1933 Act Registration No. 333-39869
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N- 14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
EVERGREEN EQUITY TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ________ pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on ________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on ________ pursuant to paragraph (a)(2) of Rule 485
Pursuant to Rule 414 under the Securities Act of 1933, by this
amendment to Registration Statement No. 33-39869 on Form N- 14 of Evergreen
Investment Trust, a Massachusetts business trust, the Registrant hereby adopts
the Registration Statement of such trust with respect to the Evergreen Value
Fund series thereof
<PAGE>
under
the Securities Act of 1933.
<PAGE>
EVERGREEN EQUITY TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary; Comparison
of Investment Objectives and
Policies; Risks
4. Information About the Summary; Reasons for the
Transaction
Reorganization; Comparative
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
7. Voting Information
Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of
Evergreen
Value Fund dated December
1, 1997, as amended
13. Additional Information Statement of Additional
about the Company Being Information of The Virtus
Acquired Funds - The Style Manager:
Large Cap Fund dated November
30, 1997
14. Financial Statements Financial Statements dated
July 31, 1997 of Evergreen
Value Fund; Financial
Statements of The Style
Manager: Large Cap Fund dated
September 30, 1997
Item of Part C of Form N-14
Incorporated by Reference to
15. Indemnification Part A Caption - "Comparative
Information on Shareholders'
Rights - Liability and
Indemnification of Trustees"
<PAGE>
16. Exhibits
Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
THE VIRTUS FUNDS
THE STYLE MANAGER: LARGE CAP FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January 5, 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of The Style Manager: Large Cap Fund (the "Fund")
to inform you of a Special Shareholders' meeting to be held on February 20,
1998. Before that meeting I would like your vote on the important issues
affecting your Fund as described in the attached Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes three proposals. The first proposal
requests that shareholders consider and act upon an Agreement and Plan of
Reorganization whereby all of the assets of the Fund would be acquired by
Evergreen Value Fund in exchange for either Class A or Class Y shares of
Evergreen Value Fund and the assumption by Evergreen Value Fund of certain
liabilities of the Fund. You will receive shares of Evergreen Value Fund having
an aggregate net asset value equal to the aggregate net asset value of your Fund
shares. Details about Evergreen Value Fund's investment objective, portfolio
management team, performance, etc. are contained in the attached
Prospectus/Proxy Statement. The transaction is a non-taxable event for
shareholders.
The second proposal requests shareholder consideration of an Interim Investment
Advisory Agreement between the Fund and Virtus
Capital Management, Inc.
The third and final proposal requests shareholder consideration of an Interim
Sub-Advisory Agreement between Virtus Capital Management, Inc. and Trend Capital
Management, Inc.
Information relating to the Interim Investment Advisory Agreement and the
Interim Sub-Advisory Agreement is contained in the attached Prospectus/Proxy
Statement.
The Board of Trustees has approved the proposals and recommends that you vote
FOR these proposals.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to
<PAGE>
familiarize yourself with the proposals presented and sign and return your proxy
card in the enclosed postage-paid envelope today.
If we do not receive your completed proxy card after several weeks, you may be
contacted by our proxy solicitor, Shareholder Communications Corporation, who
will remind you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
The Virtus Funds
<PAGE>
THE VIRTUS FUNDS
THE STYLE MANAGER: LARGE CAP FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of The Style Manager: Large Cap Fund, a series of The Virtus Funds
("Large Cap"), will be held at the offices of the Evergreen Funds, 200 Berkeley
Street, 26th Floor, Boston, Massachusetts 02116, on February 20, 1998 at 2:00
p.m.
for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of November 26, 1997, providing for the acquisition of all
of the assets of Large Cap by Evergreen Value Fund, a series of Evergreen Equity
Trust, ("Evergreen Value") in exchange for shares of Evergreen Value and the
assumption by Evergreen Value of certain identified liabilities of Large Cap.
The Plan also provides for distribution of such shares of Evergreen Value to
shareholders of Large Cap in liquidation and subsequent termination of Large
Cap. A vote in favor of the Plan is a vote in favor of the liquidation and
dissolution of Large Cap.
2. To consider and act upon the Interim Investment Advisory Agreement
between Large Cap and Virtus Capital Management, Inc.
3. To consider and act upon the Interim Sub-Advisory Agreement between
Virtus Capital Management, Inc. and Trend Capital Management, Inc.
4. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of The Virtus Funds on behalf of Large Cap have fixed the
close of business on December 26, 1997 as the record date for the determination
of shareholders of Large Cap entitled to notice of and to vote at the Meeting or
any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE
<PAGE>
ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT THEIR SHARES MAY BE
REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL
HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Trustees
John W. McGonigle
Secretary
January 5, 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr. John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JANUARY 5, 1998
Acquisition of Assets of
THE STYLE MANAGER: LARGE CAP FUND
a series of
The Virtus Funds
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
EVERGREEN VALUE FUND
a series of
Evergreen Equity Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
The Style Manager: Large Cap Fund ("Large Cap") in connection with a proposed
Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Large Cap for consideration at a Special Meeting of Shareholders
to be held on February 20, 1998 at 2:00 p.m. at the offices of the Evergreen
Funds, 200 Berkeley Street, Boston, Massachusetts 02116, and any adjournments
thereof (the "Meeting"). The Plan provides for all of the assets of Large Cap to
be acquired by Evergreen Value Fund ("Evergreen Value") in exchange for shares
of Evergreen Value and the assumption by Evergreen Value of certain identified
liabilities of Large Cap (hereinafter referred to as the "Reorganization").
Evergreen Value and Large Cap are sometimes hereinafter referred to individually
as the "Fund" and collectively as the "Funds." Following the Reorganization,
shares of Evergreen Value will be distributed to shareholders of Large Cap in
liquidation of Large Cap and such Fund will be terminated. Holders of Investment
shares and Trust shares of Large Cap will receive Class A and Class Y shares,
respectively, of Evergreen Value. Each such class of shares of Evergreen Value
has the same Rule 12b-1 distribution-related fees, if any, as the shares of the
class of Large Cap held by such holders prior to the Reorganization. No initial
sales charge will be imposed in connection with Class A shares of Evergreen
Value received by holders of Investment shares of Large Cap. As a result of the
proposed Reorganization, shareholders of Large Cap will receive that number of
full and fractional shares of Evergreen Value having an aggregate net asset
value equal to the aggregate net asset value of such shareholder's shares of
Large Cap. The Reorganization is being structured as a tax-free reorganization
for federal income tax purposes.
<PAGE>
Evergreen Value is a separate series of Evergreen Equity Trust, an
open-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The investment objectives of Evergreen
Value are to seek long-term capital appreciation with current income as a
secondary objective. Such investment objectives are substantially identical to
those of Large Cap.
Shareholders of Large Cap are also being asked to approve the Interim
Investment Advisory Agreement with Virtus Capital Management, Inc., a subsidiary
of First Union Corporation ("Virtus") (the "Interim Advisory Agreement"), with
the same terms and fees as the previous advisory agreement between Large Cap and
Virtus and the Interim Sub-Advisory Agreement between Virtus and Trend Capital
Management, Inc. ("Trend") with the same terms and fees as the previous
sub-advisory agreement between Virtus and Trend. The Interim Advisory Agreement
and Interim Sub-Advisory Agreement will be in effect for the period of time
between November 28, 1997, the date on which the merger of Signet Banking
Corporation with and into a wholly-owned subsidiary of First Union Corporation
was consummated, and the date of the Reorganization (scheduled for on or about
February 27, 1998).
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen Value that
shareholders of Large Cap should know before voting on the Reorganization.
Certain relevant documents listed below, which have been filed with the
Securities and Exchange Commission ("SEC"), are incorporated in whole or in part
by reference. A Statement of Additional Information dated January 5, 1998,
relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Evergreen Value dated July 31, 1997 and
Large Cap dated September 30, 1997, has been filed with the SEC and is
incorporated by reference in its entirety into this Prospectus/Proxy Statement.
A copy of such Statement of Additional Information is available upon request and
without charge by writing to Evergreen Value at 200 Berkeley Street, Boston,
Massachusetts 02116, or by calling toll-free 1-800-343-2898.
The two Prospectuses of Evergreen Value dated May 1, 1997, as amended
and its Annual Report for the period ended July 31, 1997 are incorporated herein
by reference in their entirety, insofar as they relate to Evergreen Value only,
and not to any other fund described therein. The Prospectuses, which pertain (i)
to Class Y shares and (ii) to Class A, Class B and Class C shares, differ only
insofar as they describe the separate distribution and shareholder servicing
arrangements applicable to the classes. Shareholders of Large Cap will receive,
with this
<PAGE>
Prospectus/Proxy Statement, copies of the Prospectus pertaining to the class of
shares of Evergreen Value that they will receive as a result of the consummation
of the Reorganization. Additional information about Evergreen Value is contained
in its Statement of Additional Information dated December 1, 1997, as amended,
which has been filed with the SEC and which is available upon request and
without charge by writing to or calling Evergreen Value at the address or
telephone number listed in the preceding paragraph.
The two Prospectuses of Large Cap (which pertain to (i) Trust shares
and (ii) Investment shares) dated November 30, 1997, insofar as they relate to
Large Cap only, and not to any other funds described therein, are incorporated
herein in their entirety by reference. Copies of the Prospectuses and related
Statements of Additional Information dated the same date are available upon
request without charge by writing to Large Cap at the address listed on the
cover page of this Prospectus/Proxy Statement or by calling toll-free
1-800-829-3863.
Included as Exhibits A, B and C to this Prospectus/Proxy Statement are
a copy of the Plan, the Interim Advisory Agreement and the Interim Sub- Advisory
Agreement, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk, including
possible
loss of capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES............................................6
SUMMARY .................................................................11
Proposed Plan of Reorganization..................................11
Tax Consequences.................................................13
Investment Objectives and Policies
of the Funds..............................................................13
Comparative Performance Information
for each Fund.............................................................14
Management of the Funds..........................................15
Investment Advisers and Sub-Adviser..............................15
Administrators...................................................16
Portfolio Management.............................................16
Distribution of Shares...........................................16
Purchase and Redemption Procedures...............................18
Exchange Privileges..............................................18
Dividend Policy..................................................19
Risks ........................................................20
REASONS FOR THE REORGANIZATION............................................20
Agreement and Plan of Reorganization.............................23
Federal Income Tax Consequences............................... 25
Pro-forma Capitalization.........................................26
Shareholder Information..........................................28
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES..........................28
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS...........................31
Forms of Organization......................................... 32
Capitalization...................................................32
Shareholder Liability......................................... 33
Shareholder Meetings and Voting Rights...........................33
Liquidation or Dissolution.......................................34
Liability and Indemnification of Trustees..................... 35
INFORMATION REGARDING THE INTERIM ADVISORY
AGREEMENT.................................................................36
Introduction.....................................................36
Comparison of the Interim Advisory
Agreement
and the Previous Advisory
Agreement.................................................................37
Information about Large Cap's Investment
Adviser...................................................................38
<PAGE>
INFORMATION REGARDING THE INTERIM SUB-
ADVISORY AGREEMENT........................................................39
Introduction.....................................................39
Comparison of the Interim Sub-Advisory
Agreement
and the Previous Sub-
Advisory Agreement........................................................40
ADDITIONAL INFORMATION....................................................41
VOTING INFORMATION CONCERNING THE MEETING.................................42
FINANCIAL STATEMENTS AND EXPERTS....................................... 45
LEGAL MATTERS.............................................................45
OTHER BUSINESS............................................................45
APPENDIX A................................................................46
APPENDIX B................................................................47
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class Y and Class A shares of Evergreen Value set forth
in the following tables and in the examples are based on the expenses of
Evergreen Value for the fiscal year ended July 31, 1997. The amounts for Trust
and Investment shares of Large Cap set forth in the following tables and in the
examples are based on the expenses for Large Cap for the fiscal year ended
September 30, 1997. The pro forma amounts for Class Y and Class A shares of
Evergreen Value are based on the estimated expenses of Evergreen Value for the
fiscal year ending July 31, 1998.
The following tables show for Evergreen Value, Large Cap and Evergreen
Value pro forma, assuming consummation of the Reorganization, the shareholder
transaction expenses and annual fund operating expenses associated with an
investment in the Class Y, Class A, Trust and Investment shares of each Fund, as
applicable.
Comparison of Class Y and Class A Shares
of Evergreen Value With Trust and
Investment Shares of Large Cap
Evergreen Value
---------------
Shareholder
Transaction Expenses Class Y Class A
------- -------
Maximum Sales Load None 4.75%
Imposed on Purchases
(as a percentage of
offering price)
Maximum Sales Load None None
Imposed on
Reinvested Dividends
(as a percentage of
offering price)
<PAGE>
Contingent Deferred None None
Sales Charge (as a
percentage of
original purchase
price or redemption
proceeds, whichever
is lower)
Exchange Fee None None
Annual Fund
Operating Expenses
(as a percentage of
average daily net
assets)
Management Fee 0.50% 0.50%
12b-1 Fees (1) None 0.25%
Other Expenses 0.17% 0.17%
-------- ---------
Annual Fund
Operating Expenses 0.67% 0.92%
-------- ----------
-------- ----------
<TABLE>
<CAPTION>
Large Cap
---------
Shareholder Transaction Trust Investment
Expenses ----- ----------
<S> <C> <C>
Maximum Sales Load Imposed on None None
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on None None
Reinvested Dividends (as a
percentage of offering price)
<PAGE>
Contingent Deferred Sales None 2.00%
Charge (as a percentage of within
original purchase price or five years
redemption proceeds, whichever of
is lower) purchase
date and
0.00%
thereafter
Exchange Fee None None
Annual Fund Operating Expenses
(as a percentage of average
daily net assets)
Management Fee 0.75% 0.75%
12b-1 Fees None 0.25%
Other Expenses 0.49% 0.49%
----- -----
Annual Fund Operating Expenses 1.24% 1.49%
----- -----
----- -----
</TABLE>
Evergreen Value Pro Forma
Shareholder
Transaction Class Y Class A
Expenses ------- -------
Maximum Sales Load None 4.75%
Imposed on
Purchases (as a
percentage of
offering price)
Maximum Sales Load None None
Imposed on
Reinvested
Dividends (as a
percentage of
offering price)
<PAGE>
Contingent Deferred None None
Sales Charge (as a
percentage of
original purchase
price or redemption
proceeds, whichever
is lower)
Exchange Fee None None
Annual Fund
Operating Expenses
(as a percentage of
average daily net
assets)
Management Fee 0.50% 0.50%
12b-1 Fees(1) None 0.25%
Other Expenses 0.17% 0.17%
--------- ----------
Annual Fund
Operating Expenses 0.67%
--------- 0.92%
--------- ----------
----------
- ---------------
(1) Class A shares of Evergreen Value can pay up to 0.75% of average daily
net assets as a 12b-1 fee. For the foreseeable future, the Class A
12b-1 fees will be limited to 0.25% of average daily net assets.
Examples. The following tables show for Evergreen Value and Large Cap,
and for Evergreen Value pro forma, assuming consummation of the Reorganization,
examples of the cumulative effect of shareholder transaction expenses and annual
fund operating expenses indicated above on a $1,000 investment in each class of
shares for the periods specified, assuming (i) a 5% annual return, and (ii)
redemption at the end of such period and, additionally for Investment shares, no
redemption at the end of each period. In the case of Evergreen Value pro forma,
the examples do not reflect the imposition of the 4.75% maximum sales load on
purchases since Large Cap shareholders who receive Class A shares of Evergreen
Value in the Reorganization or who purchase additional Class A shares subsequent
to the Reorganization will not incur any sales load.
<PAGE>
<TABLE>
<CAPTION>
Evergreen Value
---------------
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Class Y $7 $21 $37 $83
Class A $56 $75 $95 $154
</TABLE>
<TABLE>
<CAPTION>
Large Cap
---------
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Trust $13 $39 $68 $150
Investment $35 $67 $81 $178
(Assuming
redemption at end
of period)
Investment $15 $47 $81 $178
(Assuming no
redemption at end
of period)
</TABLE>
<TABLE>
<CAPTION>
Evergreen Value Pro Forma
-------------------------
One Three Five Ten
Year Years Years Years
----- ----- ----- -----
<S> <C> <C> <C> <C>
Class Y $7 $21 $37 $83
Class A $9 $29 $51 $113
</TABLE>
<PAGE>
The purpose of the foregoing examples is to assist Large Cap
shareholders in understanding the various costs and expenses that an investor in
Evergreen Value would bear directly and indirectly as a result of the
Reorganization, as compared with the various direct and indirect expenses
currently borne by a shareholder in Large Cap. These examples should not be
considered a representation of past or future expenses or annual return. Actual
expenses may be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement
and, to the extent not inconsistent with such additional information, the
Prospectuses of Evergreen Value dated May 1, 1997, as amended and the
Prospectuses of Large Cap dated November 30, 1997 (which are incorporated herein
by reference), the Plan, the Interim Advisory Agreement and the Interim
Sub-Advisory Agreement, forms of which are attached to this Prospectus/Proxy
Statement as Exhibits A, B and C, respectively.
Proposed Plan of Reorganization
The Plan provides for the transfer of all of the assets of Large Cap in
exchange for shares of Evergreen Value and the assumption by Evergreen Value of
certain identified liabilities of Large Cap. The identified liabilities consist
only of those liabilities reflected on the Fund's statement of assets and
liabilities determined immediately preceding the Reorganization. The Plan also
calls for the distribution of shares of Evergreen Value to Large Cap
shareholders in liquidation of Large Cap as part of the Reorganization. As a
result of the Reorganization, the holders of Investment and Trust shares of
Large Cap will become the owners of that number of full and fractional Class A
and Class Y shares, respectively, of Evergreen Value having an aggregate net
asset value equal to the aggregate net asset value of the shareholders' shares
of Large Cap as of the close of business immediately prior to the date that
Large Cap's assets are exchanged for shares of Evergreen Value. See "Reasons for
the Reorganization - Agreement and Plan of Reorganization."
The Trustees of The Virtus Funds, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of Large Cap, and that the interests of the
shareholders of Large Cap will not be diluted as a result of the transactions
contemplated by the Reorganization. Accordingly, the Trustees
<PAGE>
have submitted the Plan for the approval of Large Cap's
shareholders.
THE BOARD OF TRUSTEES OF THE VIRTUS FUNDS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF LARGE CAP
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Equity Trust have also approved the Plan and,
accordingly, Evergreen Value's participation in the Reorganization.
Approval of the Reorganization on the part of Large Cap will require
the affirmative vote of a majority of Large Cap's shares voted and entitled to
vote, with all classes voting together as a single class at a Meeting at which a
quorum of the Fund's shares is present. A majority of the outstanding shares
entitled to vote, represented in person or by proxy, is required to constitute a
quorum at the Meeting. See "Voting Information Concerning the Meeting."
The merger (the "Merger") of Signet Banking Corporation ("Signet") with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
has been consummated and, as a result, by law the Merger terminated the
investment advisory agreement between Virtus and Large Cap and the sub-advisory
agreement between Virtus and Trend. Prior to consummation of the Merger, Large
Cap received an order from the SEC which permitted the implementation, without
formal shareholder approval, of a new investment advisory agreement between the
Fund and Virtus and a new sub-advisory agreement between Virtus and Trend for a
period of not more than 120 days beginning on the date of the closing of the
Merger and continuing through the date the Interim Advisory Agreement and
Interim Sub-Advisory Agreement are approved by the Fund's shareholders (but in
no event later than April 30, 1998). The Interim Advisory Agreement and the
Interim Sub-Advisory Agreement have the same terms and fees as the previous
investment advisory agreement between Large Cap and Virtus and the previous
sub-advisory agreement between Virtus and Trend, respectively. The
Reorganization is scheduled to take place on or about February 27, 1998.
Approval of the Interim Advisory Agreement and Interim Sub- Advisory
Agreement requires the affirmative vote of (i) 67% or more of the shares of
Large Cap present in person or by proxy at the Meeting, if holders of more than
50% of the shares of Large Cap outstanding on the record date are present, in
person or by proxy, or (ii) more than 50% of the outstanding shares of Large
Cap, whichever is less. See "Voting Information Concerning the Meeting."
<PAGE>
If the shareholders of Large Cap do not vote to approve the
Reorganization, the Trustees will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Large Cap will
have received an opinion of Sullivan & Worcester LLP that the Reorganization has
been structured so that no gain or loss will be recognized by the Fund or its
shareholders for federal income tax purposes as a result of the receipt of
shares of Evergreen Value in the Reorganization. The holding period and
aggregate tax basis of shares of Evergreen Value that are received by Large
Cap's shareholders will be the same as the holding period and aggregate tax
basis of shares of the Fund previously held by such shareholders, provided that
shares of the Fund are held as capital assets. In addition, the holding period
and tax basis of the assets of Large Cap in the hands of Evergreen Value as a
result of the Reorganization will be the same as in the hands of the Fund
immediately prior to the Reorganization, and no gain or loss will be recognized
by Evergreen Value upon the receipt of the assets of the Fund in exchange for
shares of Evergreen Value and the assumption by Evergreen Value of certain
identified liabilities.
Investment Objectives and Policies of the Funds
The investment objectives and policies of Evergreen Value and Large Cap
are substantially identical.
The investment objectives of Evergreen Value are long-term capital
appreciation with current income as a secondary objective. Normally, at least
75% of the Fund's assets will be invested in equity securities of U.S. companies
with prospects for earnings growth and dividends. The Fund's investments consist
of common and preferred stocks, bonds and convertible preferred stock of U.S.
companies with minimum market capitalizations of $100 million which are listed
on the New York or American Stock Exchange or traded in the over-the-counter
market.
The investment objective of Large Cap is to provide growth of capital
and income. The Fund pursues its investment objective by investing in common
stocks of large-capitalization companies, with market capitalizations of at
least $1 billion at the time of investment, and which are listed either on the
New York or American Stock Exchange or traded in the over-the-counter market.
See "Comparison of Investment Objectives and Policies" below.
<PAGE>
Comparative Performance Information for 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 total return of Evergreen Value for the one, five and ten year
periods ended September 30, 1997, the total return of Large Cap for the one and
five year periods ended September 30, 1997 and for both Funds for the periods
from inception through September 30, 1997 is set forth in the table below. The
calculations of total return assume the reinvestment of all dividends and
capital gains distributions on the reinvestment date and the deduction of all
recurring expenses (including sales charges) that were charged to shareholders'
accounts.
<TABLE>
<CAPTION>
Average Annual Total Return
1 Year From
Ended 5 Years 10 Years Inception
September Ended Ended To
30, September September September Inception
1997 30, 1997 30, 1997 30, 1997 Date
------- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Evergreen
Value
Class A 28.02% 16.33% 12.67% 14.37% 4/12/85
shares
Class Y 34.74% 17.79% N/A 17.80% 1/3/91
shares
Large Cap
(1) (2)
Trust 37.37% 14.09% N/A 14.21% 10/16/90
shares
Investment 34.75% 13.84% N/A 14.03% 10/16/90
shares
</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.
(2) Effective October 21, 1996, Trend became the sub-adviser to Large Cap.
<PAGE>
Important information about Evergreen Value is also contained in
management's discussion of Evergreen Value's performance, attached hereto as
Exhibit D. This information also appears in Evergreen Value's most recent Annual
Report.
Management of the Funds
The overall management of Evergreen Value and of Large Cap is the
responsibility of, and is supervised by, the Board of Trustees of Evergreen
Equity Trust and The Virtus Funds, respectively.
Investment Advisers and Sub-Adviser
The investment adviser to Evergreen Value is the Capital Management
Group of First Union National Bank ("FUNB"). FUNB is a subsidiary of First
Union, the sixth largest bank holding company in the United States based on
total assets as of September 30, 1997. The Capital Management Group of FUNB and
its affiliates manage the Evergreen family of mutual funds with assets of
approximately $40 billion as of November 30, 1997. For further information
regarding FUNB and First Union, see "Management of the Funds - Investment
Advisers" in the Prospectuses of Evergreen Value.
FUNB manages investments and supervises the daily business affairs of
Evergreen Value subject to the authority of the Trustees. FUNB is entitled to
receive from the Fund an annual fee equal to 0.50% of the Fund's average daily
net assets.
Virtus serves as the investment adviser for Large Cap. As investment
adviser, Virtus continuously conducts investment research and supervision on
behalf of the Fund and is responsible for the purchase and sale of portfolio
securities. Virtus has engaged Trend as the Fund's sub-adviser. Virtus
compensates Trend from the advisory fee received from Large Cap. See
"Information Regarding the Interim Sub-Advisory Agreement." For its services as
investment adviser, Virtus receives a fee at an annual rate of 0.75% of the
Fund's average daily net assets.
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Administrators
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
Evergreen Value. As administrator, EIS provides
<PAGE>
facilities, equipment and personnel to Evergreen Value and is entitled to
receive an administration fee from the Fund based on the aggregate average daily
net assets of all the mutual funds advised by FUNB and its affiliates,
calculated in accordance with the following schedule: 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 and 0.010% on assets in
excess of $30 billion.
Federated Administrative Services ("FAS") provides Large Cap with
certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to receive a fee for such services at the
following annual rates: 0.15% on the first $250 million of average daily net
assets of the combined assets of the funds in the Blanchard/Virtus mutual fund
family, 0.125% on the next $250 million of such assets, 0.10% on the next $250
million of such assets, and 0.075% on assets in excess of $750 million.
Portfolio Management
J. Donald Raines and David C. Francis have been co-portfolio managers
of Evergreen Value since 1995. Mr. Raines, who has over nineteen years of
banking and investment experience, joined FUNB in 1990 where he is responsible
for the Institutional Portfolio Management Group. Mr. Francis has over seventeen
years of equity analysis and investment experience. He joined FUNB in July, 1994
from Federated Investment Counseling, a division of Federated Investors. Mr.
Francis is responsible for directing the equity investment process for the
Capital Management Group,.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of Evergreen Value's shares. EDI distributes the
Fund's shares directly or through broker-dealers, banks (including FUNB), or
other financial intermediaries. Evergreen Value offers four classes of shares:
Class A, Class B, Class C and Class Y. Each class has separate distribution
arrangements. (See "Distribution -Related Expenses" below.) No class bears the
distribution expenses relating to the shares of any other class.
In the proposed Reorganization, shareholders of Large Cap who own Trust
shares and Investment shares will receive Class Y and Class A shares,
respectively, of Evergreen Value. The Class Y and Class A shares of Evergreen
Value have substantially similar arrangements with respect to the imposition of
Rule 12b-1 distribution and service fees as the Trust and Investment shares
<PAGE>
of Large Cap. Because the Reorganization will be effected at net asset value
without the imposition of a sales charge, Evergreen Value shares acquired by
shareholders of Large Cap pursuant to the proposed Reorganization would not be
subject to any initial sales charge or contingent deferred sales charge as a
result of the Reorganization.
The following is a summary description of charges and fees for the
Class Y and Class A shares of Evergreen Value which will be received by Large
Cap shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
the respective Evergreen Value Prospectuses and the Large Cap Prospectuses and
in each Fund's respective Statements of Additional Information.
Class Y Shares. Class Y shares are sold at net asset value without any
initial sales charge and are not subject to distribution-related fees. Class Y
shares are only available to (i) persons who at or prior to December 31, 1994
owned shares in a mutual fund advised by Evergreen Asset Management Corp.
("Evergreen Asset"), (ii) certain institutional investors and (iii) investment
advisory clients of FUNB, Evergreen Asset or their affiliates. Large Cap
shareholders who receive Evergreen Value Class Y shares in the Reorganization
who wish to make subsequent purchases of Evergreen Value's shares will be able
to purchase Class Y shares.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees. For a description of the initial sales charges
applicable to purchases of Class A shares, see "Purchase and Redemption of
Shares - How to Buy Shares" in the applicable Prospectus for Evergreen Value.
Holders of Investment shares of Large Cap who receive Class A shares of
Evergreen Value in the Reorganization will be able to purchase additional Class
A shares of Evergreen Value and of any other Evergreen fund at net asset value.
No initial sales charge will be imposed.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectuses and Statements of Additional
Information.
Distribution-Related Expenses. Evergreen Value has adopted a Rule 12b-1
plan with respect to its Class A shares under which the Class may pay for
distribution-related expenses at an annual rate which may not exceed 0.75% of
average daily net assets attributable to the Class. Payments with respect to
Class A shares are currently limited to 0.25% of average daily net assets
<PAGE>
attributable to the Class, which amount may be increased to the full plan rate
for the Fund by the Trustees without shareholder approval.
Large Cap has adopted a Rule 12b-1 plan with respect to its Investment
shares under which the Class may pay for distribution- related expenses at an
annual rate of 0.25% of average daily net assets attributable to the Class.
Large Cap has not adopted a Rule 12b-1 plan with respect to its Trust shares.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectuses and Statements of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related fees is provided above. Investments in the Funds are not
insured. The minimum initial purchase requirement for each Fund is $1,000
($10,000 for Trust shares of Large Cap). Except for the minimum subsequent
investment requirement of $100 for Investment shares of Large Cap, 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 Prospectuses for each Fund. Each
Fund may involuntarily redeem shareholders' accounts that have less than $1,000
of invested funds. All funds invested in each Fund are invested in full and
fractional shares. The Funds reserve the right to reject any purchase order.
Exchange Privileges
Large Cap currently permits holders of Investment shares to exchange
such shares for Investment shares of other funds managed by Virtus. Exchanges of
Trust shares are not permitted. Holders of shares of a class of Evergreen Value
generally may exchange their shares for shares of the same class of any other
Evergreen fund. Large Cap shareholders will be receiving Class Y and Class A
shares of Evergreen Value in the Reorganization and, accordingly, with respect
to shares of Evergreen Value received by Large Cap shareholders in the
Reorganization, the exchange privilege is limited to the Class Y and Class A
shares, as applicable, of other Evergreen funds. No sales charge is imposed on
an exchange. An exchange which represents an initial investment in another
Evergreen fund must amount to at least $1,000. The current exchange privileges,
and the requirements
<PAGE>
and limitations attendant thereto, are described in each Fund's respective
Prospectuses and Statements of Additional Information.
Dividend Policy
Each Fund distributes its income dividends quarterly. Distributions of
any net realized gains of a Fund will be made at least annually. Shareholders
begin to earn dividends on the first business day after shares are purchased
unless shares were not paid for, in which case dividends are not earned until
the next business day after payment is received. Dividends and distributions are
reinvested in additional shares of the same class of the respective Fund, or
paid in cash, as a shareholder has elected. See the respective Prospectuses of
each Fund for further information concerning dividends and distributions.
After the Reorganization, shareholders of Large Cap who have elected to
have their dividends and/or distributions reinvested will have dividends and/or
distributions received from Evergreen Value reinvested in shares of Evergreen
Value. Shareholders of Large Cap who have elected to receive dividends and/or
distributions in cash will receive dividends and/or distributions from Evergreen
Value in cash after the Reorganization, although they may, after the
Reorganization, elect to have such dividends and/or distributions reinvested in
additional shares of Evergreen Value.
Each of Evergreen Value and Large Cap has qualified and intends to
continue to qualify to be treated as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). While so qualified, so
long as each Fund distributes all of its net investment company taxable income
and any net realized gains to shareholders, it is expected 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 identical, the risks involved in investing in each Fund's shares
are similar. For a discussion of each Fund's objectives and policies, see
"Comparison of Investment Objectives and Policies." There is no assurance that
investment performances will be positive and that the Funds will meet their
investment objectives. In addition, both Funds may employ for hedging purposes
the strategy of engaging in options and futures
<PAGE>
transactions. See limitations discussed in "Comparison of Investment Objectives
and Policies." However, Evergreen Value does not currently engage in these
investment strategies. The risks involved in these strategies are described in
the "Investment Practices and Restrictions - Options, Futures and Derivatives"
section in Evergreen Value's Prospectuses.
Each Fund may invest in foreign securities or securities denominated in
or indexed to foreign currencies. These may involve additional risks.
Specifically, they may be affected by the strength of foreign currencies
relative to the U.S. dollar, or by political or economic developments in foreign
countries. Accounting procedures and government supervision may be less
stringent than those applicable to U.S. companies. There may be less publicly
available information about a foreign company than about a U.S. company. Foreign
markets may be less liquid or more volatile than U.S. markets and may offer less
protection to investors. It may also be more difficult to enforce contractual
obligations abroad than would be the case in the United States because of
differences in the legal systems. Foreign securities may be subject to foreign
taxes, which may reduce yield, and be less marketable than comparable U.S.
securities. All these factors are considered by each Fund's investment adviser
before making any of these types of investments.
REASONS FOR THE REORGANIZATION
On July 18, 1997, First Union entered into an Agreement and Plan of
Merger with Signet which provided, among other things, for the Merger of Signet
with and into a wholly-owned subsidiary of First Union. The Merger was
consummated on November 28, 1997. As a result of the Merger it is expected that
FUNB and its affiliates will succeed to the investment advisory and
administrative functions currently performed for Large Cap by various units of
Signet and various unaffiliated parties. It is also expected that Signet will no
longer, upon completion of the Reorganization and similar reorganizations of
other funds in the Signet mutual fund family, provide investment advisory or
administrative services to investment companies.
At a meeting held on September 16, 1997, the Board of Trustees of The
Virtus Funds considered and approved the Reorganization as in the best interests
of shareholders of Large Cap and determined that the interests of existing
shareholders of Large Cap will not be diluted as a result of the transactions
contemplated by the Reorganization. In addition, the Trustees approved the
Interim Advisory Agreement and Interim Sub-Advisory Agreement with respect to
Large Cap.
<PAGE>
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise The Virtus Funds. The Merger caused,
as a matter of law, termination of the investment advisory agreement between
each series of The Virtus Funds and Virtus and the sub-advisory agreement
between Virtus and Trend with respect to the Fund. The Virtus Funds have
received an order from the SEC which permits Virtus and Trend to continue to act
as Large Cap's investment adviser and sub- adviser, respectively, without
shareholder approval, for a period of not more than 120 days from the date the
Merger was consummated (November 28, 1997) to the date of shareholder approval
of a new investment advisory agreement and sub-advisory agreement. Accordingly,
the Trustees considered the recommendations of Signet in approving the proposed
Reorganization.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Evergreen Value and Large Cap. Specifically, Evergreen Value and Large
Cap have substantially similar investment objectives and policies and comparable
risk profiles. See "Comparison of Investment Objectives and Policies" below. At
the same time, the Board of Trustees evaluated the potential economies of scale
associated with larger mutual funds and concluded that operational efficiencies
may be achieved upon the combination of Large Cap with an Evergreen fund with a
greater level of assets. As of September 30, 1997, Evergreen Value's net assets
were approximately $1.8 billion and Large Cap's net assets were approximately
$107 million.
In addition, assuming that an alternative to the Reorganization would
be to propose that Large Cap continue its existence and be separately managed by
FUNB or one of its affiliates, Large Cap would be offered through common
distribution channels with the substantially identical Evergreen Value. Large
Cap would also have to bear the cost of maintaining its separate existence.
Signet and FUNB believe that the prospect of dividing the resources of the
Evergreen mutual fund organization between two substantially identical funds
could result in each Fund being disadvantaged due to an inability to achieve
optimum size, performance levels and the greatest possible economies of scale.
Accordingly, for the reasons noted above and recognizing that there can be no
assurance that any economies of scale or other benefits will be realized, Signet
and FUNB believe that the proposed Reorganization would be in the best interests
of each Fund and its shareholders.
The Board of Trustees of The Virtus Funds met and considered the
recommendation of Signet and FUNB and, in addition,
<PAGE>
considered among other things, (i) the terms and conditions of the
Reorganization; (ii) whether the Reorganization would result in the dilution of
shareholders' interests; (iii) expense ratios, fees and expenses of Evergreen
Value and Large Cap; (iv) the comparative performance records of each of the
Funds; (v) compatibility of their investment objectives and policies; (vi) the
investment experience, expertise and resources of FUNB; (vii) the service and
distribution resources available to the Evergreen funds and the broad array of
investment alternatives available to shareholders of the Evergreen funds; (viii)
the personnel and financial resources of First Union and its affiliates; (ix)
the fact that FUNB will bear the expenses incurred by Large Cap in connection
with the Reorganization; (x) the fact that Evergreen Value will assume certain
identified liabilities of Large Cap; and (xi) the expected federal income tax
consequences of the Reorganization.
The Trustees also considered the benefits to be derived by shareholders
of Large Cap from the sale of its assets to Evergreen Value. In this regard, the
Trustees considered the potential benefits of being associated with a larger
entity and the economies of scale that could be realized by the participation in
such an entity by shareholders of Large Cap.
In addition, the Trustees considered that there are alternatives
available to shareholders of Large Cap, including the ability to redeem their
shares, as well as the option to vote against the Reorganization.
During their consideration of the Reorganization the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Equity Trust also concluded at a meeting on
September 16, 1997 that the proposed Reorganization would be in the best
interests of shareholders of Evergreen Value and that the interests of the
shareholders of Evergreen Value would not be diluted as a result of the
transactions contemplated by the Reorganization.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF LARGE CAP APPROVE
THE PROPOSED REORGANIZATION.
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the
Plan (Exhibit A hereto).
The Plan provides that Evergreen Value will acquire all of the assets
of Large Cap in exchange for shares of Evergreen Value
<PAGE>
and the assumption by Evergreen Value of certain identified liabilities of Large
Cap on or about February 27, 1998 or such other date as may be agreed upon by
the parties (the "Closing Date"). Prior to the Closing Date, Large Cap will
endeavor to discharge all of its known liabilities and obligations. Evergreen
Value will not assume any liabilities or obligations of Large Cap other than
those reflected in an unaudited statement of assets and liabilities of Large Cap
prepared as of the close of regular trading on the NYSE, currently 4:00 p.m.
Eastern time, on the business day immediately prior to the Closing Date. The
number of full and fractional shares of each class of Evergreen Value to be
received by the shareholders of Large Cap will be determined by multiplying the
respective outstanding class of shares of Large Cap by a factor which shall be
computed by dividing the net asset value per share of the respective class of
shares of Large Cap by the net asset value per share of the respective class of
shares of Evergreen Value. Such computations will take place as of the close of
regular trading on the NYSE on the business day immediately prior to the Closing
Date. The net asset value per share of each class will be determined by dividing
assets, less liabilities, in each case attributable to the respective class, by
the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for Evergreen Value,
will compute the value of each Fund's respective portfolio securities. The
method of valuation employed will be consistent with the procedures set forth in
the Prospectuses and Statement of Additional Information of Evergreen Value,
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, Large Cap will have declared a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
the Fund's shareholders (in shares of the Fund, or in cash, as the shareholder
has previously elected) all of the Fund's net investment company taxable income
for the taxable period ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
As soon after the Closing Date as conveniently practicable, Large Cap
will liquidate and distribute pro rata to shareholders of record as of the close
of business on the Closing Date the full and fractional shares of Evergreen
Value received by Large Cap. Such liquidation and distribution will be
accomplished by the establishment of accounts in the names of the Fund's
shareholders on the share records of Evergreen Value's transfer
<PAGE>
agent. Each account will represent the respective pro rata number of full and
fractional shares of Evergreen Value due to the Fund's shareholders. All issued
and outstanding shares of Large Cap, including those represented by
certificates, will be canceled. The shares of Evergreen Value to be issued will
have no preemptive or conversion rights. After such distributions and the
winding up of its affairs, Large Cap will be terminated. In connection with such
termination, The Virtus Funds will file with the SEC an application for
termination as a registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Large Cap'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 Large Cap's shareholders,
the Plan may be terminated (a) by the mutual agreement of Large Cap and
Evergreen Value; or (b) at or prior to the Closing Date by either party (i)
because of a breach by the other party of any representation, warranty, or
agreement contained therein to be performed at or prior to the Closing Date if
not cured within 30 days, or (ii) because a condition to the obligation of the
terminating party has not been met and it reasonably appears that it cannot be
met.
The expenses of Large Cap in connection with the Reorganization
(including the cost of any proxy soliciting agent) will be borne by FUNB whether
or not the Reorganization is consummated. No portion of such expenses will be
borne directly or indirectly by Large Cap or its shareholders. There are not any
liabilities or any expected reimbursements in connection with the 12b-1 Plan of
Large Cap. As a result, no 12b-1 liabilities will be assumed by Evergreen Value
following the Reorganization.
If the Reorganization is not approved by shareholders of Large Cap, the
Board of Trustees of The Virtus Funds will consider other possible courses of
action in the best interests of shareholders.
Federal Income Tax Consequences
The Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Large Cap will receive an
opinion of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued thereunder,
current administrative rules, pronouncements and court decisions, for
<PAGE>
federal income tax purposes, upon consummation of the
Reorganization:
(1) The transfer of all of the assets of Large Cap solely in exchange
for shares of Evergreen Value and the assumption by Evergreen Value of certain
identified liabilities, followed by the distribution of Evergreen Value's shares
by Large Cap in dissolution and liquidation of Large Cap, will constitute a
"reorganization" within the meaning of section 368(a)(1)(C) of the Code, and
Evergreen Value and Large Cap 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 Large Cap on the transfer of
all of its assets to Evergreen Value solely in exchange for Evergreen Value's
shares and the assumption by Evergreen Value of certain identified liabilities
of Large Cap or upon the distribution of Evergreen Value's shares to Large Cap's
shareholders in exchange for their shares of Large Cap;
(3) The tax basis of the assets transferred will be the same to
Evergreen Value as the tax basis of such assets to Large Cap immediately prior
to the Reorganization, and the holding period of such assets in the hands of
Evergreen Value will include the period during which the assets were held by
Large Cap;
(4) No gain or loss will be recognized by Evergreen Value upon the
receipt of the assets from Large Cap solely in exchange for the shares of
Evergreen Value and the assumption by Evergreen Value of certain identified
liabilities of Large Cap;
(5) No gain or loss will be recognized by Large Cap's shareholders upon
the issuance of the shares of Evergreen Value to them, provided they receive
solely such shares (including fractional shares) in exchange for their shares of
Large Cap; and
(6) The aggregate tax basis of the shares of Evergreen Value, including
any fractional shares, received by each of the shareholders of Large Cap
pursuant to the Reorganization will be the same as the aggregate tax basis of
the shares of Large Cap held by such shareholder immediately prior to the
Reorganization, and the holding period of the shares of Evergreen Value,
including fractional shares, received by each such shareholder will include the
period during which the shares of Large Cap exchanged therefor were held by such
shareholder (provided that the shares of Large Cap were held as a capital asset
on the date of the Reorganization).
<PAGE>
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Large Cap would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Fund shares and the fair market value of Evergreen Value
shares he or she received. Shareholders of Large Cap should consult their tax
advisers regarding the effect, if any, of the proposed Reorganization in light
of their individual circumstances. It is not anticipated that the securities of
the combined portfolio will be sold in significant amounts in order to comply
with the policies and investment practices of Evergreen Value. Since the
foregoing discussion relates only to the federal income tax consequences of the
Reorganization, shareholders of Large Cap should also consult their tax advisers
as to the state and local tax consequences, if any, of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen Value
and Large Cap as of September 30, 1997 and the capitalization of Evergreen Value
on a pro forma basis as of that date, giving effect to the proposed acquisition
of assets at net asset value. The pro forma data reflects an exchange ratio of
approximately 0.65318 and 0.65318 for Class Y and Class A shares, respectively,
of Evergreen Value issued for each Trust and Investment share, respectively, of
Large Cap.
<TABLE>
<CAPTION>
Capitalization of Large Cap,
Evergreen Value and Evergreen
Value (Pro Forma)
Evergreen Value
(After
Reorgani-
Large Cap Evergreen Value zation)
--------- --------------- ------------
<S> <C> <C> <C>
Net Assets
Trust.......................... $26,611,481 N/A N/A
Investment..................... N/A N/A
$80,073,046
Class A........................ N/A $393,666,449
$473,739,495
Class B........................ N/A $286,679,234 $286,679,234
Class C........................ N/A $3,110,507 $3,110,507
<PAGE>
Evergreen Value
(After
Reorgani-
Large Cap Evergreen Value zation)
--------- --------------- ------------
Class Y........................ N/A $1,133,254,069 $1,159,865,550
----------- -------------- --------------
Total Net
Assets....................... $1,816,710,259
$106,684,527 $1,923,394,786
Net Asset Value Per
Share
Trust.......................... $16.31 N/A N/A
Investment..................... $16.31 N/A N/A
Class A........................ N/A $24.97 $24.97
Class B........................ N/A $24.96 $24.96
Class C........................ N/A $24.95 $24.95
Class Y........................ N/A $24.97 $24.97
Shares Outstanding
Trust.......................... 1,632,012 N/A N/A
Investment..................... N/A N/A
4,910,713
Class A........................ N/A 15,765,458
18,973,056
Class B........................ N/A 11,483,723 11,483,723
Class C........................ N/A 124,692 124,692
Class Y........................ N/A 45,390,679
--------- ---------- 46,456,683
----------
All Classes.................... 72,764,552
6,542,725 77,038,154
</TABLE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
Shareholder Information
As of December 26, 1997 (the "Record Date"), there were the following
number of each Class of shares of beneficial interest of Large Cap outstanding:
Class of Shares
- ---------------
Trust..........................................
Investment.....................................
All Classes....................................
As of November 30, 1997, the officers and Trustees of The Virtus Funds
beneficially owned as a group less than 1% of the outstanding shares of Large
Cap. To Large Cap's knowledge, the following persons owned beneficially or of
record more than 5% of Large Cap's total outstanding shares as of November 30,
1997:
<TABLE>
<CAPTION>
Percen- Percen-tage
tage of of Shares of
Shares of Class
Class
Before After
No. of Reorgani- Reorgani-
Name and Address Class Shares zation zation
- ---------------- ----- --------- ---------
------
<S> <C> <C> <C> <C>
Stephens, Inc. Investment 1,184,289 24.24% 4.21% Class A
111 Center Street
Little Rock, AR
72201-3507
Bova & Co. Trust 1,599,685 100% 2.36% Class Y
Signet Trust
Company
P.O. Box
26311
Richmond, VA
23260-6311
</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 Evergreen Value can be found in the Prospectuses of Evergreen
Value under the caption "Investment Objectives and Policies." Evergreen Value's
Prospectuses also offer additional funds advised by FUNB or its affiliates.
These additional funds are not involved in the Reorganization, their investment
objectives and policies are not discussed in this Prospectus/Proxy Statement and
their shares are not offered hereby. The investment objective, policies and
restrictions of Large Cap can be found in the respective Prospectuses of the
Fund under the caption "Investment Objective and Policies of each Fund." Unlike
the
<PAGE>
investment objective of Large Cap, which is fundamental, the investment
objectives of Evergreen Value are non-fundamental and can be changed by the
Board of Trustees without shareholder approval.
The investment objectives of Evergreen Value are long-term capital
appreciation with current income as a secondary objective. Normally, at least
75% of the Fund's assets will be invested in equity securities of U.S. companies
with prospects for earnings growth and dividends. The Fund has not adopted a
policy with respect to the minimum percent of its assets that will be invested
in equity securities. However, the Fund generally invests in excess of 65% of
its assets in stocks of large capitalization companies.
Evergreen Value's investments, in order of priority, consist of:
* common and preferred stocks, bonds and convertible
preferred stock of U.S. companies with minimum market
capitalizations of $100 million which
are listed on the New York or American Stock
Exchange or traded in the over-the-counter
market. The primary consideration is for those
industries and companies with the potential for capital
appreciation; income is a secondary consideration;
* American Depositary Receipts ("ADRs") of foreign
companies traded on the New York or American Stock
Exchanges or in the over-the-counter market;
* foreign securities (either foreign or U.S. securities
traded in foreign markets). The Fund may also invest
in obligations denominated in foreign currencies. In
making these decisions, the Fund's investment adviser
will consider such factors as the condition and growth
potential of various economies and securities markets,
currency and taxation implications and other pertinent
financial, social, national and political factors;
* convertible bonds rated no lower than BBB by Standard & Poor's
Ratings Group ("S&P") or Baa by Moody's Investors Service
("Moody's") or, if not rated, determined to be of comparable
quality by the Fund's investment adviser;
* money market instruments;
<PAGE>
* fixed rate notes and bonds and adjustable and variable rate
notes of companies whose common stock the Fund may acquire
rated no lower than BBB by S&P or Baa by Moody's or , if not
rated, determined to be of comparable quality by the Fund's
investment adviser (up to 5% of total assets);
* zero coupon bonds issued or guaranteed by the U.S.
government, its agencies or instrumentalities (up to 5%
of total assets);
* obligations, including certificates of deposit and
bankers' acceptances, of banks or savings and loan
associations having at least $1 billion in deposits and
insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, including U.S. branches of
foreign banks and foreign branches of U.S. banks; and
* prime commercial paper, including master demand notes rated no
lower than A-1 by S&P or Prime 1 by Moody's.
Bonds rated BBB by S&P or Baa by Moody's may have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to weaken such bonds' prospects for principal and interest payments than
higher rated bonds. However, like the higher rated bonds, these securities are
considered investment grade. If a security's rating is reduced below the
required minimum after Evergreen Value has purchased it, Evergreen Value is not
required to sell the security but may consider doing so.
As of December 31, 1994, 1995, 1996 and July 31, 1997 approximately
97%, 89%, 96% and 93.2%, respectively, of Evergreen Value's portfolio consisted
of equity securities.
The investment objective of Large Cap is to provide growth
of capital and income.
Large Cap pursues its investment objective by investing primarily (i.e., at
least 65% of its assets under normal conditions) in common stocks of large
capitalization companies, with market capitalizations of at least $1 billion at
the time of investment, and which are listed either on the New York or American
Stock Exchange or traded in the over-the-counter market. Large Cap may also
invest in corporate preferred stocks, bonds, notes, warrants, rights and
convertible securities, in ADRs and in high-quality, short-term money market
instruments such as commercial paper of domestic and foreign issuers and
obligations of domestic and foreign banks.
<PAGE>
The debt securities (including convertible securities) in which Large
Cap may invest must be rated, at the time of purchase, BBB or higher by S&P or
Fitch Investor Services, L.P. or Baa or higher by Moody's or, if unrated, be of
comparable quality as determined by the Fund's investment adviser. If a
security's rating is reduced below the required minimum after Large Cap has
purchased it, Large Cap is not required to sell the security but may consider
doing so.
Evergreen Value may write covered put and call options and purchase put
and call options on securities. Although there are no restrictions on the amount
of assets which may be invested in such securities, Evergreen Value does not
currently intend to invest more than 5% of its net assets in options
transactions. In addition, Evergreen Value, unlike Large Cap, may sell or
purchase currency and other financial futures contracts and may purchase
exchange listed put options on financial futures contracts. Evergreen Value does
not currently engage in futures transactions and related options. Large Cap may
enter into put and call options contracts and futures contracts. With respect to
puts and calls, Large Cap currently limits the value of the assets underlying
such options to not more than 25% of net assets, and will limit the premiums
paid for options to 20% of net assets. Large Cap will limit the margin deposits
entered into by the Fund to 5% of its net assets.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectuses and Statements of
Additional Information. The Funds have other investment policies and
restrictions which are also set forth in the Prospectuses and Statements of
Additional Information of each Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Equity Trust and The Virtus Funds are open-end management
investment companies registered with the SEC under the 1940 Act, which
continuously offer shares to the public. Evergreen Equity Trust is organized as
a Delaware business trust and The Virtus Funds is organized as a Massachusetts
business trust. Each Trust is governed by a Declaration of Trust, By-Laws and a
Board of Trustees. Each Trust is also governed by applicable Delaware,
Massachusetts and federal law. Evergreen Value is a series of Evergreen Equity
Trust and Large Cap is a series of The Virtus Funds.
As set forth in the Supplement to Evergreen Value's Prospectuses,
effective December 22, 1997, Evergreen
<PAGE>
Value Fund, a series of Evergreen Investment Trust, a Massachusetts business
trust, was reorganized (the "Delaware Reorganization") into a corresponding
series (Evergreen Value) of Evergreen Equity Trust. In connection with the
Delaware Reorganization, the Fund's investment objectives were reclassified from
"fundamental" to "non-fundamental" and therefore may be changed without
shareholder approval; the Fund adopted certain standardized investment
restrictions; and the Fund eliminated or reclassified from fundamental to non-
fundamental certain of the Fund's other fundamental investment restrictions.
Capitalization
The beneficial interests in Evergreen Value are represented by an
unlimited number of transferable shares of beneficial interest, $.001 par value
per share. The beneficial interests in Large Cap are represented by an unlimited
number of transferable shares of beneficial interest without par value. The
respective Declaration of Trust under which each Fund has been established
permits the Trustees to allocate shares into an unlimited number of series, and
classes thereof, with rights determined by the Trustees, all without shareholder
approval. Fractional shares may be issued. Each Fund's shares represent equal
proportionate interests in the assets belonging to the Funds. Shareholders of
each Fund are entitled to receive dividends and other amounts as determined by
the Trustees. Shareholders of each Fund vote separately, by class, as to
matters, such as approval of or amendments to Rule 12b-1 distribution plans,
that affect only their particular class and by series as to matters, such as
approval of or amendments to investment advisory agreements or proposed
reorganizations, that affect only their particular series.
Shareholder Liability
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the Declaration of Trust under which Large Cap was
established disclaims shareholder liability for acts or obligations of the
series and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Declaration of Trust provides for indemnification out of the series property
for all losses and expenses of any shareholder held personally liable for the
obligations of the series. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered remote since it is
limited to circumstances in which a
<PAGE>
disclaimer is inoperative and the series or the trust itself
would be unable to meet its obligations.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Equity Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of a Delaware trust to liability. To guard
against this risk, the Declaration of Trust of Evergreen Equity Trust (a)
provides that any written obligation of the Trust may contain a statement that
such obligation may only be enforced against the assets of the Trust or the
particular series in question and the obligation is not binding upon the
shareholders of the Trust; however, the omission of such a disclaimer will not
operate to create personal liability for any shareholder; and (b) provides for
indemnification out of Trust property of any shareholder held personally liable
for the obligations of the Trust. Accordingly, the risk of a shareholder of
Evergreen Equity Trust incurring financial loss beyond that shareholder's
investment because of shareholder liability is limited to circumstances in
which: (i) the court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) the Trust itself would be
unable to meet its obligations. In light of Delaware law, the nature of the
Trust's business, and the nature of its assets, the risk of personal liability
to a shareholder of Evergreen Equity Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Equity Trust on behalf of Evergreen Value nor The
Virtus Funds on behalf of Large Cap is required to hold annual meetings of
shareholders. However, a meeting of shareholders for the purpose of voting upon
the question of removal of a Trustee must be called when requested in writing by
the holders of at least 10% of the outstanding shares of Evergreen Equity Trust
or The Virtus Funds. In addition, each is required to call a meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of the Trustees then holding office were elected by shareholders. Each
Trust currently does not intend to hold regular shareholder meetings. Each Trust
does not permit cumulative voting. Except when a larger quorum is required by
applicable law, with respect to Evergreen Value, twenty-five percent (25%) of
the outstanding shares entitled to vote, and with respect to Large Cap, a
majority of the outstanding shares entitled to vote constitutes a quorum for
consideration of such matter. For Evergreen Value and
<PAGE>
Large Cap, a majority of the votes cast and entitled to vote is sufficient to
act on a matter (unless otherwise specifically required by the applicable
governing documents or other law, including the 1940 Act).
Under the Declaration of Trust of Evergreen Equity Trust, each share of
Evergreen Value is entitled to one vote for each dollar of net asset value
applicable to each share. Under the voting provisions governing Large Cap, each
share is entitled to one vote. Over time, the net asset values of the mutual
funds which are each a series of The Virtus Funds have changed in relation to
one another and are expected to continue to do so in the future. Because of the
divergence in net asset values, a given dollar investment in a fund which is a
series of The Virtus Funds and which has a lower net asset value will purchase
more shares and, under the current voting provisions of The Virtus Funds, have
more votes, than the same investment in a series with a higher net asset value.
Under the Declaration of Trust of Evergreen Equity Trust, voting power is
related to the dollar value of a shareholder's investment rather than to the
number of shares held.
Liquidation or Dissolution
In the event of the liquidation of Evergreen Value and Large Cap, the
shareholders are entitled to receive, when, and as declared by the Trustees, the
excess of the assets belonging to such Fund or attributable to the class over
the liabilities belonging to the Fund or attributable to the class. In either
case, the assets so distributable to shareholders of the Fund will be
distributed among the shareholders in proportion to the number of shares of a
class of the Fund held by them and recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declaration of Trust of The Virtus Funds provides that a Trustee
shall be liable only for his own willful defaults, and that no Trustee shall be
protected against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
The By-Laws of The Virtus Funds provide that a present or former
Trustee or officer is entitled to indemnification against liabilities and
expenses with respect to claims related to his or her position with the Trust,
provided that no indemnification shall be provided to a Trustee or officer
against any liability to the Trust or any series thereof or the shareholders of
any
<PAGE>
series by reasons of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen Equity Trust, a Trustee is
liable to the Trust and its shareholders only for such Trustee's own willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of the office of Trustee or the discharge of such
Trustee's functions. As provided in the Declaration of Trust, each Trustee of
the Trust is entitled to be indemnified against all liabilities against him or
her, including the costs of litigation, unless it is determined that the Trustee
(i) did not act in good faith in the reasonable belief that such Trustee's
action was in or not opposed to the best interests of the Trust; (ii) had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
such Trustee's duties; and (iii) in a criminal proceeding, had reasonable cause
to believe that such Trustee's conduct was unlawful (collectively, "disabling
conduct"). A determination that the Trustee did not engage in disabling conduct
and is, therefore, entitled to indemnification may be based upon the outcome of
a court action or administrative proceeding or by (a) a vote of a majority of
those Trustees who are neither "interested persons" within the meaning of the
1940 Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. The Trust may also advance money for such litigation expenses
provided that the Trustee undertakes to repay the Trust if his or her conduct is
later determined to preclude indemnification and certain other conditions are
met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware and Massachusetts law
and is not a complete description of those documents or law. Shareholders should
refer to the provisions of such Declarations of Trust, By-Laws, Delaware and
Massachusetts
law directly for more complete information.
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of The Virtus Funds recommends that shareholders of Large
Cap approve the Interim Advisory Agreement. The Merger became effective on
November 28, 1997. Pursuant to an order received from the SEC all fees payable
under the Interim Advisory Agreement will be placed in escrow and paid to Virtus
if shareholders approve the contract within 120 days of its effective date. The
Interim Advisory
<PAGE>
Agreement will remain in effect until the earlier of the Closing Date for the
Reorganization or two years from its effective date. The terms of the Interim
Advisory Agreement are essentially the same as the Previous Advisory Agreement
(as defined below). The only difference between the Previous Advisory Agreement
and the Interim Advisory Agreement, if approved by shareholders, is the length
of time each Agreement is in effect. A description of the Interim Advisory
Agreement pursuant to which Virtus continues as investment adviser to Large Cap,
as well as the services to be provided by Virtus pursuant thereto, is set forth
below under "Advisory Services." The description of the Interim Advisory
Agreement in this Prospectus/Proxy Statement is qualified in its entirety by
reference to the Interim Advisory Agreement, attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management (adviser to the Fund since 1990), is an
indirect wholly-owned subsidiary of First Union. Virtus' address is 707 East
Main Street, Suite 1300, Richmond, Virginia 23219. Virtus has served as
investment adviser pursuant to an Investment Advisory Contract dated March 1,
1995, as amended on October 21, 1996. As used herein, the Investment Advisory
Agreement, as amended, for Large Cap is referred to as the "Previous Advisory
Agreement." At a meeting of the Board of Trustees of The Virtus Funds held on
September 16, 1997, the Trustees, including a majority of the Independent
Trustees, approved the Interim Advisory Agreement for Large Cap.
The Trustees have authorized The Virtus Funds, on behalf of Large Cap,
to enter into the Interim Advisory Agreement with Virtus. Such Agreement became
effective on November 28, 1997.
If the Interim Advisory Agreement for Large Cap is not approved by
shareholders, the Trustees will consider appropriate actions to be taken with
respect to Large Cap's investment advisory arrangements at that time. The
Previous Advisory Agreement was last approved by the Trustees, including a
majority of the Independent Trustees, on February 24, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus manages Large Cap and
continuously conducts investment research and supervision for the Fund and is
responsible for the purchase and sale of portfolio securities.
<PAGE>
FAS currently acts as administrator of Large Cap. FAS will continue
during the term of the Interim Advisory Agreement as Large Cap's administrator
for the same compensation as currently received . An affiliate of FAS currently
performs transfer agency services for Large Cap's shareholders . Commencing
February 9, 1998 Evergreen Service Company will provide such transfer agency
services for the same fees charged by Large Cap's current transfer agent. See
"Summary - Administrators."
Fees and Expenses. The investment advisory fees and expense limitations for
Large Cap under the Previous Advisory Agreement and the Interim Advisory
Agreement are identical. See "Summary - Investment Advisers and Sub-Adviser."
Expense Reimbursement. The Previous Advisory Agreement included a
provision which provides that Virtus may from time to time and for such periods
as it deems appropriate reduce its compensation to the extent that the Fund's
expenses exceed such lower expense limitation as Virtus may, by notice to The
Virtus Funds, voluntarily declare to be effective. Furthermore, Virtus may, if
it deems appropriate, assume expenses of the Fund or a class to the extent that
the Fund's or classes' expenses exceed such lower expense limitation as Virtus
may, by notice to The Virtus Funds, voluntarily declare to be effective.
The Interim Advisory Agreement contains an identical provision.
Payment of Expenses and Transaction Charges. Under the Previous
Advisory Agreement, The Virtus Funds was required to pay or cause to be paid on
behalf of the Fund or each class, all of the Fund's or classes' expenses and the
Fund's or classes' allocable share of The Virtus Funds' expenses.
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to The Virtus Funds or to the Fund or to any shareholder
for any act or omission in the course of or connected in any way with rendering
services or for any losses that may be sustained in the purchase, holding or
sale of any security.
<PAGE>
The Interim Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Advisory Agreement provides that
it may be terminated without penalty by vote of a majority of the outstanding
voting securities of Large Cap (as defined in the 1940 Act) or by a vote of a
majority of The Virtus Funds' entire Board of Trustees on 60 days' written
notice to Virtus or by Virtus on 60 days' written notice to The Virtus Funds.
Also, the Interim Advisory Agreement will automatically terminate in the event
of its assignment (as defined in the 1940 Act). The Previous Advisory Agreement
contained identical provisions as to termination and assignment.
Information about Large Cap's Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, other funds of The Virtus Funds, the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus is set forth in Appendix A to this Prospectus/Proxy
Statement.
During the fiscal years ended September 30, 1997, 1996 and 1995, Virtus
received from Large Cap management fees of $749,609, $704,007 and $678,512,
respectively, of which $0, $0 and $189,893, respectively, were voluntarily
waived. Signet acts as custodian for Large Cap and received $47,632 for the
fiscal year ended September 30, 1997. Commencing on or about January 20, 1998
FUNB will act as Large Cap's custodian during the term of the Interim Advisory
Agreement.
The Board of Trustees considered the Interim Advisory Agreement as part
of its overall approval of the Plan. The Board of Trustees considered, among
other things, the factors set forth above in "Reasons for the Reorganization."
The Board of Trustees also considered the fact that there were no material
differences between the terms of the Interim Advisory Agreement and the terms of
the Previous Advisory Agreement.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF LARGE CAP
APPROVE THE INTERIM ADVISORY AGREEMENT.
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of The Virtus Funds
<PAGE>
recommends that shareholders of Large Cap approve the Interim Sub-Advisory
Agreement. Such Agreement became effective on November 28, 1997. Pursuant to an
order from the SEC, all fees payable under the Interim Sub-Advisory Agreement
will be placed in escrow and paid to Trend if shareholders approve the contract
within 120 days of its effective date. The Interim Sub- Advisory Agreement will
remain in effect until the earlier of the Closing Date for the Reorganization or
two years from its effective date. The terms of the Interim Sub-Advisory
Agreement are essentially the same as the Previous Sub-Advisory Agreement (as
defined below). The only difference between the Previous Sub-Advisory Agreement
and the Interim Sub-Advisory Agreement, if approved by shareholders, is the
length of time the Agreement is in effect. A description of the Interim
Sub-Advisory Agreement pursuant to which Trend continues as the investment
sub-adviser to Large Cap, as well as the services to be provided by Trend
pursuant thereto, is set forth below under "Sub-Advisory Services." The
description of the Interim Sub-Advisory Agreement in this Prospectus/Proxy
Statement is qualified in its entirety by reference to the Interim Sub-Advisory
Agreement, attached hereto as Exhibit C.
Trend, 956 Interchange Tower, 600 S. Highway 169, Minneapolis,
Minnesota 55426, has served as sub-investment adviser to Large Cap pursuant to a
Sub-Advisory Agreement, dated October 21, 1996. Trend was founded in 1992 by
Thomas G. Fox, its President and Chief Investment Officer. Trend provides
advisory services to individuals and institutions. Trend does not provide
investment advisory services to any other mutual fund. See "Summary - Investment
Advisers and Sub-Adviser ." As used herein, the Sub-Advisory Agreement for Large
Cap is referred to as the "Previous Sub-Advisory Agreement." At a meeting of the
Board of Trustees of The Virtus Funds held on September 16, 1997, the Trustees,
including a majority of the Independent Trustees, approved the Interim Sub-
Advisory Agreement for Large Cap.
The Trustees have authorized The Virtus Funds, on behalf of Large Cap,
to enter into the Interim Sub-Advisory Agreement with Virtus and Trend. Such
Agreement became effective on November 28, 1997. If the Interim Sub-Advisory
Agreement for Large Cap is not approved by shareholders, the Trustees will
consider appropriate actions to be taken with respect to Large Cap's investment
sub-advisory arrangements at that time. The Previous Sub-Advisory Agreement was
last approved by the Trustees, including a majority of the Independent Trustees,
on November 21, 1996.
Comparison of the Interim Sub-Advisory Agreement and the Previous
Sub-Advisory Agreement
<PAGE>
Sub-Advisory Services. The management and advisory services to be
provided by Trend under the Interim Sub-Advisory Agreement are identical to
those currently provided by Trend under the Previous Sub-Advisory Agreement.
Under the Previous Sub-Advisory Agreement, Trend furnished to Virtus such
investment advice, statistical and other factual information, as from time to
time, was reasonably requested by Virtus for Large Cap.
Fees and Expenses. The investment sub-advisory fees under the Previous
Sub-Advisory Agreement and the Interim Sub-Advisory Agreement are identical. As
compensation for its sub-advisory services under the Previous Sub-Advisory
Agreement Trend was paid by Virtus a monthly fee in an amount equal to 0.15% of
the first $100 million of the Fund's average daily net assets and 0.33 1/3% of
the Fund's average daily net assets in excess of $100 million. For the year
ended September 30, 1997 Trend received an aggregate of $144,886 in advisory
fees.
The names and addresses of the principal executive officers and
directors of Trend are set forth in Appendix B to this Prospectus/Proxy
Statement.
Expense Reimbursement. The Previous Sub-Advisory Agreement provided
that in the event Virtus' fee from Large Cap was reduced in order to meet
expense limitations imposed on the Fund by state securities laws, the
sub-advisory fee shall be reduced by the same percentage as is the existing
percentage Trend receives of Virtus' fee. The Interim Sub-Advisory Agreement
contains an identical provision as to the expense reimbursement arrangement
between Trend and Virtus.
Limitation of Liability. The Previous Sub-Advisory Agreement provided
that in the absence of willful misfeasance, bad faith or gross negligence on the
part of Trend or reckless disregard by Trend of its duties under the Agreement,
Trend shall not be liable to Virtus, The Virtus Funds or to any shareholder of
The Virtus Funds for any act or omission in the course of, or connected with,
rendering services thereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. The Interim Sub-Advisory Agreement
contains an identical provision.
Termination; Assignment. The Interim Sub-Advisory Agreement provides
that it may be terminated without penalty by vote of a majority of the
outstanding voting securities of Large Cap (as defined in the 1940 Act) or by a
vote of a majority of The Virtus Funds' entire Board of Trustees on 60 days'
written notice to Trend or by Virtus or Trend on 120 days' written notice to the
other party to the Agreement. Also, the Interim Sub-Advisory Agreement will
automatically terminate in the event of its
<PAGE>
assignment (as defined in the 1940 Act). The Previous Sub- Advisory Agreement
contained identical provisions as to termination and assignment.
The Board of Trustees considered the Interim Sub-Advisory Agreement as
part of its overall approval of the Plan. The Board of Trustees considered,
among other things, the factors set forth above in "Reasons for the
Reorganization." The Board of Trustees also considered the fact that there were
no material differences between the terms of the Interim Sub-Advisory Agreement
and the terms of the Previous Sub-Advisory Agreement.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF LARGE CAP
APPROVE THE INTERIM SUB-ADVISORY AGREEMENT.
ADDITIONAL INFORMATION
Evergreen Value. Information concerning the operation and management of
Evergreen Value is incorporated herein by reference from the Prospectuses dated
May 1, 1997, as amended, copies of which are enclosed, and Statement of
Additional Information dated December 1, 1997, as amended. A copy of such
Statement of Additional Information is available upon request and without charge
by writing to Evergreen Value at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
Large Cap. Information about the Fund is included in its current
Prospectuses dated November 30, 1997 and in the Statements of Additional
Information of the same date, that have been filed with the SEC, all of which
are incorporated herein by reference. Copies of the Prospectuses and Statements
of Additional Information are available upon request and without charge by
writing to Large Cap at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-829-3863.
Evergreen Value and Large Cap are each subject to the informational
requirements of the Securities Exchange Act of 1934 and the 1940 Act, and in
accordance therewith file reports and other information, including proxy
material and charter documents, with the SEC. These items can be inspected and
copies obtained at the Public Reference Facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices
located at Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511 and Seven World Trade Center, Suite 1300, New York, New York 10048.
VOTING INFORMATION CONCERNING THE MEETING
<PAGE>
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of The Virtus Funds to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116, and at any adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the meeting and a proxy card, is first being mailed to
shareholders of Large Cap on or about January 5, 1998. Only shareholders of
record as of the close of business on the Record Date will be entitled to notice
of, and to vote at, the Meeting or any adjournment thereof. The holders of a
majority of the outstanding shares entitled to vote, at the close of business on
the Record Date, present in person or represented by proxy, will constitute a
quorum for the Meeting. If the enclosed form of proxy is properly executed and
returned in time to be voted at the Meeting, the proxies named therein will vote
the shares represented by the proxy in accordance with the instructions marked
thereon. Unmarked proxies will be voted FOR the proposed Reorganization, FOR the
Interim Advisory Agreement, FOR the Interim Sub-Advisory Agreement and FOR any
other matters deemed appropriate. Proxies that reflect abstentions and "broker
non-votes" (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or the persons
entitled to vote or (ii) the broker or nominee does not have discretionary
voting power on a particular matter) will be counted as shares that are present
and entitled to vote for purposes of determining the presence of a quorum, but
will not be counted as shares voted and will have no effect on the vote
regarding the Plan. However, such "broker non-votes" will have the effect of
being counted as votes against the Interim Advisory Agreement and the Interim
Sub- Advisory Agreement which must be approved by a percentage of the shares
present at the Meeting or a majority of the outstanding voting securities. A
proxy may be revoked at any time on or before the Meeting by written notice to
the Secretary of The Virtus Funds, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby, FOR approval of the Interim Advisory Agreement and FOR approval of the
Interim Sub-Advisory Agreement.
Approval of the Plan will require the affirmative vote of a majority of
the shares voted and entitled to vote, with all classes voting together as a
single class at the Meeting at which a quorum of the Fund's shares is present.
Approval of the Interim Advisory Agreement and Interim Sub-Advisory Agreement
will require the affirmative vote of (i) 67% or more of the outstanding voting
securities if holders of more than 50% of the
<PAGE>
outstanding voting securities are present, in person or by proxy, at the
Meeting, or (ii) more than 50% of the outstanding voting securities, whichever
is less, with all classes voting together as one 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 Signet, their affiliates or other
representatives of Large Cap (who will not be paid for their soliciting
activities). Shareholder Communications Corporation has been engaged by Large
Cap to assist in soliciting proxies.
If you wish to participate in the Meeting, you may submit the proxy
card included with this Prospectus/Proxy Statement or attend in person. Any
proxy given by you is revocable.
In the event that sufficient votes to approve the Reorganization are
not received by February 20, 1998, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of The
Virtus Funds to demand payment for, or an appraisal of, his or her shares.
However, shareholders should be aware that the Reorganization as proposed is not
expected to result in recognition of gain or loss to shareholders for federal
income tax purposes and that, if the Reorganization is consummated, shareholders
will be free to redeem the shares of Evergreen Value which they receive in the
transaction at their then-current net asset value. Shares of Large Cap may be
redeemed at any time prior to the consummation of the Reorganization.
Shareholders of Large Cap may wish to consult their tax advisers as to any
differing consequences of redeeming
<PAGE>
Fund shares prior to the Reorganization or exchanging such shares in the
Reorganization.
Large Cap 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 Virtus Funds
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
The votes of the shareholders of Evergreen Value 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 Large Cap whether other persons are beneficial owners of shares
for which proxies are being solicited and, if so, the number of copies of this
Prospectus/Proxy Statement needed to supply copies to the beneficial owners of
the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Evergreen Value as of July 31, 1997, and
the financial statements and financial highlights for the periods indicated
therein, have been incorporated by reference herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements and financial highlights of Large Cap
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of The Virtus Funds for the year ended September 30, 1997 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Value will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
<PAGE>
The Trustees of The Virtus Funds do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND APPROVAL OF THE PLAN, THE
INTERIM ADVISORY AGREEMENT AND THE INTERIM SUB-ADVISORY AGREEMENT, AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF
APPROVAL OF THE PLAN, THE INTERIM ADVISORY AGREEMENT AND THE INTERIM
SUB-ADVISORY AGREEMENT.
January 5, 1998
<PAGE>
APPENDIX A
The names and addresses of the principal executive officers
and directors of Virtus Capital Management, Inc. are as follows:
OFFICERS:
Name Address
- ---- -------
David C. First Union National Bank
Francis, Chief Investment 201 South College Street
Officer Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Virtus Capital Management, Inc.
Clemons Rosson, Vice 707 East Main Street
President, Assistant Suite 1300
Secretary Richmond, Virginia 23219
First Union National Bank
L. 201 South College
Robert Cheshire, Vice Street
President Charlotte, North
Carolina 28288-1195
John E. Gray, Vice First Union National Bank
President 201
South College Street
Charlotte, North Carolina 28288-
1195
Dillon S. Harris, Jr., Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
J. Kellie Allen, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
DIRECTORS:
Name Address
- ---- -------
First Union National Bank
David C. 201 South College
Francis Street
Charlotte, North
Carolina 28288-1195
Donald A. McMullen First Union National Bank
201 South College
Street
Charlotte, North
Carolina 28288-1195
William M. Ennis First Union National Bank
201
South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
<PAGE>
APPENDIX B
The names and addresses of the principal executive officers
and directors of Trend Capital Management, Inc. are as follows:
OFFICERS AND DIRECTORS:
Name Address
- ---- -------
Thomas G. Fox, President Trend Capital Management, Inc.
600 S. Hwy 169, #950
Minneapolis, MN 55426
Wayne R. Eskew, Vice President Trend Capital Management, Inc.
600 S. Hwy 169, #950
Minneapolis, MN 55426
Darrel R. Lynn, CFO Trend Capital Management, Inc.
600 S. Hwy 169, #950
Minneapolis, MN 55426
Timothy W. O'Malley, Secretary Trend Capital Management, Inc.
600 S. Hwy 169, #950
Minneapolis, MN 55426
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 26th day of November, 1997, by and between the Evergreen Equity Trust, a
Delaware business trust, with its principal place of business at 200 Berkeley
Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its Evergreen
Value Fund series (the "Acquiring Fund"), and The Virtus Funds, a Massachusetts
business trust, with its principal place of business at Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779 ("Virtus Funds"), with respect to its
The Style Manager: Large Cap Fund series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A and Class Y shares
of beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Virtus Funds have determined that the Selling
Fund should exchange all of its assets and certain identified liabilities for
Acquiring Fund Shares and that the interests of the existing shareholders of the
Selling Fund will
<PAGE>
not be diluted as a result of the transactions contemplated
herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the
<PAGE>
securities, if any, on the Selling Fund's list referred to in the second
sentence of this paragraph that do not conform to the Acquiring Fund's
investment objectives, policies, and restrictions. The Selling Fund will, within
a reasonable period of time prior to the Closing Date, furnish the Acquiring
Fund with a list of its portfolio securities and other investments. In the event
that the Selling Fund holds any investments that the Acquiring Fund may not
hold, the Selling Fund, if requested by the Acquiring Fund, will dispose of such
securities prior to the Closing Date. In addition, if it is determined that the
Selling Fund and the Acquiring Fund portfolios, when aggregated, would contain
investments exceeding certain percentage limitations imposed upon the Acquiring
Fund with respect to such investments, the Selling Fund if requested by the
Acquiring Fund will dispose of a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, nothing herein will require the Selling Fund to
dispose of any investments or securities if, in the reasonable judgment of the
Selling Fund, such disposition would adversely affect the tax-free nature of the
Reorganization or would violate the Selling Fund's fiduciary duty to its
shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately prior
to the Reorganization the Aggregate NASD Cap of the Selling Fund immediately
prior to the Reorganization, in each case calculated in accordance with such
Rule 2830.
<PAGE>
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's
assets to be acquired by the Acquiring Fund hereunder shall be
<PAGE>
the value of such assets computed as of the close of business on the New York
Stock Exchange on the business day next preceding the Closing Date (such time
and date being hereinafter called the "Valuation Date"), using the valuation
procedures set forth in the Trust's Declaration of Trust and the Acquiring
Fund's then current prospectuses and statement of additional information or such
other valuation procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of
Investment shares and Trust shares of the Selling Fund will receive Class A and
Class Y shares, respectively, of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. Signet Trust Company, as
custodian for the Selling Fund (the "Custodian"), shall deliver
<PAGE>
at the Closing a certificate of an authorized officer stating that (a) the
Selling Fund's portfolio securities, cash, and any other assets shall have been
delivered in proper form to the Acquiring Fund on the Closing Date; and (b) all
necessary taxes including all applicable federal and state stock transfer
stamps, if any, shall have been paid, or provision for payment shall have been
made, in conjunction with the delivery of portfolio securities by the Selling
Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date, shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Virtus Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
<PAGE>
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Virtus Funds' Declaration of Trust or By-Laws
or of any material agreement, indenture, instrument, contract, lease, or other
undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected in the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
<PAGE>
(g) The financial statements of the Selling Fund at September
30, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since September 30, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(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
<PAGE>
full right, power, and authority to sell, assign, transfer, and deliver such
assets hereunder, and, upon delivery and payment for such assets, the Acquiring
Fund will acquire good and marketable title thereto, subject to no restrictions
on the full transfer thereof, including such restrictions as might arise under
the 1933 Act, other than as disclosed to the Acquiring Fund and accepted by the
Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2.1 REPRESENTATIONS OF THE ACQUIRING FUND. The
Acquiring Fund represents and warrants to the Selling Fund as
follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an
<PAGE>
investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The financial statements of the Acquiring Fund at July 31,
1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly reflect the financial condition of the Acquiring
Fund as of such date, and there are no known contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
(g) Since July 31, 1997, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes
<PAGE>
of this subparagraph (g), a decline in the net asset value of the Acquiring Fund
shall not constitute a material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
<PAGE>
(n) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Evergreen
Value Fund (the "Predecessor Fund"), a series of Evergreen Investment Trust, a
Massachusetts business trust, as of the date hereof. The Acquiring Fund shall
deliver to the Selling Fund a certificate of the Predecessor Fund of even date
making the representations set forth in Section 4.2.1 with respect to the
Predecessor Fund to the extent applicable to the Predecessor Fund as of the date
hereof.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. Virtus Funds will call a meeting of the
Selling Fund Shareholders to consider and act upon this Agreement and to take
all other action necessary to obtain approval of the transactions contemplated
herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
<PAGE>
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by KPMG Peat
Marwick LLP and certified by Virtus Funds' President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
5.8 CAPITAL LOSS CARRYFORWARDS. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause KPMG Peat Marwick LLP to issue a letter addressed to
the Acquiring Fund and the Selling Fund, in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
<PAGE>
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this
<PAGE>
Agreement are duly authorized and upon such delivery will be legally issued and
outstanding and fully paid and non-assessable, and no shareholder of the
Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which the Acquiring Fund is
a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
<PAGE>
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus and Proxy Statement and related matters
were discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus and Proxy Statement (except to the extent indicated
in paragraph (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the Trust's officers
and other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus and Proxy Statement as
of its date, as of the date of the Selling Fund Shareholders' meeting, and as of
the Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquiring Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquiring Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus and Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of Virtus Funds and the Selling Fund. Such opinion shall contain such
other assumptions and limitations as shall be in the opinion of Sullivan &
Worcester LLP appropriate to render the opinions expressed therein.
In this paragraph 6.2, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the
<PAGE>
obligations to be performed by it hereunder on or before the Closing Date and,
in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Virtus Funds'
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Virtus Funds.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
<PAGE>
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Virtus Funds' Declaration of Trust or By-laws, or any provision of
any material agreement, indenture, instrument, contract, lease or other
undertaking (in each case known to such counsel) to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
Regarding the Interim Advisory Agreement," the Interim Sub- Advisory Agreement
and the Previous Sub-Advisory Agreement, as set forth under the caption
"Information Regarding the Interim Sub-Advisory Agreement" and the description
of voting requirements applicable to approval of the Interim Advisory Agreement
and Interim Sub-Advisory Agreement, as set forth under the caption "Voting
Information Concerning the Meeting," insofar as the latter constitutes a summary
of applicable voting requirements under the Investment Company Act of 1940, as
amended, are, in each case, accurate and fairly present the information required
to be shown by the applicable requirements of Form N-14.
(g) Such counsel does not know of any legal or governmental
proceedings, insofar as they relate to the Selling Fund existing on or before
the date of mailing of the Prospectus and Proxy Statement and the Closing Date,
required to be described in the Prospectus and Proxy Statement or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and
<PAGE>
the Selling Fund is neither a party to nor subject to the provisions of any
order, decree or judgment of any court or governmental body, which materially
and adversely affects its business other than as previously disclosed in the
Prospectus and Proxy Statement.
7.3.2 The Acquiring Fund shall have received on the Closing
Date an opinion of C. Grant Anderson, Esq., Assistant Secretary of Virtus Funds,
in form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof has been
paid, and assuming that such shares were issued in accordance with the terms of
the Selling Fund's registration statement, or any amendment thereto, in effect
at the time of such issuance, all issued and outstanding shares of the Selling
Fund are legally issued and fully paid and non-assessable (except that, under
Massachusetts law, Selling Fund Shareholders could under certain circumstances
be held personally liable for obligations of the Selling Fund).
Mr. Anderson shall also state that he has reviewed and is familiar with
the contents of the Prospectus and Proxy Statement and, although he is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and Proxy
Statement, on the basis of the foregoing, no facts have come to his attention
that lead him to believe that the Prospectus and Proxy Statement as of its date,
as of the date of the Selling Fund Shareholders' meeting, and as of the Closing
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding the Selling Fund or
necessary, in the light of the circumstances under which they were made, to make
the statements therein regarding the Selling Fund not misleading. Such opinion
may state that he does not express any opinion or belief as to the financial
statements or any financial or statistical data, or as to the information
relating to the Acquiring Fund, contained in the Prospectus and Proxy Statement
or Registration Statement.
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Massachusetts law, that as Dickstein Shapiro Morin &
Oshinsky LLP and C. Grant Anderson are not admitted to the bar of Massachusetts,
such opinions are based either upon the review of published statutes, cases and
rules and regulations of the Commonwealth of Massachusetts or upon an opinion of
Massachusetts counsel.
<PAGE>
In this paragraph 7.3, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
7.4 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Virtus Funds' Declaration
of Trust and By-Laws and certified copies of the resolutions evidencing such
approval shall have been delivered to the Acquiring Fund. Notwithstanding
anything herein to the contrary, neither the Acquiring Fund nor the Selling Fund
may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where 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
<PAGE>
that either party hereto may for itself waive any of such
conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's net investment
company taxable income for all taxable periods ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on or prior to the
Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(C) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
<PAGE>
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates
<PAGE>
by Selling Fund's management and were found to be mathematically
correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (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
<PAGE>
Registration Statement under the 1933 Act covering the Acquiring Fund Shares to
be issued pursuant to the provisions of this Agreement; (c) registration or
qualification fees and expenses of preparing and filing such forms as are
necessary under applicable state securities laws to qualify the Acquiring Fund
Shares to be issued in connection herewith in each state in which the Selling
Fund Shareholders are resident as of the date of the mailing of the Prospectus
and Proxy Statement to such shareholders; (d) postage; (e) printing; (f)
accounting fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Virtus Funds, the respective
Trustees or officers, to the other party or its Trustees or officers.
<PAGE>
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of the Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
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,
<PAGE>
officers, agents, or employees of Virtus Funds or the Trust personally, but
shall bind only the trust property of the Selling Fund and the Acquiring Fund,
as provided in the Declarations of Trust of Virtus Funds and the Trust. The
execution and delivery of this Agreement have been authorized by the Trustees of
Virtus Funds on behalf of the Selling Fund and the Trust on behalf of the
Acquiring Fund and signed by authorized officers of Virtus Funds and the Trust,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officers shall be deemed to have been made by any
of them individually or to impose any liability on any of them personally, but
shall bind only the trust property of the Selling Fund and the Acquiring Fund as
provided in the Declarations of Trust of Virtus Funds and the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
EVERGREEN EQUITY TRUST
ON BEHALF OF EVERGREEN
VALUE FUND
By:
Name:
Title:
THE VIRTUS FUNDS
ON BEHALF OF THE STYLE
MANAGER: LARGE CAP FUND
By:
Name:
Title:
<PAGE>
EXHIBIT B
THE VIRTUS FUNDS
INTERIM INVESTMENT ADVISORY AGREEMENT
This Agreement is made between Virtus Capital Management, Inc., a
Maryland corporation having its principal place of business in Richmond,
Virginia (the "Adviser"), and The Virtus Funds, a Massachusetts business trust
having its principal place of business in Pittsburgh, Pennsylvania (the
"Trust").
WHEREAS, the Trust is an open-end management investment company as that
term is defined in the Investment Company Act of 1940 (the "Act") and
is registered as such with the Securities and Exchange Commission; and
WHEREAS, the Adviser is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:
1. The Trust hereby appoints Adviser as Investment Adviser for each of
the portfolios ("Funds") of the Trust, which may be offered in one or more
classes of shares ("Classes"), on whose behalf the Trust executes an exhibit to
this Agreement, and Adviser, by its execution of each such exhibit, accepts the
appointments. Subject to the direction of the Trustees of the Trust, Adviser
shall provide investment research and supervision of the investments of each of
the Funds and conduct a continuous program of investment evaluation and of
appropriate sale or other disposition and reinvestment of each Fund's assets.
2. Adviser, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's fundamental investment policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statement and exhibits as may be
on file with the Securities and Exchange Commission.
3. The Trust shall pay or cause to be paid on behalf of each Fund or
Class, all of the Fund's or Classes' expenses and the Fund's or Classes'
allocable share of Trust expenses.
4. The Trust, on behalf of each of the Funds shall pay to Adviser for
all services rendered to such Fund by Adviser hereunder the fees set forth in
the exhibits attached hereto.
<PAGE>
5. The Adviser may from time to time and for such periods as it deems
appropriate reduce its compensation to the extent that any Fund's expenses
exceed such lower expense limitation as the Adviser may, by notice to the Trust,
voluntarily declare to be effective. Furthermore, the Adviser may, if it deems
appropriate, assume expenses of one or more Fund or Class to the extent that any
Fund's or Classes' expenses exceed such lower expense limitation as the Adviser
may, by notice to the Trust, voluntarily declare to be effective.
6. This Agreement shall begin for each Fund on the date that the Trust
executes an exhibit to this Contract relating to such Fund. This Agreement shall
remain in effect for each Fund until the earlier of the Closing Date defined in
the Agreement and Plan of Reorganization to be dated as of November 26, 1997
with respect to each Fund or for two years from the date of its execution and
from year to year thereafter, subject to the provisions for termination and all
of the other terms and conditions hereof if: (a) such continuation shall be
specifically approved at least annually by the vote of a majority of the
Trustees of the Trust, including a majority of the Trustees who are not parties
to this Agreement or interested persons of any such party (other than as
Trustees of the Trust) cast in person at a meeting called for that purpose; and
(b) Adviser shall not have notified the Trust in writing at least sixty (60)
days prior to the anniversary date of this Agreement in any year thereafter that
it does not desire such continuation with respect to that Fund.
7. Notwithstanding any provision in this Agreement, it may be
terminated at any time with respect to any Fund, without the payment of any
penalty, by the Trustees of the Trust or by a vote of a majority of the
outstanding voting securities of that Fund, as defined in Section 2(a)(42) of
the Act on sixty (60) days' written notice to Adviser.
8. This Agreement may not be assigned by Adviser and shall
automatically terminate in the event of any assignment. Adviser may employ or
contract with such other person, persons, corporation or corporations at its own
cost and expense as it shall determine in order to assist it in carrying out
this Agreement.
9. In the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of obligations or duties under this Agreement on the part
of Adviser, Adviser shall not be liable to the Trust or to any of the Funds or
to any shareholder for any act or omission in the course of or connected in any
way with rendering services or for any losses that may be sustained in the
purchase, holding or sale of any security.
<PAGE>
10. This Agreement may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by vote of a majority
of the Trustees of the Trust, including a majority of the Trustees who are not
parties to this Agreement or interested persons of any such party to this
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for that purpose, and on behalf of a Fund by a majority of the
outstanding voting securities of such Fund as defined in Section 2(a)(42) of the
Act.
11. Adviser is hereby expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees that
the obligations pursuant to this Agreement of a particular Fund and of the Trust
with respect to that particular Fund be limited solely to the assets of that
particular Fund, and Adviser shall not seek satisfaction of any such obligation
from the assets of any other Fund, the shareholders of any Fund, the Trustees,
officers, employees or agents of the Trust, or any of them.
12. This Agreement shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
13. This Agreement will become binding on the parties hereto upon their
execution of the attached exhibits to this Agreement.
<PAGE>
EXHIBIT A
THE U.S. GOVERNMENT SECURITIES FUND
THE VIRGINIA MUNICIPAL BOND FUND
THE MARYLAND MUNICIPAL BOND FUND
THE TREASURY MONEY MARKET FUND
THE MONEY MARKET FUND
THE TAX-FREE MONEY MARKET FUND
THE STYLE MANAGER FUND
THE STYLE MANAGER: LARGE CAP FUND
Name of Fund Percentage of Net Assets
- ------------ ------------------------
The Treasury Money Market Fund .50 of 1%
The Money Market Fund .50 of 1%
The Tax-Free Money Market Fund .50 of 1%
The U.S. Government Securities Fund .75 of 1%
The Virginia Municipal Bond Fund .75 of 1%
The Maryland Municipal Bond Fund .75 of 1%
The Style Manager: Large Cap Fund .75 of 1%
The Style Manager Fund 1.25 of 1%
For all services rendered by Adviser hereunder, the Trust shall pay to
Adviser and Adviser agrees to accept as full compensation for all services
rendered hereunder, an annual investment advisory fee equal to the following
percentage (the "applicable percentage") of the average daily net assets of each
Fund.
The fee shall be accrued daily at the rate of 1/365th of the applicable
percentage applied to the daily net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this 28th day of November, 1997.
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
By:
Assistant Secretary President
Attest: THE VIRTUS FUNDS
By:
Assistant Secretary Vice President
C. Grant Anderson
<PAGE>
EXHIBIT C
INTERIM SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made between Virtus Capital Management, Inc. (hereinafter
referred to as "Adviser") and Trend Capital Management, Inc. located in
Minneapolis, Minnesota (hereinafter referred to as "Sub-Adviser").
WITNESSETH:
That the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Sub-Adviser hereby agrees to furnish to Adviser in its capacity as
investment adviser to The Virtus Funds (the "Trust") such investment advice,
statistical and other factual information, as may from time to time be
reasonably requested by Adviser for one or more of the portfolios ("Funds") of
the Trust, which may be offered in one or more classes of shares ("Classes").
2. For its services under this Agreement, Sub-Adviser shall receive
from Adviser an annual fee ("the Sub-Advisory Fee"), as set forth in the exhibit
hereto. In the event that the fee due from the Trust to the Adviser on behalf of
the Funds is reduced in order to meet expense limitations imposed on the Funds
by state securities laws or regulations, the Sub-Advisory Fee shall be reduced
by the same percentage as is the existing percentage that it receives of the
Adviser's fee. (For example, if the total fee paid by the Trust to the Adviser
were 1.00% of average daily net assets of the Fund, and the Sub-Adviser was
entitled to receive a sub-advisory fee of .25% of the Fund's average daily net
assets, then in the event there was a reduction in fees from the Trust to the
Adviser for the above-stated reason, then the reduction in the sub-advisory fee
would be 25% of the reduction in the advisory fee).
Notwithstanding any other provision of this Agreement, the Sub-Adviser
may from time to time and for such periods as it deems appropriate, reduce its
compensation (and, if appropriate, assume expenses of the Fund or the Class of
the Fund) to the extent that the Fund's expenses exceed such lower expense
limitation as the Sub-Adviser may, by notice to the Trust on behalf of the Fund,
voluntarily declare to be effective.
3. This Agreement shall begin for the Fund on the date that the parties
execute an exhibit to this Agreement relating to such
<PAGE>
Funds and shall continue in effect for the Fund until the earlier of the Closing
Date defined in the Agreement and Plan of Reorganization to be dated as of
November 26, 1997 with respect to the Fund or for two years from the date of its
execution and from year to year thereafter, subject to the provisions for
termination and all of the other terms and conditions hereof if: (a) such
continuation shall be specifically approved at least annually by the vote of a
majority of the Trustees of the Trust, including a majority of the Trustees who
are not parties to this Agreement or interested persons of any such party (other
than as Trustees of the Trust) cast in person at a meeting called for that
purpose; and (b) Adviser shall not have notified the Trust in writing at least
sixty (60) days prior to the anniversary date of this Agreement in any year
thereafter that it does not desire such continuation with respect to each Fund.
4. Notwithstanding any provision in this Agreement, it may be
terminated at any time without the payment of any penalty: (a) by the Trustees
of the Trust or by a vote of a majority of the outstanding voting securities (as
defined in Section 2(a)(42) of the Investment Company Act of 1940) of the Fund
on sixty (60) days' written notice to Adviser; (b) by Sub-Adviser or Adviser
upon 120 days' written notice to the other party to the Agreement.
5. This Agreement shall automatically terminate: (a) in the event of
its assignment (as defined in the Investment Company Act of 1940); or (b) in the
event of termination of the Interim Investment Advisory Agreement for any reason
whatsoever.
6. So long as both Adviser and Sub-Adviser shall be legally qualified
to act as an investment adviser to the Funds, neither Adviser nor Sub-Adviser
shall act as an investment adviser (as such term is defined in the Investment
Company Act of 1940) to the Funds except as provided herein and in the Interim
Investment Advisory Agreement or in such other manner as may be expressly agreed
between Adviser and Sub-Adviser.
Provided, however, that if the Adviser or Sub-Adviser shall resign
prior to the end of any term of this Agreement or for any reason be unable or
unwilling to serve for a successive term which has been approved by the Trustees
of the Trust pursuant to the provisions of Paragraph 3 of this Agreement or
Paragraph 6 of the Interim Investment Advisory Agreement, the remaining party,
Sub-Adviser or Adviser as the case may be, shall not be prohibited from serving
as an investment adviser to such Fund by reason of the provisions of this
Paragraph 6.
<PAGE>
7. This Agreement may be amended from time to time by agreement of the
parties hereto provided that such amendment shall be approved both by the vote
of a majority of Trustees of the Trust, including a majority of Trustees who are
not parties to this Agreement or interested persons, as defined in Section
2(a)(19) of the Investment Company Act of 1940, of any such party at a meeting
called for that purpose, and, where required by Section 15(a)(2) of the
Investment Company Act of 1940, by the holders of a majority of the outstanding
voting securities (as defined in Section 2(a)(42) of the Investment Company Act
of 1940) of each Fund.
8. Adviser agrees that, except as otherwise provided by law or
agreement of the parties or as may be necessary to effect the purpose and intent
of this Agreement, the advice and information provided by Sub-Adviser to Adviser
hereunder, and the trends identified therein, shall be held as confidential by
Adviser and shall not be resold or passed on by Adviser in written or oral form
by Adviser to any other non-affiliated person without Sub- Adviser's express
prior written consent.
9. In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Sub-Adviser or reckless disregard by the Sub-Adviser of its
duties under this Agreement, the Sub-Adviser shall not be liable to the Adviser,
the Trust or to any shareholder of the Trust for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security.
<PAGE>
EXHIBIT A
THE VIRTUS FUNDS
THE STYLE MANAGER: LARGE CAP FUND
INTERIM SUB-ADVISORY AGREEMENT
For all services rendered by Sub-Adviser hereunder, Adviser shall pay
Sub-Adviser a Sub-Advisory Fee equal to .15% of the first $100 million of the
Fund's average daily net assets; and .33 1/3% of the Fund's average daily net
assets in excess of $100 million. The Sub-Advisory Fee shall be accrued daily,
and paid monthly as set forth in the Interim Advisory Agreement dated November
28, 1997.
This Exhibit duly incorporates by reference the Interim Sub-
Advisory Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on their behalf by their duly authorized officers, and their corporate
seals to be affixed hereto this 28th day of November, 1997.
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
________________________ By: ____________________________
Assistant Vice President President
TREND CAPITAL MANAGEMENT, INC.
________________________ By: _____________________________
Secretary President
<PAGE>
EXHIBIT D
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
FUND-AT-A-GLANCE
As of July 31, 1997
ONE-YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
One year w/o sales
charge 42.44 % 41.20 % 41.24 % 42.58 %
One year with sales
charge 35.47 % 36.20 % 40.24 % 42.58 %
One year dividends per
share $0.356 $0.192 $0.191 $0.413
One year cap gains per
share $3.339 $3.339 $3.339 $3.339
AVERAGE
ANNUAL RETURNS CLASS A CLASS B CLASS C CLASS Y
Three years 21.60 % 22.04 % N/A 23.89 %
Five years 15.86 % N/A N/A 17.32
Ten years 12.37 % N/A N/A N/A
Since Inception* 14.42 % 16.82 % 22.25 % 17.96 %
CUMULATIVE RETURNS CLASS A CLASS B CLASS C CLASS Y
Seven months w/o sales
charge 20.78 % 20.23 % 20.25 % 20.93 %
Three years 79.80 % 81.76 % N/A 90.17 %
Five years 108.74 % N/A N/A 122.29 %
Ten years 221.12 % N/A N/A N/A
Since Inception* 425.19 % 101.19 % 79.59 % 196.62 %
* CLASS A BEGAN 4/12/85; CLASS B BEGAN 2/2/93;
CLASS C BEGAN 9/2/94; CLASS Y BEGAN 1/3/91.
[Graph appears here]
Comparison of change in value of a $10,000 investment in Evergreen Value Fund
Class A, the Standard & Poors 500 Index and the Consumer Price Index.
In Thousands from July 31, 1987 to July 31, 1997
PLOT POINTS
CLASS A: CPI S&P 500
- ------- ----- ------
$9,525 $10,000 $10,000
8,896 10,399 8,824
11,176 10,934 11,458
11,903 11,461 11,672
13,528 11,971 13,159
14,397 12,349 14,839
16,297 12,690 16,110
16,817 13,042 16,960
19,155 13,403 21,381
22,402 13,797 24,920
32,112 14,102 37,905
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in each class. The Standard & Poors 500 Index is an unmanaged market
index. This index does not include transaction costs associated with buying and
selling securities nor any management fees. The Consumer Price Index is from
July 31, 1997.
PORTFOLIO MANAGER
David C. Francis, C.F.A., Chief Investment Officer,
[Photo of Institutional, for First Union Capital Management Group, is
David C. Portfolio Management Team Leader for the Evergreen Value Fund.
Francis Mr. Francis is an investment professional with more than 17
appears here] years of equity analysis and management. He joined First Union
from Federated Investment Counseling, a division of Federated
Investors, Pittsburgh, where he managed equities for employee
benefit and tax-exempt separate accounts and mutual funds.
18
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
OBJECTIVE
Evergreen Value Fund seeks long-term capital appreciation, with current income
as a secondary objective.
STRATEGY
The Fund normally invests at least 75% of its assets in the stocks of U.S.
companies with prospects for earnings growth and dividends. These companies have
minimum capitalizations of $100 million. The Fund also may invest in foreign
securities, American Depository Receipts and investment quality bonds.
LONG-TERM GROWTH
[Graph appears here]
Growth of an investment in Evergreen Value Fund, Class A
PLOT POINTS
Initial Investment Dividend Reinvestment
------------------ ---------------------
$ 9,525 $ 9,525
8,143 8,497
9,965 11,222
9,760 11,884
10,498 13,239
10,851 14,653
10,870 15,827
11,000 17,012
12,246 20,452
12,655 22,579
15,270 32,112
A $10,000 investment in Evergreen Value Fund, Class A, made on July 31, 1987
with all distributions reinvseted was worth $32,112 on July 31, 1997. Past
performance is no guarantee of future results. The performance of each class may
vary based on differences in loads and fees paid by shareholders investing in
the different classes.
TOP 10 STOCK HOLDINGS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
COMPANY INDUSTRY ASSETS
1. Nokia Corp. Telecommunication 3.0
Services & Equip.
2. Tyco International Limited Diversified 2.9
Companies
3. General Electric Co. Diversified 2.6
Companies
4. General Mills, Inc. Food & Beverage 2.4
Products
5. Bristol-Myers Squibb Co. Healthcare Products 2.4
& Services
6. Tosco Corp. Energy 2.3
7. CoreStates Financial Corp. Banks 2.3
8. Tenet Healthcare Corp. Healthcare Products 2.2
& Services
9. Philip Morris Companies Consumer Products & 2.2
Services
10. Williams Companies, Inc. Oil 2.1
TOP 10 INDUSTRY ALLOCATIONS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
INDUSTRY ASSETS
1. Banks 16.3
2. Diversified Companies 11.7
3. Energy 10.1
4. Utilities 7.7
5. Healthcare Products & Services 7.5
6. Oil 6.6
7. Food & Beverage Products 5.3
8. Electrical Equipment & Services 4.8
9. Transportation 3.4
10. Telecommunication Services & Equip. 3.0
PORTFOLIO CHARACTERISTICS
Total Net Assets (all classes) $1.82 billion
19
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
MANAGEMENT REPORT
September 1997
Dear Shareholders:
We are pleased to report to you on the Evergreen Value Fund for the fiscal
period that ended July 31, 1997.
PERFORMANCE
The Evergreen Value Fund provided strong performance during the period. For
example, the Fund's Class Y Shares had a total return of 42.58% for the 12
months that ended on July 31, a period characterized by a positive environment
for equities that particularly rewarded the large cap, blue-chip companies
emphasized by your Fund. A complete review of the performance of each class of
shares can be found on page 18.
INVESTMENT ENVIRONMENT
The investment and economic environment during the fiscal period proved very
rewarding for investors. The U.S. economy witnessed phenomenal growth and,
surprisingly, did so without experiencing signs of inflationary pressure.
However, despite few overt signs of inflation, persistent economic growth
prompted the Federal Reserve Board, in a "pre-emptive strike" at inflation, to
increase interest rates by 0.25% on March 25. This Fed-induced rate hike-- the
only Federal Reserve action during the twelve months-- startled investors,
resulting in a short-lived decline in equities before they resumed their upward
ascent. Interest rates, despite some short-term swings, remained relatively low
and stable over the course of the fiscal year, providing more fuel to power the
equity rally.
Strong economic growth, low inflation and low interest rates set the stage for
the equity market's impressive advance. The stock market's powerful rally
featured larger "blue chip" companies, which outperformed their smaller
counterparts. Equities' narrow advance was most evident during the first three
months of 1997, as the broad market experienced modest gains versus the negative
returns for small cap stocks. Since that period, small- and mid-capitalized
stocks have provided excellent returns, and have gained some ground on their
larger counterparts. However, over the 12-month period, larger capitalization
stocks have been the best performers.
INVESTMENT STRATEGY
Throughout the period, the Evergreen Value Fund emphasized large-sized,
market-leading companies that have proven records of earnings growth. Consistent
with a traditional "value" fund, many of the holdings' share prices reflect
statistical measures of value. Such securities may be undervalued due to market
decline, poor economic conditions, actual or anticipated problems, or, simply,
lack of market attention.
Within the current market environment in which stocks, as a whole, have been bid
up to all-time highs and valuation levels that are inflated, it is increasingly
difficult to find companies which are undervalued. This investment environment
dictates that we remain focused on our "bottom-up" stock selection process,
which concentrates on analyzing security fundamentals rather than broad economic
forecasts.
FINANCE
The Fund's largest sector weighting, at approximately 19%, is the financial
sector. Within this group, banks have rebounded from the early 1990s, a period
in which many financial institutions were crippled by bad loans. Financial
companies (banks in particular) have ridden a wave of mergers, low interest
rates and productivity-enhancing technology to outstanding gains. The Fund's
bank holdings include Central Fidelity Banks, Union Planters, Citicorp and
NationsBank, all of which returned over 65% for the fiscal period. Financial
companies have provided investors handsome returns over the past three years,
and have done so with less volatility than other sectors. Going forward, the
fundamental outlook for the industry remains attractive, especially if interest
rates and inflation remain at their current benign levels.
TECHNOLOGY
The technology sector is among the best performing industries over the past two
years, although its advance over the past year has been somewhat narrow. A
relatively small number of spectacular performers such as
20
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
Intel and Microsoft are largely responsible for the excellent overall
performance in the sector. Despite a mild correction in the first quarter of
1997, technology stocks have continued their powerful advance. Despite any
short-term volatility, we anticipate this trend to continue. The fundamental
outlook for technology-related companies remains positive as companies seek to
increase their productivity through technological improvements. Currently, close
to half of all capital spending is technology-related. The Fund's performance
during the fiscal period was enhanced by particularly strong technology
holdings such as Teradyne, Intel and IBM, which returned 245%, 145% and 98%,
respectively.
UTILITIES
Utilities comprise the Fund's third largest sector weighting. Within this
sector, the portfolio is buoyed by such holdings as Houston Industries and
Illinova Corporation. A strong utility exposure bolsters the Fund in two
specific ways. First, because utility companies tend to be high dividend-paying
companies, our utility weighting tends to increase the Fund's current yield.
Second, utilities provide the portfolio a somewhat defensive posture, as these
companies possess characteristics that allow them to better endure a market
downturn.
OUTLOOK
The outstanding performance of equities over the past couple of years can be
attributed to increased efficiency as well as a very favorable economic
environment. Companies have experienced surging profits as a direct result of
cost-cutting initiatives and productivity gains through technological
enhancements. In addition, a very cooperative economy, which has provided solid
growth, low interest rates and low inflation, has contributed to a stock market
that has doubled over the past three years.
The top individual performers during the fiscal period consisted primarily of
large, industry-leading companies, specifically, those within the financial and
technology industries. We expect these sectors to remain strongly represented in
the coming quarters, as their fundamental outlooks remain very favorable. In
addition we intend to maintain a strong representation of large,
industry-leading companies such as General Electric, Bristol-Myers, Philip
Morris and General Mills, which we believe have the potential to improve the
Fund's relative performance.
In light of the dramatic market performance over the past couple of years, we
approach the remainder of 1997 with a degree of caution. Judging from its
expensive valuation levels, the stock market's upside potential appears to be
limited. At this stage of a market cycle, a correction in equity prices is not
uncommon. Although painful, a correction would reduce stock valuations to more
reasonable levels. Should a market correction occur, we would view it as a
buying opportunity.
Thank you for your investment in Evergreen Value Fund.
Sincerely,
/s/ David C. Francis
DAVID C. FRANCIS
PORTFOLIO MANAGEMENT TEAM LEADER
Evergreen Value Fund
21
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
THE STYLE MANAGER: LARGE CAP FUND
a Series of
THE VIRTUS FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
EVERGREEN VALUE FUND
a Series of
EVERGREEN EQUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of The Style Manager: Large Cap
Fund ("Large Cap"), a series of The Virtus Funds, to Evergreen Value Fund
("Evergreen Value"), a series of the Evergreen Equity Trust, in exchange for
Class A shares (to be issued to holders of Investment shares of Large Cap) and
Class Y shares (to be issued to holders of Trust shares of Large Cap) of
beneficial interest, $.001 par value per share, of Evergreen Value, consists of
this cover page and the following described documents, each of which is attached
hereto and incorporated by reference herein:
(1) The Statement of Additional Information of Evergreen Value
dated December 1, 1997 , as amended;
(2) The Statements of Additional Information of Large Cap dated
November 30, 1997;
(3) Annual Report of Large Cap for the year ended September 30,
1997; and
-6-
<PAGE>
(4) Annual Report of Evergreen Value for the period ended
July 31, 1997.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Value and Large Cap dated January 5, 1998. A copy of the
Prospectus/Proxy Statement may be obtained without charge by calling or writing
to Evergreen Value or Large Cap at the telephone numbers or addresses set forth
above.
The date of this Statement of Additional Information is January 5,
1998.
EVERGREEN GROWTH AND INCOME FUNDS
AMENDMENT TO THE
STATEMENT OF ADDITIONAL INFORMATION
Dated December 1, 1997
Growth and Income Funds
Evergreen Growth and Income Fund ("Growth and Income")
Evergreen Income and Growth Fund (formerly Evergreen Total Return Fund)
("Income and Growth")
Evergreen Small Cap Equity Income Fund ("Small Cap")
Evergreen Utility Fund ("Utility")
Evergreen Value Fund ("Value")
Evergreen Fund for Total Return ("Total Return")
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 April 1, 1997, as supplemented from time
to time, for the Growth and Income Funds for the specific Fund in which you are
making or contemplating an investment. The Evergreen Growth and Income Funds are
offered through two separate prospectuses: one offering Class A, Class B and
Class C shares and a separate prospectus offering Class Y shares.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
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Investment Objectives and Policies.............................................2
Investment Restrictions........................................................6
Non-Fundamental Operating Policies............................................12
Trustees .....................................................................13
Investment Advisers...........................................................21
Distribution Plans and Agreements.............................................25
Allocation of Brokerage.......................................................28
Additional Tax Information....................................................30
Net Asset Value...............................................................32
Purchase of Shares............................................................33
General Information about the Funds...........................................43
Performance Information.......................................................44
General .....................................................................49
Finincial Statements..........................................................49
Appendix "A"..................................................................50
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
(See also "Description of the Funds - Investment Objectives
and Policies" in each Fund's Prospectus)
- --------------------------------------------------------------------------------
The investment objective(s) 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 are fundamental and cannot be changed without the approval
of shareholders. The following expands upon the discussion in the Prospectus
regarding certain investments of each Fund.
U.S. Government Securities (All Funds)
The types of U.S. government securities in which the Funds may invest
generally include direct obligations of the U.S. Treasury such as U. S. Treasury
bills, notes and bonds and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by:
(i) the full faith and credit of the U.S. Treasury;
(ii) the issuer's right to borrow from the U.S. Treasury;
(iii) the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
(iv) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive
financial support from the U.S. government are:
(i) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association.
Restricted and Illiquid Securities (All Funds)
Each Fund may invest in restricted and illiquid securities. The ability of
the Board of Trustees ("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.
Restricted securities would generally be acquired either from institutional
investors who originally acquired the securities in private placements or
directly from the issuers of the securities in private placements. Restricted
securities and securities that are not readily marketable may sell at a discount
from the price they would bring if freely marketable.
When-Issued and Delayed Delivery Securities (Utility, Value and Total Return)
Securities purchased on a when-issued or delayed delivery basis are made to
secure what is considered to be an advantageous price or yield for a Fund. No
fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of a Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the transaction has
been settled. Utility and Value do not intend to engage in when- issued and
delayed delivery transactions to an extent that would cause the segregation of
more than 20% of the total value of their assets. Total Return does not intend
to invest more than 5% of its net assets in when-issued or delayed delivery
transactions.
Lending of Portfolio Securities (All Funds)
Each Fund may lend its portfolio securities to generate income and to
offset expenses. 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 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.
Reverse Repurchase Agreements (Small Cap, Utility, Value and Total Return)
Reverse repurchase agreements 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 (All Funds)
Options which Utility and Value trade must be listed on national securities
exchanges.
Purchasing Put and Call Options on Financial Futures Contracts
Utility, Value and Total Return may purchase put and call options on
financial futures contracts (in the case of Utility and Value limited to options
on financial futures contracts for 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 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 gain offsets the 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 only the premium paid
for the contract will be lost.
Purchasing Options
Utility, Value and Total Return 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 put and call options for the purpose of
offsetting previously written put and call 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.
Utility, Value and Total Return intend to purchase put and call options on
currency and other financial futures contracts for hedging purposes. A put
option purchased by a 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.
Utility and Value currently do not intend to invest more than 5% of their
net assets in options transactions. Total Return 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 option.
"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.
Income and Growth and Growth and Income may write covered call options to a
limited extent on their portfolio securities ("covered options") in an attempt
to earn additional income. A Fund will write only covered call option contracts
and will receive premium income from the writing of such contracts. Income and
Growth and Growth and Income may purchase call options to close out a previously
written call option. In order to do so, the Fund will make a "closing purchase
transaction" -- the purchase of a call option on the same security with the same
exercise price and expiration date as the call option which it has previously
written. A Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. If an option is exercised, a Fund
realizes a long-term or short-term gain or loss from the sale of the underlying
security and the proceeds of the sale are increased by the premium originally
received.
Junk Bonds (Growth and Income and Total Return)
Consistent with its strategy of investing in "undervalued" securities,
Growth and Income and Total Return may invest in lower medium and low-quality
bonds also known as "junk bonds" and may also purchase bonds in default if, in
the opinion of the Fund's investment adviser, there is significant potential for
capital appreciation. Total Return may invest without limit in debt securities
which are rated below investment grade. Growth and Income, however, will not
invest more than 5% of its total assets in debt securities which are rated below
investment grade. These bonds are regarded as speculative with respect to the
issuer's continuing ability to meet principal and interest payments. High yield
bonds may be more susceptible to real or perceived adverse economic and
competitive industry conditions than investment grade bonds. A projection of an
economic downturn, or higher interest rates, for example, could cause a decline
in high yield bond prices because such events could lessen the ability of highly
leveraged companies to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high yield bonds may
be less liquid than the market for higher grade bonds, which can adversely
affect the ability to dispose of such securities.
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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 the Fund's
investment 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
Neither Growth and Income nor Income and Growth may invest more than 5% of
their net assets, at the time of the investment in question, in the securities
of any one issuer other than the U.S. government and its agencies or
instrumentalities.
None of Small Cap, Utility, Value or Total Return may invest more than 5%
of its total assets, at the time of the investment in question, in the
securities of any one issuer other than the U.S. government and its agencies or
instrumentalities, except that up to 25% of the value of a Fund's total assets
may be invested without regard to such 5% limitation.
2. Ten Percent Limitation on Securities of Any One Issuer
None of Small Cap, Growth and Income or Income and Growth may purchase more
than 10% of any class of securities of any one issuer other than the U.S.
government and its agencies or instrumentalities.
Neither Value nor Utility may purchase more than 10% of the outstanding
voting securities of any one issuer.
Total Return may not purchase more than 10% of the voting securities of any
one issuer other than the U.S. government and its agencies or instrumentalities.
3. Investment for Purposes of Control or Management
None of Growth and Income, Small Cap*, Income and Growth, Utility*, Value
or Total Return may invest in companies for the purpose of exercising control or
management.
4. Purchase of Securities on Margin
None of Growth and Income, Small Cap*, Income and Growth, Utility, Value or
Total Return may 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.
5. Unseasoned Issuers
None of Income and Growth, Value*, Utility* or Total Return 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.
None of Growth and Income or Small Cap* may invest more than 15% of its
total assets (10% of total net assets in the case of Growth and Income) in
securities of unseasoned issuers that have been in continuous operation for less
than three years, including operating periods of their predecessors.
6. Underwriting
Growth and Income, Small Cap, Income and Growth, Utility, Value and Total
Return 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.
7. Interests in Oil, Gas or Other Mineral Exploration or Development
Programs.
None of Growth and Income, Small Cap or Income and Growth may purchase,
sell or invest in interests in oil, gas or other mineral exploration or
development programs.
Utility* will not purchase interests in oil, gas or other mineral
exploration or development programs or leases, although the Fund may purchase
the securities of other issuers which invest in or sponsor such programs.
Value will not purchase interests in oil, gas or other mineral exploration
or development programs or leases, although it may purchase the publicly traded
securities of companies engaged in such activities.
8. Concentration in Any One Industry
Neither Growth and Income nor Income and Growth may concentrate its
investments in any one industry, except that each Fund may invest up to 25% of
its total net assets in any one industry.
Small Cap may not invest 25% or more of its total assets in the securities
of issuers conducting their principal business activities in any one industry;
provided, that this limitation shall not apply to obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities. For
purposes of this restriction, utility companies, gas, electric, water and
telephone companies will be considered separate industries.
Value will not invest 25% or more of the value of its total assets in any
one industry except Value may invest 25% or more of its total assets in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
Utility will not invest more than 25% of its total assets (valued at the
time of investment) in securities of companies engaged principally in any one
industry other than the utilities industry, except that this restriction does
not apply to cash or cash items and securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
Total Return will not purchase any security (other than U.S. government
securities) of any issuer if as a result more than 25% of its total assets would
be invested in a single industry; except that (i) there is no restriction with
respect to obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities; (ii) 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; (iii) 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 (iv) 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. Warrants
None of Growth and Income, Income and Growth or Small Cap*, may invest more
than 5% of its net assets in warrants and, of this amount, no more than 2% of
each Fund's net assets may be invested in warrants that are listed on neither
the New York nor the American Stock Exchange.
Utility* and Value* will not invest more than 5% of their net assets in
warrants, including those acquired in units or attached to other securities. For
purposes of this restriction, warrants acquired by the Funds in units or
attached to securities may be deemed to be without value.
10. Ownership by Trustees/Officers
None of Growth and Income, Small Cap*, Income and Growth, Utility* or
Value* 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.
Portfolio securities of any Fund may not be purchased from or sold or
loaned to its adviser or any affiliate thereof, or any of their directors,
officers or employees.
11. Short Sales
None of Growth and Income or Income and Growth may make short sales of
securities unless, at the time of each such sale and thereafter while a short
position exists, each Fund owns an equal amount of securities of the same issue
or owns securities which, without payment by the Fund of any consideration, are
convertible into, or are exchangeable for, an equal amount of securities of the
same issue.
Small Cap,* may not make short sales of securities unless, at the time of
each such sale and thereafter while a short position exists, each Fund owns an
equal amount of securities of the same issue or owns securities which, without
payment by the Fund of any consideration, are convertible into, or are
exchangeable for, an equal amount of securities of the same issue (and provided
that transactions in futures contracts and options are not deemed to constitute
selling securities short).
Total Return 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 of the same
issue as, and equal in amount to, the securities sold short.
Utility and Value will not sell any securities short.
12. Lending of Funds and Securities
Small Cap may not lend its funds to other persons, except through the
purchase of a portion of an issue of debt securities publicly distributed or the
entering into of repurchase agreements.
None of Growth and Income or Income and Growth may lend its funds to other
persons, except through the purchase of a portion of an issue of debt securities
publicly distributed.
Small Cap may not lend its portfolio securities, unless the borrower is a
broker, dealer or financial institution that pledges and maintains collateral
with the Fund consisting of cash or securities issued or guaranteed by the U.S.
government having a value at all times not less than 100% of the current market
value of the loaned securities, including accrued interest, provided that the
aggregate amount of such loans shall not exceed 30% of the Fund's total assets.
Growth and Income may not lend its portfolio securities, unless the
borrower is a broker, dealer or financial institution that pledges and maintains
collateral with the Fund consisting of cash or securities issued or guaranteed
by the U.S. government having a value at all times not less than 100% of the
value of the loaned securities provided that the aggregate amount of such loans
shall not exceed 30% of the Fund's net assets.
Income and Growth may not lend its portfolio securities, unless the
borrower is a broker, dealer or financial institution that pledges and maintains
collateral with the Fund consisting of cash, letters of credit or securities
issued or guaranteed by the U.S. government having a value at all times not less
than 100% of the current market value of the loaned securities (100% of the
value of the loaned securities for Income and Growth), including accrued
interest, provided that the aggregate amount of such loans shall not exceed 30%
of the Fund's net assets.
Utility will not lend any of its assets, except portfolio securities up to
15% of the value of its total assets. This does not prevent the Fund from
purchasing or holding corporate or government bonds, debentures, notes,
certificates of indebtedness or other debt securities of an issuer, repurchase
agreements, or other transactions which are permitted by the Fund's investment
objectives and policies or the Declaration of Trust governing the Fund.
Value will not lend any of its assets except that it may purchase or hold
corporate or government bonds, debentures, notes, certificates of indebtedness
or other debt securities of an issuer, repurchase agreements or other
transactions which are permitted by the Fund's investment objectives and
policies or the Declaration of Trust by which the Fund is governed or lend
portfolio securities valued at not more than 5% of its total assets to
broker-dealers.
Total Return will not make loans, except that the Fund may purchase or hold
debt securities consistent with its investment objective, lend portfolio
securities valued at not more than 15% of its total assets to broker-dealers and
enter into repurchase agreements.
13. Commodities
Small Cap may not purchase, sell or invest in physical commodities unless
acquired as a result of ownership of securities or other instruments (but this
shall not prevent the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities).
None of Growth and Income or Income and Growth may purchase, sell or invest
in commodities or commodity contracts.
None of Utility, Value or Total Return 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.
14. Real Estate
Small Cap may not purchase or invest in real estate or interests in real
estate (but this shall not prevent the Fund from investing in marketable
securities issued by companies such as real estate investment trusts which deal
in real estate or interests therein).
None of Growth and Income or Income and Growth may purchase, sell or invest
in real estate or interests in real estate, except that each Fund may purchase,
sell or invest in marketable securities of companies holding real estate or
interests in real estate, including real estate investment trusts.
None of Utility or Value will 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. Neither Utility nor Value will invest in limited
partnership interests in real estate.
Total Return will not purchase or sell real estate, except that it may
purchase and sell securities secured by real estate and securities of companies
which invest in real estate.
15. Borrowing, Senior Securities, Repurchase Agreements and Reverse
Repurchase Agreements
Income and Growth may not borrow money except from banks as a temporary
measure to facilitate redemption requests which might otherwise require the
untimely disposition of portfolio investments and for extraordinary or emergency
purposes, provided that the aggregate amount of such borrowings shall not exceed
5% of the value of the Fund's total net assets at the time of any such
borrowing, or mortgage, pledge or hypothecate its assets, except in an amount
sufficient to secure any such borrowing.
Small Cap may not borrow money, issue senior securities or enter into
reverse repurchase agreements, except for temporary or emergency purposes, and
not for leveraging, and then in amounts not in excess of 10% of the value of the
Fund's total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the
value of the Fund's total assets at the time of such borrowing, provided that
the Fund will not purchase any securities at any time when borrowings, including
reverse repurchase agreements, exceed 5% of the value of its total assets. The
Fund will not enter into reverse repurchase agreements exceeding 5% of the value
of its total assets.
Growth and Income may not borrow money except from banks as a temporary
measure for extraordinary or emergency purposes, provided that the aggregate
amount of such borrowings shall not exceed 5% of the value of the Fund's total
assets at the time of such borrowing; or mortgage, pledge or hypothecate its
assets, except in an amount not exceeding 15% of its assets taken at cost to
secure such borrowing. Growth and Income may not issue senior securities, as
defined in the Investment Company Act of 1940, except that this restriction
shall not be deemed to prohibit the Fund from (i) making any permitted
borrowings, mortgages or pledges, (ii) lending its portfolio securities, or
(iii) entering into permitted repurchase transactions.
Utility will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-third of
the value of its total assets, including the amounts borrowed and except to the
extent the Fund may enter into futures contracts. The Fund will not borrow money
or engage in reverse repurchase agreements for investment leverage, but rather
as a temporary, extraordinary or emergency measure to facilitate management of
its portfolio by enabling it to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. Utility will not purchase any securities while borrowings in
excess of 5% of its total assets are outstanding. The Fund will not mortgage,
pledge or hypothecate any assets except to secure permitted borrowings. In these
cases, the Fund 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. 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.
Value will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements as a temporary measure
for extraordinary or emergency purposes and then only in amounts not in excess
of 10% of the value of its total assets; provided that while borrowings exceed
5% of the Fund's total assets, any such borrowings will be repaid before
additional investments are made. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of its total assets are outstanding. The
Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage purposes. The Fund will not mortgage, pledge or hypothecate
any assets except to secure permitted borrowings. In these cases, the Fund may
pledge assets having a market value not exceeding the lesser of the dollar
amounts borrowed or 10% of the value of total assets at the time of borrowing.
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.
Total Return will not 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 from banks (not including reverse repurchase agreements) exceed 5% of
the Fund's net assets, any such borrowings will be repaid before additional
investments are made. The Fund will not 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. The Fund will not 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.
16. Joint Trading
None of Growth and Income, Small Cap* or Income and Growth may participate
on a joint or joint and several basis in any trading account in any securities.
(The "bunching of orders or the purchase or sale of portfolio securities with
its investment adviser or accounts under its management to reduce brokerage
commissions, to average prices among them or to facilitate such transactions is
not considered a trading account in securities for purposes of this
restriction).
17. Options
Neither Growth and Income nor Income and Growth may write, purchase or sell
put or call options, or combinations thereof, except that each Fund is
authorized to write covered call options on portfolio securities and to purchase
call options in closing purchase transactions, provided that (i) such options
are listed on a national securities exchange, (ii) the aggregate market value of
the underlying securities does not exceed 25% of the Fund's net assets, taken at
current market value on the date of any such writing, and (iii) the Fund retains
the underlying securities for so long as call options written against them make
the shares subject to transfer upon the exercise of any options.
Utility* will not purchase put options on securities unless the securities
are held in the Fund's portfolio and not more than 5% of the Fund's total assets
would be invested in premiums on open put options. Utility* will not write call
options on securities unless securities are held in the Fund's portfolio or
unless the Fund is entitled to them in deliverable form without further payment
or after segregating cash in the amount of any further payment.
18. Investing in Securities of Other Investment Companies
Utility and Value will purchase securities of investment companies only in
open-market transactions involving customary broker's commissions. 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.
Total Return may not purchase securities of other investment companies,
except as part of a merger, consolidation, purchase or assets or similar
transaction.
Each other Fund may purchase the securities of other investment companies,
except to the extent such purchases are not permitted by applicable law.
19. Restricted Securities
Value will not invest more than 10% of its net assets in securities subject
to restrictions on resale under the Securities Act of 1933.
Utility* will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of 1933,
except for commercial paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet the criteria for
liquidity as established by the Trustees.
- --------------------------------------------------------------------------------
NON-FUNDAMENTAL OPERATING POLICIES
- --------------------------------------------------------------------------------
Certain Funds have adopted additional non-fundamental operating policies.
Operating policies may be changed by the Board of Trustees without a shareholder
vote.
1. Futures and Options Transactions
Small Cap will not: (i) sell futures contracts, purchase put options or
write call options if, as a result, more than 30% of the Fund's total assets
would be hedged with futures and options under normal conditions; (ii) purchase
futures contracts or write put options if, as a result, the Fund's total
obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 30% of its total assets; or (iii) purchase call
options if, as a result, the current value of option premiums for options
purchased by the Fund would exceed 5% of the Fund's total assets. These
limitations do not apply to options attached to, or acquired or traded together
with their underlying securities, and do not apply to securities that
incorporate features similar to options.
2. Illiquid Securities
None of Growth and Income, Small Cap or Income and Growth may invest more
than 15% of its net assets in illiquid securities and other securities which are
not readily marketable, including repurchase agreements which have a maturity of
longer than seven days, but excluding securities eligible for resale under Rule
144A of the Securities Act of 1933, as amended, which the Trustees have
determined to be liquid.
Utility will not invest more than 15% of its 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 and, in non-negotiable time deposits.
Except with respect to borrowing money (and with respect to Total Return,
including 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.
- --------------------------------------------------------------------------------
TRUSTEES
- --------------------------------------------------------------------------------
The Trustees and executive officers of each trust, their ages, addresses
and principal occupations during the past five years are set forth below:
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of the
Evergreen group of mutual funds and Trustee. Retired Vice President of Lance
Inc. (food manufacturing); Chairman of the Distribution Comm. Foundation for the
Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park, Charlotte,
NC -Trustee. Medical Director, U.S. Healthcare of Charlotte, North Carolina
since 1996; President, Primary Physician Care from 1990 to 1996.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street Suite 980, Charlotte,
NC-Trustee. Attorney, Law Offices of Michael S. Scofield since 1969. Messrs.
Howell, Salton and Scofield are Trustees of all Evergreen Mutual Funds.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC -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., 227 West Trade St.,
Charlotte, NC- Trustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990. Messrs. McDonnell, McVerry and Pettit are Trustees of all Evergreen Mutual
Funds, except those established within the Evergreen Variable Trust.
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 (70), Greenwich Plaza, Greenwich, CT- Trustee. Partner in the
law firm of Cummings and Lockwood since 1968. Messrs. Ashkin and Bam are
Trustees of all Evergreen Mutual Funds (excluded are those established within
the Evergreen Variable Trust and Evergreen Investment Trust).
FREDERICK AMLING (69) Trustee. Professor, Finance Department, George
Washington University; President, Amling & Company (investment advice); Member,
Board of Advisers, Credito Emilano (banking); and former Economics and Financial
Consultant, Riggs National Bank.
CHARLES A. AUSTIN III (61) Trustee. Investment Counselor to Appleton
Partners, Inc.; former Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment advice).
GEORGE S. BISSELL* (67) Chairman of certain funds in the Evergreen group of
mutual funds, and Trustee. 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
Advisers, Inc. and former Chairman of the Board and Chief Executive Officer of
Keystone Investments, Inc.
EDWIN D. CAMPBELL (69) Trustee. Director and former Executive Vice
President, National Alliance of Business; former Vice President, Educational
Testing Services; former Dean, School of Business, Adelphi University; and
former Executive Director, Coalition of Essential Schools, Brown University.
CHARLES F. CHAPIN (67) Trustee. Former Group Vice President, Textron Corp.;
and former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and Executive
Vice President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund, and
The Phoenix Big Edge Series Fund; and former President, Morehouse College.
F. RAY KEYSER, JR. (69) Trustee and Advisor to the Boards of Trustees of
the Evergreen group of mutual funds. 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 Hitchcock Clinic;
Director, Vermont Yankee Nuclear Power Corporation, Vermont Electric Power
Company, Inc., Grand Trunk Corporation, Central Vermont Railway, Inc., S.K.I.
Ltd., Sherburne Corporation, Union Mutual Fire Insurance Company, New England
Guaranty Insurance Company, Inc., and the Investment Company Institute; former
Governor of Vermont.
DAVID M. RICHARDSON (55) Trustee. 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.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of the
Evergreen group of mutual funds. Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Trust Company of Connecticut, Hartford
Hospital, Old State House Association, and Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-
Oxford School and Greater Hartford YMCA; former Director, Executive Vice
President, and Vice Chairman of The Travelers Corporation.
ANDREW J. SIMONS (57) Trustee. Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; former President, Nassau County Bar Association;
former Associate Dean and Professor of Law, St. John's University School of Law.
Messrs. Amling, Austin, Bissell, Campbell, Chapin, Gifford, Keith, Keyser,
Richardson, Shima and Simons are Trustees or Directors of the thirty-one funds
in the former Keystone group of mutual funds. Their addresses are 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
ROBERT J. JEFFRIES (74), 2118 New Bedford Drive, Sun City Center, Fl
Trustee Emeritus. Corporate consultant since 1967. Mr. Jeffries has been serving
as a Trustee Emeritus of eleven Evergreen Mutual Funds since January 1, 1996
(excluded are Evergreen Variable Trust, Evergreen Investment Trust, as well as
the former Keystone group of mutual funds).
EXECUTIVE OFFICERS
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY- President
and Treasurer. Consultant to BISYS Fund Services since 1996. Senior Managing
Director, Furman Selz LLC since 1992, Managing Director from 1984 to 1992.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH-Secretary. Senior
Vice President/Director of Administration and Regulatory Services, BISYS Fund
Services since April 1995. Vice President/Assistant General Counsel, Alliance
Capital Management from 1988 to 1995. -------- * Messrs. Pettit and Bissell may
each 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 the Trusts are all officers and/or employees of The BISYS
Group, Inc. ("BISYS"), except for Mr. Pileggi, who is a consultant to BISYS.
BISYS is an affiliate of Evergreen 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, Evergreen Asset
Management Corp., Keystone Investment Management Company or their affiliates.
See "Investment Advisers". Currently, none of the Trustees is an "affiliated
person" as defined in the 1940 Act.
Set forth below for each of the Trustees is the aggregate compensation (and
expenses) paid to such Trustees by each Trust for the year ended July 31, 1997.
Aggregate Compensation From Each Trust
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Name of Evergreen Evergreen Evergreen Evergreen Evergreen
Trustee Income Growth American Invest- Fund for
and and Retirement ment Total
Growth Income Trust Trust Return
Fund Fund
L.B.Ashkin $7,134 $1,119 $2,019 $ 0 $ 0
F. Bam 6,525 910 1,617 0 0
R.J. Jeffries 3,200 400 800 0 0
J.S. Howell 7,270 1,214 2,033 27,124 0
G.M. McDonnell 7,078 1,071 2,011 25,613 0
T.L. McVerry 7,161 1,133 2,021 26,252 0
W.W. Pettit 7,028 1,035 2,006 25,214 0
R.A. Salton 7,000 1,000 2,000 25,000 0
M.S. Scofield 7,000 1,000 2,000 25,000 0
F. Amling 0 0 0 0 0
C.A. Austin 0 0 0 0 0
G.S. Bissell 0 0 0 0 0
E.D. Campbell 0 0 0 0 0
C.F. Chapin 0 0 0 0 0
K.D. Gifford 0 0 0 0 0
L. Keith 0 0 0 0 0
F.R. Keyser 698 676 109 5,198 0
D.M. Richardson 0 0 0 0 0
R.J. Shima 698 676 109 5,198 0
A.J. Simons 0 0 0 0 0
-------------------------------------
</TABLE>
Set forth below for each Trustee receiving in excess of $60,000 for the
fiscal period ended July 31, 1997 is the aggregate compensation paid to such
Trustee by the Evergreen Family of Funds.
Total Compensation From Trusts
and Fund Complex Paid To Trustees
L.B. Ashkin $65,100
J.S. Howell 102,500
G.M. McDonnell 89,200
T.L. McVerry 93,700
W.W. Pettit 91,825
R.A. Salton 94,500
M.S. Scofield 95,700
As of the date of this Statement of Additional Information, the officers
and Trustees of the Trusts owned as a group less than 1% of the outstanding
Class A, Class B, Class C or Class Y shares of any of the Funds.
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 October 31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
First Union Natl. Bank-FL C/F, Inc. Income and 2,619 6.56%
Fred W. Cookson IRA Growth/C
6704 Willow Lane Braden Woods
Bradenton, FL 34202-9632
FUBS & Co. Febo Income and 2,361 5.92%
Last Stop Inc. Growth/C
8661 Colesville Rd #D149
Silver Spring, MD 20910-3933
MLPF&S for the sole benefit Growth and 227,818 21.83%
of its customers Income/C
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
First Union National Bank/EB/INT Growth and 12,928,184 55.28%
Reinvest Account Income/Y
Attn. Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG 1151
Charlotte, NC 29202-1911
First Union National Bank/EB/INT Growth and 4,685,583 20.03%
Cash Account Income/Y
Attn. Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG 1151
Charlotte, NC 29202-1911
MLPF&S for the sole benefit Small Cap/A 50,874 5.88%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Small Cap/B 278,020 13.20%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Small Cap/C 111,164 25.40%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville FL 32246-6484
First Union National Bank/EB/INT Small Cap/Y 1,832,926 48.09%
Cash Account
Attn. Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG 1151
Charlotte, NC 29202-1911
First Union National Bank/EB/INT Small Cap/Y 884,948 23.33%
Reinvest Account
Attn: Trust Operations Fund Group
401 S. Tryon Street
3rd Floor CMG 1151
Charlotte, NC 28202-1911
Citibank NA Small Cap/Y 379,0999 95%
Delta Airlines Master Trust
308235
Joe Villella Citicorp Services
1410 N. Westshore Blvd. F15
Tampa, FL 33607-4519
FUBS & Co. Febo Utility/C 6,400 21.04%
Elsie B. Strom
Lewis F. Strom
906 Wells Street
Bennettsville, SC 29512-3240
FUBS & Co. Febo Utility/C 2,185 7.18%
Thomas McKinney and
Lottie McKinney
170 Scott Blvd.
Tyrone, GA 30290-9767
Fubs & Co. Febo Utility/C 2,083 6.85%
Max Ray and
Jeralyne Ray
Route 2 Box 111
Greenmountain, NC 28740-9618
FUBS & Co. Febo Utility/C 1,796 5.90%
Evelyn L. Smith
Creg Smith
3294 Myrtle Street
Hapeville, GA 30354-1418
FUBS & Co. Febo Utility/C 1,546 5.08%
Ruth D. Hayes and
D. W. Hayes
5460 Ash Street
Forest Park, GA 30050-4068
First Union National Bank Utility/Y 86,855 58.58%
Trust Account
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
First Union National Bank Utility/Y 46,441 31.32%
Trust Account
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
First Union National Bank-FL C/F Value/C 16,4830 12.82%
Irving Decter IRA
418 Mariner Dr.
Jupiter, FL 33447
First Union National Bank Value/Y 27,876,502 62.84%
Trust Account
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
First Union National Bank Value/Y 15,892,513 35.82%
Trust Account
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
MLPF&S for the sole benefit Tot Return/A 139,971 5.98%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Tot Return/B 464,170 9.98%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
SSN/TIN: 866168037 Tot Return/C 137,812 13.47%
Lavedna Ellingson
Douglas Ellingson TTEES
Lavedna Ellingson Marital Trust
U/A DTD 5-1-86
8510 McClintock
Tempe, AZ 85284-2527
MLPF&S for the sole benefit Tot Return/C 116,702 11.41%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
SSB Cust IRA Rollover Tot Return/Y 2,159 93.73%
Gail L. Gulbenkian
3768 McCoy Road
Blacksburg, VA 24060-0652
James R. Vanko Cust Tot Return/Y 143 6.23%
Kathryn A. Vanko
UnifTrans Min Act-CA
P.O. Box 7585
Mannoth Lakes, CA 93546-7585
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
(See also "Management of the Fund" in each Fund's Prospectus)
- --------------------------------------------------------------------------------
The investment adviser of Income and Growth, Growth and Income and Small
Cap is Evergreen Asset Management Corp., a New York corporation, with offices at
2500 Westchester Avenue, Purchase, New York ("Evergreen Asset" or the
"Adviser"). Evergreen Asset is owned by FUNB (the"Adviser") which, in turn, is a
subsidiary of First Union Corporation ("First Union"), a bank holding company
headquartered in Charlotte, North Carolina.
The investment adviser of Utility and Value is FUNB which provides
investment advisory services through its Capital Management Group.
The investment adviser of Total Return is Keystone Investment Management
Company ("Keystone" or the "Adviser"), a Delaware corporation, with offices at
200 Berkeley Street, Boston, Massachusetts. Keystone is an indirectly owned
subsidiary of FUNB.
The Directors of Evergreen Asset are Richard K. Wagoner and Barbara I.
Colvin. The executive officers of Evergreen Asset are Stephen A. Lieber,
Chairman and Co-Chief Executive Officer, Nola Maddox Falcone, President and
Co-Chief Executive Officer, and Theodore J. Israel, Jr., Executive Vice
President. The Directors of Keystone are Albert H. Elfner, III, Edward F.
Godfrey, W. Douglas Munn, Donald McMullen, William M. Ennis, II and Barbara I.
Colvin. The executive officers of Keystone are Albert H. Elfner, III, Chairman,
Chief Executive Officer and President, Edward F. Godfrey, Senior Vice President
and Chief Operating Officer, W. Douglas Munn, Senior Vice President, Chief
Financial Officer and Treasurer and Rosemary D. Van Antwerp, Senior Vice
President and Secretary.
On September 6, 1996, First Union and FUNB entered into an Agreement and
Plan of Acquisition and Merger (the "Merger") with Keystone Investments, Inc.
("Keystone Investments"), the corporate parent of Keystone, which provided,
among other things, for the merger of Keystone Investments with and into a
wholly-owned subsidiary of FUNB. The Merger was consummated on December 11,
1996. Keystone continues to provide investment advisory services to certain
funds in the Evergreen Keystone Family of Funds. Contemporaneously with the
Merger, Total Return entered into a new investment advisory agreement with
Keystone and into a principal underwriting agreement with the Distributor.
Under the Investment Advisory Agreement with each Fund, each Adviser has
agreed to furnish reports, statistical and research services and recommendations
with respect to each Fund's portfolio of investments. In addition, each Adviser
provides office facilities to the Funds and performs a variety of administrative
services. Each Fund pays the cost of all of its other expenses and liabilities,
including expenses and liabilities incurred in connection with maintaining their
registrations 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, each 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:
INCOME Six Months Year Ended Year Ended
AND GROWTH Ended 7/31/97 1/31/97 1/31/96
Advisory Fee $4,371,784 $8,823,541 $9,343,195
=========== =========== ==========
Expense $0 $0 $53,576
Reimbursement
SMALL CAP Seven Months Year Ended Year Ended
Ended 7/31/97 12/31/96 12/31/95
Advisory Fee $180,153 $ 63,333 $ 45,397
Waiver ($ 35,183) ($ 63,333) ($ 45,397)
------------ ------------ ------------
Net Advisory Fee $ 144,970 $0 $0
========= ========= ========
SMALL CAP Seven Months Year Ended Year Ended
Ended 7/31/97 12/31/96 12/31/95
Expense
Reimbursement $0 $133,406 $164,584
-------------- -------------- ----------
UTILITY Seven Months Year Ended Year Ended
Ended 7/31/97 12/31/96 12/31/95
Advisory Fee $382,537 $725,733 $456,021
Waiver ($146,640) ($396,483) ($299,028)
-------------- -------------- ------------
Net Advisory Fee $235,897 $329,300 $156,993
======== ======== ========
Expense
Reimbursement $0 $0 $ 51,894
---------------- ---------------- ------------
GROWTH Seven Months Year Ended Year Ended
AND INCOME Ended 7/31/97 12/31/96 12/31/95
Advisory Fee $5,736,248 $5,287,338 $1,332,685
======== ======== ========
Expense
Reimbursement $0 $5,000 $0
-------------- -------------- ----------
VALUE Seven Months Year Ended Year Ended
Ended 7/31/97 12/31/96 12/31/95
Advisory Fee $4,753,235 $6,950,730 $5,120,579
TOTAL RETURN Eight Months Year Ended Year Ended
Ended 7/31/97 11/30/96 11/30/95
Advisory Fee $546,092 $448,266 $300,290
======== ======== ========
Expense Limitations
Keystone has voluntarily agreed to limit Total Return's Class A expenses to
1.50% of the average daily net assets of Class A shares, such expense limitation
to be reevaluated on a calendar month basis and to be modified or eliminated in
the future at the discretion of Keystone.
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 each
Trust's Trustees or by the respective 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 willful misfeasance, bad faith or gross negligence
on the part of the Adviser or of reckless disregard of its obligations
thereunder.
The Investment Advisory Agreements with respect to Income and Growth,
Growth and Income and Small Cap were approved by each Fund's shareholders on
June 23, 1994, became effective on June 30, 1994, and were last approved by the
Trustees of each Trust on June 17, 1997.
The Investment Advisory Agreement with respect to Utility and Value dated
February 28, 1985, and amended from time to time thereafter, was last approved
by the Trustees of Evergreen Investment Trust on June 17, 1997.
The Investment Advisory Agreement with respect to Total Return was approved
by the Fund's shareholders on December 9, 1996, and became effective on December
11, 1996.
Each Investment Advisory Agreement will continue in effect from year to
year provided that its continuance is approved annually by a vote of a majority
of the Trustees of each Trust including a majority of those Trustees who are not
parties thereto or "interested persons" (as defined in the 1940 Act) of any such
party (the "Independent Trustees"), cast in person at a meeting duly called for
the purpose of voting on such approval or a majority of the outstanding voting
shares of each Fund.
Certain other clients of each Adviser may have investment objectives and
policies similar to those of the Funds. Each Adviser (including the sub-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 each 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 of the 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.
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, each
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 Evergreen Asset, FUNB or Keystone act
as investment adviser or between the Fund and any advisory clients of Evergreen
Asset, FUNB, Keystone or Lieber. 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.
From July 8, 1995 to March 11, 1997, Evergreen Asset provided
administrative services to each of the portfolios of Evergreen Investment Trust
for a fee based on the average daily net assets of each fund administered by
Evergreen Asset for which Evergreen Asset or FUNB also served 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
.010% on assets in excess of $30 billion. For the period from July 8, 1995
through December 31, 1995 and the fiscal year ended December 31, 1996, Utility
and Value incurred the following administration costs: Utility $39,330 and
$70,215, respectively; and Value $323,050 and $670,060, respectively.
Evergreen Investment Services, Inc. ("EIS") began providing administrative
services on March 12, 1997 to each of the portfolios of Evergreen Investment
Trust at the same rates as described above. For the period from January 1, 1997
through July 31, 1997, Utility and Value incurred the following administration
costs: Utility $28,507; and Value $352,965, respectively.
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DISTRIBUTION PLANS AND AGREEMENTS
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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, Class B Class and Class C shares and are charged as
class expenses, as accrued. The distribution fees attributable to the Class B
shares and Class C shares are designed to permit an investor to purchase such
shares through broker-dealers without the assessment of a front-end sales
charge, and, in the case of Class C shares, without the assessment of a
contingent deferred sales charge after the first year following the month of
purchase, while at the same time permitting the Distributor to compensate
broker-dealers in connection with the sale of such shares. In this regard, the
purpose and function of the combined contingent deferred sales charge and
distribution services fee on the Class B shares and the Class C shares are the
same as those of the front-end sales charge and distribution fee with respect to
the Class A shares in that in each case the sales charge and/or distribution fee
provide for the financing of the distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each Fund
with respect to each of its Class A, Class B and Class C shares (each a "Plan"
and collectively, the "Plans"), the Treasurer of each Fund reports the amounts
expended under the Plans and the purposes for which such expenditures were made
to the Trustees of each Trust for their review on a quarterly basis. Also, each
Plan provides that the selection and nomination of the disinterested Trustees
are committed to the discretion of such disinterested Trustees then in office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for successive
twelve-month periods provided, however, that such continuance is specifically
approved at least annually by the Trustees of each Trust or by vote of the
holders of a majority of the outstanding voting securities of that Class and, in
either case, by a majority of the Independent Trustees of the Trust who have no
direct or indirect financial interest in the operation of the Plan or any
agreement related thereto.
The Plans permit the payment of fees to brokers and others for distribution
and shareholder-related administrative services and to broker-dealers,
depository institutions, financial intermediaries and administrators for
administrative services as to Class A, Class B and Class C shares. The Plans are
designed to (i) stimulate brokers to provide distribution and administrative
support services to each Fund and holders of Class A, Class B and Class C shares
and (ii) stimulate administrators to render administrative support services to
the Fund and holders of Class A, Class B and Class C shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to
providing office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding Class A, Class B and
Class C shares; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A, Class B and Class C shares.
In addition to the Plans, Utility and Value have each adopted a Shareholder
Services Plan whereby shareholder servicing agents may receive fees from the
Fund 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.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of a 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. With respect to Utility and
Value, 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 (i) by a
Fund without penalty at any time by a majority vote of the holders of the
outstanding voting securities of the Fund, voting separately by Class or by a
majority vote of the disinterested Trustees, or (ii) by the Distributor. To
terminate any Distribution Agreement, any party must give the other parties 60
days' written notice; to terminate a Plan only, the Fund need give no notice to
the Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
Income and Growth, Growth and Income, Small Cap and Total Return incurred
the following Distribution Plans and Shareholder Services Plan fees:
Distribution Fees:
INCOME AND GROWTH. For the fiscal period ended July 31, 1997, $13,129 on behalf
of its Class A shares, $141,953 on behalf of its Class B shares and $3,417 on
behalf of its Class shares.
GROWTH AND INCOME. For the fiscal period ended July 31, 1997, $175,321 on behalf
of its Class A shares, $1,627,668 on behalf of its Class B shares and $68,757 on
behalf of its class C shares.
SMALL CAP. For the fiscal period ended July 31, 1997, $1,710 on behalf of its
Class A shares, $11,297 on behalf of its Class B shares and $4,164 on behalf of
its class C shares.
TOTAL RETURN. For the fiscal period ended July 31, 1997, $66,585 on behalf of
its Class A shares and $344,125 on behalf of its Class B shares and $89,922 on
behalf of its class C shares.
Shareholder Services Fees:
INCOME AND GROWTH. For the fiscal period ended July 31, 1997, shareholder
service fees of $47,318 on behalf of its Class B shares and $1,139 on behalf of
its class C shares.
GROWTH AND INCOME. For the fiscal period ended July 31, 1997, shareholder
service fees of $542,555 on behalf of its Class B shares and $22,919 on behalf
of its class C shares.
SMALL CAP. For the fiscal period ended July 31, 1997, shareholder service fees
of $3,766 on behalf of its Class B shares and $1,388 on behalf of its class C
shares.
TOTAL RETURN. For the fiscal period ended July 31, 1997, shareholder service
fees of $116,292 on behalf of its Class B shares and $29,986 on behalf of its
class C shares.
Value and Utility incurred the following Distribution Services Plans and
Shareholder Services Plans fees:
Distribution Fees:
VALUE. For the fiscal period ended July 31, 1997, $509,860 on behalf of its
Class A shares, $1,003,000 on behalf of its Class B shares and $8,193 on behalf
of its Class C shares.
UTILITY. For the fiscal period ended July 31, 1997, $134,715 on behalf of its
Class A shares, $160,642 on behalf of its Class B shares and $1,585 on behalf of
its Class C shares.
Shareholder Services Plans fees:
VALUE. For the fiscal period ended July 31, 1997, $334,333 on behalf of its
Class B shares and $2,731 on behalf of its Class C shares.
UTILITY. For the fiscal period ended July 31, 1997, $53,548 on behalf of its
Class B shares and $529 on behalf of its Class shares.
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ALLOCATION OF BROKERAGE
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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 each Fund's
Adviser. In general, the same individuals perform the same functions for the
other funds managed by each 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 substantial portion of the 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 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. Each Adviser 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 Adviser will also consider
the availability of statistical and investment data and economic facts and
opinions helpful to the Fund. To the extent that receipt of these services for
which the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
Under Section 11(a) of the Securities Exchange Act of 1934, as amended,
and the rules adopted thereunder by the SEC, Lieber may be compensated for
effecting transactions in portfolio securities for a Fund on a national
securities exchange provided the conditions of the rules are met. Each Fund
advised by Evergreen Asset has entered into an agreement with Lieber authorizing
Lieber to retain compensation for brokerage services. In accordance with such
agreement, it is contemplated that Lieber, a member of the New York and American
Stock Exchanges, will, to the extent practicable, provide brokerage services to
Growth and Income, Income and Growth and Small Cap with respect to substantially
all securities transactions effected on the New York and American Stock
Exchanges. In such transactions, the Adviser will seek the best execution at the
most favorable price while paying a commission rate no higher than that offered
to other clients of Lieber or that which can be reasonably expected to be
offered by an unaffiliated broker-dealer having comparable execution capability
in a similar transaction. However, no Fund will engage in transactions in which
Lieber would be a principal. While no Fund advised by Evergreen Asset
contemplates any ongoing arrangements with other brokerage firms, brokerage
business may be given from time to time to other firms. In addition, the
Trustees have adopted procedures pursuant to Rule 17e-1 under the 1940 Act to
ensure that all brokerage transactions with Lieber, as an affiliated
broker-dealer, are fair and reasonable.
Each Trust's Board of Trustees has determined that a 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. The Fund expects that purchases and sales of securities will usually be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark-up or reflect a dealer's mark-down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable. Under its Investment
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 Total Return.
Any profits from brokerage commissions accruing to Lieber as a result of
portfolio transactions for Growth and Income, Income and Growth and Small Cap
will accrue to FUNB and to its ultimate parent, First Union. The Investment
Advisory Agreements do not provide for a reduction of the Adviser's fee with
respect to any Fund by the amount of any profits earned by Lieber from brokerage
commissions generated by portfolio transactions of the Fund.
The following chart shows: (i) the brokerage commissions paid by each Fund
advised by Evergreen Asset during their last three fiscal years; (ii) the amount
and percentage thereof paid to Lieber; and (iii) the percentage of the total
dollar amount of all portfolio transactions with respect to which commissions
have been paid which were effected by Lieber:
INCOME AND GROWTH Period Ended Year Ended Year Ended
7/31/97 1/31/97 1/31/96
Total Brokerage $1,575,483 $3,529,313 $3,255,068
Commissions
Dollar Amount and % $1,066,378 $2,835,293 $2,982,640
paid to Lieber 68% 80% 92%
% of Transactions
Effected by Lieber 69% 47% 90%
SMALL CAP Period Ended Year Ended Year Ended
7/31/97 12/31/96 12/31/95
Total Brokerage $74,018 $14,647 $5,968
Commissions
Dollar Amount and % $61,390 $13,246 $4,863
paid to Lieber 83% 90% 81%
% of Transactions
Effected by Lieber 75% 87% 77%
GROWTH AND INCOME Period Ended Year Ended Year Ended
7/31/97 12/31/96 12/31/95
Total Brokerage $412,968 $519,064 $210,923
Commissions
Dollar Amount and % $348,590 $429,888 $160,659
paid to Lieber 85% 83% 76%
% of Transactions
Effected by Lieber 78% 78% 74%
Each of the Funds changed its fiscal year end to July 31 during the first
period covered by the foregoing table.
Value, Utility and Total Return did not pay any commissions to Lieber. For
the fiscal period ended July 31, 1997 and the fiscal years ended December 31,
1996 and 1995, Utility paid $220,091, $323,978 and $272,806, respectively, in
commissions on brokerage transactions. For the fiscal period ended July 31, 1997
and the fiscal years ended December 31, 1996 and 1995, Value paid $273,045,
$3,164,292 and $1,644,077, respectively, in commissions on brokerage
transactions. For the fiscal period ended July 31, 1997 and the fiscal years
ended November 30, 1996 and 1995, Total Return paid $153,935, $227,013 and
$92,665, respectively, in commissions on brokerage transactions.
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ADDITIONAL TAX INFORMATION
(See also "Other Information - Dividends,
Distributions and Taxes" in each Fund's Prospectus)
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Each Fund has qualified and intends to continue to qualify for and elect
the tax treatment applicable to a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
(Such qualification does not involve supervision of management or investment
practices or policies by the Internal Revenue Service.) In order to qualify as a
RIC, a Fund must, among other things, (i) derive at least 90% of its gross
income from dividends, interest, payments with respect to proceeds from
securities loans, gains from the sale or other disposition of securities or
foreign currencies and other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in such
securities; (ii) derive less than 30% of its gross income from the sale or other
disposition of securities, options, futures or forward contracts (other than
those on foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the RIC's principal
business of investing in securities (or options and futures with respect
thereto) held for less than three months (this requirement is repealed for Fund
fiscal years beginning after August 5, 1997); and (iii) diversify its holdings
so that, at the end of each quarter of its taxable year, (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 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. Capital gain on assets held for more
than 18 months is generally subject to a maximum federal income tax rate of 20%
for an individual. The maximum capital gains tax rate for capital assets held by
an individual for more than 12 months but not more than 18 months is generally
28%. 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 will be taxable 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 gains 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.
Each shareholder should consult his or her own tax adviser to determine the
state and local tax implications of Fund distributions.
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.
If more than 50% of the value of a Fund's total assets at the end of a
fiscal year is represented by securities of foreign corporations and a Fund
elects to make foreign tax credits available to its shareholders, a shareholder
will be required to include in his gross income both cash dividends and the
amount a Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on a Fund's investments.
The shareholder will be entitled, however, to take the amount of such foreign
taxes withheld as a credit against his U.S. income tax, or to treat the foreign
tax withheld as an itemized deduction from his gross income, if that should be
to his advantage. In substance, this policy enables the shareholder to benefit
from the same foreign tax credit or deduction that he would have received if he
had been the individual owner of foreign securities and had paid foreign income
tax on the income therefrom. As in the case of individuals receiving income
directly from foreign sources, the above-described tax credit and deductions are
subject to certain limitations.
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisers regarding specific questions relating to federal,
state and local tax consequences of investing in shares of a Fund. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
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NET ASSET VALUE
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The following information supplements that set forth in each Fund's
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 upon 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 prices 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,
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, with respect to Utility and Value, Shareholder Service Plan fees) 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.
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PURCHASE OF SHARES
- --------------------------------------------------------------------------------
The following information supplements that set forth in each Fund's
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 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 the month of 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 investment is $1,000; there is no minimum
for subsequent investments. The subscriber may use the 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 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 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 Advisers 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) Class B and Class C shares of Balanced, Utility and
Value are subject to a Shareholder Service Plan 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
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 Plan 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, to the
extent applicable, Shareholder Service Plan) fee and contingent deferred sales
charges on Class B shares prior to conversion, or the accumulated distribution
services (and, to the extent applicable, shareholder service) fee 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 $250,000 for
Class B shares or $500,000 for Class C shares.
Class A shares are subject to a lower distribution services fee and no
Shareholder Service Plan fee and, accordingly, pay correspondingly higher
dividends 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, to the extent applicable, Shareholder
Service Plan) 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, to the extent applicable, Shareholder Service Plan)
fees and, in the case of Class B shares, being subject to a contingent deferred
sales charge for a six-year period. For example, based on current fees and
expenses, an investor subject to the 4.75% front-end sales charge imposed on
Class A shares of the Funds would have to hold his or her investment
approximately seven years for the Class B and Class C distribution services
(and, to the extent applicable, Shareholders Service Plan) fees, to exceed the
front-end sales charge plus the accumulated distribution services fee 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, to the extent 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 six 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 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 period.
<TABLE>
<CAPTION>
Date Net Asset Per Share Offering Price
Value Sales Charge Per Share
<S> <C> <C> <C> <C>
Growth and Income 7/31/97 $27.26 $1.36 $28.62
Income and Growth 7/31/97 $23.94 $1.19 $25.13
Small Cap 7/31/97 $15.69 $0.78 $16.47
Utility 7/31/97 $11.45 $0.57 $12.02
Value 7/31/97 $24.64 $1.23 $25.87
Total Return 7/31/97 $20.69 $1.03 $21.72
</TABLE>
Prior to January 3, 1995, shares of Growth and Income, Income and Growth
and Small Cap were offered exclusively on a no-load basis and, accordingly, no
underwriting commissions were paid in respect of sales of shares of these Funds
or retained by the Distributor. In addition, since Class B and Class C shares
were not offered by Growth and Income, Income and Growth or Small Cap prior to
January 3, 1995, contingent deferred sales charges have been paid to the
Distributor with respect to Class B or Class C shares only since January 3,
1995.
With respect to Utility and Value, the following commissions were paid to
and amounts wereretained by Federated Securities Corp. through July 7, 1995,
which until such date was the principal underwriter of portfolios of Evergreen
Investment Trust. For the subsequent periods, commissions were paid to and
amounts were retained by the current Distributor as noted below:
<TABLE>
<CAPTION>
Period Ended Year Ended Period From Period From
7/31/97 12/31/96 7/8/95 1/1/95
to 12/31/95 to 7/7/95
<S> <C> <C> <C> <C>
VALUE
Comissions $522,573 $58,797 $56,058
Received
Commissions $51,343 $ 56,609 $ 6,615 $6,001
Retained
UTILITY
Commissions $ 74,988 $15,692 $20,958
Received
Commissions $1,789 $ 7,857 $1,727 $ 2,228
Retained
</TABLE>
With respect to Income and Growth, Growth and Income and Small, the
following commissions were paid to and amounts were retained by the Distributor
for the periods indicated:
<TABLE>
<CAPTION>
Period Ended Year Ended Year Ended Period from 1/3/95
7/31/97 1/31/97 1/31/96 to 1/31/95
<S> <C> <C> <C> <C>
INCOME AND GROWTH
Commissions Received $ 187,403 $ 98,890 $ 4,585
Commissions Retained $4,194 $ 20,208 $ 10,733 ---
Year Ended Year Ended
12/31/96 12/31/95
GROWTH AND INCOME
Commissions Received $ 1,473,258 $ 326,249
Commissions Retained $169,177 $ 158,858 $ 37,300
SMALL CAP
Commissions Received $ 3,568 $ 778
Commissions Retained $6,942 $ 340 $ 284
Period Ended Year Ended Year Ended Period from 1/3/95
7/31/97 1/31/97 1/31/96 to 1/31/95
</TABLE>
With respect to Total Return, the following commissions were paid to and
amounts were retained by Keystone Investment Distributors Company, which prior
to December 1, 1996, was the distributor for Total Return.
Period Ended Year Ended Year Ended
7/31/97 11/30/96 11/30/95
TOTAL RETURN
Commissions Received $355,043 $190,327
Commissions Retained $9,998 ($75,270) ($243,621)
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
Funds (other than the 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 by an organization exempt from federal income tax under Section 501
(c)(3) or (13) of the Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Code. 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 Fund.
Cumulative Quantity Discount (Right of Accumulation). An investor's
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 shares of the Fund held by the investor and (b) all such shares
of any other Evergreen Fund held by the investor; and
(iii) the net asset value of all shares described in paragraph; and
(iv) 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
Fund worth $200,000 at their then current net asset value and, subsequently,
purchased Class A shares of a Fund worth an additional $100,000, the sales
charge for the $100,000 purchase, in the case of the Funds, would be at the
2.50% rate applicable to a single $300,000 purchase of shares of the Fund,
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.
Letter of Intent. Class A investors may also obtain the reduced sales
charges shown in the Prospectus by means of a written Letter of Intent, which
expresses the investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares of the Fund or any other Evergreen Fund.
Each purchase of shares under a Letter of Intent 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 Letter of Intent. At the
investor's option, a Letter of Intent may include purchases of Class A shares of
the Fund or any other Evergreen Fund made not more than 90 days prior to the
date that the investor signs a Letter of Intent; however, the 13-month period
during which the Letter of Intent 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 Funds under a single Letter of Intent. For
example, if at the time an investor signs a Letter of Intent to invest at least
$100,000 in Class A shares of the 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
Class A shares of the Fund or any other Evergreen Fund, to qualify for the 3.75%
sales charge applicable to purchases in any Evergreen Fund on the total amount
being invested (the sales charge applicable to an investment of $100,000).
The Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent 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 Letter
of Intent 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 Letter of Intent in conjunction with
their initial investment in Class A shares of a Fund should complete the
appropriate portion of the Application while current Class A shareholders
desiring to do so can obtain a form of Letter of Intent by writing to a Fund at
200 Berkeley Street, Boston, Massachusetts 02116-5034 or by calling
1-800-343-2898.
Investments Through Employee Benefit and Savings Plans. Certain qualified
and non-qualified benefit and savings plans may make shares of the Evergreen
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 Advisers may provide compensation to organizations
providing administrative and recordkeeping services to plans which make shares
of the Evergreen 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 income 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 a
Fund at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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 the Advisers or their affiliates; (ii) officers and present or former
Trustees of the Trusts; present or former trustees of other investment companies
managed by the Advisers; officers, directors and present or retired full-time
employees of the Advisers, 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 Advisers, 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 Alternatives--Class B and Class C 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, with respect to Utility and Value, the Shareholder Service
Plan 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, with respect to Utility and Value, the Shareholder Service Plan 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
six years of purchase will be subject to a contingent deferred sales charge at
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 six years or Class B shares acquired pursuant to
reinvestment of dividends or distributions and third of Class B shares held
longest during the six-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, with respect to
Utility and Value, the Shareholder Service Plan 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
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.
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, with respect to Utility
and Value, Shareholder Service Plan 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, with
respect to Utility and Value, the Shareholder Service Plan fee) for an
indefinite period which may extend beyond the period ending seven 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 the month of purchase. No charge
is imposed in connection with redemptions made more than one year after the
month 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, with
respect to Utility and Value, Shareholder Service Plan fee) enables the Fund to
sell Class C of 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, with respect to Utility and Value, Shareholder Service Plan
fee) 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 the
Advisers 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
Each of the Evergreen Growth and Income Fund and Evergreen Income and
Growth Fund is a Massachusetts business trust. Evergreen Small Cap Equity Income
Fund is a separate series of The Evergreen American Retirement Trust, a
Massachusetts business trust. Evergreen Utility Fund and Evergreen Value Fund,
which prior to July 7, 1995 were known as the First Union Utility Portfolio and
First Union Value Portfolio, respectively, are each separate series of Evergreen
Investment Trust, a Massachusetts business trust. Keystone Fund for Total Return
(formerly Keystone America Fund for Total Return) is a Massachusetts business
trust. On July 7, 1995, First Union Funds changed its name to Evergreen
Investment Trust. The above-named Trusts are individually referred to in this
Statement of Additional Information as the "Trust" and collectively as the
"Trusts." Each Trust is governed by a Board of Trustees. Unless otherwise
stated, references to the "Board of Trustees" or "Trustees" in this Statement of
Additional Information refer to the Trustees of all the Trusts.
Income and Growth and Growth and Income may issue an unlimited number of
shares of beneficial interest with a $0.001 par value. Small Cap, Value and
Utility may issue an unlimited number of shares of beneficial interest with a
$0.0001 par value. Total Return may issue an unlimited number of shares of
beneficial interest without 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 of the Trusts. 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 a 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
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.
Distributor
Evergreen Distributor, Inc. (the "Distributor"), 125 W. 55th Street, New
York, New York 10019, 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
Distribution Agreement between each 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
Price Waterhouse LLP has been selected to be the independent auditors of
Income and Growth.
KPMG Peat Marwick LLP has been selected to be the independent auditors of
Growth and Income, Small Cap, Utility, Value and Total Return.
- --------------------------------------------------------------------------------
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 the most 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
SEC, 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 in any advertisement or
information including performance data of the Fund.
With respect to Income and Growth, Growth and Income and Small Cap, the
shares of each Fund outstanding prior to January 3, 1995 have been reclassified
as Class Y shares. The average annual compounded total return for each Class of
shares offered by the Funds for the most recently completed one and five year
fiscal periods and for the fiscal period ended July 31, 1997 is set forth in the
table below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
INCOME AND 6 Months Ended 1 Year Ended 5 Years From Inception* to
GROWTH 7/31/97 7/31/97 Ended 7/31/97 7/31/97
Class A 9.56% 22.24% N/A 17.65%
Class B 9.54% 22.40% N/A 18.13%
Class C 13.54% 26.37% N/A 19.00%
Class Y 15.19% 28.70% 11.99% 9.54%**
GROWTH AND 7 Months Ended 1 Year Ended 5 Years Ended From Inception*** to
INCOME 7/31/97 7/31/97 7/31/97 7/31/97
Class A 15.57% 33.71% N/A 28.25%
Class B 15.82% 34.32% N/A 29.00%
Class C 19.82% 38.25% N/A 29.80%
Class Y 21.52% 40.66% 20.43% 15.06%**
SMALL CAP 7 Months Ended 1 Year Ended From
7/31/97 7/31/97 Inception****
to 7/31/97
Class A 15.24% 36.08% 26.18%
Class B 15.37% 36.69% 26.83%
Class C 19.30% 41.71% 27.76%
Class Y 21.09% 43.24% 18.98%
UTILITY 7 Months Ended 1 Year Ended From
7/31/97 7/31/97 Inception*****
to 7/31/97
Class A 5.46% 15.56% 8.95%
Class B 5.21% 15.42% 9.00%
UTILITY 7 Months Ended 1 Year Ended From
7/31/97 7/31/97 Inception*****
to 7/31/97
Class C 9.21% 19.42% 13.55%
Class Y 10.85% 21.45% 12.58%
VALUE 7 Months Ended 1 Year Ended 5 Years Ended From Inception
7/31/97 7/31/97 7/31/97 ****** to 7/31/97
Class A 15.04% 35.47% 15.86% 12.37%**
Class B 15.23% 36.20% N/A 16.82%
Class C 19.25% 40.24% N/A 22.25%
Class Y 20.93% 42.58% 17.32% 17.96%
TOTAL RETURN 8 Months Ended 1 Year Ended 5 Years Ended From Inception
7/31/97 7/31/97 7/31/97 *******
to 7/31/97
Class A 14.68% 36.84% 16.32% 12.40%**
Class B 14.75% 37.44% N/A 16.33%
Class C 18.80% 41.58% N/A 16.61%
Class Y N/A N/A N/A 17.22%
</TABLE>
* Inception date: Class A, Class B and Class C - January 3, 1995; Class Y -
August 31, 1978
** Ten years ended July 31, 1997
*** Inception date: Class A, Class B and Class C - January 3, 1995; Class Y
- - October 15, 1986
**** Inception date: Class A and Class B - January 3, 1995; Class C -
January 24, 1995; Class Y - October 1, 1993
***** Inception date: Class A and Class B - January 4, 1994; Class C -
September 2, 1994; Class Y - February 28, 1994
****** Inception date: Class A - April 12, 1985; Class B - February 2,
1993; Class C - September 2, 1994; Class Y - January 1, 1991.
******* Inception date: Class A - February 13, 1987; Class B and Class C-
February 1, 1993; Class Y - January 13, 1997
The performance numbers for Income and Growth, Growth and Income and Small
Cap for the Class A, Class B and Class C shares are hypothetical numbers based
on the performance for Class Y shares as adjusted for any applicable front-end
sales charge or contingent deferred sales charge through January 3, 1995
(commencement of class operations) and the actual performance of each class
subsequent to January 3, 1995. The performance data calculated prior to January
3, 1995, does not reflect any Rule 12b-1 fees. If such fees were reflected the
returns would be lower.
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 investment 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 SEC 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]6-1]
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 rates 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 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 Income and Growth, Growth and Income, Small Cap, Utility and
Value, except Total Return, for the thirty-day period ended July 31 for each
Class of shares offered by the Funds is set forth in the table below:
Income and Growth
Class A 3.00%
Class B 2.42%
Class C 2.42%
Class Y 3.39%
Growth and Income
Class A 0.57%
Class B -0.12%
Class C -0.12%
Class Y 0.84%
Utility
Class A 3.17%
Class B 2.59%
Class C 2.59%
Class Y 3.58%
Small Cap Value
Class A 1.97% 1.48%
Class B 1.36% 0.83%
Class C 1.36% 0.84%
Class Y 2.33% 1.79%
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,
Russell 2000 Index, or any other commonly quoted index of common stock prices.
The Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average and the Russell 2000 Index are unmanaged indices of selected common
stock 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.
Additional Information
Any shareholder inquiries may be directed to the shareholder's broker or to
each 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 Statements
filed by the Trusts with the SEC under the Securities Act of 1933. Copies of the
Registration Statements 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 the independent
auditors appearing therein, namely Price Waterhouse LLP (in the case of Income
and Growth) or KPMG Peat Marwick LLP (in the case of Growth and Income, Small
Cap, Utility, Value, and Total Return) are incorporated by reference into 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 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 obligors 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
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 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. A brief description of the applicable Moody's
rating symbols 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
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 L.P.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high 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.
COMMERCIAL PAPER RATINGS
Moody's Investors Service: 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 L.P.: 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.
<PAGE>
SUPPLEMENT TO THE STATEMENTS
OF ADDITIONAL INFORMATION OF
Evergreen Aggressive Growth Fund, Evergreen American Retirement Fund, Evergreen
Emerging Markets Growth Fund, Evergreen Florida High Income Municipal Bond Fund,
Evergreen Foundation Fund, Evergreen Fund, Evergreen Georgia Municipal Bond
Fund, Evergreen Global Leaders Fund, Evergreen Growth and Income Fund, Evergreen
High Grade Tax Free Fund, Evergreen Income and Growth Fund, Evergreen
Intermediate Term Government Securities Fund, Evergreen International Equity
Fund, Evergreen Institutional Money Market Fund, Evergreen Institutional Tax
Exempt Money Market Fund, Evergreen Institutional Treasury Money Market Fund,
Evergreen Micro Cap Fund, Evergreen Money Market Fund, Evergreen North Carolina
Municipal Bond Fund, Evergreen Short-Intermediate Bond Fund, Evergreen
Short-Intermediate Municipal Fund, Evergreen Small Cap Equity Income Fund,
Evergreen South Carolina Municipal Bond Fund, Evergreen Tax Strategic Foundation
Fund, Evergreen U.S. Government Fund, Evergreen Utility Fund, Evergreen Value
Fund, Evergreen Virginia Municipal Bond Fund, Evergreen Capital Preservation and
Income Fund, Evergreen Fund for Total Return, Evergreen Natural Resources Fund,
Evergreen Omega Fund, Evergreen Strategic Income Fund, Evergreen California Tax
Free Fund, Evergreen Massachusetts Tax Free Fund, Evergreen Missouri Tax Free
Fund, Evergreen New York Tax Free Fund, Evergreen Pennsylvania Tax Free Fund,
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone Quality Bond Fund (B-1), Keystone Small
Company Growth Fund (S-4), Keystone Strategic Growth Fund (K- 2), Keystone
Growth and Income Fund (S-1), Evergreen Select Adjustable Rate Fund, Evergreen
Select Small Cap Growth Fund, Keystone International Fund, Keystone Precious
Metals Holdings, and Keystone Tax Free Fund (each a "Fund" and, collectively,
the "Funds")
The Statements of Additional Information of each of the Funds are
hereby supplemented as follows:
STANDARDIZED FUNDAMENTAL INVESTMENT RESTRICTIONS
Each of the above Funds, except Keystone Balanced Fund (K-1), Keystone
Diversified Bond Fund (B-2), Keystone Small Company Growth Fund (S-4), and
Keystone Tax Free Fund, has adopted the following standardized fundamental
investment restrictions. These restrictions may be changed only by a vote of
Fund shareholders.
1. Diversification of Investments
The Fund may not make any investment inconsistent with the Fund's
classification as a diversified [non-diversified] investment company
under the Investment Company Act of 1940.
-1-
<PAGE>
2. Concentration of a Fund's Assets in a Particular Industry. ([All Funds
other than those listed below.)
The Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than
securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities [or in the case of Money Market Funds domestic
bank money instruments]).
For Evergreen Utility Fund
The Fund will concentrate its investments in the utilities industry.
For Keystone Precious Metals Holdings
The Fund will concentrate its investments in industries related to the
mining, processing or dealing in gold or other precious metals and
minerals.
3. Issuance of Senior Securities
Except as permitted under the Investment Company Act of 1940, the Fund
may not issue senior securities.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by
applicable law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed an underwriter in connection with the
disposition of its portfolio securities.
6. Investment in Real Estate
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in (a)
securities directly or indirectly secured by real estate, or (b)
securities issued by companies that invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on
commodities except to the extent that the Fund may engage in financial
futures contracts and related options and currency contracts and
related options and may otherwise do so in accordance with
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applicable law and without registering as a commodity pool operator
under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may
lend its portfolio securities in accordance with applicable law. The
acquisition of investment instruments shall not be deemed to be the
making of a loan.
9. Investment in Federally Tax Exempt Securities
The following Funds have also adopted a standardized fundamental
investment restriction in regard to investments in federally tax-exempt
securities:
<TABLE>
<CAPTION>
<S> <C>
Evergreen Tax Strategic Foundation Fund Evergreen High Grade Tax Free Fund
Evergreen Georgia Municipal Bond Fund Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund Evergreen Virginia Municipal Bond Fund
Evergreen New York Tax Free Fund Evergreen Massachusetts Tax Free Fund
Evergreen California Tax Free Fund Evergreen Pennsylvania Tax Free Fund
Evergreen Institutional Tax Exempt Money Market Fund Evergreen Missouri Tax Free Fund
Evergreen Short-Intermediate Municipal Fund
</TABLE>
The Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for Funds with the words tax exempt, tax free or municipal in their names.
ELIMINATION OF CERTAIN NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The nonfundamental investment restrictions described below have been
eliminated by each Fund listed under such restriction:
1. PROHIBITION ON INVESTMENT IN UNSEASONED ISSUERS
Evergreen Fund, Growth and Income Fund, Income and Growth Fund,
American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Growth and Income Fund (S-1), Omega Fund, Precious
Metals Holding, Strategic Growth Fund (K- 2), High Income Bond Fund
(B-4), Capital Preservation and Income Fund, Select Adjustable Rate
Fund, Strategic Income Fund, Fund for Total Return, International Fund
2. PROHIBITION ON INVESTMENT IN COMPANIES FOR THE PURPOSE OF EXERCISING
CONTROL OR MANAGEMENT
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, Value
Fund, Intermediate Term Government Securities Fund, Foundation Fund,
American Retirement Fund, Emerging Markets Growth Fund, International
Equity Fund, Global Leaders Fund, Money Market Fund, Florida High
Income Municipal Bond Fund, Short-Intermediate Municipal Fund, Growth
and Income Fund (S-1), Precious Metals Holdings, Strategic Growth Fund
(K-2), High Income Bond Fund (B-4), Fund for Total Return,
International Fund
3. PROHIBITION ON INVESTMENT IN COMPANIES IN WHICH TRUSTEES OR OFFICERS OF
THE FUNDS ALSO HOLD SHARES ABOVE CERTAIN PERCENTAGE LEVELS
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Intermediate Term Government Securities Fund, Foundation
Fund, American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Precious Metals Holdings, Inc.
4. Prohibition on Investment of More Than 5% of a Fund's Net Assets in
Warrants, With No More Than 2% of Net Assets Being Invested in Warrants
That Are Listed NEW YORK NOR AMERICAN STOCK EXCHANGES
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund,
Short-Intermediate Municipal Fund
5. PROHIBITION ON INVESTMENT IN OIL, GAS OR OTHER MINERAL EXPLORATION OR
DEVELOPMENT PROGRAMS
Evergreen Fund, MicroCap Fund, Aggressive Growth Fund, Growth and
Income Fund, Small Cap Equity Fund, Income and Growth Fund, Value Fund,
Intermediate Term Government Securities Fund, Foundation Fund, American
Retirement Fund, Money Market Fund, Florida High Income Municipal Bond
Fund, Short-Intermediate Municipal Fund, High Grade Tax Free Fund,
Precious Metals Holdings, Inc.
6. PROHIBITION ON JOINT TRADING ACCOUNTS
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Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund, Florida High
Income Municipal Bond Fund
7. PROHIBITION ON INVESTMENT IN OTHER INVESTMENT COMPANIES. [Note: The
Funds may invest in such companies to the extent permitted by the
Investment Company Act of 1940 and the rules thereunder.]
Growth and Income Fund, Utility Fund, Small Cap Equity Income Fund,
Income and Growth Fund, Value Fund, Short-Intermediate Bond Fund,
Intermediate Term Government Securities Fund, Foundation Fund, Tax
Strategic Foundation Fund, American Retirement Fund, High Grade Tax
Free Fund, Growth and Income Fund (S-1), Omega Fund, Precious Metals
Holdings, Strategic Growth Fund (K-2), High Income Bond Fund (B-4),
Select Adjustable Rate Fund, Strategic Income Fund, Fund for Total
Return, Global Opportunities Fund, International Fund, Massachusetts
Tax Free Fund, New York Tax Free Fund, Pennsylvania Tax Free Fund,
California Tax Free Fund and Missouri Tax Free Fund.
RECLASSIFICATION OF ALL OTHER FUNDAMENTAL INVESTMENT RESTRICTIONS
All investment restrictions other than those described above as having been
standardized or eliminated have been reclassified from fundamental to
nonfundamental and, as, such, may be changed by the Funds' Boards of Trustees at
any time without a shareholder vote.
TRUSTEES
The Trustees and executive officers of each Trust, their ages, and
their principal occupations during the last five years are shown below:
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of
the Evergreen Group of Mutual Funds and Trustee. Retired Vice President
of Lance Inc. (food manufacturing); Chairman of the Distribution Comm.
Foundation for the Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park,
Charlotte, NC- Trustee. Medical Director, U.S. Healthcare of Charlotte,
North Carolina since 1996; President, Primary Physician Care from 1990
to 1996.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street, Suite 980, Charlotte,
NC-Trustee. Attorney, Law Offices of Michael S. Scofield since 1969.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC - Trustee.
Sales Representative with Nucor-Yamoto Inc. (steel producer) since
1988.
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<PAGE>
THOMAS L. McVERRY (58), 4419 Parkview Drive, Charlotte, NC - Trustee.
Director of Carolina Cooperative Federal Credit Union since 1990 and
Rexham Corporation from 1988 to 1990; Vice President of Rexham
Industries, Inc. (diversified manufacturer) from 1989 to 1990; Vice
President - Finance and Resources, Rexham Corporation from 1979 to
1990.
WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC - Trustee. Partner in the law firm Holcomb and Pettit,
P.A. since 1990.
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL -
Trustee. Real estate developer and construction consultant since 1980;
President of Centrum Equities since 1987 and Centrum Properties, Inc.
since 1980.
CHARLES A. AUSTIN III (61), Trustee. Investment counselor to Appleton
Partners, Inc.; former Managing Director, Seaward Management
Corporation (investment advice); and former Director, Executive Vice
President and Treasurer, State Street Research & Management Company
(investment advice).
K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and
Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chief Executive
Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher &
Associates (environmental consulting); President, Oldways Preservation
and Exchange Trust (education); and former Director, Keystone
Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund
and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
DAVID M. RICHARDSON (55) Trustee. Executive Vice President, DMR
International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of
the Evergreen Group of Mutual Funds. Chairman, Environmental Warranty,
Inc., and Consultant, Drake Beam Morin, Inc. (executive outplacement);
Director of Connecticut Natural Gas Corporation, Trust Company of
Connecticut, Hartford Hospital, Old State House Association, and
Enhance Financial Services, Inc.; Chairman, Board of Trustees, Hartford
YMCA; former Director; Executive Vice President, and Vice Chairman of
The Travelers Corporation.
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<PAGE>
EXECUTIVE OFFICERS
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY -
President and Treasurer. Consultant to BISYS Fund Services since 1996.
Senior Managing Director, Furman Selz LLC since 1992, Managing Director
from 1984 to 1992.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH - Secretary.
Senior Vice President/Director of Administration and Regulatory
Services, BISYS Fund Services since April 1995. Vice
President/Assistant General Counsel, Alliance Capital Management from
1988 to 1995.
The officers of the Trusts are officers and/or employees of The BISYS
Group, Inc. ("BISYS Group"), except for Mr. Pileggi, who is a consultant to The
BISYS Group. The BISYS Group is an affiliate of Evergreen Distributor, Inc.
("EDI"), the distributor of each class of shares of each Fund.
No officer or Trustee of the Trusts owned more than 1.0% of any class
of shares of any of the Funds as of November 30, 1997.
DISTRIBUTION PLANS
The following is added to the disclosure under the caption "Distribution Plan"
Class A and B shares are made available to employer-sponsored retirement or
savings plans ("Plans") without a sales charge if:
(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch and, on
the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the Plan has $3 million or more in assets invested in broker/dealer
funds not advised or managed by Merrill Lynch Asset Management, L.P. ("MLAM")
that are made available pursuant to a Services Agreement between Merrill Lynch
and the Fund's principal underwriter or distributor and in Funds advised or
managed by MLAM (collectively, the "Applicable Investments"); or
(ii) the Plan is recordkept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has $3 million or more
in assets, excluding money market funds, invested in Applicable Investments; or
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<PAGE>
(iii) the Plan has 500 or more eligible employees, as determined by the Merrill
Lynch plan conversion manager, on the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares convert to Class A shares once the Plan has reached $5 million
invested in Applicable Investments. The Plan will receive a Plan level share
conversion.
The following is added to the Statement of Additional Information of each of
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone International Fund, Keystone Precious
Metals Holdings, Keystone Quality Bond Fund (B-1), Keystone Small Company Growth
Fund (S-4), Keystone Strategic Growth Fund (K-2), Keystone Growth and Income
Fund (S-1) and Keystone Tax Free Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DISTRIBUTION PLANS AND AGREEMENTS
Distribution fees are accrued daily and paid monthly on Class A, Class
B and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B shares and Class C shares are
designed to permit an investor to purchase such shares through broker-dealers
without the assessment of a front-end sales charge, and, in the case of Class C
shares, without the assessment of a contingent deferred sales charge after the
first year following the month of purchase, while at the same time permitting
the Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares and
the Class C shares are the same as those of the front-end sales charge and
distribution fee with respect to the Class A shares in that in each case the
sales charge and/or distribution fee provide for the financing of the
distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its Class A, Class B and Class C shares (each a
"Plan" and collectively, the "Plans"), the Treasurer of each Fund reports the
amounts expended under the Plans and the purposes for which such expenditures
were made to the Trustees of the Trust for their review on a quarterly basis.
Also, each Plan provides that the selection and nomination of the disinterested
Trustees are committed to the discretion of such disinterested Trustees then in
office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the
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<PAGE>
latter may in turn pay part or all of such compensation to brokers or other
persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Trust or by vote
of the holders of a majority of the outstanding voting securities of that Class
and, in either case, by a majority of the Independent Trustees of the Trust who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related thereto.
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<PAGE>
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to each Fund and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class A, Class B and Class C shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B and Class C shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class A, Class B and Class C shares.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (i) by a Fund without penalty
at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
disinterested Trustees, or (ii) by the Distributor. To terminate any
Distribution Agreement, any party must give the other parties 60 days' written
notice; to terminate a Plan only, the Fund need give no notice to the
Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
HOW THE FUNDS OFFER SHARES TO THE PUBLIC
You may buy shares of a Fund through the Funds' distributor,
broker-dealers that have entered into special agreements with the Funds'
distributor or certain other financial institutions. Each Fund offers four
classes of shares that differ primarily with respect to sales
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<PAGE>
charges and distribution fees. Depending upon the class of shares, you will pay
an initial sales charge when you buy a Fund's shares, a contingent deferred
sales charge (a "CDSC") when you redeem a Fund's shares or no sales charges at
all.
Purchase Alternatives
CLASS A SHARES
With certain exceptions, when you purchase Class A shares you will pay
a maximum sales charge of 4.75%. (The prospectus contains a complete table of
applicable sales charges and a discussion of sales charge reductions or waivers
that may apply to purchases.) If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, the Funds will charge a CDSC
of 1.00% if you redeem during the month of your purchase and the 12-month period
following the month of your purchase. See "Calculation of Contingent Deferred
Sales Charge" below.
CLASS B SHARES
The Funds offer Class B shares at net asset value (without a front-end
load). With certain exceptions, however, the Funds will charge a CDSC of 1.00%
on shares you redeem within 72 months after the month of your purchase. The
Funds will charge CDSCs at the following rate:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase..........................5.00%
Second twelve-month period following the month of purchase...............4.00%
Third twelve-month period following the month of purchase................3.00%
Fourth twelve-month period following the month of purchase...............3.00%
Fifth twelve-month period following the month of purchase................2.00%
Sixth twelve-month period following the month of purchase................1.00%
Thereafter...............................................................0.00%
Class B shares that have been outstanding for seven years after the month of
purchase will automatically convert to Class A shares without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificate to ESC.
CLASS C SHARES
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Funds
offer Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Funds will charge a
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CDSC of 1.00% on shares you redeem within 12-months after the month of your
purchase. See "Contingent Deferred Sales Charge" below.
CLASS Y SHARES
No CDSC is imposed on the redemption of Class Y shares. Class Y shares
are not offered to the general public and are available only to (1) persons who
at or prior to December 31, 1994 owned shares in a mutual fund advised by
Evergreen Asset Management Corp. ("Evergreen Asset"), (2) certain institutional
investors and (3) investment advisory clients of the Capital Management Group of
First Union National Bank ("FUNB"), Evergreen Asset, Keystone Investment
Management Company, or their affiliates. Class Y shares are offered at net asset
value without a front-end or back-end sales charge and do not bear any Rule
12b-1 distribution expenses.
Contingent Deferred Sales Charge
The Funds charge a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plan"). If imposed, the Funds
deduct the CDSC from the redemption proceeds you would otherwise receive. The
CDSC is a percentage of the lesser of (1) the net asset value of the shares at
the time of redemption or (2) the shareholder's original net cost for such
shares. Upon request for redemption, to keep the CDSC a shareholder must pay as
low as possible, a Fund will first seek to redeem shares not subject to the CDSC
and/or shares held the longest, in that order. The CDSC on any redemption is, to
the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the Principal Underwriter or its predecessor.
SALES CHARGE WAIVERS OR REDUCTIONS
Reducing Class a Front-end Loads
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
COMBINED PURCHASES
You can reduce your sales charge by combining purchases of Class A
shares of multiple Evergreen funds. For example, if you invested $75,000 in each
of two different Evergreen funds, you would pay a sales charge based on a
$150,000 purchase (i.e., 3.75% of the offering price, rather than 4.75%).
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RIGHTS OF ACCUMULATION
You can reduce your sales charge by adding the value of Class A shares
of Evergreen funds you already own to the amount of your next Class A
investment. For example, if you hold Class A shares valued at $99,999 and
purchase an additional $5,000, the sales charge for the $5,000 purchase would be
at the next lower sales charge of 3.75%, rather than 4.75%.
LETTER OF INTENT
You can, by completing the "Letter of Intent" section of the
application, purchase Class A shares over a 13-month period and receive the same
sales charge as if you had invested all the money at once. All purchases of
Class A shares of an Evergreen fund during the period will qualify as Letter of
Intent purchases.
Shares That Are Not Subject to a Sales Charge or CDSC
WAIVER OF SALES CHARGES
The Funds may sell their shares at net asset value without an initial
sales charge to:
1. purchases of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax
sheltered annuity or TSA plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan") or
a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust
departments and registered investment advisers;
4. investment advisers, consultants or financial planners who
place trades for their own accounts or the accounts of their
clients and who charge such clients a management, consulting,
advisory or other fee;
5. clients of investment advisers or financial planners who place
trades for their own accounts if the accounts are linked to
master accounts of such investment advisers or financial
planners on the books of the broker-dealer through whom shares
are purchased;
6. institutional clients of broker-dealers, including retirement
and deferred compensation plans and the trusts used to fund
these plans, which place trades through an omnibus account
maintained with a Fund by the broker-dealer;
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7. employees of FUNB, its affiliates, Evergreen Distributor,
Inc., any broker-dealer with whom Evergreen Distributor, Inc.,
has entered into an agreement to sell shares of the Funds, and
members of the immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen funds, the Distributor or their affiliates and to
the immediate families of such persons; or
9. a bank or trust company in a single account in the name of
such bank or trust company as trustee if the initial
investment in or any Evergreen fund made pursuant to this
waiver is at least $500,000 and any commission paid at the
time of such purchase is not more than 1.00% of the amount
invested.
With respect to items 8 and 9 above, each Fund will only sell shares to
these parties upon the purchasers written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. The Funds will not charge any
CDSC on redemptions by such purchasers.
WAIVER OF CDSCS
The Funds do not impose a CDSC when the shares you are redeeming
represent:
1. an increase in the share value above the net cost of such
shares;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares that are in the account of a shareholder who has died
or become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder
who is a least 59 1/2 years old;
6. shares in an account that we have closed because the account
has an aggregate net asset value of less than $1,000;
7. an automatic withdrawal under an Systematic Income Plan of up
to 1.00% per month of your initial account balance;
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<PAGE>
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan
that purchased Class C shares (this waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially
all of its assets).
EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of
any other Evergreen fund, as described under the section entitled "Exchanges" in
a Fund's prospectus. Before you make an exchange, you should read the prospectus
of the Evergreen fund into which you want to exchange. The Trust's Board of
Trustees reserves the right to discontinue, alter or limit the exchange
privilege at any time.
HOW THE FUNDS VALUE SHARES
How and When a Fund Calculates its Net Asset Value per Share ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as
described in the Prospectus. A Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of each Fund is calculated by dividing the value of a Fund's
net assets attributable to that class by all of the shares issued for that
class.
How a Fund Values the Securities it Owns
Current values for a Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or on the NMS prior to
the time of the valuation, provided that a sale has occurred.
(2) Securities traded in the over-the-counter market, other than on
NMS, are valued at the mean of the bid and asked prices at the time of
valuation.
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(3) Short-term investments maturing in more than sixty days for which
market quotations are readily available, are valued at current market value.
(4) Short-term investments maturing in sixty days or less (including
all master demand notes) are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market.
(5) Short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market.
(6) Securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS if, in
the Fund's opinion, the last sales price does not reflect a current market value
or if no sale occurred; and other assets are valued at prices deemed in good
faith to be fair under procedures established by the Board of Trustees.
SHAREHOLDER SERVICES
As described in the prospectus, a shareholder may elect to receive his
or her dividends and capital gains distributions in cash instead of shares.
However, ESC will automatically convert a shareholder's distribution option so
that the shareholder reinvests all dividends and distributions in additional
shares when it learns that the postal or other delivery service is unable to
deliver checks or transaction confirmations to the shareholder's address of
record. The Funds will hold the returned distribution or redemption proceeds in
a non interest-bearing account in the shareholder's name until the shareholder
updates his or her address. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
December 22, 1997
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THE VIRTUS FUNDS
INVESTMENT SHARES
CONSISTS OF EIGHT PORTFOLIOS:
THE U.S. GOVERNMENT SECURITIES FUND;
THE STYLE MANAGER: LARGE CAP FUND;
THE STYLE MANAGER FUND;
THE VIRGINIA MUNICIPAL BOND FUND;
THE MARYLAND MUNICIPAL BOND FUND;
THE TREASURY MONEY MARKET FUND;
THE MONEY MARKET FUND; AND
THE TAX-FREE MONEY MARKET FUND.
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the Prospectus for
the Investment Shares ("Investment Shares") of The Virtus Funds (the "Trust"),
dated November 30, 1997. This Statement is not a prospectus itself. You may
request a copy of a prospectus or a paper copy of this Statement of Additional
Information, if you have received it electronically, free of charge by writing
to the Trust or calling toll-free 1-800-723-9512.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 30, 1997
[GRAPHIC OMITTED]
CUSIP 927913202 CUSIP 927913848 CUSIP 927913400 CUSIP 927913871 CUSIP
927913509 CUSIP 927913889 CUSIP 927913707 CUSIP 927913806 2102608B-R
(11/97)
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Table of Contents
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I
General Information About the Trust 1
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Investment Objective and Policies of the Funds 1
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The U.S. Government Securities Fund 1
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Types of Investments 1
The Style Manager: Large Cap Fund and The Style Manager Fund 2
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Commercial Paper 4
Bank Instruments 4
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund 5
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Acceptable Investments 5
Types of Acceptable Investments 5
The Treasury Money Market Fund 5
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Types of Investments 5
The Money Market Fund 6
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Types of Investments 6
The Tax-Free Money Market Fund 6
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Portfolio Investments and Strategies 6
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Repurchase Agreements 6
Reverse Repurchase Agreements 6
When-Issued and Delayed Delivery Transactions 6
Lending of Portfolio Securities 7
Restricted and Illiquid Securities 7
Participation Interests 7
Variable Rate Municipal Securities 8
Municipal Leases 8
Temporary Investments 8
Adjustable Rate Mortgage Securities 8
Portfolio Turnover 9
Investment Limitations 9
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Virtus Funds Management 12
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Fund Ownership 16
Officers and Trustees Compensation 17
Trustee Liability 17
Investment Advisory Services 17
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Adviser to the Trust 17
Advisory Fees 18
Sub-Adviser to The Style Manager: Large Cap Fund
and The Style Manager Fund 18
Sub-Advisory Fees 18
Other Services 18
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Administrative Services 18
Custodian 19
Transfer Agent 19
Independent Auditors 19
Brokerage Transactions 19
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Purchasing Shares 20
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Distribution Plan 20
Conversion to Federal Funds 20
Determining Net Asset Value 21
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Determining Market Value of Securities 21
Use of the Amortized Cost Method 21
Valuing Municipal Securities 22
Use of Amortized Cost 23
Redeeming Shares 23
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Redemption in Kind 23
Massachusetts Partnership Law 23
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Tax Status 23
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The Funds' Tax Status 23
Shareholders' Tax Status 24
Total Return 24
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Yield 25
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Effective Yield 26
Tax-Equivalent Yield 26
Performance Comparisons 29
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The U.S. Government Securities Fund 30
The Style Manager: Large Cap Fund and The Style Manager Fund 31
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund 31
The Treasury Money Market Fund 31
The Money Market Fund 31
The Tax-Free Money Market Fund 32
Financial Statements 32
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Appendix 33
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24
General Information About the Trust
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The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated June 20, 1990. As of the date of this Statement, the Trust
consists of eight separate portfolios of securities (collectively, the "Funds",
individually, a "Fund") which are as follows: The U. S. Government Securities
Fund, The Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund. On October 1,
1992, the name of the Trust was changed from "The SBK Select Series" to "Signet
Select Funds." On August 15, 1994, the name of the Trust was changed from
"Signet Select Funds" to "The Medalist Funds." On February 15, 1995, the name of
the Trust was changed from "The Medalist Funds" to "The Virtus Funds."
With the exception of The Tax-Free Money Market Fund and The Style Manager Fund,
which offer a single class of shares, the Funds are offered in two classes,
Investment Shares and Trust Shares. This Combined Statement of Additional
Information relates only to the Investment Shares of those Funds offering
classes and to shares of The Tax-Free Money Market Fund and The Style Manager
Fund.
Investment Objective and Policies of the Funds
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The prospectus discusses the objective of each Fund and the policies it employs
to achieve those objectives. The following discussion supplements the
description of the Funds' investment policies in the combined prospectus.
The Funds' respective investment objectives cannot be changed without approval
of shareholders. The investment policies described below may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below appear in the
prospectus section "Portfolio Investments and Strategies."
The U.S. Government Securities Fund
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Types of Investments
The Fund invests primarily in securities which are guaranteed as to payment of
principal and interest by the U.S. government or its instrumentalities.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed
by U.S. government agencies or instrumentalities. These securities are
backed by: the full faith and credit of the U.S. Treasury; the issuer's
right to borrow from the U.S. Treasury; the discretionary authority of
the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality
issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are: the Farm Credit System;
Federal Home Loan Banks; Farmers Home Administration; and Federal
National Mortgage Association.
Collateralized Mortgage Obligations (CMOs)
Privately issued CMOs generally represent an ownership interest in
federal agency mortgage pass-through securities such as those issued by
the Government National Mortgage Association. The terms and
characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools.
The market for such CMOs has expanded considerably since its inception.
The size of the primary issuance market and the active participation in
the secondary market by securities dealers and other investors make
government-related pools highly liquid.
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The Style Manager: Large Cap Fund and The Style Manager Fund
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The Funds invest primarily in corporate securities, including common stocks,
preferred stocks, corporate bonds, notes, warrants and convertible securities.
Convertible Securities
Convertible securities are fixed income securities which may be
exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified
time period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of
"usable" bonds and warrants or a combination of the features of several
of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be
employed for different investment objectives.
A Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in
which, in the investment adviser's opinion, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment objectives. Otherwise, the Fund may hold or
trade convertible securities. In selecting convertible securities for a
Fund, the Fund's adviser evaluates the investment characteristics of
the convertible security as a fixed income instrument, and the
investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, a Fund's adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants
of the issuer's profits, and the issuer's management capability and
practices.
Warrants
Warrants are basically options to purchase common stock at a specific
price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time. Warrants
may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which
they are worthless. In addition, if the market price of the common
stock does not exceed the warrant's exercise price during the life of
the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or
decrease in the market price of the warrant may tend to be greater than
the percentage increase or decrease in the market price of the optioned
common stock.
Futures And Options Transactions
As a means of reducing fluctuations in the net asset value of shares of
a Fund, the Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put options
on portfolio securities and listed put options on futures contracts,
and writing call options on futures contracts. A Fund may also write
covered call options on portfolio securities to attempt to increase its
current income. The Fund will maintain its positions in securities,
option rights, and segregated cash subject to puts and calls until the
options are exercised, closed, or have expired. An option position on
financial futures contracts may be closed out only on an exchange which
provides a secondary market from options of the same series.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer, who agrees to take delivery
of the security ("going long") at a certain time in the future.
Financial futures contracts call for the delivery of shares of common
stocks represented in a particular index.
Put Options on Financial Futures Contracts
A Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
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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 option will increase in value. In such an event, a
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by a Fund upon the
sale of the second option will be large enough to offset both the
premium paid by the Fund for the original option plus the decrease in
value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would
then deliver the futures contract in return for payment of the strike
price. If the Fund neither closes out nor exercises an option, the
option will expire on the date provided in the option contract, and
only the premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, a Fund may write
listed call options on futures contracts to hedge its portfolio. When a
Fund writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall, causing the
prices of futures to go down, the Fund's obligation under a call option
on a future (to sell a futures contract) costs less to fulfill, causing
the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option. This
premium can substantially offset the drop in value of the Fund's fixed
income or indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by a Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option.
The net premium income of the Fund will then substantially offset the
decrease in value of the hedged securities.
A Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will
take prompt action to close out a sufficient number of open contracts
to bring its open futures and options positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash
or U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that
futures contract initial margin does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in the
nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract,
assuming all contractual obligations have been satisfied.
A futures contract held by 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, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing Put Options on Portfolio Securities
A Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A
put 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.
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Writing Covered Call Options On Portfolio Securities
A Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of
the option during the option period to deliver the underlying security
upon payment of the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities which it
has the right to obtain without payment of further consideration (or
has segregated cash in the amount of any additional consideration).
Over-the-Counter Options
A Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options for those options on portfolio securities held by the Fund and
not traded on an exchange.
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.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
are those set forth under "The U.S. Government Securities Fund-U.S.
Government Obligations."
Commercial Paper
A Fund may invest in commercial paper rated at least A-1 by Standard & Poor's
Ratings Group ("S&P"), Prime-1 by Moody's Investors Service, Inc. ("Moody's"),
or F-1 by Fitch Investors Service ("Fitch") and money market instruments
(including commercial paper) which are unrated but of comparable quality,
including Canadian Commercial Paper ("CCPs") and Europaper. In the case where
commercial paper, CCPs or Europaper have received different ratings from
different rating services, such commercial paper, CCPs or Europaper is an
acceptable investment so long as at least one rating is one of the preceding
high quality ratings and provided the investment adviser has determined that
such investment presents minimal credit risks.
Bank Instruments
A Fund may invest in the instruments of banks and savings associations whose
deposits are insured by the Bank Insurance Fund ("BIF"), which is administered
by the Federal Deposit Insurance Corporation ("FDIC"), or the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC, such as
certificates of deposit, demand and time deposits, savings shares, and bankers'
acceptances. These instruments are not necessarily guaranteed by those
organizations.
In addition to domestic bank obligations such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances, the Fund may invest
in:
o Eurodollar Certificates of Deposit ("ECDs") issued by foreign
branches of U.S. or foreign banks;
o Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
o Yankee Certificates of Deposit ("Yankee CDs"), which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches
of foreign banks and held in the United States.
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The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
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Acceptable Investments
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund pursue
their investment objectives by investing in professionally managed portfolios of
securities at least 65% of which are comprised of Virginia (in the case of The
Virginia Municipal Bond Fund) or Maryland (in the case of The Maryland Municipal
Bond Fund) municipal securities. The Funds will invest their assets so that,
under normal circumstances, at least 80% of their annual interest income is
exempt from federal regular and Virginia (in the case of The Virginia Municipal
Bond Fund) or Maryland (in the case of The Maryland Municipal Bond Fund) state
income taxes or that at least 80% of their total assets are invested in
obligations, the interest income from which is exempt from federal regular and
Virginia (in the case of The Virginia Municipal Bond Fund) or Maryland (in the
case of The Maryland Municipal Bond Fund) state income taxes.
Characteristics
The municipal securities in which the Funds invest have the
characteristics set forth in the prospectus. An unrated municipal
security will be determined by a Fund's adviser to meet the quality
standards established by the Fund's Board of Trustees if it is of
comparable quality to the rated municipal securities which the Fund
purchases. The Trustees consider the creditworthiness of the issuer of
a municipal security, the issuer of a participation interest if the
Fund has the right to demand payment from the issuer of the interest or
the guarantor of payment by either of those issuers.
If Moody's or S&P's ratings change because of changes in those
organizations or in their rating systems, a Fund will try to use
comparable ratings as standards in accordance with the investment
policies described in the Fund's prospectus.
Types of Acceptable Investments
Examples of Virginia and Maryland municipal securities are:
o municipal notes and tax-exempt commercial paper;
o serial bonds sold with a series of maturity dates;
o tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
o bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
o revenue anticipation notes sold in expectation of receipt of federal
income available under the Federal Revenue Sharing Program;
o prerefunded municipal bonds refundable at a later date (payment of
principal and interest on prerefunded bonds is assured through the
first call date by the deposit in escrow of U.S. government
securities); or
o general obligation bonds secured by a municipality's pledge of
taxation.
The Treasury Money Market Fund
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Types of Investments
The Fund invests only in short-term U.S. Treasury obligations. Short-term U.S.
Treasury obligations as used herein refers to evidences of indebtedness issued
by the United States, or issued by an agency or instrumentality thereof, and
fully guaranteed as to principal and interest by the United States, maturing in
397 days or less from the date of acquisition unless they are purchased under a
repurchase agreement that provides for repurchase by the seller within one year
from the date of acquisition.
The Fund may also retain Fund assets in cash.
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The Money Market Fund
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Types of Investments
The Fund invests primarily in money market instruments maturing in 397 days or
less and which include, but are not limited to, commercial paper and demand
master notes, domestic and foreign bank instruments, U.S. government
obligations, and corporate debt obligations.
Bank Instruments
The types of bank instruments in which the Fund invests are those set
forth under "The Style Manager: Large Cap Fund-Bank Instruments."
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
are those set forth under "The U.S. Government Securities Fund-U.S.
Government Obligations."
The Tax-Free Money Market Fund
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The Fund invests in a portfolio of municipal securities maturing in 13 months or
less. As a matter of investment policy, which cannot be changed without
shareholder approval, at least 80% of the Fund's annual interest income will be
exempt from federal income tax (including alternative minimum tax). The average
maturity of the securities in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less.
Portfolio Investments and Strategies
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Repurchase Agreements
The Funds or their custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. In
the event that 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 a Fund and allow
retention or disposition of such securities. The Funds will only enter into
repurchase agreements with banks and other recognized financial institutions
such as broker/dealers which are deemed by the adviser to be creditworthy
pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement a Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable a Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that a 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 are maintained until the transaction is settled.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for a Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of a Fund sufficient to
make payment for the securities to be purchased are segregated on a Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Funds may engage in these
transactions to an extent that would cause the segregation of an amount up to
20% of the total value of their assets. The Funds do not intend to engage in
when-issued and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of their respective assets.
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Lending of Portfolio Securities
The collateral received when The U.S. Government Securities Fund, The Style
Manager: Large Cap Fund, The Style Manager Fund, and The Money Market Fund lend
portfolio securities must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the particular Fund. During the time portfolio securities are on loan, the
borrower pays a Fund any dividends or interest paid on such securities. Loans
are subject to termination at the option of a 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. The U.S. Government Securities
Fund and The Style Manager: Large Cap Fund do 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.
Restricted and Illiquid Securities
The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on resale under
federal securities law. However, The U.S. Government Securities Fund, The Style
Manager: Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond
Fund and The Maryland Municipal Bond Fund will limit investments in illiquid
securities, including certain restricted securities determined by the Trustees
not to be liquid, and repurchase agreements providing for settlement in more
than seven days after notice, to 15% of its net assets. In the case of The
Virginia Municpal Bond Fund and The Maryland Municipal Bond Fund, illiquid
securities will include participation interests and variable rate municipal
securities without a demand feature or with a demand feature of longer than
seven days and which the adviser believes cannot be sold within seven days. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money Market
Fund will limit investments in illiquid securities, including certain securities
determined by the Trustees not to be liquid, and repurchase agreements providing
for settlement in more than seven days after notice, and in the case of The
Money Market Fund, specifically including non-negotiable fixed income time
deposits with maturities over seven days, to 10% of their net assets.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, The
Style Manager Fund, and The Money Market Fund 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 Fund, 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 Fund 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 Board of 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 a Fund's investment 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 intend
to not subject such paper to the limitation applicable to restricted securities.
Participation Interests
The financial institutions from which The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money Market Fund purchase
participation interests frequently provide or secure from other financial
institutions irrevocable letters of credit or guarantees and give a Fund the
right to demand payment on specified notice (normally within thirty days for The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund and seven days
for The Tax-Free Money Market Fund) from the issuer of the letter of credit or
guarantee. These financial institutions may charge certain fees in connection
with their repurchase commitments, including a fee equal to the excess of the
interest paid on the municipal securities over the negotiated yield at which the
participation interests were purchased by a Fund. By purchasing participation
interests, a Fund is buying a security meeting the maturity and quality
requirements of a Fund and is also receiving the tax-free benefits of the
underlying securities.
In the acquisition of participation interests, a Fund's investment adviser will
consider the following quality factors:
o the quality of the underlying municipal security (of which a Fund
takes possession);
o the quality of the issuer of the participation interest; and
o a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
<PAGE>
Variable Rate Municipal Securities
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund invest in variable municipal securities. Variable
interest rates generally reduce changes in the market value of municipal
securities from their original purchase prices. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation or depreciation is
less for variable rate municipal securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the The
Tax-Free Money Market Fund are subject to repayment of principal (usually within
seven days) on the The Tax-Free Money Market Fund's demand. For purposes of
determining the Fund's average maturity, the maturities of these variable rate
demand municipal securities (including participation interests) are the longer
of the periods remaining until the next readjustment of their interest rates or
the periods remaining until their principal amounts can be recovered by
exercising the right to demand payment. The terms of these variable rate demand
instruments require payment of principal and accrued interest from the issuer of
the municipal obligations, the issuer of the participation interests or a
guarantor of either issuer.
Municipal Leases
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund may purchase municipal securities in the form of
participation interests which represent undivided proportional interests in
lease payments by a governmental or nonprofit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations may
be subject to periodic appropriation. If the entity does not appropriate funds
for future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they became due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the adviser, under
the authority delegated by the Board of Trustees, will base its determination on
the following factors: (a) whether the lease can be terminated by the lessee;
(b) the potential recovery, if any, from a sale of the leased property upon
termination of the lease; (c) the lessee's general credit strength (e.g., its
debts, administrative, economic and financial characteristics, and prospects);
(d) the likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of nonappropriation"); and (e) any
credit enhancement of legal recourse provided upon an event of nonappropriation
or other termination of the lease.
Temporary Investments
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund and The
Tax-Free Money Market Fund may also invest in temporary investments during times
of unusual market conditions for defensive purposes and to maintain liquidity.
From time to time, such as when suitable securities are not available to the
respective Fund, a Fund may invest a portion of its assets in cash. Any portion
of a Fund's assets maintained in cash will reduce the amount of assets in
securities held in the respective Fund, and could thereby reduce a Fund's yield.
Adjustable Rate Mortgage Securities
The U.S. Government Securities Fund invests in adjustable rate mortgage
securities ("ARMS"). Not unlike other U.S. government securities, the market
value of ARMS will generally vary inversely with changes in market interest
rates. Thus, the market value of ARMS generally declines when interest rates
rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g. investments with comparable maturities) because
as interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures
and unscheduled principal payment may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
<PAGE>
Portfolio Turnover
The Funds will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
a Fund's investment objective. The Style Manager: Large Cap Fund and The Style
Manager Fund may experience greater portfolio turnover than would be expected
with a portfolio of higher-rated securities. A high portfolio turnover will
result in increased transaction costs to the Fund. For the fiscal years ended
September 30, 1997 and 1996, the portfolio turnover rates were 80% and 118%,
respectively, for The U.S. Government Securities Fund; 56% and 151%,
respectively, for The Style Manager: Large Cap Fund; 19% and 129%, respectively,
for The Virginia Municipal Bond Fund; 13% and 138%, respectively, for The
Maryland Municipal Bond Fund; and 94% and 112%, respectively, for The Style
Manager Fund.
Investment Limitations
- --------------------------------------------------------------------------------
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities except that a Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its net assets, including the
amount borrowed. The Funds will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling a Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. A Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. With respect to The U.S. Government Securities Fund, The
Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury
Money Market Fund, and The Money Market Fund, during the period any
reverse repurchase agreements are outstanding, the Funds will restrict
the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements, but only to the extent necessary to assure completion of
the reverse repurchase agreements.
Selling Short and Buying on Margin
The Funds will not purchase any securities on margin but they may
obtain such short-term credits as may be necessary for clearance of
transactions. With respect to The U.S. Government Securities Fund, The
Style Manager: Large Cap Fund, and The Style Manager Fund, the deposit
or payment by the 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. The Virginia Municipal
Bond Fund, The Maryland Municipal Bond Fund, The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund may not
sell any securities short.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In these cases the Funds, except The
Tax-Free Money Market Fund, may pledge assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15% of the value
of total assets of a Fund at the time of the pledge. Margin deposits
for the purchase and sale of financial futures contracts and related
options are not deemed to be a pledge.
Lending Cash or Securities
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund, The Treasury Money Market Fund and The Money
Market Fund, will not lend any of their assets, except portfolio
securities up to one-third of the value of their total assets. This
shall not prevent a Fund from purchasing or holding bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering
into repurchase agreements, or engaging in other transactions where
permitted by a Fund's investment objective, policies, and limitations
or the Trust's Declaration of Trust.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
will not lend any of their assets, except that they may acquire
publicly or nonpublicly issued municipal securities or temporary
investments or enter into repurchase agreements as permitted by a
Fund's investment objective, policies, limitations and Declaration of
Trust.
The Tax-Free Money Market Fund will not lend any of its assets except
that it may purchase or hold portfolio securities permitted by its
investment objective, policies and limitations, or Declaration of
Trust.
<PAGE>
Investing in Restricted Securities
Except for The Tax-Free Money Market Fund, the Funds will not invest
more than 10% of their net assets in securities subject to restrictions
on resale under the Securities Act of 1933 (except certain restricted
securities which meet the criteria for liquidity as established by the
Board of Trustees. With respect to The U.S. Government Securities Fund,
The Style Manager: Large Cap Fund, The Style Manager Fund and The Money
Market Fund, this exception specifically extends to commercial paper
issued under Section 4(2) of the Securities Act of 1933 and certain
other restricted securities which meet the criteria for liquidity as
established by the Board of Trustees).
The Tax-Free Money Market Fund will not invest more than 10% of its
total assets in securities subject to restrictions on resale under
federal securities law, except for restricted securities determined to
be liquid under criteria established by the Trustees.
Investing in Commodities
The Funds will not purchase or sell commodities, commodity contracts or
commodity futures contracts except for financial futures contracts in
the case of The Style Manager: Large Cap Fund and The Style Manager
Fund.
Investing in Real Estate
The Funds will not purchase or sell real estate, including limited
partnership interests with respect to The Style Manager Fund, although
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund
and The Style Manager Fund may invest in securities secured by real
estate or interests in real estate or issued by companies, including
real estate investment trusts, which invest in real estate or interests
therein. The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, The Money Market Fund, and The Tax-Free Money Market Fund may
invest in securities of issuers whose business involves the purchase or
sale of real estate or in securities which are secured by real estate
or interests in real estate.
Diversification of Investments
With respect to 75% of the value of its total assets, The U.S.
Government Securities Fund, The Style Manager: Large Cap Fund, The
Style Manager Fund and The Money Market Fund will not purchase
securities issued by any one issuer (other than cash, cash items or
securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements
collateralized by such securities), if as a result more than 5% of the
value of its total assets would be invested in the securities of that
issuer. The U.S. Government Fund and The Style Manager: Large Cap Fund
will not acquire more than 10% of the outstanding voting securities of
any one issuer.
Concentration of Investments
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund and The Money Market Fund will not invest 25% or
more of the value of their total assets in any one industry. With
respect to The Money Market Fund, investing in bank instruments (such
as time and demand deposits and certificates of deposit), U.S.
government obligations, or instruments secured by these money market
instruments, such as repurchase agreements for U.S. government
obligations, shall not be considered investments in any one industry.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
will not purchase securities if, as a result of such purchase, 25% or
more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest on which is paid from revenues of similar types of projects.
However, these Funds may invest as temporary investments more than 25%
of the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities,
or instruments secured by these money market instruments, such as
repurchase agreements.
The Tax-Free Money Market Fund will not invest 25% or more of the value
of its total assets in any one industry, except that it may invest more
than 25% of its total assets in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities and industrial
development bonds as long as they are not from the same facility or
similar types of facilities. The Tax-Free Money Market Fund does not
intend to purchase securities that would increase the percentage of its
assets invested in the securities of governmental subdivisions located
in any one state, territory, or U.S. possession to 25% or more.
<PAGE>
Underwriting
The Funds will not underwrite any issue of securities, except as a Fund
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
The above limitations cannot be changed with respect to a Fund without approval
of a majority of that Fund's Shares. The following limitations may be changed by
the Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
Investing in Illiquid Securities
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund, The Virginia Municipal Bond Fund, and The
Maryland Municipal Bond Fund will not invest more than 15% of the value
of their net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days after
notice, and certain restricted securities determined by the Trustees
not to be liquid; and, in the case of The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund, specifically including
participation interests and variable rate municipal securities without
a demand feature or with a demand feature of longer than seven days and
which the adviser believes cannot be sold within seven days. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free
Money Market Fund will not invest more than 10% of the value of their
net assets in illiquid securities, including repurchase agreements
providing for settlement more than seven days after notice and certain
securities determined by the Trustees not to be liquid; and, in the
case of The Money Market Fund, specifically including non-negotiable
fixed income time deposits with maturities over seven days.
Investing in Securities of Other Investment Companies
The Funds will limit their respective investment in other investment
companies to no more than 3% of the total outstanding voting stock of
any investment company, invest no more than 5% of total assets in any
one investment company, or invest more than 10% of total assets in
investment companies in general , unless permitted to do so by order of
the SEC. The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Treasury Money Market Fund and
The Money Market Fund will purchase securities of closed-end investment
companies only in open market transactions involving only customary
broker's commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation, reorganization,
or acquisition of assets. With respect to The Treasury Money Market
Fund and The Money Market Fund, the Funds will limit their investments
and the securities of other investment companies to those of The Money
Market Funds having investment objectives and policies similar to their
own. The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund will invest in other investment companies primarily for the
purposes of investing short-term cash which has not yet been invested
in other portfolio instruments. The adviser will waive its investment
advisory fee on assets invested in securities of open-end investment
companies.
Purchasing Securities to Exercise Control
A Fund will not purchase securities of a company for the purpose of
exercising control or management.
Selling Short
Neither The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, nor The Style Manager Fund will sell securities short unless
(1) it owns, or has a right to acquire, an equal amount of such
securities, or (2) it has segregated an amount of its other assets
equal to the lesser of the market value of the securities sold short or
the amount required to acquire such securities. The segregated amount
will not exceed 10% of The U.S. Government Securities Fund's nor The
Style Manager: Large Cap Fund's net assets.
With respect to The Style Manager Fund, the segregated amount will not
exceed 5% of the Fund's net assets. The dollar amount of short sales at
any one time shall not exceed 5% of the Fund's net assets and the value
of securities of any one issuer in which the Fund is short may not
exceed the lesser of 2% of the value of the Fund's net assets or 2% of
the securities of any class of any issuer.
While in a short position, the Fund will retain the securities, rights
or segregated assets.
<PAGE>
Except with respect to the Funds' policy of 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 U.S. Government Securities Fund, The Style Manager: Large Cap Fund and The
Style Manager Fund have no present intent to borrow money, pledge securities,
sell securities short, or invest in restricted or illiquid securities in excess
of 5% of the value of their respective net assets in the coming fiscal year.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund have no
present intent to issue senior securities or borrow money, pledge securities,
invest in restricted or illiquid securities, sell securities short, or engage in
when-issued and delayed delivery transactions in excess of 5% of the value of
its net assets during the fiscal period.
The Treasury Money Market Fund and The Money Market Fund do not expect to issue
senior securities or borrow money, pledge securities, sell securities short,
engage in when-issued and delayed delivery transactions or reverse repurchase
agreements, for The Money Market Fund only, in excess of 5% of the value of
their net assets during the coming fiscal year.
The Tax-Free Money Market Fund does not intend to borrow money, sell securities
short, or pledge securities in excess of 5% of the value of its net assets
during the coming fiscal year.
Virtus Funds Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with Virtus Funds, and principal occupations.
- --------------------------------------------------------------------------------
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President of the Company.
- --------------------------------------------------------------------------------
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly, President, Naples Property Management,
Inc. and Northgate Village Development Corporation; Director or Trustee of the
Funds.
- --------------------------------------------------------------------------------
<PAGE>
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
<PAGE>
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning; Director or Trustee of the Funds
- --------------------------------------------------------------------------------
<PAGE>
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Trustee of the Company.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board between
meetings of the Board.
<PAGE>
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the outstanding shares of each Fund.
As of October 31, 1997, the following shareholders of record owned 5% or more of
the outstanding shares of the Funds: Stephens Inc., Little Rock, AR, for the
exclusive benefit of their customers owned approximately 4,204,370 (40.26%) of
the Investment Shares of U.S. Government Securities Fund; 1,208,630 (24.63%) of
the Investment Shares of The Style Manager: Large Cap Fund; 1,742,805 (34.81%)
of the Shares of The Style Manager Fund; 1,758,994 (33.10%) of the Investment
Shares of The Virginia Municipal Bond Fund; 629,671 (25.07%) of the Investment
Shares of The Maryland Municipal Bond Fund; 18,064,663 (15.34%) of the
Investment Shares of Treasury Money Market Fund; 21,024,493 (27.80%) of the
Investment Shares of Money Market Fund; and 3,716,118 (6.60%) of the Shares of
The Tax-Free Money Market Fund. As of October 31, 1997, Bova & Co., Richmond,
VA, acting in various capacities for numerous accounts, owned approximately
5,165,113 (100%) of the Trust Shares of The U.S. Government Securities Fund;
1,613,118 (99%) of the Trust Shares of The Style Manager: Large Cap Fund;
1,693,162 (33.82%) of the Shares of The Style Manager Fund; 1,802,105 (99.78%)
of the Trust Shares of The Virginia Municipal Bond Fund; 434,681 (100%) of the
Trust Shares of The Maryland Municipal Bond Fund; 206,814,801 (99.92%) of the
Trust Shares of Treasury Money Market Fund; 177,645,283 (96.43%) of the Trust
Shares of The Money Market Fund; and 42,583,759 (75.60%) of the Shares of The
Tax-Free Money Market Fund.
<PAGE>
Officers and Trustees Compensation
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
NAME , AGGREGATE TOTAL COMPENSATION
POSITION WITH COMPENSATION FROM PAID TO TRUSTEES FROM
TRUST TRUST+ TRUST AND FUND COMPLEX
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $0 $-0- for the Trust and
Chairman and Trustee 2 investment companies
Thomas G. Bigley $2,001 $3,217 for the Trust and
Trustee 2 investment companies
John T. Conroy, Jr., $2,198 $3,538 for the Trust and
Trustee 2 investment companies
William J. Copeland, $2,198 $3,538 for the Trust and
Trustee 2 investment companies
James E. Dowd $2,198 $3,538 for the Trust and
Trustee 2 investment companies
Lawrence D. Ellis, M.D., $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Edward L. Flaherty, Jr., $2,198 $3,538 for the Trust and
Trustee 2 investment companies
Edward C. Gonzales, $0 $-0- for the Trust and
President, Treasurer and Trustee 2 investment companies
Peter E. Madden, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Wesley W. Posvar, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Marjorie P. Smuts, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
</TABLE>
+The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Investment Advisory Services
- --------------------------------------------------------------------------------
Adviser to the Trust
The Trust's investment adviser is Virtus Capital Management, Inc., a
wholly-owned subsidiary of Signet Banking Corporation. Because of the internal
controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.
The adviser shall not be liable to the Trust, a Fund, or any shareholder of any
of the Funds for any losses that may be sustained in the purchase, holding, or
sale of any security or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Trust.
<PAGE>
Advisory Fees
For its advisory services, Virtus Capital Management, Inc. receives an annual
investment advisory fee as described in the prospectus. During the fiscal years
ended September 30, 1997, 1996, and 1995, the adviser earned fees from: The U.S.
Government Securities Fund of $1,325,841, $1,612,364, and $1,581,364,
respectively, of which $37,709, $276,121, and $589,885, respectively, were
voluntarily waived; The Style Manager: Large Cap Fund of $749,609, $704,007, and
$678,512, respectively, of which $0, $0, and $189,983, respectively, were
voluntarily waived; The Virginia Municipal Bond Fund of $650,276, $762,051, and
$775,247, respectively, of which $0, $20,993, and $227,301, respectively, were
voluntarily waived; The Maryland Municipal Bond Fund of $273,851, $315,941, and
$316,194, respectively, of which $0, $106,102, and $187,476, respectively, were
voluntarily waived; The Treasury Money Market Fund of $1,897,464, $1,721,497,
and $2,347,424, respectively, of which $46,840, $209,248, and $469,485,
respectively, were voluntarily waived; The Money Market Fund of $1,250,019,
$1,249,811, and $868,490, respectively, of which $57,472, $299,129, and
$336,697, respectively, were voluntarily waived; and The Tax Free Money Market
Fund of $302,027, $462,900 and $262,792, respectively, of which $94,455,
$184,473, and $262,792, respectively, were voluntarily waived. During the fiscal
years ended September 30, 1997, 1996 and for the period from March 7, 1995 (date
of initial public investment) to September 30, 1996, the adviser earned fees
from The Style Manager Fund of $830,673, $657,611 and $374,393, respectively, of
which $326,846, $290,966 and $374,393, respectively, were voluntarily waived.
Sub-Adviser to The Style Manager: Large Cap Fund and The Style Manager Fund
Trend Capital Management, Inc. is the sub-adviser to The Style Manager: Large
Cap Fund and The Style Manager Fund.
Sub-Advisory Fees
For its sub-advisory services, the Sub-Adviser receives an annual sub-advisory
fee as described in the prospectus. For the fiscal years ended September 30,
1997, 1996, and 1995, the sub-adviser earned fees from The Style Manager; Large
Cap Fund of $144,886, $0, and $0, respectively, of which $0, $0, and $0,
respectively, were voluntarily waived. For the fiscal years ended September 30,
1997, 1996, and for the period from March 7, 1995 (date of initial public
investment) to September 30, 1995, the sub-adviser earned fees from The Style
Manager Fund of $74,119, $0, and $0, respectively, of which $0, $0, and $0,
respectively, were voluntarily waived.
Other Services
- --------------------------------------------------------------------------------
Administrative Services
Federated Administrative Services, which is a subsidiary of Federated Investors,
provides administrative personnel and services to the Funds for the fees set
forth in the prospectus. For the fiscal years ended September 30, 1997, 1996,
and 1995, the Funds incurred administrative services fees as follows: The U.S.
Government Securities Fund incurred $172,113, $211,649, and $226,246,
respectively, none of which was voluntarily waived; The Style Manager: Large Cap
Fund incurred $97,360, $92,298, and $97,229, respectively, none of which was
voluntarily waived; The Virginia Municipal Bond Fund incurred $84,421, $100,059,
and $110,908, respectively, none of which was voluntarily waived; The Maryland
Municipal Bond Fund incurred $75,000, $67,667, and $45,246, respectively, none
of which was voluntarily waived; The Treasury Money Market Fund incurred
$369,581, $336,951, and $500,283, respectively, none of which was voluntarily
waived; The Money Market Fund incurred $243,450, $254,134, and $185,586,
respectively, none of which was voluntarily waived; and The Tax-Free Money
Market Fund incurred $75,171, $95,363, and $58,355, respectively, none of which
was voluntarily waived. For the fiscal years ended September 30, 1997, 1996 and
for the period from March 7, 1995 (date of initial public investment) to
September 30, 1995, The Style Manager Fund incurred $75,125, $93,863 and
$85,069, respectively, in administrative services fees, none of which was
voluntarily waived.
<PAGE>
Custodian
Signet Trust Company, Richmond, Virginia, is custodian for the securities and
cash of the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties.
Transfer Agent
Federated Shareholder Services Company, Boston, Massachusetts, is transfer agent
for the Shares of the Funds and dividend disbursing agent for the Funds.
Independent Auditors
The independent auditors for the Funds are Deloitte & Touche LLP, Pittsburgh,
Pennsylvania.
Brokerage Transactions
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Board of Trustees.
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser in advising the
Funds and other accounts. To the extent that receipt of these services may
supplant services for which the adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
For the fiscal years ended September 30, 1997, 1996 and 1995, The Style Manager:
Large Cap Fund paid $140,842, $403,888 and $562,493, respectively, in
commissions on brokerage transactions. For the fiscal years ended September 30,
1997, 1996 and for the period from March 7, 1995 (date of initial public
investment) to September 30, 1995, The Style Manager Fund paid $215,622,
$311,323, and $0, respectively, in commissions on brokerage transactions.
<PAGE>
Purchasing Shares
- --------------------------------------------------------------------------------
Shares of the Funds are sold at their net asset value without a sales charge on
days the New York Stock Exchange is open for business. The procedure for
purchasing Shares of the Funds is explained in the prospectus under "Investing
in Shares."
Distribution Plan
The Trust has adopted a Plan for Investment Shares of the The U.S. Government
Securities Fund, The Style Manager: Large Cap Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The Treasury Money Market Fund and The
Money Market Fund and Shares of The Style Manager Fund and The Tax-Free Money
Market Fund pursuant to Rule 12b-1 which was promulgated by the Securities and
Exchange Commission pursuant to the Investment Company Act of 1940. The Plan
provides that the Funds' distributor, Federated Securities Corp., shall act as
the distributor of Shares, and it permits the payment of fees to brokers and
dealers for distribution and administrative services and to administrators for
administrative services. The Plan is designed to (i) stimulate brokers and
dealers to provide distribution and administrative support services to the Funds
and their holders of Shares and (ii) stimulate administrators to render
administrative support services to the Funds and their holders of Shares. These
services are to be provided by a representative who has knowledge of the holder
of Shares' particular circumstances and goals, and include, but are not limited
to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
Other benefits which the Funds hope to achieve through the Plan include, but are
not limited to the following: (1) an efficient and effective administrative
system; (2) a more efficient use of assets of holders of Shares by having them
rapidly invested in the Funds with a minimum of delay and administrative detail;
and (3) an efficient and reliable records system for holders of Shares and
prompt responses to shareholder requests and inquiries concerning their
accounts.
By adopting the Plan, the Board of Trustees expects that the Funds will be able
to achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and assist
the Funds in seeking to achieve their respective investment objectives. By
identifying potential investors in Shares whose needs are served by a particular
Fund's objective, and properly servicing these accounts, the Funds may be able
to curb sharp fluctuations in rates of redemptions and sales.
For the fiscal years ended September 30, 1997, 1996, and 1995, the Funds paid
fees to brokers and administrators (financial institutions) pursuant to the Plan
as follows: The U.S. Government Securities Fund $279,386, $297,511, and
$268,621, respectively; The Style Manager: Large Cap Fund $175,775, $128,090,
and $80,046, respectively; The Virginia Municipal Bond Fund, $158,225, $174,114,
and $174,523, respectively; The Maryland Municipal Bond Fund, $73,620, $82,278,
and $80,136, respectively; The Treasury Money Market Fund, $331,053, $270,001,
and $80,097, respectively; and The Money Market Fund, $206,038, $198,913, and
$79,316, respectively. For the fiscal years ended September 30, 1997, 1996 and
1995, the Tax-Free Money Market Fund paid no fees pursuant to the Plan. For the
fiscal years ended September 30, 1997, 1996 and for the period from March 7,
1995 (date of initial public investment) to September 30, 1995, The Style
Manager Fund paid no fees pursuant to the Plan.
Conversion to Federal Funds
It is the policy of The Treasury Money Market Fund, The Money Market Fund, and
The Tax-Free Money Market Fund to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders must
be in federal funds or be converted into federal funds. Federated Services
Company acts as the shareholder's agent in depositing checks and converting them
to federal funds.
<PAGE>
Determining Net Asset Value
- --------------------------------------------------------------------------------
Net asset values of The U.S. Government Securities Fund, The Style Manager:
Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund generally change each day. The Treasury Money
Market Fund, The Money Market Fund, and The Tax-Free Money Market Fund attempt
to stabilize the value of their Shares at $1.00. The days on which the net asset
value is calculated by these Funds are described in the prospectus.
Determining Market Value of Securities
The market value of The U.S. Government Securities Fund's portfolio securities
is determined as follows:
o according to the mean between the over-the-counter bid and asked
prices provided by an independent pricing service, if available, or
at fair value as determined in good faith by the Fund's Board of
Trustees; or
o for short-term obligations with remaining maturities of 60 days or
less at the time of purchase at amortized cost unless the Board of
Trustees determines that particular circumstances of the security
indicate otherwise.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The market value of portfolio securities of The Style Manager: Large Cap Fund
and The Style Manager Fund is determined as follows:
o for equity securities, according to the last sale price on a
national securities exchange, if available;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or for
short-term obligations with remaining maturities of 60 days or less
at the time of purchase at amortized cost; or
o for all other securities, at fair value as determined in good faith
by the Board of Trustees.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, and The
Style Manager Fund will value futures contracts, options, and put options on
futures and at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in good
faith that another method of valuing option positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and the asked prices.
Use of the Amortized Cost Method
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, the Trustees have decided that the best method for
determining the value of portfolio instruments is amortized cost. Under this
method, portfolio instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value.
A Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per Share, taking into account
current market conditions and a Fund's investment objective.
<PAGE>
Under the Rule, a Fund is permitted to purchase instruments which are subject to
demand features or standby commitments. As defined by the Rule, a demand feature
entitles a Fund to receive the principal amount of the instrument from the
issuer or a third party on (1) no more than 30 days' notice or (2) at specified
intervals not exceeding one year on no more than 30 days' notice. A standby
commitment entitles a Fund to achieve same day settlement and to receive an
exercise price equal to the amortized cost of the underlying instrument plus
accrued interest at the time of exercise.
The Funds acquire instruments subject to demand features and standby commitments
to enhance the instrument's liquidity. The Funds treat demand features and
standby commitments as a part of the underlying instruments, because the Funds
do not acquire them for speculative purposes and cannot transfer them separately
from the underlying instruments. Therefore, although the Rule defines demand
features and standby commitments as "puts", the Fund does not consider them to
be separate investments for purposes of its investment policies.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship between
the amortized cost value per share and the net asset value per share
based upon available indications of market value. The Trustees will
decide what, if any, steps should be taken if there is a difference of
more than .50% between the two. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
Investment Restrictions
The Rule requires that a Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally
recognized statistical rating organizations. If the instruments are not
rated, the Trustees must determine that they are of comparable quality.
The Rule also requires a Fund to maintain a dollar-weighted average
portfolio maturity (not more than 90 days) appropriate to the objective
of maintaining a stable net asset value of $1.00 per Share. In
addition, no instrument with a remaining maturity of more than 397 days
can be purchased by a Fund.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, a Fund
will invest its available cash to reduce the average maturity to 90
days or less as soon as possible.
A Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. Under the amortized cost method of
valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on Shares,
computed by dividing the annualized daily income on a Fund's portfolio by the
net asset value computed as above, may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates.
In periods of rising interest rates, the indicated daily yield on Shares
computed the same way may tend to be lower than a similar computation made by
using a method of calculation based upon market prices and estimates.
Valuing Municipal Securities
With respect to The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, and The Tax-Free Money Market Fund, the Board of Trustees uses an
independent pricing service to value municipal securities. The independent
pricing service takes into consideration: yield; stability; risk; quality;
coupon rate; maturity; type of issue; trading characteristics; special
circumstances of a security or trading market; and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities and does not rely exclusively on quoted
prices.
<PAGE>
Use of Amortized Cost
With respect to The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund, the Board of Trustees has decided that the fair value of debt securities
purchased by a Fund with remaining maturities of 60 days or less at the time of
purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Trustees.
Redeeming Shares
- --------------------------------------------------------------------------------
Each Fund redeems Shares at the next computed net asset value after a Fund
receives the redemption request, less a contingent deferred sales charge, if
applicable. Redemption procedures are explained in the prospectus under
"Redeeming Investment Shares."
Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from a Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the Board
of Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which a Fund is obligated to redeem Shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of any class' net asset value
during any 90-day period. Although a Fund reserves the right to redeem Shares in
kind, it will activate this right only after providing 60 days' notice to
shareholders.
Massachusetts Partnership Law
- --------------------------------------------------------------------------------
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for obligations of
the Trust, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Funds' Tax Status
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
<PAGE>
Shareholders' Tax Status
With respect to The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Treasury Money Market Fund and The Money
Market Fund, shareholders are subject to federal income tax on dividends
received as cash or additional shares. No portion of any income dividend paid by
a Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
With respect to The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, and The Tax-Free Money Market Fund, no portion of any income dividend paid
by a Fund is eligible for the dividends received deduction available to
corporations.
Capital Gains
Capital gains experienced by The Treasury Money Market Fund and The
Money Market Fund could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If, for some
extraordinary reason, these Funds realize net long-term capital gains,
such net long-term capital gains will be distributed at least once
every 12 months.
With respect to The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund and The Style Manager Fund, long-term capital gains distributed to
shareholders will be treated as long-term capital gains regardless of how long
shareholders have held Shares.
With respect to The Maryland Municipal Bond Fund, The Virginia Municipal Bond
Fund, and The Tax-Free Money Market Fund, capital gains or losses may be
realized by a Fund on the sale of portfolio securities and as a result of
discounts from par value on securities held to maturity. Sales would generally
be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
Total Return
- --------------------------------------------------------------------------------
The average annual total returns for Investment Shares and Trust Shares of The
U.S. Government Securities Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 4.75%, 4.70%, 7.10% and 7.16%,
4.93%, 7.27%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Style Manager: Large Cap Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 37.02%, 13.84%, 14.03% and 37.37%,
14.09%, 14.21%, respectively.
The average annual total returns for The Style Manager Fund for the one-year
period ended September 30, 1997 and for the period from March 7, 1995 (date of
initial public investment) to September 30, 1997 were 41.85% and 28.04%,
respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Virginia Municipal Bond Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 7.74%, 5.73%, 6.45% and 8.00%,
5.96%, 6.62%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Maryland Municipal Bond Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 6.92%, 5.33%, 6.01% and 7.19%,
5.56%, 6.18%, respectively.
<PAGE>
The average annual total returns for Investment Shares and Trust Shares of The
Treasury Money Market Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 4.58%, 3.93%, 4.18% and 4.84%,
4.15%, 4.34%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Money Market Fund for the one-year and five-year periods ended September 30,
1997 and for the period from October 16, 1990 (date of initial public
investment) to September 30, 1997 were 4.67%, 4.11%, 4.36% and 4.93%, 4.31%,
4.50%, respectively.
The average annual total returns for The Tax-Free Money Market Fund for the
one-year period ended September 30, 1997 and for the period from July 27, 1994
(date of initial public investment) to September 30, 1997 were 2.83% and 3.09%,
respectively.
The average annual total return for Shares of each Fund is the average
compounded rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the net asset value per share at the end of the period. The
number if shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, adjusted over the period
by any additional shares, assuming the monthly/quarterly reinvestment of all
dividends and distributions.
Yield
- --------------------------------------------------------------------------------
The yield for the seven-day period ended September 30, 1997 for The Treasury
Money Market Fund and The Money Market Fund were 4.54% and 4.59%, respectively,
for Investment Shares and 4.79% and 4.84%, respectively, for Trust Shares. The
yield for the seven-day period ended September 30, 1997 for The Tax-Free Money
Market Fund was 3.06%.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund's yield for
the thirty-day period ended September 30, 1997 was 5.27%, 0.36%, 3.72% and 3.10%
for Investment Shares and 5.52%, 0.61%, 3.97% and 3.35% for Trust Shares. The
yield for the thirty-day period ended September 30, 1997 for The Style Manager
Fund was 0.23%.
The Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money
Market Fund calculate yield daily, based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned from
the original one share and all dividends declared on the original
and any purchased Shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by 365/7.
The yield for Shares of The U.S. Government Securities Fund, The Style Manager:
Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by the
class of shares over a thirty-day period by the maximum offering price per share
of the class of shares on the last day of the period. The yield of the
Investment Shares of the Fund is determined each day by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by the class of shares over a thirty-day period by the
maximum offering price per share of the class of shares on the last day of the
period. This value is then annualized using semiannual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a 12-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by the
Fund because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
<PAGE>
With respect to The U.S. Government Securities Fund and The Style Manager: Large
Cap Fund, the yield will be calculated separately for Investment Shares and
Trust Shares. Because Investment Shares are subject to a 12b-1 fee, the net
yield for Trust Shares for the same period will exceed that of Investment
Shares.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.
Effective Yield
- --------------------------------------------------------------------------------
The effective yields for the seven-day period ended September 30, 1997 for The
Treasury Money Market Fund and The Money Market Fund were 4.64% and 4.70%,
respectively, for Investment Shares and 4.90% and 4.96%, respectively, for Trust
Shares. The effective yield for the period ended September 30, 1997 for The
Tax-Free Money Market Fund was 3.11%.
The effective yield of The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund is computed by compounding the unannualized
base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
Tax-Equivalent Yield
- --------------------------------------------------------------------------------
The tax-equivalent yield for both classes of shares for The Virginia Municipal
Bond Fund and The Maryland Municipal Bond Fund, and for The Tax-Free Money
Market Fund is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that either class would have had to earn to equal its actual
yield, assuming a 28% tax rate and also assuming that income earned by the Fund
is 100% tax-exempt.
The tax-equivalent yield for the Investment Shares for the thirty-day period
ended September 30, 1997, was 5.17% for The Virginia Municipal Bond Fund and
4.31% for The Maryland Municipal Bond Fund. The tax-equivalent yield for the
Trust Shares was 5.51% for The Virginia Municipal Bond Fund and 4.65% for The
Maryland Municipal Bond Fund for the same period. The tax-equivalent yield for
The Tax-Free Money Market Fund for the seven-day period ended September 30,
1997, was 4.25%.
<PAGE>
Tax-Equivalency Tables
Both classes of shares may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal
bonds in the Fund's portfolio generally remains free from federal
regular income tax, and is often free from state and local taxes as
well. As the tables below indicate, a "tax-free" investment is an
attractive choice for investors, particularly in times of narrow
spreads between tax-free and taxable yields.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
MULTISTATE MUNICIPAL FUNDS
- ---------------------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------------------
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an
indicator of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
<PAGE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF VIRGINIA
- ---------------------------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
20.75% 33.75% 36.75% 41.75% 45.35%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------------------
1.50% 1.89% 2.26% 2.37% 2.58% 2.74%
2.00% 2.52% 3.02% 3.16% 3.43% 3.66%
2.50% 3.15% 3.77% 3.95% 4.29% 4.57%
3.00% 3.79% 4.53% 4.74% 5.15% 5.49%
3.50% 4.42% 5.28% 5.53% 6.01% 6.40%
4.00% 5.05% 6.04% 6.32% 6.87% 7.32%
4.50% 5.68% 6.79% 7.11% 7.73% 8.23%
5.00% 6.31% 7.55% 7.91% 8.58% 9.15%
5.50% 6.94% 8.30% 8.70% 9.44% 10.06%
6.00% 7.57% 9.06% 9.49% 10.30% 10.98%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
<PAGE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF MARYLAND
INCLUDING LOCAL INCOME TAX
- ---------------------------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL, STATE, AND COUNTY INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
22.50% 35.50% 38.50% 43.50% 47.10%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN: 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN: 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
- ---------------------------------------------------------------------------------------------------------------------------------
2.00% 2.58% 3.10% 3.25% 3.54% 3.78%
2.50% 3.23% 3.88% 4.07% 4.42% 4.73%
3.00% 3.87% 4.65% 4.88% 5.31% 5.67%
3.50% 4.52% 5.43% 5.69% 6.19% 6.62%
4.00% 5.16% 6.20% 6.50% 7.08% 7.56%
4.50% 5.81% 6.98% 7.32% 7.96% 8.51%
5.00% 6.45% 7.75% 8.13% 8.85% 9.45%
5.50% 7.10% 8.53% 8.94% 9.73% 10.40%
6.00% 7.74% 9.30% 9.76% 10.62% 11.34%
6.50% 8.39% 10.08% 10.57% 11.50% 12.29%
NOTE: THE MAXIMUM MARGINAL TAX RATE FOR EACH BRACKET WAS USED IN
CALCULATING THE TAXABLE YIELD EQUIVALENT. FURTHERMORE, ADDITIONAL STATE
AND LOCAL TAXES PAID ON COMPARABLE TAXABLE INVESTMENTS WERE NOT USED TO
INCREASE FEDERAL DEDUCTIONS. THE LOCAL INCOME TAX RATE IS ASSUMED TO BE
50% OF THE STATE RATE FOR ALL COUNTIES EXCLUDING ALLEGANY, BALITMORE,
MONTGOMERY, PRINCE GEORGE'S, QUEEN ANNE'S, ST. MARY'S, SOMERSET,
TALBOT, WICOMICO, AND WORCESTER.
Performance Comparisons
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each Fund's performance of both classes of shares depends upon such variables
as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments, in the case
of The Treasury Money Market Fund and The Money Market Fund, or
changes in interest rates and market value of portfolio securities
in the case of U.S. Government Income Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund
and Maryland Municipal Bond Fund;
o changes in each Fund's or each class of Shares' expenses;
o the relative amount of The Treasury Money Market Fund's and The
Money Market Fund's cash flow; and
o various other factors.
<PAGE>
In the case of The U.S. Government Securities Fund, The Style Manager: Large Cap
Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund, either class of shares' performance fluctuates on a daily
basis largely because net earnings and offering price per Share fluctuate daily.
Both net earnings and offering price per Share are factors in the computation of
yield and total return. The Style Manager Fund and The Style Manger: Large Cap
Fund may also from time to time provide information on, or use quotations from,
studies of investment analysts dealing with the management of equity portfolios
on the basis of "style" selection (i.e., value vs. growth) and stock "size"
(i.e., large cap vs. small cap) and may also use historical data demonstrating
the performance records of the value, growth, large cap and small cap components
of the equity market, and combinations thereof.
From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications such as The Wall Street Journal, Money Magazine, Forbes, Barron's,
USA Today and Mutual Fund Investors. We may also compare the historical returns
on various investments, performance indexes of those investments or economic
indicators. In addition, the Funds may reprint articles about the Funds and
provide them to prospective shareholders. The Broker/Dealer may also make
available economic, financial and investment reports to shareholders and
prospective shareholders. In order to describe these reports, the Funds may
include descriptive information on the reports in advertising literature sent to
the public prior to the mailing of a prospectus. Performance information may be
quoted numerically or may be represented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and comparison
may be made with funds which may have different investment restrictions,
objectives, policies or techniques than the Funds, and that such other funds or
market indicators may be comprised of securities that differ significantly from
the Funds' investments.
The financial publications and/or indices which the Funds use in advertising may
include, but are not limited to:
The U.S. Government Securities Fund
o MERRILL LYNCH COMPOSITE 1-5 YEAR TREASURY INDEX is comprised of
approximately 66 issues of U.S. Treasury securities maturing between
1 and 4.99 years, with coupon rates of 4.25% or more. These total
return figures are calculated for one, three, six, and twelve month
periods and year-to-date and include the value of the bond plus
income and any price appreciation or depreciation.
o SALOMON BROTHERS 3-5 YEARS GOVERNMENT INDEX quotes total returns for
U.S. Treasury issues (excluding flower bonds) which have maturities
of three to five years. These total returns are year-to-date figures
which are calculated each month following January 1.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes income into account any
change in net asset value over a specific period of time. From time
to time, the Trust will quote its Lipper ranking in the U.S.
Government funds category in advertising and sales literature.
o MERRILL LYNCH 3-5 YEAR TREASURY INDEX is comprised of approximately
24 issues of intermediate-term U.S. government and U.S. Treasury
securities with maturities between 3 and 4.99 years and coupon rates
above 4.25%. Index returns are calculated as total returns for
periods of one, three, six and twelve months as well as
year-to-date.
o MERRILL LYNCH 3-YEAR TREASURY YIELD CURVE INDEX is an unmanaged
index comprised of the most recently issued 3-year U.S. Treasury
notes. Index returns are calculated as total returns for periods of
one, three, six, and twelve months as well as year-to-date.
o LEHMAN BROTHERS GOVERNMENT INTERMEDIATE INDEX is an unmanaged index
comprised of all publicly issued, non-convertible domestic debt of
the U.S. government, or any agency thereof, or any quasi-federal
corporation and of corporate debt guaranteed by the U.S. government.
Only notes and bonds with a minimum outstanding principal of $1
million and maturities of 1-10 years.
o 3 YEAR TREASURY NOTES Source: Wall Street Journal, Bloomberg
Financial Markets, and Telerate.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
<PAGE>
The Style Manager: Large Cap Fund and The Style Manager Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the "growth and
income funds" category in advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of
selected blue-chip industrial corporations as well as public utility
and transportation companies. The DJIA indicates daily changes in
the average price of stocks in any of its categories. It also
reports total sales for each group of industries. Because it
represents the top corporations of America, the DJIA index is a
leading economic indicator for the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, compares total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's index assumes reinvestment of all
dividends paid by stocks listed on the index. Taxes due on any of
these distributions are not included, nor are brokerage or other
fees calculated in the Standard & Poor's figures.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the "general
municipal bond funds" category in advertising and sales literature.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two
weeks.
The Treasury Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "short-term U.S. government
funds" category in advertising and sales literature.
o SALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
The Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "money market instruments fund"
category in advertising and sales literature.
o BANK RATE MONITOR NATIONAL INDEX, Miami, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading
bank and thrift institution money market deposit accounts. The rates
published in the index are an average of the personal account rates
offered on the Wednesday prior to the date of publication by ten of
the largest banks and thrifts in each of the five largest Standard
<PAGE>
Metropolitan Statistical Areas. Account minimums range upward from
$2,500 in each institution and compounding methods vary. If more
than one rate is offered, the lowest rate is used. Rates are subject
to change at any time specified by the institution. Investors may
use such indices or reporting services in addition to either class
of shares' prospectus to obtain a more complete view of the Share's
performance before investing. Of course, when comparing performance
of either class of shares to any index, factors such as portfolio
composition and prevailing market conditions should be considered in
assessing the significance of such comparisons.
The Tax-Free Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "Tax-Free Money Market Funds"
category in advertising and sales literature.
o IBC/DONOGHUE'S MONEY FUND REPORT publishes annualized yields of
hundreds of money market funds on a weekly basis, and through its
Money Market Insight publication, reports monthly and
12-month-to-date investment results for the same money funds.
o MONEY, A MONTHLY MAGAZINE, regularly ranks money market funds in
various categories based on the latest available seven-day compound
effective yield. From time to time, the Fund will quote its Money
ranking in advertising and sales literature.
o SALOMON BROTHERS SIX-MONTH PRIME MUNI NOTES is an index of selected
municipal notes, maturing in six months, whose yields are chosen as
representative of this market. Calculations are made weekly and
monthly.
o SALOMON BROTHERS ONE-MONTH TAX-EXEMPT COMMERCIAL PAPER is an index
of selected tax-exempt commercial paper issues, maturing in one
month, whose yields are chosen as representative of this particular
market. It is a weekly quote of the most representative yields for
selected securities, issued by the U.S. Treasury, maturing in 30
days. Calculations are made weekly and monthly. Ehrlich-Bober & Co.,
Inc. also tracks this Salomon Brothers Index.
Advertisements and other sales literature for both classes of shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
either class of shares based on monthly reinvestment of dividends over a
specified period of time.
Economic and Market Information
Advertising and sales literature for the Trust may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by the Trust's portfolio managers and their views and analysis on
how such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion t the more than 6,000 funds available.
Financial Statements
- --------------------------------------------------------------------------------
The financial statements for the fiscal period ended September 30, 1997, are
incorporated herein by reference from the Funds' Annual Report dated September
30, 1997. A copy of the Annual Report for a Fund may be obtained without charge
by contacting Signet Trust Company at the address located on the back cover of
the combined prospectus or by calling 804-771-7470.
<PAGE>
Appendix
- --------------------------------------------------------------------------------
Standard and Poor's Ratings Group Municipal Bond Rating Definitions
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effect of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB, B, CCC, CC Debt rated BB, B, CCC and CC 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 CC the highest degree of
speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties of major risk exposures to adverse
conditions.
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Moody's Investors Service, Inc. Municipal Bond Rating Definitions
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 fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small. Caa-Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principal or interest.
<PAGE>
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
NR NR indicates that Fitch does not the specific issue.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in AAA category.
Standard & Poor's Corporation, Municipal Note Ratings
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.
SP-2 Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Short-Term Loan Ratings
MIG1/VMIG1 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.
MIG2/VMIG2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
Evergreen Keystone
Growth and
Income Funds
1997 Annual Report
(Evergreen Keystone Logo appears here)
<PAGE>
EVERGREEN KEYSTONE
[Pine cone logo appears here]
TABLE OF CONTENTS
Letter to Shareholders............................... 1
Evergreen Growth and Income Fund
Fund at a Glance................................... 2
Management Report.................................. 4
Evergreen Income and Growth Fund
Fund at a Glance................................... 6
Management Report.................................. 8
Evergreen Small Cap Equity Income Fund
Fund at a Glance................................... 10
Management Report.................................. 12
Evergreen Utility Fund
Fund at a Glance................................... 14
Management Report.................................. 16
Evergreen Value Fund
Fund at a Glance................................... 18
Management Report.................................. 20
Keystone Fund for Total Return
Fund at a Glance................................... 22
Management Report.................................. 24
Financial Highlights
Evergreen Growth and Income Fund................... 26
Evergreen Income and Growth Fund................... 29
Evergreen Small Cap Equity
Income Fund..................................... 32
Evergreen Utility Fund............................. 34
Evergreen Value Fund............................... 36
Keystone Fund for Total Return..................... 39
Schedule of Investments
Evergreen Growth and Income Fund................... 42
Evergreen Income and Growth Fund................... 46
Evergreen Small Cap Equity
Income Fund..................................... 51
Evergreen Utility Fund............................. 54
Evergreen Value Fund............................... 56
Keystone Fund for Total Return..................... 58
Statements of Assets and Liabilities................. 61
Statements of Operations............................. 62
Statements of Changes in Net Assets.................. 64
Combined Notes to Financial Statements............... 67
Independent Auditors' Report-- KPMG Peat Marwick
LLP................................................ 79
Report of Independent Accountants
Price Waterhouse LLP............................... 80
Federal Income Tax Status of Distributions........... 81
ABOUT EVERGREEN KEYSTONE
Since 1971, the Evergreen Funds have been providing investors with a proven,
value-driven approach to equity investment management. For over 60 years of
changing economic conditions, Keystone has taken pride in helping investors meet
their financial goals through a broad range of financial products and services.
Combined, Evergreen Keystone offers over 70 funds designed to meet a broad range
of objectives, including fixed-income, balanced, growth and income, and
aggressive growth. Assets under management total more than $30 billion.
<PAGE>
EVERGREEN KEYSTONE
[Pine cone appears here]
LETTER TO SHAREHOLDERS
September 1997
[Photo of William M. Ennis appears here]
WILLIAM M. ENNIS
Dear Shareholders:
Investors in equity-oriented mutual funds had a lot to be happy about in the
returns from the 12 months that ended on July 31.
As the Evergreen Keystone Fund reports on the following pages indicate, many of
the funds that emphasize investments in common stocks had an extraordinary year.
Some funds delivered total returns of more than 40%, and even extremely
conservative, income-oriented strategies produced returns exceeding 20%.
It is easy to see how the diversity of returns from these funds could invite
questions about why some funds appeared to do "better" than others. The answer
is not simple. While we have grouped six funds together under the general
category of "Growth and Income," each of these funds is managed very
differently, with different attitudes about growth, income, and protection of
investors' principal.
The 12 months from July 31, 1996 to July 31, 1997 were an especially rewarding
time for the biggest of the large capitalization stocks. Funds that emphasized
these stocks tended to excel in this environment. Funds that emphasized either
smaller capitalization stocks or income-oriented stocks tended to do less well.
More generally, funds that emphasized growth tended to have higher returns than
funds that emphasized income or protection of principal.
We should keep these returns in perspective. Over a full market cycle, different
strategies tend to do better at different times. No one strategy is perfect for
all conditions. This is why we offer a number of different strategies with
similar growth and income objectives. It also is why many financial advisers
recommend a combination of funds with different strategies so investors will
have a more diversified portfolio.
In evaluating fund performance, investors should consider the specific objective
of each fund, how much risk it is willing to take, and how well a fund's own
objective lines up with their personal objective. They also should consider that
a fund that trails in one type of market might be a leader in the next market.
This is why we at Evergreen Keystone believe it is important that mutual fund
investors periodically review their portfolios with their professional
investment advisers.
In the following pages, Evergreen Keystone investment professionals will give
you more detailed information about the investment environment and the
strategies they use. You will notice that this annual report is a departure from
past reports. It represents the effort of Evergreen Keystone Funds to provide
thoughtful reports and to present them in a format that is attractive and makes
information easily accessible. To accomplish this change, we have adjusted some
fiscal years of funds, and we have grouped together funds with similar
investment objectives. We are very interested in hearing your thoughts on this
new format, and we welcome your suggestions.
On another note, I am delighted to inform you that Evergreen Keystone has
successfully integrated all service functions under one roof. This means you now
have full exchange privileges between Evergreen and Keystone America Funds. You
also have the benefits of the top-flight service that earned Evergreen Keystone
the 1996 Dalbar Quality Tested Service Seal, the highest award for mutual fund
service presented by Dalbar, an independent mutual fund survey and rating firm.
Thank you for investing with Evergreen Keystone Funds!
Sincerely,
/s/ William M. Ennis
WILLIAM M. ENNIS
MANAGING DIRECTOR
1
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[G&I logo appears here]
FUND-AT-A-GLANCE
As of July 31, 1997
ONE-YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
One year w/o sales
charge 40.38 % 39.32 % 39.25 % 40.66 %
One year with sales
charge 33.71 % 34.32 % 38.25 % 40.66 %
One year dividends per
share $0.134 -- -- $0.191
One year cap gains per
share $0.345 $0.345 $0.345 $0.345
AVERAGE
ANNUAL RETURNS CLASS A CLASS B CLASS C CLASS Y
Three years N/A N/A N/A 26.41 %
Five years N/A N/A N/A 20.43 %
Ten years N/A N/A N/A 15.06 %
Since Inception* 28.25 % 29.00 % 29.80 % 15.59 %
CUMULATIVE RETURNS CLASS A CLASS B CLASS C CLASS Y
Seven months w/o sales
charge 21.33 % 20.82 % 20.82 % 21.52 %
Three years N/A N/A N/A 101.98 %
Five years N/A N/A N/A 153.30 %
Ten years N/A N/A N/A 306.73 %
Since Inception* 89.91 % 92.79 % 95.89 % 378.40 %
[Graph appears here]
* CLASSES A, B & C BEGAN 1/3/95; CLASS Y BEGAN 10/15/86.
PLOT POINTS
CLASS A: CPI: S&P 500: LG&IFA:
- ------- ----- ------ -------
9,525 10,000 10,000 10,000
9,663 10,040 10,259 10,157
11,754 10,187 12,417 12,061
12,969 10,314 14,202 13,504
13,489 10,488 14,472 13,643
16,155 10,629 17,964 16,532
18,939 10,719 22,013 19,665
PORTFOLIO MANAGEMENT
<TABLE>
<S> <C>
An investment team headed by Portfolio Managers
Stephen A. Lieber and Gary Buesser manages the
[2 photos appear Fund. Mr. Lieber is Chairman and Co-Chief
here - Stephen A. Lieber Executive Officer of Evergreen Asset Management
and Gary Buesser] Corp. The founder of Evergreen, Mr. Lieber has
more than 40 years' experience in investment
management. He has been a guest lecturer at the
Investment Banking Association Annual Wharton
School Seminars, the New School for Social
School of Commerce. He is a member of the New
York Society of Security Analysts and the
Association for Investment Management and
Research. He also serves as Portfolio Manager of
several other funds, including the Evergreen Fund
and the Evergreen Foundation Fund. Mr. Buesser
joined Evergreen Asset Management in 1996
following a 10-year career at Cowan Asset
Management, where he was co-manager of a $1.5
billion private investment fund. Earlier in his
investment career, he was employed by E.F. Hutton
and Shearson Lehman Bros. He also is associate
portfolio manager of the Evergreen Foundation
Fund.
</TABLE>
2
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[G&I logo appears here]
OBJECTIVE
Evergreen Growth and Income Fund seeks a return composed of capital appreciation
and current income.
STRATEGY
The Fund invests in common stocks, convertible preferred stocks and convertible
bonds of companies it believes the market has temporarily undervalued. It
considers such factors as the company's assets, cash flow and earnings
potential. The Fund selects securities that Fund management believes will rise
in value sooner than most observers anticipate. Among those securities it
frequently purchases are those of previously successful companies undergoing
financial downturns, which the Fund believes will be temporary. The Fund invests
in bonds and preferred stocks that are not convertible if Fund management
believes the potential return is equal to that expected from common stocks and
convertible securities.
[Graph appears here. Plot points are:]
LONG-TERM GROWTH
Initial Dividend
-------- --------
9,525 9,525
9,663 9,663
10,699 10,722
11,709 11,754
11,828 11,886
12,543 12,969
13,336 13,800
13,008 13,489
14,196 14,743
15,298 16,155
15,324 16,207
17,882 18,991
TOP 10 STOCK HOLDINGS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
COMPANY INDUSTRY ASSETS
1. Webster Financial Corp. Thrift 1.9
Institutions
2. Reading & Bates Corp. Energy 1.9
3. Computer Associates International Business Equip. & 1.8
Services
4. Atlas Air, Inc. Transportation 1.7
5. Circle International Group Business Equip. & 1.6
Services
6. Pittston Brink's Group Industrial 1.5
Specialty Products
& Services
7. Gaylord Entertainment Co. Leisure & Tourism 1.4
8. Burlington Northern Santa Fe Transportation 1.4
9. Jacor Communications, Inc. Publishing, 1.4
Broadcasting &
Entertainment
10. Reynolds & Reynolds Co. Business Equip. & 1.3
Services
TOP 10 INDUSTRY ALLOCATIONS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
INDUSTRY ASSETS
1. Business Equipment & Services 11.4
2. Healthcare Products & Services 11.2
3. Publishing, Broadcasting & Entertainment 7.2
4. Energy 7.0
5. Electrical Equipment & Services 5.7
6. Industrial Specialty Products & Services 5.4
7. Transportation 5.2
8. Banks 4.7
9. Chemical & Agricultural Products 3.6
10. Finance & Insurance 3.4
PORTFOLIO CHARACTERISTICS
Total Net Assets (all classes) $1.35 billion
3
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[G&I logo appears here]
MANAGEMENT REPORT
September 1997
Dear Fellow Shareholders:
We are pleased to report on the Evergreen Growth and Income Fund for the fiscal
period that ended on July 31, 1997.
PERFORMANCE
We believe your Fund performed very well in an unusual environment,
characterized by periods of short-term volatility occurring within a remarkably
resilient, longer-term bull market. During the 12-month period, for example, the
total return on Class Y shares was 40.66%. During the seven months since the
previous fiscal year ended on December 31, 1996 (the fiscal year has been
changed so it now ends each July 31), the total return on Class Y Shares was
21.52%. A complete review of the performance of each class of shares can be
found on page 2.
The Fund's investment team maintained its discipline of searching for value
among growth companies, employing the "value timing strategy" of buying growth
stocks when the overall market is not paying a premium for growth. This
discipline has been used consistently since the Fund's inception in 1986 as the
Evergreen Value Timing Fund. A team of analysts and managers implements this
strategy by searching for new investment opportunities among growth stocks which
are temporarily out of favor because of either industry or company factors. We
believe this strategy is a comparatively low risk approach to growth stock
investing, and has resulted in a relatively consistent record of strong
performance. The Fund's Y share class, the oldest class, ranks in the top 10% of
all Growth and Income Funds (ninth of 127) for the past 10 years, according to
Lipper Analytical Services, Inc., an independent monitor of mutual fund
performance. Morningstar, an independent monitor of mutual fund performance, has
given the Fund's Y shares a four-star rating for its risk-adjusted performance
through July 31, 1997. The rating reflects historical, risk-adjusted
performance, and is based on comparisons of 2,040 equity funds, using
Morningstar's proprietary rating system. Funds that fall within the top 32.5% of
the Morningstar rating system receive four stars.
ENVIRONMENT
The seven months since the last fiscal year end constituted, in general, a
period of impressive performance in the overall stock market. An environment of
moderate economic growth, stable to declining interest rates, constrained
inflation and rising corporate profits contributed to a feeling of confidence in
the market. Within this seven-month period, we had one excellent opportunity to
buy growth stocks as very attractive valuations occurred in late March and early
April, when concern about a possible over-heating economy and the possibility of
rising interest rates caused stock prices to retreat temporarily.
PORTFOLIO HIGHLIGHTS
During the seven-month period, the strong returns of portfolio stocks in the
technology, healthcare and banking industries led the Fund's performance. For
the seven months between January 1 and July 31, 1997, the healthcare products
and services industry, which had an 11.2% allocation in the portfolio at the end
of the fiscal year, had an asset-weighted average return of 34.1%. The
electrical equipment and services industry, which had a 5.7% allocation in the
Fund on July 31, on an asset-weighted basis had an average return of 36.6%. On
the same asset-weighted basis, banks, which had a 4.7% portfolio weighting, had
an average return of 35.5%. As the accompanying table indicates, other sectors
which contributed to your Fund's performance included building, construction and
furnishings, consumer products, and finance and insurance.
INDUSTRIES LEADING PERFORMANCE
(Asset-weighted*, December 31, 1996-July 31, 1997)
INDUSTRY AVERAGE % GAIN
Thrifts 47.6%
Building, Construction & Furnishings 42.4
Electrical Equipment & Services 36.6
Banks 35.5
Healthcare Products & Services 34.1
Entertainment, Publishing, Broadcasting 28.4
Finance & Insurance 26.6
Transportation 25.4
Consumer Products & Services 24.8
* Asset-weighted returns are based on average returns of stocks in industries,
adjusted proportionate to the size of investment in the portfolio.
PERFORMANCE OF STOCKS
Basic to the strategy of the Evergreen Growth and Income Fund is the search for
good growth companies to buy when they are temporarily selling at less than
their intrinsic value, as determined by Evergreen's fundamental research and
analysis.
During the seven months that ended on July 31, the top performing company in the
portfolio was Applied Materials, Inc., which had a 155.4% return for the seven
months. This was followed by: Compuware Corp., with a 148.2% return; Unitrode
Corp., with a 105.2%
4
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[G&I logo appears here]
return, and Warner-Lambert Co, with an 85.7% return. Completing the list of top
10 performing portfolio stocks were: Evergreen Media Corp., Class A, with a
83.6% return; Lam Research Corp., with a 76.3% return; State Street Corp., with
a 73.7% return; KLA-Tencor Corp., with a 70.4% return; Dallas Semiconductor
Corp., with a 69.7% return; and Schering-Plough Corp., with a 68.2% return.
Clearly, not all portfolio holdings were winners during the period. The worst
performing stock in the portfolio for the seven months was Aspect
Telecommunications Corp., which lost 33.2%. This was followed by: 3Com
Corporation, which lost 25.3%; Fresenius National Medical Care Holdings, Inc.,
Preferred, Class D, which lost 24.8%; Reynolds & Reynolds Co., Class A, which
lost 22.1%; and Sensormatic Electronics Corp., which lost 18.2%.
While these stock holdings lost ground during the period, their losses tended to
be significantly smaller than the gains of the leading companies. This
demonstrates the value of diversification of risk. It also reflects the fact
that not all stocks perform well at the same time. We continue to believe in the
long-term value of the companies that did not fare well during the seven-month
period.
RECENT FUND PURCHASES
During the period, your Fund made a number of purchases of the stocks of
companies that we believe were attractive opportunities, but were experiencing
some short-term price weakness, which enhanced their relative value.
The largest purchase was of Reading & Bates Corp., a major offshore oil and
gas-drilling operator. We believe this company, which contracts its drilling
rigs for oil and gas exploration worldwide, has the potential to benefit from an
increase in demand for drilling equipment, particularly in the Gulf of Mexico.
At the close of the fiscal period, Reading & Bates was the Fund's second largest
holding. We believe a very recent acquisition to the Fund's portfolio,
Transocean Offshore, Inc., should benefit from the same trend.
The second largest acquisition was of Atlas Air, Inc., a major factor in the
relatively small industry of outsourced air transport operations. This company
leases its fleet of 17 Boeing 747s to larger air carriers for freight transport.
Your Fund purchased shares in February, after the stock showed weakness because
of company problems in controlling maintenance expenses of several older planes.
We believe these problems will recede as the company purchases newer, more
efficient aircraft. At the close of the period, Atlas Air was the fourth largest
holding.
Other major acquisitions were of stock of: Computer Associates International,
Inc., a major provider of computer mainframe software services for business
applications that the Fund purchased in December 1996; and Reynolds & Reynolds,
Co., a major producer of business forms. Reynolds & Reynolds is a long-term
holding in which we added to our position.
PORTFOLIO MANAGEMENT
At the close of the fiscal year, the portfolio management team of your Fund was
changed as Portfolio Manager Edmund H. Nicklin has decided to leave Evergreen
Asset Management. The team now will be headed by Stephen A. Lieber, the Chairman
and Founder of Evergreen Asset Management, and Gary Buesser, a veteran
investment manager who joined Evergreen in 1996 following a successful career as
an institutional manager.
In the future, the Evergreen Growth and Income Fund will be managed very much as
it has been in the past. The Fund is an outgrowth of Evergreen's "value timing
strategy," which has been used in portfolios since the 1970s. The fundamental
goal of this strategy is to buy growth on a value basis. We have sought to
select growth opportunities at times when the markets are not paying a premium
for the growth. This means that we buy issues during periods of either market
uncertainty, where values are under pressure, or at times in specific companies
and industries where the investment community is not attaching growth values to
opportunities and business franchises which, we think, have the potential to
develop important capital gains. As an organization, we have refined these
strategies over many years, teaching our securities analysts and portfolio
managers the approach, and having them all work together to build the power of
this investment idea.
The same Evergreen research team that has supported the management of your Fund
will continue in operation and shareholders can expect continuity in the
approach that has built an outstanding, long-term record.
We thank you for your investment in Evergreen Growth and Income Fund.
Sincerely,
/s/ Stephen A. Lieber
STEPHEN A. LIEBER
CHAIRMAN
Evergreen Asset Management Corp.
5
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G logo appears here]
FUND-AT-A-GLANCE
As of July 31, 1997
ONE-YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
One year w/o sales
charge 28.34 % 27.40 % 27.37 % 28.70 %
One year with sales
charge 22.24 % 22.40 % 26.37 % 28.70 %
One year dividends per
share $1.05 $0.91 $0.91 $ 1.09
AVERAGE
ANNUAL RETURNS CLASS A CLASS B CLASS C CLASS Y
Three years N/A N/A N/A 16.58 %
Five years N/A N/A N/A 11.99 %
Ten years N/A N/A N/A 9.54 %
Since Inception* 17.65 % 18.13 % 19.00 % 14.58 %
CUMULATIVE RETURNS CLASS A CLASS B CLASS C CLASS Y
Six months w/o sales
charge 12.45 % 12.06 % 12.06 % 12.65 %
Three years N/A N/A N/A 58.43 %
Five years N/A N/A N/A 76.12 %
Ten years N/A N/A N/A 148.70 %
Since Inception* 52.04 % 53.66 % 56.59 % 1,215.46 %
* CLASSES A, B AND C BEGAN 1/3/95; CLASS Y BEGAN 8/31/78.
[Graph appears here]
PLOT POINTS
CLASS A: CPI: WILSHIRE 5000: LIFA: LEIFA:
- ------- ----- -------------- ------- -------
9,525 10,000 10,000 10,000 10,000
9,665 10,040 10,200 10,157 10,179
11,001 10,187 12,249 11,462 11,815
11,925 10,314 13,681 12,609 13,280
11,889 10,488 13,758 12,583 13,438
13,569 10,629 16,685 14,167 15,866
15,204 10,719 19,891 15,827 18,727
PORTFOLIO MANAGER
Nola Maddox Falcone, President of Evergreen Asset Management
[Photo of Corporation, has been Portfolio Manager of Evergreen Income
Nola Falcone and Growth Fund since its inception. Before joining Evergreen
will appear in 1974 as a Senior Portfolio Manager, Mrs. Falcone was an
here] investment analyst and a personal trust officer at Chase
Manhattan Bank. She is a member of the New York Society of
Security Analysts and the Association for Investment
Management and Research. Mrs. Falcone is a graduate of Duke
University and earned her M.B.A. from the Wharton Graduate
School of Business.
6
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G logo appears here]
OBJECTIVE
The Evergreen Income and Growth Fund seeks current income and long-term growth
of capital.
STRATEGY
The Fund emphasizes securities that pay regular dividends in a strategy which
seeks both to provide current income and to act as a buffer or protection
against market fluctuations. The Fund also seeks to protect investors' principal
by diversifying investments across a spectrum of industries and by investing in
different types of securities. The Fund invests in common stocks, convertible
preferred stocks, and convertible bonds.
LONG-TERM GROWTH
[Graph appears here]
PLOT POINTS
Initial Dividend
-------- --------
9,525 9,525
9,665 9,665
10,056 10,203
10,683 11,001
10,588 11,045
11,276 11,925
11,337 12,135
10,962 11,889
11,578 12,709
12,198 13,569
11,790 13,264
13,390 15,204
TOP 10 HOLDINGS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
COMPANY INDUSTRY ASSETS
1. Long Island Lighting Electric Utilities 3.0
2. PP&L Resources, Inc. Electric Utilities 3.0
3. Wendy's Convertible Preferred Food & Beverage 2.5
Products
4. Public Service Enterprise Electric Utilities 2.4
5. AirTouch Communications Communications 2.3
Systems & Services
6. National Australia Bank, Ltd. Banks 2.0
7. Philippine Long Distance Tel Utilities 2.0
8. First Hawaiian Banks 1.9
9. Australia & New Zealand Banking Banks 1.8
10. Commonwealth Bank of Australia Banks 1.8
TOP 10 INDUSTRY ALLOCATIONS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
INDUSTRY ASSETS
1. Banks 18.9
2. Electric Utilities 15.4
3. Energy 8.3
4. Real Estate 6.3
5. Chemical & Agricultural Products 4.0
6. Finance & Insurance 3.9
7. Healthcare Products & Services 3.6
8. Food & Beverage Products 2.9
9. Transportation 2.6
10. Electrical Equipment & Service 2.5
PORTFOLIO CHARACTERISTICS
Total Net Assets (all classes) $956.5 million
7
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G logo appears here]
MANAGEMENT REPORT
September 1997
Dear Fellow Shareholders:
We are pleased to report on the Evergreen Income and Growth Fund for the fiscal
period that ended on July 31, 1997.
INCOME-FOCUSED STRATEGY
Evergreen Income and Growth Fund delivered strong performance during the past
year as it sought to provide a sizeable current income flow and competitive
growth. During the 12-month period that ended on July 31, for example, the
Fund's Y Shares had a total return of 28.70%, while paying a total of $1.09 per
share in quarterly dividend distributions. This performance put the Fund's Y
shares in the top quintile of the 53 funds in the Income Fund category of Lipper
Analytical Services, Inc., a leading independent monitor of mutual fund
performance. At the same time, the Fund's income distributions were in the top
quartile of the same Lipper category. A complete review of the perfomance of
each class of shares can be found on page 6.
The Fund achieved this performance by following the same, income-oriented
strategy that has been applied since the Fund began operations under its
original name of Evergreen Total Return Fund on August 31, 1978. We believe this
strategy has worked well, delivering an average annual return of 14.58% for the
Y share class, the oldest share class, since inception. This long-term record
has earned the Fund an "A" ranking for risk-adjusted performance over the past
10 years from the independent magazine "Mutual Fund Forecaster," as of June
1997. It has achieved this distinction by managing risk carefully. For example,
the Fund's beta on Y Shares has been a relatively low .7 since inception. Beta
is a measure of the risk of a fund's portfolio, illustrating the volatility of
the net asset value per share of a fund compared to the market as a whole, as
represented by the S&P 500 Index, which has a beta of 1.0. A beta of less than
one indicates that a fund's net asset value has fluctuated less than the stock
market, as measured by the S&P 500.
The Evergreen Income and Growth Fund is intended as an inflation-hedging
substitute for bond investing. It seeks its objective of current income by
focusing on the stock market's yield sector. The Fund seeks to provide growth by
investing in undervalued issues. We believe this strategy is appropriate for
conservative, or risk-averse investors, including shareholders with trusts,
retirees or those preparing to retire, and income-oriented investors who desire
inflation protection.
INVESTMENT THEMES
During the fiscal period, the Fund has emphasized five themes in pursuit of its
objective:
(Bullet) Stocks of companies that are potential merger and acquisition
candidates;
(Bullet) Stocks of companies that are restructuring;
(Bullet) The stocks of companies that are increasing their dividends;
(Bullet) Convertibles, including preferred stock and debt issues;
(Bullet) Foreign stocks that offer both income and price appreciation potential.
ASSET ALLOCATION JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
[Pie chart appears below with the following data]
U.S. Common Stocks 54.9%
Convertible Preferred Stocks 19.7%
Foreign Stocks 18.1%
Convertible Bonds 5.9%
Cash Equivalents 1.4%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
MERGERS AND ACQUISITIONS
Your Fund consistently has sought opportunities from the merger and acquisition
trend by searching for undervalued stocks in companies that are undergoing
consolidations. Since the Fund's inception, a total of 110 portfolio companies
have been involved in mergers and acquisitions. In 1997 alone, seven portfolio
companies have been involved in announced mergers or acquisitions, with two of
the seven transactions completed. We believe mergers and acquisitions will
continue to be a major trend in the marketplace. During the first seven months
of 1997, an average of 22 merger and acquisition transactions was completed each
week. Small regional banks have particularly benefited from the merger trend.
Jefferson Bancshares, one portfolio company, has had an acquisition offer by
Wachovia which we project would provide a gain for the portfolio of 177%, upon
completion, from its original purchase on September 5, 1991. Utilities, which
traditionally have been a major component of your Fund's strategy because of
their attractive yields, also are undergoing industry consolidation in a new era
of deregulation. The Fund's largest holding, Long Island Lighting, is the
beneficiary of a proposed merger with Brooklyn Union Gas. This transaction, if
completed, would provide a projected
8
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G logo appears here]
gain for the Fund of more than 25% since the original purchase in November,
1996.
RESTRUCTURING
Your Fund also has looked for opportunities among companies that are
restructuring themselves to refocus their attention on their most profitable
activities or to operate more efficiently. Restructuring companies in which the
Fund has invested include: Du Pont (E.I.) De Nemours & Co., the well known
chemical company that recently has appointed a new management team with stock
incentives; Rhone-Poulenc Rorer, Inc., a healthcare and pharmaceutical company;
and Consolidated Natural Gas, a traditional natural gas company which has been
successful in Gulf of Mexico exploration.
INCREASING DIVIDENDS
By emphasizing companies which are increasing their dividends, we are investing
in companies that are confident about their ability to generate earnings growth
to pay their dividends. Of the issues in the portfolio on July 31, 1997, 50% are
of companies that have increased their dividends within the past year.
CONVERTIBLES (PREFERRED AND DEBT ISSUES)
Investments in convertibles give the Fund the opportunity to buy growth
companies, whose stocks ordinarily do not pay significant dividends, and still
obtain some yield. At the close of the fiscal period, 19.7% of the portfolio was
invested in convertible preferred stock, and another 5.9% was invested in
convertible debentures. Three examples of this "buy growth with yield" strategy
were Fund investments in: Key Energy Group convertible debentures, which had a
44.5% return in the last six months of the fiscal period; convertible
subordinated notes of Photronics Inc., a manufacturer of photomasks used in the
production of integrated circuits; and convertible preferred shares of Wendy's,
the fast-food chain.
FOREIGN STOCKS
During the fiscal period, your Fund has increased its emphasis on foreign stocks
from 12.6% of net assets to 18.1%. We found some foreign companies that not only
offer very attractive yields, but also the prospects of substantial capital
appreciation because of relative undervaluation from the benefits of
restructuring or deregulation changes. Among the Fund's foreign holdings were
several Australian banking stocks, which benefited from both declines in
interest rates and the deregulation of banking in Australia. In addition, these
stocks paid very attractive dividends. Examples of Australian banking issues in
which the Fund has invested include National Australian Bank Ltd., Commonwealth
Installment Receipts, Australia & New Zealand Bank Group, Inc., and Westpac
Banking Corp. Ltd.
LEADING SECTORS
The banking, thrift, finance, insurance and health stocks led your Fund's total
return performance. Utility and convertible issues contributed to the yield
strategy, but held back performance on a total return basis. Utility stocks were
adversely affected by deregulation, while convertible issues lagged many of the
other indices in the market. During the past year, a momentum-driven stock
market has rewarded the strong growth issues without yields, but your Fund has
continued its long-term strategy of emphasizing the yield sector. We believe
this strategy should provide good downside protection in the event of a market
correction or slump in addition to strong income returns.
OUTLOOK
We maintain a generally positive outlook for the stock market. We believe the
market's extraordinary rally is liquidity-driven, propelled in part by strong
inflows into equity mutual funds. In July 1997, for example, an estimated $23
billion was invested in stock mutual funds, the second highest total of the year
in what is normally a slow month for cash flows to mutual funds.
Healthy economic growth, low inflation, and strong corporate profits have
supported the equity rally, which has helped to attract these assets. In fact,
62% of U.S. Companies surveyed by the Wall Street Journal reported
stronger-than-expected profits for the second quarter of 1997.
A NOTE OF CAUTION
While we are optimistic, we do approach the future with a degree of caution,
primarily because of the possibility that high levels of employment potentially
could trigger increased inflation. As our team of 17 equity analysts/portfolio
managers meets with company executives, we are hearing increasing reports that
companies are straining to find all the employees they need, and that they often
are paying more than they planned to attract new employees.
Given this outlook, we believe it is particularly appropriate to remain with the
defensive strategy that has been the hallmark of your Fund and to continue to
manage the Fund to seek current income and protection of investors' principal.
Thank you for your investment in Evergreen Income and Growth Fund.
Sincerely,
/s/ Nola M. Falcone
NOLA MADDOX FALCONE
PRESIDENT
Evergreen Asset Management Corp.
9
<PAGE>
EVERGREEN
SMALL CAP EQUITY INCOME FUND
[Small Cap Equity Income Fund logo appears here]
FUND-AT-A-GLANCE
As of July 31, 1997
ONE-YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
One year w/o sales
charge 42.86 % 41.69 % 40.71 % 43.24 %
One year with sales
charge 36.08 % 36.69 % 41.71 % 43.24 %
One year dividends per
share $0.308 $0.228 $0.216 $0.339
One year cap gains per
share $0.513 $0.513 $0.513 $0.513
AVERAGE
ANNUAL RETURNS CLASS A CLASS B CLASS C CLASS Y
Three years N/A N/A N/A 24.71 %
Since Inception* 26.18 % 26.83 % 27.76 % 18.98 %
CUMULATIVE RETURNS CLASS A CLASS B CLASS C CLASS Y
Seven months w/o sales
charge 20.99 % 20.37 % 20.30 % 21.09 %
Three years N/A N/A N/A 93.96 %
Since Inception* 82.13 % 84.56 % 85.43 % 94.79 %
* CLASSES A & B BEGAN 1/3/95; CLASS C BEGAN 1/24/95;
CLASS Y BEGAN 10/1/93.
[Graph appears here. Plot points are as follows:]
PLOT POINTS
CLASS A: CPI: NASDAQ: RUSSELL 2000:
- -------- -------- -------- ----------
9,525 10,000 10,000 10,000
9,564 10,040 10,043 9,874
10,915 10,187 13,316 12,100
12,292 10,314 14,095 12,831
12,669 10,488 14,372 12,942
15,280 10,629 16,567 15,269
18,213 10,719 19,181 17,266
PORTFOLIO MANAGER
Nola Maddox Falcone, President of Evergreen Asset Management
[Photo of Corporation, has been Portfolio Manager of Evergreen Small Cap
Nola Falcone Equity Income Fund since its inception. Before joining
appears here] Evergreen in 1974 as a Senior Portfolio Manager, Mrs. Falcone
was an investment analyst and a personal trust officer at
Chase Manhattan Bank. She is a member of the New York Society
of Security Analysts and the Association for Investment
Management and Research. Mrs. Falcone is a graduate of Duke
University and earned her M.B.A. from the Wharton Graduate
School of Business. She is assisted in the management of the
Fund by Eric K. Cinnamond.
10
<PAGE>
EVERGREEN
SMALL CAP EQUITY INCOME FUND
[Small Cap Equity Income Fund logo appears here]
OBJECTIVE
Evergreen Small Cap Equity Income Fund seeks a total return consisting of
current income and growth of capital.
STRATEGY
The Fund seeks to invest in small growth companies that have higher than average
yields. The companies in the portfolio typically have market capitalizations of
less than $500 million. In seeking its objective, the Fund seeks to invest in
entrepreneurial businesses that may grow faster than the economy as a whole
because they offer niche products or unique services. The Fund looks for
companies whose cash flows allow them both to reinvest profits for growth and to
pay dividends.
LONG-TERM GROWTH
[Graph appears here]
PLOT POINTS
Initial Dividend
-------- --------
9,525 9,525
9,564 9,564
10,016 10,164
10,674 10,915
11,234 11,592
11,391 12,292
11,626 12,732
11,479 12,669
12,481 13,868
13,139 15,280
13,060 15,275
15,407 18,213
TOP 10 HOLDINGS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
COMPANY INDUSTRY ASSETS
1. Hvide Marine Convertible Transportation 3.2
Preferred
2. Hardinge Brothers Inc. Diversified 3.1
Machinery
3. Gorman Rupp Industrial 2.8
Specialty Products
& Services
4. Oneida, Ltd. Consumer Products & 2.6
Services
5. Photronics Convertible Electrical Equip. & 2.2
Preferred Services
6. Matthews International Corp. Diversified 2.2
Companies
7. Penn Virginia Corp. Energy 2.1
8. Curtiss Wright Corp. Aerospace & Defense 1.9
9. Worthington Industries, Inc. Industrial 1.8
Specialty Products
& Services
10. La-Z-Boy Chair Co. Building, 1.8
Construction &
Furnishings
TOP 10 INDUSTRY ALLOCATIONS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
INDUSTRY ASSETS
1. Banks 12.6
2. Industrial Specialty Products & Services 12.0
3. Gas Utilities 6.5
4. Real Estate 6.3
5. Energy 5.7
6. Thrift Institutions 5.2
7. Food & Beverage Products 4.8
8. Electrical Equipment & Services 4.4
9. Finance & Insurance 4.3
10. Consumer Products & Services 3.8
PORTFOLIO CHARACTERISTICS
Total Net Assets (all classes) $58.8 million
Average market capitalization $249 million
11
<PAGE>
EVERGREEN
SMALL CAP EQUITY INCOME FUND
[Small Cap Equity Income Fund logo appears here]
MANAGEMENT REPORT
September 1997
Dear Fellow Shareholders:
We are pleased to report on the Evergreen Small Cap Equity Income Fund for the
fiscal period that ended on July 31, 1997.
PERFORMANCE
The Evergreen Small Cap Equity Income Fund delivered extremely strong
performance during the past fiscal year as it continued to apply its
value-oriented discipline. This discipline emphasizes investments in
entrepreneurial companies that have the financial health to generate both growth
and investment income. For the one-year period, Class Y share class had a total
return of 43.24%. A complete review of the performance of each class of shares
can be found on page 10.
Your Fund's consistent strategy, which has been followed since the Fund's
inception with Class Y Shares on October 1, 1993, has resulted in performance
which has been recognized for its attractive returns on a risk-adjusted basis.
Morningstar, an independent monitor of mutual fund performance, has given the
Fund's Class Y Shares a five-star rating, the highest rating, for its risk-
adjusted performance through July 31, 1997. The rating reflects historical,
risk-adjusted performance, and is based on comparisons of 2,040 equity funds,
using Morningstar's proprietary rating system. Funds that fall within the top
10% of the Morningstar rating system receive five stars. In addition, Barron's
ranked the fund #19 of all mutual funds on a risk-adjusted basis, based on
performance over the past three and five years, in its July 21, 1997 issue.
Since the Fund's inception, the Fund's Class Y Shares have had a relatively low
beta of .73, while delivering average annual returns of 18.98%. Beta is a
measure of the market risk of a fund's portfolio, illustrating the volatility of
the net asset value per share of a fund compared by the market as a whole, as
represented by the S&P 500 Index, which has a beta of 1. A beta of less than one
indicates that a fund has fluctuated less than the stock market, as measured by
the S&P 500.
The Fund's holdings in banks, finance, insurance, thrift institutions and
consumer products aided performance. Convertibles and holdings in the utilities
industry supported the Fund's income strategy, although they held back
performance on a total return basis.
AN EMPHASIS ON VALUE
Your Fund adheres to a value-oriented style in seeking growth from buying small,
entrepreneurial companies that have the financial strength and stability to pay
dividends. The emphasis is on fundamental company analysis and stock selection.
This style, in addition to seeking growth, is intended to provide defensive
protection in
ASSET ALLOCATION JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
[Pie chart appears below with the following data:]
Common Stocks 75.3%
Convertible Bonds 11.2%
Convertible Preferred Stocks 7.5%
Cash 6.0%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE
down markets by emphasizing securities of small companies that we believe are
undervalued relative to stock market price/earnings average multiples, asset
values or takeover multiples. We also look for companies that have a history of
dividend increases. In buying securities that offer yield with growth, your Fund
also looks for opportunities among convertible preferred stock and convertible
debentures, which together accounted for 18.7% of the portfolio at the close of
the fiscal period.
In our search for attractive values, we try to find companies that, in our
analysis, have intrinsic value exceeding that recognized by their stock prices.
In doing so, we also look for companies that have a potential catalyst that can
spark their stock performance. Among the potential catalysts that can influence
stock performance are restructurings, management changes or industry
consolidation. We often look for "value timing" opportunities. By this, we mean,
investments in the stocks of companies that we believe may be temporarily
depressed, perhaps because of one disappointing earnings announcement or some
other temporary factor. If we believe the underlying fundamentals of the company
are favorable, we may buy the stock as a "value timing" play.
INVESTMENT THEMES
During the fiscal period, the Fund has emphasized five investment themes:
(Bullet) The stocks of attractively valued companies that are in consolidating
industries and therefore may be merger and acquisition candidates;
(Bullet) Deeply undervalued stocks;
(Bullet) Securities of companies that are restructuring;
(Bullet) Energy companies; and
(Bullet) Technology companies.
12
<PAGE>
EVERGREEN
SMALL CAP EQUITY INCOME FUND
[Small Cap Equity Income Fund logo appears here]
MERGERS AND ACQUISITIONS
Since the Fund began investment operations, it has looked for value in
industries that are undergoing consolidation and in which merger and
acquisitions are occurring. We believe mergers and acquisitions are now a major
trend in the economy. For example, in the first seven months of 1997, an average
of 22 mergers or acquisitions was completed each week. During the fiscal period,
we have been alert for opportunities in consolidating industries, including
regional banks, gas utilities, and industrial pump and process control
companies.
Banking and thrifts comprise your Fund's largest industry sector, representing
approximately 16.4% of the Fund's net assets. Since the Fund began investment
operations in 1993, three banks in the portfolio have been acquired and a bank
and a thrift are pending acquisitions. In June, Liberty Bancorp was taken over
by Bank One, realizing for your Fund a gain of 23% on its Liberty Bancorp
holding since the stock was acquired in December 1996. Recently another
portfolio company, People's Savings Financial Corp., has been the subject of an
acquisition proposal from Webster Financial Corp. Year-to-date, the stock of
People's Savings had risen 54.4% in 1997.
We also have witnessed a strong movement toward consolidation in the industrial
pump and process control industries. Among portfolio companies, Gould's Pumps
has been acquired for a gain of 56.1% and BW/IP Holdings Inc. has merged with
Durco International to form Flowserve Corp.
UNDERVALUED STOCKS
Our proprietary research by Evergreen analysts often finds companies whose
stocks are extremely undervalued and yet represent growth opportunities. One
example is the Fund's investment in Matthews International Corporation, whose
stock has gained 35.8% in 1997 through July 31. This company, which manufactures
memorial plaques for the funeral industry, has had a strong earnings record and
currently has a stock buyback program.
RESTRUCTURINGS
Frequently, we look for companies that are improving their business through
restructuring. One excellent example in the portfolio is Oneida Limited, which
recently has sold its underperforming wire subsidiary to concentrate on its
profitable and well known flatware business, in which it manufactures and
distributes knives, forks and other tableware. Another portfolio company that
has benefited from restructuring is Piccadilly Cafeterias, Inc., which installed
a new management team and improved margins and operating earnings in its
restaurant and food service business considerably during the past year.
ENERGY COMPANIES
The strong growth trend of oil and gas exploration has created demand for
support products or services. In fact, the largest holding at the end of the
fiscal period, Hvide Marine, exemplifies the opportunities presented in this
sector. This company operates boats that service the offshore oil rigs in the
Gulf of Mexico. We have participated in the growth of this company's business
through our purchase of convertible preferred stock. Another major holding is
Penn Virginia, which is a stock selling as a discount to our asset value
calculations. This company holds 1.1 million shares of Norfolk Southern common
stock and significant coal and gas reserves.
TECHNOLOGY COMPANIES
Your Fund has participated in opportunities in electronics and technology. This
sector has had a key role in the improving productivity of American industry.
Among major holdings are Photronics Inc., convertible subordinate notes.
Photronics manufactures photomasks used in the integrated circuit or electronic
manufacturing process. Another is Curtiss Wright Corporation, which produces
aircraft components for the aerospace industry, which is growing strongly.
OUTLOOK
We maintain a generally positive outlook for the stock market. We believe the
market's extraordinary rally is liquidity-driven, propelled in part by strong
inflows into equity mutual funds. In July 1997, for example, an estimated $23
billion was invested in stock mutual funds, the second highest total of the year
in what is normally a slow month for cash flows to mutual funds. Healthy
economic growth, low inflation and strong corporate profits have supported the
equity rally.
TEAM APPROACH
Your Fund's management team continues to rely heavily on the independent
research and investment ideas of Evergreen Asset Management's team of 17 equity
analysts/portfolio managers. The investment ideas generated by this team are
critically important in the stock selection discipline of your Fund, which
emphasizes "bottoms up" company research in our search for investment value. One
of these analysts, Eric K. Cinnamond, also plays an important role in working
with the portfolio manager in managing the overall portfolio.
Thank you for your investment in Evergreen Small Cap Equity Income Fund.
Sincerely,
/s/ Nola M. Falcone
NOLA MADDOX FALCONE
PRESIDENT
Evergreen Asset Management Corp.
13
<PAGE>
EVERGREEN
UTILITY FUND
[Utility fund logo appears here]
FUND-AT-A-GLANCE
As of July 31, 1997
ONE-YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
One year w/o sales
charge 21.33 % 20.42 % 20.42 % 21.45 %
One year with sales
charge 15.56 % 15.42 % 19.42 % 21.45 %
One year dividends per
share $0.419 $0.340 $0.340 $0.443
One year cap gains per
share $0.278 $0.278 $0.278 $0.278
AVERAGE
ANNUAL RETURNS CLASS A CLASS B CLASS C CLASS Y
Three years 12.23 % 12.43 % N/A 14.32 %
Since Inception* 8.95 % 9.00 % 13.55 % 12.58 %
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C CLASS Y
Seven months w/o sales
charge 10.72 % 10.21 % 10.21 % 10.85 %
Three years 41.37 % 42.11 % N/A 49.39 %
Since Inception* 35.87 % 36.11 % 44.84 % 50.06 %
* CLASSES A & B BEGAN 1/4/94; CLASS C BEGAN 9/2/94;
CLASS Y BEGAN 2/28/94.
[Graph appears here]
PLOT POINTS
CLASS A: CPI S&P 500 S&P UTILITIES:
- ------- ----- ------ --------------
9,525 10,000 10,000 10,000
9,554 10,027 10,340 10,063
9,154 10,178 9,979 9,455
9,380 10,308 10,394 9,894
10,180 10,460 12,580 10,812
11,979 10,590 14,389 13,210
11,198 10,768 14,662 12,204
12,574 10,913 18,201 13,509
13,587 11,006 22,303 14,058
PORTFOLIO MANAGEMENT
<TABLE>
<S> <C>
Paul A. DiLella and Doris A. Kelley-Watkins are
Co-Managers of the Evergreen Utility Fund. Mr.
[Photos of Paul A. DiLella has more than 15 years of investment
DiLella and Doris research experience, and also is responsible for
A. Kelley-Watkins research and analysis of electric utility and
appear here] natural gas distribution companies. Ms.
Kelley-Watkins has more than 20 years' experience
in analysis of the utility industry. She also
serves as an analyst for the utility and
telecommunication sectors. Co-Manager of the Fund
previously was a Utility Industry Specialist at
Merrill Lynch's Research Department.
</TABLE>
14
<PAGE>
EVERGREEN
UTILITY FUND
[Utility fund logo appears here]
OBJECTIVE
The Evergreen Utility Fund seeks a return consisting of high current income and
moderate capital appreciation.
STRATEGY
The Fund invests at least 65% of assets in the stocks and bonds of utility
companies that derive at least 50% of their revenue from the gas, electric and
telecommunications industries. When selecting utility company stocks, Fund
management considers the company's earnings and dividend potential in the
context of current developments in that company's industry. The Fund may invest
the remainder of its assets in the common stocks of companies not primarily
involved in utility, or in U.S. government bonds, foreign securities, American
Depository Receipts and the securities of other investment companies.
LONG-TERM GROWTH
[Graph appears here]
PLOT POINTS
Initial Dividend
-------- --------
9,525 9,525
9,515 9,554
8,915 9,062
8,896 9,154
8,820 9,181
8,906 9,380
9,068 9,661
9,449 10,180
9,935 10,942
10,449 11,979
9,982 11,551
9,592 11,198
10,087 11,888
10,287 13,587
TOP 10 STOCK HOLDINGS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
COMPANY ASSETS
1. Duke Energy Corp. 3.5
2. Nokia Corp. 3.3
3. Public Service Co. of Colorado 3.2
4. Enron Corp. 3.1
5. Ford Motor Co. 3.1
6. AirTouch Communications, Inc. 3.0
7. NICOR Inc. 2.9
8. U.S. West Communications Group, Inc. 2.9
9. MCN Financing III 2.9
10. FPL Group, Inc. 2.9
INDUSTRY ALLOCATIONS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
INDUSTRY ASSETS
1. Electric Utilities 49.9
2. Telephone Utilities 24.8
3. Gas Utilities 8.6
4. Oil 4.3
5. Telecommunications Service & Equipment 3.3
6. Natural Gas 3.2
7. Automotive Equipment & Manufacturing 3.1
8. Publishing, Broadcasting & Entertainment 2.5
PORTFOLIO CHARACTERISTICS
Total Net Assets (all classes) $130.4 million
15
<PAGE>
EVERGREEN
UTILITY FUND
[Utility fund logo appears here]
MANAGEMENT REPORT
September 1997
Dear Shareholders:
We are pleased to report to you on the Evergreen Utility Fund for the fiscal
period that ended July 31, 1997.
PERFORMANCE
The Evergreen Utility Fund, aided by a strong performance by the overall stock
market, returned a strong 21.45% for Class Y Shares during the twelve-month
period ending July 31. For the seven-month period since the last fiscal year
ended on December 31, 1996, the Fund's Class Y Shares had a return of 10.85%.
The Fund kept pace with the performance of the utility sector, but
underperformed the extraordinary returns of the broad market. A complete review
of the performance of each class of shares can be found on page 14.
INVESTMENT ENVIRONMENT
The fiscal period ending July 31 witnessed a strong economy that provided the
backdrop for an extremely positive environment for equity investors. The
combination of solid economic growth with very little inflationary pressure
allowed interest rates to remain relatively low, supplying investors with extra
fuel to power the bull market in stocks. The only significant jolt the stock
market faced was during March, as rumors of a Federal Reserve-induced interest
rate hike circulated throughout the market, causing stocks to experience a
slight correction. Investors shrugged off any further inflationary fears
following the Federal Reserve Board's 0.25% increase in the Fed Funds rate on
March 25, and stocks resumed their powerful upward climb.
The environment within the utility sector has differed significantly from that
of the broad market. Whereas the S&P 500 Index returned an exceptional 52.14%
for the 12-month period, the S&P Utilities Index had a modest, but respectable
total return of 15.20%. Utility companies, traditionally, have been viewed as a
more stable and defensive equity holding. However, because the overall market
has provided exceptional gains over the past couple of years, traditional
utility investors have fled this sector in search of more attractive returns,
regardless of the perceived risk factor.
CHANGE WITHIN THE UTILITY INDUSTRY
One factor contributing to the utility sector's relative underperformance is the
uncertainty caused by the transformation and restructuring taking place within
the industry. Electric and utility companies are in the early stages of a
transition toward increased competition, less regulation and increased
volatility in their sales and share prices. Consolidation has permeated the
industry, resulting in a considerable increase in the number of mergers over the
past couple of years. We anticipate this trend may continue as utility companies
view mergers as an important defense as they seek to achieve economies of scale,
gain market share and diversify their source for earnings growth.
INVESTMENT STRATEGY
Identifying the potential pitfalls and current volatility in the utility sector
allows us to formulate an effective strategy in dealing with the industry's
transformation. We will continue to focus on the following strategies in an
effort to maximize shareholder's returns in the coming quarters.
1. Avoid the "minefields" within the industry. As we have mentioned,
electric utility companies are operating in a climate of uncertainty and
volatility as states attempt to manage the transition from monopoly
regulation to a competitive market. As managers of the Fund, it is our
primary duty to avoid those companies whose share prices will languish
within this environment. Our management style dictates careful analysis of
the industry's ongoing change and the regulatory and political impact on
shareholder interest.
16
<PAGE>
EVERGREEN
UTILITY FUND
[Utility fund logo appears here]
2. Identify attractive income opportunities. It is paramount to not only
invest in quality companies, but also to focus on increasing the Fund's
current yield. By maximizing the portfolio's income element, it will
ultimately improve the total return for shareholders.
3. Carefully analyze the utility subsectors. Constant analysis of the
utility industry is vital to identify specific trends and opportunities
within the subsectors. Consistent with this strategy, we have slightly
decreased our exposure to the telephone sector. In addition, we have
increased our weighting in the electric utility area as our analysis
indicated an improved valuation for this subsector.
4. Diversify the portfolio through the addition of quality non-utility
companies. We recognize the fact that although the Fund represents an
investment in the utility sector, there are several opportunities outside
the industry that can be capitalized upon to enhance performance.
Consistent with this philosophy, holdings such as Dow Chemical, Computer
Associates, RJR Reynolds, Phillip Morris and the Ford Motor Company all
made a positive impact on returns throughout the fiscal year.
ACTIVE MANAGEMENT STYLE
Our objective is to manage the portfolio using a research-intensive, active
style of management. A primary example of the responsive management style is
illustrated by the Fund's current investments in Duke Energy Corporation and The
AES Corporation. Both of these holdings have provided solid returns, but there
are significant differences between these two utility companies. Duke Energy had
been a traditional, "all-American" utility company, which sold and distributed
electric energy. AES Corp., conversely, represents the "new breed" of energy
company. It is more diversified, offering customers not only electricity, but
also energy planning and consulting services.
The earlier contrast between the two companies illustrated the changes within
the industry as well as the type of management style that is necessary to
thrive. Today, electric utilities no longer offer only electric power.
Traditional utility companies can still offer strong returns, but a definite
change is taking place in the utility environment. In 1997 for example, Duke
Energy completed its merger with one of the country's leading natural gas
transmission companies, transforming itself into a diversified, global,
non-traditional energy company. As fund managers, it is important, therefore,
for us to identify the underlying trends and integrate an active, responsive
management style, which identifies companies that are best able to survive in
this era of change.
OUTLOOK
At this point, the utility sector's valuation relative to the overall market is
extremely attractive. In addition, we feel the stock market's historically high
valuation level increases the likelihood of a correction. If the market does
experience a correction, we feel the Evergreen Utility Fund is positioned to
benefit as investors shift their focus to defensive-oriented investment options
in an effort to escape the broad market decline. In addition, we will continue
to adhere to our current strategies, which provide investors a diversified, high
income portfolio with defensive characteristics.
Thank you for your investment in Evergreen Utility Fund.
Sincerely,
/s/ Paul A. DiLella
PAUL A. DILELLA
CO-PORTFOLIO MANAGER
/s/ Doris Kelley-Watkins
DORIS A. KELLEY-WATKINS
CO-PORTFOLIO MANAGER
17
<PAGE>
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
FUND-AT-A-GLANCE
As of July 31, 1997
ONE-YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
One year w/o sales
charge 42.44 % 41.20 % 41.24 % 42.58 %
One year with sales
charge 35.47 % 36.20 % 40.24 % 42.58 %
One year dividends per
share $0.356 $0.192 $0.191 $0.413
One year cap gains per
share $3.339 $3.339 $3.339 $3.339
AVERAGE
ANNUAL RETURNS CLASS A CLASS B CLASS C CLASS Y
Three years 21.60 % 22.04 % N/A 23.89 %
Five years 15.86 % N/A N/A 17.32
Ten years 12.37 % N/A N/A N/A
Since Inception* 14.42 % 16.82 % 22.25 % 17.96 %
CUMULATIVE RETURNS CLASS A CLASS B CLASS C CLASS Y
Seven months w/o sales
charge 20.78 % 20.23 % 20.25 % 20.93 %
Three years 79.80 % 81.76 % N/A 90.17 %
Five years 108.74 % N/A N/A 122.29 %
Ten years 221.12 % N/A N/A N/A
Since Inception* 425.19 % 101.19 % 79.59 % 196.62 %
* CLASS A BEGAN 4/12/85; CLASS B BEGAN 2/2/93;
CLASS C BEGAN 9/2/94; CLASS Y BEGAN 1/3/91.
[Graph appears here]
PLOT POINTS
CLASS A: CPI S&P 500
- ------- ----- ------
9,525 10,000 10,000
8,896 10,399 8,824
11,176 10,934 11,458
11,903 11,461 11,672
13,528 11,971 13,159
14,397 12,349 14,839
16,297 12,690 16,110
16,817 13,042 16,960
19,155 13,403 21,381
22,402 13,797 24,920
32,182 14,102 37,905
PORTFOLIO MANAGER
David C. Francis, C.F.A., Chief Investment Officer,
[Photo of Institutional, for First Union Capital Management Group, is
David C. Portfolio Management Team Leader for the Evergreen Value Fund.
Francis Mr. Francis is an investment professional with more than 17
appears here] years of equity analysis and management. He joined First Union
from Federated Investment Counseling, a division of Federated
Investors, Pittsburgh, where he managed equities for employee
benefit and tax-exempt separate accounts and mutual funds.
18
<PAGE>
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
OBJECTIVE
Evergreen Value Fund seeks long-term capital appreciation, with current income
as a secondary objective.
STRATEGY
The Fund normally invests at least 75% of its assets in the stocks of U.S.
companies with prospects for earnings growth and dividends. These companies have
minimum capitalizations of $100 million. The Fund also may invest in foreign
securities, American Depository Receipts and investment quality bonds.
LONG-TERM GROWTH
[Graph appears here]
PLOT POINTS
Initial Dividend
-------- --------
9,525 9,525
8,143 8,497
9,965 11,222
9,760 11,884
10,498 13,239
10,851 14,653
10,870 15,827
11,000 17,012
12,246 20,452
12,655 22,579
15,270 32,112
TOP 10 STOCK HOLDINGS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
COMPANY INDUSTRY ASSETS
1. Nokia Corp. Telecommunication 3.0
Services & Equip.
2. Tyco International Limited Diversified 2.9
Companies
3. General Electric Co. Diversified 2.6
Companies
4. General Mills, Inc. Food & Beverage 2.4
Products
5. Bristol-Myers Squibb Co. Healthcare Products 2.4
& Services
6. Tosco Corp. Energy 2.3
7. CoreStates Financial Corp. Banks 2.3
8. Tenet Healthcare Corp. Healthcare Products 2.2
& Services
9. Philip Morris Companies Consumer Products & 2.2
Services
10. Williams Companies, Inc. Oil 2.1
TOP 10 INDUSTRY ALLOCATIONS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
INDUSTRY ASSETS
1. Banks 16.3
2. Diversified Companies 11.7
3. Energy 10.1
4. Utilities 7.7
5. Healthcare Products & Services 7.5
6. Oil 6.6
7. Food & Beverage Products 5.3
8. Electrical Equipment & Services 4.8
9. Transportation 3.4
10. Telecommunication Services & Equip. 3.0
PORTFOLIO CHARACTERISTICS
Total Net Assets (all classes) $1.82 billion
19
<PAGE>
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
MANAGEMENT REPORT
September 1997
Dear Shareholders:
We are pleased to report to you on the Evergreen Value Fund for the fiscal
period that ended July 31, 1997.
PERFORMANCE
The Evergreen Value Fund provided strong performance during the period. For
example, the Fund's Class Y Shares had a total return of 42.58% for the 12
months that ended on July 31, a period characterized by a positive environment
for equities that particularly rewarded the large cap, blue-chip companies
emphasized by your Fund. A complete review of the performance of each class of
shares can be found on page 18.
INVESTMENT ENVIRONMENT
The investment and economic environment during the fiscal period proved very
rewarding for investors. The U.S. economy witnessed phenomenal growth and,
surprisingly, did so without experiencing signs of inflationary pressure.
However, despite few overt signs of inflation, persistent economic growth
prompted the Federal Reserve Board, in a "pre-emptive strike" at inflation, to
increase interest rates by 0.25% on March 25. This Fed-induced rate hike-- the
only Federal Reserve action during the twelve months-- startled investors,
resulting in a short-lived decline in equities before they resumed their upward
ascent. Interest rates, despite some short-term swings, remained relatively low
and stable over the course of the fiscal year, providing more fuel to power the
equity rally.
Strong economic growth, low inflation and low interest rates set the stage for
the equity market's impressive advance. The stock market's powerful rally
featured larger "blue chip" companies, which outperformed their smaller
counterparts. Equities' narrow advance was most evident during the first three
months of 1997, as the broad market experienced modest gains versus the negative
returns for small cap stocks. Since that period, small- and mid-capitalized
stocks have provided excellent returns, and have gained some ground on their
larger counterparts. However, over the 12-month period, larger capitalization
stocks have been the best performers.
INVESTMENT STRATEGY
Throughout the period, the Evergreen Value Fund emphasized large-sized,
market-leading companies that have proven records of earnings growth. Consistent
with a traditional "value" fund, many of the holdings' share prices reflect
statistical measures of value. Such securities may be undervalued due to market
decline, poor economic conditions, actual or anticipated problems, or, simply,
lack of market attention.
Within the current market environment in which stocks, as a whole, have been bid
up to all-time highs and valuation levels that are inflated, it is increasingly
difficult to find companies which are undervalued. This investment environment
dictates that we remain focused on our "bottom-up" stock selection process,
which concentrates on analyzing security fundamentals rather than broad economic
forecasts.
FINANCE
The Fund's largest sector weighting, at approximately 19%, is the financial
sector. Within this group, banks have rebounded from the early 1990s, a period
in which many financial institutions were crippled by bad loans. Financial
companies (banks in particular) have ridden a wave of mergers, low interest
rates and productivity-enhancing technology to outstanding gains. The Fund's
bank holdings include Central Fidelity Banks, Union Planters, Citicorp and
NationsBank, all of which returned over 65% for the fiscal period. Financial
companies have provided investors handsome returns over the past three years,
and have done so with less volatility than other sectors. Going forward, the
fundamental outlook for the industry remains attractive, especially if interest
rates and inflation remain at their current benign levels.
TECHNOLOGY
The technology sector is among the best performing industries over the past two
years, although its advance over the past year has been somewhat narrow. A
relatively small number of spectacular performers such as
20
<PAGE>
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
Intel and Microsoft are largely responsible for the excellent overall
performance in the sector. Despite a mild correction in the first quarter of
1997, technology stocks have continued their powerful advance. Despite any
short-term volatility, we anticipate this trend to continue. The fundamental
outlook for technology-related companies remains positive as companies seek to
increase their productivity through technological improvements. Currently, close
to half of all capital spending is technology-related. The Fund's performance
during the fiscal period was enhanced by particularly strong technology
holdings such as Teradyne, Intel and IBM, which returned 245%, 145% and 98%,
respectively.
UTILITIES
Utilities comprise the Fund's third largest sector weighting. Within this
sector, the portfolio is buoyed by such holdings as Houston Industries and
Illinova Corporation. A strong utility exposure bolsters the Fund in two
specific ways. First, because utility companies tend to be high dividend-paying
companies, our utility weighting tends to increase the Fund's current yield.
Second, utilities provide the portfolio a somewhat defensive posture, as these
companies possess characteristics that allow them to better endure a market
downturn.
OUTLOOK
The outstanding performance of equities over the past couple of years can be
attributed to increased efficiency as well as a very favorable economic
environment. Companies have experienced surging profits as a direct result of
cost-cutting initiatives and productivity gains through technological
enhancements. In addition, a very cooperative economy, which has provided solid
growth, low interest rates and low inflation, has contributed to a stock market
that has doubled over the past three years.
The top individual performers during the fiscal period consisted primarily of
large, industry-leading companies, specifically, those within the financial and
technology industries. We expect these sectors to remain strongly represented in
the coming quarters, as their fundamental outlooks remain very favorable. In
addition we intend to maintain a strong representation of large,
industry-leading companies such as General Electric, Bristol-Myers, Philip
Morris and General Mills, which we believe have the potential to improve the
Fund's relative performance.
In light of the dramatic market performance over the past couple of years, we
approach the remainder of 1997 with a degree of caution. Judging from its
expensive valuation levels, the stock market's upside potential appears to be
limited. At this stage of a market cycle, a correction in equity prices is not
uncommon. Although painful, a correction would reduce stock valuations to more
reasonable levels. Should a market correction occur, we would view it as a
buying opportunity.
Thank you for your investment in Evergreen Value Fund.
Sincerely,
/s/ David C. Francis
DAVID C. FRANCIS
PORTFOLIO MANAGEMENT TEAM LEADER
Evergreen Value Fund
21
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return logo appears here]
FUND-AT-A-GLANCE
As of July 31, 1997
ONE-YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
One year w/o sales
charge 43.66 % 42.44 % 42.58 % N/A
One year with sales
charge 36.84 % 37.44 % 41.58 % N/A
One year dividends per
share $0.275 $0.141 $0.141 $0.155
One year cap gains per
share $0.330 $0.330 $0.330 N/A
AVERAGE
ANNUAL RETURNS CLASS A CLASS B CLASS C CLASS Y
Three years 22.15 % 22.47 % 23.17 % N/A
Five years 16.32 % N/A N/A N/A
Ten years 12.40 % N/A N/A N/A
Since Inception* 12.72 % 16.33 % 16.61 % N/A
CUMULATIVE RETURNS CLASS A CLASS B CLASS C CLASS Y
Eight months w/o sales
charge 20.40 % 19.68 % 19.73 % N/A
Three years 82.28 % 83.69 % 86.87 % N/A
Five years 112.92 % N/A N/A N/A
Ten years 221.82 % N/A N/A N/A
Since Inception* 243.38 % 97.49 % 99.66 % 17.72 %
CLASS A BEGAN 2/13/87; CLASSES B & C BEGAN 2/1/93; CLASS Y BEGAN 1/13/97.
[Graph appears here]
PLOT POINTS
CLASS A: CPI S&P 500
- ------- ----- ------
9,525 10,000 10,000
8,497 10,399 8,824
11,222 10,934 11,458
11,884 11,461 11,672
13,239 11,971 13,159
14,653 12,349 14,839
15,827 12,690 16,110
17,012 13,042 16,960
20,452 13,403 21,381
22,579 13,797 24,920
32,112 14,102 37,905
PORTFOLIO MANAGER
Walter T. McCormick, a Senior Vice President and Chief
Investment Officer, Growth and Income, at Keystone Investment
[Photo of Management Company, has been Portfolio Manager of Keystone
Walter T. Fund for Total Return since the Fund's inception. He also is
McCormick Portfolio Manager of Keystone Balanced Fund (K-1). A chartered
appears here] financial analyst with more than 25 years of investment
management experience, Mr. McCormick is a graduate of
Providence College and earned a M.B.A. at Rutgers University.
22
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return logo appears here]
OBJECTIVE
Keystone Fund for Total Return seeks total return through a combination of
growth of capital and income.
STRATEGY
The Fund invests primarily in U.S. common stocks, but also may invest in other
securities, including convertible securities, bonds and foreign stocks in an
effort to provide consistent returns with less price volatility. At the core of
the portfolio are U.S. companies with total market capitalizations of more than
$5 billion. However, the Fund also may invest in mid- or small-cap companies.
LONG-TERM GROWTH
[Graph appears here]
PLOT POINTS
Initial Dividend
-------- --------
9,525 9,525
8,409 8,896
10,078 11,176
9,873 11,903
10,819 13,528
11,025 14,397
11,721 16,297
10,953 16,817
12,194 19,155
13,310 22,402
18,470 32,182
TOP 10 STOCK HOLDINGS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
STOCK INDUSTRY ASSETS
1. General Electric Co. Capital Goods 3.0
2. Bristol-Myers Squibb Co. Healthcare Products 2.9
& Services
3. Philip Morris Companies, Inc. Consumer Products & 2.1
Services
4. American Home Products Corp. Healthcare Products 2.0
& Services
5. Motorola, Inc. Electrical Equip. & 2.0
Services
6. International Business Business Equipment & 1.9
Machines Services
7. BMC Software Business Equipment & 1.8
Services
8. Texas Instruments Electrical Equip. & 1.8
Services
9. Tyco International Ltd. Diversified 1.7
Companies
10. Northern Telecom Ltd. Telecommunication 1.6
Services & Equip.
TOP 10 INDUSTRY ALLOCATIONS JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
% OF
NET
INDUSTRY ASSETS
1. Finance & Insurance 8.7
2. Electrical Equipment & Services 8.1
3. Business Equipment & Services 7.5
4. Real Estate 7.4
5. Healthcare Products & Services 7.2
6. Consumer Products & Services 6.0
7. Oil 5.8
8. Diversified Companies 5.2
9. Telecommunication Services & Equip. 5.1
10. Chemical & Agricultural Products 4.6
PORTFOLIO CHARACTERISTICS
Total Net Assets (all classes) $163.3 million
23
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return logo appears here]
MANAGEMENT REPORT
September 1997
Dear Shareholders:
We are pleased to report on the Keystone Fund for Total Return for the fiscal
period that ended on July 31, 1997.
PERFORMANCE
The Keystone Fund for Total Return delivered exceptionally strong returns
through the period, reflecting good stock selection and the very positive
investment environment that has helped to propel the stock market to record
highs. In this positive environment, the market leaders tended to be stocks of
the large capitalization, dividend-paying companies that your Fund normally
emphasizes. A complete review of the performance of each class of shares can be
found on page 22.
ENVIRONMENT
The 12-month period that ended on July 31, especially the final eight months,
provided an extremely supportive investment environment for stocks in general,
and large company stocks in particular. In general, the economy in the United
States grew at a steady pace, with inflation well under control. Interest rates,
despite some short-term fluctuations, showed relative stability when looked at
over longer periods of time. Rates remained sufficiently low to provide
liquidity to the bull market for stocks.
The economy showed very strong growth during the final two quarters of 1996,
giving impetus to the stock markets. In early 1997, this momentum stalled
somewhat beginning in February amid concerns that economic growth might be
overheating and set off a round of inflation. This led to the anticipation that
the Federal Reserve Board might step in to pre-empt inflation by limiting
liquidity through increases in short-term interest rates. In fact, the Federal
Reserve Board did raise rates by one-quarter of one percent in late March, and
this did cause a pull-back in the stock market in March and April. This
pull-back, however, turned out to be a temporary pause in a longer-term upward
trend. In hindsight, the March-April downturn probably was healthy, reducing
some of the excess speculation from the stock market. Subsequently, as new
reports gave evidence that economic growth was slowing during the second quarter
of 1997 and that inflation was not becoming a problem, interest rates began
falling. The bull market in stocks resumed and the stock market hit a succession
of new highs in the spring and summer of 1997.
ASSET ALLOCATION JULY 31, 1997
AS A PERCENTAGE OF NET ASSETS
[Pie chart appears below with the following data:]
Common Stocks 88.2%
Convertible Preferred Stocks 5.4%
Short-term Investments & other assets 3.6%
Convertible Debentures 2.8%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
LARGE CAP LEADERS
Throughout this period, the large capitalization, U.S. companies that usually
are emphasized by your Fund were the market leaders. Many of these companies
have made significant capital investments during the past decade, especially in
technology, which have increased their productivity and improved their
competitive standing in the global markets. At the same time, many companies
also have undergone restructurings and cost-cutting, which have had similar
effects on their productivity and competitive positions. The result is that U.S.
industry has become more competitive on a worldwide basis, and many American
companies have become world leaders.
INVESTMENT STRATEGY
Throughout the period, your Fund has maintained its relatively conservative
approach to equity investing, concentrating on the stocks of large companies
with proven records of consistent earnings growth and market leadership.
Throughout the period, the Fund has emphasized several industries, including
finance and insurance, real estate trusts, healthcare products and services and
technology. In the final two months of the period, the Fund also has increased
its emphasis on technology companies, including electronics companies, office
equipment companies and software companies.
24
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return logo appears here]
REAL ESTATE TRUSTS
One of the distinctive areas of emphasis in your Fund during the past year has
been its position in real estate investment trusts. These investments, which
usually provide good yield as well as the opportunity for price appreciation,
have performed extremely well in a very strong market for real estate,
particularly commercial and office properties. While we have taken some profits
and reduced the Fund's exposure to real estate somewhat in recent months, the
Fund's position still remains significant at 7.4% of net assets.
FINANCE AND INSURANCE
The general financial area, including banks, insurance and other financial
service companies, has been the largest area of emphasis, at 12.0% of assets.
These industries have tended to do well in the environment of moderate growth
and low inflation. Significant holdings during the past year have been
BankAmerica Corp., BankBoston Corp., Chase Manhattan Corp., the Student Loan
Marketing Association (Sallie Mae), and The Travelers Group.
HEALTHCARE PRODUCTS AND SERVICES
The pharmaceutical area was another major area of emphasis, at more than 7% of
net assets at the end of the fiscal period. This area rebounded strongly after
the correction in the market during March and April, and we increased our
emphasis when we saw attractive relative values. We have favored pharmaceutical
companies with strong product pipelines, or the ability to develop and introduce
successive new products over time. Holdings include American Home Products,
Johnson & Johnson and Bristol-Myers.
TECHNOLOGY
As the stock market showed new strength in the late spring and early summer, we
increased our emphasis on technology stocks in general when we saw attractive
values. We increased Fund holdings in IBM and Motorola, both of which have had
strong comebacks, and added Microsoft, the world's dominant software company, to
the portfolio. We also have positions in Intel and Texas Instruments.
Many of these companies are benefiting from the very strong demand for personal
computers, which we expect to continue. In our portfolio, we have tended to
emphasize companies that we believe will be leading players in the personal
computer market.
OUTLOOK
As we enter the second half of 1997, we find ourselves in one of the most
positive investment environments in memory, with moderate economic growth,
stable-to-falling interest rates, high and rising corporate profits, liquidity
in the markets and low inflation. In addition, investors continue to put money
into the equity markets, feeding strong demand for stocks in general. The stocks
that have benefited the most from this phenomenon have been the stocks that have
produced the most impressive returns over the past three years-- the large
capitalization, blue chip stocks that are an important part of your Fund's
investment strategy.
We believe that as long as inflation remains under control, interest rates can
remain relatively stable and the favorable environment for stocks can continue.
A word of caution is in order, however. The extraordinarily positive environment
for stock investing cannot continue indefinitely, and we believe mutual fund
investors should moderate their expectations about future returns. In
particular, they should not expect a repeat of the extremely impressive returns
of the past 12 months. Moreover, it would not be unusual if at some point the
market experiences a major correction in stock prices. These corrections, while
very painful when they occur, are normal events in market cycles. Investors
experiencing them should remind themselves of their long-term objectives and not
be overly influenced by short-term events.
We thank you for your support of Keystone Fund for Total Return.
Sincerely,
/s/ Albert H. Elfner, III
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
/s/ Walter T. McCormick
WALTER T. MCCORMICK
SENIOR VICE PRESIDENT
Chief Investment Officer, Growth and Income
25
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[G&I logo appears here]
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED DECEMBER
ENDED 31,
JULY 31, 1997# 1996 1995*
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................... $ 22.53 $ 18.63 $ 14.48
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................................. 0.08 0.12 0.13
Net realized and unrealized gain on investments....................... 4.72 4.26 4.64
Total from investment operations...................................... 4.80 4.38 4.77
LESS DISTRIBUTIONS FROM
Net investment income................................................. (0.07) (0.13) (0.14)
In excess of net investment income.................................... 0** 0 0
Net realized gain on investments...................................... 0 (0.35) (0.48)
Total distributions................................................... (0.07) (0.48) (0.62)
NET ASSET VALUE END OF PERIOD......................................... $ 27.26 $ 22.53 $ 18.63
Total return+......................................................... 21.33% 23.50% 33.00%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................................... 1.47%++ 1.41% 1.55%++
Total expenses, excluding indirectly paid expenses.................. 1.47%++ N/A N/A
Total expenses, excluding fee waivers & expense reimbursements...... N/A N/A 1.64%++
Net investment income............................................... 0.57%++ 0.70% 0.99%++
Portfolio turnover rate............................................... 6% 14% 17%
Average commission rate paid per share................................ $ 0.0603 $0.0566 N/A
NET ASSETS END OF PERIOD (MILLIONS)................................... $ 166 $ 85 $ 19
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 3, 1995 (commencement of class operations) to
December 31, 1995.
** less than one cent per share.
# The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED DECEMBER
ENDED 31,
JULY 31, 1997# 1996 1995*
<S> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................... $ 22.43 $ 18.59 $14.48
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss).......................................... (0.02) 0** 0.05
Net realized and unrealized gain on investments....................... 4.69 4.20 4.61
Total from investment operations...................................... 4.67 4.20 4.66
LESS DISTRIBUTIONS FROM
Net investment income................................................. 0 (0.01) (0.07)
Net realized gain on investments...................................... 0 (0.35) (0.48)
Total distributions................................................... 0 (0.36) (0.55)
NET ASSET VALUE END OF PERIOD......................................... $ 27.10 $ 22.43 $18.59
Total return+......................................................... 20.82% 22.60% 32.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................................... 2.25%++ 2.17% 2.24%++
Total expenses, excluding indirectly paid expenses.................. 2.25%++ N/A N/A
Total expenses, excluding fee waivers & expense reimbursements...... N/A N/A 2.26%++
Net investment income............................................... (0.19%)++ (0.06%) 0.30%++
Portfolio turnover rate............................................... 6% 14% 17%
Average commission rate paid per share................................ $ 0.0603 $0.0566 N/A
NET ASSETS END OF PERIOD (MILLIONS)................................... $ 542 $ 245 $ 46
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 3, 1995 (commencement of class operations) to
December 31, 1995.
** Less than one cent per share.
# The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[Growth and Income Fund appears here]
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED DECEMBER
ENDED 31,
JULY 31, 1997# 1996 1995*
<S> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................... $ 22.43 $ 18.58 $14.48
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss).......................................... (0.02) 0** 0.06
Net realized and unrealized gain on investments....................... 4.69 4.21 4.60
Total from investment operations...................................... 4.67 4.21 4.66
LESS DISTRIBUTIONS FROM
Net investment income................................................. 0 (0.01) (0.08)
Net realized gain on investments...................................... 0 (0.35) (0.48)
Total distributions................................................... 0 (0.36) (0.56)
NET ASSET VALUE END OF PERIOD......................................... $ 27.10 $ 22.43 $18.58
Total return+......................................................... 20.82% 22.60% 32.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................................... 2.25%++ 2.17% 2.15%++
Total expenses, excluding indirectly paid expenses.................. 2.25%++ N/A N/A
Total expenses, excluding fee waivers & expense reimbursements...... N/A N/A 4.94%++
Net investment income............................................... (0.19%)++ (0.06%) 0.35%++
Portfolio turnover rate............................................... 6% 14% 17%
Average commission rate paid per share................................ $ 0.0603 $0.0566 N/A
NET ASSETS END OF PERIOD (MILLIONS)................................... $ 24 $ 10 $ 20
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 3, 1995 (commencement of class operations) to
December 31, 1995.
** Less than one cent per share.
# The Fund changed its fiscal year ended from December 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD............................ $ 22.55 $ 18.64 $ 14.52 $15.41 $14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income.......................................... 0.11 0.18 0.18 0.14 0.14
Net realized and unrealized gain (loss) on investments......... 4.73 4.25 4.59 0.12 1.91
Total from investment operations............................... 4.84 4.43 4.77 0.26 2.05
LESS DISTRIBUTIONS FROM
Net investment income.......................................... (0.10) (0.17) (0.17) (0.14) (0.14)
In excess of net investment income............................. 0** 0 0 0 0
Net realized gain on investments............................... 0 (0.35) (0.48) (1.01) (0.68)
Total distributions............................................ (0.10) (0.52) (0.65) (1.15) (0.82)
NET ASSET VALUE END OF PERIOD.................................. $ 27.29 $ 22.55 $ 18.64 $14.52 $15.41
Total return................................................... 21.52% 23.80% 32.90% 1.70% 14.40%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................... 1.21%++ 1.16% 1.27% 1.33% 1.26%
Total expenses, excluding indirectly paid expenses........... 1.21%++ 1.16% N/A N/A N/A
Net investment income........................................ 0.82%++ 0.93% 1.11% 0.96% 0.99%
Portfolio turnover rate........................................ 6% 14% 17% 29% 28%
Average commission rate paid per share......................... $ 0.0603 $0.0566 N/A N/A N/A
NET ASSETS END OF PERIOD (MILLIONS)............................ $ 616 $ 442 $ 141 $ 73 $ 77
YEAR ENDED DECEMBER 31,
1992 1991 1990 1989 1988* 1987*
CLASS Y SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD............................ $12.99 $10.72 $12.03 $10.62 $ 9.38 $10.05
INCOME FROM INVESTMENT OPERATIONS
Net investment income.......................................... 0.15 0.19 0.30 0.52 0.19 0.20
Net realized and unrealized gain (loss) on investments......... 1.65 2.58 (0.84) 2.17 2.10 (0.63)
Total from investment operations............................... 1.80 2.77 (0.54) 2.69 2.29 (0.43)
LESS DISTRIBUTIONS FROM
Net investment income.......................................... (0.15) (0.19) (0.30) (0.52) (0.19) (0.24)
In excess of net investment income............................. 0 0 0 0 0 0
Net realized gain on investments............................... (0.46) (0.31) (0.47) (0.76) (0.86) 0
Total distributions............................................ (0.61) (0.50) (0.77) (1.28) (1.05) (0.24)
NET ASSET VALUE END OF PERIOD.................................. $14.18 $12.99 $10.72 $12.03 $10.62 $ 9.38
Total return................................................... 13.80% 25.80% (4.50%) 25.40% 24.60% (4.30%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................... 1.33% 1.41% 1.50% 1.54% 1.56% 1.76%
Total expenses, excluding indirectly paid expenses........... N/A N/A N/A N/A N/A N/A
Net investment income........................................ 1.18% 1.55% 2.62% 4.13% 1.70% 1.90%
Portfolio turnover rate........................................ 30% 23% 41% 53% 41% 48%
Average commission rate paid per share......................... N/A N/A N/A N/A N/A N/A
NET ASSETS END OF PERIOD (MILLIONS)............................ $ 64 $ 48 $ 36 $ 32 $ 24 $ 21
</TABLE>
++ Annualized.
* Net investment income based on the average monthly shares outstanding for the
period indicated.
** Less than one cent per share.
# The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS
28
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G Fund logo appears here]
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED JANUARY 31,
JULY 31, 1997# 1997 1996 1995*
<S> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $ 21.79 $ 20.15 $ 17.28 $ 17.09
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.52 1.02 1.01 0.02
Net realized and unrealized gain on investments................... 2.15 1.67 2.94 0.17
Total from investment operations.................................. 2.67 2.69 3.95 0.19
LESS DISTRIBUTIONS FROM
Net investment income............................................. (0.52) (1.05) (1.08) 0
Total distributions............................................... (0.52) (1.05) (1.08) 0
NET ASSET VALUE, END OF PERIOD.................................... $ 23.94 $ 21.79 $ 20.15 $ 17.28
Total return+..................................................... 12.45% 13.80% 23.40% 1.10%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses.................................................. 1.45%++ 1.44% 1.36% 1.45%++
Total expenses, excluding indirectly paid expenses.............. 1.45%++ N/A N/A N/A
Total expenses, excluding fee waivers & expense reimbursements.. N/A N/A 2.50% N/A
Interest expense................................................ N/A 0.03% N/A N/A
Net investment income........................................... 4.69%++ 4.93% 5.39% 4.09%++
Portfolio turnover rate........................................... 72% 168% 138% 151%
Average commission rate paid per share............................ $ 0.0487 $0.0491 N/A N/A
NET ASSETS, END OF PERIOD (THOUSANDS)............................. $ 11,955 $ 9,678 $ 4,412 $ 119
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 3, 1995 (commencement of Class operations) to
January 31, 1995.
# The Fund changed its fiscal year end from January 31 to July 31, effective
July 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED JANUARY 31,
JULY 31, 1997# 1997 1996 1995*
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $ 21.69 $ 20.08 $ 17.28 $17.09
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.43** 0.89 0.91 0.02
Net realized and unrealized gain on investments................... 2.15 1.64 2.87 0.17
Total from investment operations.................................. 2.58 2.53 3.78 0.19
LESS DISTRIBUTIONS FROM
Net investment income............................................. (0.46) (0.92) (0.98) 0
Total distributions............................................... (0.46) (0.92) (0.98) 0
NET ASSET VALUE, END OF PERIOD.................................... $ 23.81 $ 21.69 $ 20.08 $17.28
Total return+..................................................... 12.06% 13.00% 22.40% 1.10%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses.................................................. 2.20%++ 2.19% 2.11% 2.23%++
Total expenses, excluding paid expenses......................... 2.20%++ N/A N/A N/A
Total expenses, excluding fee waivers & expense reimbursements.. N/A N/A 2.25% N/A
Interest expense................................................ N/A 0.03% N/A N/A
Net investment income........................................... 3.94%++ 4.17% 4.69% 3.23%++
Portfolio turnover rate........................................... 72% 168% 138% 151%
Average commission rate paid per share............................ $ 0.0487 $0.0491 N/A N/A
NET ASSETS, END OF PERIOD (THOUSANDS)............................. $ 43,977 $35,323 $14,750 $ 599
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 3, 1995 (commencement of operations) to January
31, 1995.
** Calculated based on average shares outstanding.
# The Fund changed its fiscal year end from January 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G logo appears here]
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED JANUARY 31,
JULY 31, 1997# 1997 1996 1995*
<S> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $ 21.69 $ 20.08 $17.27 $17.09
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.44** 0.87 0.90 0.01
Net realized and unrealized gain on investments................... 2.14 1.66 2.89 0.17
Total from investment operations.................................. 2.58 2.53 3.79 0.18
LESS DISTRIBUTIONS FROM
Net investment income............................................. (0.46) (0.92) (0.98) 0
Total distributions............................................... (0.46) (0.92) (0.98) 0
NET ASSET VALUE, END OF PERIOD.................................... $ 23.81 $ 21.69 $20.08 $17.27
Total return+..................................................... 12.06% 12.90% 22.40% 1.10%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses.................................................. 2.20%++ 2.19% 2.11% 2.22%++
Total expenses, excluding paid expenses......................... 2.20%++ N/A N/A N/A
Total expenses, excluding fee waivers & expense reimbursements.. N/A N/A 13.03% N/A
Interest expense................................................ N/A 0.03% N/A N/A
Net investment income........................................... 4.06%++ 4.15% 4.67% 2.68%++
Portfolio turnover rate........................................... 72% 168% 138% 151%
Average commission rate paid per share............................ $ 0.0487 $0.0491 N/A N/A
NET ASSETS, END OF PERIOD (THOUSANDS)............................. $ 950 $ 982 $ 523 $ 24
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 3, 1995 (commencement of operations) to January
31, 1995.
** Calculated based on average shares outstanding.
# The Fund changed its fiscal year end from January 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G logo appears here]
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED JANUARY 31,
JULY 31, 1997# 1997 1996 1995##
<S> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 21.81 $ 20.16 $ 17.28 $18.29
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................................... 0.55 1.08 1.10 0.87
Net realized and unrealized gain (loss) on investments........ 2.16 1.66 2.87 (0.55 )
Total from investment operations.............................. 2.71 2.74 3.97 0.32
LESS DISTRIBUTIONS FROM
Net investment income......................................... (0.54) (1.09) (1.09) (1.08 )
Net realized gain on investments.............................. 0 0 0 (0.25 )
Total distributions........................................... (0.54) (1.09) (1.09) (1.33 )
NET ASSET VALUE, END OF PERIOD................................ $ 23.98 $ 21.81 $ 20.16 $17.28
Total return.................................................. 12.65% 14.10% 23.50% 1.90%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses.............................................. 1.20%++ 1.18% 1.19% 1.24%++
Total expenses, excluding paid expenses..................... 1.20%++ N/A N/A N/A
Interest expense............................................ N/A 0.03% N/A N/A
Net investment income....................................... 4.97%++ 5.14% 5.70% 5.70%++
Portfolio turnover rate....................................... 72% 168% 138% 151%
Average commission rate paid per share........................ $ 0.0487 $0.0491 N/A N/A
NET ASSETS, END OF PERIOD (MILLIONS).......................... $ 900 $ 858 $ 914 $ 942
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES (CONTINUED)
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 20.90 $ 18.82 $ 18.12 $ 18.26 $17.92 $17.11
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................................... 1.08 1.11 1.08 1.02 1.07 1.12
Net realized and unrealized gain (loss) on investments...... (1.41) 2.51 0.70 (0.08) 0.36 0.79
Total from investment operations............................ (0.33) 3.62 1.78 0.94 1.43 1.91
LESS DISTRIBUTIONS FROM
Net investment income....................................... (1.08) (1.08) (1.08) (1.08) (1.09) (1.08)
Net realized gain on investments............................ (1.20) (0.46) 0 0 0 (0.02)
Total distributions......................................... (2.28) (1.54) (1.08) (1.08) (1.09) (1.10)
NET ASSET VALUE, END OF PERIOD.............................. $ 18.29 $ 20.90 $ 18.82 $ 18.12 $18.26 $17.92
Total return................................................ -2.10% 20.20% 10.20% 5.80% 7.90% 1.30%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses............................................ 1.18% 1.18% 1.21% 1.23% 1.18% 1.02%
Total expenses, excluding paid expenses................... N/A N/A N/A N/A N/A N/A
Interest expense.......................................... N/A N/A N/A N/A N/A N/A
Net investment income..................................... 5.29% 5.65% 5.73% 5.90% 5.64% 6.36%
Portfolio turnover rate..................................... 106% 164% 137% 137% 89% 86%
Average commission rate paid per share...................... N/A N/A N/A N/A N/A N/A
NET ASSETS, END OF PERIOD (MILLIONS)........................ $ 1,065 $ 1,142 $ 1,032 $ 1,151 $1,292 $1,312
<CAPTION>
YEAR ENDED MARCH 31,
1988
<S> <C>
CLASS Y SHARES (CONTINUED)
NET ASSET VALUE, BEGINNING OF PERIOD........................ $20.37
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................................... 1.06
Net realized and unrealized gain (loss) on investments...... (2.64)
Total from investment operations............................ (1.58)
LESS DISTRIBUTIONS FROM
Net investment income....................................... (0.80)
Net realized gain on investments............................ (0.88)
Total distributions......................................... (1.68)
NET ASSET VALUE, END OF PERIOD.............................. $17.11
Total return................................................ (7.80%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses............................................ 1.01%
Total expenses, excluding paid expenses................... N/A
Interest expense.......................................... N/A
Net investment income..................................... 5.80%
Portfolio turnover rate..................................... 81%
Average commission rate paid per share...................... N/A
NET ASSETS, END OF PERIOD (MILLIONS)........................ $1,346
</TABLE>
++ Annualized.
# The Fund changed its fiscal year end from January 31 to July 31, effective
July 31, 1997.
## For the ten month period ended January 31, 1995. The Fund changed its fiscal
year end from March 31 to January 31, effective January 31, 1995.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
EVERGREEN
SMALL CAP EQUITY INCOME FUND
[Small Cap Equity Income Fund logo appears here]
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED DECEMBER
ENDED 31,
JULY 31, 1997# 1996 1995*
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................................. $ 13.10 $ 11.57 $ 9.64
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................................................ 0.14** 0.34 0.34
Net realized and unrealized gain on investments...................................... 2.59 2.13 2.45
Total from investment operations..................................................... 2.73 2.47 2.79
LESS DISTRIBUTIONS FROM
Net investment income................................................................ (0.13) (0.34) (0.37)
Net realized gain on investments..................................................... (0.01) (0.60) (0.49)
Total distributions.................................................................. (0.14) (0.94) (0.86)
NET ASSET VALUE END OF PERIOD........................................................ $ 15.69 $ 13.10 $11.57
Total return+........................................................................ 20.99% 22.00% 29.50%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................................... 1.71%++ 1.75% 1.75%++
Total expenses, excluding indirectly paid expenses................................. 1.70%++ N/A N/A
Total expenses, excluding fee waivers & expense reimbursements 1.84%++ 5.03% 24.45%++
Net investment income.............................................................. 1.88%++ 3.08% 3.39%++
Portfolio turnover rate.............................................................. 13% 50% 48%
Average commission rate paid per share............................................... $ 0.0665 $0.0635 N/A
NET ASSETS END OF PERIOD (THOUSANDS)................................................. $ 4,239 $ 336 $ 216
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 3, 1995 (commencement of operations) to January
31, 1995.
** Calculation based on average shares outstanding during the period.
# The Fund changed its fiscal year end from January 31 to July 31, effective
July 31, 1997.
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED DECEMBER
ENDED 31,
JULY 31, 1997# 1996 1995*
<S> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................................. $ 13.09 $ 11.57 $ 9.64
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................................................ 0.08** 0.27 0.28
Net realized and unrealized gain on investments...................................... 2.57 2.11 2.43
Total from investment operations..................................................... 2.65 2.38 2.71
LESS DISTRIBUTIONS FROM
Net investment income................................................................ (0.09) (0.26) (0.29)
Net realized gain on investments..................................................... (0.01) (0.60) (0.49)
Total distributions.................................................................. (0.10) (0.86) (0.78)
NET ASSET VALUE END OF PERIOD........................................................ $ 15.64 $ 13.09 $11.57
Total return+........................................................................ 20.37% 21.10% 28.70%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................................... 2.46%++ 2.50% 2.50%++
Total expenses, excluding indirectly paid expenses................................. 2.45%++ N/A N/A
Total expenses, excluding fee waivers & expense reimbursements..................... 2.59%++ 5.72% 20.90%++
Net investment income.............................................................. 1.12%++ 2.39% 2.67%++
Portfolio turnover rate.............................................................. 13% 50% 48%
Average commission rate paid per share............................................... $ 0.0665 $0.0635 N/A
NET ASSETS END OF PERIOD (THOUSANDS)................................................. $ 9,462 $ 692 $ 266
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 3, 1995 (commencement of operations) to January
31, 1995.
** Calculation based on average shares outstanding during the period.
# The Fund changed its fiscal year end from January 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
EVERGREEN
SMALL CAP EQUITY INCOME FUND
[Small Cap Equity Income Fund logo appears here]
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED DECEMBER
ENDED 31,
JULY 31, 1997# 1996 1995*
<S> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................................. $ 13.09 $ 11.56 $ 9.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................................................ 0.10** 0.28 0.28
Net realized and unrealized gain on investments...................................... 2.54 2.10 2.33
Total from investment operations..................................................... 2.64 2.38 2.61
LESS DISTRIBUTIONS FROM
Net investment income................................................................ (0.09) (0.25) (0.30)
Net realized gain on investments..................................................... (0.01) (0.60) (0.49)
Total distributions.................................................................. (0.10) (0.85) (0.79)
NET ASSET VALUE END OF PERIOD........................................................ $ 15.63 $ 13.09 $11.56
Total return+........................................................................ 20.30% 21.10% 27.30%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................................... 2.45%++ 2.50% 2.50%++
Total expenses, excluding indirectly paid expenses................................. 2.44%++ N/A N/A
Total expenses, excluding fee waivers & expense reimbursements..................... 2.58%++ 5.77% 187.29%++
Net investment income.............................................................. 1.20%++ 2.33% 2.63%++
Portfolio turnover rate.............................................................. 13% 50% 48%
Average commission rate paid per share............................................... $ 0.0665 $0.0635 N/A
NET ASSETS END OF PERIOD (THOUSANDS)................................................. $ 2,770 $ 56 $ 24
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 24, 1995 (commencement of class operations) to
December 31, 1995.
** Calculation based on average shares outstanding during the period.
# The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994 1993*
<S> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD..................... $ 13.12 $ 11.58 $ 9.70 $10.15 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................... 0.19** 0.38 0.38 0.34 0.10
Net realized and unrealized gain (loss) on investments.. 2.56 2.13 2.38 (0.41) 0.15
Total from investment operations........................ 2.75 2.51 2.76 (0.07) 0.25
LESS DISTRIBUTIONS FROM
Net investment income................................... (0.15) (0.37) (0.38) (0.33) (0.10)
Net realized gain on investments........................ (0.01) (0.60) (0.50) (0.05) 0
Total distributions..................................... (0.16) (0.97) (0.88) (0.38) (0.10)
NET ASSET VALUE END OF PERIOD........................... $ 15.71 $ 13.12 $11.58 $ 9.70 $10.15
Total return............................................ 21.09% 22.40% 29.10% (0.70%) 2.50%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................................ 1.39%++ 1.50% 1.50% 1.48% 0.00%++
Total expenses, excluding indirectly paid expenses.... 1.38%++ N/A N/A N/A N/A
Total expenses, excluding fee waivers & expense
reimbursements 1.59%++ 4.75% 4.34% 4.68% 4.39%++
Net investment income................................. 2.39%++ 3.36% 3.56% 3.72% 4.07%++
Portfolio turnover rate................................. 13% 50% 48% 9% 15%
Average commission rate paid per share.................. $ 0.0665 $0.0635 N/A N/A N/A
NET ASSETS END OF PERIOD (THOUSANDS).................... $ 42,374 8,592 4,806 3,613 2,236
</TABLE>
++ Annualized.
* For the period from October 1, 1993 (commencement of operations) to December
31, 1993.
** Calculation based on average shares outstanding during the period.
# The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
EVERGREEN
UTILITY FUND
[Utility Fund logo appears here]
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994*
<S> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD............................... $ 10.57 $ 10.80 $ 9.00 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.25 0.41 0.44 0.45
Net realized and unrealized gain (loss) on investments............ 0.87 0.05 2.25 (1.01)
Total from investment operations.................................. 1.12 0.46 2.69 (0.56)
LESS DISTRIBUTIONS FROM
Net investment income............................................. (0.24) (0.41) (0.44) (0.44)
Net realized gain on investments.................................. 0 (0.28) (0.45) 0
Total distributions............................................... (0.24) (0.69) (0.89) (0.44)
NET ASSET VALUE END OF PERIOD..................................... $ 11.45 $ 10.57 $ 10.80 $ 9.00
Total return+..................................................... 10.72% 4.40% 30.70% (5.60%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................. 1.00%++ 0.87% 0.79% 0.53%++
Total expenses, excluding indirectly paid expenses.............. 0.99%++ N/A N/A N/A
Total expenses, excluding fee waivers & expense reimbursements.. 1.19%++ 1.15% 1.18% 1.43%++
Net investment income........................................... 3.85%++ 3.87% 4.51% 5.07%++
Portfolio turnover rate........................................... 50% 59% 88% 23%
Average commission rate paid per share............................ $ 0.0593 $0.0605 N/A N/A
NET ASSETS END OF PERIOD (THOUSANDS).............................. $ 91,638 $96,243 $107,872 $4,190
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 4, 1994 (commencement of class operations) to
December 31, 1994.
# The Fund changed its fiscal year ended from December 31 to July 31, effective
July 31, 1997.
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994*
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD............................... $ 10.58 $ 10.81 $ 9.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.20 0.33 0.37 0.39
Net realized and unrealized gain (loss) on investments............ 0.87 0.05 2.26 (1.01)
Total from investment operations.................................. 1.07 0.38 2.63 (0.62)
LESS DISTRIBUTIONS FROM
Net investment income............................................. (0.19) (0.33) (0.37) (0.38)
Net realized gain on investments.................................. 0 (0.28) (0.45) 0
Total distributions............................................... (0.19) (0.61) (0.82) (0.38)
NET ASSET VALUE END OF PERIOD..................................... $ 11.46 $ 10.58 $ 10.81 $ 9.00
Total return+..................................................... 10.21% 3.60% 29.90% (6.20%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................. 1.75%++ 1.62% 1.53% 1.27%++
Total expenses, excluding indirectly paid expenses.............. 1.74%++ N/A N/A N/A
Total expenses, excluding fee waivers & expense reimbursements.. 1.94%++ 1.89% 1.93% 2.11%++
Net investment income........................................... 3.10%++ 3.12% 3.78% 4.19%++
Portfolio turnover rate........................................... 50% 59% 88% 23%
Average commission rate paid per share............................ $ 0.0593 $0.0605 N/A N/A
NET ASSETS END OF PERIOD (THOUSANDS).............................. $ 36,738 $38,511 $ 35,662 $28,792
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from January 4, 1994 (commencement of class operations) to
December 31, 1994.
# The Fund changed its fiscal year ended from December 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
EVERGREEN
UTILITY FUND
[Utility Fund logo appears here]
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994*
<S> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD............................... $ 10.58 $ 10.82 $ 9.01 $ 9.33
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.20 0.33 0.37 0.12
Net realized and unrealized gain (loss) on investments............ 0.87 0.04 2.26 (0.33)
Total from investment operations.................................. 1.07 0.37 2.63 (0.21)
LESS DISTRIBUTIONS FROM
Net investment income............................................. (0.19) (0.33) (0.37) (0.11)
Net realized gain on investments.................................. 0 (0.28) (0.45) 0
Total distributions............................................... (0.19) (0.61) (0.82) (0.11)
NET ASSET VALUE END OF PERIOD..................................... $ 11.46 $ 10.58 $10.82 $ 9.01
Total return+..................................................... 10.21% 3.50% 29.80% (2.20%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................. 1.75%++ 1.63% 1.54% 1.94%++
Total expenses, excluding indirectly paid expenses.............. 1.74%++ N/A N/A N/A
Total expenses, excluding fee waivers & expense reimbursements.. 1.94%++ 1.90% 1.93% 2.78%++
Net investment income........................................... 3.10%++ 3.13% 3.76% 3.96%++
Portfolio turnover rate........................................... 50% 59% 88% 23%
Average commission rate paid per share............................ $ 0.0593 $0.0605 N/A N/A
NET ASSETS END OF PERIOD (THOUSANDS).............................. $ 379 $ 396 $ 246 $ 128
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from September 2, 1994 (commencement of class operations) to
December 31, 1994.
# The Fund changed its fiscal year ended from December 31 to July 31, effective
July 31, 1997.
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994*
<S> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD............................... $ 10.58 $ 10.82 $ 9.00 $ 9.51
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.25 0.44 0.47 0.37
Net realized and unrealized gain (loss) on investments............ 0.88 0.03 2.27 (0.50)
Total from investment operations.................................. 1.13 0.47 2.74 (0.13)
LESS DISTRIBUTIONS FROM
Net investment income............................................. (0.25) (0.43) (0.47) (0.37)
In excess of net investment income................................ 0 0 0 (0.01)
Net realized gain on investments.................................. 0 (0.28) (0.45) 0
Total distributions............................................... (0.25) (0.71) (0.92) (0.38)
NET ASSET VALUE END OF PERIOD..................................... $ 11.46 $ 10.58 $10.82 $ 9.00
Total return...................................................... 10.85% 4.50% 31.30% (1.60%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................. 0.94%++ 0.61% 0.54% 0.40%++
Total expenses, excluding indirectly paid expenses.............. 0.93%++ N/A N/A N/A
Total expenses, excluding fee waivers & expense reimbursements.. 0.73%++ 0.89% 0.93% 1.24%++
Net investment income........................................... 4.06%++ 4.01% 4.76% 4.93%++
Portfolio turnover rate........................................... 50% 59% 88% 23%
Average commission rate paid per share............................ $ 0.0593 $0.0605 N/A N/A
NET ASSETS END OF PERIOD (THOUSANDS).............................. $ 1,627 $ 2,000 $7,791 $5,201
</TABLE>
++ Annualized.
* For the period from February 28, 1994 (commencement of class operations) to
December 31, 1994.
# The Fund changed its fiscal year ended from December 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994
<S> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD............................. $ 20.57 $ 20.45 $ 16.62 $17.63
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................... 0.21 0.38 0.55 0.52
Net realized and unrealized gain (loss) on investments.......... 4.05 3.49 4.69 (0.20)
Total from investment operations................................ 4.26 3.87 5.24 0.32
LESS DISTRIBUTIONS FROM
Net investment income........................................... (0.19) (0.41) (0.51) (0.51)
Net realized gain on investments................................ 0 (3.32) (0.90) (0.82)
In excess of net investment income.............................. 0 (0.02) 0 0
Total distributions............................................. (0.19) (3.75) (1.41) (1.33)
NET ASSET VALUE END OF PERIOD................................... $ 24.64 $ 20.57 $ 20.45 $16.62
Total return+................................................... 20.78% 18.90% 31.80% 1.90%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................................ 0.92%++ 0.91% 0.90% 0.93%
Total expenses, excluding indirectly paid expenses............ 0.92%++ N/A N/A N/A
Total expenses, excluding fee waiver & expense reimbursement.. N/A N/A N/A N/A
Net investment income......................................... 1.66%++ 1.77% 2.78% 2.96%
Portfolio turnover rate......................................... 6% 91% 53% 70%
Average commission rate paid per share.......................... $ 0.0600 $0.0588 N/A N/A
NET ASSETS END OF PERIOD (MILLIONS)............................. $ 392 $ 328 $ 292 $ 189
<CAPTION>
YEAR ENDED DECEMBER 31,
1993
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD............................. $17.11
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................... 0.47
Net realized and unrealized gain (loss) on investments.......... 1.10
Total from investment operations................................ 1.57
LESS DISTRIBUTIONS FROM
Net investment income........................................... (0.47)
Net realized gain on investments................................ (0.58)
In excess of net investment income.............................. 0
Total distributions............................................. (1.05)
NET ASSET VALUE END OF PERIOD................................... $17.63
Total return+................................................... 9.30%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................................ 0.99%
Total expenses, excluding indirectly paid expenses............ N/A
Total expenses, excluding fee waiver & expense reimbursement.. N/A
Net investment income......................................... 2.63%
Portfolio turnover rate......................................... 46%
Average commission rate paid per share.......................... N/A
NET ASSETS END OF PERIOD (MILLIONS)............................. $ 190
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED MARCH 31,
1992 1991 1990* 1990 1989
<S> <C> <C> <C> <C> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD............................. $ 17.08 $ 14.61 $ 15.12 $14.45 $12.83
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................... 0.44 0.46 0.36 0.54 0.36
Net realized and unrealized gain (loss) on investments.......... 0.89 3.17 (0.44) 1.70 2.11
Total from investment operations................................ 1.33 3.63 (0.08) 2.24 2.47
LESS DISTRIBUTIONS FROM
Net investment income........................................... (0.43) (0.43) (0.36) (0.57) (0.38)
Net realized gain on investments................................ (0.87) (0.73) (0.02) (1.00) (0.47)
In excess of net investment income.............................. 0 0 (0.05) 0 0
Total distributions............................................. (1.30) (1.16) (0.43) (1.57) (0.85)
NET ASSET VALUE END OF PERIOD................................... $ 17.11 $ 17.08 $ 14.61 $15.12 $14.45
Total return+................................................... 8.00% 25.10% (0.50%) 15.50% 19.70%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................................ 1.01% 0.96% 1.39%++ 1.55% 1.71%
Total expenses, excluding indirectly paid expenses............ N/A N/A N/A N/A N/A
Total expenses, excluding fee waiver & expense reimbursement.. 1.02% 1.05% N/A N/A N/A
Net investment income......................................... 2.37%* 2.78% 3.28%++ 3.42% 2.72%
Portfolio turnover rate......................................... 56% 69% 13% 11% 24%
Average commission rate paid per share.......................... N/A N/A N/A N/A N/A
NET ASSETS END OF PERIOD (MILLIONS)............................. $ 169 $ 136 $ 105 $ 96 $ 83
<CAPTION>
YEAR ENDED MARCH 31,
1988
<S> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD............................. $14.66
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................... 0.26
Net realized and unrealized gain (loss) on investments.......... (1.30)
Total from investment operations................................ (1.04)
LESS DISTRIBUTIONS FROM
Net investment income........................................... (0.26)
Net realized gain on investments................................ (0.53)
In excess of net investment income.............................. 0
Total distributions............................................. (0.79)
NET ASSET VALUE END OF PERIOD................................... $12.83
Total return+................................................... (7.10%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................................ 1.74%
Total expenses, excluding indirectly paid expenses............ N/A
Total expenses, excluding fee waiver & expense reimbursement.. N/A
Net investment income......................................... 1.92%
Portfolio turnover rate......................................... 24%
Average commission rate paid per share.......................... N/A
NET ASSETS END OF PERIOD (MILLIONS)............................. $ 22
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
# The Fund changed its fiscal year ended from December 31 to July 31, effective
July 31, 1997.
* For the nine months ended December 31, 1990. The Fund changed fiscal year end
from March 31 to December 31, effective December 31, 1990.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994 1993*
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD................... $ 20.58 $ 20.45 $ 16.62 $ 17.63 $ 17.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................. 0.12 0.22 0.39 0.42 0.35
Net realized and unrealized gain (loss) on
investments......................................... 4.03 3.50 4.70 (0.20) 1.01
Total from investment operations...................... 4.15 3.72 5.09 0.22 1.36
LESS DISTRIBUTIONS FROM
Net investment income................................. (0.10) (0.25) (0.36) (0.41) (0.35)
Net realized gain on investments...................... 0 (3.32) (0.90) (0.82) (0.58)
In excess of net investment income.................... 0 0 0 0 (0.04)
In excess of net realized gain on investments......... 0 (0.02) 0 0 0
Total distributions................................... (0.10) (3.59) (1.26) (1.23) (0.97)
NET ASSET VALUE END OF PERIOD......................... $ 24.63 $ 20.58 $ 20.45 $ 16.62 $ 17.63
Total return+......................................... 20.23% 18.10% 30.90% 1.30% 8.00%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................... 1.67%++ 1.66% 1.65% 1.53% 1.48%++
Total expenses, excluding indirectly paid expenses.. 1.67%++ N/A N/A N/A N/A
Net investment income............................... 0.92%++ 1.01% 2.04% 2.36% 2.09%++
Portfolio turnover rate............................... 6% 91% 53% 70% 46%
Average commission rate paid per share................ $ 0.0600 $ 0.0588 N/A N/A N/A
NET ASSETS END OF PERIOD (THOUSANDS).................. $276,256 $197,411 $141,072 $104,297 $59,953
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
# The Fund changed its fiscal year ended from December 31 to July 31, effective
July 31, 1997.
* For the period from February 2, 1993 (commencement of operations) to December
31, 1993.
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994*
<S> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD...................... $ 20.56 $ 20.44 $ 16.61 $ 18.28
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................... 0.12 0.22 0.39 0.19
Net realized and unrealized gain (loss) on investments... 4.03 3.50 4.70 (0.81)
Total from investment operations......................... 4.15 3.72 5.09 (0.62)
LESS DISTRIBUTIONS FROM
Net investment income.................................... (0.10) (0.26) (0.36) (0.19)
Net realized gain on investments......................... 0 (3.32) (0.90) (0.82)
In excess of net investment income....................... 0 0 0 (0.04)
In excess of net realized gain on investments............ 0 (0.02) 0 0
Total distributions...................................... (0.10) (3.60) (1.26) (1.05)
NET ASSET VALUE END OF PERIOD............................ $ 24.61 $ 20.56 $ 20.44 $ 16.61
Total return+............................................ 20.25% 18.10% 30.90% (3.40%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................................... 1.66%++ 1.67% 1.65% 1.68%++
Total expenses, excluding indirectly paid expenses..... 1.66%++ N/A N/A N/A
Net investment income.................................. 0.94%++ 1.00% 2.03% 2.16%++
Portfolio turnover rate.................................. 6% 91% 53% 70%
Average commission rate paid per share................... $ 0.0600 $0.0588 N/A N/A
NET ASSETS END OF PERIOD (THOUSANDS)..................... $ 2,507 $ 1,458 $ 811 $ 485
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from September 2, 1994 (commencement of class operations) to
December 31, 1994.
# The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
37
<PAGE>
EVERGREEN
VALUE FUND
[Value Fund logo appears here]
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
JULY 31, 1997# 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD....... $ 20.57 $ 20.45 $ 16.61 $ 17.63 $ 17.11 $ 17.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................... 0.25 0.44 0.57 0.56 0.52 0.49
Net realized and unrealized gain (loss) on
investments............................. 4.03 3.49 4.72 (0.20) 1.12 0.90
Total from investment operations.......... 4.28 3.93 5.29 0.36 1.64 1.39
LESS DISTRIBUTIONS FROM
Net investment income..................... (0.21) (0.47) (0.55) (0.56) (0.52) (0.49)
Net realized gain on investments.......... 0 (3.32) (0.90) (0.82) (0.58) (0.87)
In excess of net investment income........ 0 0 0 0 (0.02) 0
In excess of net realized gain on
investments............................. 0 (0.02) 0 0 0 0
Total distributions....................... (0.21) (3.81) (1.45) (1.38) (1.12) (1.36)
NET ASSET VALUE END OF
PERIOD.................................. $ 24.64 $ 20.57 $ 20.45 $ 16.61 $ 17.63 $ 17.11
Total return.............................. 20.93% 19.20% 32.20% 2.10% 9.70% 8.30%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................... 0.67%++ 0.66% 0.65% 0.68% 0.65% 0.68%
Total expenses, excluding indirectly
paid expenses......................... 0.67%++ N/A N/A N/A N/A N/A
Total expenses, excluding fee waivers &
expense reimbursements................ N/A N/A N/A N/A N/A 0.69%
Net investment income................... 1.91%++ 2.02% 3.02% 3.21% 2.98% 2.90%
Portfolio turnover rate................... 6% 91% 53% 70% 46% 56%
Average commission rate paid per share.... $ 0.0600 $0.0588 N/A N/A N/A N/A
NET ASSETS END OF PERIOD (MILLIONS)....... $ 1,149 $ 996 $ 761 $ 507 $ 463 $ 326
<CAPTION>
YEAR ENDED DECEMBER 31,
1991*
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD....... $ 14.28
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................... 0.47
Net realized and unrealized gain (loss) on
investments............................. 3.53
Total from investment operations.......... 4.00
LESS DISTRIBUTIONS FROM
Net investment income..................... (0.47)
Net realized gain on investments.......... (0.73)
In excess of net investment income........ 0
In excess of net realized gain on
investments............................. 0
Total distributions....................... (1.20)
NET ASSET VALUE END OF
PERIOD.................................. $ 17.08
Total return.............................. 25.40%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................... 0.69%++
Total expenses, excluding indirectly
paid expenses......................... N/A
Total expenses, excluding fee waivers &
expense reimbursements................ 0.77%++
Net investment income................... 3.04%++
Portfolio turnover rate................... 69%
Average commission rate paid per share.... N/A
NET ASSETS END OF PERIOD (MILLIONS)....... $ 271
</TABLE>
++ Annualized.
* For the period from January 3, 1991 (commencement of class operations) to
December 31, 1991.
# The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
38
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return logo appears here]
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEAR ENDED NOVEMBER 30,
JULY 31, 1997# 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $ 17.33 $ 13.83 $ 11.75 $ 12.31 $ 12.06
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.18 0.26 0.25 0.24 0.21
Net realized and unrealized gain (loss) on investments............ 3.34 3.83 2.80 (0.56) 1.31
Total from investment operations.................................. 3.52 4.09 3.05 (0.32) 1.52
LESS DISTRIBUTIONS FROM
Net investment income............................................. (0.16) (0.26) (0.25) (0.24) (0.21)
In excess of net investment income................................ 0 0 (0.07) 0 (0.03)
Net ralized gains on investments.................................. 0 (0.33) (0.65) 0 (1.03)
Total distributions............................................... (0.16) (0.59) (0.97) (0.24) (1.27)
NET ASSET VALUE, END OF PERIOD.................................... $ 20.69 $ 17.33 $ 13.83 $ 11.75 $ 12.31
Total return+..................................................... 20.40% 29.83% 26.57% (2.65%) 12.67%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses.................................................. 1.24%++ 1.41% 1.69% 1.59% 1.85%
Total expenses, excluding indirectly paid expenses.............. 1.22%++ 1.39% 1.67% N/A N/A
Total expenses, excluding fee waivers & expense reimbursements.. N/A N/A N/A N/A N/A
Net investment income........................................... 1.46%++ 1.66% 1.94% 1.93% 1.63%
Portfolio turnover rate........................................... 41% 41% 77% 57% 92%
Average commission rate paid per share............................ $ 0.0501 $0.0037 N/A N/A N/A
NET ASSETS, END OF PERIOD (THOUSANDS)............................. $ 47,812 $40,487 $27,037 $23,162 $26,367
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1992 1991 1990 1989 1988 1987*
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $ 11.45 $ 10.29 $ 10.89 $ 9.41 $ 8.59 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.23 0.34 0.41 0.42 0.46 0.30
Net realized and unrealized gain (loss) on investments............ 1.19 1.38 (0.61) 2.01 0.89 (1.47)
Total from investment operations.................................. 1.42 1.72 (0.20) 2.43 1.35 (1.17)
LESS DISTRIBUTIONS FROM
Net investment income............................................. (0.23) (0.35) (0.40) (0.42) (0.53) (0.24)
In excess of net investment income................................ (0.05) (0.05) 0 0 0 0
Net ralized gains on investments.................................. (0.53) (0.16) 0 (0.53) 0 0
Total distributions............................................... (0.81) (0.56) (0.40) (0.95) (0.53) (0.24)
NET ASSET VALUE, END OF PERIOD.................................... $ 12.06 $ 11.45 $ 10.29 $ 10.89 $ 9.41 $ 8.59
Total return+..................................................... 12.56% 16.70% (1.85%) 26.17% 15.98% 11.94%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses.................................................. 1.85% 1.88% 2.00% 2.00% 1.47% 1.00%+++
Total expenses, excluding indirectly paid expenses.............. N/A N/A N/A N/A N/A N/A
Total expenses, excluding fee waivers & expense reimbursements.. N/A N/A 2.41% 2.48% 2.92% 4.77%+++
Net investment income........................................... 1.87% 2.98% 3.85% 3.94% 4.87% 4.94%+++
Portfolio turnover rate........................................... 66% 43% 51% 50% 64% 16%
Average commission rate paid per share............................ N/A N/A N/A N/A N/A N/A
NET ASSETS, END OF PERIOD (THOUSANDS)............................. $23,607 $22,974 $22,080 $22,764 $20,735 $ 7,672
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
+++ Annualized for the period from April 14, 1987 (commencement of investment
operations) to November 30, 1987.
# The Fund changed its fiscal year end from November 30 to July 31, effective
July 31, 1997.
* For the period from February 13, 1987 (commencement of operations) to
November 30, 1987.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return logo appears here]
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEAR ENDED NOVEMBER 30,
JULY 31, 1997# 1996 1995 1994 1993*
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE, BEGINNING OF PERIOD..................... $ 17.31 $ 13.84 $ 11.77 $ 12.32 $ 12.65
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................... 0.09 0.15 0.15 0.15 0.10
Net realized and unrealized gain (loss) on investments... 3.31 3.80 2.82 (0.56) 0.74
Total from investment operations......................... 3.40 3.95 2.97 (0.41) 0.84
LESS DISTRIBUTIONS FROM
Net investment income.................................... (0.08) (0.15) (0.15) (0.14) (0.10)
In excess of net investment income....................... 0 0 (0.10) 0 (0.04)
Net realized gains on investments........................ 0 (0.33) (0.65) 0 (1.03)
Total distributions...................................... (0.08) (0.48) (0.90) (0.14) (1.17)
NET ASSET VALUE, END OF PERIOD........................... $ 20.63 $ 17.31 $ 13.84 $ 11.77 $ 12.32
Total return+............................................ 19.68% 28.73% 25.59% (3.36%) 6.68%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses......................................... 2.02%++ 2.18% 2.47% 2.31% 2.64%++
Total expenses, excluding indirectly paid expenses..... 2.00%++ 2.16% 2.46% N/A N/A
Net investment income.................................. 0.58%++ 0.88% 1.06% 1.27% 0.84%++
Portfolio turnover rate.................................. 41% 41% 77% 57% 92%
Average commission rate paid per share................... $ 0.0501 $0.0037 N/A N/A N/A
NET ASSETS, END OF PERIOD (THOUSANDS).................... $ 94,309 $43,526 $20,605 $ 7,314 $ 4,283
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from February 1, 1993 (commencement of class operations) to
November 30, 1993.
# The Fund changed its fiscal year end from November 30 to July 31, effective
July 31, 1997.
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEAR ENDED NOVEMBER 30,
JULY 31, 1997# 1996 1995 1994 1993*
<S> <C> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE, BEGINNING OF PERIOD..................... $ 17.32 $ 13.85 $ 11.78 $ 12.33 $ 12.65
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................... 0.09 0.14 0.16 0.15 0.10
Net realized and unrealized gain (loss) on investments... 3.32 3.81 2.81 (0.56) 0.75
Total from investment operations......................... 3.41 3.95 2.97 (0.41) 0.85
LESS DISTRIBUTIONS FROM
Net investment income.................................... (0.08) (0.15) (0.16) (0.14) (0.10)
In excess of net investment income....................... 0 0 (0.09) 0 (0.04)
Net realized gain on investments......................... 0 (0.33) (0.65) 0 (1.03)
Total distributions...................................... (0.08) (0.48) (0.90) (0.14) (1.17)
NET ASSET VALUE, END OF PERIOD........................... $ 20.65 $ 17.32 $ 13.85 $ 11.78 $ 12.33
Total return+............................................ 19.73% 28.71% 25.57% (3.36%) 6.76%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses......................................... 2.01%++ 2.17% 2.47% 2.34% 2.64%++
Total expenses, excluding indirectly paid expenses..... 1.99%++ 2.15% 2.44% N/A N/A
Net investment income.................................. 0.66%++ 0.89% 1.16% 1.21% 0.83%++
Portfolio turnover rate.................................. 41% 41% 77% 57% 92%
Average commission rate paid per share................... $ 0.0501 $0.0037 N/A N/A N/A
NET ASSETS, END OF PERIOD (THOUSANDS).................... $ 21,125 $14,562 $ 9,503 $ 5,968 $ 5,030
</TABLE>
+ Initial sales charge or contingent deferred sales charge is not reflected.
++ Annualized.
* For the period from February 1, 1993 (commencement of class operations) to
November 30, 1993.
# The Fund changed its fiscal year end from November 30 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return logo appears here]
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 13, 1997
(DATE OF INITIAL
PUBLIC OFFERING)
TO JULY 31, 1997#
<S> <C>
CLASS Y SHARES
NET ASSET VALUE, BEGINNING OF PERIOD..................................................................... $ 17.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................................................................... 0.18
Net realized and unrealized gain on investments.......................................................... 2.86
Total from investment operations......................................................................... 3.04
LESS DISTRIBUTIONS FROM
Net investment income.................................................................................... (0.16)
Total distributions...................................................................................... (0.16)
NET ASSET VALUE, END OF PERIOD........................................................................... $ 20.62
Total return............................................................................................. 17.22%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS
Total expenses......................................................................................... 1.34%++
Total expenses, excluding indirectly paid expenses..................................................... 1.34%++
Net investment income.................................................................................. 0.79%++
Portfolio turnover rate.................................................................................. 41%
Average commission rate paid per share................................................................... $0.0501
NET ASSETS, END OF PERIOD (THOUSANDS).................................................................... $ 93
</TABLE>
++ Annualized.
# The Fund changed its fiscal year end from November 30 to July 31, effective
July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[G&I Fund logo
appears here]
SCHEDULE OF INVESTMENTS
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 77.2%
BANKS-- 4.7%
<C> <C> <S> <C>
118,440 Banc One Corp.................... $ 6,647,445
80,000 Bank of New York Co., Inc.
(The).......................... 3,885,000
191,000 BSB Bancorp, Inc................. 7,425,125
94,000 Carolina First Corp.............. 1,586,250
101,250 Central Fidelity Banks, Inc...... 4,037,344
41,750 Crestar Financial Corp........... 1,970,078
45,000 Cullen/Frost Bankers, Inc........ 2,103,750
157,500 First Security Corp.............. 4,232,812
39,700 First Virginia Banks, Inc........ 2,788,925
210,000 Hibernia Corp. Cl. A............. 3,176,250
83,700 Norwest Corp..................... 5,278,331
65,000 Peoples Heritage Financial
Group.......................... 2,591,875
110,000 State Street Boston Corp......... 6,166,875
45,000 Summit Bancorp................... 2,652,188
108,900 Susquehanna Bancshares, Inc...... 3,021,975
20,000 Wells Fargo & Co................. 5,498,750
63,062,973
<CAPTION>
BUILDING, CONSTRUCTION &
FURNISHINGS-- 1.2%
<C> <C> <S> <C>
320,000 * Furniture Brands International,
Inc............................ 6,580,000
113,000 Lone Star Industries, Inc........ 5,989,000
80,000 Medusa Corp...................... 3,700,000
16,269,000
<CAPTION>
BUSINESS EQUIPMENT &
SERVICES-- 11.4%
<C> <C> <S> <C>
502,500 Air Express International Corp... 15,546,094
815,000 Circle International Group,
Inc............................ 21,190,000
48,000 * Cisco Systems, Inc............... 3,819,000
350,000 Computer Associates
International, Inc............. 23,821,875
120,000 * Compuware Corp................... 7,425,000
133,000 Equifax, Inc..................... 4,513,688
300,000 * Medic Computer Systems, Inc...... 8,100,000
500,000 * Metromail Corp................... 10,031,250
10,000 * MSC Industrial Direct Co., Inc... 432,500
78,000 * Oracle Systems Corp.............. 4,246,125
640,200 Pittston Burlington Group........ 15,844,950
500,000 * Platinum Technology Corp......... 7,750,000
235,000 * Policy Management Systems Corp... 12,822,187
900,000 Reynolds & Reynolds Co. (The),
Cl. A.......................... 17,437,500
50,000 Wackenhut Corp. (The) Cl. B...... 943,750
153,923,919
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
CHEMICAL & AGRICULTURAL
PRODUCTS-- 3.6%
65,000 Air Products & Chemicals, Inc.... $ 5,732,187
79,000 Du Pont (E. I.) De Nemours &
Co............................. 5,288,062
265,000 Engelhard Corp................... 5,697,500
165,000 Grace (W.R.) & Co................ 10,147,500
42,300 H.B. Fuller Co................... 2,183,738
79,000 Pioneer Hi-Bred International,
Inc............................ 5,846,000
260,000 Praxair, Inc..................... 14,332,500
49,227,487
COMMUNICATION SYSTEMS &
SERVICES-- 0.7%
160,000 * AirTouch Communications.......... 5,270,000
168,000 * Aspect Telecommunications Corp... 3,551,625
8,821,625
CONSUMER PRODUCTS &
SERVICES-- 2.6%
96,000 Campbell Soup Co................. 4,980,000
90,000 Colgate-Palmolive Co............. 6,817,500
45,000 CPC International, Inc........... 4,317,187
52,000 Gillette Co. (The)............... 5,148,000
72,000 Harley-Davidson, Inc............. 3,834,000
150,000 Philip Morris Companies, Inc..... 6,768,750
105,000 UST, Inc......................... 3,051,563
34,917,000
DIVERSIFIED COMPANIES-- 1.3%
70,200 General Electric Co.............. 4,927,162
35,000 * ITT Corp......................... 2,237,813
195,000 ITT Industries, Inc.............. 5,520,937
125,000 Morton International, Inc........ 4,179,688
16,865,600
ELECTRICAL EQUIPMENT &
SERVICES-- 5.7%
57,000 * 3Com Corp........................ 3,117,188
80,000 * Adaptec, Inc..................... 3,370,000
42,000 * Applied Materials, Inc........... 3,858,750
201,000 AVX Corp......................... 6,356,625
165,000 Baldor Electric Co............... 5,156,250
205,000 Belden, Inc...................... 7,943,750
70,000 Dallas Semiconductor Corp........ 2,734,375
72,000 Intel Corp....................... 6,610,500
210,000 * KLA Instruments Corp............. 12,718,125
85,000 * Lam Research Corp................ 4,494,375
42,000 * LSI Logic Corp................... 1,325,625
</TABLE>
(CONTINUED)
42
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[G&I Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
ELECTRICAL EQUIPMENT &
SERVICES-- CONTINUED
3,875 * NCR Corp......................... $ 124,242
500,000 Sensormatic Electronics Corp..... 6,687,500
200,000 * Unitrode Corp.................... 11,887,500
76,384,805
ENERGY-- 6.9%
25,000 Anadarko Petroleum Corp.......... 1,746,875
134,000 * Atwood Oceanics, Inc............. 11,390,000
250,000 Berry Petroleum Co. Cl. A........ 4,203,125
45,000 Coastal Corp. (The).............. 2,446,875
165,000 * Denbury Resources, Inc........... 2,877,188
63,140 Halliburton Co................... 2,904,440
110,000 * Houston Exploration, Co. (The)... 1,794,375
25,000 Kerr-McGee Corp.................. 1,565,625
66,161 Monterey Resources, Inc.......... 1,008,955
95,000 Murphy Oil Corp.................. 4,945,938
425,000 * Oryx Energy Co................... 10,492,187
775,000 * Reading & Bates Corp............. 25,768,750
150,000 * Santa Fe Energy Resources, Inc... 1,293,750
350,000 Southwestern Energy Co........... 4,812,500
100,000 Tosco Corp....................... 3,131,250
95,000 Transocean Offshore, Inc......... 7,760,312
63,520 Union Pacific Resource Group,
Inc............................ 1,568,150
87,000 Williams Companies, Inc. (The)... 3,980,250
93,690,545
FINANCE & INSURANCE-- 3.4%
340,000 Federal Home Loan Mortgage
Corp........................... 12,261,250
290,000 Federal National Mortgage
Association.................... 13,720,625
100,000 Hartford Financial Services
Group, Inc. (The).............. 8,712,500
115,000 LaSalle Re Holdings, Ltd......... 3,838,125
67,500 Meadowbrook Insurance Group,
Inc............................ 1,729,687
106,000 Price (T.) Rowe & Associates,
Inc............................ 5,750,500
46,012,687
FOOD RETAILING & DISTRIBUTION--
0.1%
50,000 * Dominick's Supermarkets, Inc..... 1,450,000
FOREST PRODUCTS-- 0.2%
120,000 Deltic Timber Corp............... 3,262,500
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
HEALTHCARE PRODUCTS &
SERVICES-- 11.2%
110,000 Abbott Laboratories.............. $ 7,198,125
65,000 * Amgen, Inc....................... 3,822,813
110,000 * Elan Corp, plc................... 5,225,000
425,000 * Foundation Health Systems, Inc.
Cl. A.......................... 13,759,375
178,500 * Health Management Associates,
Inc. Cl. A..................... 5,700,844
55,000 * HealthCare COMPARE Corp.......... 3,135,000
206,000 * HEALTHSOUTH Corp................. 5,459,000
24,000 Johnson & Johnson................ 1,495,500
90,100 * Laboratory Corp. of America
Holdings....................... 225,250
290,000 * Lincare Holdings, Inc............ 14,210,000
235,000 * Living Centers of America, Inc... 9,238,437
60,000 Manor Care, Inc.................. 1,980,000
200,000 McKesson Corp.................... 17,337,500
42,350 * MedPartners, Inc................. 1,005,813
99,200 Pfizer, Inc...................... 5,914,800
226,000 Schering-Plough Corp............. 12,331,125
225,000 Shared Medical System Corp....... 12,150,000
25,000 * Spacelabs Medical, Inc........... 550,000
138,000 * Sybron International Corp........ 5,649,375
120,000 * Tenet Healthcare Corp............ 3,592,500
95,000 * Vencor, Inc...................... 3,829,687
34,000 Warner-Lambert Co................ 4,749,375
40,020 * Wellpoint Health Networks, Inc... 1,970,985
370,000 West Co., Inc. (The)............. 10,868,750
151,399,254
INDUSTRIAL SPECIALTY PRODUCTS
& SERVICES-- 5.4%
42,625 * Autoliv, Inc..................... 1,483,883
150,000 Borg-Warner Automotive, Inc...... 8,362,500
42,000 Carpenter Technology Corp........ 1,995,000
65,500 Danaher Corp..................... 3,631,156
51,000 Dover Corp....................... 3,640,125
53,200 J & L Specialty Steel, Inc....... 718,200
525,000 JLG Industries, Inc.............. 5,807,812
33,500 Magna Group, Inc................. 2,236,125
23,650 Newmont Mining Corp.............. 975,563
594,000 Pittston Brink's Group........... 20,678,625
300,000 * Strattec Security Corp.**........ 5,925,000
210,000 Sundstrand Corp.................. 13,020,000
15,000 Tecumseh Products Co. Cl. A...... 843,750
25,000 Vulcan Materials Co.............. 2,146,875
22,500 York International Corp.......... 1,087,031
72,551,645
</TABLE>
(CONTINUED)
43
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[G&I Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
INFORMATION SERVICES &
TECHNOLOGY-- 0.2%
63,436 First Data Corp.................. $ 2,767,396
LEISURE & TOURISM-- 1.8%
90,000 Carnival, Corp. Cl. A............ 3,791,250
60,000 * Choice Hotels Holdings, Inc...... 1,087,500
821,400 Gaylord Entertainment Co. Cl. A.. 19,046,212
23,924,962
PAPER & PACKAGING-- 0.2%
75,000 Westvaco Corp.................... 2,507,813
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 7.1%
248,820 * American Radio Systems Corp.
Cl. A.......................... 10,792,567
49,805 Comcast Corp..................... 1,129,951
39,000 Disney Walt Co. (The)............ 3,151,688
270,000 * Emmis Broadcasting Corp. Cl. A... 11,508,750
42,000 * Evergreen Media Corp. Cl. A...... 1,932,000
425,000 * Jacor Communications, Inc........ 18,221,875
63,300 * Katz Media Group, Inc............ 684,431
40,000 Knight-Ridder, Inc............... 1,987,500
275,000 * Lin Television Corp.............. 13,234,375
15,000 McGraw-Hill Companies, Inc....... 1,017,188
43,000 Scripps, (E.W.) , Inc............ 1,757,625
185,000 TCA Cable TV, Inc................ 6,983,750
250,000 Time Warner, Inc................. 13,640,625
50,000 * U.S. West, Inc................... 1,103,125
35,000 * Univision Communications, Inc.
Cl. A.......................... 1,505,000
8,276 * Viacom Inc. Cl. A................ 252,935
2,800 Washington Post Co. (The)........ 1,158,500
168,000 * Young Broadcasting Inc. Cl. A.... 5,166,000
95,227,885
RETAILING & WHOLESALE-- 0.4%
109,800 * Carson Pirie Scott & Co.......... 3,643,987
12,500 Mercantile Stores Co., Inc....... 839,844
20,000 Sears, Roebuck & Co.............. 1,266,250
5,750,081
THRIFT INSTITUTIONS-- 1.9%
515,000 Webster Financial Corp........... 26,200,625
TRANSPORTATION-- 5.2%
840,000 * Atlas Air, Inc................... 22,260,000
190,000 Burlington Northern Santa Fe..... 18,346,875
202,200 Kansas City Southern Industries,
Inc............................ 15,240,825
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
TRANSPORTATION-- CONTINUED
126,000 Petroleum Helicopters, Inc....... $ 2,047,500
170,000 Union Pacific Corp............... 12,186,875
70,082,075
UTILITIES-- 2.0%
62,000 AT & T Corp...................... 2,282,375
100,000 Century Telephone Enterprises,
Inc............................ 3,675,000
64,000 Commonwealth Energy System....... 1,636,000
70,000 Houston Industries., Inc......... 1,465,625
50,000 Illinova Corp.................... 1,178,125
75,000 MCI Communications Corp.......... 2,648,437
40,000 Texas Utilities Co............... 1,417,500
400,000 TNP Enterprises, Inc............. 9,800,000
45,000 Unicom Corp...................... 1,020,938
60,000 * WorldCom, Inc.................... 2,096,250
27,220,250
TOTAL COMMON STOCKS
(COST $675,874,912)............ 1,041,520,127
<CAPTION>
PREFERRED STOCKS-- 0.0% (A)
<C> <C> <S> <C>
HEALTHCARE PRODUCTS &
SERVICES-- 0.0% (A)
130,000 * Fresenius National Med Care, Inc.
Series D....................... 9,750
TOTAL PREFERRED STOCKS
(COST $22,740)................. 9,750
<CAPTION>
CORPORATE BONDS-- 0.2%
<C> <C> <S> <C>
ENERGY-- 0.1%
Columbia Gas Systems, Inc. (The)
106,000 6.39%, 11/28/00.................. 106,511
101,000 6.61%, 11/28/02.................. 102,431
101,000 6.80%, 11/28/05.................. 102,803
101,000 7.05%, 11/28/07.................. 104,020
101,000 7.32%, 11/28/10.................. 104,639
101,000 7.42%, 11/28/15.................. 102,954
101,000 7.62%, 11/28/25.................. 103,187
726,545
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 0.1%
Time Warner, Inc.
206,000 6.7725%, 8/15/00................. 206,207
123,000 7.975%, 8/15/04.................. 130,578
247,000 8.11%, 8/15/06................... 266,452
247,000 8.18%, 8/15/07................... 267,709
92,000 Viacom Inc.
8.00%, 7/7/06.................. 91,080
962,026
TOTAL CORPORATE BONDS
(COST $1,595,465).............. 1,688,571
</TABLE>
(CONTINUED)
44
<PAGE>
EVERGREEN
GROWTH AND INCOME FUND
[G&I Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
SHORT-TERM INVESTMENTS-- 22.1%
<C> <C> <S> <C>
COMMERCIAL PAPER-- 19.4%
AC Acquisition Holding Co.
12,325,000 5.58%, 8/21/97................... $ 12,286,792
1,100,000 5.48%, 9/16/97................... 1,092,298
7,800,000 American Honda Finance Corp.
5.53%, 9/12/97................. 7,749,677
1,300,000 BankAmerica Corp.
5.52%, 8/5/97.................. 1,299,203
13,600,000 BMW U.S. Capital Corp.
5.54%, 8/22/97................. 13,556,049
250,000 Case Equipment Loan Trust
5.50%, 9/5/97.................. 248,663
Columbia/HCA Healthcare Corp.
12,700,000 5.53%, 8/29/97................... 12,645,376
3,400,000 5.54%, 9/9/97.................... 3,379,594
10,450,000 Dupont (E.I.) De Nemours & Co.
5.50%, 8/27/97................... 10,408,490
4,200,000 Finova Capital Corp.
5.53%, 9/4/97.................. 4,178,064
800,000 Four Winds Funding Corp.
5.54%, 8/15/97................. 798,277
2,500,000 Lucent Technologies, Inc.
5.49%, 8/8/97.................. 2,497,331
Market Street Funding Corp.
2,150,000 5.54%, 8/22/97................... 2,143,052
3,350,000 5.53%, 9/22/97................... 3,323,241
9,500,000 5.55%, 9/22/97................... 9,423,842
2,150,000 Martin Marietta Corp.
5.63%, 8/7/97.................. 2,147,983
6,900,000 Merrill Lynch & Co., Inc.
5.52%, 9/3/97.................. 6,865,086
3,400,000 Metropolitan Life, Inc.
5.53%, 8/12/97................. 3,394,255
20,000,000 National Fuel Gas Co.
5.52%, 9/22/97................. 19,840,533
12,325,000 Pepsico, Inc.
5.53%, 8/15/97................. 12,298,494
16,750,000 PHH Corp.
5.57%, 8/21/97................. 16,698,168
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
SHORT-TERM INVESTMENTS-- CONTINUED
<C> <C> <S> <C>
COMMERCIAL PAPER-- CONTINUED
15,000,000 Sharp Electronics Corp.
5.52%, 9/19/97................. $ 14,887,300
12,350,000 Shell Oil Co.
5.45%, 8/25/97................. 12,305,128
8,600,000 Sigma Finance, Inc.
5.52%, 9/22/97................. 8,531,429
6,400,000 Southland Corp.
5.57%, 8/7/97.................. 6,394,059
20,000,000 Sumamer Life Insurance
5.50%, 8/11/97................. 19,969,445
9,150,000 Toyota Motor Credit Corp.
5.50%, 8/14/97................. 9,131,827
19,000,000 Trident Capital Finance, Inc.
5.52%, 9/4/97.................. 18,900,947
700,000 Twin Towers, Inc.
5.52%, 9/5/97.................. 696,243
250,000 UBS Finance Delaware, Inc.
5.50%, 8/7/97.................. 249,771
10,000,000 Windmill Funding Corp.
5.55%, 8/21/97................. 9,969,167
14,000,000 Xerox Corp.
5.46%, 8/28/97................. 13,942,670
261,252,454
GOVERNMENT AGENCY NOTES &
BONDS-- 2.7%
20,000,000 Federal Home Loan Mortgage
5.36%, 8/22/97................. 19,937,467
17,000,000 Federal National Mortgage
Association
5.39%, 8/29/97................. 16,928,732
36,866,199
TOTAL SHORT-TERM INVESTMENTS
(COST $298,118,653)............ 298,118,653
</TABLE>
<TABLE>
<C> <C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $975,611,770).... 99.5% 1,341,337,101
OTHER ASSETS AND
LIABILITIES-- NET...... 0.5 7,355,278
NET ASSETS............... 100.0% $1,348,692,379
</TABLE>
* Non-income producing securities.
** Investment in a non-controlled affiliate. The Fund owns over 5% of
outstanding voting securities. The Fund has a cost basis of $4,482,537 in
this issue at July 31, 1997. The Fund did not earn any income from this
investment during the period ended July 31, 1997.
(a) Less than one-tenth of a percent.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
45
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G Fund logo
appears here]
SCHEDULE OF INVESTMENTS
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 73.0%
<C> <C> <S> <C>
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 0.5%
99,900 Dana Corp......................... $ 4,539,206
BANKS-- 17.8%
17,850 AmSouth Bancorp................... 770,897
2,200,000 Australian & New Zealand Banking
Group Ltd....................... 17,592,366
142,000 BancorpSouth, Inc................. 4,260,000
230,402 Bank of Melbourne Ltd............. 1,691,314
49,000 Bankers Trust New York Corp....... 4,958,187
192,500 + CB Bancshares, Inc................ 6,785,625
24,850 CCB Financial Corp................ 2,068,762
1,908,000 Commonwealth Bank of Australia.... 17,489,820
30,000 Deposit Guaranty Corp............. 982,500
77,606 F&M National Corp................. 2,100,212
490,300 First Hawaiian, Inc............... 18,386,250
3,000 First of America Bank Corp........ 166,500
20,000 First Tennessee National Corp..... 1,040,000
80,500 First Virginia Banks, Inc......... 5,655,125
7,500 Firstbank of Illinois Co.......... 323,438
4,100 FirstMerit Corp................... 199,875
150,000 Fleet Financial Group, Inc........ 10,181,250
33,551 Hudson Chartered Bancorp, Inc..... 949,913
212,940 Interchange Financial Services
Corp............................ 4,764,532
203,251 Jefferson Bankshares, Inc......... 8,079,227
175,900 Magna Group, Inc.................. 6,486,312
12,000 Mercantile Bancorporation, Inc.... 846,750
257,400 National Australia Bank, Ltd...... 18,790,200
274,537 ONBANCorp, Inc.................... 13,898,436
12,500 One Valley Bancorp of West
Virginia, Inc................... 538,281
79,254 Second Bancorp, Inc............... 1,842,656
74,250 Susquehanna Bancshares, Inc....... 2,060,438
3,500 United Bankshares, Inc............ 152,688
107,320 USBancorp, Inc.................... 6,358,710
1,700,000 Westpac Banking Corp., Ltd........ 11,076,722
170,496,986
BUILDING, CONSTRUCTION &
FURNISHINGS-- 1.0%
130,000 Armstrong World Industries,
Inc............................. 9,595,625
BUSINESS EQUIPMENT &
SERVICES-- 0.7%
60,000 International Business Machines
Corp............................ 6,345,000
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
CHEMICAL & AGRICULTURAL
PRODUCTS-- 1.5%
60,000 Du Pont (E.I.) De Nemours & Co.... $ 4,016,250
2,310 Ems-Chemie Holding AG............. 10,343,967
14,360,217
CONSUMER PRODUCTS &
SERVICES-- 0.2%
150,640 Knape & Vogt Manufacturing Co..... 2,410,240
DIVERSIFIED COMPANIES-- 1.1%
524,900 Tomkins Plc, ADR.................. 11,088,512
ELECTRICAL EQUIPMENT &
SERVICES-- 0.1%
31,000 Westinghouse Electric Corp........ 745,938
ENERGY-- 6.9%
247,600 Consolidated Natural Gas Co....... 14,329,850
353,600 Enron Global Power & Pipelines
LLC............................. 11,735,100
513,200 Equitable Resources, Inc.......... 15,299,775
473,491 Monterey Resources, Inc........... 7,220,738
60,000 Murphy Oil Corp................... 3,123,750
131,150 Northwest Natural Gas Co.......... 3,409,900
684,429 * Santa Fe Energy Resources, Inc.... 5,903,200
1,000,000 Santos Ltd.-- ADR................. 4,806,861
65,829,174
FINANCE & INSURANCE-- 2.1%
50,000 Chubb Corp........................ 3,534,156
100,000 LaSalle Re Holdings, Ltd.......... 3,337,500
195,800 Ohio Casualty Corp................ 9,202,600
71,600 Provident Co., Inc................ 4,537,650
20,611,906
FOOD & BEVERAGE PRODUCTS-- 0.3%
105,600 Sbarro, Inc....................... 2,844,600
HEALTHCARE PRODUCTS &
SERVICES-- 3.3%
45,000 Abbott Laboratories............... 2,944,687
53,000 ADAC Laboratories................. 1,033,500
100,000 Baxter International, Inc......... 5,781,250
59,400 Bristol-Myers Squibb Co........... 4,659,187
200,000 Glaxo Wellcome Plc-- ADR.......... 8,500,000
25,000 Rhone Poulenc Rorer, Inc.......... 2,360,938
47,500 Shared Medical System Corp........ 2,565,000
106,800 U.S. Surgical Corp................ 3,964,950
31,809,512
</TABLE>
(CONTINUED)
46
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 0.2%
15,000 Fisher Scientific International,
Inc............................. $ 726,563
26,000 Keystone International, Inc....... 940,875
1,667,438
METAL PRODUCTS & SERVICES-- 0.8%
200,601 Freeport McMoRan Copper & Gold,
Inc. Class A.................... 5,466,377
29,800 Phelps Dodge Corp................. 2,534,863
8,001,240
PAPER & PACKAGING-- 0.4%
60,000 Union Camp Corp................... 3,513,750
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 0.5%
186,500 Reader's Digest Assn., Inc.
(The)........................... 4,650,844
REAL ESTATE-- 6.3%
85,400 Bradley Real Estate, Inc. REIT.... 1,601,250
55,000 Burnham Pacific Properties, Inc.
REIT............................ 783,750
150,000 Columbus Realty Trust REIT........ 3,553,125
120,000 Crown American Realty Trust REIT.. 1,162,500
649,800 Evans Withycombe Residential, Inc.
REIT............................ 13,767,637
381,200 Gables Residential Trust REIT..... 10,173,275
484,512 Horizon Group, Inc. REIT.......... 6,450,066
611,700 + Kranzco Realty Trust REIT......... 10,513,594
53,900 Patriot American Hospitality, Inc.
REIT............................ 1,344,144
158,000 Post Property, Inc. REIT.......... 6,310,125
157,500 Prentiss Properties Trust REIT.... 4,095,000
69,000 Sunstone Hotel Investors, Inc.
REIT............................ 966,000
60,720,466
RETAILING & WHOLESALE-- 1.4%
200,000 Mercantile Stores Co., Inc........ 13,437,500
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 0.3%
5,000 Portugal Telecom SA, ADR.......... 201,250
95,000 Telefonica del Peru SA, ADR....... 2,345,313
2,546,563
THRIFT INSTITUTIONS-- 2.2%
82,782 CFX Corp.......................... 1,655,640
30,800 Eagle Financial Corp.............. 1,039,500
56,000 First Essex Bancorp, Inc.......... 994,000
363,000 IPC Holdings Ltd.................. 10,799,250
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
THRIFT INSTITUTIONS-- CONTINUED
120,000 Jacksonville Bancorp, Inc......... $ 1,965,000
99,000 + People's Savings Financial
Corp............................ 4,257,000
20,710,390
TRANSPORTATION-- 1.7%
452,000 KLM Royal Dutch Air Lines......... 16,159,000
UTILITIES-- ELECTRIC-- 15.4%
54,100 Carolina Power & Light Co......... 1,927,312
290,400 Central Hudson Gas & Electric
Corp............................ 9,637,650
155,200 Florida Progress Corp............. 4,995,500
239,000 FPL Group, Inc.................... 11,442,125
749,000 Houston Industries., Inc.......... 15,682,187
94,900 Illinova Corp..................... 2,236,081
200,000 LG&E Energy Corp.................. 4,362,500
1,177,100 Long Island Lighting Co........... 28,912,519
1,400,000 PP&L Resources, Inc............... 28,612,500
910,300 Public Service Enterprise Group,
Inc............................. 22,529,925
201,300 Texas Utilities Co................ 7,133,569
400,200 TNP Enterprises, Inc.............. 9,804,900
147,276,768
UTILITIES-- GAS-- 1.2%
73,300 Chesapeake Utilities Corp......... 1,218,613
115,900 New Jersey Resources Corp......... 3,665,337
136,800 Peoples Energy Corp............... 5,249,700
29,300 Piedmont Natural Gas Co., Inc..... 732,500
10,000 South Jersey Industry, Inc........ 227,500
8,300 Yankee Energy System, Inc......... 199,200
11,292,850
UTILITIES-- TELEPHONE-- 2.6%
565,100 Frontier Corp..................... 11,655,187
100,000 GTE Corp.......................... 4,650,000
230,000 U.S. West Communications Group,
Inc............................. 8,409,375
24,714,562
OTHER SECURITIES-- 4.5%........... 43,421,850
TOTAL COMMON STOCKS
(COST $617,914,115)............. 698,790,137
<CAPTION>
CONVERTIBLE PREFERRED-- 19.7%
<C> <C> <S> <C>
BANKS-- 0.9%
210,000 National Australia Bank, Ltd.
7.875%,......................... 6,168,750
50,000 SunAmerica, Inc.
$3.188, PERCS................... 2,287,500
8,456,250
</TABLE>
(CONTINUED)
47
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
CONVERTIBLE PREFERRED-- CONTINUED
<C> <C> <S> <C>
CHEMICAL & AGRICULTURAL
PRODUCTS-- 2.5%
655,700 Atlantic Richfield Co.
9.0%, DECS (Exchangeable for
Lyondell Petrochemical Co.
common stock)................... $ 16,146,613
225,000 Merrill Lynch & Co., Inc.
6.25%, Series IGL, STRYPES
(Exchangeable for IMC Global,
Inc. common stock).............. 7,889,062
24,035,675
COMMUNICATION SYSTEMS &
SERVICES-- 3.0%
696,000 AirTouch Communications
6.0%............................ 22,098,000
50,000 Worldcom, Inc.
8.0%, DECS...................... 6,131,250
28,229,250
ENERGY-- 0.8%
50,000 Calenergy Capital Trust
6.25%, TIDES.................... 3,725,000
50,000 Callon Petroleum Co.
8.50% Series A.................. 1,931,250
48,000 Nuevo Energy Co.
5.75%, Series A, TECONS......... 2,400,000
8,056,250
FINANCE & INSURANCE-- 1.8%
205,000 Allstate Corp. (The)
6.76%, due 1998, DECS
(Exchangeable for PMI Group,
Inc. common stock).............. 10,070,625
100,000 American General Corp.
$3.00, Series A, MIPS........... 6,950,000
17,020,625
FOOD & BEVERAGE PRODUCTS-- 2.6%
23,900 Ralston Purina Co.
7.00%, SAILS (Exchangeable for
Interstate Bakeries common
stock).......................... 1,487,775
405,000 Wendys Financing I
5.00%, TECONS................... 23,439,375
24,927,150
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 0.3%
150,000 Worthington Industries, Inc.
7.25%, DECS (Exchangeable for
Rouge Steel Co. common stock)... 2,550,000
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
CONVERTIBLE PREFERRED-- CONTINUED
<C> <C> <S> <C>
METAL PRODUCTS & SERVICES-- 1.3%
212,800 Freeport McMoRan Copper & Gold,
Inc. 7.0%, EDS.................. $ 5,812,100
120,000 Timet Capital Trust I
6.625%, BUCS, 144A.............. 6,495,600
12,307,700
PAPER & PACKAGING-- 1.5%
295,000 Crown Cork & Seal Co., Inc.
4.5%, MIPS...................... 14,344,375
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 1.9%
220,000 Houston Industries, Inc.
7.00%, ACES (Exchangeable for
Time Warner, Inc. common
stock).......................... 11,797,500
253,000 Merrill Lynch & Co., Inc.
6.0%, STRYPES,
(exchangeable for Cox
Communications, Inc. common
stock).......................... 6,072,000
17,869,500
TRANSPORTATION-- 0.9%
78,400 CNF Trust I
5.00%, Series A, TECONS......... 4,508,000
75,000 Hvide Capital Trust
6.5%, 144A...................... 4,650,000
9,158,000
UTILITIES-- 2.2%
85,300 MCN Corp.
8.75%, PRIDES................... 2,473,700
315,000 Philippine Long Distance Telephone
Co., GDS 7.00%, Series III...... 18,742,500
21,216,200
TOTAL CONVERTIBLE PREFERRED
(COST $176,025,506)............. 188,170,975
<CAPTION>
PRINCIPAL
AMOUNT
CONVERTIBLE DEBENTURES-- 5.9%
<C> <C> <S> <C>
BANKS-- 0.2%
$1,500,000 Magna Group, Inc.
8.75%, 11/1/98.................. 2,025,000
BUSINESS EQUIPMENT &
SERVICES-- 0.1%
750,000 Personnel Group Of America, Inc.
5.75%, 7/1/04, 144A............. 860,625
</TABLE>
(CONTINUED)
48
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
<CAPTION>
CONVERTIBLE DEBENTURES-- CONTINUED
<C> <C> <S> <C>
ELECTRICAL EQUIPMENT &
SERVICES-- 2.4%
$3,000,000 Adaptec Inc.
4.75%, 2/1/04, 144A............. $ 3,221,400
3,500,000 HMT Technology Corp.
5.75%, 1/15/04, 144A............ 3,185,000
9,700,000 Photronics, Inc.
6.00%, 6/1/04................... 11,882,500
2,500,000 Sci Systems, Inc.
5.00%, 5/1/06, 144A............. 4,362,500
22,651,400
ENERGY-- 0.6%
3,775,000 Offshore Logistics, Inc.
6.00%, 12/15/03, 144A........... 4,133,625
1,500,000 Swift Energy Co.
6.25%, 11/15/06................. 1,537,500
5,671,125
HEALTHCARE PRODUCTS &
SERVICES-- 0.3%
1,320,000 Beverly Enterprises, Inc.
7.625%, 3/15/03................. 1,346,400
1,369,000 Maxxim Medical, Inc.
6.75%, 3/1/03................... 1,533,280
2,879,680
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 0.5%
500,000 Robbins & Myers, Inc.
6.50%, 9/1/03................... 727,500
3,000,000 Solectron Corp.
6.00%, 3/1/06, 144A............. 4,042,500
4,770,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
<CAPTION>
CONVERTIBLE DEBENTURES-- CONTINUED
<C> <C> <S> <C>
OIL FIELD SERVICES-- 0.7%
$1,250,000 Key Energy Group, Inc.
7.50%, 7/1/03, 144A............. $ 2,712,500
1,000,000 Nabors Industries, Inc.
5.00%, 5/15/06.................. 1,855,000
2,000,000 Seacor Holdings, Inc.
5.375%, 11/15/06................ 2,240,000
6,807,500
RETAILING & WHOLESALE-- 1.1%
5,000,000 Costco Wholesale Companies, Inc.
5.75%, 5/15/02.................. 5,356,500
4,000,000 Proffitt's, Inc.
4.75%, 11/1/03.................. 4,900,000
10,256,500
TOTAL CONVERTIBLE DEBENTURES
(COST $47,069,353).............. 55,921,830
<CAPTION>
SHORT-TERM INVESTMENTS-- 1.4%
<C> <C> <S> <C>
GOVERNMENT AGENCY NOTES &
BONDS-- 1.4%
13,200,000 Federal Home Loan Bank
5.43%, 8/27/97.................. 13,148,234
TOTAL SHORT-TERM INVESTMENTS
(COST $13,148,234).............. 13,148,234
</TABLE>
<TABLE>
<C> <C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $854,157,208)..... 100.0% 956,031,176
OTHER ASSETS AND
LIABILITIES-- NET....... 0.0 437,776
NET ASSETS................ 100.0% $956,468,952
</TABLE>
(CONTINUED)
49
<PAGE>
EVERGREEN
INCOME AND GROWTH FUND
[I&G Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
* Non-income producing securities.
+ Investment in a non-controlled affiliate. The Fund owns over 5% of outstanding
voting securities. The Fund has a cost basis of $18,665,490 in these issues at
July 31, 1997. The Fund earned $652,022 of income from these investments
during the period ended July 31, 1997.
144A-- Rule 144A securities are restricted as to resale to qualified
institutional investors.
ADR-- American Depository Receipts.
ACES-- Automatically Convertible Equity Securities.
BUCS-- Beneficial Unsecured Convertible Securities.
DECS-- Dividend Enhanced Convertible Stock.
EDS-- Exchangeable Depositary Shares.
GDS-- Global Depositary Shares.
MIPS-- Monthly Income Preferred Shares.
PERCS-- Preferred Equity Redemption Cumulative Stock.
PRIDES-- Preferred Redeemable Increased Dividend Equity Securities
REIT-- Real Estate Investment Trust.
SAILS-- Stock Appreciation Income Linked Securities.
STRYPES-- Structured Yield Product Exchangeable for Stock.
TECONS-- Term Convertible Shares.
TIDES-- Term Income Deferrable Equitable Securities.
GEOGRAPHIC DIVERSIFICATION
The Fund may invest in securities principally traded in markets outside the
United States. While investments in such securities are intended to reduce risk
by providing further diversification, foreign investments involve sovereign risk
in addition to the credit and market risks normally associated with domestic
securities. Foreign investments may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations. At July 31, 1997,
the Fund had investments, excluding short-term investments, in the following
countries:
<TABLE>
<CAPTION>
MARKET PERCENTAGE OF
COUNTRY VALUE NET ASSETS
<S> <C> <C>
United States................................ $769,577,247 80.5%
Australia.................................... 79,256,554 8.3%
Bermuda...................................... 14,136,750 1.5%
Brazil....................................... 4,920,300 0.5%
Canada....................................... 7,611,549 0.8%
France....................................... 10,343,967 1.1%
Peru......................................... 2,345,313 0.2%
Portugal..................................... 201,250 0.0%
Philippines.................................. 18,742,500 2.0%
The Netherlands.............................. 16,159,000 1.7%
United Kingdom............................... 19,588,512 2.0%
$942,882,942 98.6%
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
EVERGREEN
SMALL CAP EQUITY INCOME FUND
[Small Cap Equity
Income Fund logo
appears here]
SCHEDULE OF INVESTMENTS
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 75.3%
<C> <C> <S> <C>
AEROSPACE & DEFENSE-- 1.9%
18,000 Curtiss Wright Corp.................. $ 1,122,750
BANKS-- 11.2%
3,750 ABC Bancorp.......................... 62,813
21,000 Amcore Financial, Inc................ 609,000
3,000 BancorpSouth, Inc.................... 90,000
19,200 BSB Bancorp, Inc..................... 746,400
19,500 CB Bancshares, Inc................... 687,375
31,000 Commercial Bankshares, Inc........... 594,812
2,500 First Midwest Bancorp, Inc........... 87,500
30,000 First Oak Brook Bancshares Inc. Cl.
A.................................. 1,035,000
21,761 First State Bancorp.................. 424,339
9,747 Hudson Chartered Bancorp, Inc........ 275,962
30,000 Independent Bancshares, Inc.......... 435,000
13,962 Interchange Financial Services
Corp............................... 312,400
2,500 One Valley Bancorp of West Virginia,
Inc................................ 107,656
9,834 Pacific Century Financial Corp....... 502,149
14,000 South Alabama Bancorp, Inc........... 248,500
8,160 State Financial Services Corp........ 171,360
7,500 Susquehanna Bancshares, Inc.......... 208,125
6,598,391
BUILDING, CONSTRUCTION &
FURNISHINGS-- 2.6%
28,000 La-Z-Boy Chair Co.................... 1,051,750
30,100 Shelby Williams Industries, Inc...... 462,788
1,514,538
BUSINESS EQUIPMENT &
SERVICES-- 0.9%
21,400 American Business Products, Inc...... 518,950
CHEMICAL & AGRICULTURAL PRODUCTS--
1.8%
20,000 Learonal, Inc........................ 647,500
15,500 Stepan Co............................ 402,031
1,049,531
CONSUMER PRODUCTS &
SERVICES-- 3.8%
50,000 General Housewares Corp.............. 443,750
52,000 Oneida, Ltd.......................... 1,534,000
6,000 Polaris Industries, Inc.............. 173,625
2,800 Russ Berrie & Co., Inc............... 71,575
2,222,950
DIVERSIFIED COMPANIES-- 2.2%
32,000 Mathews International Corp........... 1,284,000
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
ELECTRICAL EQUIPMENT &
SERVICES-- 2.2%
28,000 BGS Systems, Inc..................... $ 805,000
37,500 Computer Language Research, Inc...... 365,625
10,000 Tech/OPS Sevcon, Inc................. 125,000
1,295,625
ENERGY-- 3.0%
32,800 Berry Petroleum Co. Cl. A............ 551,450
22,300 Penn Virginia Corp................... 1,234,863
1,786,313
FINANCE & INSURANCE-- 3.0%
800 American Heritage Life Investment
Corp............................... 30,400
26,600 Arthur J. Gallagher & Co............. 964,250
5,000 LaSalle Re Holdings, Ltd............. 166,875
16,000 Trenwick Group, Inc.................. 612,000
1,773,525
FOOD & BEVERAGE PRODUCTS-- 4.8%
69,000 Bridgford Foods Corp................. 681,375
2,000 Farmer Brothers Co................... 266,000
20,000 Lance, Inc........................... 395,000
16,000 Luby's Cafeterias, Inc............... 315,000
76,100 Piccadilly Cafeterias, Inc........... 994,056
10,000 Schultz Sav O Stores Inc............. 183,750
2,835,181
HEALTHCARE PRODUCTS &
SERVICES-- 1.1%
12,000 Kinetic Concepts, Inc................ 228,000
15,000 West Co., Inc. (The)................. 440,625
668,625
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 8.7%
24,500 Badger Meter, Inc.................... 1,016,750
22,298 Flowserve Corp....................... 760,906
84,100 Gorman Rupp Co....................... 1,639,950
6,400 Met-Pro Corp......................... 102,400
25,200 Raven Industries, Inc................ 611,100
8,100 Research, Inc........................ 58,725
43,300 Spartech Corp........................ 665,737
8,000 Woodward Governor Co................. 279,000
5,134,568
MACHINERY-- DIVERSIFIED-- 3.5%
55,000 Hardinge Brothers, Inc............... 1,828,750
5,800 Tennant Co........................... 205,900
2,034,650
</TABLE>
(CONTINUED)
51
<PAGE>
EVERGREEN
SMALL CAP EQUITY INCOME FUND
[Small Cap Equity
Income Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
OIL-- 1.6%
60,000 Quaker State Corp.................... $ 952,500
REAL ESTATE-- 6.3%
891 Bradley Real Estate, Inc. REIT....... 16,706
2,000 CBL & Associates Properties, Inc.
REIT............................... 51,000
36,000 Columbus Realty Trust REIT........... 852,750
46,000 Evans Withycombe Residential, Inc.
REIT............................... 974,625
20,000 Gables Residential Trust REIT........ 533,750
40,000 Innkeepers USA Trust REIT............ 562,500
1,000 Kranzco Realty Trust REIT............ 17,188
2,500 Sovran Self Storage, Inc. REIT....... 74,219
4,000 Summit Properties, Inc. REIT......... 79,000
40,000 Sunstone Hotel Investors, Inc. REIT.. 560,000
3,721,738
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 1.1%
126,000 UNR Industries, Inc.................. 614,250
TEXTILE & APPAREL-- 0.5%
20,500 Superior Surgical Manufacturing Co.,
Inc................................ 281,875
THRIFT INSTITUTIONS-- 5.2%
6,000 First Essex Bancorp, Inc............. 106,500
4,000 First Financial Holdings, Inc........ 131,500
16,000 First Palm Beach Bancorp, Inc........ 514,000
50,000 Horizon Financial Corp............... 787,500
38,000 Jacksonville Bancorp, Inc............ 622,250
12,000 Maryland Federal Bancorp, Inc........ 594,000
7,000 People's Savings Financial Corp...... 301,000
3,056,750
UTILITIES-- ELECTRIC-- 3.2%
33,000 Madison Gas & Electric Co............ 668,250
26,000 Northwestern Public Service Co....... 487,500
14,000 Otter Tail Power Co.................. 446,250
12,000 TNP Enterprises, Inc................. 294,000
1,896,000
UTILITIES-- GAS-- 6.5%
29,100 Chesapeake Utilities Corp............ 483,787
30,000 Connecticut Energy Corp.............. 684,375
28,800 Delta Natural Gas Co., Inc........... 500,400
4,000 Energen Corp......................... 145,000
24,000 Enron Global Power & Pipelines LLC... 796,500
7,400 NUI Corp............................. 170,200
26,000 Public Service Company of North
Carolina, Inc...................... 513,500
26,000 Southwest Gas Corp................... 482,625
2,000 United Cities Gas Co................. 47,500
3,823,887
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
UTILITIES-- TELEPHONE-- 0.2%
4,000 Hickory Tech Corporation............. $ 122,000
TOTAL COMMON STOCKS
(COST $38,477,528)................. 44,308,597
<CAPTION>
CONVERTIBLE PREFERRED-- 7.5%
<C> <C> <S> <C>
ENERGY-- 1.0%
16,000 Callon Petroleum Co.
8.50%, Series A.................... 618,000
FINANCE & INSURANCE-- 1.3%
12,000 American Heritage Life Investment
Corp.
8.50%, PRIDES...................... 742,500
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 1.8%
63,000 Worthington Industries, Inc.
7.25%, DECS........................ 1,071,000
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 0.2%
4,000 AMC Entertainment, Inc.
$1.75................................ 144,000
TRANSPORTATION-- 3.2%
30,000 Hvide Capital Trust
6.50%, 144A........................ 1,860,000
TOTAL CONVERTIBLE PREFERRED
(COST $3,831,717).................. 4,435,500
<CAPTION>
CONVERTIBLE DEBENTURES-- 11.2%
<C> <C> <S> <C>
BANKS-- 1.4%
700,000 First State Bancorp.
7.50%, 4/30/17..................... 840,000
BUILDING, CONSTRUCTION &
FURNISHINGS-- 0.5%
270,000 Toll Corp.
4.75%, 1/15/04..................... 289,238
BUSINESS EQUIPMENT &
SERVICES-- 0.4%
200,000 Personnel Group Of America, Inc.
5.75%, 7/1/04, 144A................ 229,500
ELECTRICAL EQUIPMENT &
SERVICES-- 2.2%
1,050,000 Photronics, Inc.
6.00%, 6/1/04...................... 1,286,250
ENERGY-- 1.7%
250,000 Key Energy Group, Inc.
7.50%, 7/1/03, 144A................ 542,500
425,000 Offshore Logistics, Inc.
6.00%, 12/15/03, 144A.............. 465,375
1,007,875
</TABLE>
(CONTINUED)
52
<PAGE>
EVERGREEN
SMALL CAP EQUITY INCOME FUND
[Small Cap Equity
Income Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
CONVERTIBLE DEBENTURES-- CONTINUED
<C> <C> <S> <C>
HEALTHCARE PRODUCTS &
SERVICES-- 1.0%
140,000 Maxxim Medical, Inc.
6.75%, 3/1/03...................... $ 156,800
480,000 Meridian Diagnostics, Inc.
7.00%, 9/1/06...................... 410,400
567,200
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 1.5%
610,000 Robbins & Myers, Inc.
6.50%, 9/1/03...................... 887,550
RETAILING & WHOLESALE-- 2.5%
500,000 Central Garden & Pet Co.
6.00%, 11/15/03, 144A.............. 567,500
750,000 Proffitt's, Inc.
4.75%, 11/1/03..................... 918,750
1,486,250
TOTAL CONVERTIBLE DEBENTURES
(COST $5,488,238).................. 6,593,863
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
SHORT-TERM INVESTMENTS-- 3.0%
<C> <C> <S> <C>
GOVERNMENT AGENCY NOTES &
BONDS-- 3.0%
Federal Home Loan Bank
350,000 5.37%, 8/15/97....................... $ 349,269
350,000 5.43%, 8/27/97....................... 348,627
Federal Home Loan Mortgage
250,000 5.36%, 8/22/97....................... 249,218
20,000 5.36%, 8/26/97....................... 19,926
270,000 5.37%, 8/27/97....................... 268,953
500,000 5.37%, 8/28/97....................... 497,986
1,733,979
TOTAL SHORT-TERM INVESTMENTS
(COST $1,733,979).................. 1,733,979
</TABLE>
<TABLE>
<C> <C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $49,531,462)....... 97.0% 57,071,939
OTHER ASSETS AND
LIABILITIES-- NET........ 3.0 1,773,247
NET ASSETS................. 100.0% $58,845,186
</TABLE>
144A-- Rule 144A securities are restricted as to resale to qualified
institutional investors.
DECS-- Dividend Enhanced Convertible Stock
PRIDES-- Preferred Redeemable Increased Dividend Equity Securities.
REIT-- Real Estate Investment Trust.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
53
<PAGE>
EVERGREEN
UTILITY FUND
[Utility Fund logo
appears here]
SCHEDULE OF INVESTMENTS
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 80.9%
<C> <C> <S> <C>
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 3.1%
100,000 Ford Motor Co................... $ 4,087,500
NATURAL GAS DIVERSIFIED-- 3.2%
108,075 Enron Corp...................... 4,100,095
OIL/GAS PRODUCTIONS-- 2.1%
350,000 Chesapeake Energy Corp.......... 2,756,250
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 3.3%
50,000 Nokia Corp...................... 4,281,250
UTILITIES-- ELECTRIC-- 46.0%
82,000 American Electric Power Co.,
Inc........................... 3,669,500
100,000 Central Hudson Gas & Electric
Corp.......................... 3,318,750
100,000 CINergy Corp.................... 3,362,500
88,774 Duke Energy Corp................ 4,499,732
150,000 Enova Corp...................... 3,637,500
80,000 FPL Group, Inc.................. 3,830,000
100,000 GPU, Inc........................ 3,468,750
170,000 Houston Industries., Inc........ 3,559,375
140,000 Illinova Corp................... 3,298,750
125,000 Long Island Lighting Co......... 3,070,313
48,000 NIPSCO Industries, Inc.......... 2,022,000
100,000 PacifiCorp...................... 2,231,250
100,000 Pinnacle West Capital Corp...... 3,156,250
150,000 PP&L Resources, Inc............. 3,065,625
100,000 Public Service Co. of
Colorado...................... 4,162,500
100,000 Public Service Enterprise Group,
Inc........................... 2,475,000
100,000 Texas Utilities Co.............. 3,543,750
120,000 UtiliCorp United, Inc........... 3,577,500
59,949,045
UTILITIES-- GAS-- 5.7%
105,000 NICOR Inc....................... 3,845,625
50,000 Northwest Natural Gas Co........ 1,300,000
60,000 Peoples Energy Corp............. 2,302,500
7,448,125
UTILITIES-- TELEPHONE-- 17.5%
100,000 ALLTEL Corp..................... 3,287,500
40,000 Ameritech Corp.................. 2,697,500
70,000 BellSouth Corp.................. 3,316,250
80,000 GTE Corp........................ 3,720,000
50,000 SBC Communications, Inc......... 2,959,375
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
UTILITIES-- TELEPHONE-- CONTINUED
60,000 Sprint Corp..................... $ 2,970,000
105,000 U.S. West Communications Group,
Inc........................... 3,839,062
22,789,687
TOTAL COMMON STOCKS
(COST $91,325,591)............ 105,411,952
<CAPTION>
CONVERTIBLE PREFERRED-- 18.8%
<C> <C> <S> <C>
OIL INTEGRATED DOMESTIC-- 2.2%
50,000 Unocal Corp.
6.25% 144A.................... 2,931,250
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 2.5%
60,000 Houston Industries Inc.
(Exchangeable for Time Warner
Common Stock)
7.0%, ACES.................... 3,217,500
UTILITIES-- ELECTRIC-- 3.9%
50,000 AES Trust I Series A
5.375% TECONS................. 3,200,000
100,000 Companhia Paranaense De Energia-
Copel, Plc-- ADR
6.25%, TIDES.................. 1,925,000
5,125,000
UTILITIES-- GAS-- 2.9%
70,000 MCN Financing III
8% PRIDES..................... 3,832,500
UTILITIES-- TELEPHONE-- 7.3%
125,000 AirTouch Communications, Inc.
6.0%, Series B................ 3,968,750
24,000 Compania de Inversiones en
Telecomunicaciones SA PRIDES*
(exchangeable for ADS's of
Telefonica de Argentina SA)
7.00% 3/3/98 144A............. 1,758,000
100,000 Sprint Corp. (Exchangeable for
Southern N.E. Telephone Common
Stock)
8.25%, DECS................... 3,737,500
9,464,250
TOTAL CONVERTIBLE PREFERRED
(COST $21,681,625)............ 24,570,500
</TABLE>
(CONTINUED)
54
<PAGE>
EVERGREEN
UTILITY FUND
[Utility Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
<CAPTION>
REPURCHASE AGREEMENT-- 2.3%
<C> <C> <S> <C>
$2,958,828 Donaldson Lufkin & Jenrette
Securities purchased 7/31/97,
5.75%, maturing 8/1/97, maturing
value $2,959,301(a)
(cost-- $2,958,828)............. $ 2,958,828
</TABLE>
<TABLE>
<C> <C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $115,966,044)...... 102.0% 132,941,280
OTHER ASSETS AND
LIABILITIES-- NET........ (2.0) (2,558,607)
NET ASSETS................. 100.0% $130,382,673
</TABLE>
* Non-income producing securities.
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at July 31, 1997.
144A-- Rule 144A securities are restricted as to resale to qualified
institutional investors.
ADR-- American Depository Receipts.
ADS-- American Depository Shares.
ACES-- Automatically Convertible Equity Securities.
DECS-- Dividend Enhanced Convertible Stock.
PRIDES-- Preferred Redeemable Increased Dividend Equity Securities.
PRIDES*-- Provisionally Redeemable Income Debt Exchangeable for Stock.
TECONS-- Term Convertible Shares.
TIDES-- Term Income Deferrable Equitable Securities.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
55
<PAGE>
EVERGREEN
VALUE FUND
[Value Fund logo
appears here]
SCHEDULE OF INVESTMENTS
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 91.7%
<C> <C> <S> <C>
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 1.4%
626,500 Ford Motor Co................... $ 25,608,188
BANKS-- 16.3%
400,000 BankBoston Corp................. 33,975,000
380,000 Bankers Trust Corp.............. 38,451,250
800,000 Central Fidelity Banks, Inc..... 31,900,000
95,000 Chase Manhattan Corp............ 10,788,438
75,000 Citicorp CCI.................... 10,181,250
675,000 CoreStates Financial Corp....... 41,639,062
450,000 First Chicago NBD Corp.......... 34,143,750
367,500 First Security Corp............. 9,876,563
425,000 First Tennessee National Corp... 22,100,000
405,000 NationsBank Corp................ 28,830,937
230,000 SouthTrust Corp................. 10,838,750
240,000 Summit Bancorp.................. 14,145,000
200,000 Union Planters Corp............. 10,575,000
297,445,000
BUSINESS EQUIPMENT &
SERVICES-- 2.2%
841,610 * Cabletron Systems, Inc.......... 28,509,539
100,000 International Business Machines
Corp.......................... 10,575,000
39,084,539
CHEMICAL & AGRICULTURAL
PRODUCTS-- 1.9%
366,200 Dow Chemical Co................. 34,789,000
COMMUNICATION SYSTEMS &
SERVICES-- 1.0%
225,500 * Cisco Systems, Inc.............. 17,941,344
CONSUMER PRODUCTS &
SERVICES-- 2.7%
200,000 Black & Decker Corp............. 8,425,000
888,300 Philip Morris Companies, Inc.... 40,084,538
48,509,538
DIVERSIFIED COMPANIES-- 11.7%
300,000 Fluor Corp...................... 18,450,000
808,200 Fortune Brands, Inc............. 28,640,587
1,000,000 Frontier Corp................... 20,625,000
673,200 General Electric Co............. 47,250,225
170,000 Loews Corp...................... 18,381,250
560,000 Tenneco, Inc.................... 26,110,000
657,015 * Tyco International Ltd.......... 53,218,215
212,675,277
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
ELECTRICAL EQUIPMENT &
SERVICES-- 4.8%
350,000 * Applied Materials, Inc.......... $ 32,156,250
850,000 CINergy Corp.................... 28,581,250
463,900 Varian Associates, Inc.......... 27,022,175
87,759,675
ENERGY-- 9.4%
1,027,500 Cabot Corp...................... 29,091,094
247,600 Mobil Corp...................... 18,941,400
637,500 Sonat, Inc...................... 31,795,312
154,800 Texaco, Inc..................... 17,966,475
1,350,000 Tosco Corp...................... 42,271,875
700,000 Union Pacific Resource Group,
Inc........................... 17,281,250
360,000 Unocal Corp..................... 14,400,000
171,747,406
FINANCE & INSURANCE-- 2.7%
300,000 Hartford Financial Services
Group, Inc. (The)............. 26,137,500
525,000 Travelers Property Casualty
Corp. Cl. A................... 22,575,000
48,712,500
FOOD & BEVERAGE
PRODUCTS-- 5.3%
1,481,500 American Stores Co.............. 37,407,875
808,200 * Gallaher Group Plc.............. 14,497,087
644,400 General Mills, Inc.............. 44,544,150
96,449,112
HEALTHCARE PRODUCTS &
SERVICES-- 7.5%
555,800 Bristol-Myers Squibb Co......... 43,595,563
790,300 Pharmacia & Upjohn, Inc......... 29,833,825
1,349,999 * Tenet Healthcare Corp........... 40,415,595
1,100,800 * Value Health, Inc............... 22,016,000
135,860,983
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 1.1%
229,600 Aluminum Co. of America......... 20,319,600
INFORMATION SERVICES &
TECHNOLOGY-- 1.2%
240,800 Intel Corp...................... 22,108,450
</TABLE>
(CONTINUED)
56
<PAGE>
EVERGREEN
VALUE FUND
[Value Fund logo
appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
MANUFACTURING--
DISTRIBUTING-- 1.3%
500,000 * Teradyne, Inc................... $ 23,375,000
OIL-- 6.6%
342,900 Ashland Inc..................... 18,216,563
200,000 Enron Corp...................... 7,587,500
370,000 Kerr-McGee Corp................. 23,171,250
965,000 Ultramar Diamond Shamrock
Corp.......................... 32,086,250
841,350 Williams Companies., Inc.
(The)......................... 38,491,762
119,553,325
RETAILING & WHOLESALE-- 0.5%
1,602,475 * Shoney's Inc.................... 9,715,005
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 3.0%
646,600 Nokia Corp...................... 55,365,125
TRANSPORTATION-- 3.4%
262,100 Burlington Northern Santa Fe.... 25,309,031
322,900 Norfolk Southern Corp........... 35,761,175
61,070,206
UTILITIES-- 7.7%
500,000 CMS Energy Corp................. 18,500,000
700,000 GPU, Inc........................ 24,281,250
683,200 GTE Corp........................ 31,768,800
637,800 Houston Industries., Inc........ 13,353,937
1,200,000 Illinova Corp................... 28,275,000
671,800 NICOR Inc....................... 24,604,675
140,783,662
TOTAL COMMON STOCKS
(COST $1,195,171,697)......... 1,668,872,935
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
CONVERTIBLE PREFERRED-- 1.5%
<C> <C> <S> <C>
ENERGY-- 0.7%
227,664 Unocal Corp.
6.25%, 144A................... $ 13,346,802
MANUFACTURING--
DISTRIBUTING-- 0.8%
98,200 Case Corp.
4.50%, Series A, 144A......... 14,877,300
TOTAL CONVERTIBLE PREFERRED
(COST $24,199,251)............ 28,224,102
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<C> <C> <S> <C> <C>
<CAPTION>
REPURCHASE AGREEMENT-- 6.6%
<C> <C> <S> <C> <C>
Donaldson, Lufkin & Jenrette
$119,249,601 Securities purchased 7/31/97,
5.75%, maturing 8/1/97,
maturing value $119,268,648
(a)
(cost-- $119,249,601)........ 119,249,601
TOTAL INVESTMENTS--
(COST
$1,338,620,549)...... 99.8% 1,816,346,638
OTHER ASSETS AND
LIABILITIES-- NET.... 0.2 3,875,282
NET ASSETS............. 100.0% $1,820,221,920
</TABLE>
* Non-income producing securities.
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at
July 31, 1997.
144A-- Rule 144A securities are restricted as to resale to qualified
institutional investors.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
57
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return
logo appears here]
SCHEDULE OF INVESTMENTS
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 88.2%
<C> <C> <S> <C>
AEROSPACE & DEFENSE-- 1.8%
30,000 Boeing Co. (The)................ $ 1,764,375
9,800 Northrop Grumman Corp........... 1,128,225
2,892,600
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 3.5%
50,000 Federal-Mogul Corp.............. 1,768,750
50,000 Ford Motor Co................... 2,043,750
40,000 * Lear Corp....................... 1,915,000
5,727,500
BANKS-- 3.3%
30,000 BankAmerica Corp................ 2,265,000
17,500 BankBoston Corp................. 1,486,406
15,000 Chase Manhattan Corp............ 1,703,438
5,454,844
BUSINESS EQUIPMENT &
SERVICES-- 6.9%
50,000 * BMC Software, Inc............... 3,009,375
20,000 Hewlett-Packard Co.............. 1,401,250
30,000 International Business Machines
Corp.......................... 3,172,500
100,000 * Laidlaw, Inc. Cl. B............. 1,593,750
15,000 * Microsoft Corp.................. 2,120,156
11,297,031
CAPITAL GOODS-- 3.9%
70,000 General Electric Co............. 4,913,125
50,000 Regal Beloit Corp............... 1,415,625
6,328,750
CHEMICAL & AGRICULTURAL
PRODUCTS-- 4.6%
15,000 Dow Chemical Co................. 1,425,000
30,000 Du Pont (E. I.) De Nemours &
Co............................ 2,008,125
50,000 Monsanto Co..................... 2,490,625
46,500 Morton International, Inc....... 1,554,844
7,478,594
CONSUMER PRODUCTS &
SERVICES-- 4.7%
15,000 Gillette Co. (The).............. 1,485,000
75,000 Philip Morris Companies, Inc.... 3,384,375
10,000 Procter & Gamble Co. (The)...... 1,521,250
29,900 Stewart Enterprises, Inc.
Cl. A......................... 1,295,044
7,685,669
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
DIVERSIFIED COMPANIES-- 5.2%
100,000 * Brown & Sharpe Manufacturing Co.
Cl. A......................... $ 1,325,000
75,000 * Owens Illinois, Inc............. 2,587,500
50,000 * Thermo Electron Corp............ 1,709,375
35,000 Tyco International Ltd.......... 2,835,000
8,456,875
ELECTRICAL EQUIPMENT &
SERVICES-- 8.1%
50,033 * Analog Devices, Inc............. 1,572,912
30,000 Emerson Electric Co............. 1,770,000
20,000 Intel Corp...................... 1,835,625
40,000 Motorola, Inc................... 3,212,500
25,000 * Solectron Corp.................. 1,971,875
25,000 Texas Instruments, Inc.......... 2,875,000
13,237,912
ENVIRONMENTAL SERVICES-- 1.2%
50,000 * USA Waste Services, Inc......... 2,015,625
FINANCE & INSURANCE-- 6.1%
25,000 Hartford Life, Inc. Cl. A....... 1,028,125
15,000 Loews Corp...................... 1,621,875
30,000 Nationwide Financial Services,
Inc.
Cl. A......................... 907,500
20,000 PMI Group, Inc. (The)........... 1,180,000
12,500 Student Loan Marketing
Association................... 1,874,219
25,000 Travelers Group, Inc............ 1,798,437
35,000 Travelers Property Casualty
Corp. Cl. A................... 1,505,000
9,915,156
FOOD & BEVERAGE
PRODUCTS-- 3.2%
25,000 Anheuser Busch Companies.,
Inc........................... 1,073,438
50,000 * General Cigar Holdings, Inc.
Cl. A......................... 1,231,250
35,000 H.J. Heinz Co................... 1,616,562
30,000 Nabisco Holdings Corp.
Cl. A......................... 1,275,000
5,196,250
HEALTHCARE PRODUCTS &
SERVICES-- 7.2%
40,000 American Home Products Corp..... 3,297,500
60,000 Bristol-Myers Squibb Co......... 4,706,250
35,000 Johnson & Johnson............... 2,180,938
14,700 Merck & Co., Inc................ 1,527,881
11,712,569
</TABLE>
(CONTINUED)
58
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return
logo appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
LEISURE & TOURISM-- 0.9%
35,000 Carnival, Corp. Cl. A........... $ 1,474,375
NATURAL GAS-- 1.6%
15,000 Burlington Resources, Inc....... 708,750
25,000 Enron Corp...................... 948,438
20,000 Sonat, Inc...................... 997,500
2,654,688
OIL-- 5.8%
15,000 Amoco Corp...................... 1,410,000
10,000 Atlantic Richfield Co........... 748,125
15,000 Chevron Corp.................... 1,186,875
20,000 Exxon Corp...................... 1,285,000
12,000 Mobil Corp...................... 918,000
18,700 Pennzoil Co..................... 1,460,937
12,000 Texaco, Inc..................... 1,392,750
25,000 Unocal Corp..................... 1,000,000
9,401,687
OIL FIELD SERVICES-- 1.4%
21,000 * Falcon Drilling Co., Inc........ 606,375
16,000 Halliburton Co.................. 736,000
12,000 Schlumberger Ltd................ 916,500
2,258,875
PAPER & PACKAGING-- 1.3%
50,000 Unisource Worldwide, Inc........ 931,250
20,000 Weyerhaeuser Co................. 1,245,000
2,176,250
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 1.1%
75,000 Westinghouse Electric Corp...... 1,804,688
REAL ESTATE-- 7.4%
30,000 Storage USA, Inc. REIT.......... 1,237,500
30,000 Bay Apartment Communities, Inc.
REIT.......................... 1,153,125
40,000 * Boston Properties, Inc. REIT.... 1,115,000
25,000 Camden Property Trust REIT...... 756,250
50,000 * Equity Office Properties Trust
REIT.......................... 1,450,000
25,000 Equity Residential Properties
Trust REIT.................... 1,260,937
30,000 First Industrial Realty Trust,
Inc. REIT..................... 928,125
33,000 Golf Trust of America, Inc.
REIT.......................... 932,250
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
REAL ESTATE-- CONTINUED
45,000 Patriot American Hospitality,
Inc. REIT..................... $ 1,122,187
49,000 Prentiss Properties Trust
REIT.......................... 1,274,000
25,000 Spieker Properties, Inc. REIT... 929,688
12,159,062
RETAILING & WHOLESALE-- 2.3%
50,000 * Costco Companies., Inc.......... 1,895,313
50,000 Wal-Mart Stores, Inc............ 1,878,125
3,773,438
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 5.1%
17,000 Ameritech Corp.................. 1,146,437
14,000 BellSouth Corp.................. 663,250
50,000 Deutsche Telekom AG, ADR........ 1,168,750
18,000 GTE Corp........................ 837,000
15,000 Loral Space & Communications
Ltd. 144A..................... 761,250
25,000 Northern Telecom Ltd............ 2,614,062
19,000 SBC Communications, Inc......... 1,124,563
8,315,312
TRANSPORTATION-- 1.6%
50,300 Canadian National Railway Co.... 2,612,456
TOTAL COMMON STOCKS
(COST $101,764,915)........... 144,030,206
<CAPTION>
CONVERTIBLE PREFERRED-- 5.4%
<C> <C> <S> <C>
BUSINESS EQUIPMENT &
SERVICES-- 0.6%
35,000 Houghton Mifflin Co
6.00%, SAILS.................. 962,500
FINANCE & INSURANCE-- 2.6%
15,000 Allstate Corp. (The)
6.76%, Exchangeable Notes Due
4/15/98, DECS................. 736,875
10,000 Conseco, Inc.
7.00%, PRIDES................. 1,430,000
25,000 Salomon, Inc.
7.625%, DECS.................. 900,000
27,500 SunAmerica, Inc.
$3.188, PERCS................. 1,258,125
4,325,000
</TABLE>
(CONTINUED)
59
<PAGE>
KEYSTONE
FUND FOR TOTAL RETURN
[Fund for Total Return
logo appears here]
SCHEDULE OF INVESTMENTS (CONTINUED)
July 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
CONVERTIBLE PREFERRED-- CONTINUED
<C> <C> <S> <C>
METAL PRODUCTS &
SERVICES-- 0.5%
15,000 Timet Capital Trust I
6.625%, BUCS, 144A............ $ 815,625
RETAILING & WHOLESALE-- 1.7%
50,000 Kmart Financing I
7.75%......................... 2,725,000
TOTAL CONVERTIBLE PREFERRED
(COST $8,562,374)............. 8,828,125
<CAPTION>
CONVERTIBLE DEBENTURES-- 2.8%
<C> <C> <S> <C>
CAPITAL GOODS-- 0.4%
400,000 Robbins & Myers, Inc.
6.50%, 9/1/03................. 572,000
CONSUMER PRODUCTS &
SERVICES-- 1.3%
1,000,000 CUC International, Inc.
3.00%, 2/15/02, 144A.......... 1,033,440
1,000,000 Sunrise Assisted Living, Inc.
5.50%, 6/15/02, 144A.......... 1,170,000
2,203,440
ENVIRONMENTAL SERVICES-- 0.5%
500,000 US Filter Corp.
6.00%, 9/15/05, 144A.......... 868,125
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
CONVERTIBLE DEBENTURES-- CONTINUED
<C> <C> <S> <C>
RETAILING & WHOLESALE-- 0.6%
750,000 Staples, Inc.
4.50%, 10/1/00, 144A.......... $ 944,063
TOTAL CONVERTIBLE DEBENTURES
(COST $3,650,000)............. 4,587,628
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<C> <C> <S> <C> <C>
<CAPTION>
REPURCHASE AGREEMENT-- 3.5%
<C> <C> <S> <C> <C>
$ 5,803,000 Keystone Joint Repurchase
Agreement Investments in
repurchase agreements, in a
joint trading account purchased
7/31/97, 5.815%, maturing
8/1/97, maturing value
$5,803,937 (a)
(cost-- $5,803,000)............. 5,803,000
TOTAL INVESTMENTS--
(COST $119,780,289)..... 99.9% 163,248,959
OTHER ASSETS AND
LIABILITIES-- NET....... 0.1 88,810
NET ASSETS................ 100.0% $163,337,769
</TABLE>
* Non-income producing securities.
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at
July 31, 1997.
144A-- Rule 144A securities are restricted as to resale to qualified
institutional investors.
ADR-- American Depository Receipts.
BUCS-- Beneficial Unsecured Convertible Securities.
DECS-- Dividend Enhanced Convertible Stock.
PERCS-- Preferred Equity Redemption Cumulative Stock.
PRIDES-- Preferred Redeemable Increased Dividend Equity Securities.
REIT-- Real Estate Investment Trust.
SAILS-- Stock Appreciation Income Linked Securities.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
STATEMENTS OF ASSETS AND LIABILITIES
July 31, 1997
<TABLE>
<CAPTION>
GROWTH AND INCOME AND SMALL CAP
INCOME GROWTH EQUITY INCOME UTILITY VALUE
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at value (identified cost,
$975,611,770, $854,157,208,
$49,531,462, $115,966,044,
$1,338,620,549 and $119,780,289,
respectively).......................... $1,341,337,101 $956,031,176 $57,071,939 $132,941,280 $1,816,346,638
Foreign currency, at value (identified
cost, $728,604)........................ 0 726,556 0 0 0
Cash..................................... 59,553 59,996 12,054 0 0
Receivable for Fund shares sold.......... 11,793,688 498,983 1,660,187 84,097 3,962,110
Receivable for investments sold.......... 800,785 28,229,812 216,544 0 0
Dividends and interest receivable........ 811,482 2,671,624 120,475 550,448 3,268,766
Foreign tax reclaim receivable........... 0 144,457 0 14,773 0
Unamortized organization expense......... 0 0 8,209 0 0
Prepaid expenses and other assets........ 52,196 38,807 21,087 33,975 28,818
Total assets......................... 1,354,854,805 988,401,411 59,110,495 133,624,573 1,823,606,332
LIABILITIES
Payable for investments purchased........ 3,216,172 30,496,546 172,816 3,009,441 0
Payable for Fund shares repurchased...... 1,207,905 294,886 7,938 117,608 1,943,742
Advisory fee payable..................... 1,015,659 782,429 45,607 38,105 800,295
Distribution fee payable................. 499,041 38,950 8,420 53,137 306,191
Due to related parties................... 4,571 28,942 0 0 41,718
Accrued expenses and other liabilities... 219,078 290,706 30,528 23,609 292,466
Total liabilities.................... 6,162,426 31,932,459 265,309 3,241,900 3,384,412
NET ASSETS................................. $1,348,692,379 $956,468,952 $58,845,186 $130,382,673 $1,820,221,920
NET ASSETS REPRESENTED BY
Paid-in capital.......................... $ 959,749,798 $810,797,352 $50,140,980 $101,882,730 $1,282,326,696
Undistributed net investment income
(accumulated distributions in excess of
net investment income)................. (10,791) 1,748,160 54,884 170,484 2,948,270
Accumulated undistributed net realized
gains on investments................... 23,228,041 42,048,929 1,108,845 11,354,223 57,220,865
Net unrealized appreciation on
investments and foreign currency
related transactions................... 365,725,331 101,874,511 7,540,477 16,975,236 477,726,089
Total net assets $1,348,692,379 $956,468,952 $58,845,186 $130,382,673 $1,820,221,920
NET ASSETS CONSIST OF
Class A.................................. $ 166,331,730 $ 11,954,975 $ 4,239,468 $ 91,638,151 $ 392,231,175
Class B.................................. 542,405,067 43,976,735 9,461,757 36,737,882 276,255,780
Class C.................................. 23,970,925 950,016 2,769,938 379,331 2,506,664
Class Y.................................. 615,984,657 899,587,226 42,374,023 1,627,309 1,149,228,301
Total net assets..................... $1,348,692,379 $956,468,952 $58,845,186 $130,382,673 $1,820,221,920
SHARES OUTSTANDING
Class A.................................. 6,101,395 499,294 270,261 8,001,245 15,920,815
Class B.................................. 20,017,483 1,846,743 604,997 3,205,111 11,217,935
Class C.................................. 884,622 39,893 177,252 33,095 101,865
Class Y.................................. 22,572,148 37,520,690 2,697,579 142,005 46,643,861
NET ASSET VALUE PER SHARE
Class A.................................. $ 27.26 $ 23.94 $ 15.69 $ 11.45 $ 24.64
Class A-- Offering price (based on sales
charge of 4.75%)....................... $ 28.62 $ 25.13 $ 16.47 $ 12.02 $ 25.87
Class B.................................. $ 27.10 $ 23.81 $ 15.64 $ 11.46 $ 24.63
Class C.................................. $ 27.10 $ 23.81 $ 15.63 $ 11.46 $ 24.61
Class Y.................................. $ 27.29 $ 23.98 $ 15.71 $ 11.46 $ 24.64
<CAPTION>
FUND FOR
TOTAL RETURN
<S> <C>
ASSETS
Investments at value (identified cost,
$975,611,770, $854,157,208,
$49,531,462, $115,966,044,
$1,338,620,549 and $119,780,289,
respectively).......................... $163,248,959
Foreign currency, at value (identified
cost, $728,604)........................ 0
Cash..................................... 513
Receivable for Fund shares sold.......... 411,079
Receivable for investments sold.......... 0
Dividends and interest receivable........ 215,198
Foreign tax reclaim receivable........... 5,909
Unamortized organization expense......... 0
Prepaid expenses and other assets........ 47,897
Total assets......................... 163,929,555
LIABILITIES
Payable for investments purchased........ 202,118
Payable for Fund shares repurchased...... 324,156
Advisory fee payable..................... 0
Distribution fee payable................. 41,347
Due to related parties................... 0
Accrued expenses and other liabilities... 24,165
Total liabilities.................... 591,786
NET ASSETS................................. $163,337,769
NET ASSETS REPRESENTED BY
Paid-in capital.......................... $111,464,266
Undistributed net investment income
(accumulated distributions in excess of
net investment income)................. (165,774)
Accumulated undistributed net realized
gains on investments................... 8,570,610
Net unrealized appreciation on
investments and foreign currency
related transactions................... 43,468,667
Total net assets $163,337,769
NET ASSETS CONSIST OF
Class A.................................. $ 47,811,561
Class B.................................. 94,308,619
Class C.................................. 21,125,065
Class Y.................................. 92,524
Total net assets..................... $163,337,769
SHARES OUTSTANDING
Class A.................................. 2,311,356
Class B.................................. 4,571,389
Class C.................................. 1,023,037
Class Y.................................. 4,487
NET ASSET VALUE PER SHARE
Class A.................................. $ 20.69
Class A-- Offering price (based on sales
charge of 4.75%)....................... $ 21.72
Class B.................................. $ 20.63
Class C.................................. $ 20.65
Class Y.................................. $ 20.62
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
STATEMENTS OF OPERATIONS
For the fiscal period ended July 31, 1997*
<TABLE>
<CAPTION>
GROWTH AND INCOME AND SMALL CAP
INCOME GROWTH EQUITY INCOME UTILITY VALUE
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest............................ $ 6,788,322 $ 1,911,374 $ 214,624 $ 315,785 $ 3,327,625
Dividends (net of foreign
withholding taxes of $2,188,
$616,492, $0, $13,932, $66,594 and
$9,996, respectively)............. 5,272,237 25,509,573 442,383 3,384,897 21,209,437
TOTAL INCOME.......................... 12,060,559 27,420,947 657,007 3,700,682 24,537,062
EXPENSES
Management fee...................... 5,736,248 4,371,784 180,153 382,537 4,753,235
Distribution Plan expenses.......... 2,437,220 204,355 22,325 351,019 1,858,117
Transfer agent fees................. 972,612 615,213 17,226 114,229 656,927
Administrative and services fees.... 0 0 0 28,507 352,965
Registration fees................... 164,820 37,061 35,869 40,605 60,606
Custodian fees...................... 150,578 166,126 20,060 64,097 249,997
Printing............................ 149,010 83,901 5,783 42,726 157,711
Professional fees................... 18,699 32,599 16,637 17,318 33,306
Amortization of organization
expenses.......................... 0 0 3,327 13,764 0
Trustees fees....................... 5,555 27,903 3,966 3,756 31,008
Other............................... 20,626 13,309 3,076 9,895 30,523
Total expenses.................. 9,655,368 5,552,251 308,422 1,068,453 8,184,395
Less: Indirectly paid expenses...... (2,717) (20,952) (1,323) (8,117) (1,012)
Fee waivers and/or reimbursement
from Investment Adviser........... 0 0 (35,183) (146,640) 0
Net expenses.................... 9,652,651 5,531,299 271,916 913,696 8,183,383
NET INVESTMENT INCOME............... 2,407,908 21,889,648 385,091 2,786,986 16,353,679
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS
Net realized gain from
Investments....................... 23,375,321 43,892,663 1,108,151 11,377,530 58,756,392
Foreign currency related
transactions.................... 0 194,336 0 0 0
Net realized gain on investments and
foreign currency related
transactions...................... 23,375,321 44,086,999 1,108,151 11,377,530 58,756,392
Net change in unrealized
appreciation on investments and
foreign currency related
transactions...................... 188,382,086 42,180,501 6,035,485 (1,002,220) 239,837,361
Net realized and unrealized gain on
investments and foreign currency
related transactions.............. 211,757,407 86,267,500 7,143,636 10,375,310 298,593,753
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS................... $214,165,315 $108,157,148 $ 7,528,727 $13,162,296 $314,947,432
<CAPTION>
FUND FOR
TOTAL RETURN
<S> <C>
INVESTMENT INCOME
Interest............................ $ 460,814
Dividends (net of foreign
withholding taxes of $2,188,
$616,492, $0, $13,932, $66,594 and
$9,996, respectively)............. 1,820,865
TOTAL INCOME.......................... 2,281,679
EXPENSES
Management fee...................... 546,092
Distribution Plan expenses.......... 646,911
Transfer agent fees................. 190,455
Administrative and services fees.... 10,250
Registration fees................... 52,957
Custodian fees...................... 39,951
Printing............................ 17,484
Professional fees................... 19,568
Amortization of organization
expenses.......................... 0
Trustees fees....................... 0
Other............................... 5,445
Total expenses.................. 1,529,113
Less: Indirectly paid expenses...... (14,235 )
Fee waivers and/or reimbursement
from Investment Adviser........... 0
Net expenses.................... 1,514,878
NET INVESTMENT INCOME............... 766,801
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS
Net realized gain from
Investments....................... 8,565,826
Foreign currency related
transactions.................... 67,725
Net realized gain on investments and
foreign currency related
transactions...................... 8,633,551
Net change in unrealized
appreciation on investments and
foreign currency related
transactions...................... 15,979,989
Net realized and unrealized gain on
investments and foreign currency
related transactions.............. 24,613,540
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS................... $25,380,341
</TABLE>
* Each of the Funds changed their fiscal year end to July 31. The Statements of
Operations are for the following periods: for Fund for Total Return, the eight
months ended July 31, 1997; for Growth and Income Fund, Small Cap Equity
Income Fund, Utility Fund and Value Fund, the seven months ended July 31,
1997; and Income and Growth Fund, the six months ended July 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH AND INCOME AND SMALL CAP
INCOME GROWTH EQUITY INCOME UTILITY VALUE
FUND** FUND* FUND** FUND** FUND**
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest.................... $ 4,585,041 $ 3,845,707 $ 86,418 $ 452,100 $ 2,988,223
Dividends (net of foreign
withholding taxes of
$3,984, $1,278,418, $0,
$18,580, $23,070, and
$5,991, respectively)..... 6,484,943 53,144,164 221,319 6,423,879 34,250,957
TOTAL INCOME.................. 11,069,984 56,989,871 307,737 6,875,979 37,239,180
EXPENSES
Management fee.............. 5,287,338 8,823,541 63,333 725,733 6,950,730
Distribution Plan
expenses.................. 1,415,844 279,046 5,239 635,044 2,452,995
Transfer agent fees......... 329,132 871,200 50,036 224,192 631,695
Administrative service
fees...................... 0 0 0 70,215 670,060
Registration fees........... 219,285 101,620 71,195 45,962 166,097
Custodian fees.............. 184,341 289,300 59,940 91,954 328,227
Professional fees........... 48,605 32,629 15,594 30,625 87,113
Printing.................... 34,721 383,131 11,634 85,237 294,326
Insurance................... 13,443 54,655 7,193 2,903 17,785
Trustees fees............... 11,987 49,710 5,346 1,386 17,961
Interest expense............ 0 220,252 0 0 0
Amortization of organization
expenses.................. 0 0 5,744 0 0
Other....................... 4,589 33,481 1,724 21,098 23,242
Total expenses.......... 7,549,285 11,138,565 296,978 1,934,349 11,640,231
Less: Indirectly paid
expenses.................. 0 0 0 0 0
Fee waivers and/or
reimbursement from
Investment Adviser........ (5,000) 0 (196,739) (396,483) 0
Net expenses............ 7,544,285 11,138,565 100,239 1,537,866 11,640,231
NET INVESTMENT INCOME....... 3,525,699 45,851,306 207,498 5,338,113 25,598,949
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain on:
Investment transactions..... 11,660,346 27,747,824 329,191 3,459,558 216,135,176
Foreign currency
transactions.............. 0 84,342 0 0 0
Covered call options........ 0 784,954 0 0 0
Net realized gain on
investments, foreign
currency and covered call
options................... 11,660,346 28,617,120 329,191 3,459,558 216,135,176
Net change in unrealized
appreciation
(depreciation) of:
Investments............... 102,653,116 43,509,351 833,605 (3,509,310) 11,014,356
Foreign currency
transactions............ 0 (1,098) 0 0 0
Net change in unrealized
appreciation on
investments and foreign
currency.................. 102,653,116 43,508,253 833,605 (3,509,310) 11,014,356
Net realized and unrealized
gain (loss) on
investments, foreign
currencies and covered
call options.............. 114,313,462 72,125,373 1,162,796 (49,752) 227,149,532
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS... $117,839,161 $117,976,679 $ 1,370,294 $5,288,361 $252,748,481
<CAPTION>
FUND FOR
TOTAL RETURN***
<S> <C>
INVESTMENT INCOME
Interest.................... $ 289,654
Dividends (net of foreign
withholding taxes of
$3,984, $1,278,418, $0,
$18,580, $23,070, and
$5,991, respectively)..... 1,807,120
TOTAL INCOME.................. 2,096,774
EXPENSES
Management fee.............. 448,266
Distribution Plan
expenses.................. 448,502
Transfer agent fees......... 165,963
Administrative service
fees...................... 27,066
Registration fees........... 43,415
Custodian fees.............. 62,950
Professional fees........... 28,295
Printing.................... 21,283
Insurance................... 0
Trustees fees............... 0
Interest expense............ 0
Amortization of organization
expenses.................. 0
Other....................... 9,069
Total expenses.......... 1,254,809
Less: Indirectly paid
expenses.................. (11,473)
Fee waivers and/or
reimbursement from
Investment Adviser........ 0
Net expenses............ 1,243,336
NET INVESTMENT INCOME....... 853,438
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain on:
Investment transactions..... 1,756,488
Foreign currency
transactions.............. 156,942
Covered call options........ 0
Net realized gain on
investments, foreign
currency and covered call
options................... 1,913,430
Net change in unrealized
appreciation
(depreciation) of:
Investments............... 16,084,525
Foreign currency
transactions............ 0
Net change in unrealized
appreciation on
investments and foreign
currency.................. 16,084,525
Net realized and unrealized
gain (loss) on
investments, foreign
currencies and covered
call options.............. 17,997,955
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS... $18,851,393
</TABLE>
*-- year ended January 31, 1997; **-- year ended December 31, 1996; and
***-- year ended November 30, 1996
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
63
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
STATEMENTS OF CHANGES IN NET ASSETS
For the fiscal period ended July 31, 1997*
<TABLE>
<CAPTION>
GROWTH AND INCOME AND SMALL CAP
INCOME GROWTH EQUITY INCOME UTILITY VALUE
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income........... $ 2,407,908 $ 21,889,648 $ 385,091 $ 2,786,986 $ 16,353,679
Net realized gain on investments
and foreign currency related
transactions.................. 23,375,321 44,086,999 1,108,151 11,377,530 58,756,392
Net change in unrealized
appreciation on investments
and foreign currency related
transactions.................. 188,382,086 42,180,501 6,035,485 (1,002,220) 239,837,361
Net increase in net assets
resulting from operations... 214,165,315 108,157,148 7,528,727 13,162,296 314,947,432
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A....................... (342,216) (248,453) (11,097) (2,030,267) (2,943,697)
Class B....................... 0 (790,199) (17,755) (639,939) (1,098,593)
Class C....................... 0 (19,512) (6,915) (6,346) (9,131)
Class Y....................... (2,065,692) (20,540,101) (297,079) (40,667) (10,102,012)
In excess of net investment
income:
Class A....................... (15,263) 0 0 0 0
Class B....................... 0 0 0 0 0
Class C....................... 0 0 0 0 0
Class Y....................... (92,131) 0 0 0 0
Net realized gain on
investments:
Class A....................... 0 0 (1,322) 0 0
Class B....................... 0 0 (2,116) 0 0
Class C....................... 0 0 (824) 0 0
Class Y....................... 0 0 (35,401) 0 0
Total distributions to
shareholders................ (2,515,302) (21,598,265) (372,509) (2,717,219) (14,153,433)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A....................... 71,457,862 2,114,635 3,587,404 494,721 21,010,689
Class B....................... 236,281,947 6,799,151 8,164,490 1,349,827 50,184,755
Class C....................... 12,290,220 66,274 2,529,352 13,731 1,018,408
Class Y....................... 145,062,792 8,929,797 36,298,202 259,189 137,931,136
Net asset value of shares issued
in reinvestment of
distributions:
Class A....................... 352,344 225,329 12,209 1,602,820 2,835,467
Class B....................... 3,746 710,178 19,472 571,837 1,086,571
Class C....................... 0 15,602 7,467 5,855 9,201
Class Y....................... 1,641,399 18,026,674 165,502 17,278 6,740,306
Payment for shares redeemed:
Class A....................... (15,573,680) (1,121,079) (37,984) (14,079,531) (24,085,514)
Class B....................... (18,705,681) (2,685,666) (142,514) (6,601,705) (15,577,742)
Class C....................... (1,340,999) (189,123) (91,950) (66,033) (355,395)
Class Y....................... (75,878,946) (67,224,141) (8,498,878) (779,946) (184,606,592)
Net increase (decrease) in net
assets resulting from
capital share
transactions................ 355,591,004 (34,332,369) 42,012,772 (17,211,957) (3,808,710)
Total increase (decrease) in
net assets................ 567,241,017 52,226,514 49,168,990 (6,766,880) 296,985,289
NET ASSETS
Beginning of period............. 781,451,362 904,242,438 9,676,196 137,149,553 1,523,236,631
END OF PERIOD................... $1,348,692,379 $956,468,952 $58,845,186 $130,382,673 $1,820,221,920
Undistributed net investment
income.......................... $ (10,791) $ 1,748,160 $ 54,884 $ 170,484 $ 2,948,270
<CAPTION>
FUND FOR
TOTAL RETURN
<S> <C>
OPERATIONS
Net investment income........... $ 766,801
Net realized gain on investments
and foreign currency related
transactions.................. 8,633,551
Net change in unrealized
appreciation on investments
and foreign currency related
transactions.................. 15,979,989
Net increase in net assets
resulting from operations... 25,380,341
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A....................... (368,590)
Class B....................... (315,494)
Class C....................... (78,332)
Class Y....................... 0
In excess of net investment
income:
Class A....................... 0
Class B....................... 0
Class C....................... 0
Class Y....................... 0
Net realized gain on
investments:
Class A....................... 0
Class B....................... 0
Class C....................... 0
Class Y....................... 0
Total distributions to
shareholders................ (762,416)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A....................... 9,464,499
Class B....................... 48,001,066
Class C....................... 6,315,824
Class Y....................... 85,018
Net asset value of shares issued
in reinvestment of
distributions:
Class A....................... 331,175
Class B....................... 275,911
Class C....................... 73,683
Class Y....................... 0
Payment for shares redeemed:
Class A....................... (10,121,645)
Class B....................... (11,087,288)
Class C....................... (3,193,608)
Class Y....................... 0
Net increase (decrease) in net
assets resulting from
capital share
transactions................ 40,144,635
Total increase (decrease) in
net assets................ 64,762,560
NET ASSETS
Beginning of period............. 98,575,209
END OF PERIOD................... $163,337,769
Undistributed net investment
income.......................... $ (165,774)
</TABLE>
* Each of the Funds changed their fiscal year end to July 31. The Statements of
Changes in Net Assets are for the following periods: for Fund for Total
Return, the eight months ended July 31, 1997; for Growth and Income Fund,
Small Cap Equity Income Fund, Utility Fund and Value Fund, the seven months
ended July 31, 1997; and Income and Growth Fund, the six months ended July 31,
1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
64
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH AND INCOME AND SMALL CAP
INCOME GROWTH EQUITY INCOME UTILITY VALUE
FUND** FUND* FUND** FUND** FUND**
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income............ $ 3,525,699 $ 45,851,306 $ 207,498 $ 5,338,113 $ 25,598,949
Net realized gain (loss) on
investments and foreign
currency related
transactions................... 11,660,346 28,617,120 329,191 3,459,558 216,135,176
Net change in unrealized
appreciation (depreciation) on
investments and foreign
currency related transactions.. 102,653,116 43,508,253 833,605 (3,509,310) 11,014,356
Net increase (decrease) in net
assets resulting from
operations................... 117,839,161 117,976,679 1,370,294 5,288,361 252,748,481
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A........................ (346,965) (379,400) (7,618) (3,887,411) (5,758,586)
Class B........................ (65,442) (1,152,510) (9,798) (1,173,301) (1,939,188)
Class C........................ (2,714) (39,024) (710) (11,835) (14,165)
Class Y........................ (3,093,315) (45,453,926) (186,039) (229,804) (19,538,457)
In excess of net investment
income:
Class A........................ (602) 0 0 0 0
Class B........................ (114) 0 0 0 0
Class C........................ (5) 0 0 0 0
Class Y........................ (5,366) 0 0 0 0
Net realized gain on investments:
Class A........................ (1,255,570) 0 (12,475) (2,465,668) (45,832,278)
Class B........................ (3,652,416) 0 (27,933) (979,858) (27,532,324)
Class C........................ (141,822) 0 (1,936) (10,055) (204,292)
Class Y........................ (6,629,223) 0 (279,606) (53,192) (141,841,285)
In excess of net realized gain on
investments:
Class A........................ (4,767) 0 0 (16,378) (229,771)
Class B........................ (13,868) 0 0 (6,509) (138,028)
Class C........................ (538) 0 0 (67) (1,024)
Class Y........................ (25,172) 0 0 (353) (711,093)
Total distributions to
shareholders................. (15,237,899) (47,024,860) (526,115) (8,834,431) (243,740,491)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A........................ 76,959,622 5,918,321 285,774 2,626,118 23,895,251
Class B........................ 185,314,202 19,899,458 341,494 8,401,385 47,442,303
Class C........................ 7,294,757 684,918 48,265 274,673 832,827
Class Y........................ 200,509,060 28,512,144 3,628,792 1,120,499 324,801,783
Net asset value of shares issued
in reinvestment of
distributions:
Class A........................ 1,546,893 341,281 19,575 5,051,093 49,562,452
Class B........................ 3,613,927 1,003,747 36,358 1,935,353 28,693,188
Class C........................ 115,108 29,305 1,697 20,723 215,421
Class Y........................ 7,729,161 40,431,169 316,899 74,971 108,890,530
Payment for shares redeemed:
Class A........................ (21,729,967) (1,646,836) (213,193) (16,984,094) (39,736,035)
Class B........................ (13,411,376) (2,649,792) (11,697) (6,652,890) (18,943,891)
Class C........................ (597,615) (328,507) (22,125) (135,909) (377,207)
Class Y........................ (135,786,868) (193,045,864) (912,038) (6,607,014) (316,060,052)
Shares issued in acquistion of
FFB Lexicon Capital
Appreciation Fund.............. 159,432,723 0 0 0 0
Class Y........................
Shares issued in acquistion of
FFB Lexicon Select Value
Fund........................... 0 0 0 0 95,883,824
Class Y........................
Shares issued in acquistion of
FFB Lexicon Equity Fund........ 0 0 0 0 14,077,973
Class Y........................
Net increase (decrease) in net
assets resulting from capital
share transactions........... 470,989,627 (100,850,656) 3,519,801 (10,875,092) 319,178,367
Total increase (decrease) in
net assets................. 573,590,889 (29,898,837) 4,363,980 (14,421,162) 328,186,357
NET ASSETS
Beginning of period.............. 207,860,473 934,141,275 5,312,216 151,570,715 1,195,050,274
END OF PERIOD.................... $781,451,362 $904,242,438 $ 9,676,196 $137,149,553 $1,523,236,631
Undistributed net investments
income (accumulated distributions
in excess of net investment
income).......................... $ 6,087 $ 1,321,369 $ 3,333 $ 100,717 $ 292,413
<CAPTION>
FUND FOR
TOTAL
RETURN***
<S> <C>
OPERATIONS
Net investment income............ $ 853,438
Net realized gain (loss) on
investments and foreign
currency related
transactions................... 1,913,430
Net change in unrealized
appreciation (depreciation) on
investments and foreign
currency related transactions.. 16,084,525
Net increase (decrease) in net
assets resulting from
operations................... 18,851,393
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A........................ (539,949 )
Class B........................ (273,356 )
Class C........................ (112,998 )
Class Y........................ 0
In excess of net investment
income:
Class A........................ 0
Class B........................ 0
Class C........................ 0
Class Y........................ 0
Net realized gain on investments:
Class A........................ (754,551 )
Class B........................ (808,105 )
Class C........................ (270,058 )
Class Y........................ 0
In excess of net realized gain on
investments:
Class A........................ 0
Class B........................ 0
Class C........................ 0
Class Y........................ 0
Total distributions to
shareholders................. (2,759,017 )
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A........................ 11,818,891
Class B........................ 23,867,265
Class C........................ 6,185,359
Class Y........................ 0
Net asset value of shares issued
in reinvestment of
distributions:
Class A........................ 1,193,118
Class B........................ 974,432
Class C........................ 362,645
Class Y........................ 0
Payment for shares redeemed:
Class A........................ (6,837,747 )
Class B........................ (8,156,600 )
Class C........................ (4,069,150 )
Class Y........................ 0
Shares issued in acquistion of
FFB Lexicon Capital
Appreciation Fund.............. 0
Class Y........................
Shares issued in acquistion of
FFB Lexicon Select Value
Fund........................... 0
Class Y........................
Shares issued in acquistion of
FFB Lexicon Equity Fund........ 0
Class Y........................
Net increase (decrease) in net
assets resulting from capital
share transactions........... 25,338,213
Total increase (decrease) in
net assets................. 41,430,589
NET ASSETS
Beginning of period.............. 57,144,620
END OF PERIOD.................... $98,575,209
Undistributed net investments
income (accumulated distributions
in excess of net investment
income).......................... $ (233,100 )
</TABLE>
*-- year ended January 31, 1997; **-- year ended December 31, 1996; and
***-- year ended November 30, 1996
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
65
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH AND INCOME AND SMALL CAP
INCOME GROWTH EQUITY INCOME UTILITY VALUE
FUND** FUND* FUND** FUND** FUND**
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income............ $ 1,291,809 $ 53,831,619 $ 159,722 $ 3,889,362 $ 29,177,545
Net realized gain on
investments.................... 5,206,584 18,456,772 232,995 6,197,705 50,649,714
Net change in unrealized
appreciation (depreciation) on
investments.................... 28,342,991 126,889,047 786,111 17,561,515 196,633,111
Net increase in net assets
resulting from operations.... 34,841,384 199,177,438 1,178,828 27,648,582 276,460,370
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A........................ (93,250) (115,623) (5,089) (2,358,231) (6,221,428)
Class B........................ (104,385) (338,493) (4,875) (1,177,734) (2,281,745)
Class C........................ (5,584) (10,937) (421) (6,275) (12,030)
Class Y........................ (1,088,590) (53,434,290) (155,906) (298,965) (19,218,021)
In excess of net investment
income:
Class A........................ (518) 0 0 0 0
Class B........................ (580) 0 0 0 0
Class C........................ (31) 0 0 0 0
Class Y........................ (6,050) 0 0 0 0
Net realized gain on investments:
Class A........................ (468,664) 0 (8,583) (4,315,104) (12,319,599)
Class B........................ (1,156,785) 0 (10,427) (1,416,839) (5,935,694)
Class C........................ (48,338) 0 (900) (9,717) (33,758)
Class Y........................ (3,524,196) 0 (196,151) (316,309) (32,229,160)
Total distributions to
shareholders................. (6,496,971) (53,899,343) (382,352) (9,899,174) (78,251,435)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A........................ 17,981,665 4,349,310 210,178 1,885,138 12,018,651
Class B........................ 43,094,733 13,730,445 248,049 4,989,454 18,428,845
Class C........................ 1,808,328 469,424 19,533 109,078 307,770
Class Y........................ 68,368,276 34,117,050 973,677 1,826,095 278,777,942
Net asset value of shares issued
in reinvestment of
distributions:
Class A........................ 545,083 101,915 13,667 5,335,896 17,771,730
Class B........................ 1,234,636 302,547 14,752 2,287,981 7,933,916
Class C........................ 50,033 8,587 1,317 15,571 45,762
Class Y........................ 3,882,512 48,020,816 285,901 84,251 40,900,972
Payment for shares redeemed:
Class A........................ (1,048,468) (423,996) (30,712) (13,551,249) (35,747,673)
Class B........................ (1,763,506) (692,877) (26,158) (6,110,450) (13,658,563)
Class C........................ (96,507) (4,731) 0 (37,152) (149,074)
Class Y........................ (27,997,743) (253,504,082) (807,286) (487,291) (193,762,147)
Shares issued in acquisition of
ABT Utility Income Fund, Inc.
Class A........................ 0 0 0 99,162,259 0
Shares issued in acquisition of
ABT Growth & Income Trust
Class A........................ 0 0 0 0 63,356,435
Net increase (decrease) in net
assets resulting from capital
share transactions........... 106,059,042 (153,525,592) 902,918 95,509,581 196,224,566
Total increase (decrease) in
net assets................. 134,403,455 (8,247,497) 1,699,394 113,258,989 394,433,501
NET ASSETS
Beginning of period.............. 73,457,018 942,388,772 3,612,822 38,311,726 800,616,773
END OF PERIOD.................... $207,860,473 $934,141,275 $ 5,312,216 $151,570,715 $1,195,050,274
Undistributed net investment
income........................... $ 0 $ 2,410,572 $ 0 $ 68,090 $ 1,943,860
<CAPTION>
FUND FOR
TOTAL
RETURN***
<S> <C>
OPERATIONS
Net investment income............ $ 708,899
Net realized gain on
investments.................... 2,737,174
Net change in unrealized
appreciation (depreciation) on
investments.................... 7,477,718
Net increase in net assets
resulting from operations.... 10,923,791
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A........................ (466,226 )
Class B........................ (149,198 )
Class C........................ (93,475 )
Class Y........................ 0
In excess of net investment
income:
Class A........................ (138,497 )
Class B........................ (110,954 )
Class C........................ (54,085 )
Class Y........................ 0
Net realized gain on investments:
Class A........................ (1,220,537 )
Class B........................ (868,298 )
Class C........................ (423,790 )
Class Y........................ 0
Total distributions to
shareholders................. (3,525,060 )
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A........................ 3,618,417
Class B........................ 13,668,348
Class C........................ 3,797,262
Class Y........................ 0
Net asset value of shares issued
in reinvestment of
distributions:
Class A........................ 1,664,588
Class B........................ 1,002,721
Class C........................ 527,153
Class Y........................ 0
Payment for shares redeemed:
Class A........................ (5,386,215 )
Class B........................ (3,483,004 )
Class C........................ (2,107,107 )
Class Y........................ 0
Shares issued in acquisition of
ABT Utility Income Fund, Inc.
Class A........................ 0
Shares issued in acquisition of
ABT Growth & Income Trust
Class A........................ 0
Net increase (decrease) in net
assets resulting from capital
share transactions........... 13,302,163
Total increase (decrease) in
net assets................. 20,700,894
NET ASSETS
Beginning of period.............. 36,443,726
END OF PERIOD.................... $57,144,620
Undistributed net investment
income........................... $ (35,682 )
</TABLE>
*-- year ended January 31, 1996; **-- year ended December 31, 1995 and
***-- year ended November 30, 1995
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
66
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
The Evergreen Keystone Growth and Income Funds consist of Evergreen Growth and
Income Fund ("Growth and Income"), Evergreen Income and Growth Fund ("Income and
Growth"), Evergreen Small Cap Equity Income Fund ("Small Cap"), Evergreen
Utility Fund ("Utility"), Evergreen Value Fund ("Value") and Keystone Fund for
Total Return ("Total Return"), each of which is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as diversified, open-end
management investment companies. Growth and Income is a Massachusetts business
trust organized in 1986. Income and Growth is a Massachusetts business trust
organized in 1986, and was originally organized as a Maryland Corporation in
1978. Small Cap is a separate series of The Evergreen American Retirement Trust,
a Massachusetts business trust organized in 1987. Utility and Value are separate
series of The Evergreen Investment Trust, a Massachusetts business trust
organized in 1984. Total Return is a Massachusetts business trust organized in
1986. Growth and Income, Income and Growth, Small Cap, Utility, Value and Total
Return, are collectively referred to herein as the "Funds".
The Funds offer Class A, Class B, Class C and Class Y shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B and Class C shares
are sold without a front-end sales charge, but pay a higher ongoing distribution
fee than Class A. Class B shares are sold subject to a contingent deferred sales
charge that is payable upon redemption and decreases depending on how long the
shares have been held. Class C shares are sold subject to a contingent deferred
sales charge payable on shares redeemed within one year after the month of
purchase. Class B shares purchased after January 1, 1997 will automatically
convert to Class A shares after seven years. Class B shares purchased prior to
January 1, 1997 retain their existing conversion rights. Class Y shares are sold
at net asset value and are not subject to contingent deferred sales charges or
distribution fees. Class Y shares are sold only to investment advisory clients
of First Union Corporation ("First Union") and its affiliates, certain
institutional investors or Class Y shareholders of record of certain other funds
managed by First Union and its affiliates as of December 30, 1994.
2. ACQUISITION INFORMATION
Effective January 1, 1996, First Fidelity Bancorporation ("First Fidelity")
merged with First Union National Bank of North Carolina ("First Union").
Effective on the close of business on January 19, 1996, Growth and Income
acquired substantially all of the net assets of FFB Lexicon Capital Appreciation
Fund, an open-end investment company registered under the 1940 Act valued at
$159,432,723. The net assets were exchanged through a non-taxable exchange for
8,631,861 Class Y shares of Growth and Income valued at $18.47 per share. The
acquired net assets consisted primarily of portfolio securities with unrealized
appreciation of $31,537,903. The aggregate net assets of Growth and Income upon
the acquisition were $375,936,243.
Effective on the close of business on January 19, 1996, Value acquired
substantially all the net assets of FFB Lexicon Select Value Fund and FFB Equity
Fund, open-end investment companies registered under the 1940 Act valued at
$95,883,824 and $14,077,973, respectively. The net assets of these Funds were
exchanged through a non-taxable exchange for 4,720,676 and 692,924 Class Y
shares of Value, valued at $20.31 per share. The acquired net assets consisted
primarily of portfolio securities with unrealized appreciation of $12,858,729
and $2,218,691, respectively. The aggregate net assets of Value upon the
acquisitions were $1,310,431,335.
In addition, on June 30, 1995, Value acquired substantially all of the net
assets of ABT Growth and Income Trust, an open-end investment company registered
under the 1940 Act valued at $63,356,435. The net assets were exchanged through
a non-taxable exchange for 3,289,535 Class A Shares of Value valued at $19.26
per share. The acquired net assets consisted primarily of portfolio securities
with unrealized appreciation of $10,278,721. The aggregate net assets of Value
upon the acquisition were $935,777,632.
On June 30, 1995, Utility acquired substantially all of the net assets of ABT
Utility Income Fund, Inc., an open-end investment company registered under the
1940 Act valued at $99,162,259. The net assets were exchanged through a
non-taxable exchange for 10,160,068 Class A Shares of Utility valued at $9.76
per share. The acquired net assets consisted primarily of portfolio securities
with unrealized appreciation of $6,321,522. The aggregate net assets of Utility
upon the acquisition were $140,913,190.
3. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
67
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A. VALUATION OF SECURITIES
The Funds value securities traded on a national securities exchange or included
on the NASDAQ National Market System ("NMS") at the last reported sales price on
the exchange where primarily traded. The Funds value securities traded on an
exchange or NMS for which there has been no sale and other securities traded in
the over-the-counter market at the mean between the last reported bid and asked
price. U.S. government obligations held by the Funds are valued at the mean
between the over-the-counter bid and asked prices. Corporate bonds, other
fixed-income securities, and mortgage and other asset-backed securities are
valued at prices provided by an independent pricing service. In determining
value for normal institutional-size transactions, the pricing service uses
methods based on market transactions for comparable securities and analysis of
various relationships between similar securities which are generally recognized
by institutional traders. Securities for which valuations are not available from
an independent pricing service, including restricted securities, are valued at
fair value as determined in good faith according to procedures established by
the Board of Trustees. Short-term investments with remaining maturities of 60
days or less are carried at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held by the custodian on the Fund's behalf. Each
Fund monitors the adequacy of the collateral daily and will require the seller
to provide additional collateral in the event the market value of the securities
pledged falls below the carrying value of the repurchase agreement, including
accrued interest. Each Fund will only enter into repurchase agreements with
banks and other financial institutions which are deemed by the investment
adviser to be creditworthy pursuant to guidelines established by the Board of
Trustees.
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
Total Return, along with certain other funds managed by Keystone, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized by
U.S. Treasury and/or federal agency obligations.
C. REVERSE REPURCHASE AGREEMENTS
To obtain short-term financing, Small Cap, Utility, Value and Total Return may
enter into reverse repurchase agreements with qualified third-party
broker-dealers. Interest on the value of reverse repurchase agreements is based
upon competitive market rates at the time of issuance. At the time a Fund enters
into a reverse repurchase agreement, it will establish and maintain a segregated
account with the custodian containing qualifying assets having a value not less
than the repurchase price, including accrued interest. If the counterparty to
the transaction is rendered insolvent, the ultimate realization of the
securities to be repurchased by the Fund may be delayed or limited.
D. FOREIGN CURRENCY
The books and records of the Funds are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment securities transactions and foreign currency related transactions.
Foreign currency gains and losses from the difference between the amounts of
interest and dividends recorded on the books of the Fund and the amount actually
received is included in dividend and interest income. The portion of foreign
currency gains and losses related to fluctuations in exchange rates between the
initial purchase trade date and subsequent sale trade date is included in
realized gain (loss) on investments.
E. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Funds may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated in
a foreign currency and to hedge certain foreign currency assets or liabilities.
Forward contracts are recorded at the forward rate and marked-to-market daily.
Realized gains and losses arising from such transactions are included in net
realized gain (loss) on foreign currency related transactions. The Fund bears
the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract and is subject to the credit risk that the other
party will not fulfill their obligations under the contract. Forward contracts
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
F. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date or in the case of some foreign securities, on the date
thereafter when the Fund is made aware of the dividend. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable. Capital
gains realized on some foreign securities may be subject to foreign taxes and
are accrued as applicable.
G. FEDERAL INCOME TAXES
The Funds have qualified and intend to continue to qualify as regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Funds will not incur any federal income tax liability since
they are expected to distribute all of their net investment company taxable
income, net tax-exempt income and net capital gains, if any, to their
shareholders. The Funds also intend to avoid any excise tax liability by making
the required distributions under the Code. Accordingly, no provision for federal
income taxes is required. To the extent that realized capital gains can be
offset by capital loss carryforwards, it is each Fund's policy not to distribute
such gains.
68
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
H. DISTRIBUTIONS
Distributions from net investment income for the Funds, except Utility, are
declared and paid quarterly. Distributions for Utility from net investment
income are declared and paid monthly. Distributions from net realized capital
gains, if any, are paid at least annually. Distributions to shareholders are
recorded at the close of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment for realized
gains from foreign currency related transactions and certain distributions
received from real estate investment trusts.
L. CLASS ALLOCATIONS
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
M. ORGANIZATION EXPENSES
Organization expenses are amortized to operations over a five-year period on a
straight-line basis. In the event any of the initial shares of the Funds are
redeemed by any holder during the five-year amortization period, redemption
proceeds will be reduced by any unamortized organization expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of the redemption.
4. CAPITAL SHARE TRANSACTIONS
The Funds, except Total Return, have an unlimited number of $0.0001 par value
shares of beneficial interest authorized. Total Return has an unlimited number
of shares of beneficial interest with no par value, authorized. Shares of
beneficial interest of the Funds are currently divided into Class A, Class B,
Class C and Class Y. Transactions in shares of the Funds were as follows:
GROWTH AND INCOME
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997** DECEMBER 31, 1996 DECEMBER 31, 1995*
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold.................................. 2,967,692 $ 71,457,862 3,719,917 $ 76,959,622 1,049,648 $ 17,981,665
Shares issued on reinvestment of
distribution............................... 14,532 352,344 69,271 1,546,893 29,563 545,083
Shares redeemed.............................. (645,446) (15,573,680) (1,044,500) (21,729,967) (59,282) (1,048,468)
Net increase................................. 2,336,778 56,236,526 2,744,688 56,776,548 1,019,929 17,478,280
CLASS B
Shares sold.................................. 9,881,863 236,281,947 8,914,571 185,314,202 2,516,682 43,094,733
Shares issued on reinvestment of
distribution............................... 166 3,746 160,953 3,613,927 66,937 1,234,636
Shares redeemed.............................. (779,920) (18,705,681) (646,461) (13,411,376) (97,308) (1,763,506)
Net increase................................. 9,102,109 217,580,012 8,429,063 175,516,753 2,486,311 42,565,863
CLASS C
Shares sold.................................. 511,624 12,290,220 348,918 7,294,757 106,185 1,808,328
Shares issued on reinvestment of
distribution............................... -- -- 5,130 115,108 2,716 50,033
Shares redeemed.............................. (55,491) (1,340,999) (29,065) (597,615) (5,395) (96,507)
Net increase................................. 456,133 10,949,221 324,983 6,812,250 103,506 1,761,854
CLASS Y
Shares sold.................................. 6,060,064 145,062,792 9,899,164 200,509,060 3,937,086 68,368,276
Shares issued in acquisition of FFB Lexicon
Capital Appreciation Fund.................. -- -- 8,631,861 159,432,723 -- --
Shares issued on reinvestment of
distribution............................... 67,571 1,641,399 349,251 7,729,161 211,697 3,882,512
Shares redeemed.............................. (3,163,527) (75,878,946) (6,820,349) (135,786,868) (1,658,100) (27,997,743)
Net increase................................. 2,964,108 70,825,245 12,059,927 231,884,076 2,490,683 44,253,045
Total net increase resulting from Fund share
transactions............................... 14,859,128 $355,591,004 23,558,661 $470,989,627 6,100,429 $106,059,042
</TABLE>
* The Funds share activity for Class A, Class B and Class C reflect the period
from January 3, 1995 (commencement of class operations) through December 31,
1995.
** The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
69
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
INCOME AND GROWTH
PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997* JANUARY 31, 1997 JANUARY 31, 1996
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold................................. 96,124 $ 2,114,635 288,739 $ 5,918,321 228,841 $ 4,349,310
Shares issued on reinvestment of
distribution.............................. 10,209 225,329 16,567 341,281 5,285 101,915
Shares redeemed............................. (51,264) (1,121,079) (80,074) (1,646,836) (22,041) (423,996)
Net increase................................ 55,069 1,218,885 225,232 4,612,766 212,085 4,027,229
CLASS B
Shares sold................................. 308,925 6,799,151 973,616 19,899,458 719,805 13,730,445
Shares issued on reinvestment of
distribution.............................. 32,359 710,178 48,861 1,003,747 15,667 302,547
Shares redeemed............................. (123,038) (2,685,666) (128,458) (2,649,792) (35,675) (692,877)
Net increase................................ 218,246 4,823,663 894,019 18,253,413 699,797 13,340,115
CLASS C
Shares sold................................. 2,951 66,274 33,684 684,918 24,468 469,424
Shares issued on reinvestment of
distribution.............................. 712 15,602 1,429 29,305 445 8,587
Shares redeemed............................. (9,060) (189,123) (15,865) (328,507) (262) (4,731)
Net increase (decrease)..................... (5,397) (107,247) 19,248 385,716 24,651 473,280
CLASS Y
Shares sold................................. 407,330 8,929,797 1,398,445 28,512,144 1,829,669 34,117,050
Shares issued on reinvestment of
distribution.............................. 816,636 18,026,674 1,968,663 40,431,169 2,547,340 48,020,816
Shares redeemed............................. (3,049,701) (67,224,141) (9,386,347) (193,045,864) (13,511,557) (253,504,082)
Net decrease................................ (1,825,735) (40,267,670) (6,019,239) (124,102,551) (9,134,548) (171,366,216)
Total net decrease resulting from Fund share
transactions.............................. (1,557,817) $(34,332,369) (4,880,740) $(100,850,656) (8,198,015) $(153,525,592)
</TABLE>
* The Fund changed its fiscal year end from January 31 to July 31, effective
July 31, 1997.
70
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SMALL CAP EQUITY INCOME
PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997** DECEMBER 31, 1996 DECEMBER 31, 1995*
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold............................................. 246,413 $ 3,587,404 23,318 $ 285,774 20,272 $ 210,178
Shares issued on reinvestment of distribution........... 854 12,209 1,564 19,575 1,218 13,667
Shares redeemed......................................... (2,663) (37,984) (17,926) (213,193) (2,789) (30,712)
Net increase............................................ 244,604 3,561,629 6,956 92,156 18,701 193,133
CLASS B
Shares sold............................................. 560,543 8,164,490 27,963 341,494 24,055 248,049
Shares issued on reinvestment of distribution........... 1,366 19,472 2,883 36,358 1,305 14,752
Shares redeemed......................................... (9,769) (142,514) (966) (11,697) (2,383) (26,158)
Net increase............................................ 552,140 8,041,448 29,880 366,155 22,977 236,643
CLASS C
Shares sold............................................. 178,877 2,529,352 3,956 48,265 1,928 19,533
Shares issued on reinvestment of distribution........... 524 7,467 136 1,697 116 1,317
Shares redeemed......................................... (6,447) (91,950) (1,838) (22,125) 0 0
Net increase............................................ 172,954 2,444,869 2,254 27,837 2,044 20,850
CLASS Y
Shares sold............................................. 2,593,853 36,298,202 289,906 3,628,792 93,274 973,677
Shares issued on reinvestment of distribution........... 11,719 165,502 25,358 316,899 25,655 285,901
Shares redeemed......................................... (562,869) (8,498,878) (75,598) (912,038) (76,033) (807,286)
Net increase............................................ 2,042,703 27,964,826 239,666 3,033,653 42,896 452,292
Total net increase resulting from Fund share
transactions.......................................... 3,012,401 $42,012,772 278,756 $3,519,801 86,618 $ 902,918
</TABLE>
* The Fund share activity for Class A, Class B and Class C shares reflect the
period from January 3, 1995, January 3, 1995, January 24, 1995, respectively,
(commencement of class operations) through December 31, 1995.
** The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
71
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
UTILITY
PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997** DECEMBER 31, 1996 DECEMBER 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold................................. 45,144 $ 494,721 246,512 $ 2,626,118 190,219 $ 1,885,138
Shares issued in acquisition of ABT Utility
Income Fund, Inc.......................... -- -- -- -- 10,160,068 99,162,259
Shares issued on reinvestment of
distribution.............................. 147,141 1,602,820 478,287 5,051,093 505,736 5,335,896
Shares redeemed............................. (1,294,589) (14,079,531) (1,609,448) (16,984,094) (1,333,516) (13,551,249)
Net increase (decrease)..................... (1,102,304) (11,981,990) (884,649) (9,306,883) 9,522,507 92,832,044
CLASS B
Shares sold................................. 123,876 1,349,827 787,800 8,401,385 506,602 4,989,454
Shares issued on reinvestment of
distribution.............................. 52,424 571,837 183,056 1,935,353 222,027 2,287,981
Shares redeemed............................. (611,224) (6,601,705) (630,402) (6,652,890) (626,919) (6,110,450)
Net increase (decrease)..................... (434,924) (4,680,041) 340,454 3,683,848 101,710 1,166,985
CLASS C
Shares sold................................. 1,231 13,731 25,812 274,673 10,650 109,078
Shares issued on reinvestment of
distribution.............................. 536 5,855 1,963 20,723 1,497 15,571
Shares redeemed............................. (6,079) (66,033) (13,100) (135,909) (3,614) (37,152)
Net increase (decrease)..................... (4,312) (46,447) 14,675 159,487 8,533 87,497
CLASS Y
Shares sold................................. 23,627 259,189 106,165 1,120,499 184,329 1,826,095
Shares issued on reinvestment of
distribution.............................. 1,585 17,278 7,089 74,971 8,025 84,251
Shares redeemed............................. (72,220) (779,946) (644,560) (6,607,014) (49,697) (487,291)
Net increase (decrease)..................... (47,008) (503,479) (531,306) (5,411,544) 142,657 1,423,055
Total net increase (decrease) resulting from
Fund share transactions................... (1,588,548) $(17,211,957) (1,060,826) $(10,875,092) 9,775,407 $ 95,509,581
</TABLE>
** The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
72
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
VALUE
PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997** DECEMBER 31, 1996 DECEMBER 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold.............................. 948,931 $ 21,010,689 1,109,850 $ 23,895,251 628,945 $ 12,018,651
Shares issued in acquisition of ABT
Growth and Income Trust................ 0 0 0 0 3,289,535 63,356,435
Shares issued on reinvestment of
distribution........................... 127,041 2,835,467 2,371,895 49,562,452 883,572 17,771,730
Shares redeemed.......................... (1,099,102) (24,085,514) (1,836,296) (39,736,035) (1,863,758) (35,747,673)
Net increase (decrease).................. (23,130) (239,358) 1,645,449 33,721,668 2,938,294 57,399,143
CLASS B
Shares sold.............................. 2,284,482 50,184,755 2,197,426 47,442,303 951,887 18,428,845
Shares issued on reinvestment of
distribution........................... 48,527 1,086,571 1,374,236 28,693,188 394,396 7,933,916
Shares redeemed.......................... (709,716) (15,577,742) (873,740) (18,943,891) (723,565) (13,658,563)
Net increase............................. 1,623,293 35,693,584 2,697,922 57,191,600 622,718 12,704,198
CLASS C
Shares sold.............................. 46,777 1,018,408 38,761 832,827 15,721 307,770
Shares issued on reinvestment of
distribution........................... 410 9,201 10,328 215,421 2,274 45,762
Shares redeemed.......................... (16,263) (355,395) (17,818) (377,207) (7,532) (149,074)
Net increase............................. 30,924 672,214 31,271 671,041 10,463 204,458
CLASS Y
Shares sold.............................. 6,289,283 137,931,136 15,195,754 324,801,783 14,762,272 278,777,942
Shares issued in acquisition of FFB
Lexicon Select Value Fund.............. 0 0 4,720,676 95,883,824 0 0
Shares issued in acquisition of FFB
Equity Fund............................ 0 0 692,924 14,077,973 0 0
Shares issued on reinvestment of
distribution........................... 302,057 6,740,306 5,208,388 108,890,530 2,044,972 40,900,972
Shares redeemed.......................... (8,383,008) (184,606,592) (14,584,293) (316,060,052) (10,121,343) (193,762,147)
Net increase (decrease).................. (1,791,668) (39,935,150) 11,233,449 227,594,058 6,685,901 125,916,767
Total net increase (decrease) resulting
from Fund share transactions........... (160,581) $ (3,808,710) 15,608,091 $ 319,178,367 10,257,376 $ 196,224,566
</TABLE>
** The Fund changed its fiscal year end from December 31 to July 31, effective
July 31, 1997.
73
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
KEYSTONE FUND FOR TOTAL RETURN
PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997*# NOVEMBER 30, 1996 NOVEMBER 30, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold........................................ 521,092 $ 9,464,499 756,854 $11,818,891 280,062 $ 3,618,417
Shares issued on reinvestment of distribution...... 18,071 331,175 71,945 1,193,118 126,167 1,664,588
Shares redeemed.................................... (564,385) (10,121,645) (446,563) (6,837,747) (422,494) (5,386,215)
Net increase (decrease)............................ (25,222) (325,971) 382,236 6,174,262 (16,265) (103,210)
CLASS B
Shares sold........................................ 2,651,702 48,001,066 1,503,008 23,867,265 1,057,718 13,668,348
Shares issued on reinvestment of distribution...... 15,072 275,911 57,897 974,432 75,397 1,002,721
Shares redeemed.................................... (609,684) (11,087,288) (534,970) (8,156,600) (266,010) (3,483,004)
Net increase....................................... 2,057,090 37,189,689 1,025,935 16,685,097 867,105 11,188,065
CLASS C
Shares sold........................................ 350,562 6,315,824 398,635 6,185,359 303,795 3,797,262
Shares issued on reinvestment of distribution...... 4,023 73,683 21,672 362,645 39,802 527,153
Shares redeemed.................................... (172,539) (3,193,608) (265,577) (4,069,150) (164,102) (2,107,107)
Net increase....................................... 182,046 3,195,899 154,730 2,478,854 179,495 2,217,308
CLASS Y
Shares sold........................................ 4,487 85,018 0 0 0 0
Shares issued on reinvestment of distribution...... 0 0 0 0 0 0
Shares redeemed.................................... 0 0 0 0 0 0
Net increase....................................... 4,487 85,018 0 0 0 0
Total net increase resulting from Fund share
transactions..................................... 2,218,401 $ 40,144,635 1,562,901 $25,338,213 1,030,335 $13,302,163
</TABLE>
* The Fund share activity for Class Y shares reflect the period from January 13,
1997 (commencement of class operations) through July 31, 1997.
# The Fund changed its fiscal year end from November 30 to July 31, effective
July 31, 1997.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term securities, were as follows for the period ended July 31, 1997 and
each Fund's previous fiscal year end:
<TABLE>
<CAPTION>
PERIOD ENDED
JULY 31, 1997** FUND'S PREVIOUS FISCAL YEAR*
COST OF PROCEEDS COST OF PROCEEDS
PURCHASES FROM SALES PURCHASES FROM SALES
<S> <C> <C> <C> <C>
Growth and Income......................... $229,043,231 $ 47,424,367 $ 238,741,288 $ 61,805,548
Income and Growth......................... 626,983,951 657,874,692 1,474,882,363 1,463,903,225
Small Cap................................. 42,724,562 3,893,209 6,550,736 3,042,710
Utility................................... 64,274,576 81,054,578 83,136,428 96,084,227
Value..................................... 95,991,449 159,700,317 1,210,509,734 1,274,623,554
Total Return.............................. 88,212,224 49,211,301 49,291,647 27,160,592
</TABLE>
* Investment activity for Growth and Income, Small Cap, Utility
and Value is for the year ended December 31, 1996, Income and
Growth is for the year ended January 31, 1997 and Total
Return is for the year ended November 30, 1996.
** Investment activity for Growth and Income, Small Cap, Utility
and Value is for the seven months ended July 31, 1997, Income
and Growth is for the six months ended July 31, 1997 and
Total Return is for the eight months ended July 31, 1997.
74
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On July 31, 1997, the composition of unrealized appreciation and depreciation of
investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET UNREALIZED
TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
<S> <C> <C> <C> <C>
Growth and Income......................... $ 975,656,115 $372,134,629 $ 6,453,643 $365,680,986
Income and Growth......................... 854,284,316 136,340,327 33,866,911 102,473,416
Small Cap................................. 49,531,462 8,139,049 598,572 7,540,477
Utility................................... 115,966,044 19,364,529 2,389,293 16,975,236
Value..................................... 1,339,048,825 500,743,472 23,445,659 477,297,813
Total Return.............................. 119,780,289 44,851,368 1,382,698 43,468,670
</TABLE>
6. DISTRIBUTION PLANS
Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of The BISYS Group Inc. ("BISYS") is
serving as principal underwriter to the Funds. Prior to December 11, 1996,
Evergreen Keystone Investment Services, Inc. (formerly, Keystone Investment
Distributors Company) ("EKIS"), a wholly-owned subsidiary of Keystone, served as
Total Return's principal underwriter.
Each Fund has adopted Distribution Plans for each class of shares, except Class
Y, as allowed by Rule 12b-1 of the 1940 Act. Distribution plans permit the fund
to reimburse its principal underwriter for costs related to selling shares of
the fund and for various other services. These costs, which consist primarily of
commissions and services fees to broker-dealers who sell shares of the fund, are
paid by shareholders through expenses called "Distribution Plan expenses". Each
class, except Class Y, currently pays a service fee equal to 0.25% of the
average daily net assets of the class. Class B and Class C also presently pay
distribution fees equal to 0.75% of the average daily net assets of the Class.
Distribution Plan expenses are calculated daily and paid monthly.
With respect to Class B and Class C shares, the principal underwriter may pay
distribution costs greater than the allowable annual amounts the Fund is
permitted to pay. The Fund may reimburse the principal underwriter for such
excess amounts in later years with annual interest at the prime rate plus 1.00%.
EKD has entered into a Shareholder Services agreement with First Union Brokerage
Services ("FUBS"), an affiliate of First Union, whereby they will pay FUBS
services fees up to the annual limit of .25 of 1% of average daily net assets of
its Class B and Class C shares of the Funds.
75
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the period ended July 31, 1997 and each Fund's previous fiscal year,
amounts paid to EKD and/or EKIS pursuant to each Fund's Class A, Class B and
Class C Distribution Plans were as follows
<TABLE>
<CAPTION>
PERIOD ENDED JULY 31, 1997*
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Growth and Income.................................................. $175,321 $2,170,223 $ 91,676
Income and Growth.................................................. 13,129 186,670 4,556
Small Cap.......................................................... 1,710 15,062 5,553
Utility............................................................ 134,715 214,190 2,114
Value.............................................................. 509,860 1,337,333 10,924
Total Return....................................................... 66,585 460,418 119,908
</TABLE>
* Distribution Plan expenses for Growth and Income, Small Cap,
Utility and Value are for the seven months ended July 31,
1997, Income and Growth are for the six months ended July 31,
1997 and Total Return are for the eight months ended July 31,
1997.
<TABLE>
<CAPTION>
PREVIOUS FISCAL YEAR**
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Growth and Income.................................................. $122,222 $1,245,549 $ 48,073
Income and Growth.................................................. 18,106 252,431 8,509
Small Cap.......................................................... 618 4,265 356
Utility............................................................ 252,753 378,500 3,791
Value.............................................................. 767,254 1,674,133 11,608
Total Return....................................................... 75,270 260,237 112,995
</TABLE>
** Distribution Plan expenses for Growth and Income, Small Cap,
Utility and Value are for the fiscal year ended December 31,
1996, Income and Growth are for the fiscal year ended January
31, 1997 and Total Return are for the fiscal year ended
November 30, 1996.
Each of the Distribution Plans for Total Return 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 provided 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 each Fund. EKD intends to seek full
payment of such distribution costs from each Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
EKD and/or its predecessor has advised the Funds that it has retained the
following amounts from front-end sales charges resulting from the sales of Class
A shares during the period ended July 31, 1997 and each Fund's previous fiscal
year:
<TABLE>
<CAPTION>
PERIOD ENDED PREVIOUS
JULY 31, 1997* FISCAL YEAR**
<S> <C> <C>
Growth and Income..................................................... $169,177 $ 158,858
Income and Growth..................................................... 4,194 20,208
Small Cap............................................................. 6,942 340
Utility............................................................... 1,789 7,857
Value................................................................. 51,343 56,609
Total Return.......................................................... 9,998 75,270
</TABLE>
* Front end sales commissions for Growth and Income, Small Cap,
Utility and Value are for the seven months ended July 31,
1997, Income and Growth are for the six months ended July 31,
1997 and Total Return are for the eight months ended July 31,
1997.
** Front end sales commissions for Growth and Income, Small Cap,
Utility and Value are for the fiscal year ended December 31,
1996, Income and Growth are for the fiscal year ended January
31, 1997 and Total Return are for the fiscal year ended
November 30, 1996.
Contingent deferred sales charges paid by redeeming shareholders are paid to EKD
or its predecessor.
7. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED
TRANSACTIONS
First Union is entitled to an annual fee of .50 of 1% of Utility's and Value's
average daily net assets pursuant to each Fund's investment advisory agreement.
First Union voluntarily waived $146,640 and $396,483, respectively, of its fee
for Utility for the seven months ended July 31, 1997 and year ended December 31,
1996.
76
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to an agreement with Growth and Income's, Income and Growth's and Small
Cap's investment adviser, Evergreen Asset Management Corp. ("Evergreen Asset"),
a wholly owned subsidiary of First Union, Evergreen Asset is entitled to an
annual fee based on each Fund's average daily net assets, respectively, in
accordance with the following schedule:
<TABLE>
<S> <C>
First $750 million.............................................. 1.00%
Next $250 million............................................... 0.90%
Over $1 billion................................................. 0.80%
</TABLE>
Evergreen Asset has agreed to reimburse Small Cap to the extent that the Fund's
operating expenses (including the investment advisory fee and amortization of
organizational expenses but excluding interest, taxes, brokerage commissions,
12b-1 distribution and shareholder services fees and extraordinary expenses)
exceed 1.50% of its average daily net assets. Evergreen Asset waived advisory
fees aggregating $53,123 and $63,333 for the seven months ended July 31, 1997
and the year ended December 31, 1996, respectively pursuant to this agreement.
Additionally, for the year ended December 31, 1996 Evergreen Asset reimbursed
other expenses amounting to $133,406. First Union and Evergreen Asset can modify
or terminate voluntary waivers at any time.
Keystone Investment Management Company ("Keystone"), a subsidiary of First Union
Corporation ("First Union"), is the investment adviser for Total Return. In
return for providing investment management and administrative services to Total
Return, the Fund pays Keystone a management fee that is calculated daily and
paid monthly. The management fee is computed at an annual rate of 1.50% of Total
Return's gross investment income plus an amount determined by applying
percentage rates starting at 0.60% and declining to 0.30% per annum as net
assets increase, to the average daily net asset value of the Fund.
Evergreen Keystone Investment Services, Inc. ("EKIS"), a subsidiary of First
Union, is the administrator for the Funds. Prior to March 11, 1997, Evergreen
Asset was the administrator for Growth and Income, Income and Growth, Small Cap,
Utility and Value. Furman Selz LLC ("Furman Selz") was the sub-administrator
through December 31, 1996 for Growth and Income, Income and Growth, Small Cap,
Utility and Value. Effective January 1, 1997, BISYS acquired Furman Selz' mutual
fund unit and accordingly BISYS Fund Services became sub-administrator for the
Funds. The administrator (and sub-administrator) for each Fund is (are) entitled
to an annual fee based on the average daily net assets of the funds administered
by EKIS for which First Union or its investment advisory subsidiaries are also
the investment advisers. The administration fee is calculated by applying
percentage rates, which start at 0.05% and decline to 0.01% per annum as net
assets increase, to the average daily net asset value of the Fund. The
sub-administration fee is calculated by applying percentage rates, which start
at 0.01% and decline to .004% as net assets increase, to the average daily net
asset value of the Fund. For Growth and Income, Income and Growth, Small Cap and
Total Return the administration and sub-administration fee is paid by their
respective investment advisor and is not a Fund expense.
Lieber & Company, an affiliate of First Union, is the investment sub-adviser to
Growth and Income, Income and Growth, and Small Cap and also provides brokerage
services with respect to substantially all security transactions of each Fund
effected on the New York or American Stock Exchanges. For the period ended July
31, 1997 and the previous fiscal year, Growth and Income, Income and Growth, and
Small Cap incurred the following brokerage commissions with Lieber & Company:
<TABLE>
<CAPTION>
PERIOD ENDED PREVIOUS
JULY 31, 1997* FISCAL YEAR**
<S> <C> <C>
Growth and Income..................................................... $ 348,590 $ 429,888
Income and Growth..................................................... 1,066,378 2,835,293
Small Cap............................................................. 61,390 13,246
</TABLE>
* Commissions paid to Leiber & Co. for Growth and Income and
Small Cap are for the seven months ended July 31, 1997,
Income and Growth are for the six months ended July 31, 1997.
** Commissions paid to Leiber & Co for Growth and Income and
Small Cap are for the fiscal year ended December 31, 1996,
Income and Growth are for the fiscal ended January 31, 1997.
Lieber & Company is reimbursed by Evergreen Asset, at no additional expense to
the Funds, for its cost of providing investment advisory services.
During the period ended July 31, 1997 and the year ended November 30, Total
Return Fund paid or accrued to EKIS $10,250 and $27,066, respectively, for
certain accounting services.
Evergreen Keystone Service Company ("EKSC") (formerly, Keystone Investor
Resource Center, Inc.), a wholly-owned subsidiary of Keystone, serves as the
transfer and dividend disbursing agent for the Total Return Fund. Effective May
5, 1997, EKSC also began providing the transfer and dividend disbursing agent
services for Growth and Income, Income and Growth, Small Cap, Utility and Value
that were formerly provided by State Street Bank and Trust Company ("State
Street"). For certain accounts, First Union had been sub-contracted by State
Street to maintain shareholder sub-account records, take fund purchase and
redemption orders and answer inquiries.
77
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For each account of Growth and Income and Value, First Union earned the
following fees:
<TABLE>
<CAPTION>
PERIOD ENDED PREVIOUS
JULY 31, 1997* FISCAL YEAR**
<S> <C> <C>
Growth and Income..................................................... $ 27,062 $ 11,011
Value................................................................. 159,620 110,847
</TABLE>
* First Union fees for Growth and Income and Value are for the
seven months ended July 31, 1997.
** First Union fees for Growth and Income and Value are for the
fiscal year ended December 31, 1996.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds.
8. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an expense offset arrangement with their custodian.
The assets deposited with the custodian under this expense offset arrangement
could have been invested in income-producing assets.
9. DEFERRED TRUSTEES' FEES
Each Independent Trustee of Growth and Income, Income and Growth, Small Cap,
Utility and Value may defer any or all compensation related to performance of
duties as a Trustee. Each Trustee's deferred balances are allocated to deferral
accounts which are included in the accrued expenses for the Fund. The investment
performance of the deferral accounts are based on the investment performance of
certain Evergreen Keystone Funds. Any gains earned or losses incurred in the
deferral accounts are reported in the Fund's Trustees'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 Board of Trustees or January 1, 2000. As of
July 31, 1997, the value of the Trustees deferral account for Growth and Income,
Income and Growth, Small Cap, Utility, and Value was $10,791, $70,668, $6,067,
$5,597, and $55,017.
10. FINANCING AGREEMENT
On October 31, 1996, a financing agreement between all of the Evergreen Funds
and State Street, Societe Generale and ABN AMRO Bank N.V. (collectively, the
"Banks") became effective. Under this agreement, the Banks provide an unsecured
credit facility in the aggregate amount of $225 million ($112.5 million
committed and $112.5 million uncommitted) allocated evenly between the Banks.
Borrowings under this facility bear interest at 0.75% per annum above the
Federal Funds rate. A commitment fee of 0.10% per annum will be incurred on the
unused portion of the committed facility which will be allocated to all
participating funds. State Street acts as agent for the Banks, and as agent is
entitled to a fee of $15,000 which is allocated to all of the Evergreen Funds.
During the period ended July 31, 1997 and the previous year, Growth and Income,
Income and Growth, Small Cap, Utility and Value had no significant borrowings
under this agreement.
11. CONCENTRATION OF CREDIT RISK
Utility invests a substantial portion of its assets in issuers in the Utilities
industry, therefore, it may be more affected by economic and political
developments in that industry than would be a comparable general equity fund.
12. CHANGE IN FISCAL YEAR END
Growth and Income, Small Cap, Utility and Value changed their fiscal year end
from December 31 to July 31, effective July 31, 1997. Income and Growth changed
its fiscal year end from January 31 to July 31, effective July 31, 1997.
Keystone Fund for Total Return changed its fiscal year end from November 30 to
July 31, effective July 31, 1997.
13. DISTRIBUTIONS TO SHAREHOLDERS
For Small Cap, $39,663 ( approximately $0.01 per share) of the dividend declared
on June 20, 1997 has been redesignated as a distribution from long-term capital
gains.
A distribution of $0.058, $0.031, $0.031 and $0.066 per share for class A, class
B, class C and Class Y, respectively, for Total Return was declared on August
22, 1997 from net investment income. This distribution was payable on August 26,
1997 to shareholders of record at the close of business on August 22, 1997.
These dividends are not reflected in these financial statements.
A distribution of $0.041, $0.034, $0.034 and $0.043 per share for Class A, Class
B, Class C and Class Y, respectively, for Utility Fund was declared on August
14, 1997 from net investment income. This distribution was payable on August 16,
1997 to shareholders of record at the close of business on August 14, 1997.
These dividends are not reflected in these financial statements.
78
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Evergreen Growth and Income Fund
Evergreen American Retirement Trust
Evergreen Investment Trust
Keystone Fund for Total Return
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Evergreen Keystone Growth and Income Funds
listed below as of July 31, 1997, and the related statements of operations,
statements of changes in net assets and financial highlights for each of the
years or periods listed below:
EVERGREEN GROWTH AND INCOME FUND-- statements of operations and changes in
net assets for the seven months ended July 31, 1997 and the year ended
December 31, 1996 and financial highlights for the periods presented on
pages 26-28, except for the periods ended prior to December 31, 1996. The
financial highlights for the periods ended prior to December 31, 1996 and
the statement of changes in net assets for the year ended December 31, 1995
were audited by other auditors, whose opinion thereon dated February 15,
1996 was unqualified.
EVERGREEN SMALL CAP EQUITY INCOME FUND (ONE OF THE SERIES CONSTITUTING
EVERGREEN AMERICAN RETIREMENT TRUST)-- statements of operations and changes
in net assets for the seven months ended July 31, 1997 and the year ended
December 31, 1996 and financial highlights for the periods presented on
pages 32 and 33, except for the periods ended prior to December 31, 1996.
The financial highlights for the periods ended prior to December 31, 1996
and the statement of changes in net assets for the year ended December 31,
1995, were audited by other auditors, whose opinion thereon dated February
15, 1996 was unqualified.
EVERGREEN UTILITY FUND (ONE OF THE SERIES CONSTITUTING EVERGREEN INVESTMENT
TRUST)-- statements of operations for the seven months ended July 31, 1997
and the year ended December 31, 1996, the statements of changes in net
assets for the seven months ended July 31, 1997 and each of the years in the
two-year period ended December 31, 1996 and the financial highlights for the
periods presented on pages 34 and 35.
EVERGREEN VALUE FUND (ONE OF THE SERIES CONSTITUTING EVERGREEN INVESTMENT
TRUST)-- statements of operations for the seven months ended July 31, 1997
and the year ended December 31, 1996, statements of changes in net assets
for the seven months ended July 31, 1997 and each of the years in the
two-year period ended December 31, 1996 and the financial highlights for the
periods presented on pages 36-38.
KEYSTONE FUND FOR TOTAL RETURN-- statements of operations for the eight
months ended July 31, 1997 and the year ended November 30, 1996, statements
of changes in net assets for the eight months ended July 31, 1997 and each
of the years in the two-year period ended November 30, 1996 and the
financial highlights for the periods presented on pages 39-41.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Evergreen Growth and Income Fund, Evergreen Small Cap Equity Income Fund,
Evergreen Utility Fund, Evergreen Value Fund, and Keystone Fund for Total Return
as of July 31, 1997, the results of their operations, the changes in their net
assets and financial highlights for each of the years or periods specified in
the first paragraph above in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
August 22, 1997
79
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
EVERGREEN INCOME AND GROWTH FUND
In our opinion, the accompanying Statement of Assets and Liabilities, including
the Statement of Investments, and the Statements of Operations and of Changes in
Net Assets and the Financial Highlights present fairly, in all material
respects, the financial position of Evergreen Income and Growth Fund (the
"Fund") at July 31, 1997, and the results of its operations, the changes in its
net assets, and its financial highlights for the six months ended July 31, 1997
and the year ended January 31, 1997, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at July 31, 1997 by correspondence with the custodian
and brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for the
opinion expressed above. The Statement of Changes in Net Assets for the year
ended January 31, 1996, and the financial highlights for each of the years or
periods ended from March 31, 1988 through January 31, 1996 were audited by other
auditors, whose report dated March 21, 1996 was unqualified.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
August 26, 1997
80
<PAGE>
EVERGREEN KEYSTONE
[Evergreen Keystone logo appears here]
FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
During the period ended July 31, 1997, the Funds paid the following
distributions in shares or cash:
<TABLE>
<CAPTION>
LONG-TERM ORDINARY
TOTAL CAPITAL GAIN INCOME
DISTRIBUTIONS DISTRIBUTIONS DIVIDENDS
<S> <C> <C> <C>
Evergreen Growth and Income Fund......................... $ 2,515,302 $ 0 $ 2,515,302
Evergreen Income and Growth Fund......................... 21,598,265 0 21,598,265
Evergreen Small Cap Equity Income Fund................... 372,509 39,663 332,846
Evergreen Utility Fund................................... 2,717,219 0 2,717,219
Evergreen Value Fund..................................... 14,153,433 0 14,153,433
Keystone Fund for Total Return........................... 789,414 0 789,414
</TABLE>
Of the ordinary income distributions stated above for Evergreen Growth and
Income Fund, Evergreen Income and Growth Fund, Evergreen Small Cap Equity Income
Fund, Evergreen Utility Fund, Evergreen Value Fund, and Keystone Fund for Total
Return, 100.0%, 48.4%, 38.0%, 53.2%, 56.6% and 53.9%, respectively, are eligible
for the corporate dividend received deduction. The above figures may differ from
those previously reported and those cited elsewhere in this report due to
differences in the calculation of income and capital gains for accounting (book)
purposes and Internal Revenue Service (tax) purposes. In January 1998, we will
send you complete information on the distributions paid during the calendar year
1997 to help you in completing your federal tax return.
SEMI-ANNUAL FINANCIAL STATEMENTS
Growth and Income, Small Cap, Utility and Value have prepared a semi-annual
report to shareholders as of June 30, 1997. This report was filed with the
Securities & Exchange Commission, but was not mailed to shareholders. If you
would like to obtain a copy of this report please call 1(800)343-2898.
81
<PAGE>
This brochure must be preceded or accompanied by a prospectus of an Evergreen
Keystone fund contained herein. The prospectus contains more complete
information, including fees and expenses, and should be read carefully before
investing or sending money.
NOT May lose value
FDIC No bank guarantee
INSURED
Evergreen Keystone Distributor, Inc.
Form #540390 Rev. 01
9/97
61177
<PAGE>
EVERGREEN KEYSTONE FUNDS
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
200 Berkeley Street
Boston, MA 02116-5034
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, D.C.
Attn: File Room
Re: Evergreen Growth & Income Fund
File No. 811-4715
CCC # 4#95edgi
CIK # 0000795891
Evergreen Income & Growth Fund
File No. 811-2829
CCC # 4#95cdtr
CIK # 0000275346
Keystone Fund For Total Return
File No. 811-4950
CCC # dcv2#rwt
CIK # 0000808335
Evergreen Investment Trust (Evergreen Value Fund and Evergreen Utility Fund)
File No. 811-4154
CCC # 4apyfsr*
CIK # 0000757440
Evergreen American Retirement Trust (Evergreen Small Cap Equity Income Fund)
File No. 811-5434
CCC # g5jfsee@
CIK # 0000826733
Commissioners:
Please be advised that the Annual Report for the above referenced Fund(s) were
submitted to your office on September 5, 1997, via electronic transmission
(EDGAR).
<PAGE>
Any questions or comments about this document should be directed to the
undersigned at (617) 210-3570.
Very Truly Yours,
/s/ Doug Miller
Doug Miller
Assistant Vice President
COMBINED
ANNUAL REPORT
SHAREHOLDERS
September 30, 1997
. The U.S. Government Securities Fund
. The Style Manager: Large Cap Fund
. The Style Manager Fund
. The Virginia Municipal Bond Fund
. The Maryland Municipal Bond Fund
. The Treasury Money Market Fund
. The Money Market Fund
. The Tax-Free Money Market Fund
Funds Managed by
[LOGO] VIRTUS
CAPITAL MANAGEMENT, INC.
The Investment Adviser to The Virtus Funds is Virtus Capital Management, Inc., a
subsidiary of Signet Banking corporation. The Virtus Funds are administered by
subsidiaries of Federated Investors, independent of Signet.
Investment products are not deposits, obligations of, or guaranteed by any bank.
They are not insured by FDIC. They involve risk, including the possible loss of
principal invested.
Virtus Capital Management, Inc. is the investment adviser for The Virtus
Funds. Federated Securities Corp. is the distributor of The Funds.
Federated Securities Corp., Distributor, is independent of Signet Bank.
[LOGO] VIRTUS
FUNDS
MESSAGE TO SHAREHOLDERS
- -------------------------------------------------------------------------------
Dear Investor:
Here is your Annual Report for The Virtus Funds, which covers the 12-month
period from October 1, 1996 through September 30, 1997.
On the following pages, you will find complete financial information for every
fund in the Virtus family. The sections for The U.S. Government Securities Fund,
The Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund and The Maryland Municipal Bond Fund begin with a management
discussion and analysis by the portfolio manager, followed by a long-term
performance graph. Each fund also contains a complete list of holdings, and the
financial statements.
As the following fund-by-fund summary indicates, the reporting period was very
strong for stocks and improved for bonds:
. THE U.S. GOVERNMENT SECURITIES FUND paid a dividend stream totaling $0.60 per
share for Investment Shares ($0.63 for Trust Shares). These dividends helped
the fund produce a total return of 6.89% for Investment Shares (7.16% for
Trust Shares) in an improved bond market.* The net asset value of both share
classes increased slightly from $9.89 on the first day of the period to $9.95
on the last day of the period. At the end of the reporting period, net assets
amounted to more than $157 million.
. THE STYLE MANAGER: LARGE CAP FUND produced a strong total return of 37.02% for
Investment Shares (37.37% for Trust Shares) in a highly favorable environment
for stocks.* The fund's high-quality stock portfolio paid dividends of $0.14
per share and capital gains of $1.83 per share for Investment Shares (and
dividends of $0.18 per share and capital gains of $1.83 per share for Trust
Shares). The net asset value of each share class rose 19% from the first day
of the period to the last day of the period. At the end of the reporting
period, net assets amounted to more than $106 million.
. THE STYLE MANAGER FUND produced an extremely strong total return of 44.01%*
through dividends totaling $0.24 per share and capital gains totaling $0.63
per share. In a highly favorable stock market environment, the fund's net
asset value soared from $11.47 on the first day of the period to $15.37 on the
last day. Net assets exceeded $76 million on the last day of the reporting
period.
. THE VIRGINIA MUNICIPAL BOND FUND paid double-tax-free dividends** of $0.42 per
share for Investment Shares ($0.45 for Trust Shares) through a portfolio that
included 29 Virginia municipal bonds. This income stream helped the fund
produce a total return of 7.74% for Investment Shares (8.00% for Trust Shares)
in a difficult bond market.* The net asset value for both share classes
increased from $10.68 on the first day of the period to $11.07 on the last day
of the period. Net assets totaled more than $78 million on the last day of the
reporting period.
. THE MARYLAND MUNICIPAL BOND FUND paid double-tax-free dividends** totaling
$0.37 per share for Investment Shares ($0.40 for Trust Shares). This income
stream helped the fund produce a total return of 6.92% for Investment Shares
(7.19% for Trust Shares) in a difficult bond market.* The net asset value for
both share classes increased from $10.56 on the first day of the period to
$10.91 on the last day of the period. At the end of the reporting period, net
assets totaled more than $33 million.
. THE TREASURY MONEY MARKET FUND, a portfolio of U.S. Treasury money market
securities, paid dividends totaling $0.05 per share for both Trust Shares
and Investment Shares. Assets totaled more than $317 million on the last day
of the reporting period.+
. THE MONEY MARKET FUND paid dividends totaling $0.05 per share for both Trust
Shares and Investment Shares through its portfolio of high-quality money
market securities. The fund ended the reporting period with more than $241
million in net assets.+
. THE TAX-FREE MONEY MARKET FUND, a portfolio of municipal money market
securities, paid tax-free dividends totaling $0.03 per share.++ At the end of
the reporting period, net assets reached more than $57 million.+
Thank you for pursuing your financial goals through The Virtus Funds. We hope
you are pleased with your progress.
Sincerely,
/s/ John S. Hall
John S. Hall
Chief Investment Officer
Virtus Capital Management, Inc.
Investment Adviser to The Virtus Funds
November 15, 1997
- --------
* Performance quoted reflects past performance and is not indicative of
future results. Investment return and principal value will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Reflecting the fund's contingent deferred sales
charge, the total returns of The Virtus Funds were as follows: The U.S.
Government Securities Fund (Investment Shares): 4.75%; The Style Manager
Fund: 41.85%; The Style Manager: Large Cap Fund (Investment Shares):
34.75%; The Virginia Municipal Bond Fund (Investment Shares): 5.70%; and
The Maryland Municipal Bond Fund (Investment Shares): 4.87%.
**Income may be subject to the federal alternative minimum tax.
+Although money market funds seek to maintain a stable net asset value of
$1.00 a share, there is no guarantee that they will be able to do so. An
investment in the fund is neither insured nor guaranteed by the U.S.
government.
++Income may be subject to the federal alternative minimum tax and state and
local taxes.
THE U.S. GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
Overall, during the last year, we have experienced a relatively calm U.S. fixed
income market. While interest rates on maturities longer than two years declined
by roughly .50% during the year, that was reasonably mild compared to yield
changes observed over the last 20 years. Even the extreme yields observed on
five-year Treasuries remained in a fairly narrow range by historical standards.
The five-year Treasury saw a low yield of about 5.80% and a high yield of about
6.80% during the 12-month period ended September 30, 1997. One recent study
indicated that a year in which interest rates moved by less than 2.00% is
reasonably uncommon.
Our overall average maturity position has remained neutral since November 1996.
We felt that interest rates would not move by large amounts, and shifted our
investment focus from direct Treasuries to mortgage-backed securities and a few
callable agencies, which seek to provide a better total return through a higher
income component during periods when interest rates are reasonably quiet. Thus,
we were able to provide a good total return despite not actively making changes
to the average maturity of the portfolio in anticipation of changes in interest
rates. For the fiscal year ended September 30, 1997, the fund produced average
annual total returns of 6.89% and 7.16% for Investment Shares and Trust Shares,
respectively.*
Most of the additional mortgage-backed securities were purchased in the
earlier part of the year. After the first quarter of 1997, the yield advantage
of buying mortgage-backed securities fell to near historical lows and
subsequent additional investments have been postponed. Only recently have
yields become slightly more attractive on mortgage-backed securities. For the
time being, the fund will maintain an average maturity similar to that of the
Lehman Brothers Intermediate Government Bond Index**, and will consider buying
additional mortgage-backed securities to help improve the income and total
return characteristics when we believe the additional yield received will
compensate us for the additional risk of pre-payments associated with
mortgage-backed securities.
- --------
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
** Lehman Brothers Intermediate Government Bond Index is comprised of all
publicly issued, non-convertible domestic debt of the U.S. government or
any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. This index is unmanaged and investments
cannot be made in an index.
THE U.S. GOVERNMENT SECURITIES FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE U.S. GOVERNMENT SECURITIES FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
U.S. Government Securities Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers Intermediate
Government Bond Index ("LBIGB").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX A
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 4.75%
5 Year 4.70%
Start of Performance (10/16/90) 7.10%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBIGB is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBIGB has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE U.S. GOVERNMENT SECURITIES FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE U.S. GOVERNMENT SECURITIES FUND--TRUST
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
U.S. Government Securities Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers Intermediate
Government Bond Index ("LBIGB").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX B
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 7.16%
5 Year 4.93%
Start of Performance (10/16/90) 7.27%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBIGB is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBIGB has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
LONG-TERM INVESTMENTS--98.9%
---------------------------------------------------------------
U.S. TREASURY BONDS--12.9%
---------------------------------------------------
$ 4,500,000 United States Treasury Bond, 11.75%, 11/15/2014 $ 6,534,225
---------------------------------------------------
13,000,000 United States Treasury Bond, 7.50%, 5/15/2002 13,785,590
--------------------------------------------------- ------------
Total U.S. Treasury Bonds 20,319,815
--------------------------------------------------- ------------
U.S. TREASURY NOTES--30.3%
---------------------------------------------------
22,000,000 United States Treasury Note, 7.125%, 2/29/2000 22,623,920
---------------------------------------------------
2,000,000 United States Treasury Note, 7.50%, 11/15/2001 2,109,080
---------------------------------------------------
22,000,000 United States Treasury Note, 8.875%, 2/15/1999 22,902,220
--------------------------------------------------- ------------
Total U.S. Treasury Notes 47,635,220
--------------------------------------------------- ------------
GOVERNMENT OBLIGATIONS--55.7%
---------------------------------------------------
993,000 Federal Agricultural Mortgage Association, 7.37%,
8/1/2006 1,036,771
---------------------------------------------------
11,350,428 Federal Home Loan Bank, 6.50%, 9/1/2008 11,330,667
---------------------------------------------------
7,801,431 Federal Home Loan Bank, 6.50%, 11/1/2009 7,818,516
---------------------------------------------------
81,255 Federal Home Loan Bank, 7.968%, 8/1/2019 85,404
---------------------------------------------------
29,676 Federal Home Loan Bank, 8.342%, 12/1/2020 30,979
---------------------------------------------------
8,500,000 Federal Home Loan Mortgage Corp., 7.36%, 6/5/2007 8,825,525
---------------------------------------------------
541,561 Federal Home Loan Mortgage Corp., REMIC, 7.80%,
5/15/2012 542,514
---------------------------------------------------
5,000,000 Federal Home Loan Mortgage Corp., 7.974%, 4/20/2005 5,062,750
---------------------------------------------------
4,480,000 Federal National Mortgage Association, 6.16%,
4/3/2001 4,496,486
---------------------------------------------------
4,500,547 Federal National Mortgage Association, 7.00%,
12/1/1999 4,543,933
---------------------------------------------------
3,705,860 Federal National Mortgage Association, 7.00%,
8/1/2001 3,756,816
---------------------------------------------------
15,418,905 Federal National Mortgage Association, 7.00%,
4/1/2011 15,597,148
---------------------------------------------------
23,204,872 Federal National Mortgage Association, 7.50%,
8/1/2026 23,618,151
---------------------------------------------------
341,912 Federal National Mortgage Association, 8.50%,
12/1/2001 354,200
---------------------------------------------------
64,350 Federal National Mortgage Association, 8.83%,
6/1/2019 66,987
---------------------------------------------------
167,619 Government National Mortgage Association, 8.00%,
3/15/2017 175,948
---------------------------------------------------
320,648 Government National Mortgage Association, 9.00%,
9/15/2021 345,196
--------------------------------------------------- ------------
Total Government Obligations 87,687,991
--------------------------------------------------- ------------
TOTAL LONG-TERM INVESTMENTS (IDENTIFIED COST
$154,447,718) 155,643,026
--------------------------------------------------- ------------
</TABLE>
THE U.S. GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- -------------------------------------------------- ------------
<C> <S> <C>
(A) REPURCHASE AGREEMENT--0.3%
--------------------------------------------------------------
$ 460,430 CS First Boston Corp., 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) $ 460,430
-------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST
$154,908,148)(B) $156,103,456
-------------------------------------------------- ------------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) The cost of investments for federal tax purposes amounts to $154,908,148.
The net unrealized appreciation of investments on a federal tax basis
amounts to $1,195,308 which is comprised of $1,747,639 appreciation and
$552,331 depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($157,425,080) at September 30, 1997.
The following acronym is used throughout this portfolio:
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER: LARGE CAP FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
While small cap value stocks had a very successful year relative to small cap
growth stocks*, large cap growth and value stocks remained neck and neck. In
August 1997, we transitioned the fund to a more neutral position and now are
roughly 50% value and 50% growth oriented.
Virtus Capital Management, Inc. continues to implement the "Style" approach to
managing the fund. We seek to capture the predominant investment style to take
greater advantage of market trends. This involves opportunistic positioning
defined by investment style. "Style" refers to two widely accepted
descriptions of stocks known as growth and value. Growth stocks are those
companies with above-average earnings expectations. Value stocks are those
companies selling at a low price relative to the actual value of their
underlying assets. During the 12-month period ended September 30, 1997, the
Standard & Poor's ("S&P") 500 Value Index+ produced a total return of 39.22%,
and the S&P 500 Growth Index+ returned 41.48%, again neck and neck performance
in a very strong year. During the same period, S&P 500 Index+ returned 40.7%.
For the 12-month period ended September 30, 1997, the fund produced average
annual total returns of 37.02% and 37.37% for Investment Shares and Trust
Shares, respectively.++
- --------
* Small cap stocks have historically experienced greater volatility than
average.
+ The S&P 500 is an unmanaged index comprised of common stocks in industry,
transportation and financial and public utility companies. The S&P 500 Value
Index and the S&P 500 Growth Index are sub-indices of the S&P 500 Index.
Investments cannot be made in an index.
++ Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
THE STYLE MANAGER: LARGE CAP FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER: LARGE CAP FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager: Large Cap Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Standard & Poor's 500 Index
("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX C
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 34.75%
5 Year 13.84%
Start of Performance (10/16/90) 14.03%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P 500
has been adjusted to reflect reinvestment of dividends on securities in the
index. This index is unmanaged.
THE STYLE MANAGER: LARGE CAP FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER: LARGE CAP FUND--TRUST SHARES
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager: Large Cap Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Standard & Poor's 500 Index
("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX D
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 37.37%
5 Year 14.09%
Start of Performance (10/16/90) 14.21%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE STYLE MANAGER: LARGE CAP FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ---------------------------- ------------
<C> <S> <C>
COMMON STOCKS--97.6%
--------------------------------------
AEROSPACE & DEFENSE--1.7%
----------------------------
25,600 Boeing Co. $ 1,393,600
----------------------------
3,600 Lockheed Martin Corp. 383,850
---------------------------- ------------
Total 1,777,450
---------------------------- ------------
AIRLINES--0.4%
----------------------------
1,500 (a)AMR Corp. 166,031
----------------------------
2,400 Delta Air Lines, Inc. 226,050
---------------------------- ------------
Total 392,081
---------------------------- ------------
ALUMINUM--0.5%
----------------------------
17,000 Alcan Aluminum, Ltd. 590,750
---------------------------- ------------
AUTO PARTS & EQUIPMENT--0.5%
----------------------------
5,200 Goodyear Tire & Rubber Co. 357,500
----------------------------
3,100 TRW, Inc. 170,113
---------------------------- ------------
Total 527,613
---------------------------- ------------
AUTOMOBILES--1.8%
----------------------------
22,600 Chrysler Corp. 831,962
----------------------------
23,400 Ford Motor Co. 1,058,850
---------------------------- ------------
Total 1,890,812
---------------------------- ------------
BANKS MAJOR REGIONAL--7.0%
----------------------------
16,400 Banc One Corp. 915,325
----------------------------
18,100 Bank of New York Co., Inc. 868,800
----------------------------
8,300 Barnett Banks, Inc. 587,225
----------------------------
19,800 First Union Corp. 991,237
----------------------------
4,100 Fleet Financial Group, Inc. 268,806
----------------------------
4,300 KeyCorp 273,588
----------------------------
10,600 Mellon Bank Corp. 580,350
----------------------------
5,500 National City Corp. 338,594
----------------------------
16,200 NationsBank Corp. 1,002,375
----------------------------
10,900 Norwest Corp. 667,625
----------------------------
12,600 PNC Financial Corp. 615,038
----------------------------
5,200 SunTrust Banks, Inc. 353,275
---------------------------- ------------
Total 7,462,238
---------------------------- ------------
BANKS-MONEY CENTER--2.3%
----------------------------
15,600 BankAmerica Corp. 1,143,675
----------------------------
6,600 Citicorp 883,987
----------------------------
6,000 First Chicago NBD Corp. 451,500
---------------------------- ------------
Total 2,479,162
---------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------
BEVERAGE-ALCOHOLIC--0.5%
-------------------------------------
15,000 Seagram Co. Ltd. $ 528,750
------------------------------------- ------------
BEVERAGE-SOFT DRINK--2.2%
-------------------------------------
38,700 Coca-Cola Co. 2,358,281
------------------------------------- ------------
BIOTECHNOLOGY--0.1%
-------------------------------------
2,900 (a)Amgen, Inc. 139,019
------------------------------------- ------------
BROADCAST MEDIA--1.1%
-------------------------------------
27,900 (a)Tele-Communications, Inc., Class A 571,950
-------------------------------------
28,900 (a)U.S. West Media Group 644,831
------------------------------------- ------------
Total 1,216,781
------------------------------------- ------------
BUILDING MATERIALS--0.4%
-------------------------------------
9,500 Masco Corp. 435,219
------------------------------------- ------------
BUILDING SUPPLIES--0.5%
-------------------------------------
4,400 Home Depot, Inc. 229,350
-------------------------------------
10,800 Sherwin-Williams Co. 317,925
------------------------------------- ------------
Total 547,275
------------------------------------- ------------
CHEMICALS--1.6%
-------------------------------------
7,200 Air Products & Chemicals, Inc. 597,150
-------------------------------------
7,600 Dow Chemical Co. 689,225
-------------------------------------
8,700 Union Carbide Corp. 423,581
------------------------------------- ------------
Total 1,709,956
------------------------------------- ------------
CHEMICALS-DIVERSE--0.6%
-------------------------------------
6,100 Du Pont (E.I.) de Nemours & Co. 375,531
-------------------------------------
8,600 Morton International, Inc. 305,300
------------------------------------- ------------
Total 680,831
------------------------------------- ------------
CHEMICALS-SPECIALTY--0.7%
-------------------------------------
5,900 Grace (W.R.) & Co. 434,388
-------------------------------------
7,000 Great Lakes Chemical Corp. 345,188
------------------------------------- ------------
Total 779,576
------------------------------------- ------------
COMMUNICATION EQUIPMENT--0.3%
-------------------------------------
6,400 Harris Corp. 292,800
------------------------------------- ------------
COMPUTER HARDWARE--4.7%
-------------------------------------
11,900 (a)Compaq Computer Corp. 889,525
-------------------------------------
6,700 (a)Dell Computer Corp. 649,062
-------------------------------------
9,800 (a)Digital Equipment Corp. 424,462
-------------------------------------
3,700 (a)EMC Corp. Mass 215,987
-------------------------------------
22,700 International Business Machines Corp. 2,404,781
-------------------------------------
4,700 (a)Seagate Technology, Inc. 169,788
-------------------------------------
11,300 (a)Silicon Graphics, Inc. 296,625
------------------------------------- ------------
Total 5,050,230
------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- --------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------
COMPUTER SERVICES--2.3%
---------------------------------------
5,300 (a)3Com Corp. $ 271,625
---------------------------------------
12,200 (a)Cisco Systems, Inc. 891,362
---------------------------------------
8,800 Computer Associates International, Inc. 631,950
---------------------------------------
18,600 (a)Oracle Corp. 677,738
--------------------------------------- ------------
Total 2,472,675
--------------------------------------- ------------
COMPUTER SOFTWARE--0.2%
---------------------------------------
4,300 (a)Parametric Technology Corp. 189,738
--------------------------------------- ------------
CONTAINERS & PACKAGING--0.1%
---------------------------------------
1,700 Union Camp Corp. 104,869
--------------------------------------- ------------
COSMETICS & TOILETRIES--2.5%
---------------------------------------
1,800 Colgate-Palmolive Co. 125,437
---------------------------------------
9,100 Gillette Co. 785,444
---------------------------------------
24,800 Procter & Gamble Co. 1,712,750
--------------------------------------- ------------
Total 2,623,631
--------------------------------------- ------------
ELECTRIC COMPANIES--3.6%
---------------------------------------
6,800 Carolina Power & Light Co. 244,375
---------------------------------------
10,800 Consolidated Edison Co. 367,200
---------------------------------------
11,600 Duke Power Co. 573,475
---------------------------------------
29,700 Edison International 749,925
---------------------------------------
13,600 Entergy Corp. 354,450
---------------------------------------
28,400 P G & E Corp. 658,525
---------------------------------------
15,500 Peco Energy Co. 363,281
---------------------------------------
24,200 Southern Co. 546,013
--------------------------------------- ------------
Total 3,857,244
--------------------------------------- ------------
ELECTRICAL EQUIPMENT--3.3%
---------------------------------------
13,100 AMP, Inc. 701,669
---------------------------------------
41,400 General Electric Co. 2,817,788
--------------------------------------- ------------
Total 3,519,457
--------------------------------------- ------------
ELECTRONICS-DEFENSE--0.4%
---------------------------------------
7,000 Raytheon Co. 413,875
--------------------------------------- ------------
ELECTRONICS-DISTRIBUTORS--0.3%
---------------------------------------
3,900 (W.W.) Grainger Inc. 347,100
--------------------------------------- ------------
ELECTRONICS-SEMICONDUCTORS--3.5%
---------------------------------------
3,400 (a)Applied Materials, Inc. 323,850
---------------------------------------
26,200 Intel Corp. 2,418,588
---------------------------------------
10,200 (a)LSI Logic Corp. 327,675
---------------------------------------
4,900 Micron Technology, Inc. 169,969
---------------------------------------
3,800 Texas Instruments, Inc. 513,475
--------------------------------------- ------------
Total 3,753,557
--------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------------
ENTERTAINMENT--1.3%
-------------------------------------------
17,200 (a)Viacom, Inc., Class B $ 543,950
-------------------------------------------
10,200 Disney (Walt) Co. 822,375
------------------------------------------- ------------
Total 1,366,325
------------------------------------------- ------------
FINANCIAL--3.7%
-------------------------------------------
5,500 American Express Co. 450,312
-------------------------------------------
13,100 American General Corp. 679,562
-------------------------------------------
30,200 Federal Home Loan Mortgage Corp. 1,064,550
-------------------------------------------
21,200 Morgan Stanley, Dean Witter, Discover & Co. 1,146,125
-------------------------------------------
9,300 Washington Mutual, Inc. 648,675
------------------------------------------- ------------
Total 3,989,224
------------------------------------------- ------------
FOODS--0.2%
-------------------------------------------
4,400 Kellogg Co. 185,350
------------------------------------------- ------------
GOLD & PRECIOUS METAL MINES--0.4%
-------------------------------------------
15,100 Barrick Gold Corp. 373,725
------------------------------------------- ------------
HEALTHCARE--2.7%
-------------------------------------------
10,000 Abbott Laboratories 639,375
-------------------------------------------
10,600 American Home Products Corp. 773,800
-------------------------------------------
18,000 Bristol-Myers Squibb Co. 1,489,500
------------------------------------------- ------------
Total 2,902,675
------------------------------------------- ------------
HEALTHCARE-DRUGS MAJOR--3.9%
-------------------------------------------
12,900 Eli Lilly & Co. 1,553,644
-------------------------------------------
21,100 Pfizer, Inc. 1,267,319
-------------------------------------------
19,500 Pharmacia & Upjohn, Inc. 711,750
-------------------------------------------
11,400 Schering Plough Corp. 587,100
------------------------------------------- ------------
Total 4,119,813
------------------------------------------- ------------
HEALTHCARE-HOSPITAL MANAGEMENT--0.7%
-------------------------------------------
27,700 Columbia/HCA Healthcare Corp. 796,375
------------------------------------------- ------------
HEALTHCARE-MEDICAL PRODUCTS & SUPPLY--2.5%
-------------------------------------------
14,400 Baxter International, Inc. 752,400
-------------------------------------------
3,800 (a)Boston Scientific Corp. 209,712
-------------------------------------------
2,800 Guidant Corp. 156,800
-------------------------------------------
18,200 Johnson & Johnson 1,048,775
-------------------------------------------
10,600 Medtronic, Inc. 498,200
------------------------------------------- ------------
Total 2,665,887
------------------------------------------- ------------
HOUSEHOLD FURNITURE & APPLIANCES--0.1%
-------------------------------------------
2,100 Whirlpool Corp. 139,256
------------------------------------------- ------------
INSURANCE-BROKERS--0.5%
-------------------------------------------
9,300 AON Corp. 491,737
------------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------ ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
----------------------------------------------
INSURANCE-LIFE/HEALTH--0.9%
------------------------------------
3,900 Aetna Services, Inc. $ 317,606
------------------------------------
8,200 Conseco, Inc. 400,262
------------------------------------
3,000 Jefferson-Pilot Corp. 237,000
------------------------------------ ------------
Total 954,868
------------------------------------ ------------
INSURANCE-MULTILINE--2.1%
------------------------------------
6,200 American International Group, Inc. 639,762
------------------------------------
2,600 Lincoln National Corp. 181,025
------------------------------------
20,100 Travelers Group, Inc. 1,371,825
------------------------------------ ------------
Total 2,192,612
------------------------------------ ------------
INSURANCE-PROPERTY--0.9%
------------------------------------
8,000 Chubb Corp. 568,500
------------------------------------
7,800 SAFECO Corp. 413,400
------------------------------------ ------------
Total 981,900
------------------------------------ ------------
INVESTMENT BANK-BROKERAGE--0.7%
------------------------------------
10,600 Merrill Lynch & Co., Inc. 786,388
------------------------------------ ------------
IRON & STEEL--0.1%
------------------------------------
3,000 USX-U.S. Steel Group, Inc. 104,250
------------------------------------ ------------
LODGING-HOTELS--0.4%
------------------------------------
5,600 (a)ITT Corp. 379,400
------------------------------------ ------------
MACHINERY--1.0%
------------------------------------
9,800 Cooper Industries, Inc. 529,812
------------------------------------
11,700 Ingersoll-Rand Co. 503,831
------------------------------------ ------------
Total 1,033,643
------------------------------------ ------------
MANUFACTURER-SPECIAL--0.4%
------------------------------------
9,600 Parker-Hannifin Corp. 432,000
------------------------------------ ------------
MANUFACTURING-DIVERSE--2.1%
------------------------------------
7,800 Allied-Signal, Inc. 331,500
------------------------------------
2,000 Minnesota Mining & Manufacturing Co. 185,000
------------------------------------
8,000 Tenneco, Inc. 383,000
------------------------------------
4,200 Textron, Inc. 273,000
------------------------------------
3,300 Unilever N.V., ADR 701,663
------------------------------------
4,600 United Technologies Corp. 372,600
------------------------------------ ------------
Total 2,246,763
------------------------------------ ------------
METALS & MINING--0.3%
------------------------------------
11,900 Inco Ltd. 298,244
------------------------------------ ------------
NATURAL GAS--0.3%
------------------------------------
6,900 Williams Cos., Inc. (The) 323,006
------------------------------------ ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------ ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
----------------------------------------------
OIL & GAS-DRILL & EQUIPMENT--0.7%
------------------------------------
8,800 Baker Hughes, Inc. $ 385,000
------------------------------------
3,800 Schlumberger Ltd. 319,913
------------------------------------ ------------
Total 704,913
------------------------------------ ------------
OIL-DOMESTIC--1.1%
------------------------------------
8,900 Phillips Petroleum Co. 459,463
------------------------------------
19,200 USX Corp. 714,000
------------------------------------ ------------
Total 1,173,463
------------------------------------ ------------
OIL-INTERNATIONAL--7.4%
------------------------------------
6,300 Amoco Corp. 607,162
------------------------------------
9,900 Chevron Corp. 823,556
------------------------------------
46,700 Exxon Corp. 2,991,719
------------------------------------
12,600 Mobil Corp. 932,400
------------------------------------
45,700 Royal Dutch Petroleum Co., ADR 2,536,350
------------------------------------ ------------
Total 7,891,187
------------------------------------ ------------
PAPER & FOREST PRODUCTS--1.3%
------------------------------------
3,300 Champion International Corp. 201,094
------------------------------------
13,100 International Paper Co. 721,319
------------------------------------
8,600 Weyerhaeuser Co. 510,625
------------------------------------ ------------
Total 1,433,038
------------------------------------ ------------
PHOTOGRAPH/IMAGING--0.9%
------------------------------------
11,600 Xerox Corp. 976,575
------------------------------------ ------------
RAILROADS--1.1%
------------------------------------
2,800 Burlington Northern Santa Fe 270,550
------------------------------------
7,900 CSX Corp. 462,150
------------------------------------
1,100 Norfolk Southern Corp. 113,575
------------------------------------
5,500 Union Pacific Corp. 344,438
------------------------------------ ------------
Total 1,190,713
------------------------------------ ------------
RETAIL-DEPARTMENT STORES--2.2%
------------------------------------
13,600 (a)Federated Department Stores, Inc. 586,500
------------------------------------
11,200 May Department Stores Co. 610,400
------------------------------------
7,700 Nordstrom, Inc. 490,875
------------------------------------
11,400 J.C. Penney Co., Inc. 664,050
------------------------------------ ------------
Total 2,351,825
------------------------------------ ------------
RETAIL-DRUG STORES--0.5%
------------------------------------
9,500 CVS Corp. 540,312
------------------------------------ ------------
RETAIL-GENERAL MERCHANDISE--1.6%
------------------------------------
10,100 (a)Costco Cos., Inc. 380,012
------------------------------------
16,800 Sears, Roebuck & Co. 956,550
------------------------------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------
RETAIL-GENERAL MERCHANDISE--CONTINUED
--------------------------------------
8,800 Wal-Mart Stores, Inc. $ 322,300
-------------------------------------- ------------
Total 1,658,862
-------------------------------------- ------------
RETAIL-SPECIALTY--0.5%
--------------------------------------
15,100 (a)Toys 'R' Us, Inc. 536,050
-------------------------------------- ------------
SERVICES-COMMERCIAL & CONSUMER--0.4%
--------------------------------------
12,800 Service Corp. International 412,000
-------------------------------------- ------------
SERVICES-DATA PROCESSING--0.3%
--------------------------------------
8,120 First Data Corp., Class 305,007
-------------------------------------- ------------
SPECIALTY PRINTING--0.4%
--------------------------------------
10,900 Donnelley (R.R.) & Sons Co. 388,994
-------------------------------------- ------------
TELECOMMUNICATIONS-CELLULAR--0.7%
--------------------------------------
20,900 (a)Airtouch Communications, Inc. 740,644
-------------------------------------- ------------
TELECOMMUNICATIONS-EQUIPMENT--1.3%
--------------------------------------
10,600 Lucent Technologies, Inc. 862,575
--------------------------------------
3,500 Northern Telecom Ltd. 363,781
--------------------------------------
3,000 (a)Tellabs, Inc. 154,500
-------------------------------------- ------------
Total 1,380,856
-------------------------------------- ------------
TELECOMMUNICATIONS-LONG DISTANCE--3.3%
--------------------------------------
40,800 AT&T Corp. 1,807,950
--------------------------------------
25,500 MCI Communications Corp. 749,063
--------------------------------------
13,700 Sprint Corp. 685,000
--------------------------------------
7,000 (a)WorldCom, Inc. 247,625
-------------------------------------- ------------
Total 3,489,638
-------------------------------------- ------------
TELEPHONE--2.8%
--------------------------------------
10,398 Bell Atlantic Corp. 836,421
--------------------------------------
30,300 BellSouth Corp. 1,401,375
--------------------------------------
20,200 U.S. West, Inc. 777,700
-------------------------------------- ------------
Total 3,015,496
-------------------------------------- ------------
TEXTILES-APPAREL--0.4%
--------------------------------------
5,100 V.F. Corp. 472,388
-------------------------------------- ------------
TOBACCO--1.4%
--------------------------------------
9,200 Fortune Brands, Inc. 309,925
--------------------------------------
9,200 (a)Gallaher Group PLC, ADR 176,525
--------------------------------------
23,600 Philip Morris Cos., Inc. 980,875
-------------------------------------- ------------
Total 1,467,325
-------------------------------------- ------------
TRUCKS & PARTS--0.1%
--------------------------------------
1,900 Cummins Engine Co., Inc. 148,319
-------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
---------- --------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
--------------------------------------------------------------
WASTE MANAGEMENT--0.9%
---------------------------------------------------
24,300 Browning-Ferris Industries, Inc. $ 924,919
--------------------------------------------------- ------------
TOTAL COMMON STOCKS (IDENTIFIED COST $83,618,762) 104,106,935
--------------------------------------------------- ------------
(B) REPURCHASE AGREEMENT--2.4%
--------------------------------------------------------------
$2,576,249 Credit Suisse First Boston, 6.05%, dated 9/30/1997,
due 10/1/1997 (AT AMORTIZED COST) 2,576,249
--------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $86,195,011)(C) $106,683,184
--------------------------------------------------- ------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $86,195,011. The
net unrealized appreciation of investments on a federal tax basis amounts to
$20,488,173 which is comprised of $22,202,146 appreciation and $1,713,973
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($106,684,527) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
PLC--Public Limited Company
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
The 12-month period ended September 30, 1997 was highlighted by significant
growth in small cap stocks*. Feeling that small cap growth stocks were
particularly overvalued, the fund focused on small cap value stocks for the
majority of 1997. During the 12-month period ended September 30, 1997, small cap
value stocks recorded a total return of 48.9% as measured by the S&P 600 Value
Index**, whereas small cap growth stocks returned only 25.2% as measured by the
S&P 600 Growth Index**. The S&P 600 Index** recorded a total return 37.0% and
the S&P 500 Index returned 40.7% for the 12-month period ended September 30,
1997. During the 12-month period ended September 30, 1997, the fund produced an
average annual total return of 44.01%.***
We continue to focus on small cap value stocks which have demonstrated greater
stability in an investment environment characterized by excessive risk
measures. In general, we believe that small cap value stocks will remain less
volatile than small cap growth stocks over time. Due to our value orientation,
the fund remains positioned in a defensive mode.
- --------
* Small capitalization stocks have historically experienced greater volatility
than average.
** The S&P 600 Index is an unmanaged capitalization weighted index representing
all major industries in the mid-range of the U.S. stock market. The S&P 600
Growth Index and the S&P 600 Value Index are sub- indices of the S&P 600
Index. Investments cannot be made in an index.
*** Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER FUND.
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager Fund (the "Fund") from March 7, 1995 (start of performance) to
September 30, 1997, compared to the Standard & Poor's 500 Index ("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX E
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 41.85%
Start of Performance (3/7/95) 28.04
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 3/7/95 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 2.00% contingent deferred sales charge on any
redemption less than five years from the purchase date. The Fund's performance
assumes the reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P 500
has been adjusted to reflect reinvestment of dividends on securities in the
index. The index is unmanaged.
THE STYLE MANAGER FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ----------------------------- -----------
<C> <S> <C>
COMMON STOCKS--98.2%
----------------------------------------
AEROSPACE & DEFENSE--1.2%
-----------------------------
22,200 Orbital Sciences Corp. $ 543,900
-----------------------------
20,100 Trimble Navigation Ltd. 394,463
----------------------------- -----------
Total 938,363
----------------------------- -----------
AIR FREIGHT--0.5%
-----------------------------
27,500 Fritz Companies, Inc. 405,625
----------------------------- -----------
APPAREL--0.7%
-----------------------------
15,500 Kellwood Co. 549,281
----------------------------- -----------
AUTO PARTS & EQUIPMENT--1.3%
-----------------------------
6,700 SPX Corp. 392,788
-----------------------------
15,400 Smith (A.O.) Corp. 610,225
----------------------------- -----------
Total 1,003,013
----------------------------- -----------
BANKING-MAJOR REGIONAL--13.3%
-----------------------------
7,920 Associated Banc Corp. 356,895
-----------------------------
10,043 Bankers Trust New York Corp. 1,230,267
-----------------------------
6,400 CCB Financial Corp. 516,000
-----------------------------
11,900 Central Fidelity Banks, Inc. 526,575
-----------------------------
14,300 Centura Banks, Inc. 787,394
-----------------------------
9,812 Commerce Bancorp, Inc. 381,441
-----------------------------
9,600 Commercial Federal Corp. 452,400
-----------------------------
10,600 Cullen Frost Bankers, Inc. 502,175
-----------------------------
27,200 Deposit Guaranty Corp. 906,100
-----------------------------
11,100 First Commercial Corp. 532,800
-----------------------------
15,500 First Michigan Bank Corp. 641,312
-----------------------------
23,600 Firstmerit Corp. 637,200
-----------------------------
22,650 Keystone Financial, Inc. 855,038
-----------------------------
13,200 Magna Group, Inc. 520,575
-----------------------------
15,400 Riggs National Corp. 362,863
-----------------------------
15,975 Summit Bancorp 709,889
-----------------------------
11,100 Susquehanna Bankshares, Inc. 341,325
----------------------------- -----------
Total 10,260,249
----------------------------- -----------
BUILDING MATERIALS--1.5%
-----------------------------
14,700 Lone Star Industries, Inc. 793,800
-----------------------------
13,400 TJ International, Inc. 342,538
----------------------------- -----------
Total 1,136,338
----------------------------- -----------
CHEMICALS--2.2%
-----------------------------
10,000 Cambrex Corp. 466,250
-----------------------------
12,800 ChemFirst, Inc. 321,600
-----------------------------
14,600 Dexter Corp. 584,912
-----------------------------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------------------------------ -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------
CHEMICALS--CONTINUED
------------------------------------
15,400 Mississippi Chemical Corp. $ 300,300
------------------------------------ -----------
Total 1,673,062
------------------------------------ -----------
COMMERCIAL SERVICES--0.4%
------------------------------------
9,300 Primark Corp. 274,931
------------------------------------ -----------
COMMUNICATION EQUIPMENT--0.7%
------------------------------------
18,800 Allen Telecom, Inc. 535,800
------------------------------------ -----------
COMPUTER SOFTWARE--1.0%
------------------------------------
34,700 Platinum Technology, Inc. 746,050
------------------------------------ -----------
COMPUTERS-PERIPHERAL--1.4%
------------------------------------
31,000 Komag, Inc. 631,625
------------------------------------
17,700 Telxon Corp. 433,650
------------------------------------ -----------
Total 1,065,275
------------------------------------ -----------
COMPUTERS-NETWORKING--0.7%
------------------------------------
28,700 Network Equipment Technologies, Inc. 500,456
------------------------------------ -----------
DEPARTMENT STORES--2.4%
------------------------------------
14,000 Carson Pirie Scott & Co. 552,125
------------------------------------
13,400 Proffitts, Inc. 793,950
------------------------------------
20,400 Shopko Stores, Inc. 530,400
------------------------------------ -----------
Total 1,876,475
------------------------------------ -----------
DISTRIBUTORS-FOOD & HEALTH--0.7%
------------------------------------
20,100 Rykoff Sexton, Inc. 520,088
------------------------------------ -----------
DRUG STORES--0.8%
------------------------------------
22,600 Longs Drug Stores Corp. 603,138
------------------------------------ -----------
ELECTRIC COMPANIES--2.8%
------------------------------------
33,500 Atlantic Energy, Inc. NJ 600,906
------------------------------------
37,179 MidAmerican Energy Holdings Co. 641,338
------------------------------------
13,500 United Illuminating Co. 491,906
------------------------------------
20,500 United Water Resources, Inc. 381,813
------------------------------------ -----------
Total 2,115,963
------------------------------------ -----------
ELECTRICAL EQUIPMENT--0.7%
------------------------------------
29,700 Anixter International, Inc. 510,469
------------------------------------ -----------
ELECTRONICS-DISTRIBUTORS--1.9%
------------------------------------
23,100 Kent Electronics Corp. 912,450
------------------------------------
13,900 Marshall Industries 538,625
------------------------------------ -----------
Total 1,451,075
------------------------------------ -----------
ELECTRONICS-INSTRUMENTS--0.5%
------------------------------------
7,600 John Fluke Manufacturing, Co. 410,400
------------------------------------ -----------
ELECTRONICS-SEMICONDUCTORS--3.0%
------------------------------------
17,500 Cyrix Corp. 586,250
------------------------------------
14,500 Dallas Semiconductor Corp. 648,875
------------------------------------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
------------------------------------------------
ELECTRONICS-SEMICONDUCTORS--CONTINUED
-------------------------------------
11,300 Photronic Labs, Inc. $ 684,356
-------------------------------------
16,700 Zilog, Inc. 364,269
------------------------------------- -----------
Total 2,283,750
------------------------------------- -----------
ENTERTAINMENT--0.9%
-------------------------------------
9,900 Carmike Cinemas, Inc., Class A 297,000
-------------------------------------
9,800 GC Cos., Inc. 421,400
------------------------------------- -----------
Total 718,400
------------------------------------- -----------
FOOD CHAINS--0.6%
-------------------------------------
26,400 Ruddick Corp. 425,700
------------------------------------- -----------
FOODS--1.3%
-------------------------------------
33,400 Chiquita Brands International 538,575
-------------------------------------
16,400 Smithfield Foods, Inc. 492,000
------------------------------------- -----------
Total 1,030,575
------------------------------------- -----------
FOOTWEAR--0.8%
-------------------------------------
8,200 Timberland Co., Class A 653,950
------------------------------------- -----------
GAMING & LOTTERY--1.0%
-------------------------------------
28,100 Grand Casinos, Inc. 430,281
-------------------------------------
16,800 Showboat, Inc. 342,300
------------------------------------- -----------
Total 772,581
------------------------------------- -----------
GOLD & PRECIOUS METAL MINES--1.1%
-------------------------------------
32,100 Coeur d'Alene Mines Corp. 523,631
-------------------------------------
16,300 Stillwater Mining Co. 347,394
------------------------------------- -----------
Total 871,025
------------------------------------- -----------
HARDWARE & TOOLS--0.5%
-------------------------------------
9,800 Toro Co. 388,325
------------------------------------- -----------
HEALTHCARE-DIVERSIFIED--0.6%
-------------------------------------
12,700 Sierra Health Services, Inc. 465,138
------------------------------------- -----------
HEALTHCARE-LONG TERM CARE--2.7%
-------------------------------------
18,800 Genesis Health Ventures, Inc. 732,025
-------------------------------------
14,200 Integrated Health Services, Inc. 474,812
-------------------------------------
13,600 Living Centers of America, Inc. 554,200
-------------------------------------
20,700 Mariner Health Group, Inc. 326,025
------------------------------------- -----------
Total 2,087,062
------------------------------------- -----------
HEALTHCARE-MANAGED CARE--0.4%
-------------------------------------
19,500 Coventry Corp. 321,750
------------------------------------- -----------
HOMEBUILDING--1.4%
-------------------------------------
15,093 Fleetwood Enterprises, Inc. 506,559
-------------------------------------
14,800 U.S. Home Corp. 571,650
------------------------------------- -----------
Total 1,078,209
------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ---------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
---------------------------------------------------
HOMEFURNISHINGS--1.4%
----------------------------------------
18,800 Fieldcrest Cannon, Inc. $ 648,600
----------------------------------------
8,300 Springs Industries, Inc., Class A 435,750
---------------------------------------- -----------
Total 1,084,350
---------------------------------------- -----------
HOSPITAL MANAGEMENT--1.0%
----------------------------------------
17,000 Universal Health Services, Inc., Class B 735,250
---------------------------------------- -----------
HOTELS--1.4%
----------------------------------------
22,700 Prime Hospitality Corp. 512,169
----------------------------------------
19,300 Marcus Corp. 562,113
---------------------------------------- -----------
Total 1,074,282
---------------------------------------- -----------
HOUSEHOLD FURNITURE & APPLIANCES--1.9%
----------------------------------------
12,900 Bassett Furniture Industries, Inc. 367,650
----------------------------------------
21,400 Ethan Allen Interiors, Inc. 663,400
----------------------------------------
11,100 Kimball International, Inc., Class B 466,200
---------------------------------------- -----------
Total 1,497,250
---------------------------------------- -----------
INSURANCE-LIFE/HEALTH--1.4%
----------------------------------------
9,100 Life Re Corp. 480,025
----------------------------------------
12,500 Protective Life Corp. 631,250
---------------------------------------- -----------
Total 1,111,275
---------------------------------------- -----------
INSURANCE-MULTILINE--0.8%
----------------------------------------
17,800 American Bankers Insurance Group, Inc. 649,700
---------------------------------------- -----------
INSURANCE-PROPERTY--3.9%
----------------------------------------
9,000 Allied Group, Inc. 457,312
----------------------------------------
7,900 Capital Re Corp. 481,900
----------------------------------------
9,200 Enhance Financial Services Group, Inc. 503,700
----------------------------------------
9,500 First American Financial Corp. 570,000
----------------------------------------
13,400 Frontier Insurance Group, Inc. 509,200
----------------------------------------
10,000 Orion Capital Corp. 453,125
---------------------------------------- -----------
Total 2,975,237
---------------------------------------- -----------
INVESTMENT BANKING/BROKERAGE--3.6%
----------------------------------------
7,100 Interra Financial, Inc. 426,444
----------------------------------------
13,467 Legg Mason, Inc. 710,367
----------------------------------------
14,100 Piper Jaffray Cos., Inc. 430,931
----------------------------------------
17,300 Quick & Reilly Group, Inc. 647,669
----------------------------------------
14,800 Raymond James Financial, Inc. 532,800
---------------------------------------- -----------
Total 2,748,211
---------------------------------------- -----------
IRON & STEEL--0.6%
----------------------------------------
12,500 Quanex Corp. 438,281
---------------------------------------- -----------
LEISURE TIME--0.5%
----------------------------------------
14,700 K2, Inc. 369,337
---------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
------------------------------------------------------
MACHINERY & EQUIPMENT--0.4%
--------------------------------------------
16,700 Global Industrial Technologies, Inc. $ 345,481
-------------------------------------------- -----------
MANUFACTURING-DIVERSIFIED--1.6%
--------------------------------------------
21,000 Figgie International Holdings, Inc., Class A 309,750
--------------------------------------------
28,200 Premark International, Inc. 902,400
-------------------------------------------- -----------
Total 1,212,150
-------------------------------------------- -----------
MANUFACTURING-SPECIALIZED--3.9%
--------------------------------------------
11,100 Aptargroup, Inc. 620,906
--------------------------------------------
11,218 Flowserve Corp. 335,138
--------------------------------------------
13,000 Greenfield Industries, Inc. 373,750
--------------------------------------------
14,600 Halter Marine Group, Inc. 706,275
--------------------------------------------
12,300 Ionics, Inc. 545,044
--------------------------------------------
13,300 Regal Beloit Corp. 408,975
-------------------------------------------- -----------
Total 2,990,088
-------------------------------------------- -----------
NATURAL GAS--2.7%
--------------------------------------------
9,800 Eastern Enterprises 365,662
--------------------------------------------
17,300 K N Energy, Inc. 791,475
--------------------------------------------
16,400 Northwest Natural Gas Co. 422,300
--------------------------------------------
18,300 Piedmont Natural Gas, Inc. 532,988
-------------------------------------------- -----------
Total 2,112,425
-------------------------------------------- -----------
OFFICE EQUIPMENT & SUPPLIES--0.5%
--------------------------------------------
11,300 Standard Register 376,431
-------------------------------------------- -----------
OIL & GAS--2.8%
--------------------------------------------
22,300 Camco International, Inc. 1,555,425
--------------------------------------------
25,400 Snyder Oil Corp. 576,263
-------------------------------------------- -----------
Total 2,131,688
-------------------------------------------- -----------
PAPER & FOREST PRODUCTS--1.4%
--------------------------------------------
28,600 Longview Fibre Co. 568,425
--------------------------------------------
10,700 Rayonier, Inc. 517,613
-------------------------------------------- -----------
Total 1,086,038
-------------------------------------------- -----------
PHARMACEUTICALS--0.5%
--------------------------------------------
16,900 Alpharma, Inc., Class A 378,137
--------------------------------------------
2,817 Alpharma, Inc., Rights 15,844
-------------------------------------------- -----------
Total 393,981
-------------------------------------------- -----------
PRINTING & PUBLISHING--0.5%
--------------------------------------------
11,700 Bowne & Co., Inc. 410,962
-------------------------------------------- -----------
PROPERTY--1.7%
--------------------------------------------
10,600 Fremont General Corp. 506,150
--------------------------------------------
9,100 Selective Insurance Group, Inc. 468,650
--------------------------------------------
11,300 Zenith National Insurance Corp. 322,756
-------------------------------------------- -----------
Total 1,297,556
-------------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------------------
RESTAURANTS--2.2%
--------------------------------------------------
11,900 IHOP Corp. $ 425,425
--------------------------------------------------
20,300 Landrys Seafood Restaurants, Inc. 596,313
--------------------------------------------------
13,800 Ruby Tuesday, Inc. 351,900
--------------------------------------------------
13,300 ShowBiz Pizza Time, Inc. 305,900
-------------------------------------------------- -----------
Total 1,679,538
-------------------------------------------------- -----------
RETAIL--0.9%
--------------------------------------------------
13,100 Fabri-Centers of America, Class A 302,937
--------------------------------------------------
12,750 Hughes Supply, Inc. 384,891
-------------------------------------------------- -----------
Total 687,828
-------------------------------------------------- -----------
RETAIL-SPECIALTY--2.4%
--------------------------------------------------
14,600 Michaels Stores, Inc. 446,213
--------------------------------------------------
22,200 O'Reilly Automotive, Inc. 505,050
--------------------------------------------------
31,050 Pier 1 Imports, Inc. 556,959
--------------------------------------------------
17,000 Sports Authority, Inc. 316,625
-------------------------------------------------- -----------
Total 1,824,847
-------------------------------------------------- -----------
SAVINGS & LOAN--5.6%
--------------------------------------------------
15,600 Astoria Financial Corp. 784,875
--------------------------------------------------
18,100 Charter One Financial, Inc. 1,070,162
--------------------------------------------------
18,600 Downey Financial Corp. 453,375
--------------------------------------------------
15,100 JSB Financial, Inc. 738,956
--------------------------------------------------
10,900 RCSB Financial, Inc. 594,050
--------------------------------------------------
27,900 St. Paul Bancorp, Inc. 697,500
-------------------------------------------------- -----------
Total 4,338,918
-------------------------------------------------- -----------
SERVICES-COMMERCIAL & CONSUMER--1.7%
--------------------------------------------------
21,700 Cerner Corp. 519,444
--------------------------------------------------
17,000 Franklin Covey Co. 474,937
--------------------------------------------------
14,247 Ogden Corp. 336,585
-------------------------------------------------- -----------
Total 1,330,966
-------------------------------------------------- -----------
SERVICES-COMPUTER SYSTEMS--0.5%
--------------------------------------------------
13,600 BancTec, Inc. 362,100
-------------------------------------------------- -----------
TRUCKERS--2.8%
--------------------------------------------------
22,900 Alexander and Baldwin, Inc. 592,537
--------------------------------------------------
18,100 American Freightways Corp. 343,900
--------------------------------------------------
16,700 Werner Enterprises, Inc. 404,975
--------------------------------------------------
24,000 Yellow Corp. 781,500
-------------------------------------------------- -----------
Total 2,122,912
-------------------------------------------------- -----------
TRUCKS & PARTS--0.6%
--------------------------------------------------
15,600 Wabash National Corp. 451,425
-------------------------------------------------- -----------
TOTAL COMMON STOCKS (IDENTIFIED COST $60,491,069) 75,511,023
-------------------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- --------------------------------------------------- -----------
<C> <S> <C>
(A) REPURCHASE AGREEMENT--1.6%
--------------------------------------------------------------
$1,219,266 C.S. First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) $ 1,219,266
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $61,710,335)(B) $76,730,289
--------------------------------------------------- -----------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) The cost of investments for federal tax purposes amounts to $61,750,880. The
net unrealized appreciation of investments on a federal tax basis amounts to
$14,979,409 which is comprised of $15,597,054 appreciation and $617,645
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($76,873,948) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE VIRGINIA MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
During the last year, interest rates have been relatively calm, but the year
ended with lower yields than were seen at the beginning of the year. Municipal
bonds, in general, outperformed Treasuries during the same period as a lack of
supply and a quieting of tax reform allowed the municipal bond market to gain
strength.
Towards the end of the year, yields on municipal bonds were at their most
attractive level relative to Treasuries at any time in the last three months.
This shift created a buying opportunity especially in the 10 to 15 year maturity
range desirable for this fund. We expect that the supply of municipal bonds will
remain relatively weak through the end of this calendar year and we would expect
municipal bonds to continue to outperform Treasuries during the same period.
Going forward, we expect overall interest rates to remain relatively calm with a
gradual bias toward lower interest rates. We will continue to maintain an
average maturity of about 15 years in an attempt to maximize yield while keeping
risk to changes in interest rates somewhat lower than the average fund.
THE VIRGINIA MUNICIPAL BOND FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE VIRGINIA MUNICIPAL BOND FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Virginia Municipal Bond Fund (the "Fund") from October 24, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPEDIX F
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 5.70%
5 Year 5.73%
Start of Performance (10/24/90) 6.45%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/24/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE VIRGINIA MUNICIPAL BOND FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE VIRGINIA MUNICIPAL BOND FUND--TRUST SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Virginia Municipal Bond Fund (the "Fund") from October 24, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX G
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 8.00%
5 Year 5.96%
Start of Performance (10/24/90) 6.62%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/24/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE VIRGINIA MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--95.6%
--------------------------------------------------------
VIRGINIA--95.6%
---------------------------------------------
$1,000,000 Albemarle County, VA IDA, Hospital Revenue
Refunding Bonds, 5.75% (Martha Jefferson
Hospital), 10/1/2008 A $ 1,056,730
---------------------------------------------
1,000,000 Arlington County, VA, GO UT Bonds, 5.30%
(Original Issue Yield: 5.40%), 6/1/2011 AAA 1,030,440
---------------------------------------------
3,175,000 Big Stone Gap, VA Redevelopment & Housing
Authority, Correctional Facility Lease
Revenue Bonds, 6.00% (Wallens Ridge
Development Project), 9/1/2007 AA 3,500,247
---------------------------------------------
2,890,000 Chesapeake Bay Bridge & Tunnel District, VA,
Revenue Bonds, 5.875% (FGIC INS)/(Original
Issue Yield: 5.95%), 7/1/2010 AAA 3,116,605
---------------------------------------------
3,500,000 Chesapeake, VA, GO UT Bonds, 5.375% (Commonwealth of Virginia
GTD)/(Original
Issue Yield: 5.45%), 5/1/2010 AA 3,635,870
---------------------------------------------
2,980,000 Chesterfield County, VA, GO UT Bonds, 5.25%,
3/1/2010 AA+ 3,051,550
---------------------------------------------
2,860,000 Commonwealth of Virginia, GO UT Bonds,
5.375%, 6/1/2009 AAA 2,993,905
---------------------------------------------
4,000,000 Commonwealth of Virginia, GO UT Public
Facilities Bonds (Series A), 5.70% (Original
Issue Yield: 5.75%), 6/1/2008 AAA 4,289,720
---------------------------------------------
2,545,000 Danville, VA IDA, Hospital Refunding Revenue Bonds, 6.20% (Danville
Regional Medical Center)/(FGIC INS)/(Original Issue Yield:
6.30%), 10/1/2009 AAA 2,779,395
---------------------------------------------
2,605,000 Fairfax County, VA Sewer Revenue, Revenue
Bonds, 5.625%, 7/15/2011 AA 2,748,197
---------------------------------------------
1,140,000 Fairfax County, VA Sewer Revenue, Sewer
Refunding Revenue Bonds, 5.30% (AMBAC INS),
11/15/2006 AAA 1,197,467
---------------------------------------------
1,505,000 Fairfax County, VA Sewer Revenue, Sewer
Refunding Revenue Bonds, 5.40% (AMBAC INS),
11/15/2007 AAA 1,583,681
---------------------------------------------
Fairfax County, VA Water Authority, 6.00%,
2,000,000 4/1/2022 AA 2,167,290
---------------------------------------------
1,000,000 Fairfax County, VA Water Authority, Revenue
Refunding Bonds, 4.65% (Original Issue Yield:
4.85%), 4/1/2010 AA 977,750
---------------------------------------------
3,500,000 Fairfax County, VA, (Series A), 5.25% (State Aid Withholding
LOC)/(Original Issue Yield:
5.35%), 6/1/2009 AAA 3,627,960
---------------------------------------------
2,000,000 Henrico County, VA IDA, Refunding Revenue Bonds, 5.60% (Bon Secours
Health System)/(MBIA INS)/(Original Issue Yield:
5.65%), 8/15/2010 AAA 2,090,720
---------------------------------------------
600,000 Loudoun County, VA IDA, Lease Revenue Bonds,
5.50% (Northern Virginia Criminal
Justice)/(Original Issue Yield: 5.829%),
6/1/2008 AA- 623,910
---------------------------------------------
1,000,000 Loudoun County, VA, GO UT Refunding Bonds
(Series A), 5.50% (Commonwealth of Virginia
GTD)/(Original Issue Yield: 5.649%),
10/1/2007 AA- 1,061,750
---------------------------------------------
4,440,000 Newport News, VA, GO UT, 5.75%, 1/15/2017 AA- 4,607,743
---------------------------------------------
3,000,000 Norfolk, VA, GO UT Bonds, 5.25% (Commonwealth of Virginia
GTD)/(Original Issue Yield:
5.55%), 6/1/2011 AA 3,052,140
---------------------------------------------
</TABLE>
THE VIRGINIA MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CREDIT
OR SHARES RATING* VALUE
---------- -------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
-------------------------------------------------------
$2,000,000 Norfolk, VA, GO UT Bonds, 5.70% (MBIA INS), AAA
6/1/2008 $ 2,152,380
--------------------------------------------
2,535,000 Portsmouth, VA, GO UT Bonds, 5.00% (FGIC
INS), 8/1/2011 AAA 2,532,313
--------------------------------------------
3,375,000 Riverside, VA Regional Jail Authority, Jail
Facility Revenue Bonds, 5.625% (MBIA
INS)/(Original Issue Yield: 5.75%), 7/1/2007 AAA 3,638,655
--------------------------------------------
1,185,000 Roanoke, VA IDA, Hospital Revenue Refunding
Bonds (Series B), 6.00% (Roanoke Memorial
Hospital)/(Original Issue Yield: 6.10%),
7/1/2007 AA- 1,260,212
--------------------------------------------
3,510,000 Virginia College Building Authority, Revenue
Bonds, 5.40% (21ST Century College Program),
8/1/2015 AA 3,555,700
--------------------------------------------
7,255,000 Virginia State Public Building Authority,
Revenue Bonds, 5.20% (Original Issue Yield:
5.40%), 8/1/2010 AA 7,366,146
--------------------------------------------
2,030,000 Virginia State Transportation Board, Revenue
Bonds, 6.00% (Northern Virginia
Transportation District)/(Original Issue
Yield: 6.10%), 5/15/2008 AA 2,198,348
--------------------------------------------
1,000,000 Virginia State Transportation Board,
Transportation Contract Revenue Refunding
Bonds, 5.375% (U.S. Route 58 Corridor
PG-A), 5/15/2007 AA 1,048,000
--------------------------------------------
2,325,000 Virginia State University-Virginia
Commonwealth, Revenue Bonds, 5.75% (Original
Issue Yield: 5.827%), 5/1/2021 AA- 2,386,055
-------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $72,293,301) 75,330,879
-------------------------------------------- -----------
MUTUAL FUND ISSUES--3.5%
-------------------------------------------------------
928,302 Goldman Sachs & Co. ILA Tax Exempt 928,302
--------------------------------------------
1,793,570 Municipal Fund for Temporary Investment 1,793,570
-------------------------------------------- -----------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET
VALUE) 2,721,872
-------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST
$75,015,173)(A) $78,052,751
-------------------------------------------- -----------
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $75,015,173. The
net unrealized appreciation of investments on a federal tax basis amounts to
$3,037,578 which is comprised of $3,041,196 appreciation and $3,618
depreciation at September 30, 1997.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($78,772,564) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company GO--General Obligation GTD--Guaranty IDA--Industrial
Development Authority INS--Insured LOC--Letter of Credit MBIA--Municipal Bond
Investors Assurance UT--Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
THE MARYLAND MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
During the last year, interest rates have been relatively calm, but the year
ended with lower yields than were seen at the beginning of the year. Municipal
bonds, in general, outperformed Treasuries during the same period as a lack of
supply and a quieting of tax reform allowed the municipal bond market to gain
strength.
Towards the end of the year, yields on municipal bonds were at their most
attractive level relative to Treasuries at any time in the last three months.
This shift created a buying opportunity especially in the 10 to 15 year maturity
range desirable for this fund. We expect that the supply of municipal bonds will
remain relatively weak through the end of this calendar year and we would expect
municipal bonds to continue to outperform Treasuries during the same period.
Bonds for the Maryland area continue to enjoy good demand, and typically yield 5
to 10 basis points less than similar bonds nationwide.
Going forward, we expect overall interest rates to remain relatively calm with a
gradual bias toward lower interest rates. We will continue to maintain an
average maturity of about 15 years in an attempt to maximize yield while keeping
risk to changes in interest rates somewhat lower than the average fund.
THE MARYLAND MUNICIPAL BOND FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE MARYLAND MUNICIPAL BOND FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Maryland Municipal Bond Fund (the "Fund") from October 30, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX H
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 4.87%
5 Year 5.33%
Start of Performance (10/30/90) 6.01%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/30/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE MARYLAND MUNICIPAL BOND FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE MARYLAND MUNICIPAL BOND FUND--TRUST SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Maryland Municipal Bond Fund (the "Fund") from October 30, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX I
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 7.19%
5 Year 5.56%
Start of Performance (10/30/90) 6.18%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/30/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE MARYLAND MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--91.0%
--------------------------------------------------------
MARYLAND--91.0%
---------------------------------------------
$1,000,000 Baltimore County, MD Revenue Authority,
Revenue Refunding Bonds, 5.25% (Original
Issue Yield: 5.40%), 7/1/2008 A $ 1,038,610
---------------------------------------------
1,000,000 Baltimore, MD, GO UT Bonds (Series A), 5.375%
(AMBAC INS), 10/15/2008 AAA 1,035,650
---------------------------------------------
1,500,000 Calvert County, MD, Pollution Control Revenue
Bonds, 5.55% (Baltimore Gas & Electric
Co.)/(Original Issue Yield: 5.601%),
7/15/2014 A 1,528,065
---------------------------------------------
1,400,000 Carroll County, MD, GO UT, 5.35%, 12/1/2016 AA 1,411,144
---------------------------------------------
1,000,000 Harford County, MD, GO UT, 4.65%, 12/1/2006 AA- 1,012,150
---------------------------------------------
1,430,000 Howard County, MD, GO Refunding Bonds (Series
A), 5.25% (Original Issue Yield: 5.60%),
8/15/2011 AA+ 1,460,416
---------------------------------------------
1,000,000 Maryland Health & Higher Educational Facilities Authority, Refunding
Revenue Bonds, 5.30% (Francis Scott Key Medical Center)/(FGIC
INS)/(Original Issue Yield:
5.40%), 7/1/2008 AAA 1,037,220
---------------------------------------------
1,500,000 Maryland Health & Higher Educational
Facilities Authority, Revenue Bonds, 5.20%
(Frederick Memorial Hospital)/(FGIC
INS)/(Original Issue Yield: 5.30%), 7/1/2008 AAA 1,565,205
---------------------------------------------
1,740,000 Maryland National Capital Park & Planning
Commission, GO UT Bonds, 5.125% (Park
Aquisition & Development-S-2)/
(Original Issue Yield: 5.25%), 7/1/2010 AA 1,773,982
---------------------------------------------
1,470,000 Maryland State Community Development
Administration, Revenue Bonds (Single Family
Program-Fifth Series), 5.40%, 4/1/2008 Aa 1,508,279
---------------------------------------------
1,800,000 Maryland State Stadium Authority, Revenue
Bonds, 5.875% (AMBAC INS), 12/15/2011 AAA 1,927,980
---------------------------------------------
850,000 Maryland State Transportation Authority,
Refunding Revenue Bonds, 5.80% (Original
Issue Yield: 5.90%), 7/1/2006 A+ 927,223
---------------------------------------------
1,000,000 Maryland State, GO UT Bonds, 5.25%, 6/15/2007 AAA 1,054,210
---------------------------------------------
2,500,000 Maryland State, GO UT Bonds, 5.70% (Original
Issue Yield: 5.75%), 3/15/2010 AAA 2,682,875
---------------------------------------------
820,000 Montgomery County, MD, GO UT Refunding Bonds (Series A), 5.75%
(Original Issue Yield:
5.85%), 7/1/2006 AAA 897,146
---------------------------------------------
1,000,000 Ocean City, MD, GO UT Refunding Bonds, 5.50%
(MBIA Insurance Corporation INS), 3/15/2009 AAA 1,046,760
---------------------------------------------
500,000 Prince Georges County, MD, GO UT Bonds, 5.50% (Stormwater
Management)/(Original Issue
Yield: 5.55%), 3/15/2008 AA 524,910
---------------------------------------------
1,435,000 Prince Georges County, MD IDA, Lease Revenue
Bonds, 6.00% (Hyattsville District Court
Facility)/(Original Issue Yield: 6.10%),
7/1/2009 AA 1,590,941
---------------------------------------------
1,425,000 Rockville, MD, GO UT Revenue Refunding Bonds,
4.90% (Original Issue Yield: 5.00%),
4/15/2007 AA+ 1,449,995
---------------------------------------------
</TABLE>
THE MARYLAND MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR CREDIT
SHARES RATING* VALUE
---------- -------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
-------------------------------------------------------
$1,500,000 University of Maryland, System Auxiliary
Facilities & Tuition Revenue Bonds (Series
A), 5.40% (Original Issue Yield: 5.45%),
4/1/2009 AA+ $ 1,573,170
--------------------------------------------
1,600,000 Washington Suburban Sanitation District, MD,
GO UT Bonds, 5.375%, 6/1/2011 AA 1,627,520
--------------------------------------------
1,700,000 Washington Suburban Sanitation District, MD,
GO UT Bonds, 5.50%, 6/1/2010 AA 1,768,781
-------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $29,252,821) 30,442,232
-------------------------------------------- -----------
MUTUAL FUND ISSUES--8.0%
-------------------------------------------------------
1,430,264 Goldman Sachs & Co. 1,430,264
--------------------------------------------
1,243,349 Municipal Fund for Temporary Investment 1,243,349
-------------------------------------------- -----------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET 2,673,613
VALUE) -----------
--------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST $33,115,845
$31,926,434)(A) -----------
--------------------------------------------
</TABLE>
At September 30, 1997, 4.7% of the total investments at market value were
subject to alternative minimum tax.
(a) The cost of investments for federal tax purposes amounts to $31,926,434. The
unrealized appreciation of investments on a federal tax basis amounts to
$1,189,411 at September 30, 1997.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($33,468,781) at September 30, 1997.
The following acronym(s) are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Financial Guaranty Insurance Company
GO--General Obligation
IDA--Industrial Development Authority
INS--Insured
MBIA--Municipal Bond Investors Assurance
UT--Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
THE TREASURY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------------ ------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS--52.6%
------------------------------------------------------------
U.S. TREASURY BILL--15.7%
------------------------------------------------
$50,000,000 10/16/1997 $ 49,906,604
------------------------------------------------
------------
------------
U.S. TREASURY NOTES--36.9%
------------------------------------------------
12,000,000 5/125%, 4/30/1998 11,935,655
------------------------------------------------
31,000,000 5.625% - 5.750%, 10/31/1997 31,002,067
------------------------------------------------
15,000,000 6.125%, 5/15/1998 15,031,852
------------------------------------------------
8,000,000 6.125%, 8/31/1998 8,024,535
------------------------------------------------
3,000,000 6.250%, 7/31/1998 3,014,931
------------------------------------------------
27,000,000 7.875%, 1/15/1998 27,168,155
------------------------------------------------
7,000,000 8.250%, 7/15/1998 7,135,850
------------------------------------------------
14,000,000 8.750%, 10/15/1997 14,016,352
------------------------------------------------
------------
Total 117,329,397
------------------------------------------------
------------
TOTAL U.S. TREASURY OBLIGATIONS 167,236,001
------------------------------------------------ ------------
(A) REPURCHASE AGREEMENTS--47.0%
------------------------------------------------------------
40,000,000 CS First Boston, 6.050%, dated 9/30/1997, due
10/1/1997 40,000,000
------------------------------------------------
40,000,000 Merrill Lynch, Pierce, Fenner and Smith, 6.050%,
dated
9/30/1997, due 10/1/1997 40,000,000
------------------------------------------------
29,310,947 Prudential Securities, Inc., 6.050%, dated
9/30/1997, due 10/1/1997 29,310,947
------------------------------------------------
40,000,000 Smith Barney, Inc., 6.000%, dated 9/30/1997, due
10/1/1997 40,000,000
------------------------------------------------
------------
TOTAL REPURCHASE AGREEMENTS 149,310,947
------------------------------------------------ ------------
------------
TOTAL INVESTMENTS (AT AMORTIZED COST)(B) $316,546,948
------------------------------------------------ ------------
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. Treasury and/or
agency obligations based on market prices at the date of the portfolio.
(b) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($317,749,268) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
(A) COMMERCIAL PAPER--55.0%
---------------------------------------------------------------
ASSET BACKED--12.7%
---------------------------------------------------
$ 7,000,000 Ascot Capital Corp., 5.621%, 12/5/1997 $ 6,929,981
---------------------------------------------------
10,000,000 Centre Square Funding, 5.574%, 10/20/1997 9,970,708
---------------------------------------------------
Fleet Funding Corp., 5.557%-5.578%, 10/6/1997-
6,000,000 10/10/1997 5,994,168
---------------------------------------------------
8,000,000 Sigma Finance, 5.697%-5.716%, 2/2/1998-2/27/1998 7,827,485
--------------------------------------------------- ------------
Total 30,722,342
--------------------------------------------------- ------------
BANKING-FINANCE--2.5%
---------------------------------------------------
3,000,000 Banc One Funding Corp., 5.605%, 12/12/1997 2,966,820
---------------------------------------------------
3,000,000 Credit Suisse First Boston, 5.691%, 1/16/1998 2,950,691
--------------------------------------------------- ------------
Total 5,917,511
--------------------------------------------------- ------------
COMMERCIAL SERVICES--1.5%
---------------------------------------------------
3,600,000 McGraw-Hill Cos., Inc., 5.565%, 10/7/1997 3,596,700
--------------------------------------------------- ------------
CONSUMER NON-DURABLES--2.9%
---------------------------------------------------
Campbell Soup Co., 5.476%-5.688%, 11/18/1997-
7,000,000 4/17/1998 6,904,653
--------------------------------------------------- ------------
FINANCE-AUTOMOTIVE--1.2%
---------------------------------------------------
Ford Motor Credit Corp., 5.725%-5.857%, 10/27/1997-
3,000,000 4/13/1998 2,962,196
--------------------------------------------------- ------------
FINANCE-RETAIL--2.9%
---------------------------------------------------
7,000,000 Xerox Credit Corp., 5.493%-5.495%, 11/5/1997 6,964,067
--------------------------------------------------- ------------
FINANCE-LEASING--3.3%
---------------------------------------------------
Pitney Bowes Credit Corp., 5.679%-5.837%,
8,000,000 10/2/1997-1/9/1998 7,922,860
--------------------------------------------------- ------------
FINANCIAL SERVICES--14.8%
---------------------------------------------------
2,000,000 American General Finance Corp., 5.780%, 6/9/1998 1,922,748
---------------------------------------------------
General Electric Capital Corp., 5.761%-5.813%,
8,000,000 5/6/1998-6/9/1998 7,700,036
---------------------------------------------------
2,000,000 Marsh & McLennan Cos., Inc., 5.597%, 12/18/1997 1,976,167
---------------------------------------------------
Merrill Lynch & Co., Inc., 5.741%-5.981%, 1/5/1998-
11,640,000 4/13/1998 11,379,917
---------------------------------------------------
5,000,000 Republic New York Corp., 5.654%, 3/27/1998 4,864,792
---------------------------------------------------
Smith Barney, Inc., 5.560%-5.564%, 10/10/1997-
8,000,000 11/17/1997 7,960,030
--------------------------------------------------- ------------
Total 35,803,690
--------------------------------------------------- ------------
HEALTH SERVICES--4.1%
---------------------------------------------------
10,000,000 Schering Corp., 5.813%-5.822%, 10/7/1997-12/2/1997 9,946,639
--------------------------------------------------- ------------
PROCESS INDUSTRIES--2.5%
---------------------------------------------------
Du Pont (E.I.) de Nemours & Co., 5.847%-5.890%,
6,000,000 10/28/1997 5,974,350
--------------------------------------------------- ------------
PRODUCER MANUFACTURING--1.2%
---------------------------------------------------
3,000,000 Xerox Corp., 5.579%, 10/15/1997 2,993,583
--------------------------------------------------- ------------
</TABLE>
THE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
(A) COMMERCIAL PAPER--CONTINUED
---------------------------------------------------------------
UTILITIES--5.4%
---------------------------------------------------
Southern California Edison Co., 5.604%-5.665%,
$ 8,000,000 10/17/1997-11/14/1997 $ 7,967,456
---------------------------------------------------
5,000,000 Virginia Electric Power Co., 9.375%, 6/1/1998 5,105,256
--------------------------------------------------- ------------
Total 13,072,712
--------------------------------------------------- ------------
TOTAL COMMERCIAL PAPER 132,781,303
--------------------------------------------------- ------------
CORPORATE BONDS--12.2%
---------------------------------------------------------------
BANKING-FINANCE--4.5%
---------------------------------------------------
Associates Corp. of North America, 8.375%,
4,000,000 1/15/1998 4,026,490
---------------------------------------------------
900,000 CIT Group Holdings, Inc., 6.750%, 4/30/1998 901,848
---------------------------------------------------
4,000,000 NationsBank Corp., 6.625%, 1/15/1998 4,007,304
---------------------------------------------------
2,000,000 Norwest Financial, Inc., 8.500%, 8/15/1998 2,042,512
--------------------------------------------------- ------------
Total 10,978,154
--------------------------------------------------- ------------
FINANCE-LEASING--3.2%
---------------------------------------------------
3,000,000 International Lease Finance Corp., 5.609%, 1/5/1998 2,956,160
---------------------------------------------------
International Lease Finance Corp., 8.125%,
4,760,000 1/15/1998 4,789,290
--------------------------------------------------- ------------
Total 7,745,450
--------------------------------------------------- ------------
FINANCIAL SERVICES--2.1%
---------------------------------------------------
5,000,000 American General Finance Corp., 8.250%, 1/15/1998 5,032,656
--------------------------------------------------- ------------
OIL/GAS--0.2%
---------------------------------------------------
500,000 Texaco Capital, Inc., 9.000%, 11/15/1997 501,886
--------------------------------------------------- ------------
PROCESS INDUSTRIES--0.8%
---------------------------------------------------
1,925,000 Du Pont (E.I.) de Nemours & Co., 8.650%, 12/1/1997 1,933,167
--------------------------------------------------- ------------
RESTAURANT/FOOD SERVICE--1.4%
---------------------------------------------------
3,238,000 PepsiCo, Inc., 6.125%, 1/15/1998 3,241,451
--------------------------------------------------- ------------
TOTAL CORPORATE BONDS 29,432,764
--------------------------------------------------- ------------
CORPORATE NOTES--2.2%
---------------------------------------------------------------
BANKING-FINANCE--1.3%
---------------------------------------------------
3,000,000 CIT Group Holdings, Inc., 6.500%, 7/13/1998 3,016,257
--------------------------------------------------- ------------
ELECTRONIC TECHNOLOGY--0.9%
---------------------------------------------------
2,250,000 Rockwell International Corp., 7.625%, 2/17/1998 2,264,006
--------------------------------------------------- ------------
TOTAL CORPORATE NOTES 5,280,263
--------------------------------------------------- ------------
GOVERNMENT AGENCIES--23.7%
---------------------------------------------------------------
(b)Federal National Mortgage Association, 5.360%,
2,000,000 12/14/1998 2,000,382
---------------------------------------------------
55,250,000 (b)Student Loan Marketing Association, 5.220%-
5.410%, 10/30/1997-3/7/2001 55,262,286
--------------------------------------------------- ------------
TOTAL GOVERNMENT AGENCIES 57,262,668
--------------------------------------------------- ------------
</TABLE>
THE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------ ------------
<C> <S> <C>
(C) REPURCHASE AGREEMENT--6.8%
------------------------------------------------------
Prudential Securities, Inc., 6.050%, dated
$16,490,289 9/30/1997, due 10/1/1997 $ 16,490,289
------------------------------------------ ------------
TOTAL INVESTMENTS (AT AMORTIZED COST)(D) $241,247,287
------------------------------------------ ------------
</TABLE>
(a) Each issue shows the rate of discount at the time of purchase for discount
issues, or the coupon for interest bearing issues.
(b) Current rate and next reset date shown.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(d) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($241,510,750) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--99.2%
--------------------------------------------------------
ALABAMA--4.4%
---------------------------------------------
$2,500,000 Columbia, AL IDB , PCR (Series C) Daily VRDNs
(Alabama Power Co.) A $ 2,500,000
--------------------------------------------- -----------
ALASKA--5.2%
---------------------------------------------
3,000,000 Alaska State Housing Finance Corp., Revenue
Bonds (Series 1991C) Weekly VRDNs (Swiss Bank
Capital Markets SPA) AAA 3,000,000
--------------------------------------------- -----------
ARIZONA--3.5%
---------------------------------------------
2,000,000 Arizona Health Facilities Authority, Pooled
Loan Program Revenue Bonds (Series 1985B)
Weekly VRDNs (FGIC INS)/(Chase Manhattan Bank
N.A., New York LIQ) AAA 2,000,000
--------------------------------------------- -----------
FLORIDA--5.7%
---------------------------------------------
3,290,000 Putnam County, FL Development Authority, PCR Bonds (Series 1984H)
Weekly VRDNs (Seminole Electric Cooperative, Inc (FL))/(National
Rural Utilities Cooperative Finance Corp.
LOC) AA- 3,290,000
--------------------------------------------- -----------
GEORGIA--12.6%
---------------------------------------------
2,000,000 Burke County, GA Development Authority, PCR
Bonds Daily VRDNs (Georgia Power Company
Plant Vogtle) A+ 2,000,000
---------------------------------------------
2,700,000 Gwinnett County, GA School District, GO UT
Refunding Bonds, 4.40% Bonds, 2/1/1998 AA+ 2,707,489
---------------------------------------------
1,500,000 Monroe County, GA Development Authority IDRB,
PCR Refunding Bonds (Series 2) Daily VRDNs
(Gulf Power Co.) A+ 1,500,000
---------------------------------------------
1,000,000 Putnam County, GA Development Authority Daily
VRDNs (Georgia Power Co.) A+ 1,000,000
--------------------------------------------- -----------
Total 7,207,489
--------------------------------------------- -----------
MARYLAND--8.3%
---------------------------------------------
1,000,000 Anne Arundel County, MD, GO UT, 4.00% Bonds,
4/1/1998 AA+ 1,001,229
---------------------------------------------
1,750,000 Baltimore County, MD Metropolitan District,
GO UT (65th Series), 5.00% Bonds, 6/1/1998 AAA 1,764,110
---------------------------------------------
2,000,000 Maryland Health & Higher Educational
Facilities Authority, Revenue Bonds Weekly
VRDNs (Greater Baltimore Medical
Center)/(First National Bank of Maryland,
Baltimore LOC) A1 2,000,000
--------------------------------------------- -----------
Total 4,765,339
--------------------------------------------- -----------
MASSACHUSETTS--4.4%
---------------------------------------------
2,500,000 Massachusetts IFA, (Series 1992A) Weekly
VRDNs (Ogden Haverhill)/(Union Bank of
Switzerland, Zurich LOC) AA+ 2,500,000
--------------------------------------------- -----------
MINNESOTA--0.7%
---------------------------------------------
400,000 Beltrami County, MN, Environmental Control
Authority Daily VRDNs (Northwood Panelboard
Co.)/(Union Bank of Switzerland, Zurich LOC) AA+ 400,000
--------------------------------------------- -----------
</TABLE>
THE TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
--------------------------------------------------------
NEW YORK--10.3%
---------------------------------------------
$1,000,000 New York City Municipal Water Finance
Authority, Water and Sewer System Revenue
Bonds (Series 1995 A) Daily VRDNs (FGIC
INS)/(FGIC Securities Purchase, Inc. LIQ) AAA $ 1,000,000
---------------------------------------------
1,000,000 New York City, NY Daily VRDNs (AMBAC INS) AAA 1,000,000
---------------------------------------------
900,000 New York City, NY Daily VRDNs (Morgan
Guaranty Trust Co., New York LOC) AAA 900,000
---------------------------------------------
100,000 New York City, NY, (Subseries B-4) Daily
VRDNs AA+ 100,000
---------------------------------------------
400,000 New York City, NY, GO Bonds Series-B Daily
VRDNs (FGIC INS)/(FGIC Securities Purchase,
Inc. LIQ) AAA 400,000
---------------------------------------------
500,000 New York City, NY, Series B Daily VRDNs (FGIC
INS)/(FGIC Securities Purchase, Inc. LIQ) AAA 500,000
---------------------------------------------
2,000,000 New York City, NY, Subseries A-10 Daily VRDNs AAA 2,000,000
--------------------------------------------- -----------
Total 5,900,000
--------------------------------------------- -----------
OHIO--6.8%
---------------------------------------------
1,900,000 Clermont County, OH , Revenue Bonds (Series
B) Weekly VRDNs (Mercy Health Systems) AA- 1,900,000
---------------------------------------------
2,000,000 Ohio State Air Quality Development Authority, Revenue Bonds (Series
B) Daily VRDNs (Cincinnati Gas and Electric Co.)/(J.P.
Morgan Delaware, Wilmington LOC) AAA 2,000,000
--------------------------------------------- -----------
Total 3,900,000
--------------------------------------------- -----------
PENNSYLVANIA--3.5%
---------------------------------------------
2,000,000 Allegheny County, PA HDA, (Series 1990 A)
Daily VRDNs (Presbyterian University
Hospital)/(MBIA Insurance Corporation
INS)/(PNC Bank, N.A. LIQ) AAA 2,000,000
--------------------------------------------- -----------
TEXAS--6.1%
---------------------------------------------
1,500,000 Lower Neches Valley, TX, Refunding Revenue Bonds, 3.75% TOBs
(Chevron U.S.A., Inc.)
2/16/1998 AA 1,500,000
---------------------------------------------
2,000,000 Sabine River Authority, TX , PCR Bonds
(Series B) Daily VRDNs (Texas Utilities
Electric Co.)/(Union Bank of Switzerland,
Zurich LOC) AA+ 2,000,000
--------------------------------------------- -----------
Total 3,500,000
--------------------------------------------- -----------
VIRGINIA--26.0%
---------------------------------------------
2,200,000 Fairfax County, VA IDA, Refunding Revenue
Bonds (Series A) Weekly VRDNs (Fairfax
Hospital System) AA 2,200,000
---------------------------------------------
2,000,000 Fairfax County, VA, GO UT (Series A), 5.50%
Bonds, 6/1/1998 AAA 2,022,729
---------------------------------------------
2,215,000 Loudoun County, VA, GO UT (Series A), 4.375%
Bonds, 8/1/1998 AA- 2,226,345
---------------------------------------------
965,000 Richmond, VA Public Utility, Series A, 8.00%
Bonds (United States Treasury PRF), 1/15/1998
(@102) AAA 996,204
---------------------------------------------
1,400,000 Virginia College Building Authority Weekly
VRDNs (University of Richmond)/(Crestar Bank
of Virginia, Richmond SA) Aa2 1,400,000
---------------------------------------------
</TABLE>
THE TAX-FREE MONEY MARKET FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CREDIT
OR SHARES RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
--------------------------------------------------------
$2,000,000 Virginia State Housing Development Authority,
(Series C), 3.80% TOBs, Mandatory Tender
6/10/1998 AA+ $ 1,999,173
---------------------------------------------
500,000 Virginia State Public Building Authority,
(Series A), 3.90% Bonds, 8/1/1998 AA 500,192
---------------------------------------------
1,500,000 Virginia State Public School Authority,
Series A, 6.00% Bonds, 1/1/1998 AA 1,508,956
---------------------------------------------
2,000,000 Virginia State Transportation Board, 7.70%
Bonds (Route 28 Project)/(United States
Treasury PRF), 3/1/1998 (@102) AAA 2,072,480
--------------------------------------------- -----------
Total 14,926,079
--------------------------------------------- -----------
WYOMING--1.7%
---------------------------------------------
1,000,000 Lincoln County, WY, Revenue Bonds Daily VRDNs
(Exxon Corp.) AA 1,000,000
--------------------------------------------- -----------
TOTAL SHORT-TERM MUNICIPAL SECURITIES 56,888,907
--------------------------------------------- -----------
MUTUAL FUND ISSUES--0.4%
--------------------------------------------------------
247,772 Goldman Sachs & Co. (AT NET ASSET VALUE) 247,772
--------------------------------------------- -----------
TOTAL INVESTMENTS (AT AMORTIZED COST AND NET
ASSET VALUE)(A) $57,136,679
--------------------------------------------- -----------
</TABLE>
(a) Also represents cost for federal tax purposes.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($57,369,580) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company GO--General Obligation HDA--Hospital Development Authority
IDA--Industrial Development Authority IDB--Industrial Development Bond
IDRB--Industrial Development Revenue Bond IFA--Industrial Finance Authority
INS--Insured LIQ--Liquidity Agreement LOC--Letter of Credit MBIA--Municipal Bond
Investors Assurance PCR--Pollution Control Revenue PRF--Prerefunded SA--Support
Agreement SPA--Standby Purchase Agreement TOBs--Tender Option Bonds
UT--Unlimited Tax VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. THE STYLE THE THE
GOVERNMENT MANAGER: THE STYLE VIRGINIA MARYLAND
SECURITIES LARGE CAP MANAGER MUNICIPAL MUNICIPAL
FUND FUND FUND BOND FUND BOND FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in
repurchase agreements $ 460,430 $ 2,576,249 $ 1,219,266 $ -- $ --
Investments in
securities 155,643,026 104,106,935 75,511,023 78,052,751 33,115,845
- ------------------------------------------------------------------------------------------
Total investments in
securities, at value $156,103,456 $106,683,184 $76,730,289 $78,052,751 $33,115,845
- ------------------------------------------------------------------------------------------
Cash -- 446 -- -- --
Income receivable 1,935,302 128,141 96,421 1,121,169 438,320
Receivable for shares
sold 117,229 57,067 275,041 37,019 200
Deferred expenses -- -- 9,103 -- --
- ------------------------------------------------------------------------------------------
Total assets 158,155,987 106,868,838 77,110,854 79,210,939 33,554,365
- ------------------------------------------------------------------------------------------
LIABILITIES:
Payable for shares
redeemed 249,193 87,484 187,792 238,933 13,519
Income distribution
payable 362,543 -- -- 105,709 33,929
Payable to Bank 3,989 -- -- -- --
Accrued expenses 115,182 96,827 49,114 93,733 38,136
- ------------------------------------------------------------------------------------------
Total liabilities 730,907 184,311 236,906 438,375 85,584
- ------------------------------------------------------------------------------------------
TOTAL NET ASSETS $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $174,339,274 $ 69,922,418 $48,156,564 $75,912,084 $32,631,102
Net unrealized
appreciation of
investments 1,195,308 20,488,173 15,019,954 3,037,578 1,189,411
Accumulated net realized
gain (loss) on
investments (18,155,068) 16,158,724 13,635,635 (177,098) (351,732)
Accumulated
undistributed net
investment income 45,566 115,212 61,795 -- --
- ------------------------------------------------------------------------------------------
TOTAL NET ASSETS $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSETS:
Trust Shares $ 52,177,289 $ 26,611,481 $ -- $19,891,348 $ 5,682,750
Investment Shares 105,247,791 80,073,046 76,873,948 58,881,216 27,786,031
- ------------------------------------------------------------------------------------------
Total $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AND
OFFERING PRICE PER SHARE
Trust Shares $9.95 $16.31 -- $11.07 $10.91
Investment Shares $9.95 $16.31 $15.37 $11.07 $10.91
- ------------------------------------------------------------------------------------------
REDEMPTION PROCEEDS PER
SHARE*
Trust Shares $9.95 $16.31 -- $11.07 $10.91
Investment Shares** $9.75 $15.98 $15.06 $10.85 $10.69
- ------------------------------------------------------------------------------------------
SHARES OUTSTANDING
Trust Shares 5,246,259 1,632,012 -- 1,797,148 521,087
Investment Shares 10,582,280 4,910,713 5,002,112 5,319,803 2,547,851
- ------------------------------------------------------------------------------------------
Total Shares Outstanding 15,828,539 6,542,725 5,002,112 7,116,951 3,068,938
- ------------------------------------------------------------------------------------------
Investments, at
identified cost $154,908,148 $ 86,195,011 $61,710,335 $75,015,173 $31,926,434
- ------------------------------------------------------------------------------------------
Investments, at tax cost $154,908,148 $ 86,195,011 $61,750,880 $75,015,173 $31,926,434
- ------------------------------------------------------------------------------------------
</TABLE>
*See "Redeeming Shares" in the Prospectus.
**Computation of redemption proceeds per share: 98/100 of net asset value.
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TREASURY THE TAX-FREE
MONEY THE MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments in repurchase agreements $149,310,947 $ 16,490,289 $ --
Investments in securities 167,236,001 224,756,998 57,136,679
- -------------------------------------------------------------------------------
Total investments in securities, at
value 316,546,948 241,247,287 57,136,679
- -------------------------------------------------------------------------------
Income receivable 2,578,221 1,133,016 371,750
Receivable for shares sold 3,106 11,582 69,301
Deferred expenses -- -- 4,692
- -------------------------------------------------------------------------------
Total assets 319,128,275 242,391,885 57,582,422
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for shares redeemed 206,703 66,719 6,000
Income distribution payable 930,196 602,201 135,472
Payable to Bank -- 67,897 --
Accrued expenses 242,108 144,318 71,370
- -------------------------------------------------------------------------------
Total liabilities 1,379,007 881,135 212,842
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $317,749,268 $241,510,750 $57,369,580
- -------------------------------------------------------------------------------
NET ASSETS:
Trust Shares $196,450,150 $164,290,280 $ --
Investment Shares 121,299,118 77,220,470 57,369,580
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $317,749,268 $241,510,750 $57,369,580
- -------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PROCEEDS
PER SHARE
Trust Shares $1.00 $1.00 --
Investment Shares $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------
SHARES OUTSTANDING
Trust Shares 196,450,150 164,290,280 --
Investment Shares 121,466,050 77,220,470 57,369,580
- -------------------------------------------------------------------------------
Total Shares Outstanding 317,916,200 241,510,750 57,369,580
- -------------------------------------------------------------------------------
Investments, at amortized cost and net
asset value $316,546,948 $241,247,287 $57,136,679
- -------------------------------------------------------------------------------
Investments, at tax cost $316,546,948 $241,247,287 $57,136,679
- -------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. THE STYLE THE
GOVERNMENT MANAGER: THE STYLE THE VIRGINIA MARYLAND
SECURITIES LARGE CAP MANAGER MUNICIPAL MUNICIPAL
FUND FUND FUND BOND FUND BOND FUND
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ -- $ 2,280,851 $ 1,853,994 $ -- $ --
Interest 12,930,324 109,465 110,776 4,537,516 1,875,016
- --------------------------------------------------------------------------------------
Total income 12,930,324 2,390,316 1,964,770 4,537,516 1,875,016
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 1,325,841 749,609 830,673 650,276 273,851
Administrative personnel
and services fee 172,113 97,360 75,125 84,421 75,000
Custodian fees 46,191 47,362 31,329 28,448 12,079
Transfer and dividend
disbursing agent fees
and expenses 132,824 198,044 64,733 80,614 60,084
Directors'/Trustees'
fees 3,071 3,593 2,496 2,754 2,202
Auditing fees 15,412 18,571 12,506 14,195 14,018
Legal fees 2,633 12,728 1,920 2,436 19
Portfolio accounting
fees 58,744 59,472 38,520 62,576 55,277
Distribution services
fee--
Investment Shares 279,386 175,775 -- 158,225 73,620
Share registration costs 15,210 26,705 11,764 15,011 9,626
Printing and postage 14,918 15,397 26,489 12,992 20,995
Insurance premiums 4,006 6,951 2,903 2,092 2,368
Miscellaneous 5,441 7,121 11,563 3,681 14
- --------------------------------------------------------------------------------------
Total expenses 2,075,790 1,418,688 1,110,021 1,117,721 599,153
Waivers--
Waiver of investment
advisory fee 37,709 -- 326,846 -- --
- --------------------------------------------------------------------------------------
Net expenses 2,038,081 1,418,688 783,175 1,117,721 599,153
- --------------------------------------------------------------------------------------
Net investment income 10,892,243 971,628 1,181,595 3,419,795 1,275,863
- --------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)
on investments (3,831,048) 16,227,730 13,831,352 579,805 163,436
Change in unrealized
appreciation
of investments 4,711,022 14,347,096 9,985,998 2,442,760 982,703
- --------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments 879,974 30,574,826 23,817,350 3,022,565 1,146,139
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
operations $11,772,217 $31,546,454 $24,998,945 $ 6,442,360 $2,422,002
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TAX-
THE TREASURY FREE
MONEY THE MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $20,757,671 $13,828,345 $2,158,617
- ------------------------------------------------------------------------------
Total income 20,757,671 13,828,345 2,158,617
- ------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 1,897,464 1,250,019 302,027
Administrative personnel and services
fee 369,581 243,450 75,171
Custodian fees 120,115 74,934 34,273
Transfer and dividend disbursing agent
fees and expenses 240,905 123,295 44,277
Directors'/Trustees' fees 5,057 3,656 3,408
Auditing fees 20,051 16,000 16,613
Legal fees 412 4,687 2,434
Portfolio accounting fees 109,149 75,599 46,105
Distribution services fee--Investment
Shares 331,053 206,038 --
Share registration costs 18,320 24,568 12,242
Printing and postage 26,923 28,499 23,513
Insurance premiums 4,988 6,662 2,870
Miscellaneous 2,993 8,156 6,815
- ------------------------------------------------------------------------------
Total expenses 3,147,011 2,065,563 569,748
Waivers and Reimbursements--
Waiver of investment advisory fee (46,840) (57,472) (94,455)
Reimbursements of other operating
expenses (4,897) -- --
- ------------------------------------------------------------------------------
Total waivers and reimbursements (51,737) (57,472) (94,455)
- ------------------------------------------------------------------------------
Net expenses 3,095,274 2,008,091 475,293
- ------------------------------------------------------------------------------
Net investment income 17,662,397 11,820,254 1,683,324
- ------------------------------------------------------------------------------
Change in net assets resulting
from operations $17,662,397 $11,820,254 $1,683,324
- ------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. GOVERNMENT THE STYLE MANAGER:
SECURITIES FUND LARGE CAP FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 10,892,243 $ 13,381,466 $ 971,628 $ 1,995,250
Net realized gain (loss)
on investments (3,831,048) (3,219,621) 16,227,730 12,982,465
Net change in unrealized
appreciation
(depreciation) of
investments 4,711,022 (2,011,452) 14,347,096 (2,926,184)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from operations 11,772,217 8,150,393 31,546,454 12,051,531
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS-- Distributions from net investment income:
Trust Shares (4,109,350) (6,107,288) (350,276) (926,390)
Investment Shares (6,782,893) (7,274,178) (656,481) (1,026,148)
Distributions from net realized gains:
Trust Shares -- -- (4,272,531) (3,898,915)
Investment Shares -- -- (7,971,845) (3,989,082)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (10,892,243) (13,381,466) (13,251,133) (9,840,535)
- -------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 22,960,997 46,455,480 17,201,667 18,263,662
Shares issued in
connection with the
acquisition -- -- 1,509,197 9,245,450
Net asset value of
shares issued to
shareholders in payment
of
distributions declared 5,396,173 6,142,681 9,353,220 5,478,249
Cost of shares redeemed (67,228,310) (68,163,717) (33,248,877) (31,477,651)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from share
transactions (38,871,140) (15,565,556) (5,184,793) 1,509,710
- -------------------------------------------------------------------------------------
Change in net assets (37,991,166) (20,796,629) 13,110,528 3,720,706
NET ASSETS:
Beginning of period 195,416,246 216,212,875 93,573,999 89,853,293
- -------------------------------------------------------------------------------------
End of period $157,425,080 $195,416,246 $106,684,527 $ 93,573,999
- -------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ 45,566 $ 45,566 $ 115,212 $ 150,341
- -------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE VIRGINIA MUNICIPAL
THE STYLE MANAGER FUND BOND FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 1,181,595 $ 1,728,218 $ 3,419,795 $ 3,919,914
Net realized gain (loss)
on investments 13,831,352 4,542,510 579,805 780,289
Net change in unrealized
appreciation
(depreciation) of
investments 9,985,998 (119,759) 2,442,760 (2,101,082)
- -------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 24,998,945 6,150,969 6,442,360 2,599,121
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS-- Distributions from net investment income:
Trust Shares -- -- (965,706) (1,287,834)
Investment Shares (1,233,260) (1,638,472) (2,454,089) (2,632,080)
Distributions from net realized gains:
Trust Shares -- -- -- --
Investment Shares (3,328,990) (8,143,290) -- --
- -------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (4,562,250) (9,781,762) (3,419,795) (3,919,914)
- -------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 40,136,505 16,506,045 6,840,095 16,125,700
Net asset value of
shares issued to
shareholders in payment
of
distributions declared 4,503,897 9,243,789 1,888,518 1,997,026
Cost of shares redeemed (50,985,728) (37,724,499) (26,788,539) (27,234,673)
- -------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (6,345,326) (11,974,665) (18,059,926) (9,111,947)
- -------------------------------------------------------------------------------------
Change in net assets 14,091,369 (15,605,458) (15,037,361) (10,432,740)
NET ASSETS:
Beginning of period 62,782,579 78,388,037 93,809,925 104,242,665
- -------------------------------------------------------------------------------------
End of period $ 76,873,948 $ 62,782,579 $ 78,772,564 $ 93,809,925
- -------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ 61,795 $ 113,460 $ -- $ --
- -------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE MARYLAND MUNICIPAL THE TREASURY
BOND FUND MONEY MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 1,275,863 $ 1,527,863 $ 17,662,397 $ 16,209,478
Net realized gain
(loss) on investments 163,436 186,173 -- --
Net change in
unrealized
appreciation
(depreciation) of
investments 982,703 (739,639) -- --
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 2,422,002 974,397 17,662,397 16,209,478
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS--
Distributions from net investment income:
Trust Shares (261,815) (352,284) (11,714,695) (11,356,506)
Investment Shares (1,015,074) (1,175,552) (5,947,702) (4,852,972)
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (1,276,889) (1,527,836) (17,662,397) (16,209,478)
- --------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 2,708,043 8,364,014 723,861,521 659,743,838
Shares issued in
connection with the
acquisition -- -- -- 122,108,127
Net asset value of
shares issued to
shareholders in
payment of
distributions declared 770,265 989,879 5,621,031 4,898,441
Cost of shares redeemed (11,327,459) (10,247,633) (784,872,329) (661,630,604)
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (7,849,151) (893,740) (55,389,777) 125,119,802
- --------------------------------------------------------------------------------------
Change in net assets (6,704,038) (1,447,179) (55,389,777) 125,119,802
NET ASSETS:
Beginning of period 40,172,819 41,619,998 373,139,045 248,019,243
- --------------------------------------------------------------------------------------
End of period $ 33,468,781 $ 40,172,819 $ 317,749,268 $ 373,139,045
- --------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ -- $ 1,026 $ -- $ --
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TAX-FREE MONEY
THE MONEY MARKET FUND MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 11,820,254 $ 12,191,680 $ 1,683,324 $ 2,734,120
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 11,820,254 12,191,680 1,683,324 2,734,120
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS--
Distributions from net investment income:
Trust Shares (8,056,642) (8,395,610) -- --
Investment Shares (3,763,612) (3,796,070) (1,683,324) (2,734,120)
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (11,820,254) (12,191,680) (1,683,324) (2,734,120)
- --------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 618,631,500 576,928,235 315,423,874 389,800,080
Net asset value of
shares issued to
shareholders in
payment of
distributions declared 3,617,170 3,626,658 417,624 459,305
Cost of shares redeemed (624,937,753) (551,929,373) (310,970,825) (419,737,938)
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (2,689,083) 28,625,520 4,870,673 (29,478,553)
- --------------------------------------------------------------------------------------
Change in net assets (2,689,083) 28,625,520 4,870,673 (29,478,553)
NET ASSETS:
Beginning of period 244,199,833 215,574,313 52,498,907 81,977,460
- --------------------------------------------------------------------------------------
End of period $ 241,510,750 $ 244,199,833 $ 57,369,580 $ 52,498,907
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE U.S. GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.89 $10.13 $ 9.83 $10.90 $10.95
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.60 0.62 0.64 0.61 0.66
Net realized and
unrealized gain (loss) on
investments 0.06 (0.24) 0.30 (0.94) 0.03
- -------------------------------------------------------------------------------
Total from investment
operations 0.66 0.38 0.94 (0.33) 0.69
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.60) (0.62) (0.64) (0.61) (0.66)
Distributions from net
realized gain on
investments -- -- -- -- (0.08)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.13) --
- -------------------------------------------------------------------------------
Total distributions (0.60) (0.62) (0.64) (0.74) (0.74)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.95 $ 9.89 $10.13 $ 9.83 $10.90
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 6.89% 3.79% 9.84% (3.36)% 6.82%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.25% 1.14% 1.01% 0.99% 0.77%
Net investment income 6.07% 6.11% 6.41% 5.94% 5.91%
Expense
waiver/reimbursement (c) 0.02% 0.13% 0.28% 0.32% 0.43%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $105,248 $116,418 $114,803 $112,439 $119,187
Portfolio turnover 80% 118% 82% 227% 154%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.89 $10.13 $ 9.83 $10.90 $10.95
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.63 0.64 0.66 0.63 0.67
Net realized and
unrealized gain (loss) on
investments 0.06 (0.24) 0.30 (0.94) 0.03
- -------------------------------------------------------------------------------
Total from investment
operations 0.69 0.40 0.96 (0.31) 0.70
- -------------------------------------------------------------------------------
Less distributions
Distributions from net
investment income (0.63) (0.64) (0.66) (0.63) (0.67)
Distributions from net
realized gain on
investments -- -- -- -- (0.08)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.13) --
- -------------------------------------------------------------------------------
Total distributions (0.63) (0.64) (0.66) (0.76) (0.75)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.95 $ 9.89 $10.13 $ 9.83 $10.90
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 7.16% 4.05% 10.11% (3.12)% 6.94%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.00% 0.89% 0.76% 0.74% 0.63%
Net investment income 6.32% 6.36% 6.66% 6.19% 6.17%
Expense
waiver/reimbursement (c) 0.02% 0.13% 0.28% 0.32% 0.43%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $52,177 $78,998 $101,410 $107,103 $112,334
Portfolio turnover 80% 118% 82% 227% 154%
- -------------------------------------------------------------------------------
</TABLE>
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER: LARGE CAP FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1997(C) 1996 1995(C) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $13.68 $13.70 $11.80 $12.39 $12.02
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.13 0.27 0.09 0.17 0.24
Net realized and unrealized
gain (loss) on investments 4.47 1.18 2.20 (0.39) 0.54
- -------------------------------------------------------------------------------
Total from investment operations 4.60 1.45 2.29 (0.22) 0.78
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.14) (0.27) (0.09) (0.17) (0.25)
Distributions from net realized
gain on investments (1.83) (1.20) (0.30) (0.20) (0.16)
- -------------------------------------------------------------------------------
Total distributions (1.97) (1.47) (0.39) (0.37) (0.41)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.31 $13.68 $13.70 $11.80 $12.39
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 37.02% 11.28% 20.02% (1.72%) 6.31%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.49% 1.36% 1.21% 1.20% 0.87%
Net investment income 0.88% 2.01% 0.67% 1.40% 1.81%
Expense waiver/reimbursement
(b) -- -- 0.21% 0.23% 0.55%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $80,073 $59,891 $44,509 $26,739 $18,691
Average commission rate paid
(d) $0.0783 $0.0616 -- -- --
Portfolio turnover 56% 151% 208% 205% 67%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1997(C) 1996 1995(C) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $13.68 $13.70 $11.80 $12.39 $12.02
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.18 0.33 0.12 0.20 0.28
Net realized and unrealized
gain (loss) on investments 4.46 1.15 2.20 (0.40) 0.51
- -------------------------------------------------------------------------------
Total from investment operations 4.64 1.48 2.32 (0.20) 0.79
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.18) (0.30) (0.12) (0.19) (0.26)
Distributions from net realized
gain on investments (1.83) (1.20) (0.30) (0.20) (0.16)
- -------------------------------------------------------------------------------
Total distributions (2.01) (1.50) (0.42) (0.39) (0.42)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.31 $13.68 $13.70 $11.80 $12.39
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 37.37% 11.55% 20.33% (1.50%) 6.42%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.24% 1.11% 0.96% 0.95% 0.66%
Net investment income 1.17% 2.26% 0.92% 1.68% 2.09%
Expense waiver/reimbursement
(b) -- -- 0.21% 0.23% 0.55%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $26,611 $33,683 $45,345 $70,374 $65,841
Average commission rate paid
(d) $0.0783 $0.0616 -- -- --
Portfolio turnover 56% 151% 208% 205% 67%
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Per share information presented is based on the monthly number of shares
outstanding due to large fluctuations in the number of shares outstanding
during the period.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
SEPTEMBER 30, ENDED
---------------- SEPTEMBER 30,
INVESTMENT SHARES 1997 1996 1995(A)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.47 $12.03 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.23 0.31 0.03
Net realized and unrealized gain on
investments 4.54 0.77 2.03
- --------------------------------------------------------------------------
Total from investment operations 4.77 1.08 2.06
- --------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net investment income (0.24) (0.29) (0.03)
Distributions from net realized gain on
investments (0.63) (1.35) --
- --------------------------------------------------------------------------
Total distributions (0.87) (1.64) (0.03)
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.37 $11.47 $12.03
- --------------------------------------------------------------------------
TOTAL RETURN (B) 44.01% 10.19% 20.59%
- --------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 0.99% 0.44%*
Net investment income 1.76% 2.63% 0.46%*
Expense waiver/reimbursement (c) 0.50% 0.44% 1.03%*
- --------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $76,874 $62,783 $78,388
Average commission rate paid (d) $0.0789 $0.0514 --
Portfolio turnover 94% 112% 92%
- --------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 7, 1995 (date of initial
public investment) to September 30, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
THE VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.68 $10.81 $10.26 $11.26 $10.46
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.42 0.41 0.45 0.45 0.51
Net realized and unrealized
gain (loss) on investments 0.39 (0.13) 0.55 (0.92) 0.89
- -------------------------------------------------------------------------------
Total from investment
operations 0.81 0.28 1.00 (0.47) 1.40
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.42) (0.41) (0.45) (0.45)(e) (0.51)
Distributions from net
realized gain on
investments -- -- -- (0.06) (0.09)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.02) --
- -------------------------------------------------------------------------------
Total distributions (0.42) (0.41) (0.45) (0.53) (0.60)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.07 $10.68 $10.81 $10.26 $11.26
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 7.74% 2.60% 10.00% (4.25)% 13.49%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.36% 1.32% 1.17% 1.15% 0.90%
Net investment income 3.87% 3.78% 4.32% 4.22% 4.68%
Expense waiver/reimbursement
(c) -- 0.02% 0.22% 0.27% 0.50%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $58,881 $65,700 $70,572 $74,706 $63,492
Portfolio turnover 19% 129% 26% 29% 17%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.68 $10.81 $10.26 $11.26 $10.46
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.45 0.44 0.48 0.48 0.53
Net realized and unrealized
gain (loss) on investments 0.39 (0.13) 0.55 (0.92) 0.89
- -------------------------------------------------------------------------------
Total from investment
operations 0.84 0.31 1.03 (0.44) 1.42
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.45) (0.44) (0.48) (0.48)(d) (0.53)
Distributions from net
realized gain on
investments -- -- -- (0.06) (0.09)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.02) --
- -------------------------------------------------------------------------------
Total distributions (0.45) (0.44) (0.48) (0.56) (0.62)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.07 $10.68 $10.81 $10.26 $11.26
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 8.00% 2.86% 10.27% (4.01%) 13.62%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11% 1.06% 0.92% 0.90% 0.75%
Net investment income 4.12% 4.03% 4.57% 4.47% 4.85%
Expense waiver/reimbursement
(c) -- 0.02% 0.22% 0.27% 0.50%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $19,891 $28,110 $33,670 $34,165 $41,204
Portfolio turnover 19% 129% 26% 29% 17%
- -------------------------------------------------------------------------------
</TABLE>
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Amount includes distributions to shareholders in excess of net investment
income of $0.0002 per share.
(e) Amount includes distributions to shareholders in excess of net investment
income of $0.0001 per share.
(See Notes which are an integral part of the Financial Statements)
THE MARYLAND MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.56 $10.69 $10.17 $11.24 $10.39
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.37 0.38 0.40 0.45 0.49
Net realized and unrealized
gain (loss) on investments 0.35 (0.13) 0.54 (0.97) 0.85
- -------------------------------------------------------------------------------
Total from investment operations 0.72 0.25 0.94 (0.52) 1.34
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.37) (0.38) (0.40) (0.45) (0.49)
Distributions from net realized
gain on investments -- -- (0.02) (0.10) --
- -------------------------------------------------------------------------------
Total distributions (0.37) (0.38) (0.42) (0.55) (0.49)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.91 $10.56 $10.69 $10.17 $11.24
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 6.92% 2.36% 9.81% (4.74%) 13.24%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.69% 1.43% 1.24% 1.17% 1.00%
Net investment income 3.45% 3.57% 4.24% 4.22% 4.50%
Expense waiver/reimbursement
(b) -- 0.25% 0.44% 0.51% 0.77%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $27,786 $31,284 $32,172 $34,580 $33,907
Portfolio turnover 13% 138% 21% 27% 23%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.56 $10.69 $10.17 $11.24 $10.39
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.40 0.41 0.42 0.48 0.50
Net realized and unrealized
gain (loss)
on investments 0.35 (0.13) 0.54 (0.97) 0.85
- -------------------------------------------------------------------------------
Total from investment operations 0.75 0.28 0.96 (0.49) 1.35
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.40) (0.41) (0.42) (0.48) (0.50)
Distributions from net realized
gain on investments -- -- (0.02) (0.10) --
- -------------------------------------------------------------------------------
Total distributions (0.40) (0.41) (0.44) (0.58) (0.50)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.91 $10.56 $10.69 $10.17 $11.24
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 7.19% 2.61% 10.09% (4.50%) 13.37%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.44% 1.18% 0.99% 0.92% 0.86%
Net investment income 3.70% 3.82% 4.49% 4.46% 4.64%
Expense waiver/reimbursement
(b) -- 0.25% 0.44% 0.51% 0.77%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $5,683 $8,889 $9,447 $11,301 $12,014
Portfolio turnover 13% 138% 21% 27% 23%
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.02
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.02)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.58% 4.67% 4.98% 2.90% 2.52%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.98% 0.90% 0.85% 0.84% 0.70%
Net investment income 4.49% 4.49% 4.92% 3.05% 2.47%
Expense
waiver/reimbursement (b) 0.01% 0.09% 0.10% 0.18% 0.20%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $121,299 $146,161 $39,363 $21,883 $20,382
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.84% 4.89% 5.24% 3.16% 2.64%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.73% 0.65% 0.60% 0.59% 0.58%
Net investment income 4.74% 4.81% 5.17% 3.30% 2.60%
Expense
waiver/reimbursement (b) 0.01% 0.06% 0.10% 0.18% 0.20%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $196,450 $226,978 $208,656 $304,285 $152,921
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.67% 4.91% 5.11% 3.10% 2.77%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.97% 0.73% 0.80% 0.80% 0.64%
Net investment income 4.57% 4.77% 5.04% 3.07% 2.68%
Expense
waiver/reimbursement (b) 0.02% 0.23% 0.21% 0.25% 0.30%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $77,220 $83,525 $41,813 $15,236 $9,905
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.93% 5.04% 5.36% 3.35% 2.89%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.72% 0.60% 0.57% 0.55% 0.50%
Net investment income 4.81% 4.93% 5.27% 3.25% 2.83%
Expense
waiver/reimbursement (b) 0.02% 0.12% 0.19% 0.25% 0.30%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $164,290 $160,675 $173,761 $132,445 $134,397
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE TAX-FREE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
INVESTMENT SHARES 1997 1996 1995 1994(A)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03 0.03 0.03 0.01
- ----------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.03) (0.03) (0.03) (0.01)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
TOTAL RETURN (B) 2.83% 3.01% 3.53% 0.45%
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79% 0.56% 0.39% 0.36%(c)
Net investment income 2.79% 2.95% 3.55% 2.65%(c)
Expense waiver/reimbursement (d) 0.16% 0.20% 0.56% 0.70%(c)
- ----------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $57,370 $52,499 $81,977 $21,967
- ----------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from July 27, 1994 (date of initial
public investment) to September 30, 1994.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
(1) ORGANIZATION
The Virtus Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end management investment company. The
Trust consists of eight portfolios (individually referred to as the "Fund", or
collectively as the "Funds"). All Funds, except The Style Manager Fund and The
Tax-Free Money Market Fund are offered in two classes of shares: Trust Shares
and Investment Shares. The Style Manager Fund and The Tax-Free Money Market Fund
are presented as Investment Shares for financial statement purposes. The
following portfolios comprise the Trust:
<TABLE>
<CAPTION>
PORTFOLIO NAME INVESTMENT OBJECTIVE
- ------------------------------------------------------------------------------------------
<C> <S>
The U.S. Government Securities Fund Current Income
("Government Securities Fund") (d)
- ------------------------------------------------------------------------------------------
The Style Manager: Large Cap Fund Growth of capital and income
(" Large Cap Fund") (d)
- ------------------------------------------------------------------------------------------
The Style Manager Fund ("Style Manager Growth of capital
Fund") (d)
- ------------------------------------------------------------------------------------------
The Virginia Municipal Bond Fund Current income exempt from federal regular
("Virginia Municipal Bond Fund") (n) income tax and the personal income tax
imposed
by the Commonwealth of Virginia
- ------------------------------------------------------------------------------------------
The Maryland Municipal Bond Fund Current income exempt from federal regular
("Maryland Municipal Bond Fund") (n) income tax and the personal income tax
imposed
by the State of Maryland
- ------------------------------------------------------------------------------------------
The Treasury Money Market Fund Current income consistent with stability of
("Treasury Money Market Fund") (d) principal
- ------------------------------------------------------------------------------------------
The Money Market Fund Current income consistent with stability of
("Money Market Fund") (d) principal
- ------------------------------------------------------------------------------------------
The Tax-Free Money Market Fund Current income exempt from federal income tax
("Tax-Free Money Market Fund") (d) consistent with stability of principal
</TABLE>
(d) Diversified
(n) Non-diversified
The assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held.
On June 24, 1996, the Large Cap Fund acquired all the net assets of the
Blanchard American Equity Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition was
accomplished by a tax-free exchange of 695,476 shares of the Large Cap Fund
(valued at $9,245,652) for the 845,351 shares of the Acquired Fund outstanding
on June 21, 1996. The Acquired Fund's net assets of $9,245,652, which consisted
of $7,444,690 of Paid in Capital and $2,066,228 of unrealized appreciation, were
combined at that date with those of the Large Cap Fund. The aggregate net assets
of the Large Cap Fund and the Acquired Fund immediately before the acquisition
were $92,855,251 and $9,245,652, respectively.
On April 21, 1997, the Large Cap Fund acquired all the net assets of the
Blanchard Capital Growth Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition was
accomplished by a tax-free exchange of 113,473 shares of the Large Cap Fund
(valued at $1,509,197) for the 202,789 shares of the Acquired Fund outstanding
on April 18, 1997. The Acquired Fund's net assets of $1,509,197, which consisted
of $1,319,703 of Paid in Capital and $271,223 of unrealized appreciation, were
combined at that date with those of the Large Cap Fund. The aggregate net assets
of the Large Cap Fund and the Acquired Fund immediately before the acquisition
were $91,970,866 and $1,509,197, respectively.
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, and unlisted
securities and private placement securities are generally valued at the mean
of the latest bid and asked price as furnished by an independent pricing
service. Listed equity securities are valued at the last sale price reported
on a national securities exchange. The Funds use the amortized cost method to
value portfolio securities in accordance with Rule 2a-7 under the Act. For
fluctuating net asset value Funds within the Trust, short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities purchased with remaining maturities of sixty days or
less may be valued at amortized cost, which approximates fair market value.
Investments in other open-end investment companies are valued at net asset
value.
REPURCHASE AGREEMENTS--It is the policy of the Funds to require a custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Funds to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Funds' adviser to be creditworthy pursuant to guidelines and/or standards
reviewed or established by the Board of Trustees (the "Trustees"). Risks may
arise from the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Funds could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code").
FEDERAL TAXES--It is the Funds' policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
At September 30, 1997, Government Securities Fund, Virginia Municipal Bond
Fund, and Maryland Municipal Bond Fund, for federal tax purposes, each had a
capital loss carryforward, as noted below. These capital loss carryforwards
will reduce the Fund's taxable income arising from future net realized gain on
investments, if any, to the extent permitted by the Code, and thus will reduce
the amount of the distributions to shareholders which would otherwise be
necessary to relieve the Funds of any liability for federal tax.
<TABLE>
<CAPTION>
FUNDS TOTAL TAX LOSS CARRYFORWARD
---------------------------
<S> <C>
Government Securities Fund $14,431,018
Virginia Municipal Bond Fund $ 178,797
Maryland Municipal Bond Fund $ 351,799
</TABLE>
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
Pursuant to the Code, such capital loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND VIRGINIA MUNICIPAL BOND FUND
------------------------------------- ------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT EXPIRATION YEAR EXPIRATION AMOUNT
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
2003 9,742,636 2004 178,797
2004 1,378,030
2005 3,310,352
</TABLE>
<TABLE>
<CAPTION>
MARYLAND MUNICIPAL BOND FUND
----------------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C>
2004 351,799
</TABLE>
Additionally, net capital losses, as noted below, attributable to security
transactions incurred after September 30, 1996 are treated as arising on
October 1, 1997 the first day of the Funds' next taxable year.
<TABLE>
<CAPTION>
FUND TOTAL TAX LOSS PUSHFORWARD
-------------------------- --------------------------
<S> <C>
Government Securities Fund $3,736,134
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
DEFERRED EXPENSES--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
over a period not to exceed five years from each Fund's commencement date.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At
September 30, 1997, Treasury Money Market Fund, Money Market Fund, and Tax-Free
Money Market Fund, capital paid-in aggregated $317,749,268, $241,510,750, and
$57,369,580, respectively. Transactions in shares were as follows:
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES FUND LARGE CAP FUND
------------------------ ------------------------
FOR THE YEAR ENDED
SEPTEMBER 30, 1997: SHARES DOLLARS SHARES DOLLARS
- -------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- --------------------------
Shares sold 1,348,256 $ 13,371,271 878,296 $ 12,745,846
- --------------------------
Shares issued in
connection with the
acquisition -- -- 113,473 1,509,197
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 544,149 5,396,169 640,836 8,496,790
- --------------------------
Shares redeemed (3,077,778) (30,479,752) (1,098,303) (16,038,717)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Investment Share
transactions (1,185,373) $(11,712,312) 534,302 $ 6,713,116
- -------------------------- ---------- ------------ ---------- ------------
TRUST SHARES:
- --------------------------
Shares sold 966,507 $ 9,589,726 64,549 $ 4,455,821
- --------------------------
Shares issued to
shareholders in payment of
distributions declared -- 4 324,411 856,430
- --------------------------
Shares redeemed (3,705,430) (36,748,558) (1,219,486) (17,210,160)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Trust Share transactions (2,738,923) (27,158,828) (830,526) (11,897,909)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Fund Share transactions (3,924,296) $(38,871,140) (296,224) $ (5,184,793)
- -------------------------- ---------- ------------ ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES FUND LARGE CAP FUND
------------------------ ------------------------
FOR THE YEAR ENDED
SEPTEMBER 30, 1996: SHARES DOLLARS SHARES DOLLARS
- -------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- --------------------------
Shares sold 2,763,200 $ 27,838,858 965,024 $ 12,986,255
- --------------------------
Shares issued in
connection with the
acquisition -- -- 695,147 9,245,450
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 611,870 6,142,678 379,876 4,969,161
- --------------------------
Shares redeemed (2,935,461) (29,411,819) (913,112) (13,464,743)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Investment Share
transactions 439,609 $ 4,569,717 1,126,935 $ 13,736,123
- -------------------------- ---------- ------------ ---------- ------------
TRUST SHARES:
- --------------------------
Shares sold 1,853,668 $ 18,616,622 395,754 $ 5,277,407
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 1 3 38,987 509,088
- --------------------------
Shares redeemed (3,875,084) (38,751,898) (1,282,606) (18,012,908)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Trust Share transactions (2,021,415) (20,135,273) (847,865) (12,226,413)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Fund Share transactions (1,581,806) $(15,565,556) 279,070 $ (1,509,710)
- -------------------------- ---------- ------------ ---------- ------------
</TABLE>
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STYLE MANAGER FUND
------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1997: SHARES DOLLARS
- ------------------------------------------------- ---------- ------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 3,251,568 $ 40,136,505
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 383,514 4,503,897
- -------------------------------------------------
Shares redeemed (4,107,368) (50,985,728)
- ------------------------------------------------- ---------- ------------
Net change resulting from Fund Share transactions (472,286) $ (6,345,326)
- ------------------------------------------------- ---------- ------------
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1996: SHARES DOLLARS
- ------------------------------------------------- ---------- ------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 1,489,971 $16,506,045
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 863,431 9,243,789
- -------------------------------------------------
Shares redeemed (3,397,734) (37,724,499)
- ------------------------------------------------- ---------- ------------
Net change resulting from Fund Share transactions (1,044,332) $(11,974,665)
- ------------------------------------------------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
VIRGINIA MUNICIPAL MARYLAND MUNICIPAL
BOND FUND BOND FUND
------------------------ ---------------------
FOR THE YEAR ENDED SEPTEMBER SHARES DOLLARS SHARES DOLLARS
30, 1997: ---------- ------------ -------- -----------
- -----------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------------
Shares sold 509,188 $ 5,533,656 192,865 $ 2,067,713
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared 173,844 1,888,518 71,862 770,265
- -----------------------------
Shares redeemed (1,515,555) (16,472,000) (679,110) (7,269,728)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Investment Share transactions (832,523) $ (9,049,826) (414,383) $(4,431,750)
- ----------------------------- ---------- ------------ -------- -----------
TRUST SHARES:
- -----------------------------
Shares sold 120,060 $ 1,306,439 59,419 $ 640,330
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared -- -- -- --
- -----------------------------
Shares redeemed (955,166) (10,316,539) (380,036) (4,057,731)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Trust Share transactions (835,106) (9,010,100) (320,617) (3,417,401)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Fund Share transactions (1,667,629) $(18,059,926) (735,000) $(7,849,151)
- ----------------------------- ---------- ------------ -------- -----------
</TABLE>
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VIRGINIA MUNICIPAL MARYLAND MUNICIPAL
BOND FUND BOND FUND
------------------------ ---------------------
FOR THE YEAR ENDED SHARES DOLLARS SHARES DOLLARS
SEPTEMBER 30, 1996: ---------- ------------ -------- -----------
- -----------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------------
Shares sold 1,022,563 $ 11,073,171 574,103 $ 6,142,806
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared 184,796 1,997,026 92,527 989,879
- -----------------------------
Shares redeemed (1,580,634) (17,022,733) (712,478) (7,557,624)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Investment Share transactions (373,275) $ (3,952,536) (45,848) $(424,939)
- ----------------------------- ---------- ------------ -------- -----------
TRUST SHARES:
- -----------------------------
Shares sold 468,285 $ 5,052,529 209,103 $ 2,221,208
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared -- -- -- --
- -----------------------------
Shares redeemed (950,703) (10,211,940) (252,990) (2,690,009)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Trust Share transactions (482,418) (5,159,411) (43,887) (468,801)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Fund Share transactions (855,693) $ (9,111,947) (89,735) $ (893,740)
- ----------------------------- ---------- ------------ -------- -----------
</TABLE>
<TABLE>
<CAPTION>
TREASURY MONEY
MARKET FUND MONEY MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------
Shares sold 67,174,914 92,237,108 92,778,441 144,072,045
- -----------------------
Shares issued in
connection with the
Acquisition -- 122,108,127 -- --
- -----------------------
Shares issued to
shareholders in payment
of distributions
declared 5,621,028 4,898,438 3,617,167 3,626,655
- -----------------------
Shares redeemed (97,657,884) (112,278,779) (102,699,797) (105,987,535)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Investment Share
transactions (24,861,942) 106,964,894 (6,304,189) 41,711,165
- ----------------------- ------------ ------------ ------------ ------------
TRUST SHARES:
- -----------------------
Shares sold 656,686,607 567,506,731 525,853,059 432,856,190
- -----------------------
Shares issued to
shareholders in payment
of distributions
declared 3 3 3 3
- -----------------------
Shares redeemed (687,214,445) (549,184,891) (522,237,956) (445,941,838)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Trust Share
transactions (30,527,835) 18,321,843 3,615,106 (13,085,645)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Fund Share
transactions (55,389,777) 125,286,737 (2,689,083) 28,625,520
- ----------------------- ------------ ------------ ------------ ------------
</TABLE>
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET FUND
----------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 315,423,874 389,800,080
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 417,624 459,305
- -------------------------------------------------
Shares redeemed (310,970,825) (419,737,938)
- ------------------------------------------------- ------------ ------------
Net change resulting from Fund Share transactions 4,870,673 (29,478,553)
- ------------------------------------------------- ------------ ------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Virtus Capital Management, Inc., the Trust's investment
adviser (the "Adviser"), receives for its services an annual investment advisory
fee based on a percentage of each Fund's average daily net assets (see below).
<TABLE>
<CAPTION>
FUND ANNUAL RATE
---------------------------- -----------
<C> <S>
Government Securities Fund 0.75%
Large Cap Fund 0.75%
Style Manager Fund 1.25%
Virginia Municipal Bond Fund 0.75%
Maryland Municipal Bond Fund 0.75%
Treasury Money Market Fund 0.50%
Money Market Fund 0.50%
Tax-Free Money Market Fund 0.50%
</TABLE>
The Adviser may voluntarily choose to waive a portion of its fee. The Adviser
can modify or terminate this voluntary waiver at any time at its sole
discretion.
Effective October 22, 1996 the Adviser increased its annual fee to 1.25% on the
Style Manager Fund.
Effective October 22, 1996 the Adviser entered into a sub-advisory agreement
with Trend Capital Management ("Trend") on behalf of the Style Manager Fund and
Large Cap Fund. Under the terms of a sub-advisory agreement between the Adviser
and Trend, with respect to the Style Manager Fund, the Adviser will pay Trend an
annual fee as follows: (a) an amount equal to .10% of the first $60 million of
the Fund's average daily net assets; and (b) with respect to average daily net
assets of the Fund in excess of $60 million, an amount equal to (i) one-third of
the Adviser's advisory fee to the extent that such advisory fee is less than or
equals 1% of the Fund's average daily net assets (but not to exceed .25% of the
Fund's average daily net assets); plus (ii) to the extent that the annual
advisory fee exceeds 1% of the Fund's average daily net assets, an additional
amount equal to two-thirds of such excess. With respect to the Large Cap Fund,
the Adviser will pay Trend an amount equal to .15% of the first $100 million of
the Fund's average daily net assets; and .33 1/3% of the Fund's average daily
net assets in excess of $100 million. Trend may voluntarily choose to reduce its
compensation. Trend can modify of terminate this voluntary reduction at any time
at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Funds with administrative
personnel and services. The fee paid to FAS is based on the level of average
aggregate daily net assets of the Trust, the Blanchard Precious Metals Fund,
Inc., and the Blanchard Funds, all of which are advised by the Adviser. The
administrative fee received during any fiscal year shall be at least $50,000 per
Fund. With respect to the Style Manager Fund and the Tax-Free Money Market Fund,
the fee shall be at least $75,000.
DISTRIBUTION SERVICES FEE--The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, each
Fund will reimburse Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Funds to finance activities intended to
result in the sale of the Funds' Investment Shares. The Plan provides that the
Funds may incur distribution expenses up to 0.25 % of the average daily net
assets of the Investment Shares, annually, to reimburse FSC. The Tax-Free Money
Market Fund and the Style Manager Fund will not accrue or pay any distribution
expenses pursuant to the Plan until a second class of shares has been created
for certain institutional investors.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Funds.
The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Funds' accounting records
for which it receives a fee. The fee is based on the level of each Fund's
average net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Signet Trust Company is the Funds' custodian for which it
receives a fee. The fee is based on the level of each Fund's average net assets
for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses were borne initially by FAS.
The Funds have agreed to reimburse FAS for the organizational expenses during
the five year period following each Fund's effective date. For the year ended
September 30, 1997, the following amounts were paid pursuant to this agreement:
<TABLE>
<CAPTION>
AMOUNT REIMBURSED
TO FAS FOR THE
EXPENSES OF YEAR ENDED
FUND ORGANIZING THE FUND SEPTEMBER 30, 1997
-------------------------- ------------------- ------------------
<S> <C> <C>
Style Manager Fund $28,773 $4,620
Tax-Free Money Market Fund $17,883 $2,933
</TABLE>
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended September 30, 1997, were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
------------ ------------
<S> <C> <C>
Government Securities Fund $138,698,434 $175,501,963
Large Cap Fund 55,144,492 73,658,378
Style Manager Fund 61,085,310 70,071,792
Virginia Municipal Bond Fund 15,978,372 33,799,963
Maryland Municipal Bond Fund 4,638,966 13,686,700
</TABLE>
(6) CONCENTRATION OF CREDIT RISK
Since Virginia Municipal Bond Fund and Maryland Municipal Bond Fund invest a
substantial portion of their assets in issuers located in one state, they will
be more susceptible to factors adversely affecting issuers of those states than
would be a comparable general tax-exempt mutual fund. In order to reduce the
credit risk associated with such factors, at September 30, 1997, 39% of the
securities in Virginia Municipal Bond Fund's portfolio of investments were
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit from any one institution or agency
did not exceed 11% of total investments. At September 30, 1997, 20% of the
securities in Maryland Municipal Bond Fund's portfolio of investments were
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit from any one institution or agency
did not exceed 9% of total investments.
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
(7) PROPOSED FUND MERGER
On July 18, 1997, Signet Banking Corporation ("Signet") entered into a
definitive Agreement and Plan of Reorganization whereby Signet was acquired by
First Union Corporation ("First Union"). It is anticipated that the merger will
be consummated on or about November 28, 1997.
As a result of this merger, First Union will succeed to the investment advisory
and functions formerly performed for the funds by various units of Signet and
various unaffiliated parties.
The Board of Trustees of the Trust has approved an Agreement and Plan of
Reorganization pursuant to which, on or about February 27, 1998, all of the
assets, and certain liabilities of the Funds would be acquired in exchange for
shares of a similarly managed fund (the "Acquiring Fund") that is advised by
affiliates of First Union. The reorganizations would result in the liquidation
and termination of the Funds. Pursuant to the reorganizations, shareholders of
the Funds will receive, tax-free, the number of shares of the acquiring fund
having a value equal to the value of their shares immediately prior to the
reorganizations. Consummation of the reorganizations is subject to approval of
the shareholders of the Funds.
THE VIRTUS FUNDS
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of
The Virtus Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Virtus Funds (comprising the following
portfolios: The U.S. Government Securities Fund, The Style Manager: Large Cap
Fund, The Style Manager Fund, The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, The Treasury Money Market Fund, The Money Market Fund, and
The Tax-Free Money Market Fund) as of September 30, 1997, and the related
statements of operations for the year then ended, the statements of changes in
net assets for the years ended September 30, 1997 and 1996, and the financial
highlights for the periods presented. 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 the securities owned at
September 30, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Virtus Funds as
of September 30, 1997, the results of its operations, the changes in its net
assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
As more fully described in Note 7, in November, 1997 the Funds are expected to
enter into an Agreement and Plan of Reorganization, pursuant to which (subject
to Fund shareholder approval) on or about February 27, 1998, all of the assets,
and certain liabilities of the Funds would be acquired in exchange for shares of
similarly managed funds that are advised by affiliates of First Union
Corporation. The reorganization would result in the liquidation and termination
of the Funds.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
November 7, 1997
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
William J. Copeland President and Treasurer
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. John W. McGonigle
Edward C. Gonzales Executive Vice President and
Peter E. Madden Secretary
John E. Murray, Jr. Joseph S. Machi
Wesley W. Posvar Vice President and Assistant
Marjorie P. Smuts Treasurer
Richard B. Fisher
Vice President
C. Grant Anderson
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Funds' prospectus which contains facts concerning
their objective and policies, management fees, expenses and other information.
Cusip 927913608 Cusip 927913855 Cusip 927913400
Cusip 927913707 Cusip 927913848 Cusip 927913301
Cusip 927913863 Cusip 927913830 Cusip 927913889
Cusip 927913871 Cusip 927913509 Cusip 927913103
Cusip 927913806 Cusip 927913202
G00716-01 (11/97)
THE VIRTUS FUNDS APPENDIX
A. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The U.S. Government Securities Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers
Intermediate Government Bond Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and The Lehman Brothers Intermediate
Government Bond Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 10/16/90
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to The Lehman Brothers Intermediate
Government Bond Index; the ending values are $16,120 and $16,983, respectively.
B. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The U.S. Government Securities Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers
Intermediate Government Bond Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and The Lehman Brothers Intermediate
Government Bond Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 10/16/90
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to The Lehman Brothers Intermediate
Government Bond Index; the ending values are $16,301 and $16,983, respectively.
C. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager: Large Cap Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Standard & Poor's 500
Index is represented by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in the
Fund and The Standard & Poor's 500 Index. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's start of
performance, 10/16/90 through 9/30/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to the Standard &
Poor's 500 Index; the ending values are $24,937 and $37,387, respectively.
D. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager: Large Cap Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Standard & Poor's 500
Index is represented by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in the
Fund and The Standard & Poor's 500 Index. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's start of
performance, 10/16/90 through 9/30/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to the Standard &
Poor's 500 Index; the ending values are $25,208 and $37,387, respectively.
E. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager Fund (the "Fund"). The
corresponding components of the line graph are listed underneath. The Fund is
represented by a broken line. The Standard & Poor's 500 Index is represented by
a solid line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund and The Standard
& Poor's 500 Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 3/7/95
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Standard & Poor's 500 Index; the
ending values are $18,536 and $20,576, respectively.
F. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Virginia Municipal Bond Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/24/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,433 and $17,493, respectively.
G. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Virginia Municipal Bond Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/24/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,605 and $17,493, respectively.
H. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Maryland Municipal Bond Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/30/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $14,974 and $17,493, respectively.
I. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Maryland Municipal Bond Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/30/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,142 and $17,493, respectively.
<PAGE>
EVERGREEN EQUITY TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust. Incorporated by reference to Evergreen Equity Trust's
Registration Statement on Form N-1A filed on October 8, 1997 - Registration No.
333-37453 ("Form N-1A Registration Statement")
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit A to Prospectus contained in
Part A of this Registration Statement.
5. Declaration of Trust of Evergreen Equity Trust Articles
II., III.(6)(c), IV.(3), IV.(8), V., VI., VII., VIII. and By-Laws
Articles II., III. and VIII.
6(a). Form of Investment Advisory Agreement between First Union National Bank
and Evergreen Equity Trust. Incorporated by reference to the Form N-1A
Registration Statement.
6(b). Form of Interim Investment Advisory Agreement. Exhibit
B to Prospectus contained in Part A of this Registration
Statement.
6(c). Form of Interim Sub-Advisory Agreement. Exhibit C to
Prospectus contained in Part A of this Registration Statement.
7(a). Distribution Agreement between Evergreen Distributor,
Inc. and Evergreen Equity Trust. Incorporated by reference to
the Form N-1A Registration Statement.
<PAGE>
7(b). Form of Dealer Agreement for Class A, Class B and Class C shares used by
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
8. Deferred Compensation Plan. Incorporated by reference to the Form N-1A
Registration Statement.
9. Custody Agreement between State Street Bank and Trust Company and Evergreen
Equity Trust. Incorporated by reference to the Form N-1A Registration Statement.
10(a). Rule 12b-1 Distribution Plan. Incorporated by reference to the Form N-1A
Registration Statement.
10(b). Multiple Class Plan. Incorporated by reference to the
Form N-1A Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. Filed herewith.
13. Not applicable.
14(a). Consent of KPMG Peat Marwick LLP. Filed herewith.
14(b). Consent of Deloitte & Touche LLP. Filed herewith.
15. Not applicable.
16. Powers of Attorney. Previously filed.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the
<PAGE>
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 copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post- Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of New York and State of New York, on the 22nd day of
December, 1997.
EVERGREEN EQUITY TRUST
By: /s/ William J. Tomco
-----------------------
Name: William J. Tomko
Title: President
As required by the Securities Act of 1933, the following persons
have signed this Post-Effective Amendment No. 1 to the Registration Statement in
the capacities indicated on the 22nd day of December, 1997.
Signatures Title
- ---------- -----
/s/William J. Tomko President and
- ------------------- Treasurer
William J. Tomko
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
<PAGE>
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
Gerald M. McDonnell
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
12 Tax Opinion and Consent of Sullivan & Worcester LLP
14(a) Consent of KPMG Peat Marwick LLP
14(b) Consent of Deloitte & Touche LLP
17 Form of Proxy
- --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
December 23, 1997
Evergreen Equity Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Equity Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 17, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Evergreen Value Fund (the "Acquiring Fund"), a series of the Trust. We
understand that the Trust is about to file Post-Effective Amendment No. 1 to its
Registration Statement on Form N-14 (Registration No. 333-39869) for the purpose
of registering shares of the Acquiring Fund under the Securities Act of 1933, as
amended (the "1933 Act"), in connection with the proposed acquisition by the
Acquiring Fund of all of the assets of The Style Manager: Large Cap Fund (the
"Acquired Fund"), a series of a Massachusetts business trust with transferable
shares, in exchange solely for shares of the Acquiring Fund and the assumption
by the Acquiring Fund of certain identified liabilities of the Acquired Fund
pursuant to an Agreement and Plan of Reorganization, the form of which is
included in the Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and
the District of Columbia and generally do not purport to be familiar with the
laws of the State of Delaware.
<PAGE>
To the extent that the conclusions based on the laws of the State of Delaware
are involved in the opinion set forth herein below, we have relied, in rendering
such opinions, upon our examination of Chapter 38 of Title 12 of the Delaware
Code Annotated, as amended, entitled "Treatment of Delaware Business Trusts"
(the "Delaware business trust law") and on our knowlege of interpretation of
analogous common law of The Commonwealth of Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on February 20, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
December 22, 1997
The Style Manager:
Large Cap Fund
Evergreen Value Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of The Style Manager:
Large Cap Fund by Evergreen Value Fund
Ladies and Gentlemen:
You have asked for our opinion as to certain Federal income tax
consequences of the transactions described below:
Parties to the Transaction. The Style Manager: Large Cap
Fund ("Target Fund") is a series of a The Virtus Funds, a
Massachusetts business trust.
Evergreen Value Fund ("Acquiring Fund") is a series of Evergreen Equity
Trust, a Delaware business trust.
Description of Proposed Transaction. Acquiring Fund will issue its
shares to Target Fund and assume certain stated liabilities of Target Fund, in
exchange for all of the assets of Target Fund. Target Fund will then immediately
dissolve and distribute all of the Acquiring Fund shares which it holds to its
shareholders pro rata in proportion to their shareholdings in Target Fund, in
complete redemption of all outstanding shares of Target Fund.
Scope of Review and Assumptions. In rendering our opinion, we have
reviewed and relied upon the form of Agreement and Plan of Reorganization (the
"Reorganization Agreement") between Acquiring Fund and Target Fund dated as of
November 26, 1997 which is enclosed in a draft prospectus/proxy statement to be
dated January 5, 1998 which describes the proposed transaction, and on the
information provided in such prospectus/proxy statement. We have relied, without
independent verification, upon the factual statements made therein, and assume
that there will be no change in material facts disclosed therein between the
<PAGE>
date of this letter and the date of the closing of the transaction. We further
assume that the transaction will be carried out in accordance with the
Reorganization Agreement.
Representations. Written representations, copies of which are attached
hereto, have been made to us by the appropriate officers of Target Fund and of
Acquiring Fund, and we have without independent verification relied upon such
representations in rendering our opinions.
Opinions
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, we have the following opinions:
1. The acquisition by Acquiring Fund of all of the assets of Target
Fund solely in exchange for voting shares of Acquiring Fund and assumption of
certain specified liabilities of Target Fund followed by the distribution by
Target Fund of said Acquiring Fund shares to the shareholders of Target Fund in
exchange for their Target Fund shares will constitute a reorganization within
the meaning of ss. 368(a)(1)(C) of the Code, and Acquiring Fund and Target Fund
will each be "a party to a reorganization" within the meaning of ss. 368(b) of
the Code.
2. No gain or loss will be recognized to Target Fund upon the transfer
of all of its assets to Acquiring Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of certain specified liabilities
of Target Fund, or upon the distribution of such Acquiring Fund voting shares to
the shareholders of Target Fund in exchange for all of their Target Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of any liabilities of Target
Fund.
4. The basis of the assets of Target Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund
immediately prior to the transfer, and the holding period of the assets of
Target Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Target Fund.
5. The shareholders of Target Fund will recognize no gain or loss upon
the exchange of all of their Target Fund shares solely for Acquiring Fund voting
shares.
<PAGE>
6. The basis of the Acquiring Fund voting shares to be received by the
Target Fund shareholders will be the same as the basis of the Target Fund shares
surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Target Fund shareholders will include the period during which
the Target Fund shares surrendered in exchange therefor were held, provided the
Target Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in such
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Equity Trust
We consent to the use of our report dated August 22, 1997 for Evergreen Value
Fund incorporated by reference herein and to the reference to our firm under the
caption "FINANCIAL STATEMENTS AND EXPERTS" in the prospectus/proxy statement.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
December 22, 1997
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Evergreen Equity Trust on Form N-14 of our report on The Style Manager: Large
Cap Fund dated November 7, 1997, appearing in the Annual Report of The Virtus
Funds for the year ended September 30, 1997, and to the reference to us under
the heading "Financial Statements and Experts" in the Prospectus/Proxy
Statement, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 22, 1997
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THE STYLE MANAGER: LARGE CAP FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
C. Grant Anderson, Carol B. Kayworth, Patricia F. Conner, Ann M. Scanlon and
Catherine C. Ryan or any of them as Proxies of the undersigned, with full power
of substitution, to vote on behalf of the undersigned all shares of The Style
Manager: Large Cap Fund ("Large Cap") that the undersigned is entitled to vote
at the special meeting of shareholders of Large Cap to be held at 2:00 p.m. on
Friday, February 20, 1998 at the offices of the Evergreen Funds, 200 Berkeley
Street, Boston, Massachusetts 02116 and at any adjournments thereof, as fully as
the undersigned would be entitled to vote if personally present
.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON
THIS PROXY. If joint owners, EITHER may sign this
Proxy. When signing as attorney, executor,
administrator, trustee, guardian, or custodian for a
minor, please give your full title. When signing on
behalf of a corporation or as a partner for a
partnership, please give the full corporate or
partnership name and your title, if any.
Date , 199
----------------------------------------
----------------------------------------
Signature(s) and Title(s), if applicable
-1-
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE VIRTUS
FUNDS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTION TO
BE TAKEN ON THE FOLLOWING PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED
AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF
TRUSTEES OF THE VIRTUS FUNDS RECOMMENDS A VOTE FOR THE PROPOSALS. PLEASE MARK
YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK. EXAMPLE: X
---
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Value Fund, a series of Evergreen Equity Trust, will (i) acquire all of the
assets of Large Cap in exchange for shares of Evergreen Value Fund; and (ii)
assume certain identified liabilities of Large Cap, as substantially described
in the accompanying Prospectus/Proxy Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To approve the proposed Interim Investment Advisory Agreement with
Virtus Capital Management, Inc.
- ---- FOR ---- AGAINST ---- ABSTAIN
3. To approve the proposed Interim Sub-Advisory Agreement between Virtus
Capital Management, Inc. and Trend Capital Management, Inc.
- ---- FOR ---- AGAINST ---- ABSTAIN
4. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
