increase in net assets
resulting from operations $2,324,694
- ------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 15
- -----------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income $ 3,316,330 $ 4,123,800
Net realized loss on investments and closed futures contracts (1,599) (426,554)
Net change in unrealized appreciation (depreciation) on investments (990,037) 684,236
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,324,694 4,381,482
- -------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1)
Net investment income:
Class A Shares (1,727,494) (2,209,540)
Class B Shares (1,084,150) (956,018)
Class C Shares (473,896) (785,806)
In excess of net investment income:
Class A Shares (81,785) (14,410)
Class B Shares (51,327) (6,235)
Class C Shares (22,436) (5,125)
- -------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (3,441,088) (3,977,134)
- -------------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 1,651,672 2,769,293
Class B Shares 5,962,724 7,568,772
Class C Shares 2,368,822 2,745,502
Payments for shares redeemed:
Class A Shares (7,382,633) (13,142,989)
Class B Shares (6,522,312) (5,680,735)
Class C Shares (3,283,434) (11,661,880)
Net asset value of shares issued in reinvestment of dividends and distributions:
Class A Shares 1,158,479 1,398,434
Class B Shares 617,384 567,452
Class C Shares 277,020 537,320
- -------------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share transactions (5,152,278) (14,898,831)
- -------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (6,268,672) (14,494,483)
Net assets
Beginning of year 56,940,824 71,435,307
- -------------------------------------------------------------------------------------------------------------------
End of year {including accumulated distributions in excess of net investment
income as follows: 1996--($94,763) and 1995--($25,769)} (Note 1) $50,672,152 $ 56,940,824
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 16
- -----------------------------------
Keystone Government Securities Fund
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone Government Securities Fund (the "Fund") is a Massachusetts business
trust for which Keystone Management, Inc. ("KMI") is the Investment Manager and
Keystone Investment Management Company ("Keystone") is the Investment Adviser.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"). 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 offers
several classes of shares. The Fund's investment objective is to seek the
highest possible level of current income, consistent with safety of principal
and maintenance of liquidity, by investing primarily in securities issued by or
guaranteed as to principal and interest by the full faith and credit of the U.S.
government.
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
U.S. Government obligations held by the Fund are valued at the mean between
the over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed income securities, mortgage and
other asset-backed securities, and other related 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 various relationships between
securities which are generally recognized by institutional traders. Security
valuations not available from an independent pricing service (including
restricted securities) are valued at fair value as determined in good faith
according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized by
U.S. Treasury and/or Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the
collateral daily and will require the seller to provide additional collateral
in the event the market value of the securities pledged falls below the
carrying value of the repurchase agreement.
C. Reverse Repurchase Agreements
The Fund enters into reverse repurchase agreements with qualified third-party
broker-dealers. Interest on the value of reverse repurchase agreements is based
upon competitive market rates at the time of issuance. At the time the Fund
enters into a reverse repurchase agreement, it will establish and maintain a
segregated account with its custodian containing liquid assets having a value
not less than the repurchase price (including accrued interest). If the
counterparty to the
<PAGE>
Page 17
- -----------------------------------
transaction is rendered insolvent, the ultimate realization of the securities
to be repurchased by the Fund may be delayed or limited
D. Futures Contracts
In order to gain exposure to or protect against changes in security values,
the Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
The risks of entering into futures contracts include (i) the possibility
of an illiquid market for the contract, (ii) the possibility that a change in
the value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other
party will not fulfill the obligations of the contract. Futures contracts
also 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 amortization of discounts and premiums.
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 excise tax
liability by making the required distributions under the Code. Accordingly,
no provision for federal income taxes is required.
G. Distributions
The Fund distributes net investment income monthly and net capital gains, if
any, 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 paydown gains (losses).
H. Class Allocations
Class A shares are offered at a public offering price which includes a
maximum sales charge of 4.75% payable at the time of purchase. Class B shares
are sold subject to a contingent deferred sales charge that is payable upon
redemption and decreases depending on how long the shares have been held. Class
B shares purchased on or after June 1, 1995 that have been outstanding for eight
years will automatically convert to Class A shares. Class B shares purchased
prior to June 1, 1995 that have been outstanding for seven years will
automatically convert to Class A shares. Class C shares are sold subject to a
contingent deferred sales charge payable on shares redeemed within one year of
purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
<PAGE>
Page 18
- -----------------------------------
Keystone Government Securities Fund
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest with no par value. Shares of beneficial
interest of the Fund are currently divided into Class A, Class B and Class C.
Transactions in shares of the Fund were as follows:
Year ended July 31,
Class A 1996 1995
- ----------------------------------------------------
Shares sold 169,632 291,673
Shares redeemed (762,511) (1,409,532)
Shares issued in
reinvestment of
dividends and
distributions 120,093 149,602
- ----------------------------------------------------
Net decrease (472,786) (968,257)
- ----------------------------------------------------
Class B
- ----------------------------------------------------
Shares sold 614,502 804,244
Shares redeemed (676,246) (608,903)
Shares issued in
reinvestment of
dividends and
distributions 63,955 60,604
- ----------------------------------------------------
Net increase 2,211 255,945
- ----------------------------------------------------
Class C
- ----------------------------------------------------
Shares sold 245,017 295,567
Shares redeemed (338,579) (1,253,057)
Shares issued in
reinvestment of
dividends and
distributions 28,708 57,570
- ----------------------------------------------------
Net decrease (64,854) (899,920)
- ----------------------------------------------------
(3.) Securities Transactions
Cost of purchases and proceeds from sales of U.S. government securities
(excluding short-term securities) for the year ended July 31, 1996 were
$94,561,369 and $97,608,076, respectively.
The average daily balance of reverse repurchase agreements outstanding during
the year ended July 31, 1996 was approximately $3,190,700 at a weighted average
interest rate of 5.81%. The maximum amount of borrowing during the year was
$4,463,261 (including accrued interest).
As of July 31, 1996, the Fund has a capital loss carryover for federal income
tax purposes of approximately $3,703,000 which expires in 2002.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted by its Class A, B and C shares pursuant to Rule 12b-1 under the
1940 Act. Under the Distribution Plans, the Fund pays its principal underwriter,
Keystone Investment Distributors Company ("KIDC"), a wholly-owned subsidiary of
Keystone, amounts which are calculated and paid daily.
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.25% annually of the average net assets of the Class A shares, to
pay expenses related to the distribution of Class A shares. During the year
ended July 31, 1996, the Fund paid $66,218 to KIDC under the Class A
Distribution Plan.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund pays
a distribution fee which may not exceed 1.00% of the average daily net assets of
Class B and Class C shares, respectively. Of that amount 0.75% is used to pay
distribution expenses and 0.25% is used to pay service fees.
During the year ended July 31, 1996, under the Class B Distribution Plans,
the Fund paid or accrued $150,440 for Class B shares purchased before June 1,
1995 and $46,694 for Class B shares purchased on or after June 1, 1995. The Fund
paid $86,726 under the Class C Distribution Plan.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of
<PAGE>
Page 19
- -----------------------------------
any Distribution Plan, and subject to the discretion of the Independent
Trustees, payments to KIDC may continue as compensation for services which had
been earned while the Distribution Plan was in effect.
KIDC intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. KIDC intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
At July 31, 1996 total unpaid distribution costs were $1,068,462 for Class B
shares purchased before June 1, 1995 and $343,081 for Class B shares purchased
on or after June 1, 1995. Unpaid distribution costs for Class C were $1,543,638
at July 31, 1996.
Contingent deferred sales charges paid by redeeming shareholders are paid to
KIDC.
(5.) Investment Management Agreement and Other Affiliated Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee, computed and paid daily, at an
annual rate of 2.00% of the Fund's gross investment income plus an amount
determined by applying percentage rates starting at 0.50% and declining as net
assets increase to 0.25% per annum, to the net asset value of the Fund.
KMI has entered into an Investment Advisory Agreement with Keystone under
which Keystone provides investment advisory and management services to the Fund.
In return for its services, Keystone receives an annual fee equal to 85% of the
management fee received by KMI.
Effective October 2, 1995, Keystone has voluntarily limited the expenses of
Class A shares to 1.15% of its average daily net assets and has limited the
expenses of Class B and C to 1.90% of the average daily net assets of each
respective class. Prior to October 2, 1995, Keystone voluntarily limited the
expenses of Class A shares to 1.00% of its average daily net assets and limited
the expenses of Class B and C to 1.75% of the average daily net assets of each
respective class. In accordance with the voluntary expense limits, Keystone
reimbursed $152,919 to the Fund during the year ended July 31, 1996.
During the year ended July 31, 1996, the Fund paid or accrued $24,249 to
Keystone for certain accounting services. The Fund paid or accrued $124,611 to
Keystone Investor Resource Center, Inc., a wholly-owned subsidiary of Keystone,
for services rendered as the Fund's transfer and dividend disbursing agent.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund. Currently the Independent Trustees of the
Fund receive no compensation for their services.
(6.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended July 31, 1996, the Fund incurred total custody fees of
$50,196 and received a credit of $8,794 pursuant to this expense offset
arrangement, resulting in a net custody expense of $41,402. The assets deposited
with the custodian under this expense offset arrangement could have been
invested in income-producing assets.
(7.) Subsequent Distribution to Shareholders
Distributions from net investment income of $0.050 for Class A, $0.044 for
Class B and $0.044 for Class C were declared payable by September 6, 1996 to
shareholders of record on August 23, 1996. These distributions are not reflected
in the accompanying financial statements.
<PAGE>
Page 20
- -----------------------------------
Keystone Government Securities Fund
(8.) Subsequent Event
On September 6, 1996, Keystone Investments, Inc. entered into an Agreement
and Plan of Acquisition and Merger (the "Acquisition") with First Union
Corporation and First Union National Bank of North Carolina ("First Union")
whereby First Union would acquire all the assets and liabilities of Keystone
Investments, Inc. Subject to the receipt of the required regulatory and
shareholder approvals, the Acquisition is expected to take place in late
December 1996.
<PAGE>
Page 21
- -----------------------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Government Securities Fund
We have audited the accompanying statement of assets and liabilities of Keystone
Government Securities Fund, including the schedule of investments, as of July
31, 1996, 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 nine-year
period ended July 31, 1996 and the period from February 13, 1987 (Commencement
of Operations) to July 31, 1987 for Class A Shares and for each of the years in
the three-year period ended July 31, 1996 and the period from February 1, 1993
(Date of Initial Public Offering) to July 31, 1993, for Class B and Class C
Shares. 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 July
31, 1996 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Government Securities Fund as of July 31, 1996, 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 or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
Boston, Massachusetts
September 6, 1996
KPMG Peat Marwick LLP
<PAGE>
PAGE 7
- --------------------------------------
Keystone Government Securities Fund
SCHEDULE OF INVESTMENTS--January 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT ISSUES (37.3%)
U.S. Treasury Bonds 7.875% 2021 $7,520,000 $ 8,377,731
U.S. Treasury Bonds 6.875 2025 600,000 601,218
U.S. Treasury Bonds 6.000 2026 1,575,000 1,408,633
U.S. Treasury Bonds 6.500 2026 1,000,000 962,340
U.S. Treasury Notes 6.125 1998 1,585,000 1,591,689
U.S. Treasury Notes 6.750 2000 4,000,000 4,070,640
- --------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT ISSUES (Cost--$17,416,498) 17,012,251
====================================================================================================================
GNMA (26.7%)
GNMA Pool #163934 9.000 2016 13,586 14,614
GNMA Pool #165633 9.000 2016 84,750 91,163
GNMA Pool #192803 9.500 2016 119,623 129,941
GNMA Pool #204238 9.500 2017 165,702 179,916
GNMA Pool #208850 9.500 2017 128,848 139,900
GNMA Pool #212897 9.500 2017 128,263 139,266
GNMA Pool #213635 9.500 2017 86,374 93,782
GNMA Pool #221645 9.500 2017 218,483 237,224
GNMA Pool #224848 9.500 2017 28,383 30,817
GNMA Pool #226032 9.500 2017 224,593 243,859
GNMA Pool #229824 9.500 2017 12,608 13,690
GNMA Pool #223682 9.500 2018 100,586 109,167
GNMA Pool #305224 9.500 2021 41,461 44,928
GNMA Pool #414739 6.500 2025 3,687,551 3,518,145
GNMA Pool #415807 7.000 2025 4,472,978 4,383,519
GNMA Pool #268164 10.250 2029 2,586,570 2,807,695
- --------------------------------------------------------------------------------------------------------------------
TOTAL GNMA (Cost--$11,885,491) 12,177,626
====================================================================================================================
FHA (13.8%)
FHA Pool #2343143 9.125 2034 3,374,466 3,652,860
FHA Pool #2343143 10.250 2034 2,501,540 2,653,978
- --------------------------------------------------------------------------------------------------------------------
TOTAL FHA (Cost--$6,219,181) 6,306,838
====================================================================================================================
COLLATERALIZED MORTGAGE OBLIGATIONS (11.4%)
FHLMC Series 1701 PH (Est. Mat. 2005) (b) 6.500 2009 1,000,000 977,540
FHLMC Series 117 G (Est. Mat. 2007) (b) 8.500 2021 1,000,000 1,050,988
FNMA Series 93-248 SA (Est. Mat. 2006) (b) 3.429 2023 1,250,000 909,180
FNMA GT 95-T5A (Est. Mat. 2001) (b) 7.000 2035 807,738 785,525
Resolution Trust Corp. Series 95-1 A2C (Est. Mat. 2000) (b) 7.500 2028 1,500,000 1,506,094
- --------------------------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$5,186,771) 5,229,327
====================================================================================================================
</TABLE>
<PAGE>
PAGE 8
- --------------------------------------
Keystone Government Securities Fund
SCHEDULE OF INVESTMENTS--January 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC (6.3%)
FHLMC Debenture 7.800% 2016 $1,750,000 $1,798,405
FHLMC Pool #430438 10.500 2009 55,123 59,746
FHLMC Pool #607352 7.682 2022 973,614 1,018,186
- -----------------------------------------------------------------------------------------------------------------------
TOTAL FHLMC (Cost--$2,836,079) 2,876,337
=======================================================================================================================
FNMA (2.9%) (Cost--$1,290,444)
FNMA Pool #002497 11.000 2016 1,187,980 1,322,757
- -----------------------------------------------------------------------------------------------------------------------
Maturity
Value
- -----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.3%) (Cost--$125,000)
Keystone Joint Repurchase Agreement (Investments in
repurchase agreements, in a joint trading account, purchased
1/31/97) (a) 5.580 2/3/97 125,058 125,000
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$44,959,464) 45,050,136
OTHER ASSETS AND LIABILITIES--NET (1.3%) 610,179
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS--(100.0%) $45,660,315
=======================================================================================================================
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at January 31, 1997.
(b) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected prepayment rates. Changes in interest rates
can cause the estimated maturity to differ from the listed date.
Legend of Portfolio Abbreviations
FHA--Federal Housing Association
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
See Notes to Financial Statements.
<PAGE>
PAGE 9
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
<S>
Six Months
Ended Year Ended July 31,
January 31, 1997 1996 1995 1994(c) 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<C> <C> <C> <C> <C> <C>
Net asset value
beginning of period $9.41 $ 9.61 $ 9.48 $10.45 $10.58 $10.18
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.30 0.61 0.67 0.57 0.68 0.68
Net realized and
unrealized gain (loss) on
investments 0.14 (0.18) 0.11 (0.63) 0.46 0.55
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.44 0.43 0.78 (0.06) 1.14 1.23
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.30) (0.60) (0.65) (0.57) (0.68) (0.69)
In excess of net investment
income 0 (0.03) 0 (0.02) (0.06) (0.04)
Tax basis return of capital 0 0 0 (0.06) 0 0
Net realized gain on
investments 0 0 0 0 (0.53) (0.10)
In excess of net realized
gain on investments 0 0 0 (0.26) 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.30) (0.63) (0.65) (0.91) (1.27) (0.83)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value end of
period $9.55 $ 9.41 $ 9.61 $ 9.48 $10.45 $10.58
===========================================================================================================================
Total return (a) 4.73% 4.51% 8.64% (0.71%) 11.51% 12.45%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.16%(b)(d) 1.14%(b) 1.00% 1.00% 1.41% 1.93%
Total expenses
excluding
reimbursement 1.46%(d) 1.41% 1.42% 1.35% 1.73% 1.93%
Net investment income 6.14%(d) 6.27% 7.11% 5.97% 6.49% 6.44%
Portfolio turnover rate 59% 176% 182% 230% 189% 93%
Net assets end of period
(thousands) $22,844 $24,685 $29,776 $38,541 $50,594 $47,892
===========================================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.15% (annualized) and 1.13% for the six months ended January 31, 1997
and the year ended July 31, 1996, respectively.
(c) Calculation based on average shares outstanding.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 10
- --------------------------------------
Keystone Government Securities Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
<S>
February 1, 1993
(Date of Initial
Six Months Public Offering) to
Ended Year Ended July 31,
January 31, 1997 1996 1995 1994(c) July 31, 1993
- --------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of
period $9.40 $ 9.61 $ 9.48 $10.45 $10.32
- --------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.26 0.53 0.59 0.50 0.26
Net realized and unrealized gain
(loss) on investments 0.14 (0.18) 0.12 (0.63) 0.22
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.40 0.35 0.71 (0.13) 0.48
- --------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.26) (0.53) (0.58) (0.49) (0.26)
In excess of net investment
income 0 (0.03) 0 (0.03) (0.09)
Tax basis return of capital 0 0 0 (0.06) 0
In excess of net realized gain on
investments 0 0 0 (0.26) 0
- --------------------------------------------------------------------------------------------------------------------
Total distributions (0.26) (0.56) (0.58) (0.84) (0.35)
- --------------------------------------------------------------------------------------------------------------------
Net asset value end of period $9.54 $ 9.40 $ 9.61 $ 9.48 $10.45
====================================================================================================================
Total return (a) 4.34% 3.63% 7.81% (1.44%) 4.69%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.91%(b)(d) 1.89%(b) 1.75% 1.75% 1.72%(d)
Total expenses excluding
reimbursement 2.22%(d) 2.17% 2.09% 2.12% 2.28%(d)
Net investment income 5.40%(d) 5.52% 6.40% 5.32% 5.46%(d)
Portfolio turnover rate 59% 176% 182% 230% 189%
Net assets end of period
(thousands) $16,070 $17,694 $18,064 $15,386 $9,223
====================================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.90% (annualized) and 1.88% for the six months ended January 31, 1997
and the year ended July 31, 1996, respectively.
(c) Calculation based on average shares outstanding.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 11
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
<S>
February 1, 1993
(Date of Initial
Six Months Public Offering) to
Ended Year Ended July 31,
January 31, 1997 1996 1995 1994(c) July 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of
period $9.41 $9.62 $9.49 $10.46 $10.32
- -------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.26 0.54 0.61 0.50 0.25
Net realized and unrealized gain
(loss) on investments 0.14 (0.19) 0.10 (0.63) 0.24
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.40 0.35 0.71 (0.13) 0.49
- -------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.26) (0.53) (0.58) (0.50) (0.25)
In excess of net investment
income 0 (0.03) 0 (0.02) (0.10)
Tax basis return of capital 0 0 0 (0.06) 0
In excess of net realized gain on
investments 0 0 0 (0.26) 0
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (0.26) (0.56) (0.58) (0.84) (0.35)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value end of period $9.55 $9.41 $9.62 $9.49 $10.46
=========================================================================================================================
Total return (a) 4.34% 3.62% 7.81% (1.44%) 4.79%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.91%(b)(d) 1.89%(b) 1.75% 1.75% 1.71%(d)
Total expenses excluding
reimbursement 2.22%(d) 2.17% 2.17% 2.12% 2.17%(d)
Net investment income 5.39%(d) 5.53% 6.32% 5.32% 5.31%(d)
Portfolio turnover rate 59% 176% 182% 230% 189%
Net assets end of period
(thousands) $6,746 $8,293 $9,101 $17,505 $13,286
=========================================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.90% (annualized) and 1.88% for the six months ended January 31, 1997
and the year ended July 31, 1996, respectively.
(c) Calculation based on average shares outstanding.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- --------------------------------------------------------------------
Keystone Government Securities Fund
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------
<TABLE>
<S> <C>
Assets (Notes 2 and 5)
Investments at market value (identified cost--
$44,959,464) $45,050,136
Cash 880
Receivable for:
Fund shares sold 26,308
Interest 719,932
Due from investment adviser 13,235
Other assets 6,875
- ----------------------------------------------------------------------------
Total assets 45,817,366
- ----------------------------------------------------------------------------
Liabilities (Notes 2, 4 and 5)
Payable for:
Fund shares redeemed 3,266
Distributions to shareholders 104,413
Distribution fee payable 20,236
Due to related parties 3,399
Other accrued expenses 25,737
- ----------------------------------------------------------------------------
Total liabilities 157,051
- ----------------------------------------------------------------------------
Net assets $45,660,315
============================================================================
Net assets represented by
Paid-in capital $50,381,946
Accumulated distributions in excess of net
investment income (95,359)
Accumulated net realized loss on investments (4,716,944)
Net unrealized appreciation on investments 90,672
- ----------------------------------------------------------------------------
Total net assets $45,660,315
============================================================================
Net asset value per share (Note 2)
Class A Shares
Net assets of $22,844,412 [dividedby] 2,393,152 shares
outstanding $ 9.55
Offering price per share ($9.55 [dividedby] 0.9525) (based
on a sales charge of 4.75% of the offering
price at January 31, 1997) $ 10.03
Class B Shares
Net assets of $16,070,293 [dividedby] 1,683,755 shares
outstanding $ 9.54
Class C Shares
Net assets of $6,745,610 [dividedby] 706,004 shares
outstanding $ 9.55
============================================================================
</TABLE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six Months Ended January 31, 1997 (Unaudited)
Investment income
<S> <C> <C>
Interest $1,832,404
- -------------------------------------------------------------------
Expenses (Notes 4, 5 and 6)
Management fee $ 161,671
Distribution Plan expenses 157,845
Transfer agent fees 56,905
Accounting, auditing and legal fees 29,127
Custodian fees 25,295
Registration fees 22,186
Other 12,501
Reimbursement from investment
adviser (76,910)
- ----------------------------------------------------
Total expenses 388,620
Less: Expenses paid indirectly (3,251)
- ----------------------------------------------------
Net expenses 385,369
- -------------------------------------------------------------------
Net investment income 1,447,035
- -------------------------------------------------------------------
Net realized and unrealized gain
on investments (Note 3)
Net realized loss on investments (191,763)
Net change in unrealized
appreciation on investments 961,528
- ----------------------------------------------------
Net realized and unrealized gain
on investments 769,765
- -------------------------------------------------------------------
Net increase in net assets
resulting from operations $2,216,800
===================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 13
- --------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
January 31, 1997 July 31, 1996
===============================================================================================================
(Unaudited)
<S> <C> <C>
Operations
Net investment income $ 1,447,035 $ 3,316,330
Net realized loss on investments (191,763) (1,599)
Net change in unrealized appreciation (depreciation) on investments 961,528 (990,037)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,216,800 2,324,694
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1)
Net investment income:
Class A Shares (746,537) (1,727,494)
Class B Shares (480,133) (1,084,150)
Class C Shares (220,961) (473,896)
In excess of net investment income:
Class A Shares 0 (81,785)
Class B Shares 0 (51,327)
Class C Shares 0 (22,436)
- ---------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,447,631) (3,441,088)
- ---------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 460,966 1,651,672
Class B Shares 1,882,605 5,962,724
Class C Shares 338,968 2,368,822
Payments for shares redeemed:
Class A Shares (3,167,965) (7,382,633)
Class B Shares (4,039,559) (6,522,312)
Class C Shares (2,158,475) (3,283,434)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 500,933 1,158,479
Class B Shares 268,642 617,384
Class C Shares 132,879 277,020
- ---------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share transactions (5,781,006) (5,152,278)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (5,011,837) (6,268,672)
- ---------------------------------------------------------------------------------------------------------------
Net assets
Beginning of period 50,672,152 56,940,824
- ---------------------------------------------------------------------------------------------------------------
End of period {including accumulated distributions in excess
of net investment income as follows: 1997--($95,359) and
1996--($94,763)} (Note 1) $ 45,660,315 $50,672,152
===============================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 14
- --------------------------------------
Keystone Government Securities Fund
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone Government Securities Fund (the "Fund") is a Massachusetts business
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 Keystone, Inc. First Union Keystone, Inc. is a wholly-
owned subsidiary of First Union National Bank of North Carolina, which in turn
is a wholly-owned 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 offers
several classes of shares. The Fund's investment objective is to seek the
highest possible level of current income, consistent with the safety of
principal and maintenance of liquidity, by investing primarily in securities
issued, or guaranteed as to principal and interest by the full faith and credit
of the U.S. government.
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
U.S. Government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed-income
securities, mortgage and other asset-backed securities, and other related
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
various relationships between securities that are generally recognized by
institutional traders. Securities for which valuations are not available from an
independent pricing service (including restricted securities) are valued at fair
value as determined in good faith according to procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other Keystone funds, may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are fully collateralized by U.S. Treasury and/or
Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. Reverse Repurchase Agreements
The Fund enters into reverse repurchase agreements with qualified third-party
broker-dealers. Interest on the value of reverse repurchase agreements is based
upon competitive market rates at the time of issuance. At the time the Fund
enters into a reverse repurchase agreement, it will establish and maintain a
segregated
<PAGE>
PAGE 15
- --------------------------------------
account with its custodian containing liquid assets having a value not less than
the repurchase price (including accrued interest). If the counterparty to the
transaction is rendered insolvent, the ultimate realization of the securities to
be repurchased by the Fund may be delayed or limited.
D. 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
amortization of discounts.
E. 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 also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
F. Distributions
The Fund distributes net investment income monthly 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 paydown gains (losses).
G. Class Allocations
Class A shares are offered at a public offering price which includes a maximum
sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge that
is payable upon redemption and decreases depending on how long the shares have
been held. Class B shares purchased after January 1, 1997 will automatically
convert to Class A shares after seven years. Class B shares purchased prior to
January 1, 1997 will retain their existing conversion features.
Class C shares are sold subject to a contingent deferred sales charge
payable on shares redeemed within one year after the month of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
2. Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with no par value. Shares of beneficial
interest of the Fund are currently divided into Class A, Class B and Class C.
Transactions in shares of the Fund were as follows:
<PAGE>
PAGE 16
- --------------------------------------
Keystone Government Securities Fund
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
Class A January 31, 1997 July 31, 1996
- ----------------------------------------------------------------
<S> <C> <C>
Shares sold 48,482 169,632
Shares redeemed (332,540) (762,511)
Shares issued in
reinvestment of dividends
and distributions 52,730 120,093
- -------------------------------------------------------------
Net decrease (231,328) (472,786)
=============================================================
Class B
- -------------------------------------------------------------
Shares sold 197,687 614,502
Shares redeemed (423,742) (676,246)
Shares issued in
reinvestment of dividends
and distributions 28,275 63,955
- -------------------------------------------------------------
Net increase (decrease) (197,780) 2,211
=============================================================
Class C
- -------------------------------------------------------------
Shares sold 35,432 245,017
Shares redeemed (224,388) (338,579)
Shares issued in
reinvestment of dividends
and distributions 13,971 28,708
- -------------------------------------------------------------
Net decrease (174,985) (64,854)
=============================================================
</TABLE>
3. Securities Transactions
Cost of purchases and proceeds from sales of U.S. government securities
(excluding short-term securities) for the six months ended January 31, 1997,
were $28,214,704 and $33,822,003, respectively.
The average daily balance of reverse repurchase agreements outstanding
during the six months ended January 31, 1997, was approximately $1,265,800 at a
weighted average interest rate of 3.11%. The maximum amount of borrowing during
the six months ended
January 31, 1997 was $2,793,925 (including accrued interest).
As of July 31, 1996, the Fund had a capital loss carryover for federal
income tax purposes of approximately $3,703,000 which expires in 2002.
4. Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution Plans
adopted for its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, the Fund pays its principal underwriter
amounts which are calculated and paid monthly.
On December 11, 1996, the Fund entered into a principal underwriting
agreement with Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned
subsidiary of The BISYS Group Inc. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. (formerly, Keystone Investment Distributors
Company) ("EKIS"), a wholly-owned subsidiary of Keystone, served as the Fund's
principal underwriter.
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.25% annually of the average daily net assets of the Class A shares,
to pay expenses related to the distribution of Class A shares.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund pays
a distribution fee which may not exceed 1.00% annually of the average daily net
assets of Class B and Class C shares, respectively. Of that amount, 0.75% is
used to pay distribution expenses and 0.25% is used to pay service fees.
During the six months ended January 31, 1997, amounts paid to EKD or EKIS
pursuant to the Fund's Class A, Class B and Class C Distribution Plans were as
follows:
<PAGE>
PAGE 17
- --------------------------------------
<TABLE>
<CAPTION>
Paid to Paid to
EKD EKIS
--------- ----------
<S> <C> <C>
Class A -- $28,470
Class B prior to June 1, 1995 -- 59,527
Class B on or after June 1, 1995 $97 29,098
Class C 46 40,607
</TABLE>
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of any Distribution
Plan, and subject to the discretion of the Independent Trustees, payments to
EKIS and/or EKD may continue as compensation for services which had been earned
while the Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
At January 31, 1997, total unpaid distribution costs were $1,084,026 for
Class B shares purchased before June 1, 1995, and $355,248 for Class B shares
purchased on or after June 1, 1995. Unpaid distribution costs for Class C were
$1,592,782 at January 31, 1997.
Contingent deferred sales charges paid by redeeming shareholders are paid
to EKD or its predecessor.
5. Investment Advisory and Management Agreement and Other Affiliated
Transactions
Under an Investment Advisory and Management 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 and paid daily, at an annual rate of
2.00% of the Fund's gross investment income plus an amount determined by
applying percentage rates starting at 0.50% and declining as net assets increase
to 0.25% per annum, to the average daily net asset value of the Fund.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a
wholly-owned subsidiary of Keystone, served as investment manager to the Fund
and provided investment management and administrative services. Under an
investment advisory agreement between KMI and Keystone, Keystone served as the
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.
Keystone has voluntarily limited the expenses of Class A shares to 1.15% of
its average daily net assets and has limited the expenses of Class B and C to
1.90% of the average daily net assets of each respective class. In accordance
with the voluntary expense limits, Keystone reimbursed $76,910 to the Fund
during the six months ended January 31, 1997.
During the six months ended January 31, 1997, the Fund paid or accrued
12,900 to Keystone for certain accounting services. The Fund paid or accrued
$56,905 to Evergreen Keystone Service Company (formerly, Keystone Investor
Resource Center, Inc.), a wholly-owned subsidiary of Keystone, for services
rendered as the Fund's transfer and dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund. Currently the Independent Trustees of the Fund receive
no compensation for their services.
<PAGE>
PAGE 18
- --------------------------------------
Keystone Government Securities Fund
6. Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian. For
the six months ended January 31, 1997, the Fund incurred total custody fees of
$25,295 and received a credit of $3,251 pursuant to this expense offset
arrangement, resulting in a net custody expense of $22,044. The assets deposited
with the custodian under this expense offset arrangement could have been
invested in income- producing assets.
7. Subsequent Distribution to Shareholders
Distributions from net investment income of $0.050 for Class A, $0.044 for Class
B and $0.044 for Class C were declared payable by March 6, 1997, to shareholders
of record February 25, 1997. These distributions are not reflected in the
accompanying financial statements.
<PAGE>
ADDITIONAL INFORMATION (Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday, December 9, 1996. In
addition, beside each proposal are the results of that vote.
<TABLE>
<CAPTION>
Affirmative Withheld
------------- ----------
<S> <C> <C> <C>
1. To elect the following Trustees:
Frederick Amling 3,628,419 68,876
Laurence B. Ashkin 3,627,189 70,106
Charles A. Austin III 3,628,419 68,876
Foster Bam 3,627,189 70,106
George S. Bissell 3,626,443 70,851
Edwin D. Campbell 3,628,419 68,876
Charles F. Chapin 3,628,419 68,876
K. Dun Gifford 3,628,419 68,876
James S. Howell 3,627,189 70,106
Leroy Keith, Jr. 3,628,419 68,876
F. Ray Keyser 3,628,419 68,876
Gerald M. McDonnell 3,627,189 70,106
Thomas L. McVerry 3,627,189 70,106
William Walt Pettit 3,628,419 68,876
David M. Richardson 3,628,419 68,876
Russell A. Salton, III MD 3,628,419 68,876
Michael S. Scofield 3,628,419 68,876
Richard J. Shima 3,628,419 68,876
Andrew J. Simons 3,626,453 70,842
</TABLE>
<TABLE>
<CAPTION>
Affirmative Against Abstain
------------- --------- ---------
<S> <C> <C> <C>
To approve an Investment Advisory and Management
Agreement between the Fund and Keystone Investment
2. Management Company. 3,499,650 39,041 158,603
</TABLE>
<PAGE>
Evergreen U.S. Government Fund
See Notes to Pro-Forma Financial Statements
Pro-Forma Combining Financial Statements (Unaudited)
Portfolio of Investments (000's omitted)
December 31, 1996
<TABLE>
<CAPTION>
Evergreen U.S. Keystone Government Pro-Forma
Government Fund Securities Fund Combined
Principal Principal Adjust- Principal
Amount Value Amount Value ments Amount Value
<S> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities - 52.5%
Federal Home Loan Mortgage Corp. - 10.7%(c)
6.50%, 4/1/26 $15,000 $14,364 $15,000 $14,364
7.683%, 4/1/22 $974 $1,016 974 1,016
7.80%, 9/12/16 1,750 1,817 1,750 1,817
8.00%, 7/1/17 - 4/1/22 5,755 5,923 5,755 5,923
8.50%, 2/1/17 - 10/1/17 4,059 4,237 4,059 4,237
9.00%, 11/1/19 - 4/1/21 3,801 4,064 3,801 4,064
9.50%, 9/1/20 1,463 1,583 1,463 1,583
10.00%, 12/1/19 - 8/1/21 2,247 2,464 2,247 2,464
10.50%, 11/1/09 56 60 56 60
10.50%, 12/1/19 1,883 2,081 1,883 2,081
------ ----- ------
34,716 2,893 37,609
------ ----- ------
Federal Housing Authority - 1.8%
9.125%, 8/1/34 3,375 3,580 3,375 3,580
10.25%, 8/1/34 2,502 2,708 2,502 2,708
----- -----
6,288 6,288
----- -----
Federal National Mortgage Assn. - 14.6%
6.50%, 1/1/24 5,115 4,887 5,115 4,887
7.00%, 8/1/25 - 9/1/25 18,215 17,845 18,215 17,845
7.50%, 7/1/23 - 7/1/25 12,568 12,580 12,568 12,580
8.00%, 8/1/25 12,348 12,598 12,348 12,598
9.50%, 6/1/22 1,903 2,055 1,903 2,055
11.00%, 1/1/16 1,220 1,362 1,220 1,362
------ ----- ------
49,965 1,362 51,327
------ ----- ------
Government National Mortgage Assn. - 25.4%
6.50%, 10/15/25 3,703 3,535 3,703 3,535
7.00%, 12/15/22 - 11/15/23 15,323 15,012 15,323 15,012
7.00%, 12/15/25 4,477 4,382 4,477 4,382
7.50%, 2/15/22 - 3/15/23 11,141 11,162 11,141 11,162
8.00%, 2/15/23 - 8/15/24 21,725 22,270 21,725 22,270
8.50%, 12/15/21 - 7/15/24 12,362 12,857 12,362 12,857
9.00%, 6/15/16 - 8/15/16 98 105 98 105
9.00%, 1/15/20 - 6/15/21 6,191 6,532 6,191 6,532
9.50%, 11/15/16 - 5/15/21 1,273 1,384 1,273 1,384
9.50%, 1/15/19 - 2/15/21 6,709 7,256 6,709 7,256
10.00%, 12/15/18 1,457 1,600 1,457 1,600
10.25%, 11/15/29 2,587 2,796 2,587 2,796
______ ______ ______
76,689 12,202 88,891
Total Mortgage-Backed Securities (pro-forma
combined cost ------- ------ -------
$184,873) 161,370 22,745 184,115
------- ------ -------
::
<PAGE>
U.S. Treasury Obligations - 44.6%
U.S. Treasury Bonds - 23.2%
6.00%, 2/15/26 2,525 2,298 2,525 2,298
6.75%, 8/15/26 1,000 1,007 1,000 1,007
6.875%, 8/15/25 600 612 600 612
7.875%, 2/15/21 7,520 8,500 7,520 8,500
8.125%, 8/15/19 17,930 20,726 17,930 20,726
8.50%, 2/15/20 8,100 9,722 8,100 9,722
8.75%, 11/15/08 3,650 4,101 3,650 4,101
8.75%, 8/15/20 3,080 3,793 3,080 3,793
8.875%, 8/15/17 14,010 17,298 14,010 17,298
9.25%, 2/15/16 10,300 13,071 10,300 13,071
------ ------ ------
68,711 12,417 81,128
------ ------ ------
U.S. Treasury Notes - 21.4%
6.125%, 8/31/98 2,810 2,822 2,810 2,822
6.750%, 4/30/00 4,000 4,076 4,000 4,076
7.75%, 11/30/99 12,000 12,536 12,000 12,536
7.75%, 1/31/00 9,800 10,259 9,800 10,259
7.875%, 11/15/99 21,500 22,535 21,500 22,535
8.25%, 7/15/98 8,050 8,324 8,050 8,324
9.25%, 8/15/98 13,700 14,394 13,700 14,394
______ _____ ______
68,048 6,898 74,946
------- ------ -------
Total U.S. Treasury Obligations (pro-forma combined
cost $161,882) 136,759 19,315 156,074
------- ------ -------
Collateralized Mortgage Obligations - 1.2%
FHLMC Series 117 G, 8.50%, 1/15/21 (Est. Mat. 2007) (b) 1,000 1,059 1,000 1,059
FNMA Series 93-248 5A, 3.591%, 8/25/23
(Est. Mat. 2006) (b) 1,250 906 1,250 906
FNMA GT 95-T5A, 7.00%, 3/17/35 (Est. Mat. 2001) (b) 808 790 808 790
Resolution Trust Corp. Series 95-1 A2C, 7.50%,
10/25/28 (Est. Mat. 2000) (b) 1,500 1,518 1,500 1,518
----- -----
Total Collateralized Mortgage Obligations (pro-forma combined
cost $4,210) 4,273 4,273
----- -----
Repurchase Agreements - 0.9%
Donaldson, Lufkin & Jenrette Securities Corp.,
6.50% dated 12/31/96, due 1/2/97, --
collateralized by $1,759 U.S. Treasury
Notes, 8.00%, due 5/15/01; value,
including accrued interest $1,907 1,868 1,868 1,868 1,868
Keystone Joint Repurchase Agreement
(Investments in repurchase
agreements, in a joint trading
account, 6.716%, purchased
12/31/96, due 1/2/97 (a) 1,310 1,310 1,310 1,310
Total Repurchase Agreements ------ ----- -----
(pro-forma combined cost $3,178) 1,868 1,310 3,178
------ ----- -----
Total Investments
(pro-forma cost $354,143) - 99.2% 299,997 47,643 347,640
Other Assets and Liabilities
-net - 0.8% 3,368 (485) 2,883
________ _______ ________
Net Assets - 100.0% $303,365 $47,158 $350,523
________ _______ ________
-------- ------- --------
(a) The repurchase agreements are fully collateralized by U.S.
government and/or agency obligations based on market prices at
December 31, 1996.
(b) The estimated maturity of a Collateralized Mortgage Obligation
("CMO") is based on current and projected prepayment rates.
Changes in interest rates can cause the estimated maturity to
differ from the listed dates.
(c) Percentage of pro-forma combined cost net assets.
See Notes to Pro-Forma Combining Financial Statements.
</TABLE>
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
Pro-Forma Combining Financial Statements (unaudited)
Statement of Assets and Liabilities
December 31, 1996 (000's omitted)
Evergreen Keystone
U.S. Government Pro-Forma
Government Securities Adjustments Combined
Assets:
Investments at value $299,997 $47,643 $347,640
(pro-forma combined cost
$354,143)
Cash 0 1 1
Interest receivable 4,419 649 5,068
Receivable for Fund shares sold 156 18 174
Prepaid expenses 21 7 28
Due from investment adviser 0 13 13
_______ ______ _______
Total Assets 304,593 48,331 352,924
Liabilities:
Payable for Fund shares redeemed 336 1,043 1,379
Distributions payable 489 90 579
Accrued expenses 403 40 307 750
_____ _____ _____
Total Liabilities 1,228 1,173 2,401
Net Assets $303,365 $47,158 0 $350,523
________ _______ ________
-------- ------- --------
Net assets are comprised of:
Paid-in capital $326,002 $51,694 $377,696
Accumulated net realized loss (15,851) (4,713) (20,564)
Accumulated net investment loss 0 (106) (106)
Net unrealized appreciation/
depreciation of investments (6,786) 283 (6,503)
________ _______ ________
Net Assets $303,365 $47,158 0 $350,523
________ _______ ________
-------- ------- --------
Class A Shares
Net Assets $18,987 $23,145 $42,132
Shares of Beneficial Interest
Interest Outstanding 1,993 2,415 13 4,421
Net Asset Value $9.53 $9.58 $9.53
Maximum Offer Price $10.01 $10.06 $10.01
Class B Shares
Net Assets $155,900 $17,138 $173,038
Shares of Beneficial
Interest Outstanding 16,366 1,789 9 18,164
Net Asset Value $9.53 $9.58 $9.53
Class C Shares
Net Assets $713 $6,875 $7,588
Shares of Beneficial
Interest Outstanding 75 717 5 797
Net Asset Value $9.53 $9.59 $9.53
Class Y Shares
Net Assets $127,765 0 $127,765
Shares of Beneficial
Interest Outstanding 13,412 0 13,412
Net Asset Value $9.53 $9.53
See Notes to Pro-Forma Combining Financial Statements.
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND
Pro-Forma Combining Financial Statements (unaudited)
Statement of Operations
Year Ended December 31, 1996 (000's omitted)
Evergreen Keystone
U.S. Government Pro-Forma
Government Securities Adjustments Combined
Investment Income:
Interest income $23,529 $3,876 $27,405
Expenses:
Distribution fee 1,747 330 0 2,077
Advisory fee 1,555 341 (82) (a) 1,814
Transfer Agent fee 215 124 (61) (b) 278
Administration fee 150 25 (12) (a) 163
Custodian fees and expenses 139 43 (19) (b) 163
Registration and filing fees 66 45 (45) (b) 66
Reports and notices to shareholders 56 15 (10) (b) 61
Professional fees 45 30 (30) (b) 45
Trustees' fees and expenses 8 0 0 8
Other expenses 32 5 (5) (b) 32
_____ ___ _____
Total Expenses 4,013 958 (264) 4,707
Less: Fee waivers and reimbursements 0 (150) 150 (c) 0
----- ----- -----
Net Expenses 4,013 808 (114) 4,707
Net Investment Income 19,516 3,068 114 22,698
Net realized and unrealized
loss on investments:
Net realized loss on investments (3,895) (1,017) (4,912)
Net change in unrealized
appreciation(depreciation)
of investments (7,976) (1,193) (9,169)
-------- ------- --------
Net loss on investments (11,871) (2,210) 0 (14,081)
Net increase in net assets
resulting from operations $7,645 $858 114 $8,617
______ _____ ______
------ ----- ------
(a)Reflects a decrease in the investment advisory fee and a decrease in
administrative personnel and service fees based on the surviving Fund's fee
schedule.
(b)Reflects expected cost savings when the funds combine based on elimination
of duplicate expenses.
(c)Reflects elimination of waiver based on proforma combined Fund's expense
ratio.
See Notes to Pro-Forma Combining Financial Statements.
<PAGE>
Evergreen U.S. Government Fund
Notes to Pro-Forma Combining Financial Statements (Unaudited)
December 31, 1996
1. Basis of Combination - The Pro-Forma Statement of Assets and Liabilities,
including the Pro- Forma Portfolio of Investments, and the related Pro-Forma
Statement of Operations ("Pro-Forma Statements") reflect the accounts of
Evergreen U.S. Government Fund (Evergreen) and Keystone Government Securities
Fund (Keystone) at December 31, 1996 and for the year then ended.
The Pro-Forma Statements give effect to the proposed transfer of all assets and
certain identified liabilities of Keystone shares in exchange for shares of
Evergreen. The Pro-Forma Statements reflect the expense of each Fund in carrying
out its obligations under the Agreement and Plan of Reorganization (the
"Reorganization") as though the merger occurred at the beginning of the period
presented.
Under the Reorganization, Evergreen will acquire substantially all of the assets
and assume certain identified liabilities of Keystone. Thereafter, there will be
a distribution of shares of Evergreen to shareholders of Keystone in liquidation
and subsequent termination thereof. The information contained herein is based on
the experience of each Fund for the year ended December 31, 1996 and is designed
to permit shareholders of the consolidating mutual funds to evaluate the
financial effect of the proposed Reorganization. The expenses of Evergreen and
Keystone in connection with the Reorganization (including the cost of any proxy
soliciting agents), will be borne by First Union National Bank of North
Carolina.
The Pro-Forma Statements should be read in conjunction with the historical
financial statements of each Fund incorporated by reference in the Statement of
Additional Information.
2. Shares of Beneficial Interest - The Pro-Forma net asset values per share
assumes the issuance of additional shares of Evergreen Class A, Class B and
Class C which would have been issued at December 31, 1996 in connection with the
proposed Reorganization. The amount of additional shares assumed to be issued
was calculated based on the net assets of Keystone Class A, Class B and Class C
as of December 31, 1996 of $23,145, $17,138 and $6,875 (reported in 000's),
respectively, and the net asset value per share of the respective share class of
Evergreen of $9.53 for each of the 3 classes. Additional shares issued were
converted and distributed to the aforementioned Fund according to its relative
share value conversion ratio.
The Pro-Forma shares outstanding of 4,421, 18,164 and 797 for Class A, Class B
and Class C, respectively (reported in 000's) consist of 2,428 (reported in
000's) additional shares of Class A, 1,798 (reported in 000's) additional shares
of Class B and 722 (reported in 000's) additional shares of Class C (reported in
000's) to be issued in the proposed reorganization, as calculated above, in
addition to the shares of Evergreen outstanding as of December 31, 1996.
3. Pro-Forma Operations - Pro-Forma operating expenses include the actual
expenses of each Fund and the combined Fund, with certain expenses adjusted to
reflect the expected expenses of the combined entity. The investment advisory,
administrative personnel and service fees have been calculated for the combined
Fund based on the fee schedule in effect for Evergreen at the combined level of
average net assets for the year ended December 31, 1996.
<PAGE>
EVERGREEN INVESTMENT TRUST
PART C
OTHER INFORMATION
<PAGE>
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability and
Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
Number Description
1(A) Declaration of Trust, as amended.(1, 2, 3)
(B) Instrument providing for the Establishment and Designation of
Classes.(1)
2 By-laws.(1)
3 Not applicable.
4 Agreement and Plan of Reorganization (included as Exhibit A to the
Prospectus contained in Part A to this registration statement)
5 Declaration of Trust Articles II, V, VI, VIII, IX and By-Laws
Articles III and VIII.(1)
6 Investment Advisory Agreement between First Union National Bank of
North Carolina and the Registrant.(4)
7(A) Distribution Agreement between Evergreen Keystone Distributor, Inc.
(formerly Evergreen Funds Distributor, Inc.) and the Registrant.(5)
(B) Form of Dealer Agreement for Class A, B and C shares used by
Evergreen Keystone Distributor, Inc.(5)
8 Deferred Compensation Plan (6)
9 Custody Agreement between State Street Bank and Trust Company and
Registrant.(4)
10(A) Rule 12b-1 Distribution Plans.(2, 4, 7)
(B) Mutiple Class Plan. (6)
11 Opinion and consent of counsel as to the legality of the shares
being issued.(5)
12 Tax opinion and consent of counsel.(6)
13 Not applicable.
14 Consent of KPMG Peat Marwick LLP.(5)
15 Not applicable.
16 Powers of Attorney.(5)(See signature page included herewith.)
17(A) Form of Proxy Card.(5)
(B) Registrant's Rule 24f-2 Declaration.(7)
- -------------------
(1) Incorporated by reference to Registrant's registration statement
(File Nos. 2-94560/811-41154) (the "Registration Statement").
(2) Incorporated by reference to post-effective amendment no. 28 to the
Registration Statement.
(3) Incorporated by reference to post-effective amendment no. 40 to the
Registration Statement.
(4) Incorporated by reference to post-effective amendment no. 38 to the
Registration Statement.
(5) Filed herewith.
(6) To be filed.
(7) Incorporated by reference to post-effective amendment no. 32 to the
Registration Statement.
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, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned registrant agrees to file, by post-effective amendment,
an opinion of counsel or a 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 Registration Statement has
been signed on behalf of the Registrant, in the City of New York and State of
New York, on the 11th day of April 1997.
EVERGREEN INVESTMENT TRUST
By: /s/ John J. Pileggi
_____________________________
Name: John J. Pileggi
Title: President
Know all men by these presents that each person whose signature appears
below hereby severally constitutes and appoints John J. Pileggi, Dorothy E.
Bourassa, Terrence J. Cullen, James P. Wallin and Martin J. Wolin, and each of
them singly, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution, for the undersigned and in the undersigned's name, place
and stead, in any and all capacities, to sign and affix the undersigned's name
to any and all amendments to this Registration Statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing necessary or incidental to the performance and execution of
the powers herein granted, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them or their substitutes, may lawfully
do or cause to be done by virtue hereof.
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities indicated on the 12th day
of March 1997.
Signatures Title
- ----------- -----
/s/ John J. Pileggi
- ----------------------- President and
John J. Pileggi Treasurer
/s/ Laurence B. Ashkin
- ----------------------- Trustee
Laurence B. Ashkin
/s/ Foster Bam
- ----------------------- Trustee
Foster Bam
/s/ James S. Howell
- ----------------------- Trustee
James S. Howell
/s/ Gerald M. McDonnell
- ----------------------- Trustee
Gerald M. McDonnell
/s/ Thomas L. McVerry
- ----------------------- Trustee
Thomas L. McVerry
/s/ William Walt Petit
- ----------------------- Trustee
William Walt Pettit
/s/ Russell A. Salton, III
- ----------------------- Trustee
Russell A. Salton, III, M.D
/s/ Michael S. Scofield
- ----------------------- Trustee
Michael S. Scofield
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO. Page
7(a) Distribution Agreement between Evergreen Keystone Distributor, Inc.
and Registrant
(b) Form of Dealer Agreement used by Evergreen Keystone Distributor, Inc.
11 Opinion and Consent of Sullivan & Worcester LLP
14 Consent of KPMG Peat Marwick LLP
17(a) Form of Proxy
-------------------
DISTRIBUTION AGREEMENT
AGREEMENT, made as of the 1st day of January, 1997, by and between the
Evergreen Trust (the "Trust") and Evergreen Keystone Distributor, Inc. ("EKD")
WHEREAS, The Trust, has adopted one or more Plans of Distribution with
respect to certain Classes of shares of its separate investment series (each a
"Plan", or collectively the "Plans") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act") which Plans authorize the Trust
on behalf of the Funds to enter into agreements regarding the distribution of
such Classes of shares (the "Shares") of the separate investment series of the
Trust (the "Funds") set forth on Exhibit A; and
WHEREAS, the Trust has agreed that Evergreen Keystone Distributor, Inc.
(the "Distributor"), a Delaware corporation, shall act as the distributor of the
Shares; and
WHEREAS, the Distributor agrees to act as distributor of the Shares for
the period of this Distribution Agreement (the "Agreement");
NOW, THEREFORE, in consideration of the agreements hereinafter
contained, it is agreed as follows:
1. Services as Distributor
1.1. The Distributor agrees to use appropriate efforts to promote each
Fund and to solicit orders for the purchase of Shares and will undertake such
advertising and promotion as it believes reasonable in connection with such
solicitation The services to be performed hereunder by the Distributor are
described in more detail in Section 7 hereof. . In the event that the Trust
establishes additional investment series with respect to which it desires to
retain Evergreen Funds Distributor, Inc. to act as distributor for one or more
Classes hereunder, it shall promptly notify the Distributor in writing. If the
Distributor is willing to render such services it shall notify the Trust in
writing whereupon such portfolio shall become a Fund and its designated Classes
of shares of beneficial interest shall become Shares hereunder.
1.2. All activities by the Distributor and its agents and employees as
the distributor of Shares shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations made or
adopted pursuant to the 1940 Act by the Securities and Exchange Commission (the
"Commission") or any securities association registered under the Securities
Exchange Act of 1934, as amended.
1.3 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all Federal and state
laws relating to the sale of such securities. Neither the Distributor, any
selected dealer or any other person is authorized by the Trust to give any
information or to make any representations, other than those contained in the
Trust's registration statement (the "Registration Statement") or related Fund
prospectus and statement of additional information ("Prospectus and Statement of
Additional Information") and any sales literature specifically
1
<PAGE>
approved by the Trust.
1.4 The Distributor shall adopt and follow procedures, as approved by
the officers of the Trust, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
1.5. The Distributor will transmit any orders received by it for
purchase or redemption of Shares to the transfer agent and custodian for the
applicable Fund.
1.6. Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Trust's officers may decline to accept any orders for, or make any
sales of Shares until such time as those officers deem it advisable to accept
such orders and to make such sales.
1.7. The Distributor will act only on its own behalf as principal if it
chooses to enter into selling agreements with selected dealers or others. The
Distributor shall offer and sell Shares only to such selected dealers as are
members, in good standing, of the NASD.
1.8 The Distributor agrees to adopt compliance standards, in a form
satisfactory to the Trust, governing the operation of the multiple class
distribution system under which Shares are offered.
2. Duties of the Trust.
2.1. The Trust agrees at its own expense to execute any and all
documents and to furnish, at its own expense, any and all information and
otherwise to take all actions that may be reasonably necessary in connection
with the qualification of Shares for sale in such states as the Trust and the
Distributor may designate.
2.2. The Trust shall furnish from time to time, for use in connection
with the sale of Shares such information with respect to the Funds and the
Shares as the Distributor may reasonably request; and the Trust warrants that
any such information shall be true and correct. Upon request, the Trust shall
also provide or cause to be provided to the Distributor: (a) unaudited
semi-annual statements of each Fund's books and accounts, (b) quarterly earnings
statements of each Fund, (c) a monthly itemized list of the securities in each
Fund, (d) monthly balance sheets as soon as practicable after the end of each
month, and (e) from time to time such additional. information regarding each
Fund's financial condition as the Distributor may reasonably request.
3. Representations of the Trust.
2
<PAGE>
3.1. The Trust represents to the Distributor that it is registered
under the 1940 Act and that the Shares of each of the Funds have been registered
under the Securities Act of 1933, as amended (the "Securities Act"). The Trust
will file such amendments to its Registration Statement as may be required and
will use its best efforts to ensure that such Registration Statement remains
accurate.
4. Indemnification.
4.1 The Trust shall indemnify and hold harmless the Distributor, its
officers and Directors, and each person, if any, who controls the Distributor
within the meaning of Section 15 of the Securities Act against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damage or expense
and reasonable counsel fees incurred in connection therewith), which the
Distributor or such controlling person may incur under the Securities Act or
under common law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact contained in the
Registration Statement, as from time to time amended or supplemented, any
prospectus or annual or interim report to shareholders of the Trust, or arising
out of or based upon any omission, or alleged omission, to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, unless such statement or omission was made in reliance upon, and in
conformity with, information furnished to the Trust in connection therewith by
or on behalf of the Distributor, provided, however, that in no case (i) is the
indemnity of the Trust in favor of the Distributor, its officer and Directors,
or any such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of the reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling person, as the case maybe, shall have notified the Trust in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the other
first legal process giving information of the nature of the claim shall have
been served upon the Distributor or such controlling persons (or after the
Distributor or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Trust of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action it brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Trust will be entitled to participate
at its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Trust elects to
assume the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Distributor or such controlling person or persons, defendant
or defendants in the suit. In the event the Trust elects to assume the defense
of any such suit and retain such counsel, the Distributor or such controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the Trust does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses of any counsel retained by them.
The Trust shall promptly notify the Distributor of the commencement of any
litigation or proceeding against it or any of its officers or directors in
connection with the issuance or sale of any of the shares.
3
<PAGE>
4.2 The Distributor shall indemnify and hold harmless the Trust and
each of its directors and officers and each person, if any, who controls the
Trust against any loss, liability, claim, damage or expense described in the
foregoing indemnity contained in paragraph 4.1, but only with respect to
statements or omissions made in reliance upon , and in conformity with,
information furnished to the Trust in writing by or on behalf of the Distributor
for uses in connection with the Registration Statement, as from time to time
amended, or the annual or interim reports to shareholders. In case any action
shall be brought against the Trust or any persons so indemnified, in respect of
which indemnity may be sought against the Distributor, the Distributor shall
have rights and duties given to the Trust, and the Trust and each person so
indemnified shall have the rights and duties given to the Distributor by the
provisions of paragraph 4.1.
5. Offering of Shares.
5.1. None of the Shares shall be offered by either the Distributor or
the Trust under any of the provisions of this Agreement, and no orders for the
purchase or sale of Shares hereunder shall be accepted by the Trust, if and so
long as the effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the Securities Act or if and so long as a current prospectus and statement of
additional information as required by Section 10(b) (2) of the Securities Act,
as amended, is not on file with the Commission; provided, however, that nothing
contained in this paragraph 5.1 shall in any way restrict or have any
application to or bearing upon the Trust's obligation to repurchase Shares from
any shareholder in accordance with the provisions of the prospectus of each Fund
or the Trust's prospectus or Declaration of Trust.
6. Amendments to Registration Statement and Other Material Events.
6.1. The Trust agrees to advise the Distributor as soon as reasonably
practical by a notice in writing delivered to the Distributor: (a) of any
request or action taken by the Commission which is material to the Distributor's
obligations hereunder or (b) any material fact of which the Trust becomes aware
which affects the Distributor's obligations hereunder.
For purposes of this section, informal requests by or acts of
the Staff of the Commission shall not be deemed actions of or requests by the
Commission.
7. Compensation of Distributor.
7.1. (a) As promptly as possible after the first Business Day (as
defined in the Prospectus) of each month this Agreement is in effect, the Trust
shall compensate the Distributor for its distribution services rendered during
the previous month (but not prior to the Commencement Date); by making payment
to the Distributor in the amounts set forth on Exhibit A annexed hereto with
respect to each Class of Shares of each Fund to which this Agreement is
applicable. The compensation by the Trust of the Distributor is authorized
pursuant to the Plan or Plans adopted by the Trust pursuant to Rule 12b-l under
the 1940 Act.
4
<PAGE>
(b) Under this Agreement, the Distributor shall: (i) make
payments to securities dealers and others engaged in the sale of Shares; (ii)
make payments of principal and interest in connection with the financing of
commission payments made by the Distributor in connection with the sale of
Shares (iii) incur the expense of obtaining such support services, telephone
facilities and shareholder services as may reasonably be required in connection
with its duties hereunder; (iv) formulate and implement marketing and
promotional activities, including, but not limited to, direct mail promotions
and television, radio, newspaper, magazine and other mass media advertising; (v)
prepare, print and distribute sales literature; (vi) prepare, print and
distribute Prospectuses of the Funds and reports for recipients other than
existing shareholders of the Funds; and (vii) provide to the Trust such
information, analyses and opinions with respect to marketing and promotional
activities as the Trust may, from time to time, reasonably request.
(c) The Distributor shall prepare and deliver reports to the
Treasurer of the Trust on a regular, at least monthly, basis, showing the
distribution expenditures incurred by the Distributor in connection with its
services rendered pursuant to this Agreement and the Plan and the purposes
therefor, as well as any supplemental reports as the Trustees, from time to
time, may reasonably request.
(d) The Distributor may retain as a sales charge the difference
between the current offering price of Shares, as set forth in the current
prospectus for each Fund, and net asset value, less any reallowance that is
payable in accordance with the sales charge schedule in effect at any given time
with respect to the Shares.
(e) The Distributor may retain any contingent deferred sales
charge ("CDSCs") payable with respect to the redemption of any Shares, provided
however, that any CDSCs received by the Distributor shall first be applied by
the Distributor or its assignee to any outstanding amounts payable or which may
in the future be payable by the Distributor or its assignee under financing
arrangements entered into in connection with the payment of commissions on the
sale of Shares.
(f) The Distributor may sell, assign, pledge or hypothecate its
rights to receive compensation hereunder. The Trust acknowledges that, in
connection with the financing of commission payments made by the Distributor in
connection with the sale of Shares, the Distributor may sell and assign, and/or
has sold and assigned, to Mutual Fund Funding 1994-1 the Distributor's interest
in certain items of compensation payable to the Distributor hereunder, and that
Mutual Fund Funding 1994-1 in turn may pledge or assign, and/or has assigned,
such interest to First Union Corporation as lender to secure such financing. It
is understood that an assignee may not further sell, assign, pledge, or
hypothecate its right to receive such reimbursement unless such sale,
assignment, pledge or hypothecation has been approved by the vote of the Board
of the Trust, including a majority of the Disinterested Trustees, cast in person
at a meeting called for the purpose of voting on such approval.
(g) In addition to the foregoing, and in respect of its services
hereunder and for similar services rendered to other investment companies for
which Evergreen Asset Management Corp. (the "Investment Adviser") serves as
investment adviser, the Investment Adviser may pay to the
5
<PAGE>
Distributor an additional fee to be paid in such amount and manner as the
Investment Adviser and Distributor may agree from time to time.
8. Confidentiality, Non-Exclusive Agency.
8.1. The Distributor agrees on behalf of itself and its employees to
treat confidentially and as proprietary information of the Trust all records and
other information relative to the Funds and its prior, present or potential
shareholders, and not to use such records and information for any purpose other
than performance of its responsibilities and to obtain approval in writing by
the Trust, which approval shall not be unreasonably withheld and may not be
withheld where the Distributor may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Trust.
8.2. Nothing contained in this Agreement shall prevent the Distributor,
or any affiliated person of the Distributor, from performing services similar to
those to be performed hereunder for any other person, firm, or corporation or
for its or their own accounts or for the accounts of others.
9. Term.
9.1. This Agreement shall continue until June 30, 1998 and thereafter
for successive annual periods, provided such continuance is specifically
approved at least annually by (i) a vote of the majority of the Trustees of the
Trust and (ii) a vote of the majority of those Trustees of the Trust who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan, in this Agreement or any agreement
related to the Plan (the "Independent Trustees") by vote cast in person at a
meeting called for the purpose of voting on such approval. This Agreement is
terminable at any time, with respect to the Trust, without penalty, (a) on not
less than 60 days' written notice by vote of a majority of the Independent
Trustees, or by vote of the holders of a majority of the outstanding voting
securities of the Trust, or (b) upon not less than 60 days' written notice by
the Distributor. This Agreement may remain in effect with respect to a Fund even
if it has been terminated in accordance with this paragraph with respect to one
or more other Funds of the Trust. This Agreement will also terminate
automatically in the event of its assignment. (As used in this Agreement, the
terms "majority of the outstanding voting securities", "interested persons", and
"assignment" shall have the same meaning as such terms have in the 1940 Act.)
10. Miscellaneous.
10.1. This Agreement shall be governed by the laws of the State of New
York.
10.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their constructions or effect.
10.3 The obligations of the Trust hereunder are not personally binding
upon, nor shall resort be had to the private property of, any of the Trustees,
shareholders, officers, employees or agents of the Trust and only the Trust's
property shall be bound.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below.
EVERGREEN KEYSTONE DISTRIBUTOR, INC. EVERGREEN TRUST
By:_______________________________ By:_______________________________
Title: , Vice President Title: John J. Pileggi, President
7
<PAGE>
EXHIBIT A
To Distribution Agreement between Evergreen Keystone Distributor, Inc.
and EVERGREEN TRUST
FUNDS AND CLASSES COVERED BY THIS AGREEMENT:
Evergreen Fund
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS Y SHARES
Evergreen Aggressive Growth Fund
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS Y SHARES
Distribution Fees
1. During the term of this Agreement, the Trust will pay to the Distributor a
quarterly fee with respect to each of the Funds and Classes of Shares thereof
listed above. This fee will be computed at the annual rate of .25 of 1% of the
average net asset value on an annual basis of Class A Shares of each Fund; and
.75 of 1% of the average net asset value on an annual basis of Class B and Class
C Shares of each Fund.
2. For the quarterly period in which the Agreement becomes effective or
terminates, there shall be an appropriate proration of any fee payable on the
basis of the number of days that the Agreement is in effect during the quarter.
IN WITNESS WHEREOF, the parties hereto have caused this Exhibit A to
the Distribution Agreement between the parties dated as of January 1, 1997 to be
executed by their officers designated below.
EVERGREEN KEYSTONE DISTRIBUTOR, INC. EVERGREEN TRUST
By:_______________________________ By:_______________________________
Title: , Vice President Title: John J. Pileggi, President
8
- ---------------------
EVERGREEN KEYSTONE
- ---------------------
[logo] FUNDS [logo]
- ---------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
230 PARK AVENUE
NEW YORK, NEW YORK 10169
December 12, 1996
Effective January 1, 1997
To Whom It May Concern:
You currently have a dealer agreement ("Agreement") with Evergreen
Keystone Distributor, Inc. ("Company"). Effective January 1, 1997 the
Agreement is amended and restated in its entirety as set forth below.
The Company, principal underwriter, invites you to participate in the
distribution of shares, including separate classes of shares, ("Shares") of
the Keystone Fund Family, the Keystone America Fund Family, the Evergreen Fund
Family and to the extent applicable their separate investment series
(collectively "Funds" and each individually a "Fund") designated by us which
are currently or hereafter underwritten by the Company, subject to the
following terms:
1. You will offer and sell Shares of the Funds at the public offering price
with respect to the applicable class described in the then current prospectus
and/or statement of additional information ("Prospectus") of the Fund whose
Shares you offer. You will offer Shares only on a forward pricing basis, i.e.
orders for the purchase, repurchase or exchange of Shares accepted by you
prior to the close of the New York Stock Exchange and placed with us the same
day prior to the close of our business day, 5:00 p.m. Eastern Time, shall be
confirmed at the closing price for that business day. You agree to place
orders for Shares only with us and at such closing price. In the event of a
difference between verbal and written price confirmation, the written
confirmations shall be considered final. Prices of a Fund's Shares are
computed by and are subject to withdrawal by each Fund in accordance with its
Prospectus. You agree to place orders with us only through your central order
department unless we accept your written Power of Attorney authorizing others
to place orders on your behalf. This Agreement on your part runs to us and the
respective Fund and is for the benefit and enforceable by each.
2. In the distribution and sale of Shares, you shall not have authority to act
as agent for the Fund, the Company or any other dealer in any respect in such
transactions. All orders are subject to acceptance by us and become effective
only upon confirmation by us. The Company reserves the unqualified right not
to accept any specific order for the purchase or exchange of Shares.
3. In addition to the distribution services provided by you with respect to a
Fund you may be asked to render administrative, account maintenance and other
services as necessary or desirable for shareholders of such Fund ("Shareholder
Services").
4. Notwithstanding anything else contained in this Agreement or in any other
agreement between us, the Company hereby acknowledges and agrees that any
information received from you concerning your customer in the course of this
arrangement is confidential. Except as requested by the customer or as
required by law and except for the respective Fund, its officers, directors,
employees, agents or service providers, the Company will not provide nor
permit access to such information by any person or entity, including any First
Union Corporation bank or First Union Brokerage Services, Inc.
5. So long as this Agreement remains in effect, we will pay you commissions on
sales of Shares of the Funds and service fees for Shareholder Services, in
accordance with the Schedule of Commissions and Service Fees ("Schedule")
attached hereto and made a part hereof, which Schedule may be modified from
time to time or rescinded by us, in either case without prior notice. You have
no vested right to receive any continuing service fees, other fees, or other
commissions which we may elect to pay to you from time to time on Shares
previously sold by you or by any person who is not a broker or dealer actually
engaged in the investment banking or securities business. You will receive
commissions in accordance with the attached Schedule on all purchase
transactions in shareholder accounts (excluding reinvestment of income
dividends and capital gains distributions) for which you are designated as
Dealer of Record except where we determine that any such purchase was made
with the proceeds of a redemption or repurchase of Shares of the same Fund or
another Fund, whether or not the transaction constitutes the exercise of the
exchange privilege. Commissions will be paid to you twice a month. You will
receive service fees for shareholder accounts for which you are designated
Dealer of Record as provided in the Schedule. You hereby represent that
receipt of such service fees by you will be disclosed to your customers.
You hereby authorize us to act as your agent in connection with all
transactions in shareholder accounts in which you are designated as Dealer of
Record. All designations of Dealer of Record and all authorizations of the
Company to act as your agent shall cease upon the termination of this
Agreement or upon the shareholder's instruction to transfer his or her account
to another Dealer of Record.
6. Payment for all Shares purchased from us shall be made to the Company and
shall be received by the Company within three business days after the
acceptance of your order or such shorter time as may be required by law. If
such payment is not received by us, we reserve the right, without prior
notice, forthwith to cancel the sale, or, at our option, to sell such Shares
back to the respective Fund in which case we may hold you responsible for any
loss, including loss of profit, suffered by us or by such Fund resulting from
your failure to make payment as aforesaid.
7. You agree to purchase Shares of the Funds only from us or from your
customers. If you purchase Shares from us, you agree that all such purchases
shall be made only to cover orders already received by you from your
customers, or for your own bonafide investment without a view to resale. If
you purchase Shares from your customers, you agree to pay such customers the
applicable net asset value per Share less any contingent deferred sales charge
("CDSC") that would be applicable under the Prospectus ("repurchase price").
8. You will sell Shares only (a) to your customers at the prices described in
paragraph 2 above; or (b) to us as agent for a Fund at the repurchase
price. In such a sale to us, you may act either as principal for your own
account or as agent for your customer. If you act as principal for your own
account in purchasing Shares for resale to us, you agree to pay your
customer not less nor more than the repurchase price which you receive from
us. If you act as agent for your customer in selling Shares to us, you
agree not to charge your customer more than a fair commission for handling
the transaction. You shall not withhold placing with us orders received
from your customers so as to profit yourself as a result of such
withholding.
10. We will not accept from you any conditional orders for Shares.
11. If any Shares sold to you under the terms of this Agreement are
repurchased by a Fund, or are tendered for redemption, within seven business
days after the date of our confirmation of the original purchase by you, it is
agreed that you shall forfeit your right to any commissions on such sales even
though the shareholder may be charged a CDSC by the Fund.
We will notify you of any such repurchase or redemption within the next
ten business days after the date on which the certificate or written request
for redemption is delivered to us or to the Fund, and you shall forthwith
refund to us the full amount of any commission you received on such sale. We
agree, in the event of any such repurchase or redemption, to refund to the
Fund any commission we retained on such sale and, upon receipt from you of the
commissions paid to you, to pay such commissions forthwith to the Fund.
12. Shares sold to you hereunder shall not be issued until payment has been
received by the Fund concerned. If transfer instructions are not received from
you within 15 days after our acceptance of your order, the Company reserves
the right to instruct the transfer agent for the Fund concerned to register
Shares sold to you in your name and notify you of such. You agree to hold
harmless and indemnify the Company, the Fund and its transfer agent for any
loss or expense resulting from such registration.
13. You agree to comply with any compliance standards that may be furnished to
you by us regarding when each class of Shares of a Fund may appropriately be
sold to particular customers.
14. No person is authorized to make any representations concerning Shares of a
Fund except those contained in the Prospectus and in sales literature issued
by us supplemental to such Prospectus. In purchasing Shares from us you shall
rely solely on the representations contained in the appropriate Prospectus and
in such sales literature. We will furnish additional copies of such
Prospectuses and sales literature and other releases and information issued by
us in reasonable quantities upon request. You agree that you will in all
respects duly conform with all laws and regulations applicable to the sales of
Shares of the Funds and will indemnify and hold harmless the Funds, their
directors and trustees and the Company from any damage or expenses on account
of any wrongful act by you, your representatives, agents or sub-agents in
connection with any orders or solicitation or orders of Shares of the Funds by
you, your representatives, agents or sub-agents.
15. Each party hereto represents that it is (1) a member of the National
Association of Securities Dealers, Inc., and agrees to notify the other should
it cease to be a member of such Association and agrees to the automatic
termination of this Agreement at that time or (2) excluded from the definition
of broker-dealer under the Securities Exchange Act of 1934. It is further
agreed that all rules or regulations of the Association now in effect or
hereafter adopted, including its Business Conduct Rule 2830(d), which are
binding upon underwriters and dealers in the distribution of the securities of
open-end investment companies, shall be deemed to be a part of this Agreement
to the same extent as if set forth in full herein.
16. You will not offer the Funds for sale in any State where they are not
qualified for sale under the blue sky laws and regulations of such State or
where you are not qualified to act as a dealer except for States in which they
are exempt from qualification.
17. This Agreement supersedes and cancels any prior agreement with respect to
the sales of Shares of any of the Funds underwritten by the Company. The
Agreement may be amended by us at any time upon written notice to you.
18. This amendment to the Agreement shall be effective on January 1, 1997 and
all sales hereunder are to be made, and title to Shares of the Funds shall
pass in The Commonwealth of Massachusetts. This Agreement shall be interpreted
in accordance with the laws of The Commonwealth of Massachusetts.
19. All communications to the Company should be sent to the above address. Any
notice to you shall be duly given if mailed or telegraphed to you at the
addressed specified by you.
20. Either part may terminate this Agreement at any time by written notice to
the other party.
- --------------------------- EVERGREEN KEYSTONE DISTRIBUTOR, INC.
Dealer or Broker Name
- --------------------------- /s/ Robert A. Hering
Address
ROBERT A. HERING, President
<PAGE>
- ---------------------
EVERGREEN KEYSTONE
- ---------------------
[logo] FUNDS [logo]
- ---------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC. ROBERT A. HERING
230 PARK AVENUE President
NEW YORK, NEW YORK 10169
December 12, 1996
Effective January 1, 1997
Dear Financial Professional:
This Schedule of Commissions and Service Fees ("Schedule") supersedes any
previous Schedules, is hereby made part of our dealer agreement ("Agreement")
with you effective January 1, 1997 and will remain in effect until modified or
rescinded by us. Capitalized terms used in this Schedule and not defined
herein have the same meaning as such terms have in the Agreement. All
commission rates and service fee rates set forth in this Schedule may be
modified by us from time to time without prior notice.
I. KEYSTONE FUNDS
KEYSTONE QUALITY BOND FUND (B-1) KEYSTONE MID-CAP GROWTH FUND (S-3)
KEYSTONE DIVERSIFIED BOND FUND (B-2) KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
KEYSTONE HIGH INCOME BOND FUND (B-4) KEYSTONE INTERNATIONAL FUND INC.
KEYSTONE BALANCED FUND (K-1) KEYSTONE PRECIOUS METALS HOLDINGS, INC.
KEYSTONE STRATEGIC GROWTH FUND (K-2) KEYSTONE TAX FREE FUND
KEYSTONE GROWTH AND INCOME FUND (S-1) (COLLECTIVELY "KEYSTONE FUNDS")
1. COMMISSIONS FOR THE KEYSTONE FUNDS (OTHER THAN KEYSTONE PRECIOUS METALS
HOLDINGS, INC.)
Except as otherwise provided in our Agreement, we will pay you commissions
on your sales of Shares of such Keystone Funds rtds d such er tv amrr
rdKeystone Fundat the rate of 4.0% of the aggregate public offering price of
such Shares as described in the Fund's Prospectus ("Offering Price") when sold
in an eligible sale.
2. COMMISSIONS FOR KEYSTONE PRECIOUS METALS HOLDINGS, INC.
Except as otherwise provided for in our Agreement, we will pay you
commissions on your sale of Shares of Keystone Precious Metals Holdings, Inc.
as the rate of the Offering Price when sold in an eligible sale as follows:
AMOUNT OF PURCHASE COMMISSION AMOUNT OF PURCHASE COMMISSION
Less than $100,000 4% $250,000-$499,999 1%
$100,000-$249,999 2% $500,000 and above 0.5%
3. SERVICE FEES
We will pay you service fees based on the aggregate net asset value of
Shares of the Keystone Funds (other than Keystone Precious Metals Holdings,
Inc.) you have sold on or after June 1, 1983 and of Keystone Precious Metals
Holdings, Inc. you have sold on or after November 19, 1984, which remain
issued and outstanding on the books of such Funds on the fifteenth day of the
third month of each calendar quarter (March 15, June 15, September 15 and
December 15, each hereinafter a "Service Fee Record Date") and which are
registered in the names of customers for whom you are dealer of record
("Eligible Shares"). Such service fees will be calculated quarterly at the
rate of 0.0625% per quarter of the aggregate net asset value of all such
Eligible Shares (approximately 0.25% annually) on the Service Fee Record Date;
provided, however, that in any calendar quarter in which service fees earned
by you on Eligible Shares of all Funds (except Keystone Liquid Trust Class A
Shares) are less than $50.00 in the aggregate, no service fees will be paid to
you nor will such amounts be carried over for payment in a future quarter.
Service fees will be payable within five business days after the Service Fee
Record Date. Service fees will only be paid by us to the extent that such
amounts have been paid to us by the Funds.
4. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of additional commissions to certain dealers. Such
incentives may, at our discretion, be limited to dealers who allow their
individual selling representatives to participate in such additional
commissions.
<TABLE>
<CAPTION>
II. KEYSTONE AMERICA FUNDS AND EVERGREEN FUNDS
KEYSTONE AMERICA FUNDS
<S> <C>
KEYSTONE GOVERNMENT SECURITIES FUND KEYSTONE OMEGA FUND
KEYSTONE STATE TAX FREE FUND KEYSTONE SMALL COMPANY GROWTH FUND - II
KEYSTONE STATE TAX FREE FUND - SERIES II KEYSTONE FUND FOR TOTAL RETURN
KEYSTONE STRATEGIC INCOME FUND KEYSTONE BALANCED FUND - II
KEYSTONE TAX FREE INCOME FUND (COLLECTIVELY "KEYSTONE EQUITY AND LONG TERM INCOME FUNDS")
KEYSTONE WORLD BOND FUND KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
KEYSTONE FUND OF THE AMERICAS KEYSTONE INTERMEDIATE TERM BOND FUND
KEYSTONE GLOBAL OPPORTUNITIES FUND (COLLECTIVELY "KEYSTONE INTERMEDIATE INCOME FUNDS")
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. KEYSTONE LIQUID TRUST
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND
EVERGREEN FUNDS
EVERGREEN U.S. GOVERNMENT FUND EVERGREEN AMERICAN RETIREMENT FUND
EVERGREEN HIGH GRADE TAX FREE FUND EVERGREEN FOUNDATION FUND
EVERGREEN FLORIDA MUNICIPAL BOND FUND EVERGREEN TAX STRATEGIC FOUNDATION FUND
EVERGREEN GEORGIA MUNICIPAL BOND FUND EVERGREEN UTILITY FUND
EVERGREEN NEW JERSEY MUNICIPAL BOND FUND EVERGREEN TOTAL RETURN FUND
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND EVERGREEN SMALL CAP EQUITY INCOME FUND
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND (COLLECTIVELY "EVERGREEN EQUITY AND LONG TERM INCOME FUNDS")
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
EVERGREEN FLORIDA HIGH INCOME MUNICIPAL BOND FUND EVERGREEN MONEY MARKET FUND
EVERGREEN FUND EVERGREEN TAX EXEMPT MONEY MARKET FUND
EVERGREEN U.S. REAL ESTATE EQUITY FUND EVERGREEN TREASURY MONEY MARKET FUND
EVERGREEN LIMITED MARKET FUND EVERGREEN PENNSYLVANIA TAX FREE MONEY MARKET FUND
EVERGREEN AGGRESSIVE GROWTH FUND (COLLECTIVELY "EVERGREEN MONEY MARKET FUNDS")
EVERGREEN INTERNATIONAL EQUITY FUND EVERGREEN SHORT-INTERMEDIATE BOND FUND
EVERGREEN GLOBAL LEADERS FUND EVERGREEN INTERMEDIATE-TERM BOND FUND
EVERGREEN EMERGING MARKETS FUND EVERGREEN INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
EVERGREEN GLOBAL REAL ESTATE EQUITY FUND EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND
EVERGREEN BALANCED FUND EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND -- CALIFORNIA
EVERGREEN GROWTH & INCOME FUND (COLLECTIVELY "EVERGREEN INTERMEDIATE INCOME AND
EVERGREEN VALUE FUND MONEY MARKET FUNDS")
</TABLE>
A. CLASS A SHARES
1. COMMISSIONS
Except as otherwise provided in our Agreement, in paragraph 2 below or in
connection with certain types of purchases at net asset value which are
described in the Prospectuses for the Keystone America Funds and the Evergreen
Funds, we will pay you commissions on your sales of Shares of such Funds in
accordance with the following sales charge schedules* on sales where we
receive a commission from the shareholder:
KEYSTONE AMERICA AND EVERGREEN EQUITY AND LONG TERM INCOME FUNDS
SALES CHARGE AS COMMISSION AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
PURCHASE OFFERING PRICE OFFERING PRICE
Less than $50,000 4.75% 4.25%
$50,000-$99,999 4.50% 4.25%
$100,000-$249,999 3.75% 3.25%
$250,000-$499,999 2.50% 2.00%
$500,000-$999,999 2.00% 1.75%
Over $1,000,000 None See paragraph 2
KEYSTONE AMERICA AND EVERGREEN INTERMEDIATE INCOME FUNDS
SALES CHARGE AS COMMISSION AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
PURCHASE OFFERING PRICE OFFERING PRICE
Less than $50,000 3.25% 2.75%
$50,000-$99,999 3.00% 2.75%
$100,000-$249,999 2.50% 2.25%
$250,000-$499,999 2.00% 1.75%
$500,000-$999,999 1.50% 1.25%
Over $1,000,000 None See paragraph 2
KEYSTONE LIQUID TRUST AND EVERGREEN MONEY MARKET FUNDS
No sales charge for any amount of purchase.
2. COMMISSIONS FOR CERTAIN TYPES OF PURCHASES
With respect to (a) purchases of Class A Shares in the amount of $1 million
or more and/or (b) purchases of Class A Shares made by a corporate or certain
other qualified retirement plan or a non-qualified deferred compensation plan
or a Title I tax sheltered annuity or TSA Plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan"), (each such
purchase a "NAV Purchase"), we will pay you commissions as follows:
<TABLE>
<CAPTION>
a. Purchases described in 2(a) above
AMOUNT OF COMMISSION AS A PERCENTAGE
PURCHASE OF OFFERING PRICE
<S> <C>
$1,000,000-$2,999,999 1.00% of the first $2,999,999, plus
$3,000,000-$4,999,999 0.50% of the next $2,000,000, plus
$5,000,000 0.25% of amounts equal to or over $5,000,000
b. Purchases described in 2(b) above .50% of amount of purchase (subject to recapture
upon early redemption)
</TABLE>
* These sales charge schedules apply to purchases made at one time or pursuant
to Rights of Accumulation or Letters of Intent. Any purchase which is made
pursuant to Rights of Accumulation or Letter of Intent is subject to the
terms described in the Prospectus(es) for the Fund(s) whose Shares are being
purchased.
3. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of up to the entire sales charge to certain
dealers. Such incentives may, at our discretion, be limited to dealers who
allow their individual selling representatives to participate in such
additional commissions.
4. SERVICE FEES FOR EVERGREEN FUNDS (OTHER THAN EVERGREEN MONEY MARKET FUNDS)
AND KEYSTONE AMERICA FUNDS (OTHER THAN KEYSTONE STATE TAX FREE FUND,
KEYSTONE STATE TAX FREE FUND - SERIES II, KEYSTONE CAPITAL PRESERVATION AND
INCOME FUND AND KEYSTONE LIQUID TRUST)
a. Keystone America Funds Only. Until March 31, 1997, we will pay you
service fees based on the aggregate net asset value of Shares of such Funds
you have sold which remain issued and outstanding on the books of such Funds
on the fifteenth day of the third month of each calendar quarter (March 15,
June 15, September 15 and December 15, each hereinafter a "Service Fee Record
Date") and which are registered in the names of customers for whom you are
dealer of record ("Eligible Shares"). Such service fees will be calculated
quarterly at the rate of 0.0625% per quarter of the aggregate net asset value
of all such Eligible Shares (approximately 0.25% annually) on the Service Fee
Record Date; provided, however, that in any calendar quarter in which total
service fees earned by you on Eligible Shares of all Keystone Funds (except
Keystone Liquid Trust Class A Shares) are less than $50.00 in the aggregate,
no service fees will be paid to you nor will such amounts be carried over for
payment in a future quarter. Service fees will be paid within five days after
the Service Fee Record Date. Service fees will only be paid by us to the
extent that such amounts have been paid to us by the Funds.
b. Evergreen Funds and Keystone America Funds (after March 31, 1997). We
will pay you service fees based on the average daily net asset value of Shares
of such Funds you have sold which are issued and outstanding on the books of
such Funds during each calendar quarter and which are registered in the names
of customers for whom you are dealer of record ("Eligible Shares"). Such
service fees will be calculated quarterly at the rate of 0.0625% per quarter
of the daily average net asset value of all such Eligible Shares
(approximately 0.25% annually) during such quarter; provided, however, that in
any calendar quarter in which total service fees earned by you on Eligible
Shares of all Funds (except Keystone Liquid Trust Class A Shares) are less
than $50.00 in the aggregate, no service fees will be paid to you nor will
such amounts be carried over for payment in a future quarter. Service fees
will be paid by the twentieth day of the month before the end of the
respective quarter. Service fees will only be paid by us to the extent that
such amounts have been paid to us by the Funds.
5. SERVICE FEES FOR KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE
FUND - SERIES II
a. Until March 31, 1997, we will pay you service fees based on the aggregate
net asset value of Shares of such Funds you have sold which remain issued and
outstanding on the books of the Funds on the fifteenth day of the third month
of each calendar quarter (March 15, June 15, September 15 and December 15,
each hereinafter a "Service Fee Record Date") and which are registered in the
names of customers for whom you are dealer of record ("Eligible Shares"). Such
service fees will be calculated quarterly at the rate of 0.0375% per quarter
of the aggregate net asset value of all such Eligible Shares (approximately
0.15% annually) on the Service Fee Record Date; provided, however, that in any
calendar quarter in which total service fees earned by you on Eligible Shares
of all Funds (except Keystone Liquid Trust Class A Shares) are less than
$50.00 in the aggregate, no service fees will be paid to you nor will such
amounts be carried over for payment in a future quarter. Service fees will be
paid within five days after the Service Fee Record Date. Service fees will
only be paid by us to the extent that such amounts have been paid to us by the
Funds.
b. After March 31, 1997 we will pay you service fees calculated as provided
in section II (A)(4)(b) except that the quarterly rate will be 0.0375%
(approximately 0.15% annually).
c. After June 30, 1997, we will pay you service fees calculated as provided
in section II (A)(4)(b) above on Shares sold on or after July 1, 1997.
6. SERVICE FEES FOR KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
a. Until March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(4)(a) except that for Eligible Shares sold after January 1,
1997 the quarterly rate will be 0.025% (approximately 0.10% annually).
b. After March 31, 1997 we will pay you service fees calculated as provided
in section II (A)(4)(b) except that for Eligible Shares sold after January 1,
1997 the quarterly rate will be 0.025% (approximately 0.10% annually).
7. SERVICE FEES FOR KEYSTONE LIQUID TRUST
We will pay you service fees based on the aggregate net asset value of all
Shares of such Fund you have sold which remain issued and outstanding on the
books on the Fund on the fifteenth day of the third month of each calendar
quarter (March 15, June 15, September 15 and December 15, each hereinafter a
"Service Fee Record Date") and which are registered in the names of customers
for whom you are dealer of record ("Eligible Shares"). Such service fees will
be calculated at the rates set forth below and based on the aggregate net
asset value of all such Eligible Shares on the Service Fee Record Date;
provided, however, that no such service fees will be paid to you for any
quarter if the aggregate net asset value of such Eligible Shares on the last
business day of the quarter is less than $2 million; and provided further,
however, that service fees will only be paid to us to the extent that such
amounts have been paid to us by the Fund. Service fees will be paid within 5
days after the Service Fee Record Date. The quarterly rates at which such
service fees are payable and the net asset value to which such rates will be
applied are set forth below:
ANNUAL QUARTERLY AGGREGATE NET ASSET
RATE PAYMENT RATE VALUE OF SHARES
0.00000% 0.00000% of the first $1,999,999, plus
0.15000% 0.03750% of the next $8,000,000, plus
0.20000% 0.05000% of the next $15,000,000, plus
0.25000% 0.06250% of the next $25,000,000, plus
0.30000% 0.07500% of amounts over $50,000,000
8. SERVICE FEES FOR EVERGREEN MONEY MARKET FUNDS
We will pay you service fees calculated as provided in section II (A)(4)(b)
except that the quarterly rate will be 0.075% (approximately 0.30% annually.)
<PAGE>
B. CLASS B SHARES
ALL KEYSTONE AMERICA AND EVERGREEN FUNDS
1. COMMISSIONS
Except as otherwise provided in our Agreement, we will pay you commissions
on your sales of Class B Shares of the Keystone America Funds and the
Evergreen Funds at the rate of 4.00% of the aggregate Offering Price of such
Shares, when sold in an eligible sale.
2. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of additional commissions, to certain dealers. Such
incentives may, at our discretion, be limited to dealers who allow their
individual selling representatives to participate in such additional
commissions.
3. SERVICE FEES FOR EVERGREEN FUNDS AND KEYSTONE AMERICA FUNDS (OTHER THAN
KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE FUND - SERIES II)
a. Keystone America Funds - Until March 31, 1997, we will pay you service
fees calculated as provided in section II (A)(4)(a) above.
b. Evergreen Funds and Keystone America Funds (after March 31. 1997). We
will pay you service fees calculated as provided in section II (A)(4)(b)
above.
4. SERVICE FEES FOR KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE
FUND - SERIES II
a. Until March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(a) above.
b. After March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(b) above.
c. After June 30, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(c) above.
C. CLASS C SHARES
ALL KEYSTONE AMERICA AND EVERGREEN FUNDS
1. COMMISSIONS
Except as provided in our Agreement, we will pay you initial commissions on
your sales of Class C Shares of the Keystone America and the Evergreen Funds
at the rate of 0.75% of the aggregate Offering Price of such Shares sold in
each eligible sale.
We will also pay you commissions based on the average daily net asset value
of Shares of such Funds you have sold which have been on the books of the
Funds for a minimum of 14 months from the date of purchase (plus any
reinvested distributions attributable to such Shares), which have been issued
and outstanding on the books of such Funds during the calendar quarter and
which are registered in the names of customers for whom you are dealer of
record ("Eligible Shares"). Such commissions will be calculated quarterly at
the rate of 0.1875% per quarter of the average daily net asset value of all
such Eligible Shares (approximately 0.75% annually) during such quarter. Such
commissions will be paid by the twentieth day of the month before the end of
the respective quarter. Such commissions will continue to be paid to you
quarterly so long as aggregate payments do not exceed applicable NASD
limitations and other governing regulations.
2. SERVICE FEES
We will pay you a full year's service fee in advance on your sales of Class
C Shares of such Funds at the rate of 0.25% of the aggregate net asset value
of such Shares.
We will pay you service fees based on the average daily net asset value of
Shares of such Funds you have sold which have been on the books of the Funds
for a minimum of 14 months from the date of purchase (plus any reinvested
distributions attributable to such Shares), which have been issued and
outstanding during the respective quarter and which are registered in the
names of customers for whom you are the dealer of record ("Eligible Shares").
Such service fees will be calculated quarterly at the rate of 0.0625% per
quarter of the average daily net asset value of all such Eligible Shares
(approximately 0.25% annually); provided, however, that in any calendar
quarter in which total service fees earned by you on Eligible Shares of Funds
(except Keystone Liquid Trust Class A Shares) are less than $50.00 in the
aggregate, no service fees will be paid to you nor will such amounts be
carried over for payment in a future quarter. Service fees will be paid by the
twentieth day of the month before the end of the respective quarter. Service
fees other than those paid in advance will only be paid by us to the extent
that such amounts have been paid to us by the Funds.
April 11, 1997
Evergreen Investment Trust
2500 Westchester Avenue
Purchase, NY 10577
Ladies and Gentlemen:
We have been requested by the Evergreen Investment Trust, a Massachusetts
business trust with transferable shares and currently consisting of fourteen
series (the "Trust") established under a Declaration of Trust dated August 30,
1984 as amended (the "Declaration"), for our opinion with respect to certain
matters relating to the Evergreen U.S. Government Fund (the "Acquiring Fund"), a
series of the Trust. We understand that the Trust is about to file a
Registration Statement on Form N-14 for the purpose of registering shares of the
Trust under the Securities Act of 1933, as amended (the "1933 Act"), in
connection with the proposed acquisition by the Acquiring Fund of all of the
assets of the Keystone Government Securities Fund (the "Acquired Fund"), a
Massachusetts business trust with transferable shares, in exchange solely for
shares of the Acquiring Fund and the assumption by the Acquiring Fund of
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.
Based upon the foregoing, and assuming the approval by shareholders of the
Acquired Fund of certain matters scheduled for their consideration at a meeting
<PAGE>
Evergreen Investment Trust
April 11, 1997
Page 2
presently anticipated to be held on July 14, 1997, 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.
With respect to the opinion stated in the paragraph above, we note that
shareholders of a Massachusetts business trust may under some circumstances be
subject to assessment at the instance of creditors to pay the obligations of
such trust in the event that its assets are insufficient for the purpose.
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,
SULLIVAN & WORCESTER LLP
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Investment Trust
We consent to the use of our reports incorporated herein by reference and to
the references to our firm under the caption "FINANCIAL STATEMENTS AND EXPERTS"
in the prospectus/proxy statement.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 14, 1997
KEYSTONE GOVERNMENT SECURITIES FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 14, 1997
The undersigned, revoking all Proxies heretofore given, hereby appoints
George Bissell, Albert Elfner, or Rosemary Van Antwerp or any of them as Proxies
of the undersigned, with full power of substitution, to vote on behalf of the
undersigned all shares of Keystone Government Securities Fund (the "Government
Securities Fund") that the undersigned is entitled to vote at the special
meeting of shareholders of the Government Securities Fund to be held at 3:00
p.m. on Monday, July 14, 1997 at the offices of Keystone Investment Management
Company, 26th Floor, 200 Berkeley Street, Boston, Massachusetts 02116 and at any
adjournments thereof, as fully as the undersigned would be entitled to vote if
personally present, as follows:
To approve an Agreement and Plan of Reorganization whereby Evergreen US
Government Fund will (i) acquire all of the assets of the Government Securities
Fund in exchange for Shares of Evergreen US Government Fund; and (ii) assume the
[______________] liabilities of the Government Securities Fund, as substantially
described in the accompanying Prospectus/Proxy Statement.
_____FOR _____AGAINST _____ABSTAIN
<PAGE>
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE GOVERNMENT SECURITIES
FUND.
THE BOARD OF TRUSTEES OF THE GOVERNMENT SECURITIES FUND RECOMMENDS A VOTE FOR
THE PROPOSAL.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR THE PROPOSAL IF
NO CHOICE IS INDICATED.
THE PROXIES ARE AUTHORIZED IN THEIR DISCRETION TO VOTE UPON SUCH
OTHER MATTERS AS MAY COME BEFORE THE MEETING OR ANY
ADJOURNMENTS THEREOF.
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: , 1997
Signature(s):
Signature (of joint owner,
if any):
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign full corporate name and
your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy. Please sign, date and return.
