1933 Act Registration No. 333-41481
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 MUNICIPAL TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ________ pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on ________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on ________ pursuant to paragraph (a)(2) of Rule 485
Pursuant to Rule 414 under the Securities Act of 1933, by this
amendment to Registration Statement No. 333-41481 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 High
Grade Tax Free Fund
<PAGE>
series thereof under
the Securities Act of 1933.
<PAGE>
EVERGREEN MUNICIPAL 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 High
Grade Tax Free Fund dated
September 3, 1997, as amended
13. Additional Information Statement of Additional
about the Company Being Information of Blanchard Funds
Acquired - Blanchard Flexible Tax-Free
Bond Fund dated
November 30, 1997
14. Financial Statements Financial Statements dated May
31, 1997 of Evergreen High
Grade Tax Free Fund; Financial
Statements of Blanchard
Flexible Tax-Free Bond Fund
dated September 30, 1997; Pro
Forma Financial Statements
Item of Part C of Form N-14
Incorporated by Reference to
15. Indemnification Part A Caption - "Comparative
Information on Shareholders'
Rights - Liability and
Indemnification of Trustees"
<PAGE>
16. Exhibits
Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
BLANCHARD FUNDS
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January 7, 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of the Blanchard Flexible Tax-Free Bond Fund, a
series of Blanchard Funds (the "Fund"), to inform you of a Special Shareholders'
meeting to be held on February 20, 1998. Before that meeting, I would like your
vote on the important issues affecting your Fund as described in the attached
Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes three proposals. The first proposal
requests that shareholders consider and act upon an Agreement and Plan of
Reorganization whereby all of the assets of the Fund would be acquired by
Evergreen High Grade Tax Free Fund in exchange for Class A shares of Evergreen
High Grade Tax Free Fund and the assumption by Evergreen High Grade Tax Free
Fund of certain liabilities of the Fund. You will receive shares of Evergreen
High Grade Tax Free Fund having an aggregate net asset value equal to the
aggregate net asset value of your Fund shares. Details about Evergreen High
Grade Tax Free 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 United States Trust Company of New York.
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 familiarize yourself with
the proposals presented and sign and
<PAGE>
return your proxy card in the enclosed postage-paid envelope
today.
If you have any questions about this proxy, please call our proxy solicitor,
Shareholder Communications Corporation, at 800-733- 8481 ext. 437. You may also
FAX your completed and signed proxy card to 800-733-1885.
If we do not receive your completed proxy card after several weeks, you may be
contacted by Shareholder Communications Corporation who will remind you to vote
your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
Blanchard Funds
<PAGE>
BLANCHARD FUNDS
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of Blanchard Flexible Tax-Free Bond Fund, a series of Blanchard
Funds ("Tax-Free"), will be held at the offices of the Evergreen Funds, 200
Berkeley Street, 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 Tax-Free by Evergreen High Grade Tax Free Fund, a series of
Evergreen Municipal Trust ("Evergreen Tax Free"), in exchange for shares of
Evergreen Tax Free and the assumption by Evergreen Tax Free of certain
identified liabilities of Tax-Free. The Plan also provides for distribution of
such shares of Evergreen Tax Free to shareholders of Tax-Free in liquidation and
subsequent termination of Tax-Free. A vote in favor of the Plan is a vote in
favor of the liquidation and dissolution of Tax-Free .
2. To consider and act upon the Interim Management Contract between
Tax-Free and Virtus Capital Management, Inc.
3. To consider and act upon the Interim Sub-Advisory
Agreement between Virtus Capital Management, Inc. and United
States Trust Company of New York.
4. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of Blanchard Funds on behalf of Tax-Free have fixed the
close of business on December 26, 1997 as the record date for the determination
of shareholders of Tax-Free 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 ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR
<PAGE>
SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED
PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Trustees
John W. McGonigle
Secretary
January 7, 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr. John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JANUARY 7, 1998
Acquisition of Assets of
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
a series of
Blanchard Funds
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
EVERGREEN HIGH GRADE TAX FREE FUND
a series of
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
Blanchard Flexible Tax-Free Bond Fund ("Tax- Free") in connection with a
proposed Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Tax-Free 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 Tax-Free to
be acquired by Evergreen High Grade Tax Free Fund ("Evergreen Tax Free") in
exchange for shares of Evergreen Tax Free and the assumption by Evergreen Tax
Free of certain identified liabilities of Tax-Free (hereinafter referred to as
the "Reorganization"). Evergreen Tax Free and Tax-Free are sometimes hereinafter
referred to individually as the "Fund" and collectively as the "Funds."
Following the Reorganization, shares of Evergreen Tax Free will be distributed
to shareholders of Tax-Free in liquidation of Tax- Free and such Fund will be
terminated. Holders of shares of Tax- Free will receive Class A shares of
Evergreen Tax Free having the same Rule 12b-1 distribution-related fees as the
shares of Tax- Free held by such holders prior to the Reorganization. No initial
sales charge will be imposed in connection with Class A shares of Evergreen Tax
Free received by holders of shares of Tax-Free. As a result of the proposed
Reorganization, shareholders of Tax-Free will receive that number of full and
fractional Class A shares of Evergreen Tax Free having an aggregate net asset
value equal to the aggregate net asset value of such shareholder's shares of
Tax-Free. The Reorganization is being structured as a tax-free reorganization
for federal income tax purposes.
<PAGE>
Evergreen Tax Free is a separate series of Evergreen Municipal Trust,
an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). Evergreen Tax Free seeks a
high level of federally tax free income that is consistent with preservation of
capital. Such investment objective is substantially identical to that of
Tax-Free.
Shareholders of Tax-Free are also being asked to approve the Interim
Management Contract with Virtus Capital Management, Inc., a subsidiary of First
Union Corporation ("Virtus") (the "Interim Advisory Agreement"), with the same
terms and fees as the previous advisory agreement between Tax-Free and Virtus
and the Interim Sub-Advisory Agreement between Virtus and United States Trust
Company of New York ("U.S. Trust") with the same terms and fees as the previous
sub-advisory agreement between Virtus and U.S. Trust. 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 Tax Free that
shareholders of Tax-Free should know before voting on the Reorganization.
Certain relevant documents listed below, which have been filed with the
Securities and Exchange Commission ("SEC"), are incorporated in whole or in part
by reference. A Statement of Additional Information dated January 7, 1998,
relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Evergreen Tax Free dated May 31, 1997 and
Tax-Free 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 Tax Free at 200 Berkeley Street, Boston,
Massachusetts 02116, or by calling toll-free 1-800-343- 2898.
The Prospectus of Evergreen Tax Free relating to Class A and Class B
shares dated September 3, 1997, as amended, and its Annual Report for the year
ended May 31, 1997 are incorporated herein by reference in their entirety,
insofar as they relate to Evergreen Tax Free only, and not to any other fund
described therein. Shareholders of Tax-Free will receive, with this
Prospectus/Proxy Statement, a copy of the Prospectus of Evergreen Tax Free.
Additional information about Evergreen Tax Free is contained in
<PAGE>
its Statement of Additional Information of the same date which has been filed
with the SEC and which is available upon request and without charge by writing
to or calling Evergreen Tax Free at the address or telephone number listed in
the preceding paragraph.
The Prospectus of Tax-Free dated November 30, 1997, insofar as it
relates to Tax-Free only, and not to any other funds described therein, is
incorporated herein in its entirety by reference. Copies of the Prospectus and
related Statement of Additional Information dated the same date are available
upon request without charge by writing to Tax-Free 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 ..............................................................8
Proposed Plan of Reorganization...............................9
Tax Consequences.............................................10
Investment Objectives and Policies of the Funds..............11
Comparative Performance Information for each Fund.....................11
Management of the Funds......................................12
Investment Advisers and Sub-Adviser..........................12
Administrators...............................................13
Portfolio Management.........................................14
Distribution of Shares.......................................14
Purchase and Redemption......................................15
Exchange Privileges..........................................16
Dividend Policy..............................................16
Risks ....................................................17
REASONS FOR THE REORGANIZATION..................................... 18
Agreement and Plan of Reorganization.........................20
Federal Income Tax Consequences..............................22
Pro-forma Capitalization.....................................24
Shareholder Information......................................25
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES......................25
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS.......................27
Forms of Organization........................................27
Capitalization............................................ 28
Shareholder Liability........................................28
Shareholder Meetings and Voting Rights.......................29
Liquidation or Dissolution................................ 30
Liability and Indemnification of Trustees....................30
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT..................31
Introduction.................................................31
Comparison of the Interim Advisory Agreement and the
Previous Advisory Agreement.........................32
Information about Tax-Free's Investment Adviser..............34
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT..............34
Introduction.................................................34
Comparison of the Interim Sub-Advisory Agreement and
the Previous Sub-Advisory Agreement...................................35
ADDITIONAL INFORMATION............................................. 37
<PAGE>
VOTING INFORMATION CONCERNING THE MEETING.............................37
FINANCIAL STATEMENTS AND EXPERTS......................................40
OTHER BUSINESS..................................................... 41
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class A shares of Evergreen Tax Free set forth in the
following tables and in the examples are based on the expenses of Evergreen Tax
Free for the fiscal year ended May 31, 1997. The amounts for shares of Tax-Free
set forth in the following tables and in the examples are based on the expenses
for Tax-Free for the fiscal year ended September 30, 1997. The pro forma amounts
for Class A shares of Evergreen Tax Free are based on what the combined expenses
would have been for Evergreen Tax Free for the fiscal year ending May 31, 1997.
All amounts are adjusted for voluntary expense waivers.
The following tables show for Evergreen Tax Free, Tax-Free and
Evergreen Tax Free pro forma, assuming consummation of the Reorganization, the
shareholder transaction expenses and annual fund operating expenses associated
with an investment in the Class A shares of Evergreen Tax Free and shares of
Tax-Free, as applicable.
Comparison of Class A Shares
of Evergreen Tax Free With
Shares of Tax-Free
<TABLE>
<CAPTION>
Evergreen
Evergreen Tax Free
Tax Free Tax-Free Pro Forma
--------- -------- --------
<S> <C> <C> <C>
Shareholder
Transaction Class A Shares Class A
Expenses ------- ------ -------
Maximum Sales Load 4.75% None 4.75%
Imposed on Purchases
(as a percentage of
offering price)(1)
Maximum Sales Load None None None
Imposed on
Reinvested Dividends
(as a percentage of
offering price)
<PAGE>
Contingent Deferred None None None
Sales Charge (as a
percentage of
original purchase
price or redemption
proceeds, whichever
is lower)
Exchange Fee None None None
Annual Fund
Operating Expenses
(as a percentage of
average daily net
assets)
Management Fee 0.42% 0.00% 0.50%
(After Waiver)
(2)
12b-1 Fees (After Waiver)(3) 0.25% 0.00% 0.25%
Other Expenses (After Waiver)(4) 0.36% 1.00% 0.28%
------ ------ -----
Annual Fund 1.03% 1.00% 1.03%
Operating Expenses (6) ------ ------
(5) ------ ------ ------
------
</TABLE>
- ---------------
(1) The 4.75% sales load, as described in the "Examples" paragraph below,
has been waived for Tax-Free's shareholders.
(2) The management fee has been reduced to reflect the voluntary waiver by
the investment adviser. The adviser can terminate this voluntary waiver
at any time in its sole discretion. The maximum management fee is 0.50%
in the case of Evergreen Tax Free and is 0.75% in the case of Tax-Free.
(3) Class A shares of Evergreen Tax Free 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. Tax Free has
adopted a 12b-1 plan which allows the Fund to pay 0.25% as a 12b-1 fee. The
12b-1 fee is being waived by Tax Free.
(4) Reflects a waiver of 0.05% in administration fees for Tax Free. Absent such
waiver, Other Expenses would have been 1.05%.
(5) Annual Fund Operating Expenses for Evergreen Tax Free and Tax-Free would
have been 1.11% and 2.05%, respectively, absent the voluntary waivers.
<PAGE>
(6) Includes indirectly paid expenses.
Examples. The following tables show for Evergreen Tax Free and
Tax-Free, and for Evergreen Tax Free 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. In the case of
Evergreen Tax Free pro forma, the example does not reflect the imposition of the
4.75% maximum sales load on purchases since Tax-Free shareholders who receive
Class A shares of Evergreen Tax Free in the Reorganization or who purchase
additional Class A shares of Evergreen Tax Free subsequent to the Reorganization
will not incur any sales load.
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Evergreen Tax Free $58 $79 $102 $167
Class A
Tax-Free $10 $32 $55 $122
Evergreen Tax Free $11 $33 $57 $126
Pro Forma
Class A
</TABLE>
The purpose of the foregoing examples is to assist Tax-Free
shareholders in understanding the various costs and expenses that an investor in
Evergreen Tax Free as a result of the Reorganization would bear directly and
indirectly, as compared with the various direct and indirect expenses currently
borne by a shareholder in Tax-Free. These examples should not be considered a
representation of past or future expenses or annual return. Actual expenses may
be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement
and, to the extent not inconsistent with such additional information, the
Prospectus of Evergreen Tax Free dated September 3, 1997, as amended, and the
Prospectus of Tax-Free dated November 30, 1997 (which
<PAGE>
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 Tax-Free in
exchange for shares of Evergreen Tax Free and the assumption by Evergreen Tax
Free of certain identified liabilities of Tax-Free. The identified liabilities
consist only of those liabilities reflected on the Fund's statement of assets
and liabilities immediately preceding the Reorganization. The Plan also calls
for the distribution of shares of Evergreen Tax Free to Tax-Free shareholders in
liquidation of Tax-Free as part of the Reorganization. As a result of the
Reorganization, the shareholders of Tax-Free will become the owners of that
number of full and fractional Class A shares of Evergreen Tax Free having an
aggregate net asset value equal to the aggregate net asset value of the
shareholders' shares of Tax-Free as of the close of business immediately prior
to the date that Tax- Free's assets are exchanged for shares of Evergreen Tax
Free. See "Reasons for the Reorganization - Agreement and Plan of
Reorganization."
The Trustees of Blanchard Funds, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of Tax-Free, and that the interests of the
shareholders of Tax-Free will not be diluted as a result of the transactions
contemplated by the Reorganization. Accordingly, the Trustees have submitted the
Plan for the approval of Tax-Free's shareholders.
THE BOARD OF TRUSTEES OF BLANCHARD FUNDS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF TAX-FREE
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Municipal Trust have also approved the Plan,
and accordingly, Evergreen Tax Free's participation in the Reorganization.
Approval of the Reorganization on the part of Tax-Free will require the
affirmative vote of a majority of Tax-Free'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."
<PAGE>
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 Tax-Free and the sub-advisory
agreement between Virtus and U.S. Trust. Prior to consummation of the Merger,
Tax-Free 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
U.S. Trust 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 Tax- Free and Virtus and the
previous sub-advisory agreement between Virtus and U.S. Trust, 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
Tax-Free present in person or by proxy at the Meeting, if holders of more than
50% of the shares of Tax- Free outstanding on the record date are present, in
person or by proxy, or (ii) more than 50% of the outstanding shares of Tax-
Free, whichever is less. See "Voting Information Concerning the Meeting."
If the shareholders of Tax-Free 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, Tax- Free 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 Tax Free in the Reorganization. The holding period and
aggregate tax basis of shares of Evergreen Tax Free that are received by
Tax-Free'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 Tax-Free in the hands of Evergreen Tax Free as a
result of the Reorganization will be the same as in the hands of the Fund
immediately prior to
<PAGE>
the Reorganization, and no gain or loss will be recognized by Evergreen Tax Free
upon the receipt of the assets of the Fund in exchange for shares of Evergreen
Tax Free and the assumption by Evergreen Tax Free of certain identified
liabilities.
Investment Objectives and Policies of the Funds
The investment objectives and policies of Evergreen Tax Free and
Tax-Free are substantially identical.
The investment objective of Evergreen Tax Free is to seek a high level
of federally tax free income that is consistent with preservation of capital. At
least 65% of the value of the total assets of the Fund will be invested in high
grade bonds. High grade bonds mean: bonds insured by a municipal bond insurance
company which is rated AAA by Standard & Poor's Ratings Group ("S&P") and/or Aaa
by Moody's Investors Service ("Moody's"); bonds rated A or better by S&P or
Moody's; or, if unrated, of comparable quality as determined by the Fund's
investment adviser. The insurance guarantees the timely payment of principal and
interest, but not the value of the municipal bonds or the shares of the Fund.
The investment objective of Tax-Free is to provide a high level of
current interest income exempt from federal income tax consistent with the
preservation of principal. The Fund invests primarily in bonds of varying
maturities issued by or on behalf of states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities and instrumentalities, the interest from which, in the
opinion of bond counsel for the issuer, is exempt from federal income tax. The
Fund has no restrictions on the maturities of bonds that it may purchase.
Rather, it retains the flexibility to lengthen or shorten the overall maturity
of its portfolio based on the Sub-Adviser's outlook on interest rate movements,
as it attempts to reduce any price volatility. The Fund invests primarily in
high quality, investment-grade bonds. See "Comparison of Investment Objectives
and Policies" below.
Comparative Performance Information for each Fund
Discussions of the manner of calculation of total return are contained
in the respective Prospectus and Statement of Additional Information of the
Funds. The total return of Evergreen Tax Free and Tax-Free for the one and five
year periods ended September 30, 1997, and for both Funds for the periods from
inception through September 30, 1997 are set forth in the table below. The
calculations of total return assume the reinvestment of all dividends and
capital gains distributions on the reinvestment date and the deduction of all
recurring expenses
<PAGE>
(including sales charges) that were charged to shareholders'
accounts.
<TABLE>
<CAPTION>
Average Annual Total Return (1)
1 Year
Ended 5 Years From
September Ended Inception To
30, September September Inception
1997 30, 1997 30, 1997 Date
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Evergreen 2.86% 5.81% 6.42% 2/21/92
Tax Free
Class A
shares
Tax-Free 9.59% N/A 7.63% 8/12/93
</TABLE>
- --------------
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the average
annual total return during the periods would have been lower.
Important information about Evergreen Tax Free is also contained in
management's discussion of Evergreen Tax Free's performance, attached hereto as
Exhibit D. This information also appears in Evergreen Tax Free's most recent
Annual Report.
Management of the Funds
The overall management of Evergreen Tax Free and of Tax-Free is the
responsibility of, and is supervised by, the Board of Trustees of Evergreen
Municipal Trust and Blanchard Funds, respectively.
Investment Advisers and Sub-Adviser
The Capital Management Group ("CMG") of First Union National Bank
("FUNB") serves as investment adviser to Evergreen Tax Free. 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. CMG, Evergreen Asset
Management Corp. ("Evergreen Asset") and Keystone Investment Management Company
manage the Evergreen family of mutual funds with assets of approximately $40
billion as of November 30, 1997. For further information regarding CMG, FUNB and
First Union, see "Management of the Funds - Investment Advisers" in the
Prospectus of Evergreen Tax Free.
<PAGE>
CMG manages investments and supervises the daily business affairs of
Evergreen Tax Free. CMG is entitled to receive an annual fee for its services
equal to 0.50% of the Fund's average daily net assets.
Virtus serves as the investment adviser for Tax-Free. As investment
adviser, Virtus is responsible for providing or procuring for the Fund all
management and administrative services. In carrying out its obligations, Virtus
provides or arranges for investment research and supervision of the Fund's
investments; selects and evaluates the performance of the Fund's sub-adviser,
U.S. Trust; and conducts or arranges for a continuous program of appropriate
sale or other disposition of the Fund's assets, subject at all times to the
direction of the Board of Trustees. Virtus compensates U.S. Trust from the
advisory fee received from Tax-Free. 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 Tax Free. As administrator, EIS provides facilities, equipment and
personnel to Evergreen Tax Free 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 CMG 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 Tax-Free with
certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to receive a fee for such services at the
following annual rates: 0.15% on the first $250 million of average daily net
assets of combined assets of the funds in the Blanchard/Virtus mutual fund
family, 0.125% on the next $250 million of such assets, 0.10% on the next $250
million of such assets, and 0.075% on assets in excess of $750 million.
Portfolio Management
<PAGE>
The portfolio manager of Evergreen Tax Free is James T. Colby, III. Mr.
Colby is a Vice President of CMG and has been associated with Evergreen Asset
and its predecessor since 1992. He has served as portfolio manager of the Fund
and was portfolio manager of Evergreen National Tax Free Fund, the assets of
which were acquired by the Fund on July 7, 1995, since that fund's inception in
1992.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of Evergreen Tax Free's shares. EDI distributes
the Fund's shares directly or through broker-dealers, banks (including FUNB), or
other financial intermediaries. Evergreen Tax Free offers three classes of
shares: Class A, Class B 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 Tax-Free will receive
Class A shares of Evergreen Tax Free. Class A shares of Evergreen Tax Free have
substantially similar arrangements with respect to the imposition of Rule 12b-1
distribution and service fees as the shares of Tax-Free. Because the
Reorganization will be effected at net asset value without the imposition of a
sales charge, Evergreen Tax Free shares acquired by shareholders of Tax-Free
pursuant to the proposed Reorganization would not be subject to any initial
sales charge or contingent deferred sales charge as a result of the
Reorganization.
The following is a summary description of charges and fees for the
Class A shares of Evergreen Tax Free which will be received by Tax-Free
shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
each Fund's respective Prospectus and each Fund's respective Statement of
Additional Information.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees. 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 Prospectus for Evergreen Tax Free. Holders of
shares of Tax-Free who receive Class A shares of Evergreen Tax Free in the
Reorganization will be able to purchase additional Class A shares
<PAGE>
of Evergreen Tax Free and of any other Evergreen fund at net asset value. No
initial sales charge will be imposed.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectus and Statement of Additional Information.
Distribution-Related Expenses. Evergreen Tax Free has adopted a Rule
12b-1 plan with respect to its Class A shares under which the Class may pay for
distribution-related expenses at an annual rate which may not exceed 0.75% of
average daily net assets attributable to the Class. Payments with respect to
Class A shares are currently limited to 0.25% of average daily net assets
attributable to the Class, which amount may be increased to the full plan rate
for the Fund by the Trustees without shareholder approval.
Tax-Free has adopted a Rule 12b-1 plan with respect to its shares under
which such shares may pay for distribution-related expenses at an annual rate of
0.25% of average daily net assets.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectus and Statement of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related fees is provided above. Investments in the Funds are not
insured. The minimum initial purchase requirement for Evergreen Tax Free is
$1,000 and the minimum investment for Tax-Free is $3,000 ($2,000 for qualified
pension plans). Tax- Free has a minimum investment requirement of $200 for
subsequent investments. There is no minimum for subsequent purchases of shares
of Evergreen Tax Free. Each Fund provides for telephone, mail or wire redemption
of shares at net asset value as next determined after receipt of a redemption
request on each day the New York Stock Exchange ("NYSE") is open for trading.
Additional information concerning purchases and redemptions of shares, including
how each Fund's net asset value is determined, is contained in the respective
Prospectus for each Fund. Each Fund may involuntarily redeem shareholders'
accounts that have less than $1,000 of invested funds. All funds invested in
each Fund are invested in full and fractional shares. The Funds reserve the
right to reject any purchase order.
Exchange Privileges
Tax-Free currently permits shareholders to exchange such shares for
shares of another fund in the Blanchard Group of Funds
<PAGE>
or for Investment shares of other funds managed by Virtus. In addition, such
shares may be exchanged for shares of Federated Emerging Markets Fund. Holders
of shares of a class of Evergreen Tax Free generally may exchange their shares
for shares of the same class of any other Evergreen fund. Tax-Free shareholders
will be receiving Class A shares of Evergreen Tax Free in the Reorganization
and, accordingly, with respect to shares of Evergreen Tax Free received by
Tax-Free shareholders in the Reorganization, the exchange privilege is limited
to the Class A shares of other Evergreen funds. No sales charge is imposed on an
exchange. An exchange which represents an initial investment in another
Evergreen fund must amount to at least $1,000. The current exchange privileges,
and the requirements and limitations attendant thereto, are described in each
Fund's respective Prospectus and Statement of Additional Information.
Dividend Policy
Each Fund declares dividends from its net investment income daily and
distributes such dividends monthly. 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 Prospectus of each Fund for further information
concerning dividends and distributions.
After the Reorganization, shareholders of Tax-Free who have elected to
have their dividends and/or distributions reinvested will have dividends and/or
distributions received from Evergreen Tax Free reinvested in shares of Evergreen
Tax Free. Shareholders of Tax-Free who have elected to receive dividends and/or
distributions in cash will receive dividends and/or distributions from Evergreen
Tax Free 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 Tax Free.
Each of Evergreen Tax Free and Tax-Free 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
<PAGE>
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.
Neither Fund may invest more than 5% of its assets in securities of any
one issuer or purchase more than 10% of the outstanding voting securities of any
one issuer. As a diversified portfolio under the 1940 Act, these restrictions
apply to 75% of the assets of Evergreen Tax Free. However, because Tax-Free is a
non-diversified portfolio for purposes of the 1940 Act, these 5% restrictions
apply to 50% of the assets of Tax-Free. The remaining 50% of the assets of
Tax-Free may be invested up to 25% in the securities of a single issuer.
Nondiversification may increase investment risks.
The ability of the Funds to meet their investment objectives is subject
to the ability of municipal issuers to meet their payment obligations. In
addition, the portfolios of the Funds will be affected by general changes in
interest rates which will result in increases or decreases in the value of the
fixed income securities held by the Funds.
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 Tax-Free by various units of
Signet and various unaffiliated parties. It is also expected that Signet will no
longer, upon completion of the Reorganization and similar reorganizations of
other funds in the Signet mutual fund family, provide investment advisory or
administrative services to investment companies.
At a meeting held on September 16, 1997, the Board of Trustees of
Blanchard Funds considered and approved the Reorganization as in the best
interests of shareholders of Tax- Free and determined that the interests of
existing shareholders of Tax-Free 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 Tax-Free.
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise Blanchard Funds. The Merger caused,
as a matter of law, termination of the investment advisory agreement between
each series of Blanchard Funds and Virtus and the sub-advisory agreement between
Virtus and U.S. Trust with respect to the Fund. Blanchard Funds have received an
order from the SEC which permits Virtus and U.S. Trust to continue to act as
Tax-Free'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 Tax Free and Tax-Free. Specifically, Evergreen Tax Free and
Tax-Free have substantially identical investment objectives and policies and
comparable risk profiles. See "Comparison of Investment Objectives and Policies"
below. At the same time, the Board of Trustees evaluated the potential economies
of scale associated with larger mutual funds and concluded that operational
efficiencies may be achieved upon the combination of Tax-Free with an Evergreen
fund with a greater level of assets. As of September 30, 1997, Evergreen Tax
Free's net assets were approximately $103 million and Tax-Free's net assets were
approximately $24 million.
In addition, assuming that an alternative to the Reorganization would
be to propose that Tax-Free continue its existence and be separately managed by
CMG or one of its affiliates, Tax-Free would be offered through common
distribution channels with the substantially similar Evergreen Tax Free. Tax-
Free 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
<PAGE>
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 Blanchard Funds met and considered the
recommendation of Signet and FUNB and, in addition, considered among other
things, (i) the terms and conditions of the Reorganization; (ii) whether the
Reorganization would result in the dilution of shareholders' interests; (iii)
expense ratios, fees and expenses of Evergreen Tax Free and Tax-Free; (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 CMG; (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 Tax-Free in connection with the Reorganization; (x) the
fact that Evergreen Tax Free will assume certain identified liabilities of
Tax-Free; and (xi) the expected federal income tax consequences of the
Reorganization.
The Trustees also considered the benefits to be derived by shareholders
of Tax-Free from the sale of its assets to Evergreen Tax Free. 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 Tax-Free.
In addition, the Trustees considered that there are alternatives
available to shareholders of Tax-Free, 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 Municipal Trust also concluded at a meeting
on September 17, 1997 that the proposed Reorganization would be in the best
interests of shareholders of Evergreen Tax Free and that the interests of the
shareholders of Evergreen Tax Free would not be diluted as a result of the
transactions contemplated by the Reorganization.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF TAX-FREE APPROVE
THE PROPOSED REORGANIZATION.
Agreement and Plan of Reorganization
<PAGE>
The following summary is qualified in its entirety by reference to the
Plan (Exhibit A hereto).
The Plan provides that Evergreen Tax Free will acquire all of the
assets of Tax-Free in exchange for shares of Evergreen Tax Free and the
assumption by Evergreen Tax Free of certain identified liabilities of Tax-Free
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, Tax-Free will endeavor
to discharge all of its known liabilities and obligations. Evergreen Tax Free
will not assume any liabilities or obligations of Tax-Free other than those
reflected in an unaudited statement of assets and liabilities of Tax-Free
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 Tax Free to be
received by the shareholders of Tax-Free will be determined by multiplying the
respective outstanding class of shares of Tax-Free by a factor which shall be
computed by dividing the net asset value per share of the respective class of
shares of Tax-Free by the net asset value per share of the respective class of
shares of Evergreen Tax Free. 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 Tax
Free, will compute the value of each Fund's respective portfolio securities. The
method of valuation employed will be consistent with the procedures set forth in
the Prospectus and Statement of Additional Information of Evergreen Tax Free,
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, Tax-Free 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).
<PAGE>
As soon after the Closing Date as conveniently practicable, Tax-Free
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 Tax
Free received by Tax- Free. 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 Tax Free's transfer agent. Each
account will represent the respective pro rata number of full and fractional
shares of Evergreen Tax Free due to the Fund's shareholders. All issued and
outstanding shares of Tax-Free, including those represented by certificates,
will be canceled. The shares of Evergreen Tax Free to be issued will have no
preemptive or conversion rights. After such distributions and the winding up of
its affairs, Tax-Free will be terminated. In connection with such termination,
Blanchard Funds will file with the SEC an application for termination as a
registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Tax- Free'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 Tax-Free's shareholders,
the Plan may be terminated (a) by the mutual agreement of Tax-Free and Evergreen
Tax Free; 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 Tax-Free 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 Tax-Free or its shareholders. There are not any
liabilities or any expected reimbursements in connection with the 12b-1 Plan of
Tax-Free. As a result, no 12b-1 liabilities will be assumed by Evergreen Tax
Free following the Reorganization.
If the Reorganization is not approved by shareholders of Tax-Free, the
Board of Trustees of Blanchard Funds will consider other possible courses of
action in the best interests of shareholders.
Federal Income Tax Consequences
<PAGE>
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, Tax-Free 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 federal income tax
purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of Tax-Free solely in exchange
for shares of Evergreen Tax Free and the assumption by Evergreen Tax Free of
certain identified liabilities, followed by the distribution of Evergreen Tax
Free's shares by Tax-Free in dissolution and liquidation of Tax-Free, will
constitute a "reorganization" within the meaning of section 368(a)(1)(C) of the
Code, and Evergreen Tax Free and Tax-Free 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 Tax-Free on the transfer of
all of its assets to Evergreen Tax Free solely in exchange for Evergreen Tax
Free's shares and the assumption by Evergreen Tax Free of certain identified
liabilities of Tax-Free or upon the distribution of Evergreen Tax Free's shares
to Tax- Free's shareholders in exchange for their shares of Tax-Free;
(3) The tax basis of the assets transferred will be the same to
Evergreen Tax Free as the tax basis of such assets to Tax-Free immediately prior
to the Reorganization, and the holding period of such assets in the hands of
Evergreen Tax Free will include the period during which the assets were held by
Tax-Free;
(4) No gain or loss will be recognized by Evergreen Tax Free upon the
receipt of the assets from Tax-Free solely in exchange for the shares of
Evergreen Tax Free and the assumption by Evergreen Tax Free of certain
identified liabilities of Tax- Free;
(5) No gain or loss will be recognized by Tax-Free's shareholders upon
the issuance of the shares of Evergreen Tax Free to them, provided they receive
solely such shares (including fractional shares) in exchange for their shares of
Tax-Free; and
(6) The aggregate tax basis of the shares of Evergreen Tax Free,
including any fractional shares, received by each of the shareholders of
Tax-Free pursuant to the Reorganization will be the same as the aggregate tax
basis of the shares of Tax-Free held by such shareholder immediately prior to
the Reorganization, and the holding period of the shares of Evergreen Tax Free,
<PAGE>
including fractional shares, received by each such shareholder will include the
period during which the shares of Tax-Free exchanged therefor were held by such
shareholder (provided that the shares of Tax-Free were held as a capital asset
on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Tax- Free 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 Tax Free
shares he or she received. Shareholders of Tax-Free 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 Tax Free. Since the
foregoing discussion relates only to the federal income tax consequences of the
Reorganization, shareholders of Tax-Free 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 Tax
Free and Tax-Free as of September 30, 1997 and the capitalization of Evergreen
Tax Free 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 0.49687 Class A shares of Evergreen Tax Free
issued for each share of Tax-Free.
<TABLE>
<CAPTION>
Capitalization of Tax-Free,
Evergreen Tax Free and Evergreen
Tax Free (Pro Forma)
Evergreen Tax
Free (After
Evergreen Reorgani-
Tax-Free Tax Free zation)
--------- -------- ------------
<S> <C> <C> <C>
Net Assets
Shares $24,076,686 N/A N/A
Class A........................ N/A $45,817,820 $69,894,506
Class B........................ N/A $32,427,388 $32,427,388
Class Y . . . . N/A $24,636,669 $24,636,699
----------- ----------- -----------
<PAGE>
Evergreen Tax
Free (After
Evergreen Reorgani-
Tax-Free Tax Free zation)
--------- -------- ------------
Total Net
Assets....................... $24,076,686 $102,881,877 $126,958,563
Net Asset Value Per
Share
Shares $5.56 N/A N/A
Class A........................ N/A $11.19 $11.19
Class B........................ N/A $11.19 $11.19
Class Y . . . . N/A $11.19 $11,19
Shares Outstanding
Shares 4,328,344 N/A N/A
Class A........................ N/A 6,245,517
4,094,883
Class B........................ N/A 2,898,047
2,898,047
Class Y . . . . N/A 2,201,748 2,201,748
---------- -----------
--
-------
All Classes.................... 9,194,678 11,345,312
4,328,344
</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 4,282,268
shares of beneficial interest of Tax-Free outstanding.
As of November 30, 1997, the officers and Trustees of Blanchard Funds
beneficially owned as a group less than 1% of the outstanding shares of
Tax-Free. To Tax-Free's knowledge, the following persons owned beneficially or
of record more than 5% of Tax-Free's total outstanding shares as of November 30,
1997:
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Percentage of Shares of
No. of Shares Before Class After
Name and Address Shares Reorganization Reorganization
<S> <C> <C> <C>
Stephens, Inc. 565,505 13.15% 4.51%
111 Center Street Class A
Little Rock, AR
72201-3507
William J. Harnett 345,335 8.03% 2.75%
Waldorf, MD Class A
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectus and Statement of Additional
Information of the Funds. The investment objective, policies and restrictions of
Evergreen Tax Free can be found in the Prospectus of Evergreen Tax Free under
the caption "Investment Objectives and Policies." Evergreen Tax Free's
Prospectus also offers additional funds advised by affiliates of FUNB. 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 Tax-Free can be found in the Prospectus of the Fund under the
caption "The Funds' Investment Objectives and Policies." Unlike the investment
objective of Tax-Free, which is fundamental, the investment objective of
Evergreen Tax Free is non-fundamental and can be changed by the Board of
Trustees without shareholder approval.
The investment objective of Evergreen Tax Free is to seek a high level
of federally tax free income that is consistent with preservation of capital. At
least 65% of the value of Evergreen Tax Free's assets will be invested in high
grade bonds. High grade bonds means: bonds insured by a municipal bond insurance
company which is rated AAA by S&P and/or Aaa by Moody's; bonds rated A or better
by S&P or Moody's; or, if unrated, of comparable quality as determined by the
Fund's investment adviser. The insurance guarantees the timely payment of
principal and interest but not the value of the municipal bonds or the shares of
the Fund.
Evergreen Tax Free may invest in municipal notes rated SP-1 or SP-2 by
S&P or MIG-1 or MIG-2 by Moody's or rated VMIG-1 or VMIG-2 by Moody's in the
case of variable rate demand notes or
<PAGE>
having comparable ratings from another statistical rating organization ("SRO")
and commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's or
having comparable ratings from another SRO. In addition, the Fund may invest up
to 35% of its assets in general obligation municipal bonds which are rated BBB
by S&P, Baa by Moody's or bear a similar rating from another SRO. These medium
grade bonds are more susceptible to adverse economic conditions or changing
circumstances than higher grade bonds. However, like the higher rated bonds,
these securities are considered to be investment grade.
The investment objective of Tax-Free is to provide a high level of
current interest income exempt from federal income tax consistent with the
preservation of principal. The Fund invests at least 65% of its assets in
municipal obligations which are determined by the Fund's sub-adviser to present
minimal credit risks. Tax-Free invests in substantially identical types of
municipal obligations in which Evergreen Tax Free invests. However, Tax-Free
invests only in (1) municipal bonds that are rated "A" or better by Moody's or
by S&P, or in lower rated municipal bonds that are deemed by the sub-adviser to
be comparable to A-rated issues; (2) municipal notes rated MIG-2 or VMIG-2 by
Moody's or SP-2 or better by S&P; and (3) municipal commercial paper rated
Prime-2 or better by Moody's or A-2 or better by S&P.
Under normal conditions, each Fund will maintain at least 80% of its
assets in obligations exempt from federal income tax including the alternative
minimum tax.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectus and Statement of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectus and Statement of Additional Information of each
Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Municipal Trust and Blanchard Funds are open-end management
investment companies registered with the SEC under the 1940 Act, which
continuously offer shares to the public. Evergreen Municipal Trust is organized
as a Delaware business trust and Blanchard Funds is organized as a Massachusetts
business trust. Each Trust is governed by a Declaration of Trust, By-Laws and a
Board of Trustees. Each Trust is also governed by applicable Delaware,
Massachusetts and federal law.
<PAGE>
Evergreen Tax Free is a series of Evergreen Municipal Trust and Tax-Free is a
series of Blanchard Funds.
As set forth in the Supplement to Evergreen Tax Free's Prospectus,
effective December 22, 1997, Evergreen High Grade Tax Free Fund, a series of
Evergreen Investment Trust, a Massachusetts business trust, was reorganized (the
"Delaware Reorganization") into a corresponding series (Evergreen Tax Free) of
Evergreen Municipal Trust. In connection with the Delaware Reorganization, the
Fund's investment objective was reclassified from "fundamental" to
"non-fundamental" and therefore may be changed without shareholder approval; the
Fund adopted certain standardized investment restrictions; and eliminated or
reclassified from fundamental to non-fundamental certain of the Fund's other
fundamental investment restrictions.
Capitalization
The beneficial interests in Evergreen Tax Free are represented by an
unlimited number of transferable shares of beneficial interest, $.001 par value
per share. The beneficial interests in Tax-Free 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 Tax-Free 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
<PAGE>
obligations of the series. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered remote since it is
limited to circumstances in which a disclaimer is inoperative and the series or
the trust itself would be unable to meet its obligations.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Municipal 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 Municipal 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 Municipal 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 Municipal Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Municipal Trust on behalf of Evergreen Tax Free nor
Blanchard Funds on behalf of Tax-Free 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 Municipal
Trust or Blanchard Funds. In addition, each is required to call a meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of the Trustees then holding office were elected by shareholders. Each
Trust currently does not intend to hold regular shareholder meetings. Each Trust
does not permit cumulative voting. Except when a larger quorum is required by
applicable law, a majority of
<PAGE>
the outstanding shares entitled to vote of each Fund constitutes a quorum for
consideration of such matter. For Evergreen Tax Free and Tax-Free, 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 Municipal Trust, each share
of Evergreen Tax Free is entitled to one vote for each dollar of net asset value
applicable to each share. Under the voting provisions governing Tax-Free, each
share is entitled to one vote. Over time, the net asset values of the mutual
funds which are each a series of Blanchard Funds have changed in relation to one
another and are expected to continue to do so in the future. Because of the
divergence in net asset values, a given dollar investment in a fund which is a
series of Blanchard Funds and which has a lower net asset value will purchase
more shares and, under the current voting provisions of Blanchard Funds, have
more votes, than the same investment in a series with a higher net asset value.
Under the Declaration of Trust of Evergreen Municipal 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 Tax Free and Tax-Free, the
shareholders are entitled to receive, when, and as declared by the Trustees, the
excess of the assets belonging to such Fund or attributable to the class over
the liabilities belonging to the Fund or attributable to the class. In either
case, the assets so distributable to shareholders of the Fund will be
distributed among the shareholders in proportion to the number of shares of a
class of the Fund held by them and recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declaration of Trust of Blanchard Funds provides that no Trustee
shall be liable for errors of judgment or mistakes of fact or law. No Trustee
shall be subject to liability unless such Trustee is found to have acted in bad
faith, with willful misfeasance, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
The Declaration of Trust of Blanchard Funds provides that a present or
former Trustee or officer is entitled to indemnification against liabilities and
expenses with respect to claims related to his or her position with the Trust,
provided that no indemnification shall be provided to a Trustee or officer
<PAGE>
against any liability to the Trust or any series thereof or the shareholders of
any series by reasons of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen Municipal 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 Blanchard Funds recommends that shareholders of
Tax-Free 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
<PAGE>
within 120 days of its effective date. The Interim Advisory Agreement will
remain in effect until the earlier of the Closing Date for the Reorganization or
two years from its effective date. The terms of the Interim Advisory Agreement
are essentially the same as the Previous Advisory Agreement (as defined below).
The only difference between the Previous Advisory Agreement and the Interim
Advisory Agreement, if approved by shareholders, is the length of time each
Agreement is in effect. A description of the Interim Advisory Agreement pursuant
to which Virtus continues as investment adviser to Tax-Free, as well as the
services to be provided by Virtus pursuant thereto is set forth below under
"Advisory Services." The description of the Interim Advisory Agreement in this
Prospectus/Proxy Statement is qualified in its entirety by reference to the
Interim Advisory Agreement, attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management, is an indirect wholly-owned subsidiary of
First Union. Virtus' address is 707 East Main Street, Suite 1300, Richmond,
Virginia 23219. Virtus has served as investment adviser pursuant to an
Investment Advisory Contract dated July 12, 1995. As used herein, the Investment
Advisory Agreement, as amended, for Tax-Free is referred to as the "Previous
Advisory Agreement." At a meeting of the Board of Trustees of Blanchard Funds
held on September 16, 1997, the Trustees, including a majority of the
Independent Trustees, approved the Interim Advisory Agreement for Tax-Free.
The Trustees have authorized Blanchard Funds, on behalf of Tax-Free, to
enter into the Interim Advisory Agreement with Virtus. Such Agreement became
effective on November 28, 1997. If the Interim Advisory Agreement for Tax-Free
is not approved by shareholders, the Trustees will consider appropriate actions
to be taken with respect to Tax-Free's investment advisory arrangements at that
time. The Previous Advisory Agreement was last approved by the Trustees,
including a majority of the Independent Trustees, on May 11, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus is responsible for
managing the Fund and overseeing the investment of its assets, subject at all
times to the supervision of the Board of Trustees. Virtus selects, monitors and
evaluates the Fund's sub- adviser. Virtus periodically reviews the sub-adviser's
<PAGE>
performance record and will make a change, if necessary, subject to approval of
the Board of Trustees and shareholders.
FAS currently acts as administrator of Tax-Free. FAS will continue
during the term of the Interim Advisory Agreement as Tax-Free's administrator
for the same compensation as currently received . An affiliate of FAS currently
performs transfer agency services for Tax-Free's shareholders . Commencing
February 9, 1998 Evergreen Service Company will provide such transfer agency
services for the same fees charged by Tax Free's current transfer agent. See
"Summary - Administrators."
Fees and Expenses. The investment advisory fees and expense limitations for
Tax-Free under the Previous Advisory Agreement and the Interim Advisory
Agreement are identical. See "Summary - Investment Advisers and Sub-Adviser."
Expense Reimbursement. Virtus may, if it deems appropriate, assume
expenses of the Fund or a class to the extent that the Fund's or classes'
expenses exceed such lower expense limitation as Virtus may, by notice to the
Fund, voluntarily declare to be effective.
The Interim Advisory Agreement contains an identical provision.
Payment of Expenses and Transaction Charges. Under the Previous
Advisory Agreement, Blanchard Funds was required to pay or cause to be paid on
behalf of the Fund, all of the Fund's expenses and the Fund's allocable share of
Blanchard Funds' expenses.
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to Blanchard Funds or to the Fund or to any shareholder
for any act or omission in the course of or connected in any way with rendering
services or for any losses that may be sustained in the purchase, holding or
sale of any security.
The Interim Advisory Agreement contains an identical provision.
<PAGE>
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 Tax-Free (as defined in the 1940 Act) or by a vote of the
Trustees of Blanchard Funds on 60 days' written notice to Virtus or by Virtus on
60 days' written notice to Blanchard Funds. Also, the Interim Advisory Agreement
will automatically terminate in the event of its assignment (as defined in the
1940 Act). The Previous Advisory Agreement contained identical provisions as to
termination and assignment.
Information about Tax-Free's Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, other funds of The Virtus Funds, the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus is set forth in Appendix A to this Prospectus/Proxy
Statement.
For the fiscal year ended September 30, 1997 and the period from May 1,
1996 to September 30, 1996, Virtus received from Tax- Free management fees of
$169,751 and $71,788, respectively, of which $142,067 and $71,788, respectively,
were voluntarily waived. For the fiscal year ended April 30, 1996, the Fund's
investment management fee paid to Virtus and the prior manager was $162,655, all
of which was voluntarily waived. Virtus is currently waiving a portion of its
management fee. See "Comparison of Fees and Expenses." Signet acts as custodian
for Tax-Free and received $16,080 for the fiscal year ended September 30, 1997.
Commencing on or about January 20, 1998 FUNB will act as Tax-Free'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 BLANCHARD FUNDS RECOMMEND THAT THE
SHAREHOLDERS OF TAX-FREE APPROVE THE INTERIM
ADVISORY AGREEMENT.
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT
Introduction
<PAGE>
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of Blanchard Funds recommends that shareholders of
Tax-Free 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 U.S. Trust 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 U.S. Trust continues as the investment sub-adviser to Tax-
Free, as well as the services to be provided by U.S. Trust 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.
U.S. Trust, 114 West 47th Street, New York, New York 10036, has served
as investment adviser to Tax-Free pursuant to a Sub- Advisory Agreement, dated
July 12, 1995. U.S. Trust, a New York State chartered bank and trust company
established in 1853, manages in excess of $58 billion in assets. U.S. Trust is a
financial services company that specializes in asset management, private
banking, fiduciary and securities services. Kenneth J. McAlley, an executive
vice president of U.S. Trust, has been actively engaged in municipal obligation
portfolio management with U.S. Trust for over 10 years and has been responsible
for the Fund's day-to-day investment decisions since the Fund commenced
operations in July 1993. See "Summary - Investment Advisers and Sub-Adviser." As
used herein, the Sub-Advisory Agreement for Tax-Free is referred to as the
"Previous Sub- Advisory Agreement." At a meeting of the Board of Trustees of
Blanchard Funds held on September 16, 1997, the Trustees, including a majority
of the Independent Trustees, approved the Interim Sub-Advisory Agreement for
Tax-Free.
The Trustees have authorized Blanchard Funds, on behalf of Tax-Free, to
enter into the Interim Sub-Advisory Agreement with Virtus and U.S. Trust. Such
Agreement became effective on November 28, 1997. If the Interim Sub-Advisory
Agreement for Tax-Free is not approved by shareholders, the Trustees will
consider appropriate actions to be taken with respect to Tax- Free's investment
sub-advisory arrangements at that time. The
<PAGE>
Previous Sub-Advisory Agreement was last approved by the Trustees, including a
majority of the Independent Trustees, on May 11, 1997.
Comparison of the Interim Sub-Advisory Agreement and the Previous
Sub-Advisory Agreement
Sub-Advisory Services. The management and advisory services to be
provided by U.S. Trust under the Interim Sub-Advisory Agreement are identical to
those currently provided by U.S. Trust under the Previous Sub-Advisory
Agreement. Under the Previous Sub-Advisory Agreement, U.S. Trust supervised the
investment and reinvestment of the cash, securities or other properties
comprising the Fund's portfolio, subject at all times to the direction of Virtus
and the policies and control of Blanchard Funds' Board of Trustees.
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 U.S. Trust was paid by Virtus a monthly fee at the annual rate of
0.20% of the Fund's average daily net assets.
The fee paid to U.S. Trust by Virtus for the fiscal year ended
September 30, 1997 was $45,267. The fee paid to U.S. Trust by Virtus for the
period from May 1, 1996 through September 30, 1996 was $19,145. The fee paid to
U.S. Trust and the prior sub- adviser by the prior manager and by Virtus for the
fiscal year ended April 30, 1996 was $42,605.
The names and addresses of the principal executive officers and
directors of U.S. Trust are set forth in Appendix B to this Prospectus/Proxy
Statement.
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 U.S. Trust or reckless disregard by U.S. Trust of its duties under the
Agreement, U.S. Trust shall not be liable to Virtus, Blanchard Funds or to any
shareholder of Blanchard Funds for any act or omission in the course of, or
connected with, rendering services thereunder or for any losses that may
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 Tax-Free (as defined in the 1940 Act) or by a vote of a
majority of Blanchard
<PAGE>
Funds' entire Board of Trustees on 60 days' written notice to U.S. Trust or by
Virtus or U.S. Trust on 60 days' written notice to the other party to the
Agreement. Also, the Interim Sub- Advisory Agreement will automatically
terminate in the event of its 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 BLANCHARD FUNDS RECOMMEND THAT THE
SHAREHOLDERS OF TAX-FREE APPROVE THE INTERIM
SUB-ADVISORY AGREEMENT.
ADDITIONAL INFORMATION
Evergreen Tax Free. Information concerning the operation and management
of Evergreen Tax Free is incorporated herein by reference from the Prospectus
dated September 3, 1997, as amended, a copy of which is enclosed, and Statement
of Additional Information dated September 3, 1997, as amended. A copy of such
Statement of Additional Information is available upon request and without charge
by writing to Evergreen Tax Free at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
Tax-Free. Information about Tax-Free is included in its current
Prospectus dated November 30, 1997 and in the Statement of Additional
Information of the same date that have been filed with the SEC, all of which are
incorporated herein by reference. Copies of the Prospectus and Statement of
Additional Information are available upon request and without charge by writing
to Tax-Free at the address listed on the cover page of this Prospectus/Proxy
Statement or by calling toll-free 1-800- 829-3863.
Evergreen Tax Free and Tax-Free 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
<PAGE>
West Madison Street, Chicago, Illinois 60661-2511 and Seven World Trade Center,
Suite 1300, New York, New York 10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of Blanchard Funds to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116, and at any adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the meeting and a proxy card, is first being mailed to
shareholders of Tax-Free on or about January 7, 1998. Only shareholders of
record as of the close of business on the Record Date will be entitled to notice
of, and to vote at, the Meeting or any adjournment thereof. The holders of a
majority of the outstanding shares entitled to vote, at the close of business on
the Record Date, present in person or represented by proxy, will constitute a
quorum for the Meeting. If the enclosed form of proxy is properly executed and
returned in time to be voted at the Meeting, the proxies named therein will vote
the shares represented by the proxy in accordance with the instructions marked
thereon. Unmarked proxies will be voted FOR the proposed 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 Blanchard Funds, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the 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 at the Meeting at which a quorum of the
Fund's shares is present. Approval of
<PAGE>
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 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. 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 Tax- Free (who will not be paid for their soliciting
activities). Shareholders Communications Corporation has been engaged by Tax-
Free 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 Blanchard
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 Tax Free which they receive in the
transaction at their then-current net asset value. Shares of Tax-Free may be
redeemed at any time prior to the consummation of the Reorganization.
Shareholders of Tax-Free may wish to consult their tax advisers as to any
differing consequences of redeeming Fund shares prior
<PAGE>
to the Reorganization or exchanging such shares in the
Reorganization.
Tax-Free 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 Blanchard Funds
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
The votes of the shareholders of Evergreen Tax Free 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 Tax-Free 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 Tax Free as of May 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 Price Waterhouse 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 Tax- Free
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of the Blanchard 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
Tax Free will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
<PAGE>
The Trustees of Blanchard Funds do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND APPROVAL OF THE 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 7, 1998
<PAGE>
APPENDIX A
The names and addresses of the principal executive officers
and directors of Virtus Capital Management, Inc. are as follows:
OFFICERS:
Name Address
- ---- -------
David C. Francis, Chief First Union National Bank
Investment Officer 201 South College Street
Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Clemons Rosson, Vice Virtus Capital Management, Inc.
President, Assistant 707 East Main Street
Secretary Suite 1300
Richmond, Virginia 23219
L. Robert Cheshire, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
John E. Gray, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Dillon S. Harris, Jr., Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
J. Kellie Allen, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
DIRECTORS:
<PAGE>
Name Address
- ---- -------
First Union National Bank
201 South College
David C. Francis Street
Charlotte, North
Carolina 28288-1195
Donald A. McMullen First Union National Bank
201
South College Street
Charlotte, North Carolina 28288-
1195
William M. Ennis First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
<PAGE>
APPENDIX B
The names and addresses of the principal executive officers and
directors of United States Trust Company of New York are as follows:
OFFICERS :
Name Address
- ---- -------
H. Marshall Schwarz, Chairman 114 West 47th Street
of the Board and Director New York, New York 10036
John L. Kirby, Treasurer and 114 West 47th Street
Chief Financial Officer New York, New York 10036
Richard E. Brinkmann, Senior 114 West 47th Street
Vice President and Comptroller New York, New York 10036
Jeffrey S. Maurer, President, 114 West 47th Street
Chief Operating Officer and New York, New York 10036
Director
Frederick B. Taylor, Vice 114 West 47th Street
Chairman of the Board, Chief New York, New York 10036
Investment Officer and
Director
DIRECTORS:
Name Address
- ---- -------
Samuel C. Butler 114 West 47th Street
New York, New York 10036
Frederic C. Hamilton 114 West 47th Street
New York, New York 10036
Paul W. Douglas 114 West 47th Street
New York, New York 10036
Daniel P. Davison 114 West 47th Street
New York, New York 10036
Carroll L. Wainwright, Jr. 114 West 47th Street
New York, New York 10036
Orson D. Munn 114 West 47th Street
New York, New York 10036
<PAGE>
Name Address
- ---- -------
Philippe de Montebello 114 West 47th Street
New York, New York 10036
Richard F. Tucker 114 West 47th Street
New York, New York 10036
Philip L. Smith 114 West 47th Street
New York, New York 10036
John H. Stookey 114 West 47th Street
New York, New York 10036
Antonia M. Grumbach 114 West 47th Street
New York, New York 10036
Robert N. Wilson 114 West 47th Street
New York, New York 10036
Peter O. Crisp 114 West 47th Street
New York, New York 10036
Peter L. Malkin 114 West 47th Street
New York, New York 10036
Eleanor Baum 114 West 47th Street
New York, New York 10036
Ruth A. Wooden 114 West 47th Street
New York, New York 10036
<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 Municipal
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to the
Evergreen High Grade Tax Free Fund series (the "Acquiring Fund"), and Blanchard
Funds, a Massachusetts business trust, with its principal place of business at
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, with respect to
its Blanchard Flexible Tax-Free Bond Fund series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Blanchard Funds have determined that the
Selling Fund should exchange all of its assets and certain identified
liabilities for Acquiring Fund Shares and that
<PAGE>
the interests of the existing shareholders of the Selling Fund will not be
diluted as a result of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
<PAGE>
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable time prior to the
Closing Date, furnish the Acquiring Fund with a list of its portfolio securities
and other investments. In the event that the Selling Fund holds any investments
that the Acquiring Fund may not hold, the Selling Fund, if requested by the
Acquiring Fund, will dispose of such securities prior to the Closing Date. In
addition, if it is determined that the Selling Fund and the Acquiring Fund
portfolios, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Selling Fund if requested by the Acquiring Fund will dispose of
a sufficient amount of such investments as may be necessary to avoid violating
such limitations as of the Closing Date. Notwithstanding the foregoing, nothing
herein shall require the Selling Fund to dispose of any investments or
securities if, in the reasonable judgment of the Selling Fund, such disposition
would adversely affect the tax-free nature of the Reorganization or would
violate the Selling Fund's fiduciary duty to its shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for
purposes of calculating the maximum amount of sales charges (including asset
based sales charges) permitted to be imposed by the Acquiring Fund under the
National Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate
NASD Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately
prior to the Reorganization the Aggregate NASD Cap of the Selling Fund
immediately prior to the Reorganization, in each case calculated in accordance
with such Rule 2830.
<PAGE>
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
<PAGE>
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectuses and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of shares of
the Selling Fund will receive Class A shares of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
<PAGE>
3.2 CUSTODIAN'S CERTIFICATE. Signet Trust Company, as custodian for the
Selling Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Selling Fund's portfolio securities,
cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Closing Date; and (b) all necessary taxes including all
applicable federal and state stock transfer stamps, if any, shall have been
paid, or provision for payment shall have been made, in conjunction with the
delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Blanchard Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
<PAGE>
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Blanchard Funds' Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected on the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or
<PAGE>
governmental body that materially and adversely affects its business or its
ability to consummate the transactions herein contemplated.
(g) The financial statements of the Selling Fund at 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.
<PAGE>
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2.1 REPRESENTATIONS OF THE ACQUIRING FUND. The
Acquiring Fund represents and warrants to the Selling Fund as
follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series
of a Delaware business trust that is registered as an investment
<PAGE>
company classified as a management company of the open-end type, and its
registration with the Commission as an investment company under the 1940 Act is
in full force and effect.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The financial statements of the Acquiring Fund at May 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 May 31, 1997 there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise
<PAGE>
disclosed to and accepted by the Selling Fund. For the purposes of this
subparagraph (g), a decline in the net asset value of the Acquiring Fund shall
not constitute a material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with
<PAGE>
federal securities and other laws and regulations applicable
thereto.
(n) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Evergreen
High Grade Tax Free 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. Blanchard Funds will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants
that the Acquiring Fund Shares to be issued hereunder are not
being acquired for the purpose of making any distribution
<PAGE>
thereof other than in accordance with the terms of this
Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by Price
Waterhouse LLP and certified by Blanchard Funds' President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
5.8 CAPITAL LOSS CARRYFORWARDS. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause Price Waterhouse 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.
<PAGE>
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
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.
<PAGE>
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable. 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
<PAGE>
Acquiring Fund is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body, which materially and
adversely affects its business, other than as previously disclosed in the
Registration Statement.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus and Proxy Statement and related matters
were discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus and Proxy Statement (except to the extent indicated
in paragraph (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the Trust's officers
and other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus and Proxy Statement as
of its date, as of the date of the Selling Fund Shareholders' meeting, and as of
the Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquiring Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquiring Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus and Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of Blanchard Funds and the Selling Fund. Such opinion shall contain such
other assumptions and limitations as shall be in the opinion of Sullivan &
Worcester LLP appropriate to render the opinions expressed therein.
In this paragraph 6.2, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
<PAGE>
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Blanchard Funds'
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Blanchard Funds.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or
<PAGE>
affecting creditors' rights generally and to general equity
principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Blanchard Funds' Declaration of Trust or By-laws, or any provision
of any material agreement, indenture, instrument, contract, lease or other
undertaking (in each case known to such counsel) to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
Regarding the Interim Advisory Agreement," the Interim Sub- Advisory Agreement
and the Previous Sub-Advisory Agreement, as set forth under the caption
"Information Regarding the Interim Sub-Advisory Agreement" and the description
of voting requirements applicable to approval of the Interim Advisory Agreement
and Interim Sub-Advisory Agreement, as set forth under the caption "Voting
Information Concerning the Meeting," insofar as the latter constitutes a summary
of applicable voting requirements under the Investment Company Act of 1940, as
amended, are, in each case, accurate and fairly present the information required
to be shown by the applicable requirements of Form N-14.
(g) Such counsel does not know of any legal or governmental
proceedings, insofar as they relate to the Selling Fund existing on or before
the date of mailing of the Prospectus and Proxy Statement and the Closing Date,
required to be described in the Prospectus and Proxy Statement or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required.
<PAGE>
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and the Selling Fund is neither a
party to nor subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its business
other than as previously disclosed in the Prospectus and Proxy Statement.
7.3.2 The Acquiring Fund shall have received on the Closing Date an
opinion of C. Grant Anderson, Esq., Assistant Secretary of the Blanchard Funds,
in form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof has been
paid, and assuming that such shares were issued in accordance with the terms of
the Selling Fund's registration statement, or any amendment thereto, in effect
at the time of such issuance, all issued and outstanding shares of the Selling
Fund are legally issued and fully paid and non-assessable (except that, under
Massachusetts law, Selling Fund Shareholders could under certain circumstances
be held personally liable for obligations of the Selling Fund).
Mr. Anderson shall also state that he has reviewed and is familiar with
the contents of the Prospectus and Proxy Statement and, although he is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and Proxy
Statement on the basis of the foregoing, no facts have come to his attention
that lead him to believe that the Prospectus and Proxy Statement as of its date,
as of the date of the Selling Fund Shareholders' meeting, and as of the Closing
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding the Selling Fund or
necessary, in the light of the circumstances under which they were made, to make
the statements therein regarding the Selling Fund not misleading. Such opinion
may state that he does not express any opinion or belief as to the financial
statements or any financial or statistical data, or as to the information
relating to the Acquiring Fund, contained in the Prospectus and Proxy Statement
or Registration Statement.
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Massachusetts law,
<PAGE>
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.
In this paragraph 7.3, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
7.4 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Blanchard Funds'
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary
<PAGE>
"no-action" positions of and exemptive orders from such federal and state
authorities) to permit consummation of the transactions contemplated hereby
shall have been obtained, except where failure to obtain any such consent,
order, or permit would not involve a risk of a material adverse effect on the
assets or properties of the Acquiring Fund or the Selling Fund, provided that
either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's 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
<PAGE>
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.
(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 Price Waterhouse LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of appropriate
officials of the Blanchard Funds responsible for financial and accounting
matters, nothing came to their attention that caused them to believe that such
unaudited pro forma financial
<PAGE>
statements do not comply as to form in all material respects with the applicable
accounting requirement of the 1933 Act and the published rules and regulations
thereunder;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and Prospectus and
Proxy Statement were prepared based on the valuation of the Selling Fund's
assets in accordance with the Trust's Declaration of Trust and the Acquiring
Fund's then current prospectus and statement of additional information pursuant
to procedures customarily utilized by the Acquiring Fund in valuing its own
assets;
(e) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from Price
Waterhouse 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 Price Waterhouse LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
<PAGE>
(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 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
<PAGE>
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, Blanchard Funds, the respective
Trustees or officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
<PAGE>
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, officers, agents, or employees of Blanchard Funds or the
Evergreen Municipal Trust personally, but shall bind only the trust property of
the Selling Fund and the Acquiring Fund, as provided in the Declarations of
Trust of Blanchard Funds and the Trust. The execution and delivery of this
Agreement have been authorized by the Trustees of Blanchard Funds on behalf of
the Selling Fund and the Trust on behalf of the Acquiring Fund and signed by
authorized officers of Blanchard Funds and the Trust, acting as such, and
neither such authorization by such Trustees nor such execution and delivery by
such officers shall be deemed to have been made by any of them individually or
to impose any liability on any of them personally, but shall bind only the trust
property of the Selling Fund and the Acquiring Fund as provided in the
Declarations of Trust of Blanchard Funds and the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN MUNICIPAL TRUST
ON BEHALF OF EVERGREEN HIGH GRADE
TAX FREE FUND
By:
Name:
Title:
BLANCHARD FUNDS
ON BEHALF OF BLANCHARD FLEXIBLE
TAX-FREE BOND FUND
By:
Name:
Title:
<PAGE>
EXHIBIT B
BLANCHARD FUNDS
INTERIM MANAGEMENT CONTRACT
This Contract is made this 28th day of November, 1997 between Virtus
Capital Management, Inc., a Maryland corporation having its principal place of
business in Richmond, Virginia (the "Manager"), and Blanchard Funds, a
Massachusetts business trust having its principal place of business in
Pittsburgh,
Pennsylvania (the "Trust").
WHEREAS the Trust is an open-end management investment company as that
term is defined in the Investment Company Act of 1940, as amended, and
is registered as such with the Securities and Exchange Commission; and
WHEREAS Manager is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The Trust hereby appoints Manager as manager for each of the
portfolios ("Funds") of the Trust which executes an exhibit to this Contract,
and Manager accepts the appointments. Subject to the direction of the Trustees
of the Trust, Manager shall provide or procure on behalf of each of the Funds
all management and administrative services. In carrying out its obligations
under this paragraph, the Manager shall; (i) provide or arrange for investment
research and supervision of the investments of the Funds; (ii) select and
evaluate the performance of each Fund's Portfolio Sub-Adviser; (iii) select and
evaluate the performance of the Administrator; and (iv) conduct or arrange for a
continuous program of appropriate sale or other disposition and reinvestment of
each Fund's assets.
2. Manager, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's investment objective and policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statements and exhibits as may be
on file with the Securities and Exchange Commission.
3. Each Fund shall pay or cause to be paid all of its own expenses and
its allocable share of Trust expenses, including, without limitation, the
expenses of organizing the Trust and continuing its existence; fees and expenses
of Trustees and officers of the Trust; fees for management services and
<PAGE>
administrative personnel and services; expenses incurred in the distribution of
its shares ("Shares"), including expenses of administrative support services;
fees and expenses of preparing and printing its Registration Statements under
the Securities Act of 1933 and the Investment Company Act of 1940, as amended,
and any amendments thereto; expenses of registering and qualifying the Trust,
the Funds, and Shares of the Funds under federal and state laws and regulations;
expenses of preparing, printing, and distributing prospectuses (and any
amendments thereto) to shareholders; interest expense, taxes, fees, and
commissions of every kind; expenses of issue (including cost of Share
certificates), purchase, repurchase, and redemption of Shares, including
expenses attributable to a program of periodic issue; charges and expenses of
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing and mailing costs, auditing, accounting, and
legal expenses; reports to shareholders and governmental officers and
commissions; expenses of meetings of Trustees and shareholders and proxy
solicitations therefor; insurance expenses; association membership dues and such
nonrecurring items as may arise, including all losses and liabilities incurred
in administering the Trust and the Funds. Each Fund will also pay its allocable
share of such extraordinary expenses as may arise including expenses incurred in
connection with litigation, proceedings, and claims and the legal obligations of
the Trust to indemnify its officers and Trustees and agents with respect
thereto.
4. Each of the Funds shall pay to Manager, for all services rendered to
each Fund by Manager hereunder, the fees set forth in the exhibits attached
hereto.
5. If, for any fiscal year, the total of all ordinary business expenses
of the Fund, including all investment advisory fees but excluding distribution
fees, taxes, interest and extraordinary expenses and certain other excludable
expenses, would exceed the most restrictive expense limits imposed by any
statute or regulatory authority of any jurisdiction in which Shares of the Fund
are offered for sale Manager shall reduce its management fee in order to reduce
such excess expenses, but will not be required to reimburse the Fund for any
ordinary business expenses which exceed the amount of its management fee for
such fiscal year. The amount of any such reduction is to be borne by the Manager
and shall be deducted from the monthly management fee otherwise payable to the
Manager during such fiscal year. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the current fiscal year which shall
have elapsed prior to the date hereof and shall include the portion of the then
current fiscal year which shall have elapsed at the date of termination of this
Agreement.
<PAGE>
6. The net asset value of each Fund's Shares as used herein will be
calculated to the nearest 1/10th of one cent.
7. The Manager may from time to time and for such periods as it deems
appropriate reduce its compensation (and, if appropriate, assume expenses of one
or more of the Funds) to the extent that any Fund's expenses exceed such lower
expense limitation as the Manger may, by notice to the Fund, voluntarily declare
to be effective.
8. This Contract shall begin for each Fund as of the date of execution
of the applicable exhibit and shall continue in effect with respect to each Fund
presently set forth on an exhibit (and any subsequent Funds added pursuant to an
exhibit during the initial term of this Contract) until the earlier of the
Closing Date defined in the Agreement and Plan of Reorganization dated as of
November 26, 1997 with respect to each Fund or for two years from the date of
this Contract set forth above and thereafter for successive periods of one year,
subject to the provisions for termination and all of the other terms and
conditions hereof if: (a) such continuation shall be specifically approved at
least annually by the vote of a majority of the Trustees of the Trust, including
a majority of the Trustees who are not parties to this Contract or interested
persons of any such party cast in person at a meeting called for that purpose;
and (b) Manager shall not have notified a Fund in writing at least sixty (60)
days prior to the anniversary date of this Contract in any year thereafter that
it does not desire such continuation with respect to that Fund. If a Fund is
added after the first approval by the Trustees as described above, this Contract
will be effective as to that Fund upon execution of the applicable exhibit and
will continue in effect until the next annual approval of the Contract by the
Trustees and thereafter for successive periods of one year, subject to approval
as described above.
9. Notwithstanding any provision in this Contract, it may be terminated
at any time with respect to any Fund, without the payment of any penalty, by the
Trustees of the Trust or by a vote of the shareholders of that Fund on sixty
(60) days' written notice to Manager.
10. This Contract may not be assigned by Manager and shall
automatically terminate in the event of any assignment. Manager may employ or
contract with such other person, persons, corporation, or corporations at its
own cost and expense as it shall determine in order to assist it in carrying out
this Contract.
<PAGE>
11. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the obligations or duties under this Contract on the
part of Manager, Manager shall not be liable to the Trust or to any of the Funds
or to any shareholder for any act or omission in the course of or connected in
any way with rendering services or for any losses that may be sustained in the
purchase, holding, or sale of any security.
12. This Contract may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by the vote of a
majority of the Trustees of the Trust, including a majority of the Trustees who
are not parties to this Contract or interested persons of any such party to this
Contract (other than as Trustees of the Trust) cast in person at a meeting
called for that purpose, and where required by Section 15(a)(2) of the Act, on
behalf of a Fund by a majority of the outstanding voting securities of such Fund
as defined in Section 2(a)(42) of the Act.
13. The Manager acknowledges that all sales literature for investment
companies (such as the Trust) are subject to strict regulatory oversight. The
Manager agrees to submit any proposed sales literature for the Trust (or any
Fund) or for itself or its affiliates which mentions the Trust (or any Fund) to
the Trust's distributor for review and filing with the appropriate regulatory
authorities prior to the public release of any such sales literature, provided,
however, that nothing herein shall be construed so as to create any obligation
or duty on the part of the Manager to produce sales literature for the Trust (or
any Fund). The Trust agrees to cause its distributor to promptly review all such
sales literature to ensure compliance with relevant requirements, to promptly
advise Manager of any deficiencies contained in such sales literature, to
promptly file complying sales literature with the relevant authorities, and to
cause such sales literature to be distributed to prospective investors in the
Trust.
14. A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees, or any of the officers,
employees, agents or shareholders of the Trust individually but are binding only
upon the assets and property of the Trust. Notice is also hereby given that the
obligations pursuant to this instrument of a particular Fund and of the Trust
with respect to that particular Fund shall be limited solely to the assets of
that particular Fund.
<PAGE>
15. This Contract shall be construed in accordance with and governed by
the laws of the Commonwealth of Pennsylvania.
16. This Contract will become binding on the parties hereto upon their
execution of the attached exhibits to this Contract.
<PAGE>
EXHIBIT A
to the
Management Contract
Blanchard Global Growth Fund
Blanchard Flexible Income Fund
Blanchard Short-Term Flexible Income Fund
Blanchard Flexible Tax-Free Bond Fund
Blanchard Growth & Income Fund
For all services rendered by Manager hereunder, the above-named Funds
of the Trust shall pay to Manager and Manager agrees to accept as full
compensation for all services rendered hereunder, an annual management fee equal
to the following percentage ("the applicable percentage") of the average daily
net assets of each Fund
Name of Fund Percentage of Net Assets
Blanchard Global Growth Fund 1% of the first $150 million
of average daily net
assets, .875% of the
Fund's average daily
net assets in excess
of $150 million but
not exceeding $300
million and .75% of
the Fund's average
daily net assets in
excess of $300
million.
Blanchard Flexible Income Fund .75%
Blanchard Growth & Income Fund 1.10% of the Fund's average
daily net assets, .40% of
which, which would otherwise
be received by Manager and
paid to the Chase Manhattan
Bank, N.A. ("Chase") for
portfolio advisory services,
shall be paid to Chase
directly by the Fund under a
separate investment advisory
agreement between Chase and
the Fund.
Blanchard Short-Term .75%
Flexible Income Fund
Blanchard Flexible Tax-Free .75%
Bond Fund
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.
The advisory fee so accrued shall be paid to Manager daily except for
the Blanchard Growth & Income Fund which shall be paid to Manager monthly.
Witness the execution hereof this 28th day of November, 1997.
Attest: Virtus Capital Management, Inc.
________________________ By: ___________________________
Secretary Executive Vice President
Attest: Blanchard Funds
________________________ By: ____________________________
Assistant Secretary Vice President
<PAGE>
EXHIBIT C
INTERIM SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this 28th day of November, 1997 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the "Manager"), and
UNITED STATES TRUST COMPANY OF NEW YORK, a New York State chartered bank and
trust company (the "Sub-Adviser" or "U.S. Trust") with respect to the following
recital of fact:
R E C I T A L
WHEREAS, Blanchard Funds (the "Trust") is registered as an open-end,
non-diversified, management investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"), and the rules and regulations promulgated
thereunder; and
WHEREAS, the Sub-Adviser is a New York State chartered bank and trust
company and engages in the business of acting as an investment adviser; and
WHEREAS, the Trust is authorized to issue shares of beneficial interest
in separate series, with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Trust offers shares in one series called the Blanchard
Flexible Tax-Free Bond Fund (such series, being referred to as the "Fund"); and
WHEREAS, the Trust and the Manager have entered into an agreement of
even date herewith to provide for management services for the Fund on the terms
and conditions set forth therein (the "Interim Management Agreement"); and
WHEREAS, U.S. Trust proposes to render investment advisory services to
the Manager in connection with the Manager's responsibilities to the Fund's
portfolio on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Investment Management. U.S. Trust shall act as a Sub- Adviser for the
Fund and shall, in such capacity, supervise the investment and reinvestment of
the cash, securities or other properties comprising the Fund's portfolio,
subject at all times
<PAGE>
to the direction of the Manager and the policies and control of the Trust's
Board of Trustees. U.S. Trust shall give the Fund the benefit of its best
judgment, efforts and facilities in rendering its services as Sub-Adviser.
2. Investment Analysis and Implementation. In carrying out its obligation
under paragraph 1 hereof, the Sub-Adviser shall:
a. use the same skill and care in providing such
service as it uses in providing services to fiduciary
accounts for which it has investment responsibilities;
b. obtain and evaluate pertinent information about significant
developments and economics, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the
Fund's portfolio and whether concerning the individual issuers whose
securities are included in the Fund's portfolio or the activities in
which the issuers engage, or with respect to securities which the
Sub-Adviser considers desirable for inclusion in the Fund's portfolio;
c. determine which issuers and securities shall be
represented in the Fund's portfolio and regularly report
thereon to the Trust's Board of Trustees;
d. formulate and implement continuing programs for
the purchases and sales of the securities of such issuers
and regularly report thereon to the Trust's Board of
Trustees;
e. be authorized to give instructions to the custodian and/or
sub-custodian of the Fund appointed by the Trust's Board of Trustees,
as to deliveries of securities, transfers of currencies and payments of
cash for the account of the Fund, in relation to the matters
contemplated by this Agreement; and
f. take, on behalf of the Fund, all actions which appear to
the Trust and the Manager necessary to carry into effect such purchase
and sale programs and supervisory functions as aforesaid, including the
placing of orders for the purchase and sale of securities for the Fund
and the prompt reporting to the Manager of such purchases and sales.
3. Broker-Dealer Relationships. The Sub-Adviser is responsible for
decisions to buy and sell securities for the Fund's portfolio, broker-dealer
selection, and negotiation of brokerage commission rates. The Sub-Adviser's
primary
<PAGE>
consideration in effecting a security transaction will be execution at the most
favorable price. In selecting a broker-dealer to execute each particular
transaction, the Sub-Adviser will take the following into consideration: the
best net price available, the reliability, integrity and financial condition of
the broker-dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker-dealer to the investment
performance of the Fund on a continuing basis. Accordingly, the price to the
Fund in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered. Subject to such policies as the Board of
Trustees may determine, the Sub-Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer for
effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction, if the Sub-Adviser determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Sub-Adviser's overall responsibilities with
respect to the Fund and to its other clients as to which it exercises investment
discretion. Subject to such policies as the Board of Trustees may determine, the
Sub-Adviser will purchase and sell foreign currency contracts and other
securities for the Fund. The Sub-Adviser is further authorized to allocate the
orders placed by it on behalf of the Fund to any affiliated broker-dealer of the
Fund or to such brokers and dealers who also provide research or statistical
material, or other services to the Fund, the Manager or the Sub-Adviser. Such
allocation shall be in such amounts and proportions as the Sub-Adviser shall
determine and the Sub-Adviser will report on said allocations regularly to the
Board of Trustees of the Trust indicating the brokers to whom such allocations
have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by
the Sub-Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Adviser on behalf of the Fund pursuant thereto, shall at
all times be subject to any directives of the Board of Trustees of the Trust.
The Manager shall provide the Sub-Adviser with written notice of all such
directives, so long as this Agreement remains in effect.
5. Compliance with Applicable Requirements. In carrying out its obligations
under this Agreement, the Sub-Adviser shall at all times conform to:
<PAGE>
a. all applicable provisions of the 1940 Act;
b. the provisions of the Registration Statement of
the Trust under the Securities Act of 1933 and the 1940 Act;
and
c. any other applicable provisions of state and
federal law.
6. Expenses. The Sub-Adviser shall maintain, at its expense and without
cost to the Manager or the Fund, a trading function in order to carry out its
obligations under subparagraph (f) of paragraph 2 hereof to place orders for the
purchase and sale of portfolio securities for the Fund.
7. Delegation of Responsibilities. Upon request of the Manager and with
the approval of the Trust's Board of Trustees, the Sub-Adviser may perform
services on behalf of the Fund which are not required by this Agreement. Such
services will be performed on behalf of the Fund and the Sub-Adviser's cost in
rendering such services may be billed monthly to the Manager, subject to
examination by the Manager's independent accountants. Payment or assumption by
the Sub-Adviser of any Fund expense that the Sub-Adviser is not required to pay
or assume under this Agreement shall not relieve the Manager or the Sub-Adviser
of any of their obligations to the Fund or obligate the Sub-Adviser to pay or
assume any similar Fund expense on any subsequent occasions.
8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Sub- Adviser a monthly fee at the
annual rate of .20% of the Fund's average daily net assets. Compensation under
this Agreement shall be calculated and accrued daily and the amounts of the
daily accruals shall be paid monthly. The compensation paid to the Sub-Adviser
will not be reduced by the amount of brokerage commissions received by the
Sub-Adviser or its affiliated broker-dealer pursuant to Section 17(e)(2) of the
1940 Act. If this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fees as set forth above. Payment of the
Sub- Adviser's compensation for the preceding month shall be made as promptly as
possible after the end of each month.
9. Term. This Agreement shall become effective at the close of business
on the date hereof and shall remain in force and effect until the earlier of the
Closing Date defined in the Agreement and Plan of Reorganization dated November
26, 1997 with
<PAGE>
respect to the Fund or for an initial term of two years, and shall remain in
effect thereafter if approved in the manner set forth in Section 10 hereof.
10. Renewal. Following the expiration of its initial two year term,
this Agreement shall continue in force and effect from year to year, provided
that such continuance is specifically approved at least annually:
a. (i) by the Trust's Board of Trustees or (ii) by
the vote of a majority of the Fund's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act),
and
b. by the affirmative vote of a majority of the Trustees who
are not parties to this agreement or interested persons of a party to
this Agreement (other than as a Trustee of the Trust), by votes cast in
person at a meeting specifically called for such purpose.
11. Termination. This Agreement may be terminated at any time, without
the payment of any penalty, by vote of the Trust's Board of Trustees or by vote
of a majority of the Fund's outstanding voting securities (as defined in Section
2(a)(42) of the 1940 Act), or by the Manager or the Sub-Adviser, on sixty (60)
days' written notice to the other party. This Agreement shall automatically
terminate: (a) in the event of its assignment, the term "assignment" having the
meaning defined in Section 2(a)(4) of the 1940 Act, or (b) in the event that the
Interim Management Agreement between the Fund and the Manager shall terminate.
12. Liability of the Sub-Adviser. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the Sub-Adviser or its
officers, directors or employees, or reckless disregard by the Sub-Adviser of
its duties under this Agreement, the Sub-Adviser shall not be liable to the
Manager, 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.
13. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the Manager
for this purpose shall be 707 East Main Street, Suite 1300, Richmond, Virginia
23219, that of the Trust for this purpose shall be Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779,
<PAGE>
and the address of the Sub-Adviser for this purpose shall be 114 West 47th
Street, New York, New York 10036.
14. Questions of Interpretation. Any questions of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretations thereof, if any, by the
United States Courts or in the absence of any controlling decision of any such
courts, by rules, regulations or orders of the Securities and Exchange
Commission issued pursuant to said Act. In addition, where the effect of a
requirement of the 1940 Act reflected in a provision of this Agreement is
revised by rule, regulation or order of the Securities and Exchange Commission,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
Attest: UNITED STATES TRUST COMPANY
OF NEW YORK
By
Title: Title:
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
By
Title: Title: Senior Vice President
<PAGE>
EXHIBIT D
(logo) EVERGREEN
HIGH GRADE TAX FREE FUND
FUND-AT-A-GLANCE
As of May 31, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
One year with sales charge 1.90% 1.19% 7.25%
One year w/o sales charge 6.99% 6.19% 7.25%
One year dividends per share 50.2(cents) 42.1(cents) 52.0(cents)
30-day SEC Yield
(as of 5/31/97) 4.19% 3.63% 4.66%
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Three years 5.11% 5.16% 7.10%
Five years 5.75% N/A N/A
Since Inception* 6.00% 5.13% 5.11%
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Nine months w/o sales charge 5.13% 4.55% 5.32%
Three years 16.13% 16.30% 22.83%
Five years 32.24% N/A N/A
Since Inception* 36.01% 24.55% 17.64%
</TABLE>
* CLASS A BEGAN 2/21/92; CLASS B BEGAN 1/11/93;
CLASS Y BEGAN 2/28/94
** ALL RETURNS INCLUDE THE MAXIMUM SALES CHARGE, IF APPLICABLE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS MAY 31, 1997
<S> <C> <C> <C>
Total Net Assets (all classes) $102.1 million
Average Credit Quality AAA
Average Maturity 12.3 years
Average Duration 8.2 years
</TABLE>
PORTFOLIO COMPOSITION MAY 31, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
Hospital 14.8%
Ports 9.4%
Industrial Development
(pollution control) 8.5%
Electric 8.0%
General Obligation
(schools) 8.8%
Water/Sewer 6.5%
Airport 6.2%
Industrial Development 5.3%
Housing 4.9%
Pre-refunded 4.6%
General Obligation
(municipalities) 3.8%
General Obligation 3.8%
Toll Roads 3.3%
Other 12.1%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen High Grade Tax Free Fund seeks income exempt from federal income taxes
while conserving capital. Income may be subject to local taxes and the Federal
Alternative Minimum Tax for certain investors.
STRATEGY
The Fund seeks its objective by investing in insured municipal securities and
municipal securities rated high grade by independent bond rating services. The
portfolio management team will, in seeking the Fund's objectives, buy and sell
securities to effect changes in portfolio maturities and to change allocations
among different sectors. Insured bonds are bonds insured as to timely payment of
principal and interest. The Fund itself is not insured, nor is the value of its
shares guaranteed. Insured bonds must be insured by a municipal bond insurance
company which is rated AAA by Standard & Poors Ratings Group (S&P) and/or Aaa by
Moody's Investors Service, Inc., (Moody's). Bonds that are considered high grade
are rated A or better by S&P or Moody's or, if unrated, are considered of
comparable quality as determined by the Fund's investment advisor.
PORTFOLIO MANAGEMENT TEAM
(Photo of James T. Colby, III, the Senior Portfolio Manager, is a Vice
James T. Colby, President and Senior Portfolio Manager of Evergreen Asset
III) Management. He also is Senior Portfolio Manager for Evergreen
U.S. Government Securities Fund and is co-manager of the
Evergreen Tax Strategic Foundation Fund. Prior to joining
Evergreen in 1992, Mr. Colby was Vice President and Senior
Portfolio Manager for $5 billion in tax-exempt holdings at
American Express. Mr. Colby also has served in portfolio
management capacities at Marinvest, a subsidiary of Marine
Midland Bank. He is a graduate of Brown University, and holds
an MBA from Hofstra University. In 1996, Mr. Colby was
Chairman of the Municipal Bond Buyers Conference.
2
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EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
MANAGEMENT REPORT
July 1997
Dear Fellow Shareholders:
We are pleased to report on Evergreen High Grade Tax Free Fund for the fiscal
period that ended on May 31, 1997. You may recall that you recently received a
semiannual report for the six-month period that ended on February 28, 1997. We
have changed your Fund's fiscal year so it now will end each May 31. This is
part of an effort by Evergreen Keystone Funds to streamline, and increase the
efficiency of, fund administration. Funds with similar investment objectives, in
this case national tax free funds, are placed on the same fiscal year cycle.
Information about these funds will be presented in common annual and semi-annual
reports. The next report you will receive will be a semiannual report for the
period ending November 30, 1997. You should expect to receive it in January
1998.
PERFORMANCE
We believe your Fund performed well as a high quality municipal bond fund during
a period marked by short-term interest rate volatility. The charts and tables on
page 2 provide a comprehensive view of the performance for the fiscal period, as
well as since each class of shares began.
STRATEGY
Evergreen High Grade Tax Free Fund is managed with a long-term view, with the
goal of providing federally tax-free income from insured and high quality
municipal bonds while protecting principal. We do not structure the portfolio in
anticipation of short-term movements in interest rates, but try to employ
strategies that build value over time based on longer-term trends in the
municipal bond market. The nine-month period that ended on May 31 was a
generally favorable period for municipal bond investing. During this period, we
kept the maturities of bonds in the portfolio relatively consistent, with
average maturities remaining in the 12-to-16 year range, and average duration in
the 7-to-9-year range. This policy proved successful during a time when
long-term interest rates, despite some short-term volatility, remained in a
consistent trading range of 6 1/2% to 7%.
Your Fund is required to invest at least 65% of net assets in high grade
municipal bonds. In fact, the Fund held 87% of net assets in insured municipal
bonds, with 95% of net assets AAA-rated at the end of the period. The bonds are
insured for the timely payment of principal and interest. The value of insured
bonds can fluctuate. The Fund itself is not insured. The Fund does not search
for opportunities among bonds that are below investment grade.
Evergreen High Grade Tax Free Fund invests in different sectors of the market
based upon evolving trends. For example, two sectors-- the hospital/health care
and the electric utility sectors-- have experienced changes which affected
portfolio strategy recently. In the hospital sector, the process of
consolidation has left behind the weaker institutions which we have pointedly
avoided. We hold only the dominant regional facilities or those aligned with
strong national systems, which we believe have the strongest potential to
survive the new era of competition. Accordingly, we have increased the Fund's
allocation to 14.8% of the net assets. Conversely, the impact of deregulation
and competition upon municipal utilities is less clear and we have decreased the
Fund's allocation to this sector to 7.9%, though we will closely monitor
important legislation pending in states on the east and west coasts which may
soon set new strategic parameters for this sector. For comparison, three years
ago this Fund's relative weightings of these two sectors would have been
reversed.
OUTLOOK
Looking ahead, we continue to see a favorable investment environment for
municipal bonds. We anticipate long-term interest rates, as represented by the
benchmark 30-year U.S. Treasury Bond, to trade in the 6-to-7% range, with
relatively firm economic growth and stable inflation.
Within this environment, we will continue our strategy of seeking to provide as
reasonable a yield as is possible, without assuming significant market risks by
extending maturities. At the same time, we will continue to monitor changes in
the municipal bond industry and put in place further strategies that have the
potential to benefit from evolving trends.
Thank you for your support of the Evergreen High Grade Tax Free Fund.
Sincerely,
/s/ James T. Colby, III
JAMES T. COLBY, III
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
Evergreen Asset Management Corp.
3
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STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
a Series of
BLANCHARD FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
EVERGREEN HIGH GRADE TAX FREE FUND
a Series of
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Blanchard Flexible Tax-Free
Bond Fund ("Tax- Free"), a series of Blanchard Funds, to Evergreen High Grade
Tax Free Fund ("Evergreen Tax Free"), in exchange for Class A shares of
beneficial interest, $.001 par value per share, of Evergreen Tax Free, 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 Tax Free
dated September 3, 1997 , as amended;
(2) The Statement of Additional Information of Tax-Free dated
November 30, 1997;
(3) Annual Report of Tax-Free for the year ended September 30,
1997;
(4) Annual Report of Evergreen Tax Free for the period ended May
31, 1997; and
(5) Pro-Forma Combining Financial Statements (unaudited) dated May
31, 1997.
<PAGE>
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Tax Free and Tax-Free dated January 7, 1998. A copy of
the Prospectus/Proxy Statement may be obtained without charge by calling or
writing to Evergreen Tax Free or Tax-Free at the telephone numbers or addresses
set forth above.
The date of this Statement of Additional Information is January 7,
1998.
STATEMENT OF ADDITIONAL INFORMATION
September 3, 1997
THE EVERGREEN KEYSTONE NATIONAL TAX FREE FUNDS
200 Berkeley Street, Boston, Massachusetts 02116
800-343-2898
Evergreen High Grade Tax Free Fund ("High Grade")
Evergreen Short-Intermediate Municipal Fund ("Short-Intermediate")
Keystone Tax Free Income Fund ("Tax Free Income")
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 September 3, 1997, as supplemented from
time to time for the Fund in which you are making or contemplating an
investment. The Evergreen Keystone National Tax Free Funds are offered through
two separate prospectuses: one offering Class A shares and Class B shares of
High Grade and Short-Intermediate and Class A shares, Class B shares and Class C
shares of Tax Free Income, and a separate prospectus offering Class Y shares of
High Grade and Short-Intermediate. Copies of each Prospectus may be obtained
without charge by calling the number listed above.
TABLE OF CONTENTS
Investment Objectives and Policies.........................................2
Investment Restrictions...................................................11
Non-fundamental Operating Policies........................................16
Management................................................................17
Investment Advisers.......................................................22
Distribution Plans........................................................25
Allocation of Brokerage ..................................................27
Additional Tax Information................................................28
Net Asset Value...........................................................30
Purchase of Shares........................................................31
General Information about the Funds ......................................39
Performance Information...................................................41
General...................................................................44
Financial Statements......................................................45
Appendix "A".............................................................A-1
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INVESTMENT OBJECTIVES AND POLICIES
(See also "Description of the Funds - Investment Objectives
and Policies" in each Fund's Prospectus)
The investment objective of each Fund and a description of the
securities in which each Fund may invest is set forth under "Description of the
Funds - Investment Objectives and Policies" in the relevant Prospectus. The
investment objective of Tax Free Income Fund is fundamental and cannot be
changed without the approval of shareholders. The following expands the
discussion in the Prospectus regarding certain investments of each Fund.
Additional Information Regarding Investments that each Fund May Make
Participation Interests (All Funds)
Participation interests may take the form of participations, beneficial
interests in a trust, partnership interests, or any other form of indirect
ownership that allows a Fund to treat the income from the investments as exempt
from federal and state tax. The financial institutions from which a Fund
purchases participation interests frequently provide or secure from another
financial institution irrevocable letters of credit or guarantees and give a
Fund the right to demand payment of the principal amounts of the participation
interests plus accrued interest on short notice (usually within seven days).
Variable Rate Municipal Securities (All Funds)
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 a Fund
are subject to repayment of principal (usually within seven days) on the Fund's
demand. The terms of these variable rates demand instruments require payment of
principal obligations by the issuer of the participation interests or a
guarantor of either issuer. All variable rate municipal securities will meet the
quality standards for a Fund. Each Fund's investment adviser has been instructed
by the Board of Trustees (the "Trustees") to monitor the pricing, quality, and
liquidity of the variable rate municipal securities, including participation
interests held by a Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
Municipal Leases (All Funds)
When determining whether municipal leases purchased by a Fund will be
classified as a liquid or illiquid security, the Trustees have directed each
Fund's investment adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and trade
prices for the security, the number of dealers willing to purchase or sell the
security and the number of potential purchasers; dealer undertakings to make a
market in the security; the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of
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the security, the method of soliciting offers, and the mechanics of transfer);
the rating of the security and the financial condition and prospects of the
issuer of the security; whether the lease can be terminated by the lessee; the
potential recovery, if any, from a sale of the leased property upon termination
of the lease; the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and prospects); 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"); any credit enhancement
or legal recourse provided upon an event of nonappropriation or other
termination of the lease; and such other factors as may be relevant to the
Fund's ability to dispose of the security.
When-Issued and Delayed Delivery Transactions (All Funds)
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
the Fund's records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. Short-Intermediate
does not expect its commitments to purchase when-issued securities will normally
exceed 25% of their total assets and High Grade does not expect that such
commitments will exceed 20% of its total assets.
Futures and Options Transactions (Tax Free Income)
The Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts and options on financial futures
contracts. Additionally, the Fund may buy and sell call and put options on
portfolio securities.
Purchasing Put Options on Financial Futures Contracts (Tax Free Income)
Tax Free Income may purchase listed put and call 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 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.
The Fund may purchase put 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 option will increase in value. In such an event, the 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 realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. 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 the premium paid
for the contract will be lost.
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Writing Call Options on Financial Futures Contracts (Tax Free Income)
In addition to purchasing put options on futures, Tax Free Income may write
listed call options on futures contracts for U.S. government securities to hedge
its portfolio against an increase in market interest rates. When the 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 market interest rates rise, 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 offset
the drop in value of the Fund's fixed income portfolio which is occurring as
interest rates rise.
Prior to the expiration of a call written by the 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 a Fund will then offset the decrease in value of the hedged
securities.
Writing Put Options on Financial Futures Contracts (Tax Free Income)
Tax Free Income may write listed put options on financial futures
contracts for U.S. government securities to hedge its portfolio against a
decrease in market interest rates. When the Fund writes a put option on a
futures contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at any time
during the life of the option. As market interest rates decrease, the market
price of the underlying futures contract normally increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the buyer
can sell the same futures contract at a higher price in the market. The premium
received by the Fund can then be used to offset the higher prices of portfolio
securities to be purchased in the future due to the decrease in the market
interest rates.
Prior to the expiration of the put option or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the hedge is
successful, the cost of buying the second option will be less than the premium
received by the Fund for the initial option.
Purchasing Call Options on Financial Futures Contracts (Tax Free Income)
An additional way in which Tax Free Income may hedge against decreases
in market interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call option
on a futures contract, it is purchasing the right (not the obligation) to assume
a long futures position (buy a futures contract) at a fixed price at any time
during the life of the option. As market interest rates fall, the value of the
underlying futures contract will normally increase, resulting in an increase in
value of the Fund's option position. When the market price of the underlying
futures contract increases above the strike price plus premium paid, the Fund
could exercise its option and buy the futures contract below
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market price.
Prior to the exercise or expiration of the call option the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium originally
paid, the Fund has completed a successful hedge.
Limitation on Open Futures Positions (Tax Free Income)
Tax Free Income 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 (Tax Free Income)
Unlike the purchase or sale of a security, Tax Free Income 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. The Fund may
not purchase or sell futures contracts or related options if immediately
thereafter the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, the
Fund will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing and Writing Put and Call Options on Portfolio Securities
(Tax Free Income)
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities. 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. A call
option gives the Fund, in return for a premium, the right to buy the underlying
security from the seller.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or buyers of
the options since
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<PAGE>
options on the portfolio securities held by the Fund are to be traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's investment adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange traded options have a
continuous liquid market while over-the-counter options may not.
Repurchase Agreements (All Funds)
Repurchase agreements are arrangements in which banks, broker/dealers,
and other recognized financial institutions sell U.S. government securities or
other securities to a Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price within one year from the date of
acquisition. A Fund or its custodian will take possession of the securities
subject to repurchase agreements. To the extent that the original seller does
not repurchase the securities from a Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. Each Fund believes
that under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. A Fund may only enter into repurchase agreements with banks
and other recognized financial institutions, such as broker/dealers, which are
found by the Fund's investment adviser to be creditworthy pursuant to guidelines
established by the Trustees.
Reverse Repurchase Agreements (All Funds)
A Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, a Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Lending of Portfolio Securities (All Funds)
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 Fund. During the time
portfolio securities are
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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.
Restricted Securities (All Funds)
With the exceptions noted below, a Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund may
otherwise invest pursuant to its investment objectives and policies but which
are subject to restrictions on resale under federal securities laws.
Short-Intermediate will not invest more than 15% and for High Grade and Tax Free
Income, 10%, of the value of their net assets in restricted securities; however,
certain restricted securities which the Trustees deem to be liquid will be
excluded from this limitation.
The ability of the 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 resale under the
Rule 144A. 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.
Municipal Bond Insurance (High Grade)
The Fund may purchase two types of municipal bond insurance policies
("Policies") issued by municipal bond insurers. One type of Policy covers
certain municipal securities only during the period in which they are in the
Fund's portfolio. In the event that a municipal security covered by such a
Policy is sold by the Fund, the insurer of the relevant Policy will be liable
only for those payments of interest and principal which are then due and owing
at the time of sale.
The other type of Policy covers municipal securities not only while
they remain in the Fund's portfolio but also until their final maturity, even if
they are sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. The Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the investment adviser,
the Fund would receive net proceeds from the sale of those securities, after
deducting the cost of such permanent insurance and related fees, significantly
in excess of the proceeds it would receive if such
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municipal securities were sold without insurance. Payments received from
municipal bond insurers may not be tax-exempt income to shareholders of the
Fund.
Depending upon the characteristics of the municipal security held by
the Fund, the annual premiums for the Policies are estimated to range from 0.10%
to 0.25% of the value of the municipal securities covered under the Policies,
with an average annual premium rate of approximately 0.175%.
The Fund may purchase Policies from Municipal Bond Investors Assurance
Corp. ("MBIA"), AMBAC Indemnity Corporation ("AMBAC"), Financial Guaranty
Insurance Company ("FGIC"), each as described under "Municipal Bond Insurers",
or any other municipal bond insurer which is rated at least Aaa by Moody's
Investors Service, Inc. ("Moody's") or AAA by Standard & Poor's Ratings Group
("S&P"). Each Policy guarantees the payment of principal and interest on those
municipal securities it insures. The Policies will have the same general
characteristics and features. A municipal security will be eligible for coverage
if it meets certain requirements set forth in a Policy. In the event interest or
principal on an insured municipal security is not paid when due, the insurer
covering the security will be obligated under its Policy to make such payment
not later than 30 days after it has been notified by the Fund that such
non-payment has occurred.
MBIA, AMBAC, and FGIC will not have the right to withdraw coverage on
securities insured by their Policies so long as such securities remain in the
Fund's portfolio, nor may MBIA, AMBAC, or FGIC cancel their Policies for any
reason except failure to pay premiums when due. MBIA, AMBAC, and FGIC will
reserve the right at any time upon 90 days' written notice to the Fund to refuse
to insure any additional municipal securities purchased by the Fund after the
effective date of such notice. The Fund's investment adviser will reserve the
right to terminate any of the Policies if it determines that the benefits to the
Fund of having its portfolio insured under such Policy are not justified by the
expense involved.
Additionally, the Fund's investment adviser reserves the right to enter
into contracts with insurance carriers other than MBIA, AMBAC, or FGIC, if such
carriers are rated Aaa by Moody's or AAA by S&P.
Under the Policies, municipal bond insurers unconditionally guarantee
to the Fund the timely payment of principal and interest on the insured
municipal securities when and as such payments shall become due but shall not be
paid by the issuer, except that in the event of any acceleration of the due date
of the principal by reason of mandatory or optional redemption (other than
acceleration by reason of mandatory sinking fund payments), default or
otherwise, the payments guaranteed will be made in such amounts and at such
times as payments of principal would have been due had there not been such
acceleration. The municipal bond insurers will be responsible for such payments
less any amounts received by the Fund from any trustee for the municipal bond
holders or from any other source. The Policies do not guarantee payment on an
accelerated basis, the payment of any redemption premium, the value for the
shares of the Fund, or payments of any tender purchase price upon the tender of
the municipal securities. The Policies also do not insure against nonpayment of
principal of or interest on the securities resulting from the insolvency,
negligence or any other act or omission of the trustee or other paying agent for
the securities. However, with respect to small issue industrial development
municipal bonds and pollution control revenue municipal bonds covered by the
Policies, the municipal bond insurers guarantee the full and complete payments
required to be made by or on behalf of an issuer of such municipal securities if
there occurs any change in the tax-exempt status of interest on such municipal
securities, including principal, interest or premium payments, if
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any, as and when required to be made by or on behalf of the issuer pursuant to
the terms of such municipal securities. A when-issued municipal security will be
covered under the Policies upon the settlement date of the original issue of
such when-issued municipal securities. In determining whether to insure
municipal securities held by the Fund, each municipal bond insurer has applied
its own standard, which corresponds generally to the standards it has
established for determining the insurability of new issues of municipal
securities. This insurance is intended to reduce financial risk, but the cost
thereof and compliance with investment restrictions imposed under the Policies
and these guidelines will reduce the yield to shareholders of the Fund.
If a Policy terminates as to municipal securities sold by the Fund on
the date of sale, in which event municipal bond insurers will be liable only for
those payments of principal and interest that are then due and owing, the
provision for insurance will not enhance the marketability of securities held by
the Fund, whether or not the securities are in default or subject to significant
risk of default, unless the option to obtain permanent insurance is exercised.
On the other hand, since issuer-obtained insurance will remain in effect as long
as the insured municipal securities are outstanding, such insurance may enhance
the marketability of municipal securities covered thereby, but the exact effect,
if any, on marketability cannot be estimated. The Fund generally intends to
retain any securities that are in default or subject to significant risk of
default and to place a value on the insurance, which ordinary will be the
difference between the market value of the defaulted security and the market
value of similar securities of minimum high grade (i.e., rated A by Moody's or
S&P) that are not in default. To the extent that the Fund holds defaulted
securities, it may be limited in its ability to manage its investment and to
purchase other municipal securities. Except as described above with respect to
securities that are in default or subject to significant risk of default, the
Fund will not place any value on the insurance in valuing the municipal
securities that it holds.
Municipal Bond Insurers
Municipal bond insurance may be provided by one or more of the
following insurers or any other municipal bond insurer which is rated at least
Aaa by Moody's or AAA by S&P.
Municipal Bond Investors Assurance Corp.
Municipal Bond Investors Assurance Corp. is a wholly-owned subsidiary
of MBIA, Inc., a Connecticut insurance company, which is owned by AEtna Life and
Casualty, Credit Local DeFrance CAECL, S.A., The Fund American Companies, and
the public. The investors of MBIA, Inc. are not obligated to pay the obligations
of MBIA. MBIA, domiciled in New York, is regulated by the New York State
Insurance Department and licensed to do business in various states. The address
of MBIA is 113 King Street, Armonk, New York, 10504, and its telephone number is
(914) 273-4345. S&P has rated the claims-paying ability of MBIA AAA.
AMBAC Indemnity Corporation
AMBAC Indemnity Corporation is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of Wisconsin, and licensed to do
business in various states. AMBAC is a wholly-owned subsidiary of AMBAC, Inc., a
financial holding company which is owned by the public. Copies of certain
statutorily required filings of AMBAC can be obtained from AMBAC. The address of
AMBAC's administrative offices is One State Street Plaza, 17th Floor, New York,
New York, 10004, and its telephone number is (212) 668-0340. S&P has rated the
claims-paying ability of AMBAC AAA.
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Financial Guaranty Insurance Company
Financial Guaranty Insurance Company is a wholly-owned subsidiary of
FGIC Corporation, a Delaware holding company. FGIC Corporation is wholly-owned
by General Electric Capital Corporation. The investors of FGIC Corporation are
not obligated to pay the debts of or the claims against Financial Guaranty.
Financial Guaranty is subject to regulation by the state of New York Insurance
Department and is licensed to do business in various states. The address of
Financial Guaranty is 115 Broadway, New York, New York, 10006, and its telephone
number is (212) 312-3000. S&P has rated the claims-paying ability of Financial
Guaranty AAA.
Municipal Bonds (All Funds)
The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue bonds". General obligation bonds are secured by
the issuer's pledge of its full faith, credit and unlimited taxing power for the
payment of principal and interest. Revenue or special tax bonds are payable only
from the revenues derived from a particular facility or class of facilities or
projects or, in a few cases, from the proceeds of a special excise or other tax,
but are not supported by the issuer's power to levy general taxes. There are, of
course, variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors. The
yields of municipal bonds depend on, among other things, general money market
conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligations and rating of the issue.
Since the Funds may invest in industrial development bonds, the Funds
may not be appropriate investment for entities which are "substantial users" of
facilities financed by industrial development bonds or for investors who are
"related persons". Generally, an individual will not be a "related person" under
the Internal Revenue Code of 1986 (the "Code") unless such investor or his
immediate family (spouse, brothers, sisters and lineal descendants) own directly
or indirectly in the aggregate more than 50 percent of the value of the equity
of a corporation or partnership which is a "substantial user" of a facility
financed from proceeds of "industrial development bonds". A "substantial user"
of such facilities is defined generally as a "non-exempt person who regularly
uses a part of a facility" financed from the proceeds of industrial development
bonds.
As set forth in the Prospectus, the Code establishes new unified volume
caps for most "private purpose" municipal bonds (such as industrial development
bonds and obligations to finance low-interest mortgages on owner-occupied
housing and student loans). The unified volume cap is not expected to affect
adversely the availability of municipal bonds for investment by the Funds;
however, it is possible that proposals will be introduced before Congress to
further restrict or eliminate the federal income tax exemption for interest on
Municipal Obligations. Any such proposals, if enacted, could adversely affect
the availability of municipal bonds for investment by the Funds and the value of
each Fund's portfolio might be affected. In that event, each Fund might
reevaluate its investment policies and restrictions and consider recommending to
its shareholders changes in both.
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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 Short-Intermediate nor Tax Free Income Fund 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 each Fund's total
assets may be invested without regard to such 5% limitation. For this purpose
each political subdivision, agency, or instrumentality and each multi-state
agency of which a state is a member, and each public authority which issues
industrial development bonds on behalf of a private entity, will be regarded as
a separate issuer for determining the diversification of each Fund's portfolio.
With respect to 75% of the value of its total assets, High Grade will
not purchase securities of any one issuer (other than cash, cash items or
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities) if as a result more than 5% of the value of its total assets
would be invested in the securities of that issuer.
Under this limitation, each governmental subdivision, including states
and the District of Columbia, territories, possessions of the United States, or
their political subdivisions, agencies, authorities, instrumentalities, or
similar entities, will be considered a separate issuer if its assets and
revenues are separate from those of the governmental body creating it and the
security is backed only by its own assets and revenues.
Industrial development bonds, backed only by the assets and revenues of a
nongovernmental issuer, are considered to be issued solely by that issuer. If,
in the case of an industrial development bond or governmental-issued security, a
governmental or other entity guarantees the security, such guarantee would be
considered a separate security issued by the guarantor as well as the other
issuer, subject to limited exclusions allowed by the Investment Company Act of
1940.
2. Ten Percent Limitation on Securities of Any One Issuer
Short-Intermediate may not purchase more than 10% of any class of
voting securities of any one issuer other than the U.S. government and its
agencies or instrumentalities.
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3. Investment for Purposes of Control or Management
Short-Intermediate may not invest in companies for the purpose of
exercising control or management.
4. Purchase of Securities on Margin
High Grade, Short-Intermediate or Tax Free Income Fund may not 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
High Grade* will not invest more than 5% of its total assets in
industrial development bonds and other municipal securities where the principal
and interest are the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations, including the
operation of any predecessor.
Short-Intermediate may not invest more than 5% of its total assets in
taxable securities of unseasoned issuers that have been in continuous operation
for less than three years, including operating periods of their predecessors,
except that no such limitation shall apply to the extent that (i) the Fund may
invest in obligations issued or guaranteed by the U.S. government and its
agencies or instrumentalities, and (ii) the Fund may invest in municipal
securities.
Tax Free Income may not invest more than 5% of its total assets in
securities of any company having a record, together with its predecessors, of
less that three years of continuous operation.
6. Underwriting
High Grade, Short-Intermediate or Tax Free Income may not engage in the
business of underwriting the securities of other issuers, provided that the
purchase of municipal securities or other permitted investments, directly from
the issuer thereof (or from an underwriter for an issuer) and the later
disposition of such securities in accordance with a Fund's investment program
shall not be deemed to be an underwriting.
7. Interests in Oil, Gas or Other Mineral Exploration or Development
Programs
Short-Intermediate may not purchase, sell or invest in interests in
oil, gas or other mineral exploration or development programs.
High Grade will not purchase interests in or sell oil, gas or other
mineral exploration or development programs or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
8. Concentration in Any One Industry
Short-Intermediate 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
and to municipal
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securities.
High Grade 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 upon which is paid from revenues of similar types of projects. However,
the Fund may invest as temporary investments more than 25% of the value of its
total 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.
Tax Free Income may 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, including industrial development
bonds from the same facility or similar types of facilities; governmental
issuers of municipal bonds are not regarded as members of an industry and the
Fund may invest more than 25% of its assets in industrial bonds.
9. Warrants
Short-Intermediate may not invest more than 5% of its total net assets
in warrants, and, of this amount, no more than 2% of each Fund's total net
assets may be invested in warrants that are listed on neither the New York nor
the American Stock Exchange.
10. Ownership by Trustees/Officers
High Grade* and Short-Intermediate may not 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.
11. Short Sales
High Grade and Tax Free Income will not make short sales of securities
or maintain a short position, unless at all times when a short position is open
a Fund owns an equal amount of such securities or of securities which, without
payment of any further consideration are convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the securities sold
short. The use of short sales will allow the Funds to retain certain bonds in
their portfolios longer than it would without such sales. To the extent that a
Fund receives the current income produced by such bonds for a longer period than
it might otherwise, a Fund's investment objective is furthered.
Short-Intermediate will not sell any securities short or maintain a
short position.
12. Lending of Funds and Securities
Short-Intermediate may not lend its funds to other persons, provided
that each Fund may purchase issues of debt securities, acquire privately
negotiated loans made to municipal borrowers and enter into repurchase
agreements.
Short-Intermediate may not lend its portfolio securities, unless the
borrower is
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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.
High Grade will not lend any of its assets except that it may purchase
or hold money market instruments, including repurchase agreements and variable
amount demand master notes in accordance with its investment objective, policies
and limitations and it may lend portfolio securities valued at not more than 15%
of its total assets to broker-dealers.
Tax Free Income may 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 thatn 15% of its total assets to broker-dealers
and enter repurchase agreements.
13. Commodities
Short-Intermediate may not purchase, sell or invest in commodities,
commodity contracts or financial futures contracts.
Tax Free Income may not purchase or sell commodities or commodity
contracts except that it may engage in currency or other financial futures
contracts and related options transactions.
14. Real Estate
High Grade will not buy or sell real estate, although it 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.
Tax Free Income may 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.
Short-Intermediate may not purchase, sell or invest in real estate or
interests in real estate, except that each Fund may purchase municipal
securities and other debt securities secured by real estate or interests
therein.
15. Borrowing, Senior Securities, Reverse Repurchase Agreements
Short-Intermediate 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 net 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, are outstanding. The Fund will not
enter into reverse repurchase agreements exceeding 5% of the value of its total
assets.
High Grade will not issue senior securities, except the Fund may borrow
money directly or through reverse repurchase agreement as a temporary measure
for
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<PAGE>
extraordinary or emergency purposes in an amount up to one-third of the value of
its net assets, including the amount borrowed, in order to meet redemption
requests without immediately selling portfolio instruments; and except to the
extent the Fund will enter into futures contracts. Any such borrowings need not
be collateralized. The Fund will not purchase any securities while borrowings in
excess of 5% of its total assets are outstanding. The Fund will not borrow money
or engage in reverse repurchase agreements for investment leverage purposes.
High Grade will not mortgage, pledge or hypothecate any assets except to secure
permitted borrowings. In those cases, High Grade 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 and the purchase of securities on a when-issued basis are not deemed
to be a pledge.
Tax Free Income 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 a pledge of assets.
Tax Free Income 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 aggregated
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.
Tax Free Income will not pledge more than 15% of its net asets 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.
16. Options
Short-Intermediate may not write, purchase or sell put or call options,
or combinations thereof, except the Fund may purchase securities with rights to
put securities to the seller in accordance with its investment program.
17. Investing in Securities of Other Investment Companies
High Grade 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 the Fund in shares of another investment company would be subject
to such duplicate expenses.
Short-Intermediate* may not purchase the securities of other investment
companies, except to the extent such purchases are not prohibited by applicable
law.
Tax Free Income may not purchase securities of other investment
companies, except as part of a merger, consolidation, purchase of assets or
similar transaction.
18. Restricted Securities
High Grade will not invest more than 10% of its total assets in
securities subject to restrictions on resale under the Federal securities laws.
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<PAGE>
Tax Free Income will not invest more than 10% of its total assets in
securities with legal or contractual restrictions on resale or in securities for
which market quotations are not readily available, or in repurchase agreements
maturing in more than seven days.
19. Investment in Municipal Securities
Short-Intermediate may not invest more than 20% of its total assets in
securities other than municipal securities, (as described under "Description of
the Funds Investment Objectives and Policies" in the Fund's Prospectus), unless
extraordinary circumstances dictate a more defensive posture.
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. Securities Issued by Government Units; Industrial Development Bonds
Short-Intermediate has determined not to invest more than 25% of its
total assets (i) in securities issued by governmental units located in any one
state, territory or possession of the United States (but this limitation does
not apply to project notes backed by the full faith and credit of the U.S.
government) or (ii) industrial development bonds not backed by bank letters of
credit.
Tax Free Income does not presently intend to invest more than 25% of
its total assets in (1) municipal bonds of a single state and its subdivisions,
agencies and instrumentalities; of a single territory or possession of the U.S.
and its subdivisions, agencies or instrumentalities; or of the District of
Columbia and any subdivision, agency or instrumentality thereof; or (2)
municipal bonds, the payment of which depends on revenues derived from a single
facility or similar types of facilities. Since certain municipal bonds may be
related in such a way that an economic, business or political development or
change affecting one such security could likewise affect the other securities, a
change in this policy could result in increased investment risk, but no change
is presently contemplated. The Fund may invest more than 25% of its total assets
in industrial development bonds.
High Grade does not intend to invest more than 25% of the value of its
assets in any issuer in a single state.
2. Illiquid Securities
Short-Intermediate may not invest more than 15% and High Grade not more
than 10% of their 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 certain securities and
municipal leases determined by the Trustees to be liquid.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
For purposes of their policies and limitations, the Funds consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or
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savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items".
MANAGEMENT
The Evergreen Keystone funds consist of seventy-three mutual funds.
Each mutual fund is, or is a series of, a registered, open-end management
company.
Trustees and executive officers of each mutual fund, their ages, and
their principal occupations during the last five years are shown below. Except
as set forth below, the address of each of the Trustees is 200 Berkeley Street,
Boston, Massachusetts 02116.
FREDERICK AMLING (69). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); and former Member,
Board of Advisers, Credito Emilano (banking).
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL. Trustee of the
Trusts; Trustee or Director of all Evergreen Keystone funds other than Evergreen
Investment Trust and Evergreen Variable Trust; real estate developer and
construction consultant; and President of Centrum Equities and Centrum
Properties, Inc.
CHARLES A. AUSTIN III (61). Trustee of Tax Free Income; Trustee or Director of
23 other Evergreen Keystone funds; Investment Counselor to Appleton Partners,
Inc.; and former Managing Director, Seaward Management Corporation (investment
advice).
FOSTER BAM (70), Greenwich Plaza, Greenwich, CT. Trustee of the Trusts; Trustee
or Director of all other Evergreen Keystone funds other than Evergreen
Investment Trust and Evergreen Variable Trust; Partner in the law firm of
Cummings & Lockwood; Director, Symmetrix, Inc. (sulphur company) and Pet
Practice, Inc. (veterinary services); and former Director, Chartwell Group Ltd.
(manufacturer of office furnishings and accessories), Waste Disposal Equipment
Acquisition Corporation and Rehabilitation Corporation of America
(rehabilitation hospitals).
*GEORGE S. BISSELL(67). Chairman of the Board and Chief Executive Officer and
Trustee of Tax Free Income and 23 other Evergreen Keystone funds; Chairman of
the Board and Trustee of Anatolia College; Trustee of University Hospital (and
Chairman of its Investment Committee); former Director and Chairman of the Board
of Hartwell Keystone Advisers, Inc.; and former Chairman of the Board, Director
and Chief Executive Officer of Keystone Investments, Inc.
EDWIN D. CAMPBELL (69). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; Principal, Padanaram Associates, Inc.; and
former Executive Director, Coalition of Essential Schools, Brown University.
CHARLES F. CHAPIN (67). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; and former Director, Peoples Bank (Charlotte,
NC).
K. DUN GIFFORD (57). Trustee of Tax Free Income; Trustee or Director of 23 other
Evergreen Keystone funds; Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and Director, American Institute
of Food and Wine; Chairman and President, Oldways Preservation and Exchange
Trust (education); former Chairman of the Board, Director, and Executive Vice
President, The London Harness Company; former Managing Partner, Roscommon
Capital Corp.; former Chief Executive Offi cer, Gifford Gifts of Fine Foods;
former Chairman, Gifford, Drescher & Associates (environmental consulting); and
former Director, Keystone Investments, Inc. and Keystone Investment Management
Company.
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC. Trustee; Chairman of
11 Evergreen Keystone funds and Trustee or Director of all Evergreen Keystone
funds; former Chairman of the Distribution Foundation for the Carolinas; and
former Vice President of Lance Inc. (food manufacturing).
LEROY KEITH, JR. (57), 4124 Crossgate Road, Charlotte, NC. Trustee of Tax Free
Income; Trustee or Director of 23 other Evergreen Keystone funds; Chairman of
the Board and Chief Executive Officer, Carson Products Company; Director of
Phoenix Total Return Fund and Equifax, Inc.; Trustee of Phoenix Series Fund,
Phoenix Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
F. RAY KEYSER, JR. (69). Trustee of Tax Free Income; Trustee or Director and
Member of the Board of Advisers of all other Evergreen Keystone funds; Chairman
and Of Counsel, Keyser, Crowley & Meub, P.C.; Member, Governor's (VT) Council of
Economic Advisers; Chairman of the Board and Director, Central Vermont Public
Service Corporation and Lahey Hitchcock Clinic; Director, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand Trunk Western Railroad, Union
Mutual Fire Insurance Company, New England Guaranty Insurance Company, Inc., and
the Investment Company Institute; former Director and President, Associated
Industries of Vermont; former Director of Keystone, Central Vermont Railway,
Inc., S.K.I. Ltd., and Arrow Financial Corp.; and former Director and Chairman
of the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC. Trustee; Trustee or
Director of all other Evergreen Keystone funds with the exception of Evergreen
Variable Trust; and Sales Representative with Nucor-Yamoto, Inc. (steel
producer) since 1988.
THOMAS L. MCVERRY (58), 4419 Parkview Drive, Charlotte, NC. Trustee; Trustee or
Director of all other Evergreen Keystone funds with the exception of Evergreen
Variable Trust; former Vice President and Director of Rexham Corporation; and
former Director of Carolina Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC. Trustee; Trustee or Director of all other Evergreen Keystone
funds with the exception of Evergreen Variable Trust; and Partner in the law
firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON (55). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; Vice Chair and former Executive Vice President,
DHR Interna tional, Inc. (executive recruitment); former Senior Vice President,
Boyden International Inc. (executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
RUSSELL A. SALTON, III M.D. (49), 205 Regency Executive Park, Charlotte, NC.
Trustee; Trustee or Director of all other Evergreen Keystone funds; Medical
Director, U.S. Health Care/Aetna Health Services; and former Managed Health Care
Consultant; former President, Primary Physician Care.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street, Suite 980, Charlotte, NC.
Trustee; Trustee or Director of all other Evergreen Keystone funds; and
Attorney, Law Offices of Michael S. Scofield.
RICHARD J. SHIMA (57). Trustee of Tax Free Income; Trustee or Director or Member
of the
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Board Advisers of all other Evergreen Keystone funds; Chairman, Environmental
Warranty, Inc. (insurance agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut Natural Gas Corporation,
Hartford Hospital, Old State House Association, Middlesex Mutual Assurance
Company, and Enhance Financial Services, Inc.; Chairman, Board of Trustees,
Hartford Graduate Center; Trustee, Greater Hartford YMCA; former Director, Vice
Chairman and Chief Investment Officer, The Travelers Corporation; former
Trustee, Kingswood-Oxford School; and former Managing Director and Consultant,
Russell Miller, Inc.
ANDREW J. SIMONS (57). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; Adjunct Professor of Law and former Associate Dean,
St. John's Univer sity School of Law; Adjunct Professor of Law, Touro College
School of Law; and former President, Nassau County Bar Association.
ROBERT J. JEFFRIES (74), 2118 New Bedford Drive, Sun City Center, FL. Trustee
Emeritus of 11 Evergreen Keystone funds and Corporate Consultant since 1967.
JOHN J. PILEGGI (37) President and Treasurer of the Trusts; President and
Treasurer of all other Evergreen Keystone funds; Senior Managing Director,
Furman Selz LLC since 1992; Managing Director from 1984 to 1992; Consultant to
BISYS Fund Services since 1996; 230 Park Avenue, Suite 910, New York, NY.
GEORGE O. MARTINEZ (37) Secretary of the Trusts; Secretary of all other
Evergreen Keystone funds; Senior Vice President and Director of Administration
and Regulatory Services, BISYS Fund Services; Vice President/Assistant General
Counsel, Alliance Capital Management from 1988 to 1995; 3435 Stelzer Road,
Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Funds within the
meaning of the 1940 Act.
For the fiscal year ended May 31, 1997, Trustees of the Funds received
$32,166, $159,659 and $9,830 in retainers and fees from Evergreen Municipal
Trust, Evergreen Investment Trust and Tax Free Income. For the year ending May
31, 1997, fees paid to Independent Trustees on a fund complex wide basis were
approximately $964,000.
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 Keystone Distributor, Inc. ("EKD"),
the distributor of each Class of shares of each Fund.
No officer or Trustee of the Trusts owned more than 1.0% of Class A,
Class B or Class C or Class Y shares of any Fund as of August 31, 1997.
Set forth below for each of the Trustees receiving in excess of $60,000
for the fiscal period of June 1, 1996 through May 31, 1997 is the aggregate
compensation paid to such Trustee by the Evergreen Keystone funds:
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Total Compensation
From Fund Complex
NAME PAID TO TRUSTEE
James S. Howell $76,875
Gerald M. McDonnell 65,550
Thomas L. McVerry 71,375
William Walt Pettit 69,375
Russell A Salton, III M.D. 71,325
Michael S. Scofield 71,325
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 August 31, 1997.
<TABLE>
<CAPTION>
Name of No. of % of
Name and Address Fund/Class Shares Class
- ---------------- ---------- ------ ----------
<S> <C> <C>
First Union National Bank High Grade/Y 504,862 23.59%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
Foster & Foster High Grade/Y 405,595 16.95%
PO Box 1669
Greenwich, CT 06836-1669
FUBS & Co. FEBO Short-Intermediate/A 104,560 16.93%
Haywood D. Cochrane Ljr.
21 Castlewood Court
Nashville, TN 37215-4617
FUBS & Co. FEBO Short-Intermediate/A 93,702 12.37%
Stephen Nash and
Linda N. Nash
10006 Stonemill Road
Richmond, VA 23233-2800
FUBS & Co. FEBO Short-Intermediate/A 76,391 12.37%
Manuel Garcia and
Adeline Garcia
4933 New Providence
Tampa, FL 33269-4814
FUBS & Co. FEBO Short-Intermediate/A 39.115 6.33%
Anthony M. Truscello Sr and
Carolyn A. Truscello
878 Taylor Dr.
Folcroft, PA 19032-1523
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<PAGE>
FUBS & Co. FEBO Short-Intermediate/A 37,789 6.12%
First Union Nat'l Bank-PA FBO
Anthony Dambro Loan Acct.
Attn: Augusto Bonnani PA 1322
123 Broad St.
Philadelphia, PA 19109-1029
FUBS & Co. FEBO Short-Intermediate/B 50,343 7.97%
Carl R. Nodine and
Linda F. Nodine
PO Box 210086
Nashville, TN 37221-0086
FUBS & Co. FEBO Short-Intermediate/B 38,129 6.03%
Mark E. Smith
Melissa A. Smith Jt Ten
397 Yadkin Valley Road
Advance, NC 27006-8702
FUBS & Co FEBO Short-Intermediate/B 32,757 5.18%
Shirley L. Roberts
2770 S. Garden Dr.
210 Bldg. 21
Lake Worth, FL 33461-6280
First Union National Bank/EB/INT Short-Intermediate/Y 779,296 17.16%
Cash Accuont
Attn Trust Opoerations Fund Group
401 S. Tryon St., 3rd Fl, CMG 1151
Charlotte,NC 28202-1191
Merrill Lynch, Pierce, Tax Free Income/A 1,590,918 22.38%
Fenner, Smith
For Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Merrill Lynch, Pierce, Tax Free Income/B 553,766 19.80%
Fenner, Smith
For Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Alletta Laird Downs TTEE Tax Free Income/B 205,973 7.36%
Alletta Laird Downs Trust
U/A DTD 3-29-89
P.O. Box 3666
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<PAGE>
Wilmington, DE 19807-0666
Merrill Lynch, Pierce, Tax Free Income/C 459,477 45.17%
Fenner, Smith
For Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT ADVISERS
(See also "Management of the Funds" in each Fund's Prospectus)
The investment adviser of Short-Intermediate is Evergreen Asset
Management Corp., a New York corporation, with offices at 2500 Westchester
Avenue, Purchase, New York ("Evergreen Asset" or the "Adviser") and which
Evergreen Asset is owned by First Union National Bank ("FUNB" or the "Adviser")
which, in turn, is a subsidiary of First Union Corporation ("First Union"), a
bank holding company headquartered in Charlotte, North Carolina. The sub-adviser
to Short-Intermediate is Lieber and Company ("Lieber"), located at 2500
Westchester Avenue, Purchase, New York, which provides certain services to
Evergreen Asset and is owned by First Union. The investment adviser of High
Grade is FUNB which provides investment advisory services through its Capital
Management Group. 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 investment adviser of Tax Free Income is Keystone Investment
Management Company ("Keystone" or the "Adviser"), a Delaware corporation,
located at 200 Berkeley Street, Boston, Massachusetts. Keystone is an indirectly
owned subsidiary of FUNB.
The Directors of Keystone are Donald McMullen; William M. Ennis, II;
Barbara I. Colvin; Albert H. Elfner, III, Chairman, CEO and President; Edward F.
Godfrey, Senior Vice President and Chief Operating Officer; and W. Douglas Munn,
Senior Vice President, Chief Financial Officer and Treasurer.
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 the Keystone
Family of Funds. Contemporaneously with the Merger, Tax Free Income entered into
a new investment advisory agreement with Keystone and into a principal
underwriting agreement with EKD.
Under its 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 registration under the Securities Act of 1933,
as amended, and the 1940 Act, printing prospectuses (for existing shareholders)
as they are updated, state qualifications, share certificates, mailings,
brokerage, custodian and stock transfer charges, printing, legal and auditing
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<PAGE>
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. For Tax Free Income, total dollar amounts paid by the Fund to
Keystone Management, Inc., the Fund' former investment manager, for investment
management and administrative services rendered, are inclusive of payments from
Keystone Management to Keystone for investment advisory services:
HIGH GRADE Period Ended Year Ended Period Ended
05/31/97 8/31/96 8/31/95
Advisory Fee $399,929 $575,456 $338,767
Waiver (64,199) (228,548) (20,456)
--------- --------- ---------
Net Advisory Fee $335,730 $346,908 $318,311
========= ========= =========
SHORT-INTERMEDIATE Period Ended Year Ended Year Ended
5/31/97 8/31/96 8/31/95
Advisory Fee $248,564 $287,149 $263,947
Waiver (60,003) (109,619) (63,612)
--------- --------- --------
Net Advisory Fee $188,561 $177,530 $200,335
========= ======== ========
Expense
Reimbursement 0 ( 30,962) $(28,521)
--------- --------- --------
TAX FREE INCOME Period Ended Year Ended Year Ended
5/31/97 11/30/96 8/31/95
Advisory Fee 367,154 $844,486 $919,802
717,813 781,832
Waiver 0 0 0
-------- -------- --------
Net Advisory Fee $367,154 $844,486 $919,802
======== ======== ========
With respect to Short-Intermediate, Evergreen Asset has agreed to
reimburse the Fund to the extent that the Fund's aggregate operating expenses
(including the Adver's fee but excluding interest, taxes, brokerage commissions
and extraordinary expenses, and, for Class A and Class B shares Rule 12b-1
distribution fees and shareholder servicing fees payable) exceed 1% of its
average net assets for any fiscal year.
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<PAGE>
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 each Fund
continue in effect for two years from their effective dates and, thereafter,
from year to year provided that their 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, 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 some
of the same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, the Adviser
attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to
permit purchase and sales transactions to be effected between each Fund and the
other registered investment companies for which Evergreen Asset, Keystone, FUNB
or its affiliates acts as investment adviser or between the Fund and any
advisory clients of Evergreen Asset, Keystone, FUNB or its affiliates. Each Fund
may from time to time engage in such transactions but only in accordance with
these procedures and if they are equitable to each participant and consistent
with each participant's investment objectives.
At present, Evergreen Keystone Investment Services ("EKIS") serves as
administrator to High Grade and Short-Intermediate subject to the supervision
and control of the Trustees of each Trust. As administrator, EKIS provides
facilities, equipment and personnel to the Funds and is entitled to receive a
fee based on the
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<PAGE>
average daily net assets of all mutual funds for which CMG, Keystone or Evergeen
Asset serve as investment adviser, calculated in accordance with the following
schedule:.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.
BISYS Fund Services, an affiliate of EKD, serves as sub-administrator
to High Grad and Short-Intermediate and is entitled to receive a fee from EKIS
calculated on the average daily net assets of each Fund at a rate based on the
total assets of the mutual funds administered by EKIS for which FUNB, Evergreen
Asset, Keystone or affiliates of First Union also serve as investment adviser.
BISYS Fund Services also serves as sub-administrator to Tax Free Income and is
entitled to receive a fee from Keystone based on the total assets of the mutual
funds for which FUNB affiliates serve as investment adviser. Fees are calculated
in accordance with the following schedule: .0100% of the first $7 billion;
.0075% on the next $3 billion; .0050% on the next $15 billion; and .0040% on
assets in excess of $25 billion. The total assets of mutual funds for which
FUNB, Evergreen Asset, Keystone, or affiliates of First Union serve as
investment adviser as of June 30, 1997 were approximately $30.5 billion.
For the fiscal period ended May 31, 1997, the fiscal year ended August
31, 1996, and fiscal period ended August 31, 1995 High Grade paid to EKIS or its
predecessor, Evergreen Asset, $33,901, $59,073 and $50,406, respectively, in
administrative service costs.
DISTRIBUTION PLANS
Reference is made to "Management of the Funds - Distribution Plans and
Agreements" in the Prospectus of each Fund for additional disclosure regarding
the Funds' distribution arrangements. Distribution fees are accrued daily and
paid monthly on the Class A, Class B and Class C shares and are charged as class
expenses, as accrued. The distribution fees attributable to the Class B shares
are designed to permit an investor to purchase such shares through
broker-dealers without the assessment of a front-end sales charge, while at the
same time permitting 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 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, where applicable, Class C
shares (each a "Plan" and collectively, the "Plans"), the Treasurer of each Fund
reports the amounts expended under the Plan and the purposes for which such
expenditures were made to the Trustees of each Trust for their review on a
quarterly basis. Also, each Plan provides that the selection and nomination of
Trustees who are not "interested persons" of each Trust (as defined in the 1940
Act) 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.
The Plans permit the payment of fees to brokers and others for
distribution and
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<PAGE>
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, High Grade has 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 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 EKD 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 EKD 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 High Grade,
amendments to the Shareholder Services Plan require a majority vote of the
disinterested Trustees but do not require a shareholders vote. Any Plan,
Shareholder Services Plan or Distribution Agreement may be terminated (a) by a
Fund without penalty at any time by a majority vote of the holders of the
outstanding voting securities of the Fund, voting separately by Class or by a
majority vote of the Trustees who are not "interested persons" as defined in the
1940 Act, or (b) by EKD. 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 EKD. Any Distribution Agreement will terminate
automatically in the event of its assignment.
FEES PAID PURSUANT TO DISTRIBUTION PLANS. The Funds incurred the following
distribution services fees:
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<PAGE>
High Grade. For the fiscal period ended May 31, 1997 and the fiscal year ended
August 31, 1996, $92,644 and $97,996, respectively, on behalf of Class A shares;
and $240,510 and $167,706, respectively, on behalf of Class B shares.
Short-Intermediate. For the fiscal period ended May 31, 1997 and the fiscal year
ended August 31, 1996, $19,181 and $4,106, respectively, on behalf of Class A
shares; and $52,576 and $20,584, respectively, on behalf of Class B shares.
Tax Free Income. For the fiscal period ended May 31, 1997 and the fiscal year
ended November 30, 1996, $90,496 and $205,872, respectively, on behalf of Class
A shares; $154,261 and $333,417, respectively, on behalf of Class B shares and
$62,367 and $169,992 on behalf of Class C shares.
FEE PAID PURSUANT TO SHAREHOLDER SERVICES PLAN. High Grade incurred the
following shareholder services fees: For the fiscal period ended May 31, 1997
and the fiscal year ended August 31, 1996, $60,421 and $55,902, respectively, on
behalf of Class B shares.
Short-Intermediate. For the fiscal period ended May 31, 1997, the fiscal year
ended August 31, 1996 and the fiscal period ended August 31, 1995, $13,161,
$17,458 and $6,623, respectively, on behalf of Class B shares.
ALLOCATION OF BROKERAGE
Decisions regarding each Fund's portfolio are made by its Adviser,
subject to the supervision and control of the Trustees. Orders for the purchase
and sale of securities and other investments are placed by employees of the
Adviser, all of whom, in the case of Evergreen Asset, are associated with
Lieber. In general, the same individuals perform the same functions for the
other funds managed by the Adviser. A Fund will not effect any brokerage
transactions with any broker or dealer affiliated directly or indirectly with
the Adviser unless such transactions are fair and reasonable, under the
circumstances, to the Fund's shareholders. Circumstances that may indicate that
such transactions are fair or reasonable include the frequency of such
transactions, the selection process and the commissions payable in connection
with such transactions.
It is anticipated that most of the Funds purchase and sale transactions
will be with the issuer or an underwriter or with major dealers in such
securities acting as principals. Such transactions are normally on a net basis
and generally do not involve payment of brokerage commissions. However, the cost
of securities purchased from an underwriter usually includes a commission paid
by the issuer to the underwriter. Purchases or sales from dealers will normally
reflect the spread between bid and ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Fund shall be prompt execution at the most favorable
price. A Fund will also consider such factors as the price of the securities and
the size and difficulty of execution of the order. If these objectives may be
met with more than one firm, the Fund will also consider the availability of
statistical and investment data and economic facts and opinions helpful to the
Fund. 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.
The transactions in which the Funds engage do not involve the payment
of brokerage commissions and are executed with dealers other than Lieber.
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<PAGE>
ADDITIONAL TAX INFORMATION
(See also "Taxes" in the Prospectus)
Each Fund has qualified and intends to continue to qualify for and
elect the tax treatment applicable to regulated investment companies ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). (Such qualification does not involve supervision of management or
investment practices or policies by the Internal Revenue Service.) In order to
qualify as a regulated investment company, a Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
securities or foreign currencies and other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in such securities; (b) derive less than 30% of its gross income from the sale
or other disposition of securities, options, futures or forward contracts (other
than those on foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the RIC's principal
business of investing in securities (or options and futures with respect
thereto) held for less than three months (this provision is repealed starting in
1998); and (c) diversify its holdings so that, at the end of each quarter of its
taxable year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash, U.S. government securities and other securities limited in
respect of any one issuer, to an amount not greater than 5% of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. government securities and securities of other
regulated investment companies). By so qualifying, a Fund is not subject to
Federal income tax if it timely distributes its investment company taxable
income and any net realized capital gains. A 4% nondeductible excise tax will be
imposed on a Fund to the extent it does not meet certain distribution
requirements by the end of each calendar year. Each Fund anticipates meeting
such distribution requirements.
Dividends paid by a Fund from investment company taxable income
generally will be taxed to the shareholders as ordinary income. Investment
company taxable income includes net investment income and net realized
short-term gains (if any).
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders (who are not exempt from
tax) as long-term capital gain, regardless of the length of time the shares of a
Fund have been held by such shareholders. Short-term capital gains distributions
are taxable to shareholders who are not exempt from tax as ordinary income. Such
distributions are not eligible for the dividends-received deduction.
Distributions of investment company taxable income and any net
short-term capital gains will be taxable as ordinary income as described above
to shareholders (who are not exempt from tax), whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for Federal income tax purposes in each share so
received equal to the net asset value of a share of a Fund on the reinvestment
date.
Distributions by each Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would be taxable as
ordinary income or capital gain as described above to shareholders (who are not
exempt from tax), even though, from an investment standpoint, it may constitute
a return of capital. In
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<PAGE>
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 losses
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. Long-term capital gains on assets held
for more than 18 months are taxable as a maximum rate of 28%; such gains on
assets held for more than 18 months are taxable as a maximum rate of 20%.
Generally, any loss realized on a sale or exchange will be disallowed to the
extent shares disposed of are replaced within a period of sixty-one days
beginning thirty days before and ending thirty days after the shares are
disposed of. Any loss realized by a shareholder on the sale of shares of the
Fund held by the shareholder for six months or less will be disallowed to the
extent of any exempt interest dividends received by the shareholder with respect
to such shares, and will be treated for tax purposes as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her Federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% Federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). It does not reflect
the special tax consequences to certain taxpayers (e.g., banks, insurance
companies, tax exempt organizations and foreign persons). Shareholders are
encouraged to consult their own tax advisers regarding specific questions
relating to Federal, state and local tax consequences of investing in shares of
a Fund. Each shareholder who is not a U.S. person should consult his or her tax
adviser regarding the U.S. and foreign tax consequences of ownership of shares
of a Fund, including the possibility that such a shareholder may be subject to a
U.S. withholding tax at a rate of 31% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
Special Tax Considerations
In order to qualify to pay exempt interest dividend for a year, a Fund
must have exempt bonds with a value equal to more than half of the Fund's total
asset value at the close of each quarter of the year. To the extent that the
Fund distributes exempt interest dividends to a shareholder, interest on
indebtedness incurred or continued by
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<PAGE>
such shareholder to purchase or carry shares of the Fund is not deductible.
Furthermore, entities or persons who are "substantial users" (or related
persons) of facilities financed by "private activity" bonds (some of which were
formerly referred to as "industrial development" bonds) should consult their tax
advisers before purchasing shares of the Fund. "Substantial user" is defined
generally as including a "non-exempt person" who regularly uses in its trade or
business a part of a facility financed from the proceeds of industrial
development bonds.
The percentage of the total dividends paid by a Fund with respect to
any taxable year that qualifies as exempt interest dividends will be the same
for all shareholders of the Fund receiving dividends with respect to such year.
If a shareholder receives an exempt interest dividend with respect to any share
and such share has been held for six months or less, any loss on the sale or
exchange of such share will be disallowed to the extent of the exempt interest
dividend amount.
NET ASSET VALUE
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 on
the purchase alternative chosen by the investor, as more fully described in the
Prospectus. See "Purchase of Shares - Class A Shares - Front-End Sales Charge
Alternative. " On each Fund business day on which a purchase or redemption order
is received by a Fund and trading in the types of securities in which a Fund
invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Declaration of
Trust and By-Laws governing each Fund as of the next close of regular trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time)
by dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any weekday,
exclusive of national holidays on which the Exchange is closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic or
foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked price and portfolio bonds are presently valued by
a recognized pricing service when such prices are believed to reflect the fair
value of the security. Over-the-counter securities not included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one or more brokers. If accurate quotations are not available,
securities will be valued at fair value determined in good faith by the Board of
Trustees.
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 shares and Class C shares relating to
distribution services fees (and, with respect to High Grade, Shareholder Service
Plan fee) and the fact that Class Y shares bear no additional distribution or
shareholder service 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 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
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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.
PURCHASE OF SHARES
The following information supplements that set forth in each Prospectus
under the heading "Purchase and Redemption of Shares - How To Buy Shares."
General
Shares of each Fund will be offered on a continuous basis at a price
equal to their net asset value plus an initial sales charge at the time of
purchase (the "front-end sales charge alternative"), or with a contingent
deferred sales charge (the deferred sales charge 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 EKD ("selected dealers"), (ii)
depository institutions and other financial intermediaries or their affiliates,
that have entered into selected agent agreements with EKD ("selected agents"),
or (iii) EKD. The minimum for initial investments is $1,000; there is no minimum
for subsequent investments. The subscriber may use the Application available
from EKD 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 EKD. 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 EKD 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 EKD 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. Eastern time. 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
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Association ("ACH"). If a shareholder's telephone purchase request is received
before 4:00 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 for any class of shares of any Fund. This facilitates later redemption
and relieves the shareholder of the responsibility for and inconvenience of lost
or stolen certificates.
Alternative Purchase Arrangements
High Grade and Short-Intermediate issue three 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; and (iii) 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. Tax Free
Income offers Class A, Class B and Class C shares. The three 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 shares of High Grade are subject to a Shareholder Service Plan
fee, (III) Class A shares bear the expense of the front-end sales charge and
Class B, Class C and, when applicable, Class A shares bear the expense of the
deferred sales charge, (IV) Class B and Class C shares bear the expense of a
higher Rule 12b-1 distribution services fee and Shareholder Service Plan fee
than Class A shares (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, where applicable, 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 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 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 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, EKD will reject any order (except
orders for Class B shares from certain retirement plans) for more than $250,000
for Class B shares.
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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. 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 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 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 being subject to a contingent deferred sales charge for a seven-year
period. For example, based on current fees and expenses, an investor subject to
the 4.75% front-end sales 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, Shareholder
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 Plan)
fees on the investment, fluctuations in net asset value or the effect of
different performance assumptions.
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. EKD will reallow discounts to selected dealers
and agents in the amounts indicated in the table in the Prospectus. In this
regard, EKD may elect to reallow the entire sales charge to selected dealers and
agents for all sales with respect to which orders are placed with EKD.
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
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each Fund at the end of each Fund's latest fiscal year.
Net Per Share Offering
Asset Sales Price
Value Charge Date Per Share
High Grade $10.89 $.54 5/31/97 $11.43
Short-
Intermediate $10.09 $.34 5/31/97 $10.43
Tax Free Income $ 9.78 $.49 5/31/97 $10.27
With respect to High Grade, the following commissions were paid and
amounts retained by EKD or its predecessor for the period ending May 31, 1997,
the fiscal year ended August 31, 1996 and from July 7, 1995 through August 31,
1995:
Period From Fiscal Year Period From
9/1/96-5/31/97 Ended 8/31/96 7/7/95-8/31/95
Commissions Received $46,714 $73,014 $5,767
Commissions Retained $6,389 9,050 712
With respect to Short-Intermediate for the period ending May 31, 1997,
the fiscal year ended August 31, 1996 and the period from January 3, 1995
(commencement of offering of Class A shares) through August 31, 1995, and
commissions were paid to and amounts retained by EKD or its predecessor are
noted below:
Period From Fiscal Year Period From
9/1/96-5/31/97 Ended 8/31/96 1/5/95-8/31/95
Commissions Received $26,752 $33,816 $ 37,130
Commissions Retained 3,820 8,464 4,445
With respect to Tax Free Income for the period ending May 31, 1997 and
the fiscal years ended November 30, 1996 and 1995 commissions were paid to and
amounts retained by EKD or its predecessor are noted below:
Period From Fiscal Year Fiscal Year
12/1/96-5/31/97 Ended 11/30/96 Ended 11/30/95
Commissions Received $9,477 $469,269 $254,934
Commissions Retained 890 254,934 143,281
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
Keystone fund other than money market funds into a single "purchase", if the
resulting "purchase" totals at least $100,000. The term "purchase" refers to:
(i) a single purchase by an individual, or to concurrent purchases, which in the
aggregate are at least equal to
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the prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own
account(s); (ii) a single purchase by a trustee or other fiduciary purchasing
shares for a single trust, estate or single fiduciary account although more than
one beneficiary is involved; or (iii) a single purchase for the employee benefit
plans of a single employer. The term "purchase" also includes purchases by any
"company", as the term is defined in the 1940 Act, but does not include
purchases by any such company which has not been in existence for at least six
months or which has no purpose other than the purchase of shares of a Fund or
shares of other registered investment companies at a discount. The term
"purchase" does not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit card holders of
a company, policy holders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. A "purchase" may also include
shares, purchased at the same time through a single selected dealer or agent, of
any Evergreen Keystone fund.
Prospectuses for the Evergreen Keystone funds may be obtained without
charge by contacting EKD or the Advisers at the telephone number shown on the
front cover of this Statement of Additional Information.
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 and Class B shares of the Fund held by
the investor and (b) all such shares of any other Evergreen
mutual fund held by the investor; and
(iii) the net asset value of all shares described in paragraph (ii)
owned by another shareholder eligible to combine his or her
purchase with that of the investor into a single "purchase"
(see above).
For example, if an investor owned Class A, Class B or Class C shares of
an Evergreen Keystone fund worth $200,000 at their then current net asset value
and subsequently purchased Class A shares worth an additional $100,000, the
sales charge for the $100,000 purchase, in the case of Short-Intermediate, would
be at the 2.00% rate applicable to a single $300,000 purchase rather than the
2.50% rate, or in the case of High Grade, at the 2.50% rate applicable to a
single $300,000 purchase rather than the 3.75% rate.
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through a selected dealer or agent,
the investor or selected dealer or agent must provide the Distributor with
sufficient information to verify that each purchase qualifies for the privilege
or discount.
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 (or Class A, Class B and Class C shares)
of the Fund or any other Evergreen mutual 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
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investor's option, a Letter of Intent may include purchases of Class A or B
shares of the Fund or any other Evergreen Keystone 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 Keystone 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 shares of the Fund or any other Evergreen Keystone fund,
to qualify for the 3.75% sales charge applicable to purchases in High Grade and
Tax Free Income or 2.50% applicable to purchases in Short-Intermediate 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 contacting a Fund at
the address or telephone number shown on the cover of this Statement of
Additional Information.
Investments Through Employee Benefit and Savings Plans. Certain
qualified and non-qualified benefit and savings plans may make shares of the
Evergreen mutual funds available to their participants. Investments made by such
employee benefit plans may be exempt from any applicable front-end sales charges
if they meet the criteria set forth in the Prospectus under "Class A
Shares-Front End Sales Charge Alternative". The Advisers may provide
compensation to organizations providing administrative and record keeping
services to plans which make shares of the Evergreen Keystone mutual funds
available to their participants.
Reinstatement Privilege. A Class A shareholder who has caused any or
all of his or her shares of the 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;
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therefore, any gain or loss so realized will be recognized for Federal tax
purposes except that no loss will be recognized to the extent that the proceeds
are reinvested in shares of the Fund. The reinstatement privilege may be used by
the shareholder only once, irrespective of the number of shares redeemed or
repurchased, except that the privilege may be used without limit in connection
with transactions whose sole purpose is to transfer a shareholder's interest in
the Fund to his or her individual retirement account or other qualified
retirement plan account. Investors may exercise the reinstatement privilege by
written request sent to the Fund at the address shown on the cover of this
Statement of Additional Information.
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 Adviser, the Distributor, and their affiliates; officers,
directors and present and full-time employees of selected dealers or agents; or
the spouse, sibling, direct ancestor or direct descendant (collectively
"relatives") of any such person; or any trust, individual retirement account or
retirement plan account for the benefit of any such person or relative; or the
estate of any such person or relative, if such shares are purchased for
investment purposes (such shares may not be resold except to the Fund); (iii)
certain employee benefit plans for employees of the Advisers, EKD, and their
affiliates; (iv) persons participating in a fee-based program, sponsored and
maintained by a registered broker-dealer and approved by EKD, pursuant to which
such persons pay an asset-based fee to such broker-dealer, or its affiliate or
agent, for service in the nature of investment advisory or administrative
services. These provisions are intended to provide additional job-related
incentives to persons who serve the Funds or work for companies associated with
the Funds and selected dealers and agents of the Funds. Since these persons are
in a position to have a basic understanding of the nature of an investment
company as well as a general familiarity with the Fund, sales to these persons,
as compared to sales in the normal channels of distribution, require
substantially less sales effort. Similarly, these provisions extend the
privilege of purchasing shares at net asset value to certain classes of
institutional investors who, because of their investment sophistication, can be
expected to require significantly less than normal sales effort on the part of
the Funds and the Distributor.
Deferred Sales Charge Alternative--Class B 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.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within seven years after the month 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
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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 in the shareholder's Fund account, second of Class B shares held for over
seven years or Class B shares acquired pursuant to reinvestment of dividends or
distributions and third of Class B shares held longest during the seven-year
period.
To illustrate, assume that an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the second year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional Class B shares upon dividend reinvestment. If at such
time the investor makes his or her first redemption of 50 Class B shares, 10
Class B shares will not be subject to charge because of dividend reinvestment.
With respect to the remaining 40 Class B shares, the charge is applied only to
the original cost of $10 per share and not to the increase in net asset value of
$2 per share. Therefore, of the $600 of the shares redeemed $400 of the
redemption proceeds (40 shares x $10 original purchase price) will be charged at
a rate of 4.0% (the applicable rate in the second year after purchase for a
contingent deferred sales charge of $16).
The contingent deferred sales charge is waived on redemptions of shares
(i) following the death or disability, as defined in the Code, of a shareholder,
or (ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Proceeds from the contingent deferred sales charge are paid to EKD or its
predecessor and are used by EKD to defray the expenses of EKD 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
High Grade, 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 Florida Municipal Bond,
Georgia Municipal Bond, New Jersey Tax-Free, North Carolina Municipal Bond,
South Carolina Municipal Bond, Virginia Municipal Bond and High Grade, 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.
Conversion Feature. At the end of the period ending seven years after
the end of the calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A shares and will
no longer be subject to a higher distribution services fee and the applicable
shareholder service fee imposed on Class B shares. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose of the conversion
feature is to reduce the distribution services fee paid by holders of Class B
shares that have been outstanding long enough for the Distributor to have been
compensated for the expenses associated with the sale of such shares.
For purposes of conversion to Class A, Class B shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the
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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 High
Grade, Shareholder Service Plan fee) 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 High Grade, 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
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 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
The Evergreen Short-Intermediate Municipal Fund is a separate series of
The Evergreen Municipal Trust, a Massachusetts business trust. Evergreen High
Grade Tax Free Fund is a separate series of Evergreen Investment Trust, a
Massachusetts business trust. Keystone Tax Free Income Fund is a Massachsuetts
business trust. The above-named Trusts are individually referred to in this
Statement of Additional Information as the
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"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.
Each Fund, other than Tax Free Income, may issue an unlimited number of
shares of beneficial interest with a $0.0001 par value. Tax Free Income may
issue an unlimited number of shares of beneficial interest with no 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 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 that 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.
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An order has been received from the SEC permitting the issuance and
sale of multiple classes of shares representing interests in each Fund. In the
event a Fund were to issue additional Classes of shares other than those
described herein, no further relief from the SEC would be required.
Distributor
Evergreen Keystone Distributor, Inc. ("EKD" or 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 Agreement between each Fund and the Distributor, each 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 Short-Intermediate and High Grade.
KPMG Peat Marwick LLP has been selected to be the independent auditors
of Tax Free Income.
PERFORMANCE INFORMATION
Total Return
From time to time a Fund may advertise its "total return". Computed
separately for each class, the Fund's "total return" is its average annual
compounded total return for recent one, five, and ten-year periods (or the
period since the Fund's inception). The Fund's total return for such a period is
computed by finding, through the use of a formula prescribed by the 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.
The average annual compounded total return for each Class of shares
offered by the Funds for the most recently completed one year, three year, five
year and ten year periods, where applicable, and the period since each Fund's
inception is set forth in the table below.
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1 Year 3 Years 5 Years 10 Years
Ended Ended Ended Ended From Inception**
05/31/97 05/31/97 05/31/97 05/31/97 to 05/31/97
HIGH GRADE
Class A 1.90% 5.11% 5.75% N/A 6.00%
Class B 1.19% 5.16% N/A N/A 5.13%
Class Y 7.25% 7.10% N/A N/A 5.11%
SHORT-
INTERMEDIATE
Class A 0.92% N/A N/A N/A 3.40%
Class B 1.51% N/A N/A N/A 2.76%
Class Y 4.62% 3.95% 4.44% N/A 4.88%
TAX FREE INCOME
Class A 1.80% 4.39% 4.64% 6.23% N/A
Class B 1.03% 4.39% N/A N/A 3.84%
Class C 5.03% 5.26% N/A N/A 4.22%
** INCEPTION DATE
Short-Intermediate
Class A and B January 3, 1995
Class Y July 17, 1991
High Grade Class A February 21, 1992
Class B January 11, 1993
Class Y February 28, 1994
Tax Free Income Class A February 13, 1987
Class B February 1, 1993
Class C February 1, 1993
A Fund's total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and quality of the
securities in a Fund's portfolio and its expenses. Total return information is
useful in reviewing a Fund's performance but such information may not provide a
basis for comparison with bank deposits or other investments which pay a fixed
yield for a stated period of time. An investor's principal invested in a Fund is
not fixed and will fluctuate in response to prevailing market conditions.
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other communications to shareholders. Yield quotations are expressed
in annualized terms and may be quoted on a compounded basis. Yields are computed
by dividing the Fund's interest income (as defined in the 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:
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YIELD = 2[(a-b+1)6-1]
cd
Where a = Interest earned during the period
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of shares outstanding during the
period that were entitled to receive dividends
d = The maximum offering price per share on the last day of
the period
Income is calculated for purposes of yield quotations in accordance with
standardized methods applicable to all stock and bond funds. Gains and losses
generally are excluded from the calculation. Income calculated for purposes of
determining a Fund's yield differs from income as determined for other
accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yields quoted for
a Fund may differ from the rate of distributions a Fund paid over the same
period, or the net investment income reported in a Fund's financial statements.
Tax Equivalent Yield
The Funds invest principally in obligations the interest from which is
exempt from Federal income tax other than the Alternative Minimum Tax. However,
from time to time the Funds may make investment which generate taxable income. A
Fund's tax-equivalent yield is the rate an investor would have to earn from a
fully taxable investment in order to equal the Fund's yield after taxes.
Tax-equivalent yields are calculated by dividing a Fund's yield by the result of
one minus a stated Federal or combined Federal and state tax rate. (If only a
portion of the Fund's yield is tax-exempt, only that portion is adjusted in the
calculation.) Of course, no assurance can be given that a Fund will achieve any
specific tax-exempt yield. If only a portion of the Fund's yield is tax-exempt,
only that portion is adjusted in the calculation. Of course, no assurance can be
given that the Fund will achieve any specific tax-exempt yield.
The following formula is used to calculate Tax Equivalent Yield without
taking into account state tax:
FUND'S YIELD
1 - Fed Tax Rate
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
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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 tax exempt yields (calculated using a 31% federal tax rate) of each
Fund for the thirty-day period ended May 31, 1997 for each Class of shares
offered by the Funds is set forth in the table below:
Yield Tax Equivalent Yield
High Grade
Class A 4.19% 6.07%
Class B 3.63% 5.26%
Class Y 4.66% 6.75%
Short-Intermediate
Class A 3.74% 5.42%
Class B 2.94% 4.26%
Class Y 3.93% 5.70%
Tax Free Income
Class A 4.58% 6.64%
Class B 4.05% 5.87%
Class C 4.05% 5.87%
Non-Standardized Performance
In addition to the performance information described above, a Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
GENERAL
From time to time, a Fund may quote its performance in advertising and
other types of literature as compared to the performance of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, Lehman
Brothers General Obligations Municipal Bond Index or any other commonly quoted
index of common stock or municipal bond prices. The Standard & Poor's 500
Composite Stock Price Index and the Dow Jones Industrial Average are unmanaged
indices of selected common stock prices. The Lehman Brothers General Obligations
Municipal Bond Index is an unmanaged index of state general obligation debt
issues which are rated A or better and represent a variety of coupon ranges. 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 aid. 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
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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
Statement may be obtained at a reasonable charge from the SEC or may be
examined, without charge, at the offices of the SEC in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements of Tax Free Income, appearing in its most
current fiscal year Annual Report to Shareholders and the report thereon of KPMG
Peat Marwick LLP, independent auditors, appearing therein are incorporated by
reference into this Statement of Additional Information. The financial
statements of High Grade and Short-Intermediate, appearing in their most current
Annual Reports to Shareholders and the report thereon of Price Waterhouse LLP,
independent auditors, appearing therein are incorporated by reference into this
Statement of Additional Information. The Annual Report to Shareholders for the
Funds, which contain the referenced statements, are available upon request and
without charge.
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APPENDIX "A"
DESCRIPTION OF BOND, MUNICIPAL NOTE AND COMMERCIAL PAPER RATINGS
Standard & Poor's Ratings Group. A Standard & Poor's corporate or
municipal bond rating is a current assessment of the credit worthiness of an
obligor with respect to a specific obligation. This assessment of credit
worthiness may take into consideration obligers such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
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 is 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.
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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,
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AA, A, BBB, commonly known as "Investment Grade" ratings) are generally regarded
as eligible for bank investment. In addition, the Legal Investment Laws of
various states may impose certain rating or other standards for obligations
eligible for investment by savings banks, trust companies, insurance companies
and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service, Inc. 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.
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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 form time to time because of economic
conditions; A--average credit quality with adequate protection factors, but with
greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating categories.
Fitch Investors Service, Inc.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high 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
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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, Inc.: Commercial paper rated "Prime" carries
the smallest degree of investment risk. The modifiers 1, 2, and 3 are used to
denote relative strength within this highest classification.
Standard & Poor's Ratings Group: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service, Inc.: F-1+ -- denotes exceptionally strong
credit quality given to issues regarded as having strongest degree of assurance
for timely payment; F-1+ -- very strong credit quality, with only slightly less
degree of assurance for timely payment than 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.
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SUPPLEMENT TO THE STATEMENTS
OF ADDITIONAL INFORMATION OF
Evergreen Aggressive Growth Fund, Evergreen American Retirement Fund, Evergreen
Emerging Markets Growth Fund, Evergreen Florida High Income Municipal Bond Fund,
Evergreen Foundation Fund, Evergreen Fund, Evergreen Georgia Municipal Bond
Fund, Evergreen Global Leaders Fund, Evergreen Growth and Income Fund, Evergreen
High Grade Tax Free Fund, Evergreen Income and Growth Fund, Evergreen
Intermediate Term Government Securities Fund, Evergreen International Equity
Fund, Evergreen Institutional Money Market Fund, Evergreen Institutional Tax
Exempt Money Market Fund, Evergreen Institutional Treasury Money Market Fund,
Evergreen Micro Cap Fund, Evergreen Money Market Fund, Evergreen North Carolina
Municipal Bond Fund, Evergreen Short-Intermediate Bond Fund, Evergreen
Short-Intermediate Municipal Fund, Evergreen Small Cap Equity Income Fund,
Evergreen South Carolina Municipal Bond Fund, Evergreen Tax Strategic Foundation
Fund, Evergreen U.S. Government Fund, Evergreen Utility Fund, Evergreen Value
Fund, Evergreen Virginia Municipal Bond Fund, Evergreen Capital Preservation and
Income Fund, Evergreen Fund for Total Return, Evergreen Natural Resources Fund,
Evergreen Omega Fund, Evergreen Strategic Income Fund, Evergreen California Tax
Free Fund, Evergreen Massachusetts Tax Free Fund, Evergreen Missouri Tax Free
Fund, Evergreen New York Tax Free Fund, Evergreen Pennsylvania Tax Free Fund,
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone Quality Bond Fund (B-1), Keystone Small
Company Growth Fund (S-4), Keystone Strategic Growth Fund (K- 2), Keystone
Growth and Income Fund (S-1), Evergreen Select Adjustable Rate Fund, Evergreen
Select Small Cap Growth Fund, Keystone International Fund, Keystone Precious
Metals Holdings, and Keystone Tax Free Fund (each a "Fund" and, collectively,
the "Funds")
The Statements of Additional Information of each of the Funds are
hereby supplemented as follows:
STANDARDIZED FUNDAMENTAL INVESTMENT RESTRICTIONS
Each of the above Funds, except Keystone Balanced Fund (K-1), Keystone
Diversified Bond Fund (B-2), Keystone Small Company Growth Fund (S-4), and
Keystone Tax Free Fund, has adopted the following standardized fundamental
investment restrictions. These restrictions may be changed only by a vote of
Fund shareholders.
1. Diversification of Investments
The Fund may not make any investment inconsistent with the Fund's
classification as a diversified [non-diversified] investment company
under the Investment Company Act of 1940.
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2. Concentration of a Fund's Assets in a Particular Industry. ([All Funds
other than those listed below.)
The Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than
securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities [or in the case of Money Market Funds domestic
bank money instruments]).
For Evergreen Utility Fund
The Fund will concentrate its investments in the utilities industry.
For Keystone Precious Metals Holdings
The Fund will concentrate its investments in industries related to the
mining, processing or dealing in gold or other precious metals and
minerals.
3. Issuance of Senior Securities
Except as permitted under the Investment Company Act of 1940, the Fund
may not issue senior securities.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by
applicable law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed an underwriter in connection with the
disposition of its portfolio securities.
6. Investment in Real Estate
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in (a)
securities directly or indirectly secured by real estate, or (b)
securities issued by companies that invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on
commodities except to the extent that the Fund may engage in financial
futures contracts and related options and currency contracts and
related options and may otherwise do so in accordance with
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applicable law and without registering as a commodity pool operator
under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may
lend its portfolio securities in accordance with applicable law. The
acquisition of investment instruments shall not be deemed to be the
making of a loan.
9. Investment in Federally Tax Exempt Securities
The following Funds have also adopted a standardized fundamental
investment restriction in regard to investments in federally tax-exempt
securities:
<TABLE>
<CAPTION>
<S> <C>
Evergreen Tax Strategic Foundation Fund Evergreen High Grade Tax Free Fund
Evergreen Georgia Municipal Bond Fund Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund Evergreen Virginia Municipal Bond Fund
Evergreen New York Tax Free Fund Evergreen Massachusetts Tax Free Fund
Evergreen California Tax Free Fund Evergreen Pennsylvania Tax Free Fund
Evergreen Institutional Tax Exempt Money Market Fund Evergreen Missouri Tax Free Fund
Evergreen Short-Intermediate Municipal Fund
</TABLE>
The Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for Funds with the words tax exempt, tax free or municipal in their names.
ELIMINATION OF CERTAIN NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The nonfundamental investment restrictions described below have been
eliminated by each Fund listed under such restriction:
1. PROHIBITION ON INVESTMENT IN UNSEASONED ISSUERS
Evergreen Fund, Growth and Income Fund, Income and Growth Fund,
American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Growth and Income Fund (S-1), Omega Fund, Precious
Metals Holding, Strategic Growth Fund (K- 2), High Income Bond Fund
(B-4), Capital Preservation and Income Fund, Select Adjustable Rate
Fund, Strategic Income Fund, Fund for Total Return, International Fund
2. PROHIBITION ON INVESTMENT IN COMPANIES FOR THE PURPOSE OF EXERCISING
CONTROL OR MANAGEMENT
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, Value
Fund, Intermediate Term Government Securities Fund, Foundation Fund,
American Retirement Fund, Emerging Markets Growth Fund, International
Equity Fund, Global Leaders Fund, Money Market Fund, Florida High
Income Municipal Bond Fund, Short-Intermediate Municipal Fund, Growth
and Income Fund (S-1), Precious Metals Holdings, Strategic Growth Fund
(K-2), High Income Bond Fund (B-4), Fund for Total Return,
International Fund
3. PROHIBITION ON INVESTMENT IN COMPANIES IN WHICH TRUSTEES OR OFFICERS OF
THE FUNDS ALSO HOLD SHARES ABOVE CERTAIN PERCENTAGE LEVELS
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Intermediate Term Government Securities Fund, Foundation
Fund, American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Precious Metals Holdings, Inc.
4. Prohibition on Investment of More Than 5% of a Fund's Net Assets in
Warrants, With No More Than 2% of Net Assets Being Invested in Warrants
That Are Listed NEW YORK NOR AMERICAN STOCK EXCHANGES
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund,
Short-Intermediate Municipal Fund
5. PROHIBITION ON INVESTMENT IN OIL, GAS OR OTHER MINERAL EXPLORATION OR
DEVELOPMENT PROGRAMS
Evergreen Fund, MicroCap Fund, Aggressive Growth Fund, Growth and
Income Fund, Small Cap Equity Fund, Income and Growth Fund, Value Fund,
Intermediate Term Government Securities Fund, Foundation Fund, American
Retirement Fund, Money Market Fund, Florida High Income Municipal Bond
Fund, Short-Intermediate Municipal Fund, High Grade Tax Free Fund,
Precious Metals Holdings, Inc.
6. PROHIBITION ON JOINT TRADING ACCOUNTS
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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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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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SUPPLEMENT TO THE STATEMENTS
OF ADDITIONAL INFORMATION OF
Evergreen Aggressive Growth Fund, Evergreen American Retirement Fund, Evergreen
Emerging Markets Growth Fund, Evergreen Florida High Income Municipal Bond Fund,
Evergreen Foundation Fund, Evergreen Fund, Evergreen Georgia Municipal Bond
Fund, Evergreen Global Leaders Fund, Evergreen Growth and Income Fund, Evergreen
High Grade Tax Free Fund, Evergreen Income and Growth Fund, Evergreen
Intermediate Term Government Securities Fund, Evergreen International Equity
Fund, Evergreen Institutional Money Market Fund, Evergreen Institutional Tax
Exempt Money Market Fund, Evergreen Institutional Treasury Money Market Fund,
Evergreen Micro Cap Fund, Evergreen Money Market Fund, Evergreen North Carolina
Municipal Bond Fund, Evergreen Short-Intermediate Bond Fund, Evergreen
Short-Intermediate Municipal Fund, Evergreen Small Cap Equity Income Fund,
Evergreen South Carolina Municipal Bond Fund, Evergreen Tax Strategic Foundation
Fund, Evergreen U.S. Government Fund, Evergreen Utility Fund, Evergreen Value
Fund, Evergreen Virginia Municipal Bond Fund, Evergreen Capital Preservation and
Income Fund, Evergreen Fund for Total Return, Evergreen Natural Resources Fund,
Evergreen Omega Fund, Evergreen Strategic Income Fund, Evergreen California Tax
Free Fund, Evergreen Massachusetts Tax Free Fund, Evergreen Missouri Tax Free
Fund, Evergreen New York Tax Free Fund, Evergreen Pennsylvania Tax Free Fund,
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone Quality Bond Fund (B-1), Keystone Small
Company Growth Fund (S-4), Keystone Strategic Growth Fund (K- 2), Keystone
Growth and Income Fund (S-1), Evergreen Select Adjustable Rate Fund, Evergreen
Select Small Cap Growth Fund, Keystone International Fund, Keystone Precious
Metals Holdings, and Keystone Tax Free Fund (each a "Fund" and, collectively,
the "Funds")
The Statements of Additional Information of each of the Funds are
hereby supplemented as follows:
STANDARDIZED FUNDAMENTAL INVESTMENT RESTRICTIONS
Each of the above Funds, except Keystone Balanced Fund (K-1), Keystone
Diversified Bond Fund (B-2), Keystone Small Company Growth Fund (S-4), and
Keystone Tax Free Fund, has adopted the following standardized fundamental
investment restrictions. These restrictions may be changed only by a vote of
Fund shareholders.
1. Diversification of Investments
The Fund may not make any investment inconsistent with the Fund's
classification as a diversified [non-diversified] investment company
under the Investment Company Act of 1940.
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2. Concentration of a Fund's Assets in a Particular Industry. ([All Funds
other than those listed below.)
The Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than
securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities [or in the case of Money Market Funds domestic
bank money instruments]).
For Evergreen Utility Fund
The Fund will concentrate its investments in the utilities industry.
For Keystone Precious Metals Holdings
The Fund will concentrate its investments in industries related to the
mining, processing or dealing in gold or other precious metals and
minerals.
3. Issuance of Senior Securities
Except as permitted under the Investment Company Act of 1940, the Fund
may not issue senior securities.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by
applicable law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed an underwriter in connection with the
disposition of its portfolio securities.
6. Investment in Real Estate
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in (a)
securities directly or indirectly secured by real estate, or (b)
securities issued by companies that invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on
commodities except to the extent that the Fund may engage in financial
futures contracts and related options and currency contracts and
related options and may otherwise do so in accordance with
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applicable law and without registering as a commodity pool operator
under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may
lend its portfolio securities in accordance with applicable law. The
acquisition of investment instruments shall not be deemed to be the
making of a loan.
9. Investment in Federally Tax Exempt Securities
The following Funds have also adopted a standardized fundamental
investment restriction in regard to investments in federally tax-exempt
securities:
<TABLE>
<CAPTION>
<S> <C>
Evergreen Tax Strategic Foundation Fund Evergreen High Grade Tax Free Fund
Evergreen Georgia Municipal Bond Fund Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund Evergreen Virginia Municipal Bond Fund
Evergreen New York Tax Free Fund Evergreen Massachusetts Tax Free Fund
Evergreen California Tax Free Fund Evergreen Pennsylvania Tax Free Fund
Evergreen Institutional Tax Exempt Money Market Fund Evergreen Missouri Tax Free Fund
Evergreen Short-Intermediate Municipal Fund
</TABLE>
The Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for Funds with the words tax exempt, tax free or municipal in their names.
ELIMINATION OF CERTAIN NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The nonfundamental investment restrictions described below have been
eliminated by each Fund listed under such restriction:
1. PROHIBITION ON INVESTMENT IN UNSEASONED ISSUERS
Evergreen Fund, Growth and Income Fund, Income and Growth Fund,
American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Growth and Income Fund (S-1), Omega Fund, Precious
Metals Holding, Strategic Growth Fund (K- 2), High Income Bond Fund
(B-4), Capital Preservation and Income Fund, Select Adjustable Rate
Fund, Strategic Income Fund, Fund for Total Return, International Fund
2. PROHIBITION ON INVESTMENT IN COMPANIES FOR THE PURPOSE OF EXERCISING
CONTROL OR MANAGEMENT
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, Value
Fund, Intermediate Term Government Securities Fund, Foundation Fund,
American Retirement Fund, Emerging Markets Growth Fund, International
Equity Fund, Global Leaders Fund, Money Market Fund, Florida High
Income Municipal Bond Fund, Short-Intermediate Municipal Fund, Growth
and Income Fund (S-1), Precious Metals Holdings, Strategic Growth Fund
(K-2), High Income Bond Fund (B-4), Fund for Total Return,
International Fund
3. PROHIBITION ON INVESTMENT IN COMPANIES IN WHICH TRUSTEES OR OFFICERS OF
THE FUNDS ALSO HOLD SHARES ABOVE CERTAIN PERCENTAGE LEVELS
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Intermediate Term Government Securities Fund, Foundation
Fund, American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Precious Metals Holdings, Inc.
4. Prohibition on Investment of More Than 5% of a Fund's Net Assets in
Warrants, With No More Than 2% of Net Assets Being Invested in Warrants
That Are Listed NEW YORK NOR AMERICAN STOCK EXCHANGES
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund,
Short-Intermediate Municipal Fund
5. PROHIBITION ON INVESTMENT IN OIL, GAS OR OTHER MINERAL EXPLORATION OR
DEVELOPMENT PROGRAMS
Evergreen Fund, MicroCap Fund, Aggressive Growth Fund, Growth and
Income Fund, Small Cap Equity Fund, Income and Growth Fund, Value Fund,
Intermediate Term Government Securities Fund, Foundation Fund, American
Retirement Fund, Money Market Fund, Florida High Income Municipal Bond
Fund, Short-Intermediate Municipal Fund, High Grade Tax Free Fund,
Precious Metals Holdings, Inc.
6. PROHIBITION ON JOINT TRADING ACCOUNTS
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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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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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(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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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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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
22943
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated November 30, 1997 (the "Prospectus"), pursuant to which
the Blanchard Flexible Tax-Free Bond Fund (the "FUND") is offered.
Please retain this document for future reference.
To obtain the Prospectus please call the FUND at 1-800-829-3863.
TABLE OF CONTENTS Page
General Information and History 2
Investment Objective and Policies 2
Securities in Which the FUND May Invest 3
Investment Restrictions 8
Portfolio Transactions 9
Computation of Net Asset Value 10
Performance Information 11
Additional Purchase and Redemption Information 13
Tax Matters 13
Blanchard Funds Management 18
Management Services 22
Portfolio Management Services 23
Custodian 23
Administrative Services 24
Distribution Plan 24
Description of the FUND 24
Shareholder Reports 25
Appendix A - Description of Bond Ratings A-26
MANAGER
Virtus Capital Management, Inc.
PORTFOLIO ADVISER
United States Trust Company of New York
DISTRIBUTOR
Federated Securities Corp.
CUSTODIAN
Signet Trust Company
TRANSFER AGENT
Federated Shareholder Services Company
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Dated: November 30, 1997
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND is a "no-load" fund which seeks to provide a high level of current interest
income exempt from Federal income tax consistent with the preservation of
principal. The FUND invests primarily in obligations of varying maturities
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies,
authorities and instrumentalities, the interest from which, in the opinion of
bond counsel for the issuer, is exempt from Federal income tax ("Municipal
Obligations"). There is no assurance that the FUND will achieve its investment
objective. This objective is a fundamental policy and may not be changed except
by a majority vote of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies," "Securities in Which the Fund May Invest" and "Other
Investment Information."
The FUND's investment objective is to provide a high level of current
interest income exempt from Federal income tax consistent with the preservation
of principal. The FUND will invest at least 65% of its assets in Municipal
Obligations, except when maintaining a temporary defensive position.
The FUND invests in Municipal Obligations which are determined by U.S.
Trust to present minimal credit risks. As a matter of fundamental policy, except
during temporary defensive periods, the FUND will maintain at least 80% of its
assets in tax-exempt obligations. (This policy may not be changed without the
vote of the holders of a majority of the FUND's outstanding shares.) However,
from time to time on a temporary defensive basis due to market conditions, the
FUND may hold uninvested cash reserves or invest in taxable obligations in such
proportions as, in the opinion of U.S. Trust, prevailing market or economic
conditions may warrant. Uninvested cash reserves will not earn income. Should
the FUND invest in taxable obligations, it would purchase: (i) obligations of
the U.S. Treasury; (ii) obligations of agencies and instrumentalities of the
U.S. Government; (iii) money market instruments, such as certificates of
deposit, commercial paper, and bankers' acceptances; (iv) repurchase agreements
collateralized by U.S. Government obligations or other money market instruments;
(v) municipal bond index futures and interest rate futures contracts; or (vi)
securities issued by other investment companies that invest in high quality,
short-term securities. Interest income from certain short-term holdings may be
taxable to shareholders as ordinary income.
In seeking to achieve its investment objective, the FUND may invest in
"private activity bonds" (see "Municipal Obligations" below), the interest on
which is treated as a specific tax preference item under the Federal alternative
minimum tax. Investments in such securities, however, will not exceed, under
normal market conditions, 20% of the FUND's total assets when added together
with any taxable investments held by the FUND.
The Municipal Obligations purchased by the FUND will consist of: (1)
municipal bonds rated "A" or better by Moody's Investors Service, Inc.
("Moody's") or by Standard & Poor's Ratings Group ("S&P") or, in certain
instances, municipal bonds with lower ratings if they are deemed by U.S. Trust
to be comparable to A-rated issues; (2) municipal notes rated "MIG-2" or better
("VMIG-2" or better in the case of variable rate notes) by Moody's or "SP-2" or
better by S&P; and (3) municipal commercial paper rated "Prime-2" or better by
Moody's or "A-2" or better by S&P. If not rated, securities purchased by the
FUND will be of comparable quality to the above ratings as determined by U.S.
Trust under the supervision of the FUND's Board of Trustees. A discussion of
Moody's and S&P's rating categories is contained in Appendix A.
<PAGE>
Although the FUND does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by U.S. Trust. To the extent that
the FUND's assets are concentrated in Municipal Obligations payable from
revenues on similar projects, the FUND will be subject to the peculiar risks
presented by such projects to a greater extent than it would be if the FUND's
assets were not so concentrated.
SECURITIES IN WHICH THE FUND MAY INVEST
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal
Obligations which may be held by the FUND are "general obligation" securities
and "revenue" securities. General obligation securities are secured by the
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the user of the facility being financed. Private activity bonds held by the
FUND are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity revenue bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
The FUND's portfolio may also include "moral obligation" securities,
which are normally issued by special-purpose public authorities. If the issuer
of moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund the restoration of which is
a moral commitment, but not a legal obligation of the state or municipality
which created the issuer. There is no limitation on the amount of moral
obligation securities that may be held by the FUND.
The FUND may also purchase custodial receipts evidencing the right to
receive either the principal amount or the periodic interest payments
("stripped") or both with respect to specific underlying Municipal Obligations.
In general, such "stripped" Municipal Obligations are offered at a substantial
discount in relation to the principal and/or interest payments which the holders
of the receipt will receive. To the extent that such discount does not produce a
yield to maturity for the investor that exceeds the original tax-exempt yield on
the underlying Municipal Obligation, such yield will be exempt from Federal
income tax for such investor to the same extent as interest on the underlying
Municipal Obligation. The FUNDs intend to purchase "stripped" Municipal
Obligations only when the yield thereon will be, as described above, exempt from
Federal income tax to the same extent as interest on the underlying Municipal
Obligations. "Stripped" Municipal Obligations are considered illiquid securities
subject to the 10% limit described in "Investment Limitations" in the Statement
of Additional Information.
FUTURES CONTRACTS. The FUND may purchase and sell municipal bond index
and interest rate futures contracts as a hedge against changes in market
conditions. A municipal bond index assigns values daily to the municipal bonds
included in the index based on the independent assessment of dealer-to-dealer
municipal bond brokers. A municipal bond index futures contract represents a
firm commitment by which two parties agree to take or make a delivery of an
amount equal to a specified dollar amount times the difference between the
municipal bond index value on the last trading date of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the underlying securities in the index is made.
The FUND may enter into contracts for the future delivery of
fixed-income securities commonly known as interest rate futures contracts.
Interest rate futures contracts are similar to the municipal bond index futures
contracts except that, instead of a municipal bond index, the "underlying
commodity" is represented by various types of fixed-income securities.
The FUND will not engage in transactions in futures contracts for
speculation, but only as a hedge against changes in market values of securities
which it holds or intends to purchase where the transactions are intended to
reduce risks inherent in the management of the FUND. The FUND may engage in
futures contracts only to the extent permitted by the Commodity Futures Trading
Commission ("CFTC") and the Securities and Exchange Commission ("SEC").
<PAGE>
When investing in futures contracts, the FUND must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When the FUND takes a long position in a futures contract, it must maintain a
segregated account containing cash and/or certain liquid assets equal to the
purchase price of the contract, less any margin or deposit. When the FUND takes
a short position in a futures contract, the FUND must maintain a segregated
account containing cash and/or certain liquid assets equal to the market value
of the securities underlying such contract, less any margin or deposit, which
must be at least equal to the market price at which the short position was
established.
Transactions by the FUND in futures contracts may subject the FUND to a
number of risks. Successful use of futures by the FUND is subject to the ability
of U.S. Trust to anticipate correctly movements in the direction of the market.
In addition, there may be an imperfect correlation, or no correlation at all,
between movements in the price of the futures contracts and movements in the
price of the instruments being hedged. Further, there is no assurance that a
liquid market will exist for any particular futures contract at any particular
time. Consequently, the FUND may realize a loss on a futures transaction that is
not offset by a favorable movement in the price of securities which it holds or
intends to purchase, or it may be unable to close a futures position in the
event of adverse price movements. Any income from investments in futures
contracts will be taxable income of the FUND.
MONEY MARKET INSTRUMENTS. Money market instruments that may be
purchased by the FUND in accordance with its investment objectives and policies
stated above include, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by a
savings association or savings bank which is insured by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation. Investments in time
deposits are limited to no more than 5% of the value of the FUND's total assets
at time of purchase.
Investments by the FUND in commercial paper will consist of issues that
are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In addition,
the FUND may acquire unrated commercial paper that is determined by U.S. Trust
at the time of purchase to be of comparable quality to rated instruments that
may be acquired by the FUND.
Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by the FUND, the FUND may, from time to time as specified
in the instrument, demand payment of the principal of the instrument or may
resell the instrument to a third party. The absence of an active secondary
market, however, could make it difficult for the FUND to dispose of the
instrument if the issuer defaulted on its payment obligation or during periods
that the FUND is not entitled to exercise its demand rights, and the FUND could,
for this or other reasons, suffer a loss with respect to such instrument.
REPURCHASE AGREEMENTS. As stated above, the FUND may agree to purchase
portfolio securities subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price ("repurchase agreements"). The FUND will
enter into repurchase agreements only with financial institutions such as banks
or broker/dealers which are deemed to be creditworthy by U.S. Trust under
guidelines approved by the FUND's Board of Trustees. The FUND will not enter
into repurchase agreements with U.S. Trust or its affiliates. Repurchase
agreements maturing in more than seven days will be considered illiquid
securities subject to the 10% limit described in "Investment Restrictions."
The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose the
FUND to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Income on
the repurchase agreements will be taxable.
<PAGE>
INVESTMENT COMPANY SECURITIES. The FUND may also invest in securities
issued by other investment companies that invest in high-quality, short-term
securities and that determine their net asset value per share based on the
amortized cost or penny-rounding method. In addition to the advisory fees and
other expenses the FUND bears directly in connection with its own operations, as
a shareholder of another investment company, the FUND would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the FUND's shareholders would indirectly bear the expenses of the FUND and
the other investment company, some or all of which would be duplicative. Such
securities will be acquired by the FUND within the limits prescribed by the
Investment Company Act of 1940 (the "1940 Act").
WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS. The FUND
may purchase eligible securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions involve a
commitment by the FUND to purchase or sell particular securities with payment
and delivery taking place in the future, beyond the normal settlement date, at a
stated price and yield. Securities purchased on a "forward commitment" or "when
issued" basis are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. It is expected that forward
commitments and "when-issued" purchases will not exceed 25% of the value of the
FUND's total assets absent unusual market conditions, and that the length of
such commitments will not exceed 45 days. The FUND does not intend to engage in
"when-issued" purchases and forward commitments for speculative purposes, but
only in furtherance of its investment objectives.
In addition, the FUND may acquire "stand-by commitments" with respect
to Municipal Obligations that it holds. Under a "stand-by commitment," a dealer
agrees to purchase, at the FUND's option, specified Municipal Obligations at a
specified price. The FUND will acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. "Stand-by commitments" acquired by the FUND
would be valued at zero in determining the FUND's net asset value.
RISK FACTORS:
FUTURES CONTRACTS. The FUND may enter into contracts for the purchase
or sale for future delivery of municipal bond indices or fixed-income securities
which otherwise meet the FUND's investment policies, to the extent permitted by
the Commodity Futures Trading Commission (the "CFTC"). U.S. futures contracts
have been designed by exchanges which have been designated "contract markets" by
the CFTC, and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on a number of contract markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange.
A municipal bond index futures contract represents a firm commitment by
which two parties agree to take or make a delivery of an amount equal to a
specified dollar amount times the difference between the municipal bond index
value on the last trading date of the contract and the price at which the
futures contract is originally struck. An interest rate futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specific, interest rate-sensitive financial instrument
(debt security) at a specified price, date, time and place.
The FUND will not use leverage when it enters into long futures or
options contracts. For each such long position the FUND will deposit cash or
cash equivalents, such as U.S. Government Securities or high grade debt
obligations, having a value equal to the underlying commodity value of the
contract as collateral with its custodian in a segregated account.
No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, equal to approximately 5% of the contract amount (this amount is
subject to change by the exchange on which the contract is traded and brokers
may charge a higher amount). This amount is known as "initial margin" and is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the FUND upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in
<PAGE>
the margin account if the FUND fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker, will
be made daily as the price of the currency or securities underlying the futures
contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." At any time prior
to the expiration of a futures contract, the FUND may elect to close the
position by taking an opposite position, which will operate to terminate the
FUND's existing position in the contract.
There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability of FUND
management to predict correctly movements in the price of the securities or
currencies underlying the particular transaction. These predictions and, thus,
the use of futures contracts involve skills and techniques that are different
from those involved in the management of portfolio securities.
Positions in futures contracts may be closed out only on the exchange
on which they were entered into (or through a linked exchange). No secondary
market for such contracts exists. Although the FUND intends to enter into
futures contracts only if there is an active market for such contracts, there is
no assurance that an active market will exist for the contracts at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit. It is possible that futures contract prices could
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting the FUND to substantial losses. In such event, and in the event of
adverse price movements, the FUND would be required to make daily cash payments
of variation margin.
REPURCHASE AGREEMENTS. The FUND may enter into repurchase agreements.
Under a repurchase agreement, the FUND acquires a debt instrument for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the FUND to resell such debt
instrument at a fixed price. The resale price is in excess of the purchase price
in that it reflects an agreed-upon market interest rate effective for the period
of time during which the FUND's money is invested. The FUND's risk is limited to
the ability of the seller to pay the agreed-upon sum upon the delivery date.
When the FUND enters into a repurchase agreement, it obtains collateral having a
value at least equal to the amount of the purchase price. Repurchase agreements
can be considered loans, as defined by the 1940 Act, collateralized by the
underlying securities. The return on the collateral may be more or less than
that from the repurchase agreement. The securities underlying a repurchase
agreement will be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including the accrued
interest earned. In evaluating whether to enter into a repurchase agreement, the
Portfolio Adviser will carefully consider the creditworthiness of the seller. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the FUND may incur a loss.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM or the Portfolio
Adviser. The borrower at all times during the loan must maintain with the FUND
cash or cash equivalent collateral or provide to the FUND an irrevocable letter
of credit equal in value at all times to at least 100% of the value of the
securities loaned. During the time portfolio securities are on loan, the
borrower pays the FUND any dividends or interest paid on such securities, and
the FUND may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. Loans are subject to
termination at the option of the FUND or the borrower at any time. The FUND may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the income earned on the cash to the borrower or
placing broker.
<PAGE>
ILLIQUID SECURITIES
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. The staff of the SEC defines an illiquid security as any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the company has valued the instrument.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. FUND management anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
<PAGE>
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. The FUND, a non-diversified management investment company, at the
close of each quarter of the FUND's taxable year, has the following
restrictions: (a) with respect to 50% of the FUND's total assets, the
FUND may not invest more than 5% of its total assets, at market value,
in the securities of one issuer (except the securities of the U.S.
Government, its agencies and instrumentalities) and (b) with respect to
the other 50% of the FUND's total assets, the FUND may not invest more
than 25% of the market value of its total assets in a single issuer
(except the securities of the U.S. Government, its agencies and
instrumentalities). These two restrictions, hypothetically, could give
rise to the FUND having securities, other than U.S. Government
securities, of as few as twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities
of any single company; (b) more than 5% of its total assets would be
invested in the securities of companies (including predecessors) that
have been in continuous operation for less than 3 years; (c) more than
25% of its total assets would be concentrated in companies within any
one industry (except that this restriction does not apply to U.S.
Government securities); or (d) more than 5% of net assets would be
invested in warrants or rights. (Included within that amount, but not
to exceed 2% of the value of the FUND's net assets, may be warrants
which are not listed on the New York or American Stock Exchanges.)
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the
market value of its total assets). This does not preclude the FUND from
obtaining such short-term credit as may be necessary for the clearance
of purchases and sales of its portfolio securities. The FUND will not
purchase additional securities while the amount of any borrowings is in
excess of 5% of the market value of its total assets.
4. The FUND will not make loans of money or securities except (i)
through repurchase agreements, (ii) through loan participations, and
(iii) through the lending of its portfolio securities as described in
the Prospectus and in this Statement of Additional Information.
5. The FUND may not invest more than 10% of its total assets in the
securities of other investment companies or purchase more than 3% of
any other investment company's voting securities, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.
6. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND
may pledge securities having a value at the time of pledge not
exceeding 10% of the market value of the FUND's total assets.
Collateral arrangements with respect to the FUND's permissible futures
transactions, including initial and variation margin, are not
considered to be a pledge of assets for purposes of this restriction.
7. The FUND may not buy any securities or other property on margin
(except for the deposit of initial or variation margin in connection
with hedging and risk management transactions and for such short term
credits as are necessary for the clearance of transactions) or engage
in short sales.
8. The FUND may not invest in companies for the purpose of exercising
control or management.
<PAGE>
9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing
or selling portfolio securities.
10. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers
and Trustees of the FUND and the officers and directors of VCM or the
Portfolio Adviser who individually own beneficially more than 1/2 of 1%
of the outstanding securities of such issuer, together own beneficially
more than 5% of such outstanding securities.
11. The FUND may not purchase or sell real property (including limited
partnership interests, but excluding readily marketable securities of
companies which invest in real estate).
12. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases.
13. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Adviser subject to the supervision of VCM
and the Trustees and pursuant to authority contained in the Investment Advisory
Contract between the FUND and VCM, and the Sub-Advisory Agreement between VCM
and the Portfolio Adviser. In selecting such brokers or dealers, the Portfolio
Adviser will consider various relevant factors, including, but not limited to
the best net price available, the size and type of the transaction, the nature
and character of the markets for the security to be purchased or sold, the
execution efficiency, settlement capability, financial condition of the
broker-dealer firm, the broker-dealer's execution services rendered on a
continuing basis and the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to the Portfolio Adviser for the
FUND's use, which in the opinion of the Trustees, are reasonable and necessary
to the FUND's normal operations. Those services may include economic studies,
industry studies, security analysis or reports, sales literature and statistical
services furnished either directly to the FUND or to the Portfolio Adviser. Such
allocation shall be in such amounts as VCM or the Portfolio Adviser shall
determine and the Portfolio Adviser shall report regularly to VCM who will in
turn report to the Trustees on the allocation of brokerage for such services.
The receipt of research from broker-dealers may be useful to the
Portfolio Adviser in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers who
have executed orders on behalf of the Portfolio Adviser's other clients may be
useful to the Portfolio Adviser in carrying out its obligations to the FUND. The
receipt of such research may not reduce the Portfolio Adviser's normal
independent research activities.
<PAGE>
The Portfolio Adviser is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are authorized
to use Federated Securities Corp. ("the Distributor"), and the Portfolio Adviser
or an affiliated broker-dealer on an agency basis, to effect a substantial
amount of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from portfolio transactions earned by the Distributor as a result of
FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory Contract
does not provide for any reduction in the management fee as a result of profits
resulting from brokerage commissions effected through the Distributor. In
addition, the Sub-Advisory Agreement between VCM and the Portfolio Adviser does
not provide for any reduction in the advisory fees as a result of profits
resulting from portfolio transactions effected through the Portfolio Adviser or
an affiliated brokerage firm. For the fiscal year ended September 30, 1997, and
for the period from May 1, 1996 through September 30, 1996, and for the fiscal
years ended April 30, 1996 and 1995, the FUND paid no brokerage commissions. For
the period from August 12, 1993 (commencement of operations) to April 30, 1994,
the FUND paid no brokerage commissions.
The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid to the Distributor or to the Portfolio Adviser or an affiliated
broker-dealer must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." The Rule and the procedures also contain review requirements
and require VCM to furnish reports to the Trustees and to maintain records in
connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of the Portfolio Adviser. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in accordance with a formula considered by VCM to be equitable
to each, taking into consideration such factors as size of account,
concentration of holdings, investment objectives, tax status, cash availability,
purchase cost, holding period and other pertinent factors relative to each
account. In some cases this system could have a detrimental effect on the price
or volume of the security as far as the FUND is concerned. In other cases,
however, the ability of the FUND to participate in volume transactions will
produce better executions for the FUND.
For the fiscal year ended September 30, 1997, and for the period from
May 1, 1996 through September 30, 1996, and for the fiscal years ended April 30,
1996 and 1995, the FUND's annual rates of portfolio turnover were approximately
163%, 25%, 275%, and 170%, respectively.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
Time) on each day that the New York Exchange is open for business and on such
other days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Year's Day, Presidents' Day, Good Friday, Martin Luther King Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
<PAGE>
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the FUND's portfolio securities are determined
as follows:
o according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on
more than one exchange, the price on the primary market for
that security, as determined by the Adviser or sub-adviser, is
used.);
o according to the last reported bid price, if no sale on the
recognized exchange is reported or
if the security is traded over-the-counter;
o for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term
obligations with remaining maturities of 60 days or less at
the time of purchase, may be valued at amortized cost; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate; maturity;
type of issue; trading characteristics; and other market data.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10
year periods (or fractional portion
thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
<PAGE>
The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
fiscal year ended September 30, 1997, and the period from May 1, 1996 through
September 30, 1996 was 9.59% and 7.27%, respectively. For the fiscal year ended
April 30, 1996 and since inception (August 12, 1993 through September 30, 1997)
the FUND's aggregate annualized total rates of return were 6.86% and 7.63%,
respectively.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. and Morningstar, Inc., or similar
independent services or financial publications, the FUND calculates its
aggregate total return for the specified periods of time by assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial net asset value of the investment from the ending net asset value and by
dividing the remainder by the beginning net asset value. The FUND does not, for
these purposes, deduct the pro rata share of the account opening fee, which was
in effect from August, 1993 to 1994, from the initial value invested. The FUND
will, however, disclose the pro rata share of the account opening fee and will
disclose that the performance data does not reflect such non-recurring charge
and that inclusion of such charge would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in such
advertising than the information prescribed under the Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:
YIELD = 2[( a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last
day of the period.
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
<PAGE>
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
The FUND'S yield for the 30-day period ended September 30, 1997 was 4.18%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, including foreign
currency gains and loss) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its "investment company taxable income"
(i.e., net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Please note that the below-listed and defined "Short-Short Gain
Test" has been repealed pursuant to the Taxpayer Relief Act of 1997, effective
for taxable years beginning after the date of enactment. For purposes of the
FUND, the effective date of the repeal will be October 1, 1997. Distributions by
the FUND made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and can therefore satisfy
the Distribution Requirement.
<PAGE>
In addition to satisfying the Distribution Requirement, a regulated
investment company with investment objectives, policies and restrictions similar
to the FUND must (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities and other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock or securities (the "Income
Requirement"); and (2) derive less than 30% of its gross income (exclusive of
certain gains on designated hedging transactions that are offset by realized or
unrealized losses on offsetting positions) from the sale or other disposition of
stock, or securities or foreign currencies (or options, futures or forward
contracts thereon) held for less than three months (the "Short-Short Gain
Test"). Because of the Short-Short Gain Test, the FUND may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent the FUND from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by the FUND at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income attributable to
realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose. At September 30, 1997, the
FUND had a net capital loss carryover of $354,460, which is available through
the year 2003 to offset future capital gains.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation.
Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts and options on stock indexes and futures contracts)
will be subject to special tax treatment as "Section 1256 contracts." Section
1256 contracts are treated as if they are sold for their fair market value on
the last business day of the taxable year, even though a taxpayer's obligations
(or rights) under such contract have not terminated (by delivery, exercise,
entering into a closing transaction or otherwise) as of such date. Any gain or
loss recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is taken into account for the taxable year together with any
other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss for
the taxable year with respect to Section 1256 contracts (including any capital
gain or loss arising as a consequence of the year-end deemed sale of such
contracts) is
<PAGE>
generally treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss. The FUND may elect not to have this special tax treatment
apply to Section 1256 contracts that are part of a "mixed straddle" with other
investments of the FUND that are not Section 1256 contracts. The Internal
Revenue Service has held in several private rulings and Treasury Regulations now
provide that gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held for
not less than three months if the gains arise as a result of a constructive sale
under Code Section 1256.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, or any net long-term capital loss incurred after October 31 as if
they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, options (call or
put) with respect to a security are treated as issued by the issuer of the
security and not by the issuer of the option.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will he subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
<PAGE>
FUND DISTRIBUTIONS
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporations.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. Federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
<PAGE>
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the FUND's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having been paid. Such a foreign shareholder would generally be
exempt from U.S. Federal income tax on gains realized on the sale of shares of
the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. Federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
<PAGE>
BLANCHARD FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, and present
positions with Blanchard Funds, and principal occupations.
<TABLE>
<CAPTION>
<S> <C>
JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND; Chairman and
BIRTHDATE: JULY 28, 1924 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 Trust.
THOMAS G. BIGLEY
15 OLD TIMBER TRAIL
PITTSBURGH, PA
BIRTHDATE: FEBRUARY 3, 1934 TRUSTEE OF THE FUND; 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 TRUSTEE OF THE FUND; President, Investment
BIRTHDATE: JUNE 23, 1937 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.
WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA TRUSTEE OF THE FUND; Director and Member of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC
Bank Corp. and Director, Ryan Homes, Inc.; Director
or Trustee of the Funds.
<PAGE>
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-law; Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or Trustee of
the Funds.
LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor of Medicine,
BIRTHDATE: OCTOBER 11, 1932 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 TRUSTEE OF THE FUND; Attorney of Counsel, Miller,
PITTSBURGH, PA Ament, Henny & Kochuba; Director, Eat'N Park
BIRTHDATE: JUNE 18, 1924 Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Director or
Trustee of the Funds. .
EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE FUND;
BIRTHDATE: OCTOBER 22, 1930 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.
PETER E. MADDEN
ONE ROYAL PALM WAY
100 ROYAL PALM WAY
PALM BEACH, FL TRUSTEE OF THE FUND; Consultant; Former State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation;
Director or Trustee of the Funds.
<PAGE>
JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA TRUSTEE OF THE FUND; President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor, International
BIRTHDATE: SEPTEMBER 14, 1925 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 TRUSTEE OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning; Director
or Trustee of the Funds.
J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND; President
BIRTHDATE: APRIL 11, 1949 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 Trust.
<PAGE>
JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT, AND SECRETARY
BIRTHDATE: OCTOBER 26, 1938 OF THE FUND; 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 VICE PRESIDENT OF THE FUND; Executive Vice
BIRTHDATE: MAY 17, 1923 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.
JOESEPH S. MACHI
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT AND ASSISTANT TREASURER; Vice
BIRTHDATE: MAY 22, 1962 President and Assistant Treasurer of some of the
Funds.
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for
U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market 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
As of October 29, 1997, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of October 29, 1997, the
following shareholders owned 5% or more of the outstanding shares of the FUND:
Stephens Inc., Little Rock, AR, for the exclusive benefit of its customers,
owned approximately 547,502 shares (12.69%), and William J. Harnett, Waldorf,
MD, owned approximately 343,023 shares (7.95%).
OFFICERS AND TRUSTEES COMPENSATION
<TABLE>
<CAPTION>
- -------------------------------------- ------------------------------------- -------------------------------------
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION PAID TO TRUSTEES
NAME, POSITION THE TRUST* FROM THE FUND AND FUND COMPLEX**
WITH THE TRUST
- -------------------------------------- ------------------------------------- -------------------------------------
- -------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
John F. Donahue, Chairman and Trustee $0 $0 for the Fund Complex
Thomas G. Bigley, Trustee $1,011 $3,217 for the Fund Complex
John T. Conroy, Jr., Trustee $1,114 $3,538 for the Fund Complex
William J. Copeland, Trustee $1,114 $3,538 for the Fund Complex
James E. Dowd, Trustee $1,114 $3,538 for the Fund Complex
Lawrence D. Ellis, M.D., Trustee $1,011 $3,217 for the Fund Complex
Edward L. Flaherty, Jr., Trustee $1,114 $3,538 for the Fund Complex
Edward C. Gonzales, President and $0 $0 for the Fund Complex
Trustee
Peter E. Madden, Trustee $1,011 $3,217 for the Fund Complex
John E. Murray, Jr., J.D., S.J.D., $1,011 $3,217 for the Fund Complex
Trustee
Wesley W. Posvar, Trustee $1,011 $3,217 for the Fund Complex
Marjorie P. Smuts $1,011 $3,217 for the Fund Complex
Trustee
</TABLE>
* The aggregate compensation for the fiscal year ended 9/30/97 is provided for
the Trust which is comprised of five portfolios.
**The total compensation is provided for the Fund Complex, which consists of the
Blanchard Precious Metals Fund, The Virtus Funds, and the Trust. The
information is provided for Blanchard Funds and Blanchard Precious Metals
Fund, Inc. and The Virtus Funds for the fiscal year ended 9/30/97.
MANAGEMENT SERVICES
MANAGER TO THE TRUST
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is 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 manager 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.
MANAGEMENT FEES
For its services, VCM receives an annual management fee as described in
the prospectus. For the fiscal year ended September 30, 1997, and for the period
from May 1, 1996 through September 30, 1996, the FUND's investment management
fee paid to VCM was $169,751 and $71,788, respectively, of which $142,067 and
$71,788, respectively, was voluntarily waived. For the fiscal year ended April
30, 1996, the FUND's investment management fee paid to the prior manager and to
VCM was $132,013 and $30,642, respectively, all of which was voluntary waived.
For the fiscal years ended April 30, 1995, the FUND's investment management fee
paid to the prior manager were $127,835, all of which was voluntarily waived.
For the period from August 12, 1993 (commencement of operations) to April 30,
1994, the FUND's investment management fee paid to the prior manager was
$89,180, all of which was voluntarily waived.
PORTFOLIO MANAGEMENT SERVICES
Pursuant to a sub-advisory agreement which became effective on July 12,
1995, (the "Sub-Advisory Agreement") between VCM and United States Trust Company
of New York ("U.S. Trust"), VCM has delegated to U.S. Trust the authority and
responsibility to make and execute decisions for the FUND within the framework
of the FUND's investment policies, subject to review by VCM and the Board of
Trustees of the FUND. Under the terms of the Sub-Advisory Agreement, U.S. Trust
has discretion to purchase and sell securities, except as limited by the FUND's
investment objective, policies and restrictions.
The Sub-Advisory Agreement provides for the payment to U.S. Trust, by
VCM, of monthly compensation based on the FUND's average daily net assets for
providing investment advice to the FUND and managing the investment of assets of
the FUND. For the services to be rendered, VCM shall pay U.S. Trust a monthly
fee at the annual rate of 0.20% of the FUND's average daily net assets. For the
fiscal year ended September 30, 1997, and for the period from May 1, 1996
through September 30, 1996, the aggregate amount paid to U.S. Trust by VCM was
$45,267 and $19,145, respectively. For the fiscal year ended April 30, 1996, the
aggregate amount paid to U.S. Trust and prior sub-adviser by VCM and the prior
manager was $42,605. For the fiscal year ended April 30, 1995 and the period
from August 12, 1993 (commencement of operations) to April 30, 1994, the
aggregate amounts paid to the prior sub-adviser by the prior manager were
$34,662 and $9,758, respectively.
The Sub-Advisory Agreement dated July 12, 1995 was approved by the
FUND's Board of Trustees and the FUND's shareholders. The Sub-Advisory Agreement
provides that it may be terminated without penalty by either the FUND or U.S.
Trust at any time by the giving of 60 days' written notice to the other and
terminates automatically in the event of "assignment", as defined in the
Investment Company Act. The Sub-Advisory Agreement provides that, unless sooner
terminated, it shall continue in effect from year to year only so long as such
continuance is specifically approved at least annually by either the Board of
Trustees of the FUND or by a vote of the majority of the outstanding voting
securities of the FUND, provided, that in either event, such continuance is also
approved by the vote of the majority of the Trustees who are not parties cast in
person at a meeting called for the purpose of voting on such approval.
CUSTODIAN
Signet Trust Company 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. The custodian receives a fee at an annual rate
of .05% on the first $10 million of average net assets of each of the six
respective portfolios and .025% on average net assets in excess of $10 million.
There is a $20 fee imposed on each transaction. The custodian fee received
during any fiscal year shall be at least $1,000 per Fund.
<PAGE>
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus. For the fiscal year ended September 30, 1997,
and for the period from May 1, 1996 through September 30, 1996, and for the
fiscal year ended April 30, 1996, Federated Administrative Services earned
$75,000, $31,438 and $31,841, respectively, in administrative services fees, of
which $39,951, $22,290 and $0, respectively, were voluntarily waived. For the
fiscal years ended April 30, 1995 and 1994, the administrative services fees
were included as part of the Management fee.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the fiscal year ended September 30, 1997, and for the period from May 1,
1996 through September 30, 1996, the FUND accrued payments under the Plan
amounting to $56,584 and $23,929, respectively, all of which were voluntarily
waived. For the fiscal year ended April 30, 1996 the FUND accrued payments under
the Plan amounting to $54,218, all of which was voluntarily waived.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objective, and properly servicing these accounts, the Fund may be able to
curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
SHAREHOLDER AND TRUSTEE LIABILITY. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
<PAGE>
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
VOTING RIGHTS. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
The financial statements for the fiscal year ended September 30, 1997,
are incorporated herein by reference from the FUND's Annual Report dated
September 30, 1997. A copy of the FUND'S Annual Report may be obtained without
charge by contacting Signet Financial Services, Inc. at 1-800-829-3863.
<PAGE>
APPENDIX A
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
BOND RATINGS:
AAA: Bonds which are rated Aaa judged to be 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 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.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in the generic
rating classifications Aa and A in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category, the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months.
Issuers rated PRIME-1 or P-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations. Prime-1
or P-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated PRIME-2 or P-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
A-26
<PAGE>
DESCRIPTION OF STANDARD AND POOR'S CORPORATION'S
BOND RATINGS:
AAA: Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest; and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
PLUS (+) OR MINUS (-): The ratings AA and A may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
NOTES WITH RESPECT TO ALL RATINGS:
Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal that are similar to the risks of
lower-rated bonds. The Fund is dependent on Fund management's judgment, analysis
and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
Cusip 093212603
G01386-13
A-27
- -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
- -------------------------------------------------------------------------------
Dear Investor:
I'm pleased to present the Annual Report to Shareholders for the Blanchard Group
of Funds. This report covers the funds' fiscal year, which is the period from
October 1, 1996 through September 30, 1997.
For greater efficiency in printing and mailing, this report now combines
information for all funds. It begins with a commentary by the portfolio manager,
and follows with a complete list of holdings and financial statements for each
fund.
A fund-by-fund summary for the period follows:
. BLANCHARD GLOBAL GROWTH FUND
The fund's diversified portfolio of U.S. and foreign stocks and bonds+ produced
a solid total return of 13.20%* through dividends totaling $0.21 per share and
capital gains totaling $2.26 per share. Assets in the fund totaled more than $62
million at the end of the period.
. BLANCHARD PRECIOUS METALS FUND, INC.
Due to extremely weak market conditions, the fund's portfolio of precious metals
investments and securities of mining companies produced a negative total return
of (15.24%).* While the fund paid dividends totaling $0.30 per share and capital
gains totaling $2.25 per share, the fund's share price fell from $8.90 to $5.37
as prices of the fund's holdings declined with the market. The fund's assets
closed the period at $67 million.
. BLANCHARD FLEXIBLE INCOME FUND
The fund's diversified portfolio of fixed income securities paid monthly
dividends totaling $0.31 per share and recorded a $0.14 per share increase in
net asset value. As a result, the fund achieved a total return of 9.53%.* The
fund's assets reached $155 million.
. BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
The fund's conservative portfolio of fixed income securities produced a total
return of 7.24%* through monthly dividends totaling $0.17 per share, and a $0.04
per share increase in net asset value. Assets in the fund totaled more than $133
million.
. BLANCHARD FLEXIBLE TAX-FREE BOND FUND
Designed for tax-sensitive investors, this fund paid federally tax-free
dividends totaling $0.25 per share.** Through this income stream and a $0.25 per
share increase in net asset value, the fund achieved a total return of 9.59%.*
Assets reached $24 million.
- -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE (CONTINUED)
- -------------------------------------------------------------------------------
Thank you for pursuing your financial goals through the Blanchard Group of
Funds. If you are not already doing so, consider reinvesting your earnings
automatically in additional shares. It's a convenient way to gain the advantage
of compounding--and increase your opportunity to participate in key financial
markets over time.
Sincerely,
/s/ Edward C. Gonzales
Edward C. Gonzales
President
November 15, 1997
+Foreign investing involves special risks including currency risk, increased
volatility of foreign securities, and differences in auditing and other
financial standards.
*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.
**Income may be subject to the federal alternative minimum tax and state and
local taxes.
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Global Growth Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A1 omitted. See Appendix."]
The Blanchard Global Growth Fund's total return (price change plus
reinvestment of distributions) for the year ending September 30, 1997 was
13.20%. By comparison, the Morgan Stanley World Index (MSCI World) rose 24.12%,
and the Salomon Brothers World Government Bond Index (WGBI) was up 2.41% for the
same period.*
During the past year, equity markets substantially outperformed bond markets
around the globe. It appears the markets have priced in a continued period of
strong economic growth with low inflation. Equity markets in Continental Europe
performed better than the rest of the world, mainly because corporate earnings
have increased. Corporate earnings increased due to a pick up in economic
growth, and an increase in exports (due to their weaker currencies), as well as
from gains in productivity. Among the major stock markets, only
*The Morgan Stanley World Index is based on the share prices of approximately
1,600 companies listed on the stock exchanges of 22 countries. The Salomon
Brothers World Government Bond Index is comprised of 17 Government bond markets
whose eligibility is determined based on market capitalization and investment
criteria; a market's issues must total at least US$20 billion, DM30 billion,
and 2.5 trillion for three consecutive months, after which it will be added to
the SBWGBI at the end of the following quarter. These indices are unmanaged.
Actual investment cannot be made in an index.
the Japanese stock market declined during the past year. The low interest rate
environment in Japan has yet to spur economic growth, as the deregulation of the
financial industry has been slow.
The Blanchard Global Growth Fund benefited from its exposure to equities,
since equities posted higher returns than bonds. However, our allocation across
equity markets did not help performance. We were overweighted in Continental
Europe and Japan and underweighted in the United States. Our currency hedging
strategy added value, since the U.S. Dollar strengthened against most currencies
in Continental Europe and Japan. We continue to hedge a portion of our Japanese
Yen, Swiss Franc, and Dutch Guilder exposure.
During the past year, the Blanchard Global Growth Fund sold equities in favor
of fixed income securities, as the result of strong equity performance during
the past year. We also shifted a portion of the fund out of U.S. equities and
into foreign equities. Continental Europe and Japan offer more attractive
values, since the U.S. equity market has appreciated substantially in the past
few years. We believe the gloom has been overdone in Japan, and the stock market
reflects attractive long-term value.
Thank you for your continued patronage.
Sincerely,
/s/ Thomas B. Hazuka
Thomas B. Hazuka, Ph.D.
Chief Investment Officer
Mellon Capital Management Corporation
Portfolio Manager of the
Blanchard Global Growth Fund
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Precious Metals Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A2 omitted. See Appendix."]
THE YEAR IN REVIEW
One year ago, gold was trading around the $380 level and concerns were
mounting that the International Monetary Fund, or IMF, was likely to sell 5
million ounces of gold to fund capital projects in developing countries. This
and other concerns, such as the strengthening U.S. dollar, moved us to adopt a
more defensive posture in the portfolio to reflect the increasing likelihood
that the gold price would come under pressure.
This turned out to be quite an understatement, as large sales of gold by
central banks, particularly the Dutch and Australians, drove the yellow metal
sharply lower. Central bank sales are almost impossible to forecast except for
the general expectation that they do occur every year, but generally in
quantities that don't disrupt the market. This is partly because other central
banks tend to buy about half of the gold sold by their sister institutions. In
the 1990's, central bank gold sales have netted out to about 7.5 million ounces
per year when central bank buying is accounted for.
Surprisingly, the past year has not been terribly out of the ordinary. About
15 million ounces of central bank gold has been sold, with perhaps 9 million of
this not taken up by other central bank purchases. Ordinarily, one would not
expect the price of gold to swoon by as much as 19% (from $380 to $308) in
response. However, this time was different in a very significant way.
Aggressive speculative short sales of gold accompanied every announcement of a
central bank sale. Large quantities of gold have been borrowed from central
banks at a borrowing cost of 2-3% per annum and sold in the marketplace in what
turned out to be a successful effort to drive the gold price lower. These
speculators have correctly assumed that gold buyers will be timid in the face of
a growing perception that some banks are less willing to hold onto their sizable
gold holdings.
Estimates of the quantity of gold borrowed and sold short range as high as
2,000 metric tons, which is about 65 million ounces! Clearly, this swamps the
actual amount of gold sold by the banks and amply explains the sharp gold price
decline, which has in turn pushed most gold equities dramatically lower. In line
with the gold price decline, the Blanchard Precious Metals Fund declined by
15.24% in the past year.
A LOOK AHEAD
The dominant theme of increasing and long-lasting central bank gold sales
continues to weigh heavily on the bullion price as 1997 draws to a close. In
recent days, the focal point of the issue has become the potential for sales of
Swiss gold reserves starting in the year 2000. These sales could come about in
response to a change in the Swiss constitution, which would eliminate or reduce
the requirement for a gold backstop in the money supply. Complicating the issue
is the proposal to create a Solidarity Foundation for charitable purposes, which
would be funded in part by gold bullion sales, perhaps as much as 800 metric
tons (about 26 million ounces).
These proposals would both require political approval, followed by popular
approval in a national referendum. If successful, the gold would be sold
gradually over a period of five to eight years. The worst-case scenario at
present seems to be the addition of 9 million ounces of gold to the annual
supply-demand equation, which would last 5 years. Putting this into perspective,
the annual gold market is currently sized at 130 million ounces of gold, so this
is a manageable quantity. However, the larger issue is whether a significant
change in central bank attitudes toward gold is at hand. If central banks are
more willing to part with their gold in the years ahead, then gold will settle
into a lower trading range than we have become accustomed to in the past ten
years. If instead, the net supply of
central bank gold remains at less than ten million ounces per year as in the
past, then we can look forward to an explosive rally in the gold market as the
huge outstanding short position is bought back.
We lean toward the latter scenario, particularly since gold is now trading
below the cost of production for about one quarter of the global gold mining
community! New mining projects are being canceled or deferred and the supply of
newly mined gold and scrap is now falling. Nonetheless, caution is the order of
the day until we discern a more predictable upward path for the gold price.
Thank you for your continued patronage.
Sincerely,
/s/ Peter C. Cavelti
Peter C. Cavelti
Chairman and CEO
Cavelti Capital Management Ltd.
Portfolio Manager of the
Blanchard Precious Metals Fund, Inc.
Dear Shareholders,
Enclosed please find the annual report for your Blanchard Flexible Income Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A3 omitted. See Appendix."]
The past year has been one of relatively good economic growth and declining
inflation. The Federal Reserve Board (the "Fed") has continued its policy of
promoting price stability and the market has responded by pushing bonds yields
lower.
The fund has benefited from this environment as the investments in high yield
bonds* and mortgage backed securities have not only earned attractive yields,
but have also appreciated in price. The third allocation, U.S. Treasurys, has
provided the anchor to the portfolio.
Looking forward, we are increasingly concerned with the tight labor markets
and high resource utilization currently existing in the U.S. In order to relieve
these pressures, higher interest rates will probably be required. However, if
the Fed continues to be vigilant in its fight against inflation, significant
interest rate increases should not be in the offing.
*Lower rated bonds involve a higher degree of risk than investment grade bonds
in return for higher yield potential.
While the markets will undoubtedly have bouts of volatility, relative
stability may remain the norm. In this environment, the fund should continue to
benefit from its prudent blend of financial assets.
Thank you for your continued patronage.
Sincerely,
/s/ Jack D. Burks
Jack D. Burks
Managing Director of OFFITBANK
Portfolio Manager of the
Blanchard Flexible Income Fund
Dear Shareholders,
Enclosed please find the annual report for your Blanchard Short-Term Flexible
Income Fund for the fiscal year ended September 30, 1997.
["Graphic representation A4 omitted. See Appendix."]
The past year has been one of relatively good economic growth and declining
inflation. The Federal Reserve Board (the "Fed") has continued its policy of
promoting price stability and the market has responded by pushing bond yields
lower.
The fund has benefited from this environment as the investments in high yield
bonds* and mortgage backed securities have not only earned attractive yields,
but have also appreciated in price. The third allocation, U.S. Treasurys, has
provided the anchor to the portfolio.
Looking forward, we are increasingly concerned with the tight labor markets
and high resource utilization currently existing in the U.S. In order to relieve
these pressures, higher interest rates will probably be required. However, if
the Fed continues to be vigilant in its fight against inflation, significant
interest rate increases should not be in the offing.
*Lower rated bonds involve a higher degree of risk than investment grade bonds
in return for higher yield potential.
While the markets will undoubtedly have bouts of volatility, relative
stability may remain the norm. In this environment, the fund should continue to
benefit from its prudent blend of financial assets.
Thank you for your continued patronage.
Sincerely,
/s/ Jack D. Burks
Jack D. Burks
Managing Director of OFFITBANK
Portfolio Manager of the
Blanchard Short-Term Flexible Income Fund
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Flexible Tax-Free
Bond Fund for the fiscal year ended September 30, 1997.
["Graphic representation A5 omitted. See Appendix."]
The past fiscal year was an excellent one for investors in the Blanchard
Flexible Tax-Free Bond Fund. Interest rates declined during the first fiscal
quarter, but rose sharply in early 1997 as the Federal Reserve Board raised
interest rates to slow an extremely strong economy and quell inflation fears.
Although the economy continued to grow at a 3.5% - 4% rate over the next two
quarters, inflation continued moderate with the consumer price index rising only
2.2% over the past 12 months. Consequently, interest rates declined during the
final two quarters of the fund's fiscal year.
The Blanchard Flexible Tax-Free Bond Fund was invested in a portfolio of
longer-term, high-quality tax exempt bonds, with a maturity of approximately 20
years for most of the year. During the latter part of the fiscal year, cash
reserves were raised to reduce the average maturity of the fund in anticipation
of possible interest rate increases.
Overall, the fund had an excellent year, posting a total return of 9.59%
versus 8.43% for the Lehman Brothers Current Municipal Bond Index.+
Additionally, the fund was ranked #31 by Lipper Analytical Services out of 233
funds in its category of general municipal debt funds for total cumulative
reinvested performance for the twelve month period ended 9/30/97. The fund also
outperformed the Lipper General Municipal Debt Fund average of 8.59%.++
Morningstar has awarded the Blanchard Flexible Tax-Free Bond Fund its 4-star
rating for risk-adjusted performance for the overall period ended 9/30/97 in its
category of 1,374 municipal funds.*
Naturally, past performance is no guarantee of future performance. As with any
fixed income fund, investment return, yield, and principal value will vary with
changing market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original purchase price.
Thank you for your continued patronage.
Sincerely,
/s/ Kenneth J. McAlley
Kenneth J. McAlley
Executive Vice President
United States Trust Company of New York
Portfolio Manager of the
Blanchard Flexible Tax-Free Bond Fund
+Lehman Brothers Municipal Index is an unmanaged broad market performance
benchmark for the tax-exempt bond market. To be included in the Lehman
Brothers Municipal Bond Index, bonds must have a minimum credit rating of at
least Baa. Actual investments cannot be made in an index.
++Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the respective categories indicated. Lipper rankings and figures do not
reflect sales charges.
*Morningstar proprietary ratings reflect risk-adjusted performance through
9/30/97. The ratings are subject to change every month. Past performance is
not a guarantee of future results. Morningstar ratings are calculated from the
fund's three-year returns in excess of 90-day Treasury bill returns, and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The fund received 4 stars for the three-year period. It was rated among 1,374
municipal funds for the three-year period. The top ten percent of the funds in
the category receive 5 stars, the next 22.5% receive 4 stars, and the next 35%
receive 3 stars. The rating shown does not reflect certain management fees
which were waived during the period. If reflected, they may have impacted the
rating.
BLANCHARD GLOBAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------ -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--29.8%
-------------------------------------
AUSTRIA--0.1%
------------------------------
BANKING--0.0%
------------------------------
100 Bank Austria, AG $ 4,865
------------------------------
100 (a)Bank Austria AG, Rights 226
------------------------------ -----------
Total 5,091
------------------------------ -----------
CHEMICALS--0.0%
------------------------------
200 Lenzing AG 11,821
------------------------------ -----------
FINANCIAL SERVICES--0.0%
------------------------------
100 Creditanstalt-Bankverein 6,298
------------------------------
200 Creditanstalt-Bankverein, Pfd. 10,422
------------------------------ -----------
Total 16,720
------------------------------ -----------
PETROLEUM--0.1%
------------------------------
150 OMV AG 22,375
------------------------------ -----------
RUBBER & MISC. MATERIALS--0.0%
------------------------------
200 Radex-Heraklith 8,299
------------------------------ -----------
STEEL--0.0%
------------------------------
100 Boehler-Uddeholm 8,403
------------------------------ -----------
UTILITIES--0.0%
------------------------------
100 Oest Elektrizitats, Class A 7,081
------------------------------ -----------
TOTAL AUSTRIA 79,790
------------------------------ -----------
BRAZIL--0.0%
------------------------------
7,481 Rhodia-Ster S.A., GDR 18,702
------------------------------ -----------
DENMARK--0.1%
------------------------------
BANKING--0.1%
------------------------------
200 Den Danske Bank 21,787
------------------------------
400 Unidanmark, Class A 25,978
------------------------------ -----------
Total 47,765
------------------------------ -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------ ------------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-------------------------------------
DENMARK--CONTINUED
------------------------------
COMMUNICATIONS EQUIPMENT--0.0%
------------------------------
200 Tele Danmark AS, Class B $ 10,492
------------------------------ ------------
ENVIRONMENTAL SERVICES--0.0%
------------------------------
100 Danisco 5,662
------------------------------ ------------
INDUSTRIAL SERVICES--0.0%
------------------------------
100 Nkt Holding 7,728
------------------------------ ------------
MISCELLANEOUS--0.0%
------------------------------
300 Korn-Og Foderstof 9,363
------------------------------ ------------
TRANSPORTATION-AIR--0.0%
------------------------------
400 SAS Danmark AS 6,717
------------------------------ ------------
TOTAL DENMARK 87,727
------------------------------ ------------
FINLAND--0.2%
------------------------------
BANKING--0.0%
------------------------------
3,950 Merita Ltd, Class A 18,739
------------------------------ ------------
ELECTRICAL EQUIPMENT--0.1%
------------------------------
250 Nokia AB, Class K 23,672
------------------------------
500 Nokia AB-A 47,534
------------------------------ ------------
Total 71,206
------------------------------ ------------
MISCELLANEOUS--0.1%
------------------------------
36 Rauma Oy 748
------------------------------
1,300 UPM-Kymmene OY 36,118
------------------------------ ------------
Total 36,866
------------------------------ ------------
NON-FERROUS METALS--0.0%
------------------------------
500 Outokumpu Oy 9,119
------------------------------ ------------
TRADING COMPANY--0.0%
------------------------------
750 Kesko 10,560
------------------------------ ------------
TOTAL FINLAND 146,490
------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------------
FRANCE--0.7%
----------------------------------------
AUTOMOBILE--0.0%
----------------------------------------
150 Peugeot S.A. $ 19,772
---------------------------------------- -----------
BEVERAGE--0.2%
----------------------------------------
310 LVMH (Moet-Hennessy) 65,891
---------------------------------------- -----------
BROADCASTING--0.0%
----------------------------------------
150 Havas S.A. 10,182
---------------------------------------- -----------
BUILDING MATERIALS--0.1%
----------------------------------------
255 Compagnie de St. Gobain 39,329
----------------------------------------
280 Lafarge-Coppee 20,521
---------------------------------------- -----------
Total 59,850
---------------------------------------- -----------
CHEMICALS--0.1%
----------------------------------------
1,122 Rhone-Poulenc, Class A 44,633
---------------------------------------- -----------
FINANCIAL SERVICES--0.1%
----------------------------------------
260 AXA 17,442
----------------------------------------
230 Compagnie Financiere de Paribas, Class A 17,058
---------------------------------------- -----------
Total 34,500
---------------------------------------- -----------
MOTOR VEHICLE PARTS--0.0%
----------------------------------------
384 Michelin, Class B 21,813
---------------------------------------- -----------
PHARMACEUTICALS--0.2%
----------------------------------------
220 L'Oreal 88,072
----------------------------------------
290 Sanofi S.A. 26,934
---------------------------------------- -----------
Total 115,006
---------------------------------------- -----------
RETAILERS-BROADLINE--0.0%
----------------------------------------
60 Pinault-Printemps-Redoute S.A. 28,146
---------------------------------------- -----------
RETAILERS SPECIALTY--0.0%
----------------------------------------
275 Castorama Dubois Investisse 29,574
---------------------------------------- -----------
UTILITIES--0.0%
----------------------------------------
170 Lyonnaise des Eaux S.A. 18,970
---------------------------------------- -----------
TOTAL FRANCE 448,337
---------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------------
GERMANY--2.6%
-----------------------------------------
AIRLINES--0.1%
-----------------------------------------
2,500 Deutsche Lufthansa AG $ 49,237
----------------------------------------- -----------
AUTOMOTIVE & RELATED--0.1%
-----------------------------------------
1,000 Daimler Benz AG 82,515
----------------------------------------- -----------
BANKING--0.4%
-----------------------------------------
2,250 Bayerische Hypotheken-Und Wechsel-Bank AG 96,140
-----------------------------------------
2,700 Deutsche Bank AG 190,090
----------------------------------------- -----------
Total 286,230
----------------------------------------- -----------
CHEMICALS--0.2%
-----------------------------------------
4,500 Bayer AG 179,165
----------------------------------------- -----------
ELECTRICAL EQUIPMENT--0.6%
-----------------------------------------
5,650 Siemens AG 381,634
----------------------------------------- -----------
HEALTHCARE-GENERAL--0.1%
-----------------------------------------
1,500 Merck KGAA 57,302
----------------------------------------- -----------
INSURANCE-LIFE--0.6%
-----------------------------------------
1,500 Allianz AG Holding 361,895
----------------------------------------- -----------
MULTI-INDUSTRY--0.2%
-----------------------------------------
218 Viag AG 97,566
----------------------------------------- -----------
STEEL--0.1%
-----------------------------------------
200 Thyssen AG 46,634
----------------------------------------- -----------
UTILITIES-ELECTRIC--0.2%
-----------------------------------------
2,050 RWE AG 99,254
----------------------------------------- -----------
TOTAL GERMANY 1,641,432
----------------------------------------- -----------
HONG KONG--1.1%
-----------------------------------------
BANKING--0.2%
-----------------------------------------
4,844 Bank Of East Asia 18,093
-----------------------------------------
6,000 Hang Seng Bank, Ltd. 73,856
-----------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------
HONG KONG--CONTINUED
----------------------------------
BANKING--CONTINUED
----------------------------------
1,545 HSBC Holdings PLC $ 51,713
----------------------------------
1,200 Wing Lung Bank 7,118
---------------------------------- -----------
Total 150,780
---------------------------------- -----------
BROADCASTING--0.0%
----------------------------------
2,000 Television Broadcasting 7,082
---------------------------------- -----------
ENTERTAINMENT & RECREATION--0.0%
----------------------------------
3,000 Hong Kong & Shang Hot 3,644
----------------------------------
4,000 Shangri-La Asia 4,110
---------------------------------- -----------
Total 7,754
---------------------------------- -----------
FINANCIAL SERVICES--0.0%
----------------------------------
6,000 Peregrine Investment 10,196
---------------------------------- -----------
MULTI-INDUSTRY--0.2%
----------------------------------
9,000 Hutchison Whampoa 88,686
----------------------------------
3,000 Swire Pacific, Ltd. 22,971
---------------------------------- -----------
Total 111,657
---------------------------------- -----------
PROPERTY--0.1%
----------------------------------
2,000 Hysan Development Co., Ltd. 5,983
----------------------------------
5,033 New World Development Co., Ltd. 30,440
----------------------------------
4,000 Wharf Holdings Ltd. 14,732
---------------------------------- -----------
Total 51,155
---------------------------------- -----------
REAL ESTATE--0.3%
----------------------------------
5,000 Cheung Kong 56,216
----------------------------------
10,000 Sun Hung Kai Properties 117,601
---------------------------------- -----------
Total 173,817
---------------------------------- -----------
TELECOMMUNICATIONS--0.2%
----------------------------------
34,843 Hong Kong Telecommunications, Ltd. 78,800
---------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------
HONG KONG--CONTINUED
---------------------------------
UTILITIES--0.1%
---------------------------------
9,000 China Light and Power Co., Ltd. $ 49,548
---------------------------------
12,000 Hong Kong and China Gas Co., Ltd. 24,735
--------------------------------- -----------
Total 74,283
--------------------------------- -----------
TOTAL HONG KONG 665,524
--------------------------------- -----------
IRELAND--0.3%
---------------------------------
BANKING--0.0%
---------------------------------
1 Bank of Ireland PLC 7
--------------------------------- -----------
BUILDING MATERIALS--0.3%
---------------------------------
14,329 CRH PLC 163,425
--------------------------------- -----------
TOTAL IRELAND 163,432
--------------------------------- -----------
ITALY--1.0%
---------------------------------
AUTOMOTIVE & RELATED--0.2%
---------------------------------
37,510 Fiat SPA 133,859
---------------------------------
4,180 Fiat SPA 7,434
--------------------------------- -----------
Total 141,293
--------------------------------- -----------
BANKING--0.1%
---------------------------------
5,300 Banca Commerciale Italiana 15,229
---------------------------------
600 Imi 6,437
--------------------------------- -----------
Total 21,666
--------------------------------- -----------
BROADCASTING--0.0%
---------------------------------
3,500 Mediaset SPA 18,046
--------------------------------- -----------
FINANCE-0.0%
---------------------------------
6,200 Credito Italiano 16,774
--------------------------------- -----------
PAPER PRODUCTS--0.0%
---------------------------------
1,000 Burgo (Cartiere) SPA 6,488
--------------------------------- -----------
PETROLEUM--0.3%
---------------------------------
26,000 Eni SPA 163,729
--------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------------
ITALY--CONTINUED
---------------------------------------
RUBBER & MISC. MATERIALS--0.0%
---------------------------------------
2,300 Pirelli SPA $ 6,742
--------------------------------------- -----------
TELECOMMUNICATIONS--0.4%
---------------------------------------
46,000 Telecom Italia Mobile SPA 182,545
---------------------------------------
9,944 Telecom Italia SPA 66,249
--------------------------------------- -----------
Total 248,794
--------------------------------------- -----------
UTILITIES--0.0%
---------------------------------------
1,200 Edison SPA 6,458
--------------------------------------- -----------
TOTAL ITALY 629,990
--------------------------------------- -----------
JAPAN--10.3%
---------------------------------------
AIRLINES-0.0%
---------------------------------------
2,000 Japan Airlines Co. 7,276
--------------------------------------- -----------
AUTOMOTIVE & RELATED--1.0%
---------------------------------------
2,000 Denso Corp. 48,562
---------------------------------------
3,000 Honda Motor Co., Ltd. 104,666
---------------------------------------
5,000 Nissan Motor Co., Ltd. 29,833
---------------------------------------
15,000 Toyota Motor Credit Corp. 459,932
--------------------------------------- -----------
Total 642,993
--------------------------------------- -----------
BANKING--1.7%
---------------------------------------
9,000 Asahi Bank, Ltd. 52,208
---------------------------------------
18,000 Bank of Tokyo-Mitsubishi, Ltd. 343,084
---------------------------------------
9,000 Fuji Bank, Ltd., Tokyo 99,196
---------------------------------------
8,000 Industrial Bank of Japan, Ltd., Tokyo 99,445
---------------------------------------
6,000 Mitsubishi Trust & Banking Corp., Tokyo 93,478
---------------------------------------
4,000 Mitsui Trust & Banking 19,922
---------------------------------------
15,000 Sakura Bank, Ltd., Tokyo 71,725
---------------------------------------
10,000 Sumitomo Bank, Ltd., Osaka 150,825
---------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------
JAPAN--CONTINUED
-----------------------------------
BANKING--CONTINUED
-----------------------------------
8,000 Tokai Bank, Ltd., Nagoya $ 66,230
----------------------------------- -----------
Total 996,113
----------------------------------- -----------
BUILDING & CONSTRUCTION-0.0%
-----------------------------------
1,000 Obayashi Corp. 6,041
----------------------------------- -----------
BUILDING MATERIALS--0.0%
-----------------------------------
3,000 Takara Standard Co. 21,331
----------------------------------- -----------
CAPITAL GOODS--0.2%
-----------------------------------
13,000 Asahi Glass Co., Ltd. 101,052
----------------------------------- -----------
CHEMICALS & RELATED--0.4%
-----------------------------------
12,000 Daicel Chemical Industries 30,728
-----------------------------------
6,000 Sekisui Chemical Co. 45,198
-----------------------------------
1,000 Shin-Etsu Chemical Co. 27,513
-----------------------------------
6,000 Sumitomo Bakelite Co., Ltd. 42,562
-----------------------------------
2,000 Sumitomo Chemical Co. 7,342
-----------------------------------
3,000 Takeda Chemical Industries 89,998
----------------------------------- -----------
Total 243,341
----------------------------------- -----------
CHEMICAL-SPECIALTY--0.3%
-----------------------------------
2,000 Fuji Photo Film Co. 82,539
-----------------------------------
5,000 Shiseido Co. 80,385
----------------------------------- -----------
Total 162,924
----------------------------------- -----------
COMMUNICATION EQUIPMENT--0.3%
-----------------------------------
8,000 Matsushita Electric Industrial Co. 144,526
-----------------------------------
1 NTT Data Communications Systems Co. 45,330
----------------------------------- -----------
Total 189,856
----------------------------------- -----------
COMPUTERS--0.2%
-----------------------------------
6,000 Fujitsu, Ltd. 75,081
-----------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ---------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------------
JAPAN--CONTINUED
----------------------------------------
COMPUTERS--CONTINUED
----------------------------------------
6,000 NEC Corp. $ 73,092
---------------------------------------- -----------
Total 148,173
---------------------------------------- -----------
CONSUMER ELECTRONIC--0.4%
----------------------------------------
1,000 Rohm Co. 117,676
----------------------------------------
6,000 Sharp Corp. 54,695
----------------------------------------
1,000 Sony Corp. 94,473
---------------------------------------- -----------
Total 266,844
---------------------------------------- -----------
ELECTRONICS & ELECTRICAL EQUIPMENT--0.9%
----------------------------------------
500 Advantest 49,308
----------------------------------------
2,000 Canon Sales Co., Inc. 39,446
----------------------------------------
5,000 Canon, Inc. 146,267
----------------------------------------
16,000 Hitachi, Ltd. 139,223
----------------------------------------
600 Kyocera Corp. 39,231
----------------------------------------
1,000 Mitsubishi Corp. 9,696
----------------------------------------
1,000 Murata Manufacturing 43,258
----------------------------------------
1,000 Tokyo Electron, Ltd. 61,076
----------------------------------------
4,000 Yamatake-Honeywell 56,352
---------------------------------------- -----------
Total 583,857
---------------------------------------- -----------
FINANCIAL SERVICES--0.8%
----------------------------------------
2,200 Credit Saison Co., Ltd. 59,799
----------------------------------------
4,000 Daiwa Securities Co., Ltd. 24,530
----------------------------------------
134,000 (a)Nikkei 300 Stock Index List Fund 304,268
----------------------------------------
7,000 Nomura Securities Co., Ltd. 91,075
----------------------------------------
3,000 Yamaichi Securities Co., Ltd. 6,166
---------------------------------------- -----------
Total 485,838
---------------------------------------- -----------
FOOD PROCESSING--0.1%
----------------------------------------
3,000 House Foods Corp. 50,965
---------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------
JAPAN--CONTINUED
-----------------------------------
HOUSING & CONSTRUCTION--0.1%
-----------------------------------
13,000 Taisei Corp. $ 48,587
----------------------------------- -----------
INSURANCE--0.2%
-----------------------------------
11,000 Sumitomo Marine & Fire 76,117
-----------------------------------
4,000 Tokio Marine and Fire Insurance Co. 48,065
----------------------------------- -----------
Total 124,182
----------------------------------- -----------
MACHINERY--0.3%
-----------------------------------
14,000 Komatsu, Ltd. 78,313
-----------------------------------
4,000 Mori Seiki Co. 46,739
-----------------------------------
4,000 Takuma Co., Ltd. 39,778
----------------------------------- -----------
Total 164,830
----------------------------------- -----------
NON-RESIDENTIAL CONSTRUCTION--0.1%
-----------------------------------
7,000 Sekisui House, Ltd. 66,711
----------------------------------- -----------
OIL & RELATED--0.0%
-----------------------------------
8,000 Mitsubishi Oil Co. 21,480
----------------------------------- -----------
PAPER PRODUCTS--0.0%
-----------------------------------
2,000 Nippon Paper Industries Co. 10,972
----------------------------------- -----------
PHARMACEUTICALS--0.4%
-----------------------------------
6,000 Chugai Pharmaceutical Co. 51,711
-----------------------------------
4,000 Kaken Pharmaceutical 13,823
-----------------------------------
2,000 Sankyo Co., Ltd. 69,280
-----------------------------------
4,000 Shionogi and Co. 24,894
-----------------------------------
3,000 Yamanouchi Pharmaceutical Co., Ltd. 74,086
----------------------------------- -----------
Total 233,794
----------------------------------- -----------
PHOTO EQUIPMENT & SUPPLIES--0.0%
-----------------------------------
1,000 Nikon Corp. 15,745
----------------------------------- -----------
PRINTING-COMMERCIAL--0.0%
-----------------------------------
1,000 Dai Nippon Printing Co., Ltd. 21,381
----------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------
JAPAN--CONTINUED
----------------------------------
REAL ESTATE--0.2%
----------------------------------
8,000 Mitsubishi Estate Co., Ltd. $ 116,682
---------------------------------- -----------
RETAIL--0.3%
----------------------------------
1,000 Daiei, Inc. 5,519
----------------------------------
5,000 Hankyu Department Stores, Inc. 41,435
----------------------------------
1,000 Isetan Co. 9,613
----------------------------------
2,000 Ito Yokado Co., Ltd. 108,395
---------------------------------- -----------
Total 164,962
---------------------------------- -----------
RUBBER & MISC. MATERIALS--0.1%
----------------------------------
3,000 Bridgestone Corp. 72,097
---------------------------------- -----------
SHIPBUILDING--0.2%
----------------------------------
27,000 Mitsubishi Heavy Industries, Ltd. 147,899
---------------------------------- -----------
STEEL--0.1%
----------------------------------
44,000 NKK Corp. 59,070
----------------------------------
9,000 Nippon Steel Co. 19,839
---------------------------------- -----------
Total 78,909
---------------------------------- -----------
TELECOMMUNICATIONS--0.9%
----------------------------------
62 Nippon Telegraph & Telephone Corp. 570,316
---------------------------------- -----------
TEXTILE & APPAREL--0.1%
----------------------------------
6,000 Nisshinbo Industries 39,728
---------------------------------- -----------
TRADING COMPANY--0.3%
----------------------------------
15,000 Itochu Corp. 51,960
----------------------------------
22,000 Marubeni Corp. 72,926
----------------------------------
4,000 Onward Kashiyama Co., Ltd. 57,678
---------------------------------- -----------
Total 182,564
---------------------------------- -----------
TRANSPORTATION--0.4%
----------------------------------
12 East Japan Railway Co. 56,286
----------------------------------
35,000 (a)Kawasaki Kisen Kaisha, Ltd. 38,286
----------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
--------------------------------------
JAPAN--CONTINUED
-------------------------------
TRANSPORTATION--CONTINUED
-------------------------------
28,000 Kinki Nippon Railway $ 159,874
------------------------------- -----------
Total 254,446
------------------------------- -----------
UTILITIES--0.3%
-------------------------------
900 Kansai Electric Power Co., Inc. 16,035
-------------------------------
1,000 Sumitomo Electric Industries 14,337
-------------------------------
8,100 Tokyo Electric Power Co. 155,731
------------------------------- -----------
Total 186,103
------------------------------- -----------
TOTAL JAPAN 6,427,992
------------------------------- -----------
NETHERLANDS--0.7%
-------------------------------
BANKING--0.1%
-------------------------------
1,621 ABN-Amro Hldgs N.V. 32,822
------------------------------- -----------
CONSUMER & RELATED--0.0%
-------------------------------
200 Heineken N.V. 35,080
------------------------------- -----------
FOOD PROCESSING--0.1%
-------------------------------
200 Unilever N.V. 42,687
------------------------------- -----------
HOUSEHOLD DURABLES--0.1%
-------------------------------
600 Philips Electronics N.V. 50,766
------------------------------- -----------
INSURANCE--0.2%
-------------------------------
315 Aegon N.V. 25,228
-------------------------------
1,065 Ahold N.V. 28,788
-------------------------------
1,436 ING Groep N.V. 65,945
------------------------------- -----------
Total 119,961
------------------------------- -----------
PETROLEUM--0.2%
-------------------------------
2,600 Royal Dutch Petroleum 145,526
------------------------------- -----------
TOTAL NETHERLANDS 426,842
------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------
NEW ZEALAND--0.1%
---------------------------------
BUILDING MATERIALS--0.0%
---------------------------------
5,552 Fletcher Challenge Energy $ 6,936
--------------------------------- -----------
FOREST PRODUCTS--0.1%
---------------------------------
8,300 Carter Holt Harvey 18,026
---------------------------------
222 Fletcher Challenge Forests 277
--------------------------------- -----------
Total 18,303
--------------------------------- -----------
TELECOMMUNICATIONS--0.0%
---------------------------------
3,900 Telecom Corp. of New Zealand 19,788
--------------------------------- -----------
TOTAL NEW ZEALAND 45,027
--------------------------------- -----------
NORWAY--0.2%
---------------------------------
ENERGY--0.1%
---------------------------------
1,000 Norsk Hydro AS 59,591
--------------------------------- -----------
FOREST PRODUCTS--0.1%
---------------------------------
300 Norske Skogindustrier AS, Class A 11,271
---------------------------------
200 Norske Skogindustrier AS, Class B 6,867
--------------------------------- -----------
Total 18,138
--------------------------------- -----------
INSURANCE-LIFE--0.0%
---------------------------------
1,300 (a)Storebrand ASA 9,329
--------------------------------- -----------
MULTI-INDUSTRY--0.0%
---------------------------------
200 Aker AS, Class A 3,743
---------------------------------
40 Aker AS, Class B 681
---------------------------------
100 Orkla Borregaard AS, Class A 8,837
--------------------------------- -----------
Total 13,261
--------------------------------- -----------
NON-FERROUS METALS--0.0%
---------------------------------
400 Elkem AS, Class A 7,092
--------------------------------- -----------
TOTAL NORWAY 107,411
--------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ -------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------
SOUTH AFRICA--0.1%
--------------------------------
MINERAL PRODUCTS--0.1%
--------------------------------
20,000 Billiton PLC $ 77,030
-------------------------------- -----------
SPAIN--0.8%
--------------------------------
BANKING--0.1%
--------------------------------
300 Argentaria SA 17,947
--------------------------------
900 Banco Bilbao Vizcaya SA 27,705
--------------------------------
1,200 Banco Santander 39,311
-------------------------------- -----------
Total 84,963
-------------------------------- -----------
PETROLEUM--0.1%
--------------------------------
1,100 Repsol SA 47,531
-------------------------------- -----------
REAL ESTATE--0.3%
--------------------------------
6,000 Vallehermosa SA 165,405
-------------------------------- -----------
TELECOMMUNICATIONS--0.1%
--------------------------------
2,200 Telefonica de Espana 69,123
-------------------------------- -----------
UTILITIES--0.2%
--------------------------------
2,400 Endesa SA 51,209
--------------------------------
400 Gas Natural SDG SA 21,063
--------------------------------
2,200 Iberdrola SA 27,045
--------------------------------
600 Union Elec Fenosa 5,205
-------------------------------- -----------
Total 104,522
-------------------------------- -----------
TOTAL SPAIN 471,544
-------------------------------- -----------
SWEDEN--0.7%
--------------------------------
BANKING--0.0%
--------------------------------
1,500 Skand Enskilda BKN, Class A 18,188
--------------------------------
300 Svenska Handelsbanken, Stockholm 10,399
-------------------------------- -----------
Total 28,587
-------------------------------- -----------
COMMUNICATIONS--0.2%
--------------------------------
2,300 Telefonaktiebolaget LM Ericsson 110,491
-------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------------------------
SWEDEN--CONTINUED
-------------------------------------------------
MISCELLANEOUS--0.2%
-------------------------------------------------
2,600 Scania AB, Class A 78,814
-------------------------------------------------
2,600 Scania AB, Class B $ 78,814
------------------------------------------------- -----------
Total 157,628
------------------------------------------------- -----------
PHARMACEUTICALS--0.3%
-------------------------------------------------
8,800 Astra AB, Class A 162,372
------------------------------------------------- -----------
TOTAL SWEDEN 459,078
------------------------------------------------- -----------
SWITZERLAND--7.6%
-------------------------------------------------
AIRLINES-0.1%
-------------------------------------------------
30 Sairgroup 40,120
------------------------------------------------- -----------
BANKING--1.2%
-------------------------------------------------
600 Credit Suisse Group 81,064
-------------------------------------------------
200 Schweizerische Bankgesellschaft (UBS) 46,755
-------------------------------------------------
300 Schweizerische Bankgesellschaft (UBS) 350,454
-------------------------------------------------
900 Schweizerischer Bankverein 243,193
------------------------------------------------- -----------
Total 721,466
------------------------------------------------- -----------
BUILDING PRODUCTS--0.1%
-------------------------------------------------
50 Holderbank Financiere Glaris AG, Class B 47,442
-------------------------------------------------
100 Holderbank Financiere Glaris AG, Class R 19,527
------------------------------------------------- -----------
Total 66,969
------------------------------------------------- -----------
COMMERCIAL SERVICES--0.0%
-------------------------------------------------
15 SGS Societe Generale de Surveillance Holding S.A. 26,248
------------------------------------------------- -----------
ELECTRICAL EQUIPMENT--0.3%
-------------------------------------------------
95 ABB AG 139,913
-------------------------------------------------
10 Schindler Holding AG 12,445
-------------------------------------------------
50 Sulzer AG 38,023
------------------------------------------------- -----------
Total 190,381
------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ -------------------------------------------------------- ------------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------------------------------
SWITZERLAND--CONTINUED
--------------------------------------------------------
FOOD PROCESSING--1.1%
--------------------------------------------------------
500 Nestle SA $ 696,507
-------------------------------------------------------- ------------
HEALTHCARE-GENERAL--1.6%
--------------------------------------------------------
100 Roche Holding AG 1,015,677
-------------------------------------------------------- ------------
HOUSEHOLD PRODUCTS--0.4%
--------------------------------------------------------
600 Zurich Versicherungsgesellschaft 261,139
-------------------------------------------------------- ------------
HUMAN RESOURCES--0.1%
--------------------------------------------------------
200 Adecco S.A. 80,446
-------------------------------------------------------- ------------
INSURANCE-LIFE--0.5%
--------------------------------------------------------
190 Schw Rueckversicherungs 284,922
-------------------------------------------------------- ------------
METAL & MINING--0.1%
--------------------------------------------------------
75 Alusuisse Lonza Holding AG 73,002
-------------------------------------------------------- ------------
MISCELLANEOUS--2.0%
--------------------------------------------------------
790 Novartis AG 1,211,909
-------------------------------------------------------- ------------
RETAIL-RESTAURANTS--0.0%
--------------------------------------------------------
50 Valora Holding AG 10,640
-------------------------------------------------------- ------------
UNASSIGNED--0.1%
--------------------------------------------------------
50 Societe Suisse pour la Microelectronique et l'Horlogerie 29,772
--------------------------------------------------------
200 Societe Suisse pour la Microelectronique et l'Horlogerie 27,537
-------------------------------------------------------- ------------
Total 57,309
-------------------------------------------------------- ------------
TOTAL SWITZERLAND 4,736,735
-------------------------------------------------------- ------------
UNITED KINGDOM--3.2%
--------------------------------------------------------
AEROSPACE--0.1%
--------------------------------------------------------
1,900 British Aerospace PLC 50,307
-------------------------------------------------------- ------------
BANKING--0.6%
--------------------------------------------------------
7,100 Lloyds TSB Group PLC 95,311
--------------------------------------------------------
18,028 National Westminster Bank PLC, London 272,242
-------------------------------------------------------- ------------
Total 367,553
-------------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
--------------------------------------------------------
UNITED KINGDOM--CONTINUED
-------------------------------------------------
BROADCASTING--0.4%
-------------------------------------------------
900 British Sky Broadcasting Group PLC $ 6,809
-------------------------------------------------
27,500 Carlton Communications PLC 227,572
------------------------------------------------- -----------
Total 234,381
------------------------------------------------- -----------
DIVERSIFIED OPERATIONS--0.2%
-------------------------------------------------
19,334 Williams Holdings PLC 115,040
------------------------------------------------- -----------
FOOD PROCESSING--0.2%
-------------------------------------------------
14,300 Allied Domecq PLC 113,334
------------------------------------------------- -----------
HEALTH CARE--0.5%
-------------------------------------------------
33,224 Smithkline Beecham Corp. 324,121
------------------------------------------------- -----------
MACHINERY--0.3%
-------------------------------------------------
8,800 Siebe PLC 176,949
------------------------------------------------- -----------
MULTI-INDUSTRY--0.3%
-------------------------------------------------
7,500 Hanson PLC, ADR 180,938
------------------------------------------------- -----------
OIL & RELATED--0.2%
-------------------------------------------------
10,370 British Petroleum Co. PLC 156,347
------------------------------------------------- -----------
PHARMACEUTICALS--0.2%
-------------------------------------------------
4,800 Glaxo Wellcome PLC 107,036
------------------------------------------------- -----------
PUBLISHING--0.2%
-------------------------------------------------
12,722 EMI Group PLC 124,933
------------------------------------------------- -----------
RETAIL--0.0%
-------------------------------------------------
5,468 Thorn EMI 12,318
------------------------------------------------- -----------
TELECOMMUNICATIONS--0.0%
-------------------------------------------------
1,125 Cable & Wireless 9,578
------------------------------------------------- -----------
TOTAL UNITED KINGDOM 1,972,835
------------------------------------------------- -----------
TOTAL FOREIGN SECURITIES SECTOR (IDENTIFIED COST
$18,032,118) 18,605,918
------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
--------- --------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--9.9%
-------------------------------------------------------------
ARGENTINA--0.3%
---------------------------------------------------
PETROLEUM--0.3%
---------------------------------------------------
21,385 Compania Naviera Perez Companc S.A., Class B $ 172,398
--------------------------------------------------- ------------
BRAZIL--1.4%
---------------------------------------------------
BANKING--0.1%
---------------------------------------------------
7,000,000 Banco Bradesco S.A., Pfd. 73,794
--------------------------------------------------- ------------
BASIC INDUSTRY--0.6%
---------------------------------------------------
4,387 (a)Cia Acos Especiais Itabira-Acesita, ADR 16,937
---------------------------------------------------
3,207 (a)Companhia Energetica de Minas Gerais, ADR 176,219
---------------------------------------------------
7,400 Companhia Vale Do Rio Doce, ADR 181,017
--------------------------------------------------- ------------
Total 374,173
--------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.6%
---------------------------------------------------
2,750 Telecomunicacoes Brasileras, ADR 354,063
--------------------------------------------------- ------------
STEEL--0.0%
---------------------------------------------------
1,211,792 Cia Acos Especiais Itabira-Acesita, Pfd. 2,632
--------------------------------------------------- ------------
UTILITIES--0.1%
---------------------------------------------------
150,000 Centrais Eletricas Brasileiras S.A., Pfd., Series B 84,887
---------------------------------------------------
6,588 Light Servicos de Eletricidade S.A. 2,820
--------------------------------------------------- ------------
Total 87,707
--------------------------------------------------- ------------
TOTAL BRAZIL 892,369
--------------------------------------------------- ------------
CHILE--0.8%
---------------------------------------------------
CONSUMER DURABLES--0.2%
---------------------------------------------------
4,200 Compania Cervecerias Unidas S.A., ADR 120,750
--------------------------------------------------- ------------
ENGINEERING-BUSINESS SERVICES--0.3%
---------------------------------------------------
5,319 Chilgener S.A., ADR 145,940
--------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
---------------------------------------------------
2,525 Compania Telecomunicacion Chile, ADR 81,747
--------------------------------------------------- ------------
UTILITIES--0.2%
---------------------------------------------------
3,750 (b)Chilectra S.A., ADR 118,378
--------------------------------------------------- ------------
TOTAL CHILE 466,815
--------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ------------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
--------------------------------------------------------------
COLOMBIA--0.4%
------------------------------------------------------
BANKING--0.3%
------------------------------------------------------
2,600 Banco Ganadero S.A., ADR, Class B $ 104,000
------------------------------------------------------
5,500 Banco Industrial Colombiano, ADR 98,313
------------------------------------------------------ ------------
Total 202,313
------------------------------------------------------ ------------
MISCELLANEOUS--0.1%
------------------------------------------------------
3,500 Cementos Diamante S.A., GDR 45,500
------------------------------------------------------ ------------
TOTAL COLOMBIA 247,813
------------------------------------------------------ ------------
GREECE--0.0%
------------------------------------------------------
BANKING--0.0%
------------------------------------------------------
422 Ergo Bank S.A. 28,267
------------------------------------------------------ ------------
INDIA--0.3%
------------------------------------------------------
CHEMICALS--0.1%
------------------------------------------------------
5,700 Indian Petrochemicals, GDR 58,397
------------------------------------------------------ ------------
STEEL--0.0%
------------------------------------------------------
5,500 Steel Authority of India, GDR 35,888
------------------------------------------------------ ------------
TEXTILES--0.2%
------------------------------------------------------
4,300 Reliance Industries, Ltd., GDR 98,631
------------------------------------------------------ ------------
TOTAL INDIA 192,916
------------------------------------------------------ ------------
INDONESIA--0.3%
------------------------------------------------------
BANKING--0.2%
------------------------------------------------------
275,626 (a)PT Bank Dagang Nasional 54,455
------------------------------------------------------
39,374 (a)PT Bank Dagang Nasional, Warrants 2/14/2000 2,274
------------------------------------------------------
260,814 (a)PT Bank International Indonesia 75,311
------------------------------------------------------
32,072 (a)PT Bank International Indonesia, Warrants 1/17/2000 2,720
------------------------------------------------------ ------------
Total 134,760
------------------------------------------------------ ------------
CAPITAL GOODS--0.1%
------------------------------------------------------
3,100 (a)PT Indosat, ADR 81,375
------------------------------------------------------ ------------
TOTAL INDONESIA 216,135
------------------------------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------------------- -----------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
----------------------------------------------------
KOREA--0.6%
---------------------------------------------
AUTOMOBILE--0.0%
---------------------------------------------
2,066 Hyundai Motor Service Co., Pfd. $ 13,999
--------------------------------------------- -----------
CAPITAL GOODS--0.1%
---------------------------------------------
3,284 (a)Anam Industrial Co., Ltd. 52,400
--------------------------------------------- -----------
COMPUTERS--0.1%
---------------------------------------------
5,750 Anam Industrial Co., Ltd., Pfd. 33,934
--------------------------------------------- -----------
ELECTRONICS & ELECTRICAL--0.0%
---------------------------------------------
2 (a)Samsung Electronics Co. 193
---------------------------------------------
18 (b)Samsung Electronics Co., GDR 968
--------------------------------------------- -----------
Total 1,161
--------------------------------------------- -----------
HOUSING & CONSTRUCTION--0.0%
---------------------------------------------
9,000 (a)Kumho Construction & Engineering Co., Pfd. 21,836
--------------------------------------------- -----------
MACHINERY--0.0%
---------------------------------------------
6,000 (a)(b)Daewoo Heavy Industries, Pfd. 23,213
--------------------------------------------- -----------
MULTI-INDUSTRY--0.2%
---------------------------------------------
2,283 (a)(b)Dong Bang Forwarding Co. 118,516
---------------------------------------------
913 (a)Dong Bang Forwarding Co., Rights 14,222
--------------------------------------------- -----------
Total 132,738
--------------------------------------------- -----------
PETROLEUM--0.1%
---------------------------------------------
2,571 (a)Yukong, Ltd. 47,767
--------------------------------------------- -----------
UTILITIES--0.1%
---------------------------------------------
3,200 (a)Korea Electric Power Corp. 70,995
--------------------------------------------- -----------
TOTAL KOREA 398,043
--------------------------------------------- -----------
MALAYSIA--0.9%
---------------------------------------------
AIRLINES--0.1%
---------------------------------------------
25,000 Malaysian Airline System 40,071
--------------------------------------------- -----------
BANKING--0.2%
---------------------------------------------
14,000 Commerce Asset Holdings Berhad 15,708
---------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------------ ----------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-------------------------------------------------------------
MALAYSIA--CONTINUED
------------------------------------------------------
BANKING--CONTINUED
------------------------------------------------------
1,750 (a)Commerce Asset Holdings Berhad, Warrants 12/31/2002 $ 566
------------------------------------------------------
25,000 RHB Capital BHD 29,591
------------------------------------------------------
12,000 Malayan Banking Berhad 60,291
------------------------------------------------------ ----------
Total 106,156
------------------------------------------------------ ----------
BEVERAGES--0.1%
------------------------------------------------------
40,000 Guinness Anchor Berhad 61,648
------------------------------------------------------ ----------
FOREST PRODUCTS--0.0%
------------------------------------------------------
10,000 Jaya Tiasa Holdings 27,587
------------------------------------------------------ ----------
INDUSTRIAL COMPONENT--0.0%
------------------------------------------------------
9,000 United Engineers, Ltd. 28,851
------------------------------------------------------ ----------
LEISURE & RECREATION--0.1%
------------------------------------------------------
12,000 Genting Berhad 37,358
------------------------------------------------------ ----------
MULTI-INDUSTRY--0.1%
------------------------------------------------------
35,000 Sime Darby Berhad 72,821
------------------------------------------------------ ----------
NON RESIDENTIAL CONSTRUCTION--0.1%
------------------------------------------------------
47,000 Renong Berhad 46,359
------------------------------------------------------ ----------
TELECOMMUNICATIONS--0.1%
------------------------------------------------------
13,500 Telekom Malaysia Berhad 40,988
------------------------------------------------------ ----------
UTILITIES--0.1%
------------------------------------------------------
18,000 Petronas Gas Berhad 53,263
------------------------------------------------------ ----------
TOTAL MALAYSIA 515,102
------------------------------------------------------ ----------
MEXICO--1.4%
------------------------------------------------------
FINANCIAL SERVICES--0.3%
------------------------------------------------------
4,900 (a)Carso Global Telecom, ADR 41,592
------------------------------------------------------
4,900 (a)Grupo Carso S.A. de C.V., Class A1, ADR 78,898
------------------------------------------------------
16,000 (a)Grupo Financiero Banamex Accivel, Class B 50,450
------------------------------------------------------
1,140 (a)Grupo Financiero Banamex Accivel, Class L 3,345
------------------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ------------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
--------------------------------------------------------------
MEXICO--CONTINUED
------------------------------------------------------
FINANCIAL SERVICES--CONTINUED
------------------------------------------------------
68 Grupo Financiero Inbursa, S.A. de C.V., Class B, ADR $ 1,504
------------------------------------------------------ ------------
Total 175,789
------------------------------------------------------ ------------
INDUSTRIAL & RELATED--0.1%
------------------------------------------------------
11,000 Apasco S.A. de C.V. 83,668
------------------------------------------------------ ------------
MULTI-INDUSTRY--0.2%
------------------------------------------------------
12,791 Alfa, S.A. de C.V., Class A 120,173
------------------------------------------------------ ------------
PAPER PRODUCTS--0.2%
------------------------------------------------------
25,000 Kimberly-Clark de Mexico 130,792
------------------------------------------------------ ------------
TELECOMMUNICATIONS--0.5%
------------------------------------------------------
110,000 Telefonos de Mexico 286,679
------------------------------------------------------ ------------
TELECOMMUNICATION SERVICES--0.1%
------------------------------------------------------
4,000 Grupo Televisa S.A. 71,094
------------------------------------------------------ ------------
TOTAL MEXICO 868,195
------------------------------------------------------ ------------
PHILIPPINES--0.1%
------------------------------------------------------
BANKING--0.0%
------------------------------------------------------
1,935 Metro Bank and Trust Co. 17,247
------------------------------------------------------ ------------
OIL & RELATED--0.1%
------------------------------------------------------
400,000 (a)Belle Corp. 52,174
------------------------------------------------------
80,000 (a)Belle Corp., warrants 10/6/2000 0
------------------------------------------------------ ------------
Total 52,174
------------------------------------------------------ ------------
TOTAL PHILIPPINES 69,421
------------------------------------------------------ ------------
PORTUGAL--0.6%
------------------------------------------------------
ENGINEERING-BUSINESS SERVICES--0.1%
------------------------------------------------------
Sonae Investimentos Sociedade Gestora de Participacoes
1,500 Sociais, S.A. 59,303
------------------------------------------------------ ------------
FINANCIAL SERVICES--0.2%
------------------------------------------------------
6,000 Banco Commercial Portugues, Class R 126,709
------------------------------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------------------
PORTUGAL--CONTINUED
----------------------------------------------------
FOOD & BEVERAGE--0.2%
----------------------------------------------------
1,399 Estabelecimentos Jeronimo Martins & Filho SGPS, S.A. $ 107,681
---------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
----------------------------------------------------
2,000 Portugal Telecom S.A. 86,751
---------------------------------------------------- ------------
TOTAL PORTUGAL 380,444
---------------------------------------------------- ------------
SINGAPORE--0.3%
----------------------------------------------------
BANKING--0.1%
----------------------------------------------------
3,000 Development Bank of Singapore, Ltd. 30,598
----------------------------------------------------
6,000 Oversea-Chinese Banking Corp., Ltd. 41,582
---------------------------------------------------- ------------
Total 72,180
---------------------------------------------------- ------------
BROADCASTING--0.0%
----------------------------------------------------
1,000 Singapore Press Holdings, Ltd. 14,711
---------------------------------------------------- ------------
ENTERTAINMENT & RECREATION--0.0%
----------------------------------------------------
3,000 Hotel Properties, Ltd. 3,707
---------------------------------------------------- ------------
MACHINERY--0.0%
----------------------------------------------------
1,250 Keppel Corp. 4,985
----------------------------------------------------
2,000 Van Der Horst, Ltd. 2,733
---------------------------------------------------- ------------
Total 7,718
---------------------------------------------------- ------------
PROPERTY--0.1%
----------------------------------------------------
2,000 City Developments, Ltd. 12,945
----------------------------------------------------
3,000 DBS Land Ltd. 7,297
----------------------------------------------------
2,000 First Capital Corp., Ltd. 4,472
----------------------------------------------------
9,000 United Overseas Bank, Ltd. 35,829
---------------------------------------------------- ------------
Total 60,543
---------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
----------------------------------------------------
13,000 Singapore Telecommunications 22,014
---------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------
SINGAPORE--CONTINUED
----------------------------------------
TRANSPORTATION-AIR--0.0%
----------------------------------------
3,000 Singapore Airlines, Ltd. $ 22,164
---------------------------------------- ------------
TOTAL SINGAPORE 203,037
---------------------------------------- ------------
SOUTH AFRICA--1.8%
----------------------------------------
BANKING--0.2%
----------------------------------------
7,186 Amalgamated Banks of South Africa 48,955
----------------------------------------
2,515 Nedcor, Ltd. 54,234
----------------------------------------
1,000 Standard Bank Investment Corp., Ltd. 44,523
---------------------------------------- ------------
Total 147,712
---------------------------------------- ------------
CHEMICAL--0.2%
----------------------------------------
9,000 Sasol, Ltd. 124,075
---------------------------------------- ------------
COAL--0.0%
----------------------------------------
419 Anglo American Coal Corp., Ltd. 24,454
---------------------------------------- ------------
ENTERTAINMENT--0.1%
----------------------------------------
62,743 Sun International (South Africa), Ltd. 38,503
---------------------------------------- ------------
FINANCIAL SERVICES--0.2%
----------------------------------------
312 (a)Dimension Data Holdings, Ltd. 1,305
----------------------------------------
4,500 Free State Consolidated Gold Mines, Ltd. 26,553
----------------------------------------
6,000 Malbak Limited 8,754
----------------------------------------
7,000 Rembrandt Group, Ltd. 63,384
---------------------------------------- ------------
Total 99,996
---------------------------------------- ------------
FOOD & BEVERAGE--0.0%
----------------------------------------
672 Foodcorp., Ltd. 4,326
---------------------------------------- ------------
HOUSEHOLD PRODUCTS--0.0%
----------------------------------------
837 Ellerine Holdings, Ltd. 6,645
----------------------------------------
81 (a)JD Group, Ltd. 613
---------------------------------------- ------------
Total 7,258
---------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
--------- -------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
------------------------------------------------------------
SOUTH AFRICA--CONTINUED
--------------------------------------------------
INDUSTRIAL MANUFACTURING--0.2%
--------------------------------------------------
6,045 Barlow Ltd. $ 69,069
--------------------------------------------------
1,030 Anglo American Industrial Corp., Ltd. 38,676
-------------------------------------------------- ------------
Total 107,745
-------------------------------------------------- ------------
INSURANCE--0.3%
--------------------------------------------------
27,826 LibLife Strategic Investments, Ltd. 96,127
--------------------------------------------------
3,000 Liberty Life Association of Africa, Ltd. 87,544
-------------------------------------------------- ------------
Total 183,671
-------------------------------------------------- ------------
LODGING & RESTAURANT--0.2%
--------------------------------------------------
4,068 South African Breweries, Ltd. 118,055
-------------------------------------------------- ------------
MEDICAL-DRUGS--0.0%
--------------------------------------------------
989 South African Druggists, Ltd. 6,451
-------------------------------------------------- ------------
METALS & MINING--0.4%
--------------------------------------------------
3,000 Anglo American Platinum Corp., Ltd. 51,979
--------------------------------------------------
1,500 Anglo American Corporation of South Africa Limited 76,762
--------------------------------------------------
3,300 De Beers Centenary AG 96,299
--------------------------------------------------
4,000 Gencor Ltd. 9,441
-------------------------------------------------- ------------
Total 234,481
-------------------------------------------------- ------------
RETAIL-DIVERSIFIED--0.0%
--------------------------------------------------
2,284 New Clicks Holdings, Ltd. 2,960
-------------------------------------------------- ------------
TOTAL SOUTH AFRICA 1,099,687
-------------------------------------------------- ------------
TAIWAN--0.4%
--------------------------------------------------
MISCELLANEOUS--0.1%
--------------------------------------------------
7,018 (a)Walsin Lihwa Wire, GDR 56,846
-------------------------------------------------- ------------
NON-RESIDENTIAL CONSTRUCTION--0.1%
--------------------------------------------------
10,902 (a)Tuntex Distinct Corp., GDR 62,414
-------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- ------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------------------
TAIWAN--CONTINUED
------------------------------------------------
TECHNOLOGY--0.2%
------------------------------------------------
4,213 (a)Macronix International Co., Ltd., ADR $ 94,529
------------------------------------------------ ------------
TOTAL TAIWAN 213,789
------------------------------------------------ ------------
THAILAND--0.3%
------------------------------------------------
BANKING--0.1%
------------------------------------------------
27,000 Krung Thai Bank PLC 18,223
------------------------------------------------
13,500 Siam Commercial Bank 43,884
------------------------------------------------ ------------
Total 62,107
------------------------------------------------ ------------
BUILDING MATERIALS--0.0%
------------------------------------------------
2,000 Siam Cement Co., Ltd 32,837
------------------------------------------------ ------------
COMMUNICATIONS--0.1%
------------------------------------------------
35,000 (a)TelecomAsia Corp. 28,444
------------------------------------------------
9,000 United Communication Industry Public Co., Ltd. 26,777
------------------------------------------------ ------------
Total 55,221
------------------------------------------------ ------------
PETROLEUM--0.1%
------------------------------------------------
4,500 PTT Exploration and Production Public Co. 60,248
------------------------------------------------ ------------
TOTAL THAILAND 210,413
------------------------------------------------ ------------
TURKEY--0.0%
------------------------------------------------
MULTI-INDUSTRY--0.0%
------------------------------------------------
349 Koc Yatirim Ve Sanayi Mamulleri Pazarlama S.A. 132
------------------------------------------------ ------------
TOTAL EMERGING MARKETS SECURITIES SECTOR 6,174,976
(IDENTIFIED COST $6,248,756)
------------------------------------------------ ------------
COMMERCIAL PAPER--28.8%
-----------------------------------------------------------
FINANCE--28.8%
------------------------------------------------
$3,000,000 Ford Motor Credit Corp., 5.50%, 12/12/1997 2,969,670
------------------------------------------------
3,000,000 General Electric Capital Corp., 5.50%, 10/8/1997 2,996,792
------------------------------------------------
3,000,000 Hertz Corp., 5.50%, 12/12/1997 2,969,670
------------------------------------------------
3,000,000 Monte Rosa Capital Corp., 5.54%, 10/2/1997 2,999,538
------------------------------------------------
New Center Asset Trust, A1/P1 Series, 5.53%,
3,000,000 10/6/1997 2,997,696
------------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
FOREIGN VALUE
CURRENCY PAR IN U.S.
AMOUNT DOLLARS
------------ -------------------------------------------------- -----------
<C> <S> <C>
COMMERCIAL PAPER--CONTINUED
---------------------------------------------------------------
FINANCE--CONTINUED
--------------------------------------------------
$ 3,000,000 Sheffield Receivables Corp., 5.54%, 10/2/1997 $ 2,999,538
-------------------------------------------------- -----------
TOTAL COMMERCIAL PAPER (IDENTIFIED COST
$17,927,564) 17,932,904
-------------------------------------------------- -----------
U.S. FIXED INCOME SECURITIES SECTOR--10.7%
---------------------------------------------------------------
GOVERNMENT/AGENCY--10.7%
--------------------------------------------------
1,500,000 United States Treasury Bill, 12/11/1997 1,485,591
--------------------------------------------------
325,000 United States Treasury Bond, 7.25%, 8/15/2022 355,427
--------------------------------------------------
500,000 United States Treasury Bond, 7.50%, 11/15/2016 556,730
--------------------------------------------------
1,200,000 United States Treasury Bond, 7.625%, 11/15/2022 1,368,528
--------------------------------------------------
1,430,000 United States Treasury Bond, 11.75%, 11/15/2014 2,076,432
--------------------------------------------------
400,000 United States Treasury Note, 6.25%, 2/15/2003 404,000
--------------------------------------------------
350,000 United States Treasury Receipt PO Strip, 8/15/2005 216,097
--------------------------------------------------
350,000 United States Treasury Receipt IO Strip, 2/15/2005 223,298
-------------------------------------------------- -----------
TOTAL U.S. FIXED INCOME SECURITIES SECTOR
(IDENTIFIED COST $6,431,631) 6,686,103
-------------------------------------------------- -----------
FOREIGN FIXED INCOME SECURITIES SECTOR--17.1%
---------------------------------------------------------------
DENMARK--0.9%
--------------------------------------------------
3,310,000 Denmark--Bullet, Bond, 8.00%, 3/15/2006 562,497
-------------------------------------------------- -----------
FRANCE--3.7%
--------------------------------------------------
10,500,000 France (Govt. of), 6.50%, 10/25/2006 1,909,509
--------------------------------------------------
2,150,000 France O.A.T., Bond, 7.25%, 4/25/2006 409,622
-------------------------------------------------- -----------
Total 2,319,131
-------------------------------------------------- -----------
GERMANY--3.4%
--------------------------------------------------
1,040,000 Republic of Germany, Bond, 6.25%, 4/26/2006 620,604
--------------------------------------------------
287,000 Republic of Germany, Deb., 7.125%, 12/20/2002 178,442
--------------------------------------------------
1,065,000 Germany (Fed. Republic), 6.50%, 7/15/2003 646,130
--------------------------------------------------
1,140,000 Germany (Fed. Republic), Bond, 6.00%, 1/5/2006 669,438
-------------------------------------------------- -----------
Total 2,114,614
-------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
FOREIGN VALUE
CURRENCY PAR IN U.S.
AMOUNT DOLLARS
------------ --------------------------------------------------- -----------
<C> <S> <C>
FOREIGN FIXED INCOME SECURITIES SECTOR--CONTINUED
----------------------------------------------------------------
ITALY--1.2%
---------------------------------------------------
$880,000,000 Buoni Poliennali Del Tes, Deb., 10.50%, 4/15/1998 $ 519,182
---------------------------------------------------
310,000,000 Italy (Republic of), Deb., 10.50%, 4/1/2005 227,162
--------------------------------------------------- -----------
Total 746,344
--------------------------------------------------- -----------
NETHERLANDS--3.1%
---------------------------------------------------
1,690,000 Dutch Government Bond, 5.75%, 2/15/2007 864,572
---------------------------------------------------
580,000 Netherlands Government Bond, 7.50%, 4/15/2010 337,602
---------------------------------------------------
880,000 Dutch Government Bond, 7.25%, 10/1/2004 493,875
---------------------------------------------------
410,000 Netherlands Government Bond, 7.00%, 2/15/2003 225,363
--------------------------------------------------- -----------
Total 1,921,412
--------------------------------------------------- -----------
SPAIN--1.3%
---------------------------------------------------
104,600,000 Kingdom of Spain, Deb., 12.25%, 3/25/2000 817,732
--------------------------------------------------- -----------
SWEDEN--0.4%
---------------------------------------------------
1,600,000 Sweden (Kingdom of), 10.25%, 5/5/2000 236,091
--------------------------------------------------- -----------
UNITED KINGDOM--3.1%
---------------------------------------------------
245,000 United Kingdom Treasury Bond, 8.00%, 12/7/2015 455,561
---------------------------------------------------
239,000 United Kingdom Treasury, 7.75%, 9/8/2006 417,789
---------------------------------------------------
400,000 United Kingdom Treasury, 8.50%, 7/16/2007 737,321
---------------------------------------------------
190,000 United Kingdom Treasury, 9.75%, 8/27/2002 346,591
--------------------------------------------------- -----------
Total 1,957,262
--------------------------------------------------- -----------
TOTAL FOREIGN FIXED INCOME SECURITIES SECTOR
(IDENTIFIED COST $10,804,770) 10,675,083
--------------------------------------------------- -----------
(C) REPURCHASE AGREEMENT--1.9%
----------------------------------------------------------------
1,176,958 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(at amortized cost) 1,176,958
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $60,621,797)(D) $61,251,942
--------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- -------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $261,075 which represents 0.4% of net assets.
(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. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $60,689,138 The
net unrealized appreciation of investments on a federal tax basis amounts to
$562,804 which is comprised of $2,899,362 appreciation and $2,336,558
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($62,197,366) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depositary Receipt
GDR--Global Depositary Receipt
IO--Interest Only
PO--Principal Only
PLC--Public Limited Company
SPA--Standby Purchase Agreement
STRIP--Separate Trading of Registered Interest & Principal of Securities
(See Notes which are an integral part of the Financial Statements)
BLANCHARD PRECIOUS METALS FUND, INC.
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
--------- -------------------------------- -----------
<C> <S> <C>
EQUITIES--84.5%
------------------------------------------
METALS & MINING--84.5%
--------------------------------
AUSTRALIA--1.0%
--------------------------------
600,000 (a)Croesus Mining NL $ 152,449
--------------------------------
1,000,000 (a)Laverton Gold NL 148,820
--------------------------------
1,258,000 (a)(b)Lone Star Exploration NL 200,253
--------------------------------
1,300,000 (a)Lone Star Exploration NL 215,500
-------------------------------- -----------
Total 717,022
-------------------------------- -----------
CANADA--53.0%
--------------------------------
1,640,000 (a)Ariel Resources, Ltd. 367,859
--------------------------------
421,000 Cambior, Inc. 4,736,840
--------------------------------
229,600 (a)Dayton Mining Corp. 803,600
--------------------------------
1,405,500 (a)(b)Eldorado Gold Corp., Ltd. 3,823,798
--------------------------------
230,000 (a)First Silver Reserve, Inc. 183,061
--------------------------------
95,200 Franco-Nevada Mining Corp., Ltd. 2,242,148
--------------------------------
721,000 (a)Geomaque Explorations, Ltd. 1,930,249
--------------------------------
50,000 (a)Goldcorp, Inc., Class A 318,750
--------------------------------
401,500 (a)Golden Knight Resources, Inc. 1,191,093
--------------------------------
316,000 (a)Greenstone Resources, Ltd. 3,235,339
--------------------------------
510,000 (a)Kinross Gold Corp. 2,836,875
--------------------------------
194,300 (a)Philex Gold, Inc. 773,235
--------------------------------
135,000 Placer Dome, Inc. 2,581,875
--------------------------------
4,115,069 (a)Santa Cruz Gold, Inc. 1,488,755
--------------------------------
1,260,000 (a)TVX Gold, Inc. 7,840,527
--------------------------------
466,000 (a)Viceroy Resource Corp. 1,180,131
-------------------------------- -----------
Total 35,534,135
-------------------------------- -----------
</TABLE>
BLANCHARD PRECIOUS METALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- ---------------------------------------------------- -----------
<C> <S> <C>
EQUITIES--CONTINUED
---------------------------------------------------------------
GHANA--4.8%
----------------------------------------------------
290,000 Ashanti Goldfields Co., GDR $ 3,190,000
---------------------------------------------------- -----------
SOUTH AFRICA--5.0%
----------------------------------------------------
551,700 East Rand Gold & Uranium Co., Ltd., ADR 764,325
----------------------------------------------------
200,000 Free State Consolidated Gold Mines Ltd., ADR 1,218,750
----------------------------------------------------
255,000 Vaal Reefs Explorations & Mining Co., Ltd., ADR 1,370,625
---------------------------------------------------- -----------
Total 3,353,700
---------------------------------------------------- -----------
UNITED STATES--20.7%
----------------------------------------------------
1,425,000 (a)Canyon Resources Corp. 3,918,750
----------------------------------------------------
260,000 Homestake Mining Co. 3,981,250
----------------------------------------------------
626,500 (a)Meridian Gold, Inc. 3,093,344
----------------------------------------------------
64,500 Newmont Mining Corp. 2,898,469
---------------------------------------------------- -----------
Total 13,891,813
---------------------------------------------------- -----------
TOTAL EQUITIES (IDENTIFIED COST $78,030,194) 56,686,670
---------------------------------------------------- -----------
WARRANTS--1.3%
---------------------------------------------------------------
227,500 (a)Atlas Corp., Warrants (expire 12/15/99) 1,138
----------------------------------------------------
75,000 (a)Canyon Resources Corp., Warrants (expire 3/20/99) --
----------------------------------------------------
(a)(b)Geomaque Explorations Ltd., Warrants (expire 870,084
325,000 3/19/99)
---------------------------------------------------- -----------
TOTAL WARRANTS (IDENTIFIED COST $827,565) 871,222
---------------------------------------------------- -----------
PREFERRED STOCK--0.8%
---------------------------------------------------------------
UNITED STATES--0.8%
----------------------------------------------------
25,000 Freeport-McMoRan Copper & Gold, Inc., Cumulative
Pfd., Series SILV (IDENTIFIED COST $432,868) 528,125
---------------------------------------------------- -----------
U.S. TREASURY SECURITIES--7.8%
---------------------------------------------------------------
U.S. TREASURY BILL--7.8%
----------------------------------------------------
$5,300,000 12/11/1997 (IDENTIFIED COST $5,248,217) 5,249,088
---------------------------------------------------- -----------
</TABLE>
BLANCHARD PRECIOUS METALS FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- --------------------------------------------------- -----------
<C> <S> <C>
(C) REPURCHASE AGREEMENT--8.2%
--------------------------------------------------------------
$5,492,706 CS First Boston Corp., 6.05%, dated 9/30/1997, due
10/1/1997 (at amortized cost) $ 5,492,706
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $90,031,550)(D) $68,827,811
--------------------------------------------------- -----------
</TABLE>
(a) Non-income producing security.
(b) Certain of these securities are subject to restrictions on resale under
Federal Securities laws. At September 30, 1997, these securities amounted to
$4,894,135 with represents 7.3% of net assets.
(c) The repurchase agreements is fully collateralized by U.S.government and/or
agency obligations based on market prices at the date of the portfolio.
(d) The cost of investments for federal tax purposes amounts to $90,719,260. The
net unrealized depreciation of investments on a federal tax basis amounts to
$20,522,951 which is comprised of $1,599,113 appreciation and $22,122,064
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($67,037,240) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
GDR--Global Depository Receipt
(See Notes which are an integral part of the Financial Statements)
BLANCHARD FLEXIBLE INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--26.6%
---------------------------------------------------------------
AEROSPACE--1.1%
-------------------------------------------------
$ 1,700,000 Sequa Corp., Sr. Note, 8.75%, 12/15/2001 $ 1,738,250
------------------------------------------------- ------------
CONSUMER RELATED--1.3%
-------------------------------------------------
Host Marriot Travel Plaza, Sr. Note, 9.50%, 1,062,500
1,000,000 5/15/2005
-------------------------------------------------
John Q. Hammons Hotels, 1st Mtg. Bond, 8.875%, 1,015,000
1,000,000 2/15/2004
------------------------------------------------- ------------
Total 2,077,500
------------------------------------------------- ------------
FINANCE--3.5%
-------------------------------------------------
Americo Life, Inc., Sr. Sub. Note, 9.25%, 1,548,750
1,500,000 6/1/2005
-------------------------------------------------
1,000,000 Navistar Financial Corp. Owner Trust 1995-A , Sr.
Sub. Note, 8.875%, 11/15/1998 1,024,241
-------------------------------------------------
Presidential Life Corp., Sr. Note, 9.50%, 1,556,250
1,500,000 12/15/2000
-------------------------------------------------
Reliance Group Holdings, Inc., Sr. Note, 9.00%, 1,306,250
1,250,000 11/15/2000
------------------------------------------------- ------------
Total 5,435,491
------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.6%
-------------------------------------------------
1,000,000 EnviroSource, Inc., Sr. Note, 9.75%, 6/15/2003 1,005,000
------------------------------------------------- ------------
OIL REFINING--1.5%
-------------------------------------------------
2,250,000 PDV America, Sr. Note, 7.25%, 8/1/1998 2,267,957
------------------------------------------------- ------------
PAPER/FOREST PRODUCTS/CONTAINERS--4.9%
-------------------------------------------------
Doman Industries, Ltd., Sr. Note, 8.75%, 995,000
1,000,000 3/15/2004
-------------------------------------------------
1,250,000 Fort Howard Corp., Sr. Sub. Note, 9.00%, 2/1/2006 1,358,749
-------------------------------------------------
1,000,000 Maxxam Group, Inc., Sr. Note, 11.25%, 8/1/2003 1,065,000
-------------------------------------------------
1,000,000 Repap New Brunswick, 1st Priority Sr. Secd. Note,
9.875%, 7/15/2000 1,012,500
-------------------------------------------------
1,000,000 Repap Wisconsin, Inc., 1st Priority Sr. Secd.
Note, 9.25%, 2/1/2002 1,058,750
-------------------------------------------------
2,000,000 (a)Stone Container Finance Co. CDA, Company
Guarantee, 11.50%, 8/15/2006 2,130,000
------------------------------------------------- ------------
Total 7,619,999
------------------------------------------------- ------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
REAL ESTATE DEVELOPMENT--1.0%
-------------------------------------------------
Granite Development Partners, Sr. Note, Series B, $ 1,477,500
$ 1,500,000 10.83%, 11/15/2003
------------------------------------------------- ------------
RETAIL TRADE--0.7%
-------------------------------------------------
(a)Nine West Group, Inc., Sr. Note, 8.375%, 1,010,000
1,000,000 8/15/2005
------------------------------------------------- ------------
SERVICES--2.0%
-------------------------------------------------
1,000,000 (a)Calpine Corp., Sr. Note, 8.75%, 7/15/2007 1,022,500
-------------------------------------------------
HMH Properties, Inc., Sr. Note, Series B, 9.50%, 1,057,500
1,000,000 5/15/2005
-------------------------------------------------
Prime Hospitality Corp., Sr. Sub. Note, 9.75%, 1,060,000
1,000,000 4/1/2007
------------------------------------------------- ------------
Total 3,140,000
------------------------------------------------- ------------
STEEL--1.7%
-------------------------------------------------
1,500,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 1,552,500
-------------------------------------------------
Bethlehem Steel Corp., Sr. Note, 10.375%, 1,080,000
1,000,000 9/1/2003
------------------------------------------------- ------------
Total 2,632,500
------------------------------------------------- ------------
TELECOMMUNICATIONS/CABLE--2.0%
-------------------------------------------------
Centennial Cellular Corp., Sr. Note, 8.875%, 1,020,000
1,000,000 11/1/2001
-------------------------------------------------
Lenfest Communications Inc., Sr. Note, 8.375%, 1,007,500
1,000,000 11/1/2005
-------------------------------------------------
Teleport Communications Group, Inc., Sr. Note, 1,097,500
1,000,000 9.875%, 7/1/2006
------------------------------------------------- ------------
Total 3,125,000
------------------------------------------------- ------------
TRANSPORTATION--4.1%
-------------------------------------------------
Eletson Holdings, Inc., 1st Mtg. Note, 9.25%, 1,541,250
1,500,000 11/15/2003
-------------------------------------------------
1,389,000 Piedmont Aviation, 10.15%, 3/28/2003 1,451,505
-------------------------------------------------
852,000 Piedmont Aviation, 9.90%, 1/15/2001 862,650
-------------------------------------------------
1,500,000 Sea Containers Ltd., Sr. Note, 9.50%, 7/1/2003 1,552,500
-------------------------------------------------
896,000 USAir, Inc., 9.90%, 1/15/2001 885,920
------------------------------------------------- ------------
Total 6,293,825
------------------------------------------------- ------------
UTILITIES-ELECTRIC--2.2%
-------------------------------------------------
1,000,000 Cleveland Electric Illuminating Co., 1st Mtg.
Bond, 9.50%, 5/15/2005 1,090,000
-------------------------------------------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
UTILITIES-ELECTRIC--CONTINUED
-------------------------------------------------
$ 2,218,808 (a)Tucson Electric Power Co., 10.21%, 1/1/2009 $ 2,307,561
------------------------------------------------- ------------
Total 3,397,561
------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST 41,220,583
$39,374,399)
------------------------------------------------- ------------
FOREIGN SECURITIES--1.0%
---------------------------------------------------------------
TELECOMMUNICATIONS--1.0%
-------------------------------------------------
CAD 2,000,000 Rogers Cablesystems, Ltd., Sr. Secd. Note, 9.65%,
1/15/2014 (IDENTIFIED COST $1,511,716) 1,545,948
------------------------------------------------- ------------
MORTGAGE BACKED SECURITIES--31.1%
---------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--31.1%
-------------------------------------------------
35,403 Pool E00434, 7.00%, 5/1/2011 35,809
-------------------------------------------------
975,488 Pool E00466, 7.00%, 1/1/2012 986,676
-------------------------------------------------
993,214 Pool E00497, 7.00%, 7/1/2012 1,004,139
-------------------------------------------------
1,627,552 Pool E20217, 7.00%, 1/1/2011 1,646,202
-------------------------------------------------
3,643,090 Pool E20271, 7.00%, 11/1/2011 3,684,872
-------------------------------------------------
702,239 Pool E64769, 7.00%, 7/1/2011 710,292
-------------------------------------------------
264,596 Pool E64891, 7.00%, 7/1/2011 267,631
-------------------------------------------------
1,498,267 Pool E65184, 7.00%, 8/1/2011 1,515,450
-------------------------------------------------
440,315 Pool E65186, 7.00%, 8/1/2011 445,365
-------------------------------------------------
58,006 Pool E65399, 7.00%, 9/1/2011 58,671
-------------------------------------------------
459,199 Pool E65450, 7.00%, 10/1/2011 464,466
-------------------------------------------------
283,376 Pool E65454, 7.00%, 10/1/2011 286,626
-------------------------------------------------
163,361 Pool E65468, 7.00%, 10/1/2011 165,235
-------------------------------------------------
2,208,871 Pool E65490, 7.00%, 10/1/2011 2,234,205
-------------------------------------------------
2,821,959 Pool E65503, 7.00%, 10/1/2011 2,854,324
-------------------------------------------------
304,766 Pool E65597, 7.00%, 10/1/2011 308,261
-------------------------------------------------
241,313 Pool E65645, 7.00%, 11/1/2011 244,080
-------------------------------------------------
643,716 Pool E65660, 7.00%, 11/1/2011 651,099
-------------------------------------------------
786,446 Pool E65690, 7.00%, 11/1/2011 795,466
-------------------------------------------------
1,523,500 Pool E65702, 7.00%, 11/1/2011 1,540,973
-------------------------------------------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- --------------------------------------------- ------------
<C> <S> <C>
MORTGAGE BACKED SECURITIES--CONTINUED
-----------------------------------------------------------
$ 945,741 Pool E65703, 7.00%, 11/1/2011 $ 956,588
---------------------------------------------
1,908,905 Pool E65712, 7.00%, 12/1/2011 1,930,799
---------------------------------------------
326,516 Pool E65717, 7.00%, 11/1/2011 330,261
---------------------------------------------
1,026,390 Pool E65723, 7.00%, 11/1/2011 1,038,161
---------------------------------------------
409,609 Pool E65750, 7.00%, 11/1/2011 414,307
---------------------------------------------
34,080 Pool E65759, 7.00%, 12/1/2011 34,471
---------------------------------------------
3,252,636 Pool E67171, 7.00%, 7/1/2012 3,288,412
---------------------------------------------
2,981,906 Pool E67276, 7.00%, 8/1/2012 3,014,704
---------------------------------------------
30,851 Pool G10524, 7.00%, 5/1/2011 31,205
---------------------------------------------
596,894 Pool G10556, 7.00%, 7/1/2011 603,740
---------------------------------------------
298,671 Pool G10590, 7.00%, 10/1/2011 302,097
---------------------------------------------
16,291,034 Pool G10690, 7.00%, 7/1/2012 16,470,219
--------------------------------------------- ------------
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED 48,314,806
COST $47,988,240)
--------------------------------------------- ------------
U.S. TREASURY--37.5%
-----------------------------------------------------------
U.S. TREASURY BONDS--13.7%
---------------------------------------------
20,000,000 7.25%, 5/15/2004 21,256,240
--------------------------------------------- ------------
U.S. TREASURY NOTES--23.8%
---------------------------------------------
35,000,000 7.00%, 7/15/2006 36,914,047
--------------------------------------------- ------------
TOTAL U.S. TREASURY (IDENTIFIED COST 58,170,287
$56,623,205)
--------------------------------------------- ------------
(B)REPURCHASE AGREEMENT--2.9%
-----------------------------------------------------------
4,512,438 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) 4,512,438
--------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $153,764,062
$150,009,998)(C)
--------------------------------------------- ------------
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $6,470,061 which represents 4.2% of net assets.
(b) The repurchase agreement is fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $150,009,998.
The net unrealized appreciation of investments on a federal tax basis
amounts to $3,754,064 which is comprised of $3,781,564 appreciation and
$27,500 depreciation at September 30, 1997.
BLANCHARD FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
Note: The categories of investments are shown as a percentage of net assets
($155,222,701) at September 30, 1997.
The following acronyms are used throughout this portfolio:
CAD--Canadian Dollars
CDA--Community Development Administration
(See Notes which are an integral part of the Financial Statements)
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS--4.5%
---------------------------------------------------------------
FINANCIAL SERVICES--0.4%
---------------------------------------------------
$ 4,796 CMC Securities Corp. 1993-A, Series 1993-A, Class
A2, 7.50%, 2/25/2023 $ 4,785
---------------------------------------------------
583,666 Merrill Lynch Mortgage Investors, Series 1990-I,
Class A, 9.20%, 1/15/2011 583,223
--------------------------------------------------- ------------
Total 588,008
--------------------------------------------------- ------------
GOVERNMENT/AGENCY--4.1%
---------------------------------------------------
1,892,678 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-3,
Series 1992-3, Class A2, 6.45%, 10/25/2019 1,896,823
---------------------------------------------------
1,283,183 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-3,
Series 1992-3, Class A3, 6.05%, 6/25/2021 1,287,200
---------------------------------------------------
1,412,944 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-6,
Series 1992-6, Class A4, 7.36%, 11/25/2025 1,423,542
---------------------------------------------------
774,275 Resolution Trust Corp. Mtg. Pass-Thru 1992-C1,
Series 1992-C1, Class A1, 8.80%, 8/25/2023 781,778
--------------------------------------------------- ------------
Total 5,389,343
--------------------------------------------------- ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(IDENTIFIED COST $5,841,278) 5,977,351
--------------------------------------------------- ------------
CORPORATE BONDS--29.3%
---------------------------------------------------------------
AEROSPACE/DEFENSE--0.4%
---------------------------------------------------
500,000 Sequa Corp., Sr. Note, 8.75%, 12/15/2001 511,250
--------------------------------------------------- ------------
AIRLINES--0.1%
---------------------------------------------------
200,000 USAir, Inc., 9.80%, 1/15/2000 208,250
--------------------------------------------------- ------------
CHEMICALS--1.9%
---------------------------------------------------
500,000 Borden Chemicals & Plastics Operating, Note, 9.50%,
5/1/2005 528,750
---------------------------------------------------
Harris Chemical North America, Inc., Sr. Note, 523,750
500,000 10.25%, 7/15/2001
---------------------------------------------------
300,000 ISP Holdings, Inc., Sr. Note, 9.00%, 10/15/2003 315,000
---------------------------------------------------
500,000 Kaiser Aluminum & Chemical Corp., Sr. Note, 9.875%,
2/15/2002 522,500
---------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------------- ------------
<C> <S> <C>
CHEMICALS--CONTINUED
-------------------------------------------------
$ 600,000 SIFTO Canada, Inc., Sr. Note, 8.50%, 7/15/2000 $ 612,000
------------------------------------------------- ------------
Total 2,502,000
------------------------------------------------- ------------
CONSUMER RELATED--4.0%
-------------------------------------------------
750,000 Chiquita Brands International Inc., Sr. Note,
9.625%, 1/15/2004 795,000
-------------------------------------------------
800,000 HMH Properties, Inc., Sr. Note, Series B, 9.50%,
5/15/2005 846,000
-------------------------------------------------
2,460,000 RJR Nabisco, Inc., Note, 8.75%, 7/15/2007 2,615,172
-------------------------------------------------
1,000,000 Revlon Consumer Products Corp., Note, 9.375%,
4/1/2001 1,037,500
------------------------------------------------- ------------
Total 5,293,672
------------------------------------------------- ------------
CONTAINERS-PAPER/PLASTIC--0.8%
-------------------------------------------------
500,000 Container Corp. of America, Sr. Note, 11.25%,
5/1/2004 555,000
-------------------------------------------------
500,000 Sea Containers Ltd., 9.50%, 7/1/2003 517,500
------------------------------------------------- ------------
Total 1,072,500
------------------------------------------------- ------------
ENERGY MINERALS--1.4%
-------------------------------------------------
2,000,000 USX Marathon Group, 5.75%, 7/1/2001 1,962,500
------------------------------------------------- ------------
ENTERTAINMENT--4.2%
-------------------------------------------------
1,000,000 Caesars World, Inc., Sr. Sub. Note, 8.875%,
8/15/2002 1,037,500
-------------------------------------------------
1,000,000 Harrah's Operations, Inc., Sr. Sub. Note, 8.75%,
3/15/2000 1,027,500
-------------------------------------------------
405,000 Host Marriot Travel Plazas Inc., Sr. Note, 9.50%,
5/15/2005 430,312
-------------------------------------------------
900,000 Station Casinos, Inc., Sr. Sub. Note, 9.625%,
6/1/2003 904,500
-------------------------------------------------
1,000,000 Time Warner Entertainment Co. LP, Note, 9.625%,
5/1/2002 1,116,927
-------------------------------------------------
600,000 Trump Atlantic City Associations, Company
Guarantee, 11.25%, 5/1/2006 584,250
-------------------------------------------------
500,000 Viacom, Inc., Sub. Deb., 8.00%, 7/7/2006 500,000
------------------------------------------------- ------------
Total 5,600,989
------------------------------------------------- ------------
FINANCIAL SERVICES--1.9%
-------------------------------------------------
500,000 Navistar Financial Corp. Owner Trust 1995-A , Sr.
Sub. Note, 8.875%, 11/15/1998 512,120
-------------------------------------------------
500,000 Presidential Life Corp., Sr. Note, 9.50%,
12/15/2000 518,750
-------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
FINANCIAL SERVICES--CONTINUED
---------------------------------------------------
$ 1,000,000 Reliance Group Holdings, Inc., Sr. Note, 9.00%,
11/15/2000 $ 1,045,000
---------------------------------------------------
500,000 Williams Scotsman, Inc., Sr. Note, 9.875%, 6/1/2007 512,500
--------------------------------------------------- ------------
Total 2,588,370
--------------------------------------------------- ------------
INDUSTRIAL RELATED--2.9%
---------------------------------------------------
850,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 879,750
---------------------------------------------------
350,000 Bethlehem Steel Corp., Sr. Note, 10.375%, 9/1/2003 378,000
---------------------------------------------------
500,000 Exide Corp., Sr. Note, 10.75%, 12/15/2002 531,250
---------------------------------------------------
500,000 Fort Howard Corp., Sr. Sub. Note, 9.00%, 2/1/2006 543,499
---------------------------------------------------
700,000 John Q. Hammon Hotels, 1st Mtg. Bond, 8.875%,
2/15/2004 710,500
---------------------------------------------------
500,000 Unisys Corp., Deb., 9.50%, 7/15/1998 503,750
---------------------------------------------------
300,000 Unisys Corp., Sr. Note, 10.625%, 10/1/1999 311,250
--------------------------------------------------- ------------
Total 3,857,999
--------------------------------------------------- ------------
OIL REFINING--1.1%
---------------------------------------------------
1,000,000 Clark Oil Refining and Corp. Del, Sr. Note, 10.50%,
12/1/2001 1,035,000
---------------------------------------------------
500,000 PDV America Inc., Sr. Note, 7.25%, 8/1/1998 503,991
--------------------------------------------------- ------------
Total 1,538,991
--------------------------------------------------- ------------
PAPER PRODUCTS--2.0%
---------------------------------------------------
500,000 Repap New Brunswick Inc., 1st Priority Sr. Secd.
Note, 9.875%, 7/15/2000 506,250
---------------------------------------------------
500,000 Repap New Brunswick Inc., Sr. Note, 9.0625%,
7/15/2000 495,000
---------------------------------------------------
700,000 Repap Wisconsin, Inc., 1st Priority Sr. Secd. Note,
9.25%, 2/1/2002 741,125
---------------------------------------------------
700,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 714,875
---------------------------------------------------
200,000 Stone Container Corp., Sr. Sub. Note, 11.00%,
8/15/1999 208,500
--------------------------------------------------- ------------
Total 2,665,750
--------------------------------------------------- ------------
PRINTING & PUBLISHING--0.5%
---------------------------------------------------
600,000 World Color Press Inc., Sr. Sub. Note, 9.125%,
3/15/2003 630,750
--------------------------------------------------- ------------
RETAIL TRADE--0.7%
---------------------------------------------------
1,000,000 Nine West Group, Inc., Sr. Note, 8.375%, 8/15/2005 1,010,000
--------------------------------------------------- ------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
SERVICES--1.2%
---------------------------------------------------
$ 600,000 Fleming Cos., Inc., Sr. Note, 10.625%, 12/15/2001 $ 642,000
---------------------------------------------------
500,000 Marcus Cable Operating Co. LP, Sr. Disc. Note,
0/13.50%, 8/1/2004 453,750
---------------------------------------------------
500,000 Prime Hospitality Corp., 1st Mtg. Bond, 9.25%,
1/15/2006 526,875
--------------------------------------------------- ------------
Total 1,622,625
--------------------------------------------------- ------------
STEEL--0.6%
---------------------------------------------------
750,000 Wheeling Pittsburgh Corp., Sr. Note, 9.375%,
11/15/2003 774,375
--------------------------------------------------- ------------
TELECOMMUNICATIONS--4.0%
---------------------------------------------------
750,000 Centennial Cellular Corp., Sr. Note, 8.875%,
11/1/2001 765,000
---------------------------------------------------
750,000 Century Communications, Corp., Sr. Note, 9.75%,
2/15/2002 795,000
---------------------------------------------------
1,000,000 Comcast Corp., Sr. Sub. Deb., 9.375%, 5/15/2005 1,075,000
---------------------------------------------------
1,000,000 Videotron Group Ltd., Sr. Note, 10.625%, 2/15/2005 1,110,000
---------------------------------------------------
1,000,000 Lenfest Communications Inc., Sr. Note, 8.375%,
11/1/2005 1,007,500
---------------------------------------------------
500,000 Olympus Communications LP, Sr. Note, 10.625%,
11/15/2006 544,375
--------------------------------------------------- ------------
Total 5,296,875
--------------------------------------------------- ------------
TEXTILE PRODUCTS--0.4%
---------------------------------------------------
500,000 Dominion Textile USA Inc., Sr. Note, 8.875%,
11/1/2003 513,750
--------------------------------------------------- ------------
UTILITIES-ELECTRIC--1.2%
---------------------------------------------------
500,000 Jones Intercable, Inc., Sr. Note, 9.625%, 3/15/2002 537,500
---------------------------------------------------
1,000,000 Long Island Lighting Co., Deb., 7.30%, 7/15/1999 1,016,131
--------------------------------------------------- ------------
Total 1,553,631
--------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $37,300,571) 39,204,277
--------------------------------------------------- ------------
CORPORATE NOTE--0.8%
---------------------------------------------------------------
TELECOMMUNICATIONS--0.8%
---------------------------------------------------
1,000,000 Rogers Cablesystems Ltd., Note, 9.625%, 8/1/2002
(identified cost $1,006,758) 1,075,000
--------------------------------------------------- ------------
U.S. TREASURY OBLIGATIONS--61.8%
---------------------------------------------------------------
U.S. TREASURY NOTES--61.8%
---------------------------------------------------
15,000,000 5.75%, 12/31/1998 15,009,375
---------------------------------------------------
20,000,000 6.125%, 5/15/1998 20,075,000
---------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS--CONTINUED
---------------------------------------------------------------
U.S. TREASURY NOTES--CONTINUED
---------------------------------------------------
$20,000,000 6.25%, 3/31/1999 $ 20,143,740
---------------------------------------------------
27,000,000 6.875%, 8/31/1999 27,514,674
--------------------------------------------------- ------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST
$82,053,737) 82,742,789
--------------------------------------------------- ------------
(B)REPURCHASE AGREEMENT--2.9%
---------------------------------------------------------------
3,832,176 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997 (at amortized cost) 3,832,176
--------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $130,034,520)(C) $132,831,593
--------------------------------------------------- ------------
</TABLE>
(a) Denotes variable rate securities which show current rate.
(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 $130,034,520.
The net unrealized appreciation of investments on a federal tax basis
amounts to $2,797,073 which is comprised of $2,812,462 appreciation and
$15,389 depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($133,877,535) at September 30, 1997.
The following acronym is used throughout this portfolio:
LP--Limited Partnership
(See Notes which are an integral part of the Financial Statements)
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--94.5%
--------------------------------------------------------
ALASKA--4.1%
---------------------------------------------
$1,000,000 Valdez, AK Marine Terminal, Revenue Refunding
Bonds (Series B), 5.50% (BP Pipeline Inc.),
10/1/2028 AA $ 983,917
--------------------------------------------- -----------
CALIFORNIA--8.1%
---------------------------------------------
1,000,000 California State Department of Water
Resources, Revenue Refunding Bonds, 5.375%
(Original Issue Yield: 5.67%), 12/1/2027 AAA 994,002
---------------------------------------------
1,000,000 East Bay Municipal Utility District, CA,
Water System Subordinated Refunding Revenue
Bonds (Series 1996), 5.00% (FGIC
INS)/(Original Issue Yield: 5.39%), 6/1/2026 AAA 947,502
--------------------------------------------- -----------
Total 1,941,504
--------------------------------------------- -----------
FLORIDA--8.0%
---------------------------------------------
1,000,000 Dade County, FL Water & Sewer System, Revenue
Bonds, 5.25% (FGIC INS)/(Original Issue
Yield: 5.70%), 10/1/2026 AAA 979,577
---------------------------------------------
1,000,000 Florida State Board of Education Capital
Outlay, GO UT, (Series A), 5.00% (Original
Issue Yield: 5.40%), 6/1/2027 AA+ 948,163
--------------------------------------------- -----------
Total 1,927,740
--------------------------------------------- -----------
ILLINOIS--16.5%
---------------------------------------------
1,000,000 Cook County, IL, GO UT Refunding Bonds (Series B), 5.375% (MBIA
INS)/(Original Issue
Yield: 5.72%), 11/15/2018 AAA 1,001,236
---------------------------------------------
1,000,000 Illinois Health Facilities Authority, Revenue
Bonds Daily VRDNs (Healthcorp Affiliates) Aaa 1,000,000
---------------------------------------------
1,000,000 Illinois State Sales Tax, Refunding Revenue
Bonds (Series Q), 5.50% (Original Issue
Yield: 6.202%), 6/15/2020 AAA 1,000,000
---------------------------------------------
1,000,000 Metropolitan Pier & Exposition Authority, IL,
Revenue Refunding Bonds, 5.25% (McCormick
Plan Expansion Project)/(AMBAC INS)/(Original
Issue Yield: 5.90%), 6/15/2027 AAA 972,077
--------------------------------------------- -----------
Total 3,973,313
--------------------------------------------- -----------
</TABLE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
--------------------------------------------------------
INDIANA--4.2%
---------------------------------------------
$1,000,000 Purdue University, IN, Student Fees Revenue
Bonds (Series H), Weekly VRDNs (Purdue
University, IN LOC) AA- $ 1,000,000
--------------------------------------------- -----------
MASSACHUSETTS--3.9%
---------------------------------------------
1,000,000 Massachusetts Water Resources Authority,
Water Revenue Bonds, 5.00% (Original Issue
Yield: 5.35%), 12/1/2025 AAA 942,362
--------------------------------------------- -----------
MICHIGAN--4.1%
---------------------------------------------
1,000,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds,
5.25% (Henry Ford Health System, MI)/(Original Issue Yield:
5.70%), 11/15/2025 AA 984,047
--------------------------------------------- -----------
NEVADA--4.1%
---------------------------------------------
1,000,000 Clark County, NV School District, GO UT,
5.25% (Original Issue Yield: 5.83%),
6/15/2017 AAA 996,268
--------------------------------------------- -----------
NEW JERSEY--4.2%
---------------------------------------------
1,000,000 New Jersey State Transportation Trust Fund
Agency, Revenue Bonds, 5.25% (Original Issue
Yield: 5.70%), 6/15/2016 A+ 1,004,261
--------------------------------------------- -----------
NEW YORK--20.8%
---------------------------------------------
1,000,000 New York City Municipal Water Finance
Authority, Revenue Bonds, 5.50% (Original
Issue Yield: 5.855%), 6/15/2027 AAA 1,003,925
---------------------------------------------
1,000,000 New York State Dormitory Authority, Revenue
Bonds, 5.25% (Monte Fiore Medical
Center)/(AMBAC and FHA INSs)/(Original Issue
Yield: 5.53%), 2/1/2015 AAA 1,006,724
---------------------------------------------
1,000,000 New York State Local Government Assistance
Corp., Refunding Revenue Bonds (Series B),
5.50% (Original Issue Yield: 5.97%), 4/1/2021 A 1,003,043
---------------------------------------------
1,000,000 New York State Medical Care Facilities
Finance Agency, Revenue Refunding Bonds,
5.375% (Presbyterian Hospital)/(Original
Issue Yield: 5.52%), 2/15/2025 AAA 995,669
---------------------------------------------
1,000,000 Port Authority of New York and New Jersey,
Revenue Bonds (104th Series), 5.20% (AMBAC
INS)/(Original Issue Yield: 5.35%), 7/15/2021 AAA 990,487
--------------------------------------------- -----------
Total 4,999,848
--------------------------------------------- -----------
</TABLE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
--------------------------------------------------------
TEXAS--8.2%
---------------------------------------------
$1,000,000 Coastal Bend Health Facilities Development
Corp., TX, Revenue Bonds Weekly VRDNs
(Incarnate World Health Systems)/(First
National Bank of Chicago LOC) Aa3 $ 1,000,000
---------------------------------------------
1,000,000 San Antonio, TX, Electric & Gas, Revenue Refunding Bonds, 5.00%
(Original Issue Yield:
5.275%), 2/1/2014 AA 980,250
--------------------------------------------- -----------
Total 1,980,250
--------------------------------------------- -----------
WASHINGTON--4.2%
---------------------------------------------
1,000,000 Port of Seattle, WA, Revenue Bonds, 5.50%
(FGIC INS)/(Original Issue Yield: 5.80%),
10/1/2022 AAA 1,008,212
--------------------------------------------- -----------
WISCONSIN--4.2%
---------------------------------------------
1,000,000 Wisconsin State Transportation, Revenue Bonds
(Series B), 5.50% (Original Issue Yield:
5.912%), 7/1/2022 AA- 1,004,466
--------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST
$21,420,079) 22,746,188
--------------------------------------------- -----------
MUTUAL FUND SHARES--4.2%
--------------------------------------------------------
999,900 Dreyfus Tax Exempt Cash Management (AT NET
ASSET VALUE) 999,900
--------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST
$22,419,979)(A) $23,746,088
--------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
(a) The cost of investments for federal tax purposes amounts to $22,419,979. The
unrealized appreciation of investments on a federal tax basis amounts to
$1,326,109 at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($24,076,686) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company FHA--Federal Housing Administration GO--General Obligation
INS--Insured LOC--Letter of Credit MBIA--Municipal Bond Investors Assurance
UT--Unlimited Tax VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROUP OF FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD BLANCHARD
BLANCHARD BLANCHARD BLANCHARD SHORT -TERM FLEXIBLE
GLOBAL PRECIOUS METALS FLEXIBLE FLEXIBLE TAX-FREE
GROWTH FUND FUND, INC. INCOME FUND INCOME FUND BOND FUND
- ------------------------ ----------- --------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
- ------------------------
Investments in
repurchase agreements $ 1,176,958 $ 5,492,706 $ 4,512,438 $ 3,832,176 $ --
- ------------------------
Investments in
securities 60,074,984 63,335,105 149,251,624 128,999,417 23,746,088
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total investments in
securities, at value $61,251,942 $68,827,811 $153,764,062 $132,831,593 $23,746,088
- ------------------------
Cash -- -- -- -- 72
- ------------------------
Income receivable 330,910 191,606 2,362,460 2,479,981 365,497
- ------------------------
Receivable for
investments sold 1,820,484 485,614 -- -- --
- ------------------------
Receivable for shares
sold 1,350 1,250,418 72,325 46,320 41,115
- ------------------------
Net receivable for
foreign currency
exchange contracts sold 150,030 -- -- -- --
- ------------------------
Deferred organizational
costs -- -- 15,094 17,490 16,399
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total assets 63,554,716 70,755,449 156,213,941 135,375,384 24,169,171
- ------------------------ ----------- ----------- ------------ ------------ -----------
LIABILITIES:
- ------------------------
Payable for investments
purchased 1,024,123 2,114,799 -- -- --
- ------------------------
Payable for shares
redeemed 60,354 605,097 272,640 497,950 24,696
- ------------------------
Income distribution
payable -- -- 446,081 75,908 40,374
- ------------------------
Payable to Bank -- 803,519 -- 625,000 --
- ------------------------
Payable for forward
foreign currency
exchange contracts -- -- 7,439 -- --
- ------------------------
Payable for taxes
withheld 7,796 3,188 -- --
- ------------------------
Payable for daily
variation margin 63,340 -- -- -- --
- ------------------------
Accrued expenses 201,737 191,606 265,080 298,991 27,415
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total liabilities 1,357,350 3,718,209 991,240 1,497,849 92,485
- ------------------------ ----------- ----------- ------------ ------------ -----------
NET ASSETS CONSIST OF:
- ------------------------
Paid in capital 53,368,473 92,377,394 168,418,381 140,351,915 23,120,612
- ------------------------
Net unrealized
appreciation
(depreciation) of
investments, translation
of assets and
liabilities in foreign
currency, and futures
contracts 821,161 (21,203,902) 3,746,717 2,798,583 1,326,109
- ------------------------
Accumulated net realized
gain (loss) on
investments, foreign
currency transactions,
and futures contracts 7,100,967 (5,605,824) (16,630,125) (9,171,223) (354,461)
- ------------------------
Distributions in excess
of/Undistributed net
investment income 906,765 1,469,572 (312,272) (101,740) (15,574)
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total Net Assets $62,197,366 $67,037,240 $155,222,701 $133,877,535 $24,076,686
- ------------------------ ----------- ----------- ------------ ------------ -----------
NET ASSET VALUE,
OFFERING PRICE AND
REDEMPTION PROCEEDS PER
SHARE: $ 10.54 $ 5.37 $ 4.98 $ 3.04 $ 5.56
- ------------------------ ----------- ----------- ------------ ------------ -----------
Shares Outstanding 5,899,615 12,486,361 31,152,932 44,036,295 4,328,344
- ------------------------ ----------- ----------- ------------ ------------ -----------
Investments, at
identified cost $60,621,797 $90,031,550 $150,009,998 $130,034,520 $22,419,979
- ------------------------ ----------- ----------- ------------ ------------ -----------
Investments, at tax cost $60,689,138 $90,719,260 $150,009,998 $130,034,520 $22,419,979
- ------------------------ ----------- ----------- ------------ ------------ -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROUP OF FUNDS
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD BLANCHARD
BLANCHARD BLANCHARD BLANCHARD SHORT -TERM FLEXIBLE
GLOBAL PRECIOUS METALS FLEXIBLE FLEXIBLE TAX-FREE
GROWTH FUND FUND, INC. INCOME FUND INCOME FUND BOND FUND
- ------------------------ ----------- --------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------
Dividends $ 376,712(a) $ 675,606(c) $ -- $ -- $ --
- ------------------------
Interest 2,434,670(b) 631,572 13,043,023 10,247,264 1,236,154
- ------------------------ ---------- ------------ ----------- ----------- ----------
Total income 2,811,382 1,307,178 13,043,023 10,247,264 1,236,154
- ------------------------ ---------- ------------ ----------- ----------- ----------
EXPENSES:
- ------------------------
Management fee 645,955 744,283 1,273,719 1,095,713 169,751
- ------------------------
Administrative personnel
and services fee 75,000 78,467 165,355 142,259 75,000
- ------------------------
Custodian fees 63,163 50,200 68,539 48,762 16,080
- ------------------------
Transfer and dividend
disbursing agent fees
and expenses 118,177 77,453 317,118 343,119 37,447
- ------------------------
Directors'/Trustees'
fees 2,098 2,544 3,267 3,420 1,598
- ------------------------
Auditing fees 20,726 21,698 20,688 12,277 26,804
- ------------------------
Legal fees 2,939 2,290 1,764 1,653 85
- ------------------------
Portfolio accounting
fees 49,714 54,606 57,885 49,725 43,386
- ------------------------
Distribution services
fee 484,467 558,212 424,573 365,238 56,584
- ------------------------
Share registration costs 11,775 21,568 12,098 13,477 11,706
- ------------------------
Printing and postage 61,840 28,849 33,894 48,635 7,825
- ------------------------
Insurance premiums 2,255 1,873 1,665 2,288 1,412
- ------------------------
Taxes 495 697 495 495 --
- ------------------------
Miscellaneous 2,018 1,786 34,211 18,580 17,258
- ------------------------ ---------- ------------ ----------- ----------- ----------
Total expenses 1,540,622 1,644,526 2,415,271 2,145,641 464,936
- ------------------------ ---------- ------------ ----------- ----------- ----------
WAIVERS--
- ------------------------
Waiver of management fee -- -- -- (129,528) (142,067)
- ------------------------
Waiver of administrative
personnel and services
fee -- -- -- -- (39,951)
- ------------------------
Waiver of distribution
services fee -- -- -- -- (56,584)
- ------------------------ ---------- ------------ ----------- ----------- ----------
Total waivers -- -- -- (129,528) (238,602)
- ------------------------ ---------- ------------ ----------- ----------- ----------
Net expenses 1,540,622 1,644,526 2,415,271 2,016,113 226,334
- ------------------------ ---------- ------------ ----------- ----------- ----------
Net investment income
(loss) 1,270,760 (337,348) 10,627,752 8,231,151 1,009,820
- ------------------------ ---------- ------------ ----------- ----------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS, FOREIGN
CURRENCY, AND FUTURES
CONTRACTS:
- ------------------------
Net realized gain (loss)
on investments, foreign
currency transactions,
and futures contracts 8,407,403 (2,561,982) 2,191,827 483,971 285,298
- ------------------------
Net change in unrealized
appreciation
(depreciation) of
investments, translation
of assets and liablities
in foreign currency, and
futures contracts (1,721,197) (9,413,528) 2,926,980 1,694,128 784,728
- ------------------------ ---------- ------------ ----------- ----------- ----------
Net realized and
unrealized gain (loss)
on investments 6,686,206 (11,975,510) 5,118,807 2,178,099 1,070,026
- ------------------------ ---------- ------------ ----------- ----------- ----------
Change in net assets
resulting from
operations $7,956,966 $(12,312,858) $15,746,559 $10,409,250 $2,079,846
- ------------------------ ---------- ------------ ----------- ----------- ----------
</TABLE>
(a) Net of Foreign taxes withheld $33,962.
(b) Net of Foreign taxes withheld $4,228.
(c) Net of Foreign taxes withheld $47,201.
(See Notes which are an integral part of the Financial Statements)
THE BLANCHARD GROUP OF FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD GLOBAL BLANCHARD PRECIOUS
GROWTH FUND METALS FUND, INC.
--------------------------------------- ----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
---------------- ------------- ------------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS:
----------------
OPERATIONS--
----------------
Net investment
income/operating
(loss) $ 1,270,760 $ 465,544 $ 295,860 $ (337,348) $ (500,885) $ (1,069,928)
----------------
Net realized
gain (loss) on
investments,
foreign currency
transactions and
futures
contracts 8,407,403 6,148,207 8,019,815 (2,561,982) 10,615,594 13,950,013
----------------
Net change in
unrealized
appreciation/depreciation
of investments,
translation of
assets and
liablities in
foreign
currency, and
futures
contracts (1,721,197) (5,394,534) 5,636,916 (9,413,528) (19,953,719) 13,616,081
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
operations 7,956,966 1,219,217 13,952,591 (12,312,858) (9,839,010) 26,496,166
---------------- ----------- ----------- ----------- ----------- ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS--
----------------
Distributions
from net
investment
income (1,170,525) -- (295,860) (2,843,687) -- --
----------------
Distributions
from net
realized gains (12,602,965) (20,849,369) -- --
----------------
Distributions in
excess of net
investment
income -- -- (274,732) -- -- --
----------------
Tax return of
capital -- -- -- -- -- --
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
distributions
to shareholders (13,773,490) -- (570,592) (23,693,056) -- --
---------------- ----------- ----------- ----------- ----------- ----------- ------------
SHARE
TRANSACTIONS--
----------------
Proceeds from
sale of shares 10,109,624 8,636,590 5,765,409 60,617,474 35,684,735 103,376,874
----------------
Net asset value
of shares issued
to shareholders
in payment of
distributions
declared 13,095,694 -- 548,261 21,735,905 -- --
----------------
Cost of shares
redeemed (23,098,557) (13,130,249) (35,601,975) (67,198,114) (67,247,212) (75,865,525)
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
share
transactions 106,761 (4,493,659) (29,288,305) 15,155,265 (31,562,477) 27,511,349
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets (5,709,763) (3,274,442) (15,906,306) (20,850,649) (41,401,487) 54,007,515
----------------
NET ASSETS:
----------------
Beginning of
period 67,907,129 71,181,571 87,087,877 87,887,889 129,289,376 75,281,861
---------------- ----------- ----------- ----------- ----------- ----------- ------------
End of period $62,197,366 $67,907,129 $71,181,571 $67,037,240 $87,887,889 $129,289,376
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Undistributed
net investment
income included
in net assets at
end of period $ 906,765 $ 818,136 $ -- $ 1,469,572 $ 2,856,971 $ 1,904,789
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Net gain (loss)
as computed for
federal tax
purposes $ 7,911,101 $ 6,561,362 $ 5,881,028 $ 76,050 $ 9,039,433 $ 12,174,374
---------------- ----------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
BLANCHARD FLEXIBLE
INCOME FUND
--------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996
- --------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS:
- ---------------------------
OPERATIONS--
- ---------------------------
Net investment
income/operating
(loss) $10,627,752 $ 5,059,729 $ 14,539,300
- ---------------------------
Net realized
gain (loss) on
investments,
foreign currency
transactions and
futures
contracts 2,191,827 175,174 480,236
- ---------------------------
Net change in
unrealized
appreciation/depreciation
of investments,
translation of
assets and
liablities in
foreign
currency, and
futures
contracts 2,926,980 2,016,909 5,042,160
- --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
operations 15,746,559 7,251,812 20,061,696
- --------------------------- -------------- -------------- --------------
DISTRIBUTIONS TO
SHAREHOLDERS--
- ---------------------------
Distributions
from net
investment
income (10,302,558) (5,012,727) (15,359,777)
- ---------------------------
Distributions
from net
realized gains -- -- --
- ---------------------------
Distributions in
excess of net
investment
income -- -- --
- ---------------------------
Tax return of
capital (342,877) (48,762) --
- --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
distributions
to shareholders (10,645,435) (5,061,489) (15,359,777)
- --------------------------- -------------- -------------- --------------
SHARE
TRANSACTIONS--
- ---------------------------
Proceeds from
sale of shares 33,454,106 13,294,718 60,702,516
- ---------------------------
Net asset value
of shares issued
to shareholders
in payment of
distributions
declared 8,400,717 4,042,963 11,757,432
- ---------------------------
Cost of shares
redeemed (79,085,787) (38,410,603) (133,349,811)
- --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
share
transactions (37,230,964) (21,072,922) (60,889,863)
- --------------------------- -------------- -------------- --------------
Change in net
assets (32,129,840) (18,882,599) (56,187,944)
- ---------------------------
NET ASSETS:
- ---------------------------
Beginning of
period 187,352,541 206,235,140 262,423,084
- --------------------------- -------------- -------------- --------------
End of period $155,222,701 $187,352,541 $ 206,235,140
- --------------------------- -------------- -------------- --------------
Undistributed
net investment
income included
in net assets at
end of period $ -- $ -- $ --
- --------------------------- -------------- -------------- --------------
Net gain (loss)
as computed for
federal tax
purposes $ 1,771,520 $ (1,335,786) $ (3,223,064)
- --------------------------- -------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE BLANCHARD GROUP OF FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD SHORT-TERM BLANCHARD FLEXIBLE
FLEXIBLE INCOME FUND TAX-FREE BOND FUND
------------------------------------------ -----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
- ------------------------ ------------- ------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
- ------------------------
OPERATIONS--
- ------------------------
Net investment income $ 8,231,151 $ 3,640,476 $ 3,088,222 $ 1,009,820 $ 461,956 $ 960,342
- ------------------------
Net realized gain (loss)
on investments, foreign
currency transactions
and futures contracts 483,971 (42,344) 511,538 285,298 39,445 891,432
- ------------------------
Net change in unrealized
appreciation/
depreciation of
investments, translation
of assets and liablities
in foreign currency, and
futures contracts 1,694,128 526,658 767,013 784,728 594,290 (406,293)
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from
operations 10,409,250 4,124,790 4,366,773 2,079,846 1,095,691 1,445,481
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS--
- ------------------------
Distributions from net
investment income (8,210,879) (3,150,985) (3,088,222) (1,005,915) (445,952) (960,342)
- ------------------------
Distributions from net
realized gains (45,361) -- -- -- -- --
- ------------------------
Distributions in excess
of net investment income -- -- (4,918) -- -- (8,706)
- ------------------------
Tax return of capital -- (529,561) -- -- -- --
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from
distributions to
shareholders (8,256,240) (3,680,546) (3,093,140) (1,005,915) (445,952) (969,048)
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
SHARE TRANSACTIONS--
- ------------------------
Proceeds from sale of
shares 34,559,663 12,700,025 13,369,396 10,279,470 6,936,750 26,287,368
- ------------------------
Proceeds from shares
issued in connection
with the acquisition of
Blanchard Short-Term
Global Income Fund -- -- 174,188,041 -- -- --
- ------------------------
Net asset value of
shares issued to
shareholders in payment
of distributions
declared 7,218,527 3,194,311 2,652,603 919,487 411,088 750,232
- ------------------------
Cost of shares redeemed (68,087,183) (36,071,531) (37,161,711) (10,766,336) (8,149,963) (24,287,075)
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from share
transactions (26,308,993) (20,177,195) 153,048,329 432,621 (802,125) 2,750,525
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets (24,155,983) (19,732,951) 154,321,962 1,506,552 (152,386) 3,226,958
- ------------------------
NET ASSETS:
- ------------------------
Beginning of period 158,033,518 177,766,469 23,444,507 22,570,134 22,722,520 19,495,562
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
End of period $133,877,535 $158,033,518 $177,766,469 $ 24,076,686 $22,570,134 $ 22,722,520
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Undistributed net
investment income
included in net assets
at end of period $ -- $ -- $ -- $ -- $ -- $ --
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Net gain (loss) as
computed for federal tax
purposes $ 483,971 $ 87,710 $ 493,015 $ -- $ -- $ --
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
[This Page Intentionally Left Blank]
63
BLANCHARD GROUP OF FUNDS
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NET REALIZED AND DISTRIBUTIONS
UNREALIZED FROM NET
GAIN/(LOSS) REALIZED GAINS
NET ON INVESTMENTS, ON INVESTMENTS,
YEAR NET ASSET INVESTMENT FUTURES DISTRIBUTIONS DISTRIBUTIONS FUTURES
ENDED VALUE INCOME/ CONTRACTS, AND TOTAL FROM FROM NET IN EXCESS OF TAX CONTRACTS, AND
APRIL30/ BEGINNING OPERATING FOREIGN CURRENCY INVESTMENT INVESTMENT NET INVESTMENT RETURN FOREIGN CURRENCY
SEPTEMBER 30, OF PERIOD (LOSS) TRANSACTIONS OPERATIONS INCOME INCOME(E) OF CAPITAL TRANSACTIONS
- ------------- --------- ---------- ---------------- ---------- ------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BGGF
1993 $ 9.92 0.25 0.32 0.57 (0.30) -- -- (0.19)
1994 $10.00 0.03 1.29 1.32 -- -- -- (1.28)
1995 $10.04 0.08 (0.19) (0.11) -- -- -- --
1996 $ 9.71 0.04 1.86 1.90 (0.04) (0.04) -- --
1996(a) $11.53 0.08 0.13 0.21 -- -- -- --
1997 $11.74 0.23 1.04 1.27 (0.21) -- -- (2.26)
BPMF
1993 $ 5.04 (0.08)(h) 1.87(h) 1.79 -- -- -- --
1994 $ 6.83 (0.11)(h) 2.01(h) 1.90 -- -- -- --
1995 $ 8.73 (0.02) (0.41) (0.43) -- -- (0.09) (0.03)
1996 $ 7.12 (0.10) 2.75 2.65 -- -- -- --
1996(a) $ 9.77 (0.10) (0.77) (0.87) -- -- -- --
1997 $ 8.90 (0.02) (0.96) (0.98) (0.30) -- -- (2.25)
BFIF
1993(b) $ 5.00 0.21 0.09 0.30 (0.21) -- -- --
1994 $ 5.09 0.40 (0.17) 0.23 (0.36) -- (0.03) (0.08)
1995 $ 4.85 0.30 (0.13) 0.17 (0.00)(i) -- (0.31) --
1996 $ 4.71 0.28 0.10 0.38 (0.31) -- -- --
1996(a) $ 4.78 0.15 0.04 0.19 (0.13) -- (0.00)(i) --
1997 $ 4.84 0.30 0.15 0.45 (0.30) -- (0.01) --
BSTFIF
1993(c) $ 3.00 0.00(i) 0.00(i) 0.00(i) (0.00)(i) -- -- (0.00)(i)
1994 $ 3.00 0.17 (0.06) 0.11 (0.17) -- -- (0.01)
1995 $ 2.93 0.15 -- 0.15 (0.14) (0.00)(i) -- --
1996 $ 2.94 0.22 -- 0.22 (0.17) (0.00)(i) -- --
1996(a) $ 2.99 0.07 0.01 0.08 (0.06) (0.00)(i) (0.01) --
1997 $ 3.00 0.17 0.04 0.21 (0.17) -- -- (0.00)(i)
BFTFBF
1994(d) $ 5.00 0.18 (0.20) (0.02) (0.18) -- -- (0.03)
1995 $ 4.77 0.24 0.26 0.50 (0.23) (0.01) -- --
1996 $ 5.03 0.22 0.13 0.35 (0.22) -- -- --
1996(a) $ 5.16 0.11 0.15 0.26 (0.11) -- -- --
1997 $ 5.31 0.25 0.25 0.50 (0.25) -- -- --
<CAPTION>
DISTRIBUTIONS
IN EXCESS OF
NET REALIZED
GAINS ON
INVESTMENTS,
YEAR FUTURES
ENDED CONTRACTS, AND
APRIL30/ FOREIGN CURRENCY
SEPTEMBER 30, TRANSACTIONS(E)
- ------------- ----------------
<S> <C>
BGGF
1993 --
1994 --
1995 (0.22)
1996 --
1996(a) --
1997 --
BPMF
1993 --
1994 --
1995 (1.06)
1996 --
1996(a) --
1997 --
BFIF
1993(b) --
1994 --
1995 --
1996 --
1996(a) --
1997 --
BSTFIF
1993(c) --
1994 --
1995 --
1996 --
1996(a) --
1997 --
BFTFBF
1994(d) --
1995 --
1996 --
1996(a) --
1997 --
</TABLE>
* Computed on an annualized basis.
(a) The Funds have changed their fiscal year end from April 30 to September 30.
Reflects operations for the period from May 1, 1996 to September 30, 1996.
(b) Reflects operations for the period from November 2, 1992 (commencement of
operations) to April 30, 1993.
(c) Reflects operations for the period from April 16, 1993 (commencement of
operations) to April 30, 1993.
(d) Reflects operations for the period from August 12, 1993 (commencement of
operations) to April 30, 1994.
(e) 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.
(f) Based on net asset value.
(g) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(h) Calculated based on average shares outstanding-prior years amounts restated
for comparative purposes.
(i) Less than one cent per share.
(j) 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)
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
------------------------------------
NET
INVESTMENT NET ASSETS,
NET ASSET INCOME/ EXPENSE END AVERAGE PORTFOLIO
TOTAL VALUE, AND TOTAL OPERATING WAIVER/ OF PERIOD COMMISSIONS TURNOVER
DISTRIBUTIONS OF PERIOD RETURN(F) EXPENSES (LOSS) REIMBURSEMENT(G) (000 OMITTED) RATE PAID(J) RATE
- ------------- ---------- --------- -------- ---------- ---------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.49) $10.00 6.08% 2.40% 1.72% -- $ 84,780 -- 138%
(1.28) $10.04 12.91% 2.61% 0.67% -- $109,805 -- 166%
(0.22) $ 9.71 (1.04%) 2.51% 0.76% -- $ 87,088 -- 221%
(0.08) $11.53 19.68% 2.54% 0.38% -- $ 71,182 -- 91%
-- $11.74 1.91% 2.52%* 1.60%* -- $ 67,907 $0.0040 47%
(2.47) $10.54 13.20% 2.39% 1.97% -- $ 62,197 $0.0049 49%
-- $ 6.83 35.50% 3.24% (1.46%) -- $ 32,636 -- 66%
-- $ 8.73 27.80% 2.46% (1.21%) -- $ 68,092 -- 174%
(1.18) $ 7.12 (4.39%) 2.49% (1.48%) -- $ 75,282 -- 116%
-- $ 9.77 37.03% 2.36% (1.27%) -- $129,289 -- 176%
-- $ 8.90 (8.90%) 2.32%* (1.13%)* -- $ 87,888 $0.0199 36%
(2.55) $ 5.37 (15.24%) 2.21% (0.45%) -- $ 67,037 $0.0125 97%
(0.21) $ 5.09 6.17% 0.20%* 9.02%* -- $315,845 -- 129%
(0.47) $ 4.85 4.11% 1.30% 7.10% -- $550,254 -- 346%
(0.31) $ 4.71 3.74% 1.58% 6.52% -- $262,423 -- 455%
(0.31) $ 4.78 8.06% 1.56% 6.06% -- $206,235 -- 347%
(0.13) $ 4.84 3.95% 1.59%* 7.38%* 0.01%* $187,353 -- 87%
(0.31) $ 4.98 9.53% 1.42% 6.26% -- $155,223 -- 101%
(0.00)(i) $ 3.00 0.15% 3.03%* 3.89%* -- $ 2,000 -- 36%
(0.18) $ 2.93 3.72% 0.63% 5.64% 1.42% $ 42,381 -- 212%
(0.14) $ 2.94 5.34% 1.38% 4.80% 0.75% $ 23,445 -- 84%
(0.17) $ 2.99 7.47% 1.44% 5.49% 0.40% $177,766 -- 291%
(0.07) $ 3.00 2.61% 1.39%* 5.26%* 0.25%* $158,034 -- 21%
(0.17) $ 3.04 7.24% 1.38% 5.63% 0.09% $133,878 -- 80%
(0.21) $ 4.77 (0.48%) 0.00%* 6.79%* 2.22%* $ 23,267 -- 190%
(0.24) $ 5.03 10.74% 1.00% 4.87% 1.17% $ 19,496 -- 170%
(0.22) $ 5.16 6.86% 1.05% 4.43% 1.25% $ 22,723 -- 275%
(0.11) $ 5.31 5.02% 1.01%* 4.83%* 1.23%* $ 22,570 -- 25%
(0.25) $ 5.56 9.59% 1.00% 4.46% 1.05% $ 24,077 -- 163%
</TABLE>
BLANCHARD GROUP OF FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
(1) ORGANIZATION
Blanchard Group of Funds consists of Blanchard Funds (the "Trust") and Blanchard
Precious Metals Fund, Inc. (the "Company") which are registered under the
Investment Company Act of 1940, as amended (the "Act"), as open-end management
investment companies. The Trust consists of six portfolios. The financial
statements of the following portfolios (individually referred to as the "Fund",
or collectively as the "Funds") are presented herein:
<TABLE>
<CAPTION>
PORTFOLIO NAME DIVERSIFICATION INVESTMENT OBJECTIVE
-------------- --------------- --------------------
<S> <C> <C>
Blanchard Global Growth Fund diversified Long-term capital growth.
("BGGF")
Blanchard Precious Metal Fund, non- Long-term capital appreciation and
Inc. ("BPMF") diversified preservation of purchasing power
through investments in
physical precious metals,
such as gold, silver,
platinum and palladium, and
in securities of companies
involved in precious metals.
A secondary objective of the
Fund is to reduce the risk of
loss of capital and decrease
the volatility often
associated with precious
metals investments by
changing the allocation of
its assets from precious
metals securities to physical
precious metals and/or
investing in short-term
instruments and government
securities during periods
when the Fund's portfolio
manager believes the precious
metals markets may experience
declines.
Blanchard Flexible Income Fund diversified High current income while seeking
("BFIF") opportunities for capital appreciation.
Blanchard Short-Term Flexible diversified High current income while seeking
Income Fund ("BSTFIF") opportunities for capital appreciation.
Blanchard Flexible Tax-Free Bond diversified High level of current interest income
Fund ("BFTFBF") exempt from federal income tax,
consistent with the preservation of
capital.
</TABLE>
In addition, the Trust offers Blanchard Asset Allocation Fund which is presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
BLANCHARD GROUP OF 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 foreign valued at the last sale price reported on a national
securities exchange. Short-term foreign and domestic securities are valued at
the prices provided by an independent pricing service. However, short-term
foreign or domestic securities purchased with remaining maturities of sixty
days or less may be valued at amortized cost, which approximates fair market
value. Investments in open-end regulated investment companies are valued at
net asset value. Foreign government and corporate bonds are valued at the last
sales price reported on a national exchange. If the last sales price is not
available the securities are valued at the mean of the latest bid and ask
price as furnished by an independent pricing service.
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").
Distributions in excess of net investment income were the result of certain
book and tax timing differences. These distributions do not represent a return
of capital for federal income tax purposes.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions. In addition, BPMF and BFIF reclassed a tax
return of capital. The following reclassifications have been made to the
financial statements as of September 30, 1997.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT
FUND PAID-IN ACCUMULATED NET INCOME/ DISTRIBUTIONS IN EXCESS
NAME CAPITAL REALIZED GAIN/LOSS OF NET INVESTMENT INCOME
------------ --------- ------------------ -------------------------------
<S> <C> <C> <C>
BGGF -- $ 11,606 $ (11,606)
BPMF $ 120,846 (1,911,826) 1,790,980
BFIF (342,877) (258,682) 601,559
</TABLE>
Net investment income, net realized gain/losses, and net assets were not
affected by this change.
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.
Withholding taxes on foreign interest have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
At September 30, 1997, BFIF, BSTFIF, and BFTFBF, for federal tax purposes, had
capital loss carryforwards, as noted below, which will reduce the Funds
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>
BFIF $16,630,124
BSTFIF 9,125,862
BFTFBF 354,460
</TABLE>
Pursuant to the Code, such capital loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
BFIF BSTFIF
---------------------------------------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT EXPIRATION YEAR EXPIRATION AMOUNT
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
2002 $12,071,274 2003 $9,125,862
2003 3,223,064
2004 1,335,786
</TABLE>
<TABLE>
<CAPTION>
BFTFBF
------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C> <C> <C>
2003 $354,460
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
Additionally, net capital losses, as noted below, attributable to security
transactions incurred after October 31, 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>
BPMF $4,504,362
BFIF 157,286
</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.
FUTURES CONTRACTS--BGGF purchases stock index futures contracts to manage
cashflows, enhance yield, and to potentially reduce transaction costs. Upon
entering into a stock index futures contract with a broker, the Fund is
required to deposit in a segregated account a specified amount of cash or U.S.
government securities. Futures contracts are valued daily and unrealized gains
or losses are recorded in a "variation margin" account. Daily, the Fund
receives from or pays to the broker a specified amount of cash based upon
changes in the variation margin account. When a contract is closed, the Fund
recognizes a realized gain or loss. For the period ended September 30, 1997,
BGGF had realized gains on futures contracts of $5,426,009. Futures contracts
have market risks, including the risk that the change in the value of the
contract may not correlate with changes in the value of the underlying
securities.
At September 30, 1997, BGGF had outstanding futures contracts as set forth
below:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION APPRECIATION
DATE CONTRACTS TO RECEIVE POSITION (DEPRECIATION)
----------- -------------------- -------- --------------
<S> <C> <C> <C>
December 1997 20 S&P 500 Long $332,326
December 1997 4 Long Gilt Long 17,265
December 1997 5 Notional Long 3,412
December 1997 7 CAC 40 Long 773
December 1997 7 Bund Long 15,831
December 1997 3 DAX Long 28,979
December 1997 221 Nikkei 300 Long (195,176)
December 1997 12 T Bond Long 43,438
December 1997 11 T Note Long 20,875
December 1997 5 ALL--Ords Long 253
December 1997 5 FT-SE Long 81,577
--------
Net Unrealized Appreciation on
Futures Contracts $349,553
</TABLE>
FOREIGN EXCHANGE CONTRACTS--BGGF, BPMF, BFIF, and BSTFIF may enter into
foreign currency exchange contracts as a way of managing foreign exchange rate
risk. BGGF, BPMF, BFIF, and BSTFIF may enter into these contracts for the
purchase or sale of a specific foreign currency at a
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
fixed price on a future date as a hedge or cross hedge against either specific
transactions or portfolio positions. The objective of the Funds foreign
currency hedging transactions is to reduce the risk that the U.S. dollar value
of the Funds foreign currency denominated securities will decline in value due
to changes in foreign currency exchange rates. All foreign currency exchange
contracts are "marked to market" daily at the applicable translation rates
resulting in unrealized gains or losses. Realized gains or losses are recorded
at the time the foreign currency exchange contract is offset by entering into
a closing transaction or by the delivery or receipt of the currency. Risk may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. At
September 30, 1997, only BGGF and BFIF had outstanding foreign exchange
contracts as set forth below:
BGGF
<TABLE>
<CAPTION>
CONTRACTS TO IN UNREALIZED
SETTLEMENT DELIVER/ EXCHANGE CONTRACTS AT APPRECIATION
DATE RECEIVE FOR VALUE (DEPRECIATION)
---------------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
CONTRACTS PURCHASED:
Australian Dollar 10/2/97 517,000 $ 388,913 $ 387,621 $ 1,292
Australian Dollar 1/5/98 330,000 240,059 240,195 (136)
Swiss Franc 10/2/97 7,812,500 5,368,856 5,372,931 (4,075)
Deutsche Mark 12/23/97 3,787,600 2,147,104 2,155,278 (8,174)
French Franc 10/2/97-1/5/98 15,903,400 2,662,152 2,687,859 (25,707)
British Pound 12/23/97 907,200 1,457,870 1,457,897 (27)
Netherlands Guilder 10/2/97 3,975,000 1,998,692 1,997,458 1,234
<CAPTION>
CONTRACTS SOLD:
<S> <C> <C> <C> <C> <C>
Swiss Franc 10/2/97-12/23/97 14,772,000 10,111,286 10,205,532 94,246
Deutsche Mark 12/23/97 971,000 552,489 552,533 44
French Franc 10/2/97 9,246,200 1,553,066 1,558,737 5,671
British Pound 12/23/97 127,000 204,286 204,093 (193)
Japanese Yen 12/18/97 414,228,700 3,460,752 3,472,727 11,975
Netherlands Guilder 10/2/97-12/23/97 7,950,000 3,931,396 4,005,276 73,880
--------
Net Unrealized Appreciation on Foreign Exchange Contracts $150,030
========
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
BFIF
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS AT APPRECIATION
DATE DELIVER/RECEIVE FOR VALUE (DEPRECIATION)
---------- --------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Contracts Sold:
Canadian Dollar 12/15/97 2,200,000 $1,591,320 $1,598,759 ($7,439)
-------
Net Unrealized Depreciation on Foreign Exchange Contracts ($7,439)
-------
</TABLE>
FOREIGN CURRENCY TRANSLATION--The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies ("FC") are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and
collected or paid are adjusted when reported by the custodian bank. The Funds
does not isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales of
FCs, currency gains or losses realized between the trade and settlement dates
on securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at fiscal year
end, resulting from changes in the exchange rate.
RESTRICTED SECURITIES--Restricted securities are securities that may only be
resold upon registration under federal or international securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities may
be resold in the secondary market in transactions exempt from registration.
Such restricted securities may be determined to be liquid under criteria
established by the Board of Trustees. The Fund will not incur any registration
costs upon such resales. The Funds' restricted securities are valued at the
price provided by dealers in the secondary market or, if no market prices are
available, at the fair value as determined by the Fund's pricing committee.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
Additional information on each restricted security held by BGGF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
----------------------------- ---------------- ----------------
<S> <C> <C>
Chilectra S.A. ADR 7/19/96 $91,177
Daewoo Heavy Industries, Pfd. 2/3/95-4/12/95 49,952
Samsung Electronics Co., GDR 1/3/95 917
Dong Bang Forwarding Co. 2/3/95-5/29/95 74,380
</TABLE>
Additional information on each restricted security held by BPMF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
--------------------------- ----------------- ----------------
<S> <C> <C>
Eldorado Gold Corp. Ltd. 04/08/96-08/14/97 $433,523
Geomaque Explorations Ltd.,
Warrants 3/11/97 827,565
Lone Star Exploration 2/26/96-3/26/97 587,746
</TABLE>
Additional information on each restricted security held by BFIF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
--------------------------- ------------------ ----------------
<S> <C> <C>
Calpine Corp. 7/2/1997 $ 996,412
Nine West Group, Inc. 7/1/1997 999,012
Stone Container Finance Co. 8/9/1996 2,000,000
Tucson Electric Power Co. 2/10/1993-12/22/93 2,098,170
</TABLE>
CHANGE IN FISCAL YEAR--The Funds changed their fiscal year-end from April 30
to September 30 beginning May 1, 1996.
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.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Articles of Incorporation permit the Directors to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
BGGF BPMF
--------------------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED
1997 1996 1996 1997 1996 APRIL 30, 1996
------------- ------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 973,160 748,872 559,635 9,876,823 3,728,778 11,891,108
Shares issued to
shareholders in payment
of distributions
declared 1,381,403 -- 52,311 3,428,378 -- --
Shares redeemed (2,237,898) (1,137,138) (3,413,086) (10,697,610) (7,081,402) (9,230,002)
----------- ----------- ----------- ----------- ----------- -----------
Net change resulting
from share transactions 116,665 (388,266) (2,801,140) 2,607,591 (3,352,624) 2,661,106
=========== =========== =========== =========== =========== ===========
<CAPTION>
BFIF BSTFIF
--------------------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
------------- ------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 6,828,666 2,777,685 12,498,920 11,452,843 4,248,564 4,477,310
Shares issued in
connection with the
acquisition of Blanchard
Short-Term Global Income
Fund -- -- -- -- -- 57,869,781
Shares issued to
shareholders in payment
of distributions
declared 1,711,576 844,211 2,424,612 2,391,887 1,070,524 888,044
Shares redeemed (16,127,237) (8,034 ,939) (27,527,713) (22,560,468) (12,096,346) (11,691,202)
----------- ----------- ----------- ----------- ----------- -----------
Net change resulting
from share transactions (7,586,995) (4,413,043) (12,604,181) (8,715,738) (6,777,258) 51,543,933
=========== =========== =========== =========== =========== ===========
<CAPTION>
BFTFBF
---------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996
------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,901,018 1,341,280 5,015,985
Shares issued to
shareholders in payment
of distributions
declared 169,611 78,775 142,764
Shares redeemed (1,995,557) (1,571,250) (4,631,991)
----------- ----------- -----------
Net change resulting
from share transactions 75,072 (151,195) 526,758
=========== =========== ===========
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(4) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEE--Virtus Capital Management, Inc., the Trust's manger (the
"Manager"), receives for its services an annual management fee based on a
percentage of each Fund's average daily net assets (see below).
<TABLE>
<CAPTION>
FUND ANNUAL RATE
------ -----------------------------------------------------------------------
<C> <S>
BGGF 1.00% of the first 150 million, 0.875% of the excess of 150 million but
not exceeding 300 million, 0.75% in excess of 300 million
BPMF 1.00% of the first 150 million, 0.875% of the excess of 150 million but
not exceeding 300 million, 0.75% in excess of 300 million
BFIF 0.75%
BSTFIF 0.75%
BFTFBF 0.75%
</TABLE>
The Manager may voluntarily choose to waive a portion of its fee. The Manager
can modify or terminate this voluntary waiver at any time at its sole
discretion.
SUB-ADVISORY FEE--To provide portfolio advisory services for the Funds, the
Manager has entered into sub-advisory agreements with the sub-advisers listed
below. Under the terms of each sub-advisory agreement, the Manager will pay each
sub-adviser a fee based on a percentage of each Fund's average daily net assets
(see below).
<TABLE>
<CAPTION>
FUND SUB-ADVISER ANNUAL RATE
------ --------------------------------------- -------------------------------
<C> <C> <S>
BGGF Mellon Capital Mortgage Corp. 0.375% of the first $100
million, 0.350% of the excess
of $100 million but not
exceeding $150 million, 0.325%
of the excess of $150 million
BPMF Cavelti Capital Management, Ltd. 0.30% of the first $150
million, 0.2625% of the excess
of $150 million but less than
$300 million, and 0.255% in
excess of $300 million
BFIF OFFITBANK 0.30% of the first $25 million,
0.25% of the next $25 million,
and 0.20% in excess of $50
million
BSTFIF OFFITBANK 0.30% of the first $25 million,
0.25% of the next $25 million,
and 0.20% in excess of $50
million
BFTFBF United States Trust Company of New York 0.20%
</TABLE>
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 Funds and The Virtus Funds for the period. FAS
may voluntarily choose to waive a portion of its fee. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $75,000 per portfolio. FAS can modify or terminate this voluntary waiver
at any time at its sole discretion.
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 Fund to finance activities intended to
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
result in the sale of the Fund's Investment Shares. The Plan provides that the
Funds may incur distribution expenses up to 0.25% of the average daily net
assets of the BFIF, BSTFIF, and BFTFBF and up to 0.75% of the average daily net
assets of BGGF and BPMF, annually, to reimburse FSC. The distributor may
voluntarily choose to waive any portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER 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--The Funds' Manager paid the organization expenses of
the Funds listed below incurred prior to the public offering of its shares. The
Funds reimbursed the Manager for these expenses and has deferred and is
amortizing such expenses over five years from the date of commencement of the
Funds operations. Organizational expenses paid is as follows:
<TABLE>
<CAPTION>
FUND ORGANIZATIONAL EXPENSES
- ------ -----------------------
<S> <C>
BFIF $151,712
BSTFIF 80,724
BFTFBF 89,448
</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>
BGGF $ 44,853,363 $18,165,537
BPMF 63,481,368 66,049,224
BFIF 164,757,771 202,202,473
BSTFIF 109,275,828 128,141,491
BFTFBF 35,259,413 35,460,535
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(6) CONCENTRATION OF CREDIT RISK
BGGF, BPMF, and BFIF invest in securities of non-U.S. issuers. The political or
economic developments within a particular country or region may have an adverse
effect on the ability of domiciled issuers to meet their obligations.
Additionally, political or economic developments may have an effect on the
liquidity and volatility of portfolio securities and currency holdings.
(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 First Union 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/Directors of the Funds 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 similarly managed funds (the "Acquiring Funds") that is advised by
affiliates of First Union. The reorganization would result in the liquidation
and termination of the Funds. Pursuant to the reorganization, shareholders of
the Funds will receive, tax-free, the number of shares of the Acquiring Funds
having a value equal to the value of their shares immediately prior to the
reorganization. Consummation of the reorganization is subject to approval of the
shareholders of the Funds.
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of Blanchard Group of Funds:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Blanchard Group of Funds (comprising the
following portfolios: Blanchard Global Growth Fund, Blanchard Precious Metals
Fund, Inc., Blanchard Flexible Income Fund, Blanchard Short- Term Flexible
Income Fund, Blanchard Flexible Tax-Free Bond 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 year ended September 30, 1997 and the period
ended September 30, 1996, and the financial highlights for the periods ended in
1997 and 1996. The financial highlights for the periods ended in 1993, 1994 and
1995 were audited by other auditors, whose reports thereon dated June 20, 1995,
expressed an unqualified opinion. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
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 as of
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 Blanchard Group of
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/DIRECTORS OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
William J. Copeland President and Treasurer
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. John W. McGonigle
Edward C. Gonzales Executive Vice President and
Peter E. Madden Secretary
John E. Murray, Jr. Joseph S. Machi
Wesley W. Posvar Vice President and Assistant
Marjorie P. Smuts Treasurer
Richard B. Fisher
Vice President
C. Grant Anderson
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contain facts concerning
its objective and policies, management fees, expenses and other information.
PORTFOLIO ADVISERS B L A N C H A R D
Global Growth Fund GLOBAL GROWTH FUND
Mellon Capital Management Corp.
Precious Metals Fund, Inc. PRECIOUS METALS FUND, INC.
Cavelti Capital Management Ltd.
Flexible Income Fund FLEXIBLE INCOME FUND
OFFITBANK
Short-Term Flexible Income Fund SHORT-TERM FLEXIBLE INCOME FUND
OFFITBANK
Flexible Tax-Free Bond Fund FLEXIBLE TAX-FREE BOND FUND
United States Trust Company of New York
The Blanchard Group of Funds are available through Signet(R) Financial Services,
Inc., member NASD, and are advised by an affiliate, Virtus Capital Management,
Inc., which is
compensated for this service.
- ---------------------------------------------
INVESTMENT PRODUCTS ARE NOT DEPOSITS,
OBLIGATIONS OF, OR GUARANTEED BY ANY
BANK. THEY ARE NOT INSURED BY THE FDIC.
THEY INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL INVESTED.
- ---------------------------------------------
Federated Securities Corporation is the ANNUAL REPORT
distributor of the Funds. SEPTEMBER 30, 1997
Managed by: Virtus Capital
Management, Inc.
G01684-12
CUSIP 093212603/093212405/093265106/093212306/093254100
(2431)AR1197
A1. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Global Growth Fund (the "Fund") is represented by a broken line. The Standard &
Poor's 500 Index (the "S&P 500") is represented by a solid line. The line graph
is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 4/30/98 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$20,006 and $44,582, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, five-year, ten-year and the since inception (6/1/86) periods ended
9/30/97, which were 13.20%, 10.51%, 6.44% and 8.97%, respectively.
A2. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Precious Metals Fund (the "Fund") is represented by a broken line. The Toronto
Stock Exchange Gold & Silver Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Toronto Stock Exchange Gold & Silver
Index. The "x" axis reflects computation periods from 6/23/88 to 9/30/97. The
"y" axis reflects the cost of the investment. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to the
Toronto Stock Exchange Gold & Silver Index; the ending values were $11,167and
$13,936, respectively. The legend in the upper middle quadrant of the graphic
presentation indicates the Fund's Average Annual Total Return for the one-year,
five-year, and the since inception (6/23/88) periods ended 9/30/97, which were
(15.24%), 9.96%, and 1.27%, respectively.
A3. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Income Fund (the "Fund") is represented by a broken line. The Merrill
Lynch Aggregate Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Merrill Lynch Aggregate Bond Index.
The "x" axis reflects computation periods from 11/2/92 to 9/30/97. The "y" axis
reflects the cost of the investment. The right margin reflects the ending value
of the hypothetical investment in the Fund as compared to the Merrill Lynch
Aggregate Bond Index; the ending values were $14,003 and $14,387, respectively.
The legend in the upper middle quadrant of the graphic presentation indicates
the Fund's Average Annual Total Return for the one-year, and the since inception
(11/2/92) periods ended 9/30/97, which were 9.53% and 7.25%, respectively.
A4. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Short-Term Flexible Income Fund (the "Fund") is represented by a broken line.
The Merrill Lynch Short-Term Govenment Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Fund and the Merrill Lynch Short-Term
Govenment Index. The "x" axis reflects computation periods from 4/16/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Merrill Lynch Short-Term Govenment Index; the ending values were $12,940
and $12,709, respectively. The legend in the upper middle quadrant of the
graphic presentation indicates the Fund's Average Annual Total Return for the
one-year, and the since inception (4/16/93) periods ended 9/30/97, which were
7.24% and 5.95%, respectively.
A5. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Tax-Free Bond Fund (the "Fund") is represented by a broken line. The
Lehman Brothers Current 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
$10,000 hypothetical investment in the Fund and the Lehman Brothers Current
Municipal Bond Index. The "x" axis reflects computation periods from 8/12/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Lehman Brothers Current Municipal Bond Index; the ending values were
$13,553 and $12,485, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, and the since inception (8/12/93) periods ended 9/30/97, which
were 9.59% and 7.63%, respectively.
A6. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Asset Alocation Fund (the "Fund") is represented by a broken line. The Standard
& Poor's 500 Index (the "S&P 500") is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 6/6/96 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$14,534 and $14,571, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year and the since inception (6/6/96) periods ended 9/30/97, which were
38.64%, 33.03%, respectively.
(logo) EVERGREEN KEYSTONE
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders............................... 1
Evergreen High Grade Tax Free Fund
Fund at a Glance................................... 2
Management Report.................................. 3
Evergreen Short-Intermediate Municipal Fund
Fund at a Glance................................... 4
Management Report.................................. 5
Keystone Tax Free Income Fund
Fund at a Glance................................... 6
Management Report.................................. 7
Growth of Investments................................ 8
Financial Highlights
Evergreen High Grade Tax Free Fund................. 9
Evergreen Short-Intermediate Municipal Fund........ 11
Keystone Tax Free Income Fund...................... 13
Schedule of Investments
Evergreen High Grade Tax Free Fund................. 16
Evergreen Short-Intermediate Municipal Fund........ 20
Keystone Tax Free Income Fund...................... 22
Statements of Assets and Liabilities................. 27
Statements of Operations............................. 28
Statements of Changes in Net Assets.................. 30
Combined Notes to Financial Statements............... 33
Report of Independent Accountants-- Price Waterhouse
LLP................................................ 39
Independent Auditors' Report-- KPMG Peat Marwick
LLP................................................ 41
</TABLE>
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
(logo)
LETTER TO SHAREHOLDERS
July 1997
(Photo of William M. Ennis)
WILLIAM M. ENNIS
Dear Shareholders:
They don't have the glamour or the impressive recent returns of stock funds, but
municipal bond funds quietly have been doing their job for the past three years.
In fact, the average annual return of the Lehman Brothers Municipal Bond Index
for the three years that ended on May 31, 1997 was 7.32%. Considering the tax
advantages and relatively low volatility of municipal bonds and the modest
inflation we have been enjoying, that is nothing to ignore. In fact, on May 31,
the average AAA-rated 30-year municipal bond was yielding 5.50%. For investors
in the 31% federal income tax bracket, that's equivalent to a
before-federal-taxes yield of 7.97% on a taxable bond at a time when the 30-year
Treasury bond was yielding less than 7%.
The outlook for municipal bonds is no less encouraging. Thanks to factors that
include the careful monetary policy of the Federal Reserve Board and the
increasing productivity of American industry, we continue to expect a sustained
economic environment of moderate growth, contained inflation, low unemployment,
and stable interest rates. That is an ideal climate for bond investing in
general, and municipal bond investing in particular, especially considering the
rather limited supply of new municipal bonds available in the market. During
1996, new municipal bond issuance totaled $185 billion, compared to the $292
billion peak in 1993. In the face of this limited supply, an increase in demand
for municipal bonds could have a favorable impact on performance.
It is easy to believe we could see an increase in demand. As stock market prices
reach record highs in late spring and early summer, it makes more and more sense
for investors to allocate at least a portion of their portfolios into bond
funds. That makes sense for both diversification purposes and for risk reduction
reasons. For investors in higher income tax brackets, municipal bond funds make
even more sense. At Evergreen Keystone, we also believe it is important for
investors to remain in close touch with their professional advisers for guidance
on changing markets and strategies.
I am delighted to inform you that Evergreen Keystone successfully integrated all
service functions of the Evergreen and Keystone Funds in early May. This means
that you now have full exchange privileges among all Evergreen and Keystone
America Funds. In addition, you will be receiving the top-flight shareholder
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.
In the following pages, Evergreen Keystone investment professionals will give
you more detailed information about the investment environment and the
strategies employed in managing your funds. You will notice that this annual
report is a departure from past reports in format. It represents the effort of
Evergreen Keystone Funds to provide honest, thoughtful reports and to present
them in a format that is attractive and makes information easily accessible. We
are very interested in hearing your thoughts on this new format, and we welcome
any suggestions you may have.
Sincerely,
/s/ William M. Ennis
WILLIAM M. ENNIS
MANAGING DIRECTOR
1
<PAGE>
(logo) EVERGREEN
HIGH GRADE TAX FREE FUND
FUND-AT-A-GLANCE
As of May 31, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
One year with sales charge 1.90 % 1.19 % 7.25 %
One year w/o sales charge 6.99 % 6.19 % 7.25 %
One year dividends per share 50.2(cents) 42.1(cents) 52.0(cents)
30-day SEC Yield
(as of 5/31/97) 4.19 % 3.63 % 4.66 %
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Three years 5.11 % 5.16 % 7.10 %
Five years 5.75 % N/A N/A
Since Inception* 6.00 % 5.13 % 5.11 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Nine months w/o sales charge 5.13 % 4.55 % 5.32 %
Three years 16.13 % 16.30 % 22.83 %
Five years 32.24 % N/A N/A
Since Inception* 36.01 % 24.55 % 17.64 %
</TABLE>
* CLASS A BEGAN 2/21/92; CLASS B BEGAN 1/11/93;
CLASS Y BEGAN 2/28/94
** ALL RETURNS INCLUDE THE MAXIMUM SALES CHARGE, IF APPLICABLE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS MAY 31, 1997
<S> <C> <C> <C>
Total Net Assets (all classes) $102.1 million
Average Credit Quality AAA
Average Maturity 12.3 years
Average Duration 8.2 years
</TABLE>
PORTFOLIO COMPOSITION MAY 31, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
Hospital 14.8%
Ports 9.4%
Industrial Development
(polution control) 8.5%
Electric 8.0%
General Obligation
(schools) 8.8%
Water/Sewer 6.5%
Airport 6.2%
Industrial Development 5.3%
Housing 4.9%
Pre-refunded 4.6%
General Obligation
(municipalities) 3.8%
General Obligation 3.8%
Toll Roads 3.3%
Other 12.1%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen High Grade Tax Free Fund seeks income exempt from federal income taxes
while conserving capital. Income may be subject to local taxes and the Federal
Alternative Minimum Tax for certain investors.
STRATEGY
The Fund seeks its objective by investing in insured municipal securities and
municipal securities rated high grade by independent bond rating services. The
portfolio management team will, in seeking the Fund's objectives, buy and sell
securities to effect changes in portfolio maturities and to change allocations
among different sectors. Insured bonds are bonds insured as to timely payment of
principal and interest. The Fund itself is not insured, nor is the value of its
shares guaranteed. Insured bonds must be insured by a municipal bond insurance
company which is rated AAA by Standard & Poors Ratings Group (S&P) and/or Aaa by
Moody's Investors Service, Inc., (Moody's). Bonds that are considered high grade
are rated A or better by S&P or Moody's or, if unrated, are considered of
comparable quality as determined by the Fund's investment advisor.
PORTFOLIO MANAGEMENT TEAM
(Photo of James T. Colby, III, the Senior Portfolio Manager, is a Vice
James T. Colby, President and Senior Portfolio Manager of Evergreen Asset
III) Management. He also is Senior Portfolio Manager for Evergreen
U.S. Government Securities Fund and is co-manager of the
Evergreen Tax Strategic Foundation Fund. Prior to joining
Evergreen in 1992, Mr. Colby was Vice President and Senior
Portfolio Manager for $5 billion in tax-exempt holdings at
American Express. Mr. Colby also has served in portfolio
management capacities at Marinvest, a subsidiary of Marine
Midland Bank. He is a graduate of Brown University, and holds
an MBA from Hofstra University. In 1996, Mr. Colby was
Chairman of the Municipal Bond Buyers Conference.
2
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
MANAGEMENT REPORT
July 1997
Dear Fellow Shareholders:
We are pleased to report on Evergreen High Grade Tax Free Fund for the fiscal
period that ended on May 31, 1997. You may recall that you recently received a
semiannual report for the six-month period that ended on February 28, 1997. We
have changed your Fund's fiscal year so it now will end each May 31. This is
part of an effort by Evergreen Keystone Funds to streamline, and increase the
efficiency of, fund administration. Funds with similar investment objectives, in
this case national tax free funds, are placed on the same fiscal year cycle.
Information about these funds will be presented in common annual and semi-annual
reports. The next report you will receive will be a semiannual report for the
period ending November 30, 1997. You should expect to receive it in January
1998.
PERFORMANCE
We believe your Fund performed well as a high quality municipal bond fund during
a period marked by short-term interest rate volatility. The charts and tables on
page 2 provide a comprehensive view of the performance for the fiscal period, as
well as since each class of shares began.
STRATEGY
Evergreen High Grade Tax Free Fund is managed with a long-term view, with the
goal of providing federally tax-free income from insured and high quality
municipal bonds while protecting principal. We do not structure the portfolio in
anticipation of short-term movements in interest rates, but try to employ
strategies that build value over time based on longer-term trends in the
municipal bond market. The nine-month period that ended on May 31 was a
generally favorable period for municipal bond investing. During this period, we
kept the maturities of bonds in the portfolio relatively consistent, with
average maturities remaining in the 12-to-16 year range, and average duration in
the 7-to-9-year range. This policy proved successful during a time when
long-term interest rates, despite some short-term volatility, remained in a
consistent trading range of 6 1/2%
to 7%.
Your Fund is required to invest at least 65% of net assets in high grade
municipal bonds. In fact, the Fund held 87% of net assets in insured municipal
bonds, with 95% of net assets AAA-rated at the end of the period. The bonds are
insured for the timely payment of principal and interest. The value of insured
bonds can fluctuate. The Fund itself is not insured. The Fund does not search
for opportunities among bonds that are below investment grade.
Evergreen High Grade Tax Free Fund invests in different sectors of the market
based upon evolving trends. For example, two sectors-- the hospital/health care
and the electric utility sectors-- have experienced changes which affected
portfolio strategy recently. In the hospital sector, the process of
consolidation has left behind the weaker institutions which we have pointedly
avoided. We hold only the dominant regional facilities or those aligned with
strong national systems, which we believe have the strongest potential to
survive the new era of competition. Accordingly, we have increased the Fund's
allocation to 14.8% of the net assets. Conversely, the impact of deregulation
and competition upon municipal utilities is less clear and we have decreased the
Fund's allocation to this sector to 7.9%, though we will closely monitor
important legislation pending in states on the east and west coasts which may
soon set new strategic parameters for this sector. For comparison, three years
ago this Fund's relative weightings of these two sectors would have been
reversed.
OUTLOOK
Looking ahead, we continue to see a favorable investment environment for
municipal bonds. We anticipate long-term interest rates, as represented by the
benchmark 30-year U.S. Treasury Bond, to trade in the 6-to-7% range, with
relatively firm economic growth and stable inflation.
Within this environment, we will continue our strategy of seeking to provide as
reasonable a yield as is possible, without assuming significant market risks by
extending maturities. At the same time, we will continue to monitor changes in
the municipal bond industry and put in place further strategies that have the
potential to benefit from evolving trends.
Thank you for your support of the Evergreen High Grade Tax Free Fund.
Sincerely,
/s/ James T. Colby, III
JAMES T. COLBY, III
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
Evergreen Asset Management Corp.
3
<PAGE>
EVERGREEN
(logo) SHORT-INTERMEDIATE MUNICIPAL FUND
FUND-AT-A-GLANCE
As of May 31, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
One year with sales charge 0.92 % 1.51 % 4.62 %
One year w/o sales charge 4.31 % 3.49 % 4.62 %
One year dividends per share 39.7(cents) 30.7(cents) 40.7 (cents)
30-day SEC Yield
(as of 5/31/97) 3.74 % 2.94 % 3.93 %
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Three years N/A N/A 3.95 %
Five years N/A N/A 4.44 %
Since Inception* 3.40 % 2.76 % 4.88 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Nine months w/o sales charge 3.08 % 2.49 % 3.36 %
Three years N/A N/A 12.33 %
Five years N/A N/A 24.26 %
Since Inception* 8.38 % 6.76 % 30.24 %
</TABLE>
* CLASSES A AND B BEGAN 1/5/95; CLASS Y BEGAN 7/17/91. SINCE
INCEPTION RETURN FOR CLASS Y SHARES REFLECTS TOTAL RETURN FROM
11/18/91 WHEN THE FUND CHANGED TO A FLUCTUATING NET ASSET VALUE FUND.
** ALL RETURNS INCLUDE THE MAXIMUM SALES CHARGE, IF APPLICABLE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS MAY 31, 1997
<S> <C> <C> <C>
Total Net Assets (all classes) $45.1 million
Average Credit Quality AA
Average Maturity 2.7 years
Average Duration 2.4 years
</TABLE>
PORTFOLIO QUALITY MAY 31, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
NR 2.25%
AAA 45.52%
AA 37.37%
A 12.63%
BBB 2.23%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen Short-Intermediate Municipal Fund seeks income that is exempt from
federal income taxes, while preserving capital. Income may be subject to local
taxes and the Federal Alternative Minimum Tax for certain investors.
STRATEGY
The Fund invests in high-quality and upper medium-quality municipal bonds. The
average maturity of bonds in the portfolio is expected to be between two and
five years.
PORTFOLIO MANAGEMENT TEAM
(Photo of Steven Steven C. Shachat, Portfolio Manager of Evergreen
C. Shachat) Short-Intermediate Municipal Fund, has been a member of the
investment team of Evergreen Asset Management team since 1988,
concentrating on short-term tax exempt investments. He also is
manager of the Evergreen Tax-Exempt Money Market Fund and the
Evergreen Short-Intermediate Municipal Fund-California. Prior
to joining Evergreen, Mr. Shachat served at Mitchell Hutchins
Asset Management, Inc., a subsidiary of Paine Webber, Inc., as
a Portfolio Manager in the tax-exempt area. Earlier, he served
at Donald Sheldon & Co., a firm specializing in tax-exempt
securities. Mr. Shachat is a graduate of Boston University.
4
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE MUNICIPAL FUND
(logo)
MANAGEMENT REPORT
July 1997
Dear Fellow Shareholders:
We are pleased to report on Evergreen Short-Intermediate Municipal Fund for the
fiscal period that ended on May 31, 1997. You may recall that you recently
received a semiannual report for the six-month period that ended on February 28,
1997. We have changed your Fund's fiscal year so that it now will end each May
31. This is part of an effort by Evergreen Keystone Funds to streamline, and
increase the efficiency of, fund administration. Funds with similar investment
objectives, in this case national tax free funds, are placed on the same fiscal
year cycle. Information about these funds will be presented in common annual and
semiannual reports. The next report you will receive will be a semiannual report
for the period ending November 30, 1997. You should expect to receive it in
January 1998.
PERFORMANCE
We believe the Fund performed satisfactorily, consistent with its objective,
which is to seek to provide as high a level of income, exempt from federal
income taxes other than the alternative minimum tax, as is consistent with
preserving capital and providing liquidity. The tables on page 4 provide a
comprehensive view of the performance for the fiscal period, as well as since
each class of shares began.
STRATEGY
Evergreen Short-Intermediate Municipal Fund, in the face of a significant amount
of near-term interest rate volatility, maintained a laddered structure of its
portfolio securities. This strategy, which seeks to maintain as stable a price
as possible, is one in which the maturities of the portfolio are spread
throughout the range in which the Fund invests. There is not an over-emphasis on
securities that are on either the long end or the short end of the range. The
allocation of the maturity dates of the Fund's portfolio securities is
illustrated in the pie chart on this page. As interest rates changed during the
period, your Fund was able to use the proceeds from the minority of securities
which had matured to re-invest at current market rates.
An additional factor which contributed to your Fund's dividend income was the
employment of a strategy to seek opportunities in sectors that we believed may
have been undervalued. One example is the healthcare sector, where a series of
consolidations and mergers among hospitals and other health care delivery
institutions have
PORTFOLIO MATURITIES MAY 31, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
0-1 years 17 %
1-2 years 19.8%
2-3 years 11.8%
3-4 years 21.4%
4-5 years 24.4%
5-7 years 5.6%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
helped some previously weaker institutions become stronger. This made bonds
issued by these institutions more attractive, given the institutions' new
strength. Another area in which we increased the Fund's emphasis was in general
obligation bonds, backed by the full taxing ability of municipalities and other
public agencies.
The Fund continues to maintain an emphasis on quality, with an average credit
rating of AA at the end of the period.
OUTLOOK
We anticipate the demand for municipal bonds in the short-to-intermediate
maturity range to continue to be strong. At a time of some uncertainty over the
direction of interest rates, at least for the near term, investors appear to
want to take a conservative approach and maintain short-to-intermediate term
securities in their portfolios. We believe the potential implications are that
these securities should continue to exhibit relatively stable prices because of
the strong demand, but that yields available may not rise significantly.
Thank you for your support of Evergreen Short-Intermediate Municipal Fund.
Sincerely,
/s/ Steven C. Shachat
STEVEN C. SHACHAT
PORTFOLIO MANAGER
Evergreen Asset Management Corp.
5
<PAGE>
KEYSTONE
(logo) TAX FREE INCOME FUND
FUND-AT-A-GLANCE
As of May 31, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
One year with sales charge 1.80 % 1.03 % 5.03 %
One year w/o sales charge 6.88 % 6.03 % 6.03 %
One year dividends per share 50.7(cents) 43.5(cents) 43.5 (cents)
30-day SEC Yield
(as of 5/31/97) 4.58 % 4.05 % 4.05 %
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Three years 4.39 % 4.39 % 5.26 %
Five years 4.64 % N/A N/A
Ten years 6.23 % N/A N/A
Since Inception* N/A 3.84 % 4.22 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Six months w/o sales charge 1.34 % 0.97 % 0.97 %
Three years 13.75 % 13.76 % 16.63 %
Five years 25.44 % N/A N/A
Ten years 83.03 % N/A N/A
Since Inception* N/A 17.73 % 19.61 %
</TABLE>
* CLASS A BEGAN 2/13/87. CLASS B AND CLASS C BEGAN 2/1/93.
** ALL RETURNS INCLUDE THE MAXIMUM SALES CHARGE, IF APPLICABLE. FOR CLASSES WITH
MORE THAN 10-YEAR HISTORY, THE 10-YEAR HISTORY IS PRESENTED.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS MAY 31, 1997
<S> <C>
Total Net Assets (all classes) $113.3 million
Average Credit Quality AA+
Average Maturity 17 years
Average Duration 8 years
</TABLE>
PORTFOLIO QUALITY MAY 31, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
AAA 62.8%
NR 5.0%
A 9.5%
AA 10.5%
BBB 12.2%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Keystone Tax Free Income Fund seeks the highest possible current income exempt
from federal taxes, while preserving capital. Income may be subject to local
taxes and the Federal Alternative Minimum Tax for certain investors.
STRATEGY
The Fund invests in high quality municipal bonds from different regions of the
country. In pursuing the Fund's objective, the portfolio management team may
make adjustments in the portfolio's maturity, asset allocation among sectors, or
credit quality. When targeting investments, the portfolio management team seeks
out bonds that meet high standards for safety and creditworthiness. These bonds
are principally rated within the four highest grades by established rating
agencies. Keystone's fixed income analysts also conduct extensive in-house
research and regularly monitor bonds in the portfolio.
PORTFOLIO MANAGEMENT
(Photo of Betsy Betsy A. Hutchings, a Senior Vice President and Group Leader
A. Hutchings) of the Municipal Bond Team of Keystone Investment Management
Company, is Portfolio Manager of the Fund. A professional with
more than 15 years' experience in investment management, Ms.
Hutchings also is Portfolio Manager of Keystone Tax Free Fund.
Prior to joining Keystone in 1988, Ms. Hutchings served in
portfolio management and research positions at Scudder Stevens
& Clark, New York, and John Nuveen & Co., Chicago. Ms.
Hutchings is active in the Boston Municipal Analysts Forum and
the Municipal Bond Buyers Conference. She is a graduate of
Wheaton College.
6
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
MANAGEMENT REPORT
July 1997
Dear Shareholders:
We are pleased to report on Keystone Tax Free Income Fund for the fiscal period
that ended on May 31, 1997. You may recall that you recently received an annual
report for the fiscal period that ended November 30, 1996. We have changed your
Fund's fiscal year so that it will now end each May 31. This is part of an
effort by Evergreen Keystone Funds to streamline, and increase the efficiency
of, fund administration. Funds with similar investment objectives, in this case
national tax free funds, are being placed on the same fiscal year cycle, and
information about these funds will be presented in common annual and semi-annual
reports. The next report you will receive will be a semi-annual report for the
period ending November 30, 1997. You should expect to receive it in January
1998.
PERFORMANCE
We believe your Fund performed satisfactorily in a challenging interest rate
environment over the past six months. During this period, rates moved down and
then up before ending at approximately the same point as they began. The bond
market in general was vigilant about a possible pickup of inflation and the
potential of higher interest rates. In fact, after interest rates fell during
late 1996 and very early 1997, they started to rise again in February and March,
hurting the prices of bonds in general, including municipal bonds.
STRATEGY
In this changing environment, we managed your Fund conservatively, as we both
shortened the overall maturity of portfolio holdings and upgraded the average
quality of the bonds. At the same time as we were reducing the interest rate
risk by selling longer maturity bonds into the market as rates were falling, we
were also reducing credit risk by improving overall quality. This quality
upgrade was achieved by paring back BBB-rated and nonrated bonds and using the
proceeds to buy higher quality holdings, principally AAA-rated bonds. During the
past 12 months, the percentage of AAA-rated holdings in the portfolio went from
40% to 54%.
Through the full 12-month period, the average maturity of bond holdings was
reduced from 18.5 years to 17 years, while the average credit quality was
increased from AA- to AA+.
We pursued these tactics with two objectives:
(Bullet) To lock-in gains through the sale of bonds that had performed well.
(Bullet) To position the Fund more defensively by lowering both interest rate
risk and credit risk.
OUTLOOK
Looking forward, we are positive about the investment environment for municipal
bonds. On a technical basis, the demand for bonds is strong, with a relatively
limited
PORTFOLIO COMPOSITION MAY 31, 1997
(AS A PERCENTAGE OF NET ASSETS)
(Pie chart appears with the following plot points)
General Obligations 16.6%
Hospital 14.0%
Water & Sewer 12.9%
Electric 8.5%
Transportation 8.0%
Industrial Development
(pollution control) 7.1%
Pre-Refunded 6.9%
Housing 6.5%
Education 6.4%
Airports 4.8%
Solid Waste 1.3%
Other 7.0%
supply of available bonds as public agencies in general have been restrained in
borrowing. On an after-tax, after-inflation basis, municipal bonds continue to
appear to be an attractive value. At the close of the period, for example, an
AA-rated 30-year municipal bond was yielding 85% of the yield of a 30-year
Treasury bond.
On a fundamental economic basis, the overall economy is growing at a moderate
basis, with inflation well under control. Shorter-term, fixed income investors
can be expected to continue to watch nervously for signs of inflation, and there
may be some month-to-month interest rate volatility. Longer term, we see more
reason for stability in interest rates, as it appears that the policies of the
Federal Reserve Board have been successful in keeping inflation well under
control.
With this outlook, we continue to emphasize the income from higher quality bonds
in the 15-to-20-year maturity range and to be guardedly optimistic.
Thank you for your support of Keystone Tax Free Income Fund.
Sincerely,
/s/ Albert H. Elfner, III
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
/s/ Betsy A. Hutchings
BETSY A. HUTCHINGS
SENIOR VICE PRESIDENT
HEAD, MUNICIPAL BOND GROUP
Keystone Investment Management Company
7
<PAGE>
EVERGREEN KEYSTONE
(logo)
GROWTH OF INVESTMENTS
EVERGREEN HIGH GRADE TAX FREE FUND
Comparisons of a $10,000 investment in Evergreen High Grade Tax Free Fund,
Class A shares, versus a similar investment in the Lehman Brothers Insured
Bond Index (LBIBI) and the Consumer Price Index (CPI).
In Thousands
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 1.90% 5.75% 6.00%
Class B 1.19% -- 5.13%
Class Y 7.25% -- 5.11%
(Line graph appears here with the following plot points.)
2/92 5/92 5/93 5/94 5/95 5/96 5/97
Class A Shares (PLEASE FILL IN) $13,601
CPI (PLEASE FILL IN) $11,591
LBIBI (PLEASE FILL IN) $14,607
Past performance is no guarantee of future results. The performance of each
class may vary baed on differences in loads and fees paid by the shareholder
investing in the different classes. The Lehman Brothers Insured Bond Index
is an unmanaged, market index. The index does not include transaction costs
associated with buying and selling securities, nor any management fees. The
Consumer Price Index, a measure of inflation, is through May 31, 1997.
EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND
Comparisons of a $10,000 investment in Evergreen Short-Intermediate
Municipal Fund, Class A shares, versus a similar investment in the Lehman
Brothers Insured 3 Year Municipal Bond Index (LB3YMBI) and the Consumer Price
Index (CPI).
In Thousands
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 0.92% -- 3.40%
Class B 1.51% -- 2.76%
Class Y 4.62% 4.44% 4.88%
(Line graph appears here with the following plot points.)
1/95 5/95 11/95 5/96 11/96 5/97
Class A Shares (PLEASE FILL IN) $10,695
CPI (PLEASE FILL IN) $10,838
LB3YMBI (PLEASE FILL IN) $11,560
Past performance is no guarantee of future results. The performance of each
class may vary baed on differences in loads and fees paid by the shareholder
investing in the different classes. The Lehman Brothers 3 Year Municipal Bond
Index is an unmanaged, market index. The index does not include transaction
costs associated with buying and selling securities, nor any management fees.
The Consumer Price Index, a measure of inflation, is through May 31, 1997.
KEYSTONE TAX FREE INCOME FUND
Comparisons of a $10,000 investment in Keystone Tax Free Income Fund,
Class A shares, versus a similar investment in the Lehman Brothers Municipal
Bond Index (LMBI) and the Consumer Price Index (CPI).
In Thousands
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 1.80% 4.64% --
Class B 1.03% -- 3.84%
Class Y 5.03% -- 4.22%
(Line graph appears here with the following plot points.)
<TABLE>
<CAPTION>
5/97 5/88 5/89 5/90 5/91 5/92 5/93 5/94 5/95 5/96 5/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares (PLEASE FILL IN) $18,303
CPI (PLEASE FILL IN) $14,158
LMBI (PLEASE FILI IN) $22,346
</TABLE>
Past performance is no guarantee of future results. The performance of each
class may vary baed on differences in loads and fees paid by the shareholder
investing in the different classes. The Lehman Brothers Municipal Bond
Index is an unmanaged, market index. The index does not include transaction
costs associated with buying and selling securities, nor any management fees.
The Consumer Price Index, a measure of inflation, is through May 31, 1997.
8
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
EIGHT
MONTHS
NINE MONTHS YEAR ENDED ENDED YEAR ENDED
ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
MAY 31, 1997 (A) 1996 1995 (D) 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.72 $ 10.69 $ 9.79 $ 11.16 $ 10.42
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.37 0.52 0.34 0.52 0.54
Net realized and unrealized gain
(loss) on investments............... 0.17 0.03 0.90 (1.37) 0.81
Total from investment operations...... 0.54 0.55 1.24 (0.85) 1.35
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.37) (0.52) (0.34) (0.52) (0.54)
Net realized gains on investments..... 0 0 0 0 (0.07)
Total distributions................... (0.37) (0.52) (0.34) (0.52) (0.61)
NET ASSET VALUE END OF PERIOD......... $ 10.89 $ 10.72 $ 10.69 $ 9.79 $ 11.16
Total return (c)...................... 5.13% 5.21% 12.83% (7.71%) 13.25%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 1.03%(b) 0.89% 1.06%(b) 1.01% 0.85%
Total expenses excluding indirectly
paid expenses..................... 1.03%(b) -- -- -- --
Total expenses excluding waivers and
reimbursements.................... 1.11%(b) 1.09% 1.09%(b) 1.02% 1.07%
Net investment income............... 4.60%(b) 4.78% 4.93%(b) 5.04% 4.99%
Portfolio turnover rate............... 114% 65% 27% 53% 14%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 45,814 $ 50,569 $ 58,751 $57,676 $101,352
<CAPTION>
FEBRUARY 21, 1992
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1992
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.51
Net realized and unrealized gain
(loss) on investments............... 0.42
Total from investment operations...... 0.93
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.51)
Net realized gains on investments..... 0
Total distributions................... (0.51)
NET ASSET VALUE END OF PERIOD......... $ 10.42
Total return (c)...................... 9.48%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.49%(b)
Total expenses excluding indirectly
paid expenses..................... --
Total expenses excluding waivers and
reimbursements.................... 1.11%(b)
Net investment income............... 5.79%(b)
Portfolio turnover rate............... 7%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 90,738
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The Fund changed its fiscal year end from December 31 to August 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
EIGHT MONTHS
NINE MONTHS ENDED YEAR ENDED
ENDED YEAR ENDED AUGUST 31, DECEMBER 31,
MAY 31, 1997 (A) AUGUST 31, 1996 1995 (D) 1994
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD.... $ 10.72 $ 10.69 $ 9.79 $ 11.16
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.31 0.44 0.29 0.46
Net realized and unrealized gain (loss)
on investments....................... 0.17 0.03 0.90 (1.37)
Total from investment operations....... 0.48 0.47 1.19 (0.91)
LESS DISTRIBUTIONS FROM
Net investment income.................. (0.31) (0.44) (0.29) (0.46)
Net realized gain on investments....... 0 0 0 0
Total Distributions.................... (0.31) (0.44) (0.29) (0.46)
NET ASSET VALUE END OF PERIOD.......... $ 10.89 $ 10.72 $ 10.69 $ 9.79
Total return (c)....................... 4.55% 4.42% 12.27% (8.24%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................... 1.78%(b) 1.64% 1.81%(b) 1.58%
Total expenses excluding indirectly
paid expenses...................... 1.78%(b) -- -- --
Total expenses excluding waivers and
reimbursements..................... 1.86%(b) 1.84% 1.84%(b) 1.59%
Net investment income................ 3.85%(b) 4.03% 4.18%(b) 4.47%
Portfolio turnover rate................ 114% 65% 27% 53%
NET ASSETS END OF PERIOD
(THOUSANDS).......................... $ 31,874 $32,221 $34,206 $ 32,435
<CAPTION>
JANUARY 11, 1993
OF CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1993
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD.... $ 10.42
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.47
Net realized and unrealized gain (loss)
on investments....................... 0.81
Total from investment operations....... 1.28
LESS DISTRIBUTIONS FROM
Net investment income.................. (0.47)
Net realized gain on investments....... (0.07)
Total Distributions.................... (0.54)
NET ASSET VALUE END OF PERIOD.......... $ 11.16
Total return (c)....................... 12.52%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................... 1.35%(b)
Total expenses excluding indirectly
paid expenses...................... --
Total expenses excluding waivers and
reimbursements..................... 1.57%(b)
Net investment income................ 4.44%(b)
Portfolio turnover rate................ 14%
NET ASSETS END OF PERIOD
(THOUSANDS).......................... $ 41,030
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The Fund changed its fiscal year end from December 31 to August 31.
<TABLE>
<CAPTION>
NINE MONTHS YEAR EIGHT MONTHS
ENDED ENDED ENDED
MAY 31, AUGUST 31, AUGUST 31,
1997 (A) 1996 1995 (C)
<S> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 10.72 $ 10.69 $ 9.79
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.39 0.55 0.36
Net realized and unrealized gain (loss) on investments...... 0.17 0.03 0.90
Total from investment operations............................ 0.56 0.58 1.26
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME............... (0.39) (0.55) (0.36)
NET ASSET VALUE END OF PERIOD............................... $ 10.89 $ 10.72 $ 10.69
Total return................................................ 5.32% 5.47% 13.02%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 0.78%(b) 0.64% 0.81%(b)
Total expenses excluding indirectly paid expenses......... 0.78%(b) -- --
Total expenses excluding waivers and reimbursements....... 0.86%(b) 0.84% 0.84%(b)
Net investment income..................................... 4.85%(b) 5.03% 5.18%(b)
Portfolio turnover rate..................................... 114% 65% 27%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 24,441 $ 25,112 $ 25,079
<CAPTION>
FEBRUARY 28, 1994
OF CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1994
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $10.93
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.46
Net realized and unrealized gain (loss) on investments...... (1.14)
Total from investment operations............................ (0.68)
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME............... (0.46)
NET ASSET VALUE END OF PERIOD............................... $ 9.79
Total return................................................ (6.29%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 0.76%(b)
Total expenses excluding indirectly paid expenses......... --
Total expenses excluding waivers and reimbursements....... 0.77%(b)
Net investment income..................................... 5.46%(b)
Portfolio turnover rate..................................... 53%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $4,318
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) The Fund changed its fiscal year end from December 31 to August 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE MUNICIPAL FUND
(logo)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
JANUARY 5, 1995
(COMMENCEMENT
NINE MONTHS OF CLASS OPERATIONS)
ENDED YEAR ENDED THROUGH
MAY 31, 1997 (A) AUGUST 31, 1996 AUGUST 31, 1995
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................... $10.08 $ 10.17 $ 9.97
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. 0.30 0.43 0.30
Net realized and unrealized gain (loss) on investments................ 0.01 (0.09) 0.20
Total from investment operations...................................... 0.31 0.34 0.50
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME......................... (0.30) (0.43) (0.30)
NET ASSET VALUE END OF PERIOD......................................... $10.09 $ 10.08 $10.17
Total return (c)...................................................... 3.08% 3.37% 5.09%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................................... 0.84%(b) 0.80% 0.70%(b)
Total expenses excluding indirectly paid expenses................... 0.83%(b) -- --
Total expenses excluding waivers and reimbursements................. 0.96%(b) 1.11% 1.14%(b)
Net investment income............................................... 3.94%(b) 4.05% 4.32%(b)
Portfolio turnover rate............................................... 34% 29% 80%
NET ASSETS END OF PERIOD (THOUSANDS).................................. $6,072 $27,722 $6,820
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
<TABLE>
<CAPTION>
JANUARY 5, 1995
(COMMENCEMENT
NINE MONTHS OF CLASS OPERATIONS)
ENDED YEAR ENDED THROUGH
MAY 31, 1997 (A) AUGUST 31, 1996 AUGUST 31, 1995
<S> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................... $10.08 $ 10.17 $ 9.97
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. 0.23 0.34 0.24
Net realized and unrealized gain (loss) on investments................ 0.02 (0.09) 0.20
Total from investment operations...................................... 0.25 0.25 0.44
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME......................... (0.23) (0.34) (0.24)
NET ASSET VALUE END OF PERIOD......................................... $10.10 $ 10.08 $10.17
Total return (c)...................................................... 2.49% 2.44% 4.50%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................................... 1.73%(b) 1.67% 1.58%(b)
Total expenses excluding indirectly paid expenses................... 1.73%(b) -- --
Total expenses excluding waivers and reimbursements................. 1.86%(b) 2.07% 2.26%(b)
Net investment income............................................... 3.04%(b) 3.28% 3.50%(b)
Portfolio turnover rate............................................... 34% 29% 80%
NET ASSETS END OF PERIOD (THOUSANDS).................................. $6,742 $ 7,413 $6,050
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE MUNICIPAL FUND
(logo)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED AUGUST 31,
MAY 31, 1997 (A) 1996 1995 1994 1993 1992 (C)
<S> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.07 $ 10.17 $ 10.21 $ 10.58 $ 10.33 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.30 0.43 0.46 0.47 0.49 0.51
Net realized and unrealized gain
(loss) on investments............... 0.03 (0.10) (0.04) (0.32) 0.25 0.33
Total from investment operations...... 0.33 0.33 0.42 0.15 0.74 0.84
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.30) (0.43) (0.46) (0.47) (0.49) (0.51)
In excess of net investment income.... 0 0 0 (0.03) 0 0
Net realized gain on investments...... 0 0 0 (0.02) 0 0
Total distributions................... (0.30) (0.43) (0.46) (0.52) (0.49) (0.51)
NET ASSET VALUE END OF PERIOD......... $ 10.10 $ 10.07 $ 10.17 $ 10.21 $ 10.58 $ 10.33
Total return.......................... 3.36% 3.30% 4.20% 1.40% 7.40% 8.56%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.74%(b) 0.70% 0.74% 0.58% 0.40% 0.17%
Total expenses excluding indirectly
paid expenses..................... 0.73%(b) -- -- -- -- --
Total expenses excluding waivers and
reimbursements.................... 0.86%(b) 0.90% 0.86% 0.83% 0.81% 0.86%
Net investment income............... 4.04%(b) 4.27% 4.52% 4.54% 4.73% 4.85%
Portfolio turnover rate............... 34% 29% 80% 32% 37% 57%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 32,293 $34,893 $40,581 $53,417 $66,607 $ 54,470
<CAPTION>
JULY 17, 1991
THROUGH
AUGUST 31, 1991 (C)
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.06
Net realized and unrealized gain
(loss) on investments............... 0
Total from investment operations...... 0.06
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.06)
In excess of net investment income.... 0
Net realized gain on investments...... 0
Total distributions................... (0.06)
NET ASSET VALUE END OF PERIOD......... $10.00
Total return.......................... 0.62%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.00%(b)
Total expenses excluding indirectly
paid expenses..................... --
Total expenses excluding waivers and
reimbursements.................... 1.40%(b)
Net investment income............... 4.93%(b)
Portfolio turnover rate............... --
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $4,025
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized
(c) On November 18, 1991, the Fund was changed to a diversified municipal bond
fund with a fluctuating net asset value per share from a non-diversified
money market fund with a stable net asset value per share. The shares
outstanding and the related per share data as of August 31, 1991 are
restated to reflect both a 1 for 2 reverse share split on October 30, 1991
and a 1 for 5 reverse share split on August 19, 1992. Total return
calculated after November 18, 1991 reflects the fluctuation in net asset
value per share.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1997 (A) 1996 (F) 1995 (F) 1994
<S> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 9.90 $ 10.05 $ 8.93 $ 10.25
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.24 0.51 0.51 0.51
Net realized and unrealized gain (loss) on investments and
futures contracts................................................. (0.11) (0.14) 1.13 (1.28)
Total from investment operations.................................... 0.13 0.37 1.64 (0.77)
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.24) (0.52) (0.51) (0.52)
In excess of net investment income.................................. (0.01) 0(e) (0.01) 0
Net realized gain on investments.................................... 0 0 0 0
Tax basis return of capital......................................... 0 0 0 (0.03)
Total distributions................................................. (0.25) (0.52) (0.52) (0.55)
NET ASSET VALUE END OF PERIOD....................................... $ 9.78 $ 9.90 $ 10.05 $ 8.93
Total return (c).................................................... 1.34% 3.83% 18.71% (7.81%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.19%(b) 1.13% 1.19% 1.13%
Total expenses excluding indirectly paid expenses................. 1.18%(b) 1.12% 1.18% --
Net investment income............................................. 4.85%(b) 5.21% 5.35% 5.27%
Portfolio turnover rate............................................. 54% 128% 30% 98%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $ 72,629 $ 82,425 $ 94,183 $95,691
<CAPTION>
1993
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 10.17
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.57
Net realized and unrealized gain (loss) on investments and
futures contracts................................................. 0.36
Total from investment operations.................................... 0.93
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.57)
In excess of net investment income.................................. (0.04)
Net realized gain on investments.................................... (0.24)
Tax basis return of capital......................................... 0
Total distributions................................................. (0.85)
NET ASSET VALUE END OF PERIOD....................................... $ 10.25
Total return (c).................................................... 9.37%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.21%
Total expenses excluding indirectly paid expenses................. --
Net investment income............................................. 5.40%
Portfolio turnover rate............................................. 47%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $124,102
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 13, 1987
(COMMENCEMENT
YEAR ENDED NOVEMBER 30, OF OPERATIONS) TO
1992 1991 1990 1989 1988 NOVEMBER 30, 1987
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD................. $ 10.13 $ 9.94 $ 10.24 $ 9.96 $ 9.64 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................... 0.63 0.61 0.59 0.62 0.63 0.33
Net realized and unrealized gain (loss) on
investments and futures contracts................. 0.30 0.31 (0.06) 0.34 0.37 (0.32)
Total from investment operations.................... 0.93 0.92 0.53 0.96 1.00 0.01
LESS DISTRIBUTIONS FROM:
Net investment income............................... (0.62) (0.61) (0.60) (0.63) (0.68) (0.37)
In excess of net investment income.................. 0 0 (0.03) 0 0 0
Net realized gain on investments.................... (0.27) (0.12) (0.20) (0.05) 0 0
Tax basis return of capital......................... 0 0 0 0 0 0
Total distributions................................. (0.89) (0.73) (0.83) (0.68) (0.68) (0.37)
NET ASSET VALUE END OF PERIOD....................... $ 10.17 $ 10.13 $ 9.94 $ 10.24 $ 9.96 $ 9.64
Total return (c).................................... 9.35% 9.59% 5.55% 9.97% 10.60% 0.17%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................... 1.25% 1.58% 1.66% 1.62% 1.57% 1.00%(d)
Total expenses excluding indirectly paid
expenses........................................ -- -- -- -- -- --
Net investment income............................. 6.02% 5.95% 6.03% 6.15% 6.13% 6.85%(d)
Portfolio turnover rate............................. 32% 37% 42% 49% 109% 67%
NET ASSETS END OF PERIOD (THOUSANDS)................ $120,660 $133,524 $146,335 $162,013 $179,191 $16,090
</TABLE>
(a) The Fund changed its fiscal year end from November 30 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to November 30, 1987.
(e) Reflects distributions in excess of net investment income which were under
$0.01 per share.
(f) Calculation based on average shares outstanding.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1997 (A) 1996 (E) 1995 (E) 1994
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 9.81 $ 9.97 $ 8.88 $ 10.25
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.19 0.44 0.44 0.45
Net realized and unrealized gain (loss) on investments and
futures contracts......................................... (0.10) (0.16) 1.11 (1.29)
Total from investment operations............................ 0.09 0.28 1.55 (0.84)
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.20) (0.44) (0.45) (0.50)
In excess of net investment income.......................... (0.01) 0(d) (0.01) 0
Net realized gain on investments............................ 0 0 0 0
Tax basis return of capital................................. 0 0 0 (0.03)
Total distributions......................................... (0.21) (0.44) (0.46) (0.53)
NET ASSET VALUE END OF PERIOD............................... $ 9.69 $ 9.81 $ 9.97 $ 8.88
Total return (c)............................................ 0.97% 2.99% 17.84% (8.43%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.95%(b) 1.90% 1.96% 1.88%
Total expenses excluding indirectly paid expenses......... 1.94%(b) 1.89% 1.94% --
Net investment income..................................... 4.09%(b) 4.44% 4.59% 4.60%
Portfolio turnover rate..................................... 54% 128% 30% 98%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 28,822 $ 33,063 $ 33,449 $28,860
<CAPTION>
FEBRUARY 1, 1993
TO NOVEMBER 30,
1993
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 10.27
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.37
Net realized and unrealized gain (loss) on investments and
futures contracts......................................... 0.30
Total from investment operations............................ 0.67
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.37)
In excess of net investment income.......................... (0.08)
Net realized gain on investments............................ (0.24)
Tax basis return of capital................................. 0
Total distributions......................................... (0.69)
NET ASSET VALUE END OF PERIOD............................... $ 10.25
Total return (c)............................................ 6.59%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.96%(b)
Total expenses excluding indirectly paid expenses......... --
Net investment income..................................... 4.42%(b)
Portfolio turnover rate..................................... 47%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 14,091
</TABLE>
(a) The Fund changed its fiscal year end from November 30 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) Reflects distributions in excess of net investment income which were under
$0.01 per share.
(e) Calculation based on average shares outstanding.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1997 (A) 1996 (E) 1995 (E) 1994
<S> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 9.81 $ 9.97 $ 8.88 $ 10.26
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.18 0.41 0.44 0.43
Net realized and unrealized gain (loss) on investments and
futures contracts......................................... (0.09) (0.13) 1.11 (1.27)
Total from investment operations............................ 0.09 0.28 1.55 (0.84)
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.20) (0.44) (0.45) (0.51)
In excess of net investment income.......................... (0.01) 0(d) (0.01) 0
Net realized gain on investments............................ 0 0 0 0
Tax basis return of capital................................. 0 0 0 (0.03)
Total distributions......................................... (0.21) (0.44) (0.46) (0.54)
NET ASSET VALUE END OF PERIOD............................... $ 9.69 $ 9.81 $ 9.97 $ 8.88
Total return (c)............................................ 0.97% 2.99% 17.84% (8.52%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.95%(b) 1.90% 1.96% 1.89%
Total expenses excluding indirectly paid expenses......... 1.94%(b) 1.89% 1.94% --
Net investment income..................................... 4.09%(b) 4.44% 4.59% 4.52%
Portfolio turnover rate..................................... 54% 128% 30% 98%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 11,879 $ 13,769 $ 20,386 $23,230
<CAPTION>
FEBRUARY 1, 1993
TO NOVEMBER 30,
1993
<S> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 10.27
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.37
Net realized and unrealized gain (loss) on investments and
futures contracts......................................... 0.31
Total from investment operations............................ 0.68
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.37)
In excess of net investment income.......................... (0.08)
Net realized gain on investments............................ (0.24)
Tax basis return of capital................................. 0
Total distributions......................................... (0.69)
NET ASSET VALUE END OF PERIOD............................... $ 10.26
Total return (c)............................................ 6.70%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.94%(b)
Total expenses excluding indirectly paid expenses......... --
Net investment income..................................... 4.41%(b)
Portfolio turnover rate..................................... 47%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 27,261
</TABLE>
(a) The Fund changed its fiscal year end from November 30 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) Reflects distributions in excess of net investment income which were under
$0.01 per share.
(e) Calculation based on average shares oustanding.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
SCHEDULE OF INVESTMENTS
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- 97.4%
ARIZONA-- 1.1%
$1,000,000 Creighton Elem. Sch. Dist.
No. 14 of Maricopa Cnty.,
Sch. Imp. Bonds (Proj. of
1990), (Series C 1991),
6.50%, 7/1/07, (FGIC)............. $ 1,125,240
CALIFORNIA-- 2.6%
2,000,000 Redevelopment Agcy. of the
City of San Jose Merged Area
Redev. Proj., Tax Allocation
Bonds, (Series 1993),
6.00%, 8/1/15, (MBIA)............. 2,144,880
500,000 San Mateo Cnty. Joint Pwrs.
Financing Auth. Lease RB
(Capital Projs. Prog.), (1993
Refunding Series A),
6.50%, 7/1/16, (MBIA)............. 560,505
2,705,385
COLORADO-- 3.7%
Arapahoe Cnty. Pub. Hwy.
Auth. Capital Imp. Trust Fund
Hwy. RB (E-470 Proj.):
1,000,000 6.15%, 8/31/26, (MBIA).............. 1,053,890
Sr. Current Interest Bonds,
2,000,000 7.00%, 8/31/26...................... 2,144,720
500,000 School Dist. No. 1,
City & Cnty. of Denver, GO
Refunding Bonds, (Series
1994A),
6.50%, 6/1/10, (MBIA)............. 560,370
3,758,980
FLORIDA-- 1.1%
1,000,000 Orange Cnty. Forida Hlth.
Facs. Auth. Hosp. RB (Orlando
Regional Healthcare Sys.),
(Series 1996C),
6.25%, 10/1/16, (MBIA)............ 1,089,760
GEORGIA-- 5.2%
500,000 City of Atlanta Arpt. Facs.
RRB, (Series 1994A),
6.50%, 1/1/10, (AMBAC)............ 557,990
1,000,000 Metropolitan Atlanta Rapid
Transit Auth. Georgia
Refunding Second Indenture,
(Series A),
5.50%, 7/1/17, (MBIA)............. 998,740
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
GEORGIA-- CONTINUED
Municipal Elec. Auth. Georgia
Spec. Oblig. Fifth Crossover
Series Proj. One:
$1,000,000 6.40%, 1/1/13, (AMBAC).............. $ 1,102,190
2,400,000 6.50%, 1/1/17, (MBIA)............... 2,694,720
5,353,640
HAWAII-- 3.7%
2,500,000 Hawaii St., GO, (Series. CM),
6.00%, 12/1/10, (FGIC)............ 2,679,750
1,000,000 State of Hawaii Arpt. Sys.
RB, (Second Series of 1990),
7.50%, 7/1/20, (FGIC)............. 1,088,990
3,768,740
IDAHO-- 0.9%
845,000 Idaho Hsg. Agcy. Single
Family Mtge. Bonds, (1994
Series C-1 Sr. Bonds &
Mezzanine Bonds),
6.30%, 7/1/11..................... 869,657
ILLINOIS-- 16.9%
4,725,000 City of Chicago Wtr. RRB,
(Series 1993),
6.50%, 11/1/15, (FGIC)............ 5,308,727
2,150,000 City of Chicago GO Current
Interest Bonds, (Proj. Series
1995),
6.13%, 1/1/16, (AMBAC)............ 2,229,249
Illinois Dev. Fin. Auth.
Poll. Ctrl. RRB (Commonwealth
Edison Co. Proj.):
(Series 1991),
2,000,000 7.25%, 6/1/11, (MBIA)............... 2,182,060
(Series 1994D),
3,000,000 6.75%, 3/1/15, (AMBAC).............. 3,293,160
1,750,000 Illinois Hlth. Facs. Auth.
Hlth. Facs. RRB (SSM Hlth.
Care), (Series 1992AA),
6.50%, 6/1/12, (MBIA)............. 1,953,875
5,625,000 Metropolitan Pier &
Exposition Authority Illinois
Refunding McCormick Place
Expn, Project B, (Eff. Yield
5.80%)(a),
0.00%, 6/15/13, (MBIA)............ 2,258,550
17,225,621
</TABLE>
(CONTINUED)
16
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
INDIANA-- 3.5
$ 1,000,000 Indiana Muni. Pwr. Agcy.,
Pwr. Supply Sys. RRB, (1993
Series B),
6.00%, 1/1/13, (MBIA)............... $ 1,063,720
700,000 Indiana Trans. Fin. Auth.
Hwy. RB, (Series 1992A),
6.80%, 12/1/16, (MBIA).............. 808,024
1,500,000 Middle Sch. Bldg. Corp. of
Lawrence Township of Marion
Cnty., First Mtge. Bonds,
6.88%, 7/5/11, (MBIA)............... 1,729,185
3,600,929
1,000,000 LOUISIANA-- 1.3%
Orleans Parish Louisiana,
School Board RB
9.05%, 2/1/10, (MBIA)............. 1,339,390
1,000,000 MAINE-- 1.1%
Maine Turnpike Auth.,
Turnpike RB, (Series 1994),
7.13%, 7/1/08, (MBIA)............. 1,171,010
2,500,000 MARYLAND-- 2.4%
Maryland St. GO, St. & Local
Facilities, (First Series),
5.00%, 3/1/10..................... 2,455,900
MASSACHUSETTS-- 1.6%
500,000 Massachusetts Hsg. Fin.
Agcy., Hsg. Proj. RB, (1993
Series A),
6.15%, 10/1/15, (AMBAC)........... 508,015
1,000,000 Massachusetts St., Refunding,
(Series A),
6.50%, 11/1/14, (AMBAC)........... 1,119,500
1,627,515
MINNESOTA-- 0.5%
490,000 Minnesota Hsg. Fin. Agcy.
Single Family Mtge. Bonds,
(1994 Series H),
6.70%, 1/1/18..................... 514,397
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
NEW MEXICO-- 1.0%
City of Albuquerque, Arpt. RB:
(Series 1995 A),
$ 500,000 6.35%, 7/1/07, (AMBAC).............. $ 540,220
$ 500,000 (Series 1995 B),
7.00%, 7/1/16, (AMBAC).............. 501,170
1,041,390
NEW YORK-- 11.2%
1,000,000 Albany Cnty., Arpt. Auth.
Arpt. Rev.,
5.25%, 12/15/10, (FSA)............ 980,990
1,500,000 New York St. Housing Finance
Agency Revenue, (Series 1994 B),
6.35%, 8/15/23, (AMBAC)........... 1,538,700
2,590,000 New York St. Local Government
Assistance Corporation RB,
(Prerefunded @ $102), (Series B),
7.38%, 4/1/01..................... 2,895,076
5,000,000 Port Auth. New York & New
Jersey Special Obligation
(for JFK Intl. Arrivals
Terminal),
6.25%, 12/1/10, (MBIA)............ 5,453,950
500,000 The Port Auth. of New York &
New Jersey Consolidated Bonds
Fifth Installment,
(Ninety-Seventh Series),
6.50%, 7/15/19, (FGIC)............ 529,900
11,398,616
NORTH DAKOTA-- 3.0%
3,000,000 Mercer Cnty. Poll. Ctrl. RRB
(Basin Elec. Pwr.
Cooperative-Antelope Valley
Unit 1 & Common Facs.),
(Second 1995 Series),
6.05%, 1/1/19, (AMBAC)............ 3,107,910
OHIO-- 3.3%
1,000,000 Board of Ed., Kings Local
Sch. Dist. (City of Warren)
Sch. Imp. Bonds (Unltd. Tax
GO), (Series 1995),
7.50%, 12/1/16, (FGIC)............ 1,254,130
1,500,000 City of Toledo, GO (Ltd. Tax)
Hsg. Imp. Bonds (Macy's
Proj.), (Series 1995A),
6.35%, 12/1/25, (MBIA)............ 1,580,835
</TABLE>
(CONTINUED)
17
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
OHIO-- CONTINUED
$ 475,000 Ohio Hsg. Fin. Agcy.
Residential Mtge. RB (GNMA
Mortgage-Backed Securities
Prog.), (1995 Series A-2),
6.63%, 3/1/26..................... 490,252
3,325,217
SOUTH CAROLINA-- 3.4%
3,250,000 South Carolina St., Port
Auth. RB, (Series 1991),
6.63%, 7/1/11, (AMBAC)............ 3,468,563
SOUTH DAKOTA-- 4.2%
4,000,000 South Dakota Hlth. & Edl.
Facs. Auth. RRB (St. Luke's
Midland Regional Med. Center
Issue), (Series 1991),
6.63%, 7/1/11, (MBIA)............. 4,304,240
TENNESSEE-- 3.1%
1,200,000 The Hlth. & Edl. Facs. Board
of the City of Bristol Hosp.
RRB (Bristol Mem. Hosp.),
(Series 1993),
6.75%, 9/1/07, (FGIC)............. 1,366,740
1,700,000 The Hlth., Edl. & Hsg. Facs.
Board of the Cnty. of Knox
Hosp. RRB (Fort Sanders
Alliance Obligated Group),
(Series 1993),
6.25%, 1/1/13, (MBIA)............. 1,843,378
3,210,118
TEXAS-- 4.4%
1,500,000 City of Austin Arpt. Sys.
Prior Lien RB, (Series 1995A),
6.13%, 11/15/25, (MBIA)........... 1,533,060
1,000,000 City of Houston Wtr.
Conveyance Sys. Contract COP,
(Series 1993H),
7.50%, 12/15/14, (AMBAC).......... 1,221,290
6,000,000 Harris County Texas, RB Toll
Road, (Prerefunded @
$53.836), (Eff. Yield 5.39%)(a),
0.00%, 8/15/09, (AMBAC)........... 1,699,500
4,453,850
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
UTAH-- 3.6%
$2,500,000 Board of Ed. of Iron Cnty.
Sch. Dist. GO Sch. Bldg.
Bonds, (Series 1994),
6.40%, 1/15/12, (MBIA)............ 2,675,325
1,000,000 Salt Lake City, Salt Lake
Cnty. Arpt. RB, (Series 1993A),
6.00%, 12/1/12, (FGIC)............ 1,030,860
3,706,185
VIRGINIA-- 2.1%
2,000,000 Industrial Dev. Auth. of
Hanover Hosp. RB (Mem.
Regional Med. Center Proj. at
Hanover Med. Park), (Series 1995),
6.38%, 8/15/18, (MBIA)............ 2,196,040
WASHINGTON-- 2.6%
2,500,000 City of Tacoma Elec. Sys.
RRB, (Series 1994),
6.25%, 1/1/15, (FGIC)............. 2,619,825
WEST VIRGINIA-- 0.5%
500,000 West Virginia St. Hsg. Dev.
Fund Hsg. Fin. (Series. A),
6.05%, 5/1/27..................... 501,605
WISCONSIN-- 7.3%
4,500,000 City of Superior Ltd. Oblig.
RRB (Midwest Energy Res. Co.
Proj.), (Series E-1991),
6.90%, 8/1/21, (FGIC)............. 5,275,890
2,000,000 Wisconsin Hlth. & Edl. Facs.
Auth. RB (Wausau Hosps., Inc.
Proj.), (Series 1991B),
6.63%, 8/15/11, (AMBAC)........... 2,142,580
7,418,470
PUERTO RICO-- 2.1%
500,000 Commonwealth of Puerto Rico,
Elec. Pwr. Auth. RRB,
(Series Y),
6.50%, 7/1/06, (MBIA)............. 558,460
500,000 Commonwealth of Puerto Rico,
Hsg. Bank & Fin. Agcy.
Affordable Hsg. Mtge. Subsidy
Prog. Single Family Mtge. RB,
Portfolio I,
6.10%, 10/1/15,
(Collateralized by GNMA, FNMA
& FHLMC Certificates)............. 506,220
</TABLE>
(CONTINUED)
18
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
<TABLE>
LONG-TERM INVESTMENTS-- CONTINUED
PUERTO RICO-- CONTINUED
$1,000,000 Commonwealth of Puerto Rico,
Elec. Pwr. Auth.,
RB, (Series BB),
6.25%, 7/1/10, (MBIA)............. $ 1,100,720
2,165,400
TOTAL LONG-TERM INVESTMENTS
(COST $95,320,879)................ 99,523,593
SHORT-TERM INVESTMENTS-- 0.9%
ALABAMA-- 0.1%
100,000 Phenix Cnty. Alabama RB
Refunding Mead Coated Board
Project B, VRDN
4.15%, 10/1/25.................... 100,000
KANSAS-- 0.8%
800,000 Kansas City Kansas Industrial
Revenue PQ Corporation
Project, VRDN
4.10%, 8/15/01.................... 800,000
TOTAL SHORT-TERM INVESTMENTS
(COST $900,000)................... 900,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
MUTUAL FUND SHARES-- 0.2%
167,000 Federated Tax Free Fund
(cost $167,000)................... $ 167,000
TOTAL INVESTMENTS--
(COST $96,387,879)....... 98.5% 100,590,593
OTHER ASSETS AND
LIABILITIES-- NET........ 1.5 1,538,629
NET ASSETS--............... 100.0% $102,129,222
</TABLE>
(a) Effective yield (calculated at date of purchase) is the annual yield at
which the bond accrues until its maturity date.
SUMMARY OF ABBREVIATIONS
AMBAC-- American Municipal Bond Assurance Corp.
COP-- Certificate of Participation
FGIC-- Financial Guaranty Insurance Corp.
FHLMC-- Federal Home Loan Mortgage Corporation
FNMA-- Federal National Mortgage Association
FSA-- Financial Security Assurance Corp.
GNMA-- Government National Mortgage Association
GO-- General Obligation Bonds
MBIA-- Municipal Bond Investors Assurance Corp.
RB-- Revenue Bonds
RRB-- Revenue Refunding Bonds
VRDN-- Variable Rate Demand Notes are payable on demand at par on no more than
seven calendar days' notice given by the Fund to the issuer or other parties not
affiliated with the issuer. Interest rates are determined and reset by the
issuer daily or weekly depending upon the terms of the security. The interest
rates presented for these securities are those in effect at May 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
EVERGREEN
SHORT - INTERMEDIATE MUNICIPAL FUND
(logo)
SCHEDULE OF INVESTMENTS
May 31, 1997
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS-- 97.0%
ARIZONA-- 3.8%
$1,600,000 Pima Cnty. GO RFB, (Series 1992),
6.55%, 7/1/01..................... $ 1,718,384
COLORADO-- 1.2%
520,000 Colorado Stud. Oblig. Board
Auth., Stud. Loan RB,
(Series 1985B),
6.13%, 12/1/98.................... 530,104
DISTRICT OF COLUMBIA-- 3.4%
1,500,000 Dist. of Columbia GO RFB,
(Series 1989B),
6.63%, 6/1/98, (MBIA)............. 1,539,375
ILLINOIS-- 2.4%
1,000,000 Central Lake Cnty. Joint
Action Wtr. Agcy. RB,
(Prerefunded @ $102),
(Series 1990A),
7.00%, 5/1/00, (AMBAC)............ 1,086,340
MARYLAND-- 4.0%
635,000 Maryland Energy Financing
Administration Solid Waste
Disp. RB, (Wheelabrator Wtr.
Technologies Baltimore L.L.C.
Projs.), (Series 1996),
4.80%, 12/1/98.................... 638,156
1,140,000 Montgomery Cnty. GO Bonds
Consolidated Pub. Imp. RB,
(Series 1992A),
5.30%, 7/1/01..................... 1,174,075
1,812,231
MASSACHUSETTS-- 12.1%
Massachusetts Ind. Fin. Agcy. IDR:
460,000 (Series 1986G),
5.30%, 12/1/06.................... 467,149
565,000 (Series 1986I),
5.30%, 12/1/06.................... 573,780
1,185,000 (Series 1996A),
5.35%, 11/1/07.................... 1,208,368
1,160,000 (Series 1996B),
5.35%, 11/1/07.................... 1,182,875
New England Ed. Loan
Marketing Corp. Stud. Loan RB:
1,000,000 (Series 1993B),
5.40%, 6/1/00..................... 1,016,840
1,000,000 (Series 1993C),
4.75%, 7/1/98..................... 1,007,330
5,456,342
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
MINNESOTA-- 2.3%
$1,015,000 City of Minneapolis & Hsg.
& Redev. Auth. of the City of
St. Paul, Single Family Mtge.
RRB, (Series 1996A),
5.13%, 6/1/32..................... $ 1,015,974
MISSOURI-- 3.2%
North Kansas City Sch. Dist.
GO, Direct Deposit Prog.,
(Series 1996),
710,000 6.70%, 3/1/00....................... 750,179
665,000 7.00%, 3/1/99....................... 695,204
1,445,383
NEW JERSEY-- 4.7%
2,000,000 New Jersey St. GO, (Series 1991),
5.90%, 8/1/02..................... 2,116,380
NEW YORK-- 4.5%
1,000,000 New York, New York, (Series 1997L),
5.25%, 8/1/00..................... 1,009,710
1,000,000 Pwr. Auth. of the St. of New
York, General Purpose Bonds,
(Series Z),
5.85%, 1/1/00..................... 1,033,310
2,043,020
OHIO-- 2.3%
1,000,000 The Stud. Loan Funding Corp.
(Cincinnati) Stud. Loan RB,
(Series 1993A),
5.50%, 12/1/01.................... 1,019,940
OREGON-- 2.5%
1,125,000 Josephine Cnty., Sch. Dist.
#007 GO,
5.00%, 6/1/99, (FGIC)............. 1,140,818
PENNSYLVANIA-- 7.9%
1,000,000 Lancaster Cnty. Hosp. Auth.
Hosp. RB (The Lancaster
General Hosp. Proj.), (Series
1992),
5.60%, 7/1/00, (AMBAC)............ 1,031,900
1,950,000 Sayre Hlth. Care Facs. Auth.
RB, Guthrie Healthcare Sys.,
(Series 1991A),
6.40%, 3/1/99, (AMBAC)............ 2,017,489
500,000 St. of Pennsylvania GO,
(Series 1971),
6.00%, 12/15/98................... 503,270
3,552,659
</TABLE>
(CONTINUED)
20
<PAGE>
EVERGREEN
SHORT - INTERMEDIATE MUNICIPAL FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
SOUTH CAROLINA-- 1.2%
$ 500,000 Charleston Cnty. Arpt.
Dist. Arpt. System RRB,
(Series 1993),
8.25%, 7/1/00, (MBIA)............. $ 552,420
TEXAS-- 15.0%
1,000,000 Brazos Higher Ed. Auth.,
Inc., Stud. Loan RRB,
(Series 1992A),
5.30%, 12/1/97.................... 1,006,210
500,000 City of Dallas GO,
5.90%, 2/15/01.................... 523,625
1,000,000 City of Houston Pub. Imp.
RFB, (Series 1992C),
5.70%, 3/1/01..................... 1,038,490
1,300,000 Dallas Cnty. Imp. (Ltd. Tax)
RB, (Series 1992A),
6.00%, 8/15/01.................... 1,373,905
505,000 San Antonio Independent Sch.
Dist. Pub. Facs. Corp. RB,
(Series 1996),
5.00%, 10/15/00, (AMBAC).......... 510,969
Texas Dept. Hsg. & Cmnty.
Affairs Single Family Mtge.
RB, (Series 1996E):
1,260,000 4.45%, 3/1/99, (MBIA)............... 1,261,562
1,045,000 4.65%, 3/1/00, (MBIA)............... 1,049,034
6,763,795
UTAH-- 6.4%
2,500,000 Intermountain Pwr. Agcy.,
Pwr. Supply RFB, (Series C),
6.00%, 7/1/00, (MBIA)............. 2,603,150
290,000 Utah Hsg. Fin. Agcy. Single
Family Mtge. RRB, (Series 1993A),
5.20%, 1/1/01..................... 293,996
2,897,146
VIRGINIA-- 3.4%
1,500,000 Virginia Hsg. Dev. Auth.
Commonwealth Mtge. Bonds,
(Series 1992B, Subseries B-1),
6.00%, 1/1/98..................... 1,513,845
WASHINGTON-- 11.9%
2,950,000 St. of Washington GO RB,
Motor Vehicle Fuel Tax,
(Series R-92D),
5.60%, 9/1/01..................... 3,064,844
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
WASHINGTON-- CONTINUED
$ 550,000 Washington Pub. Pwr. Supply
Sys. RRB (Nuclear Proj. #1),
(Series 1992A),
5.00%, 7/1/98..................... $ 556,122
Washington Pub. Pwr. Supply
Sys. RRB (Nuclear Proj. #2),
(Series 1992A):
1,070,000 5.00%, 7/1/98....................... 1,081,909
675,000 5.00%, 7/1/99....................... 681,088
5,383,963
WISCONSIN-- 4.8%
1,000,000 Milwaukee GO,
Pub. Imps., (Series BZ),
6.30%, 6/15/01.................... 1,064,300
1,000,000 Milwaukee Metropolitan Sewage
Dist. GO, (Series 1989A),
7.00%, 9/1/01..................... 1,092,060
2,156,360
TOTAL LONG-TERM INVESTMENTS
(COST $43,306,201)................ 43,744,479
SHORT-TERM INVESTMENTS-- 3.3%
COLORADO-- 3.3%
1,500,000 Arapahoe Cnty. MHRB Ref.
Stratford Sta., (Series 1994),
VRDN, (LOC: Heller Finl., Inc.)
4.45%, 11/1/17 (cost $1,500,000).. 1,500,000
TOTAL INVESTMENTS--
(COST $44,806,201)....... 100.3% 45,244,479
OTHER ASSETS AND
LIABILITIES-- NET........ (0.3) (137,878)
NET ASSETS--............... 100.0% $ 45,106,601
</TABLE>
SUMMARY OF ABBREVIATIONS:
AMBAC-- American Municipal Bond Assurance Corp.
FGIC-- Financial Guaranty Insurance Corp.
GO-- General Obligation Bonds
IDR-- Industrial Development Revenue Bonds
LOC-- Letter of Credit
MBIA-- Municipal Bond Investors Assurance Corp.
MHRB-- Municipal Housing Revenue Bonds
RB-- Revenue Bonds
RFB-- Refunding Bonds
RRB-- Refunding Revenue Bonds
VRDN-- Variable Rate Demand Notes are payable on demand at par on no more than
seven calendar days' notice given by the Fund to the issuer or other parties not
affiliated with the issuer. Interest rates are determined and reset by the
issuer daily or weekly depending upon the terms of the security. The interest
rates presented for these securities are those in effect at May 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- 98.2%
ALABAMA-- 0.2%
$ 265,000 Alabama Housing Finance Agency,
Single Family Mortgage,
10.75%, 6/1/13.................... $ 281,125
ALASKA-- 0.4%
470,000 Alaska Housing Finance Corp.,
Collateralized Home Mortgage,
8.75%, 12/1/16.................... 483,898
ARIZONA-- 1.6%
1,875,000 Page, Arizona, Municipal Property
Corp., Excise Tax Revenue,
5.00%, 7/1/11, (MBIA)............. 1,806,450
CALIFORNIA-- 7.0%
500,000 Anaheim, California, Public
Financing Authority, Series C,
6.00%, 9/1/16..................... 529,385
1,400,000 California Health Facilities,
Children's Hospital,
5.38%, 7/1/20..................... 1,341,914
2,115,000 Central Coast, California, Water
Authority Revenue,
State Water Project, Regional
Facilities, Series A,
5.00%, 10/1/16, (AMBAC)........... 1,977,737
1,785,000 East Bay, California, Municipal
Utility District, Water System
Revenue,
5.00%, 6/1/16, (FGIC)............. 1,678,382
San Francisco, California, State
Building Authority, Lease Revenue,
San Francisco Civic Center
Complex-- A:
1,000,000 5.25%, 12/1/16...................... 964,440
500,000 5.25%, 12/1/21...................... 476,840
2,450,000 Victor Valley, California, Joint
Union High School District,
Capital Appreciation, (effective
yield
5.69%) (b),
0.00%, 9/1/13, (MBIA)............. 991,172
7,959,870
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
COLORADO-- 5.5%
City and County of Denver, Colorado,
Airport System:
Series A:
$1,250,000 7.00%, 11/15/99..................... $ 1,314,500
720,000 7.25%, 11/15/25..................... 821,102
1,000,000 8.00%, 11/15/25..................... 1,105,710
750,000 8.75%, 11/15/23..................... 876,570
Series B,
750,000 7.25%, 11/15/12..................... 814,590
Series D,
1,100,000 7.75%, 11/15/13..................... 1,339,877
6,272,349
FLORIDA-- 8.6%
750,000 Gainesville, Florida, Utilities
System Revenue, Series A,
5.20%, 10/1/22.................... 710,595
1,500,000 Martin County, Florida, Industrial
Development Authority, Industrial
Development Revenue, Indiantown
Cogeneration Project, Series A,
7.88%, 12/15/25................... 1,682,865
2,000,000 Orange County, Florida, Health
Facilities Authority, Orlando
Hospital Regional Healthcare,
Series A,
6.25%, 10/1/18.................... 2,186,940
1,000,000 Sarasota County, Florida, Utility
Systems Revenue,
6.50%, 10/1/22, (FGIC)............ 1,122,620
2,640,000 Tallahassee, Florida, Health
Facilities, Tallahassee Memorial
Regional Medical Project,
6.63%, 12/1/13, (MBIA)............ 2,927,971
1,015,000 Tampa, Florida, Subordinated
Guaranteed Entitlement Revenue,
Series 1988B,
8.40%, 10/1/08.................... 1,070,226
9,701,217
</TABLE>
(CONTINUED)
22
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
ILLINOIS-- 1.9$%
$910,000 Chicago, Illinois, Gas Supply
Revenue (People's Gas, Light and
Coke Co.), Series A,
8.10%, 5/1/20..................... $ 998,316
1,000,000 Illinois Health Facilities
Authority, United Medical Center,
8.38%, 7/1/12..................... 1,187,550
2,185,866
INDIANA-- 2.8%
1,300,000 Indiana Municipal Power Supply,
Systems Revenue,
5.50%, 1/1/16..................... 1,289,340
1,640,000 St. Joseph County, Indiana,
Educational Facilities Revenue,
University of Notre Dame,
6.50%, 3/1/26..................... 1,835,226
3,124,566
LOUISIANA-- 1.3%
1,415,000 Louisiana Public Facilities
Authority, Health and Education,
Pre-refunded,
7.90%, 12/1/15.................... 1,505,461
MASSACHUSETTS-- 8.2%
Massachusetts Bay Transportation
Authority, Series A:
1,875,000 6.25%, 3/1/12....................... 2,050,763
1,000,000 7.00%, 3/1/11....................... 1,167,180
1,950,000 7.00%, 3/1/21....................... 2,315,450
400,000 Massachusetts, General Obligation,
(effective yield 7.00%) (b),
0.00%, 6/1/07, (FGIC)............. 241,104
1,490,000 Massachusetts State Housing Finance
Agency, Residential Housing,
Series A,
8.40%, 8/1/21..................... 1,552,967
500,000 Massachusetts State Industrial
Finance Agency, Senior Lien,
Massachusetts Recycling
Association,
9.00%, 8/1/16 (a)................. 200,000
Massachusetts Water Resources
Authority, General Revenue Bonds:
1,000,000 Series A,
6.00%, 8/1/20..................... 1,012,170
1,000,000 1995, Series B,
4.00%, 12/1/18.................... 774,880
9,314,514
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
MICHIGAN-- 0.5%
$ 500,000 Monroe County, Michigan, Economic
Development Corp.,
Detroit Edison Co.,
6.95%, 9/1/22, (FGIC)............. $ 594,535
MINNESOTA-- 0.5%
595,000 Minnesota Housing Finance Agency,
Single Family Mortgage, Series A,
8.20%, 8/1/19..................... 611,785
MISSOURI-- 0.5%
500,000 Sikeston, Missouri, Electric
Revenue,
6.00%, 6/1/14, (MBIA)............. 530,165
NEW JERSEY-- 5.0%
1,000,000 New Jersey Economic Development
Authority, Water Facilities
Revenue, NJ American Water Co.,
Inc. Project,
6.50%, 4/1/22, (FGIC)............. 1,055,410
4,325,000 Salem County, New Jersey, Pollution
Control Financing Authority,
Waste Disposal Revenue,
6.50%, 11/15/21................... 4,560,496
5,615,906
NEW MEXICO-- 3.8%
500,000 Albuquerque, New Mexico, Airport
Revenue, Series B,
8.75%, 7/1/19..................... 506,720
1,950,000 Albuquerque, New Mexico, Joint Water
and Sewer System Revenue,
Capital Appreciation, Series A,
(effective yield 5.42%) (b),
0.00%, 7/1/08, (FGIC)............. 1,083,030
1,590,000 New Mexico Mortgage Finance
Authority, Single Family Mortgage,
8.63%, 7/1/17, (FGIC)............. 1,637,970
1,000,000 University of New Mexico, University
Revenue, Series A,
6.00%, 6/1/21..................... 1,045,860
4,273,580
</TABLE>
(CONTINUED)
23
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
NEW YORK-- 14.4%
New York City, New York, GO:
$1,410,000 Fiscal 1992, Pre-refunded, Series A,
7.75%, 8/15/15 (d)................ $ 1,602,056
2,500,000 Series G,
6.75%, 2/1/09..................... 2,733,600
500,000 New York and New Jersey, Port
Authority, Special Obligation
Revenue, JFK International Airport
Terminal-- 6 Project,
5.75%, 12/1/25, (MBIA)............ 498,675
2,000,000 New York State Dormitory Authority,
State University Dormitory
Facilities, Series A,
6.00%, 7/1/09..................... 2,142,620
New York State Dormitory Authority,
State University Educational
Facilities Revenue:
800,000 Series A,
5.25%, 5/15/15, (AMBAC)........... 778,120
1,300,000 Series C,
7.38%, 5/15/10.................... 1,515,046
1,600,000 New York State Local Government
Assistance Corp., Series A
5.50%, 4/1/17..................... 1,573,072
2,510,000 New York State Tollway Authority,
Highway and Bridge
Trust Fund, Series A,
5.25%, 4/1/16, (AMBAC)............ 2,422,225
New York State Urban Development
Corp.:
Correctional Facilities, Series A:
1,000,000 6.50%, 1/1/10....................... 1,084,510
1,000,000 7.50%, 4/1/11....................... 1,121,870
805,000 Higher Education Technology Grants,
6.00%, 4/1/10, (MBIA)............... 847,528
16,319,322
$1,000,000 NORTH CAROLINA-- 0.8%
North Carolina Medical Care, Duke
University Hospital, Series C,
5.25%, 6/1/21..................... 941,530
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
OHIO-- 1.8%
1,000,000 Montgomery County, Ohio, Hospital
Revenue, Kettering Medical
Center, 6.25%, 4/1/20............. 1,087,260
1,000,000 North Olmsted, Ohio, GO,
5.00%, 12/1/16, (AMBAC)........... 935,880
2,023,140
PENNSYLVANIA-- 8.2%
1,500,000 Pennsylvania Convention Center
Authority, Series A,
(effective yield 7.00%) (b),
0.00%, 9/1/08, (FGIC)............. 840,405
2,450,000 Pennsylvania Economic Development
Financing Authority, Resources
Recovery, Northampton Project,
6.50%, 1/1/13 (c)................. 2,420,085
1,000,000 Philadelphia, Pennsylvania, Hospital
and Higher Education Facilities,
Community College, Series B,
6.50%, 5/1/07, (MBIA)............. 1,104,070
4,000,000 Pittsburgh, Pennsylvania, School
District, Capital Appreciation,
Series B, (effective yield 5.42%)
(b),
0.00%, 8/1/09, (AMBAC)............ 2,135,320
2,200,000 Scranton-Lackawanna, Pennsylvania,
Health and Welfare
Authority Revenue, Walters
Institute Project,
8.13%, 7/15/28.................... 2,307,184
500,000 Southeastern Pennsylvania
Transportation Authority,
Special Revenue,
5.38%, 3/1/22, (FGIC)............. 481,765
9,288,829
PUERTO RICO-- 3.5%
2,000,000 Commonwealth of Puerto Rico, GO,
7.00%, 7/1/10, (MBIA)............. 2,336,700
1,365,000 Puerto Rico Electric Power
Authority, Series S,
7.00%, 7/1/07..................... 1,584,287
3,920,987
</TABLE>
(CONTINUED)
24
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
TENNESSEE-- 4.9%
$2,000,000 Bristol, Tennessee, Health and
Education Authority,
Bristol Memorial Hospital,
6.75%, 9/1/10, (FGIC)............. $ 2,303,820
Knox County, Tennessee, Health and
Educational Facilities,
Fort Sanders Hospital Alliance:
1,000,000 Series B,
7.25%, 1/1/10, (MBIA)............. 1,171,990
1,000,000 Series C,
5.25%, 1/1/15, (MBIA)............. 969,670
1,000,000 Metropolitan Government of Nashville
and Davidson County,
Tennessee Water and Sewer,
step bond, (effective yield 5.20%)
(b),
0.00%, 1/1/12, (FGIC)............. 1,100,570
5,546,050
TEXAS-- 10.7%
3,000,000 Brazos River Authority, Texas,
Revenue Refunding,
Houston Light and Power Project,
8.10%, 5/1/19, (MBIA)............. 3,154,980
1,000,000 Harris County, Texas, Toll Road,
Senior Lien, Series A,
7.00%, 8/15/10.................... 1,166,690
3,000,000 Houston, Texas, Water and Sewer
System Revenue,
Jr. Lien, Series C,
(effective yield 6.05%) (b),
0.00%, 12/1/11, (AMBAC)........... 1,349,400
1,500,000 Northwest, Texas, Independent School
District, Capital Appreciation,
(effective yield 5.50%) (b),
0.00%, 8/15/08, (PSFG)............ 832,260
1,000,000 Nueces River Authority, Texas Water
Supply, Facilities Corpus Christie
Lake,
5.25%, 7/15/16.................... 960,200
2,125,000 Tarrant County, Texas, Health
Facilities Development, Harris
Methodist Health Systems, Series
A,
5.13%, 9/1/12, (AMBAC)............ 2,036,388
2,125,000 Texas Municipal Power Agency,
(effective yield 7.09%) (b),
0.00%, 9/1/08, (AMBAC)............ 1,176,294
1,500,000 United Independent School District,
Texas, GO,
5.25%, 8/15/15, (PSFG)............ 1,438,335
12,114,547
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
UTAH-- 0.4%
$ 750,000 Intermountain Power Agency, Utah,
Power Supply Refunding, Series A,
(effective yield 6.95%) (b),
0.00%, 7/1/07..................... $ 445,320
WASHINGTON-- 4.7%
3,000,000 Chelan County, Washington, Public
Utilities District, Series A,
(effective yield 5.53%) (b),
0.00%, 6/1/09..................... 1,563,210
1,500,000 Tacoma, Washington, Solid Waste
Utility Revenue, Series B,
5.50%, 12/1/17, (AMBAC)........... 1,453,305
1,000,000 Washington Public Power Supply
System, Nuclear Project #2,
Series C,
7.63%, 7/1/10..................... 1,118,080
1,000,000 Washington State GO, Series A,
6.75%, 2/1/15..................... 1,146,110
5,280,705
WYOMING-- 1.0%
1,140,000 Wyoming Community Development
Authority, Single Family Mortgage,
Series A,
7.88%, 6/1/18..................... 1,180,196
TOTAL LONG-TERM INVESTMENTS
(COST-- $107,046,798)............. 111,321,913
SHORT-TERM INVESTMENTS-- 0.5%
FLORIDA-- 0.5%
565,000 Dade County, Florida, Water and
Sewer Systems Revenue, VRDN,
3.85%, 10/5/22.................... 565,000
WASHINGTON-- 0.0%
5,000 Washington State Health Care
Facilities, VRDN,
4.00%, 10/1/05.................... 5,000
TOTAL SHORT-TERM
INVESTMENTS (COST-- $570,000)... 570,000
TOTAL INVESTMENTS
(COST-- $107,616,798)...... 98.7% 111,891,913
OTHER ASSETS AND
LIABILITIES-- NET.......... 1.3% 1,437,886
NET ASSETS................... 100.0% $113,329,799
</TABLE>
(CONTINUED)
25
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
(a) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on those so identified.
(b) Effective yield (calculated at date of purchase) is the yield at which the
bond accretes on an annual basis until maturity date.
(c) Securities that may be resold to "qualified instituional buyers" under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act
of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
(d) At May 31, 1997, $300,000 principal amount of New York City, New York, GO,
Fiscal 1992, Pre-refunded, Series A, 7.75%, 8/15/15 was pledged to cover
margin requirements for open futures contracts.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC-- American Municipal Bond Assurance Corporation
FGIC-- Financial Guaranty Insurance Company
GO-- General Obligation Bonds
MBIA-- Municipal Bond Investors Assurance Corp.
PSFG-- Permanent School Fund Guaranteed
VRDN-- Variable Rate Demand Notes are payable on demand at par on no more than
seven calendar days' notice given by the Fund to the issuer or other parties not
affiliated with the issuer. Interest rates are determined and reset by the
issuer daily or weekly depending upon the terms of the security. The interest
rates presented for these securities are those in effect at May 31, 1997.
FUTURES CONTRACTS-- SHORT POSITIONS
<TABLE>
<CAPTION>
NUMBER INITIAL CONTRACT UNREALIZED
EXPIRATION OF CONTRACTS AMOUNT DEPRECIATION
<S> <C> <C> <C> <C>
JUNE 97 17 U.S. TREASURY BOND INDEX $1,833,031 $(37,500)
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF ASSETS AND LIABILITIES
May 31, 1997
<TABLE>
<CAPTION>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND FUND INCOME FUND
<S> <C> <C> <C>
ASSETS
Investments at market value (identified cost-- $96,387,879, $44,806,201
and $107,616,798, respectively)....................................... $100,590,593 $ 45,244,479 $111,891,913
Cash.................................................................... 0 66,326 4,334
Receivable for investments sold......................................... 0 0 2,466,140
Interest receivable..................................................... 1,897,863 843,625........ 1,892,703
Receivable for Fund shares sold......................................... 107,105 35,048 22,000
Prepaid expenses and other assets....................................... 26,968 30,724 58,554
Total assets........................................................ 102,622,529 46,220,202 116,335,644
LIABILITIES
Payable for investments purchased....................................... 0 1,008,560 2,341,411
Payable for Fund shares redeemed........................................ 228,082 17,401 290,463
Dividends payable....................................................... 140,678 44,499 244,167
Distribution fee payable................................................ 52,967 10,616 63,516
Due to related parties.................................................. 19,104 4,250 13,902
Due to custodian bank................................................... 18,471 0 0
Payable for daily variation margin on open futures contracts............ 0 0 12,219
Accrued expenses and other liabilities.................................. 34,005 28,275 40,167
Total liabilities................................................... 493,307 1,113,601 3,005,845
NET ASSETS................................................................ $102,129,222 $ 45,106,601 $113,329,799
NET ASSETS REPRESENTED BY
Paid-in capital......................................................... $ 99,066,689 $ 45,350,089 $112,869,280
Undistributed net investment income (accumulated distributions in excess
of net investment income)............................................. 124,532 0 (244,167 )
Accumulated net realized loss on investments and futures contracts...... (1,264,713) (681,766) (3,532,929 )
Net unrealized appreciation on investments and futures contracts........ 4,202,714 438,278 4,237,615
Total net assets.................................................... $102,129,222 $ 45,106,601 $113,329,799
NET ASSETS CONSIST OF
Class A................................................................. $ 45,814,519 $ 6,072,249 $72,629,064
Class B................................................................. 31,874,058 6,741,653 28,821,838
Class C................................................................. -- -- 11,878,897
Class Y................................................................. 24,440,645 32,292,699 --
$102,129,222 $ 45,106,601 $113,329,799
SHARES OUTSTANDING
Class A................................................................. 4,207,467 601,763 7,424,946
Class B................................................................. 2,927,195 667,292 2,974,366
Class C................................................................. -- -- 1,225,559
Class Y................................................................. 2,244,589 3,197,322 --
NET ASSET VALUE PER SHARE
Class A................................................................. $ 10.89 $ 10.09 $ 9.78
Class A-- Offering price (based on sales charge of 4.75%, 3.25% and
4.75%, respectively).................................................. $ 11.43 $ 10.43 $ 10.27
Class B................................................................. $ 10.89 $ 10.10 $ 9.69
Class C................................................................. -- -- $ 9.69
Class Y................................................................. $ 10.89 $ 10.10 --
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF OPERATIONS
Period Ended May 31, 1997
<TABLE>
<CAPTION>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND* FUND* INCOME FUND**
<S> <C> <C> <C>
INVESTMENT INCOME
Interest....................................................... $ 4,496,797 $2,373,153 $ 3,631,204
EXPENSES
Management fee................................................. 399,929 248,564 367,154
Distribution Plan expenses..................................... 333,154 71,757 307,124
Transfer agent fees............................................ 65,152 45,027 99,665
Registration and filing fees................................... 52,562 30,280 6,147
Custodian fees................................................. 49,228 48,597 41,888
Administrative services fees................................... 33,901 0 17,396
Professional fees.............................................. 22,955 22,587 25,138
Trustees' fees and expenses.................................... 4,431 7,083 6,480
Other.......................................................... 57,713 23,623 12,229
Fee waivers by investment manager.............................. (64,199) (60,003) 0
Total expenses............................................... 954,826 437,515 883,221
Less: Indirectly paid expenses................................. (197) (639) (7,261)
Net expenses................................................. 954,629 436,876 875,960
NET INVESTMENT INCOME.......................................... 3,542,168 1,936,277 2,755,244
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES CONTRACTS
Net realized gain on:
Investments.................................................. 640,025 18,940 1,212,437
Futures contracts............................................ 0 0 50,174
Net realized gain on investments and futures contracts......... 640,025 18,940 1,262,611
Net change in unrealized appreciation (depreciation) on:
Investments.................................................. 982,691 139,624 (2,667,451)
Futures contracts............................................ 0 0 (37,500)
Net change in unrealized appreciation (depreciation) on
investments and futures contracts............................ 982,691 139,624 (2,704,951)
Net realized and unrealized gain (loss) on investments and
futures contracts............................................ 1,622,716 158,564 (1,442,340)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 5,164,884 $2,094,841 $ 1,312,904
</TABLE>
* Nine months ended May 31, 1997. During the period, the Fund changed its
fiscal year end from August 31 to May 31.
** Six months ended May 31, 1997. During the period, the Fund changed its fiscal
year end from November 30 to May 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF OPERATIONS
Fiscal Year Ended 1996
<TABLE>
<CAPTION>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND FUND INCOME FUND
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996
<S> <C> <C> <C>
INVESTMENT INCOME
Interest....................................................... $ 6,526,273 $2,837,285 $ 8,727,446
EXPENSES
Management fee................................................. 575,456 287,149 844,486
Distribution plan expenses..................................... 483,026 83,180 709,281
Custodian fees................................................. 100,816 55,841 94,590
Transfer agent fees............................................ 76,905 55,501 186,105
Administrative services fees................................... 59,073 0 21,926
Registration and filing fees................................... 49,627 67,347 36,773
Professional fees.............................................. 25,849 27,986 26,696
Trustees' fees and expenses.................................... 3,640 8,457 6,780
Amortization of organization expenses.......................... 0 8,846 0
Other.......................................................... 76,011 30,530 18,810
Fee waivers and/or expense reimbursement by investment
manager...................................................... (228,548) (140,581) 0
Total expenses............................................... 1,221,855 484,256 1,945,447
Less: Expenses paid indirectly................................. 0 0 (12,939)
Net expenses................................................. 1,221,855 484,256 1,932,508
NET INVESTMENT INCOME.......................................... 5,304,418 2,353,029 6,794,938
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES CONTRACTS
Realized gain (loss) on:
Investments.................................................. 1,622,360 161,202 2,300,652
Futures contracts............................................ 0 0 (301,239)
Net realized gain on investments and futures contracts......... 1,622,360 161,202 1,999,413
Net change in unrealized appreciation (depreciation) on
investments.................................................. (1,135,792) (564,810) (4,259,520)
Net realized and unrealized gain (loss) on investments and
futures contracts............................................ 486,568 (403,608) (2,260,107)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 5,790,986 $1,949,421 $ 4,534,831
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Period Ended May 31, 1997
<TABLE>
<CAPTION>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND* FUND* INCOME FUND**
<S> <C> <C> <C>
OPERATIONS
Net investment income................................................ $ 3,542,168 $ 1,936,277 $ 2,755,244
Net realized gain on investments and futures contracts............... 640,025 18,940 1,262,611
Net change in unrealized appreciation (depreciation) on investments
and futures contracts.............................................. 982,691 139,624 (2,704,951 )
Net increase in net assets resulting from operations............... 5,164,884 2,094,841 1,312,904
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................................ (1,696,428) (755,942) (1,868,216 )
Class B............................................................ (934,247) (159,979) (649,369 )
Class C............................................................ 0 0 (262,024 )
Class Y............................................................ (929,415) (1,020,356) 0
In excess of net investment income:
Class A............................................................ 0 0 (73,369 )
Class B............................................................ 0 0 (25,502 )
Class C............................................................ 0 0 (10,290 )
Total distributions to shareholders................................ (3,560,090) (1,936,277) (2,888,770 )
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................................ 9,286,983 9,393,392 1,652,335
Proceeds from reinvestment of distributions.......................... 2,003,093 973,716 1,527,184
Payment for shares redeemed.......................................... (18,667,515) (35,446,549) (17,530,768 )
Net decrease in net assets resulting from capital share
transactions..................................................... (7,377,439) (25,079,441) (14,351,249 )
Total decrease in net assets..................................... (5,772,645) (24,920,877) (15,927,115 )
NET ASSETS
Beginning of period.................................................. 107,901,867 70,027,478 129,256,914
END OF PERIOD........................................................ $102,129,222 $ 45,106,601 $113,329,799
Undistributed net investment income (accumulated distributions in
excess of net investment income)..................................... $ 124,532 $ 0 $ (244,167 )
</TABLE>
* Nine months ended May 31, 1997. During the period, the Fund changed its
fiscal year end from August 31 to May 31.
** Six months ended May 31, 1997. During the period, the Fund changed its fiscal
year end from November 30 to May 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Fiscal Year Ended 1996
<TABLE>
<CAPTION>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND FUND INCOME FUND
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996
<S> <C> <C> <C>
OPERATIONS
Net investment income............................................. $ 5,304,418 $ 2,353,029 $ 6,794,938
Net realized gain on investments and futures contracts............ 1,622,360 161,202 1,999,413
Net change in unrealized depreciation on investments.............. (1,135,792) (564,810) (4,259,520)
Net increase in net assets resulting from operations............ 5,790,986 1,949,421 4,534,831
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A......................................................... (2,655,984) (541,615) (4,538,414)
Class B......................................................... (1,385,989) (229,080) (1,498,516)
Class C......................................................... 0 0 (758,007)
Class Y......................................................... (1,262,445) (1,582,334) 0
In excess of net investment income:
Class A......................................................... 0 0 (31,491)
Class B......................................................... 0 0 (10,398)
Class C......................................................... 0 0 (5,260)
Total distributions to shareholders............................. (5,304,418) (2,353,029) (6,842,086)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold......................................... 16,695,647 37,737,994 6,339,187
Proceeds from shares issued in acquisition of Keystone Texas Tax
Free Fund....................................................... 0 0 5,119,680
Proceeds from reinvestment of distributions....................... 3,093,850 1,651,747 3,629,202
Payment for shares redeemed....................................... (30,410,409) (22,410,625) (31,540,948)
Net increase (decrease) in net assets resulting from capital
share transactions............................................ (10,620,912) 16,979,116 (16,452,879)
Total increase (decrease) in net assets....................... (10,134,344) 16,575,508 (18,760,134)
NET ASSETS
Beginning of year................................................. 118,036,211 53,451,970 148,017,048
END OF YEAR....................................................... $ 107,901,867 $ 70,027,478 $ 129,256,914
Undistributed net investment income (accumulated distributions in
excess of net investment income).................................. $ 115,656 $ 0 $ (245,552)
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Fiscal Year Ended 1995
<TABLE>
<CAPTION>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND FUND INCOME FUND
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1995 AUGUST 31, 1995 NOVEMBER 30, 1995
<S> <C> <C> <C>
OPERATIONS
Net investment income........................................ $ 3,187,579 $ 2,318,884 $ 7,600,756
Net realized gain (loss) on investments and futures
contracts.................................................. 437,882 (713,222) (760,743)
Net change in unrealized appreciation on investments......... 7,804,353 529,821 18,451,939
Net increase in net assets resulting from operations....... 11,429,814 2,135,483 25,291,952
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A.................................................... (1,935,789) (178,721) (5,042,433)
Class B.................................................... (936,437) (96,022) (1,531,824)
Class C.................................................... 0 0 (1,026,499)
Class Y.................................................... (315,353) (2,044,141) 0
In excess of net investment income:
Class A.................................................... 0 0 (70,626)
Class B.................................................... 0 0 (21,455)
Class C.................................................... 0 0 (14,377)
Total distributions to shareholders........................ (3,187,579) (2,318,884) (7,707,214)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.................................... 3,098,389 25,128,726 11,472,775
Proceeds from shares issued in acquisition of Evergreen
National
Tax-Free Fund.............................................. 28,779,194 0 0
Proceeds from reinvestment of distributions.................. 1,826,205 1,923,116 4,018,869
Payment for shares redeemed.................................. (18,339,492) (26,833,640) (32,840,818)
Net increase (decrease) in net assets resulting from
capital share transactions............................... 15,364,296 218,202 (17,349,174)
Total increase in net assets............................. 23,606,531 34,801 235,564
NET ASSETS
Beginning of year............................................ 94,429,680 53,417,169 147,781,484
END OF YEAR.................................................. $ 118,036,211 $ 53,451,970 $ 148,017,048
Undistributed net investment income (accumulated distributions
in excess of net investment income).......................... $ 22,568 $ 0 $ (288,160)
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Evergreen Keystone National Tax Free Funds consist of Evergreen High Grade
Tax Free Fund ("High Grade Fund"), Evergreen Short-Intermediate Municipal Fund
("Short-Intermediate Fund") and Keystone Tax Free Income Fund ("Tax Free Income
Fund") (collectively, the "Funds"), all of which are registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as diversified,
open-end management investment companies. High Grade Fund is a series of
Evergreen Investment Trust and Short-Intermediate Fund is a series of Evergreen
Municipal Trust.
The Funds offer Class A, Class B, Class C and/or Class Y shares. Class A shares
are sold with a maximum front-end sales charge of 4.75% for both the High Grade
and Tax Free Income Funds and a maximum front-end sales charge of 3.25% for the
Short-Intermediate Fund. 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 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.
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.
A. VALUATION OF SECURITIES
An independent pricing service values each Fund's municipal bonds at fair value
using a variety of factors which may include yield, liquidity, interest rate
risk, credit quality, coupon, maturity and type of issue. 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 sixty days or less are
carried at amortized cost, which approximates market value.
B. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, Tax
Free Income Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
C. 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.
D. 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 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.
E. DISTRIBUTIONS
Distributions from net investment income for the Funds are declared daily and
paid monthly. Distributions from net realized capital gains, if any, are paid at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
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 market
discount on securities.
F. 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.
33
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
G. ORGANIZATION EXPENSES
Organizational expenses of High Grade Fund were initially borne by a prior
administrator. As a result of a change in the administration agreement, First
Union purchased the remaining unreimbursed organizational expenses from the
prior administrator. The High Grade Fund had agreed to reimburse such expenses
during the five year period following its commencement of operations. Pursuant
to these arrangements, as of May 31, 1997, the High Grade Fund has fully
reimbursed First Union for such expenses.
2. CAPITAL SHARE TRANSACTIONS
The High Grade and Short-Intermediate Funds have an unlimited number of shares
of beneficial interest with a par value of $0.0001 authorized. The Tax Free
Income Fund 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 or Class Y. Transactions in shares of the
Funds were as follows:
HIGH GRADE FUND
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 AUGUST 31, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 138,267 $ 1,503,579 728,801 $ 7,875,800 95,059 $ 1,003,763
Shares issued in acquisition of Evergreen
National Tax Free Fund........................ 0 0 0 0 369,661 3,970,157
Shares issued in reinvestment of
distributions................................. 91,672 998,917 144,023 1,571,241 109,500 1,150,986
Shares redeemed................................. (737,802) (8,010,676) (1,652,697) (17,891,048) (967,409) (10,152,313)
Net decrease.................................... (507,863) $ (5,508,180) (779,873) $ (8,444,007) (393,189) $ (4,027,407)
CLASS B
Shares sold..................................... 418,834 $ 4,553,869 420,508 $ 4,595,803 112,511 $ 1,186,133
Shares issued in acquisition of Evergreen
National Tax Free Fund........................ 0 0 0 0 243,174 2,611,688
Shares issued in reinvestment of
distributions................................. 50,410 549,306 75,686 825,507 52,945 556,311
Shares redeemed................................. (546,605) (5,937,166) (691,236) (7,495,373) (520,448) (5,459,057)
Net decrease.................................... (77,361) $ (833,991) (195,042) $ (2,074,063) (111,818) $ (1,104,925)
CLASS Y
Shares sold..................................... 296,083 $ 3,229,535 387,417 $ 4,224,044 85,773 $ 908,493
Shares issued in acquisition of Evergreen
National Tax Free Fund........................ 0 0 0 0 2,066,792 22,197,349
Shares issued in reinvestment of
distributions................................. 41,755 454,870 63,909 697,102 11,174 118,908
Shares redeemed................................. (434,833) (4,719,673) (455,583) (5,023,988) (258,812) (2,728,122)
Net increase (decrease)......................... (96,995) $ (1,035,268) (4,257) $ (102,842) 1,904,927 $ 20,496,628
</TABLE>
34
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SHORT-INTERMEDIATE FUND
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 AUGUST 31, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 182,673 $ 1,860,992 2,806,176 $ 28,333,550 1,438,502 $ 14,469,110
Shares issued in reinvestment of
distributions................................. 17,182 174,056 24,978 253,579 16,308 164,891
Shares redeemed................................. (2,348,922) (23,711,903) (750,660) (7,689,314) (784,474) (7,943,982)
Net increase (decrease)......................... (2,149,067) $(21,676,855) 2,080,494 $ 20,897,815 670,336 $ 6,690,019
CLASS B
Shares sold..................................... 144,261 $ 1,461,443 291,382 $ 2,967,713 673,520 $ 6,777,013
Shares issued in reinvestment of
distributions................................. 11,819 119,733 16,079 163,265 7,150 72,369
Shares redeemed................................. (224,553) (2,272,638) (166,441) (1,686,967) (85,925) (870,798)
Net increase (decrease)......................... (68,473) $ (691,462) 141,020 $ 1,444,011 594,745 $ 5,978,584
CLASS Y
Shares sold..................................... 600,756 $ 6,070,957 635,204 $ 6,436,731 385,625 $ 3,882,603
Shares issued in reinvestment of
distributions................................. 67,156 679,927 121,645 1,234,903 167,271 1,685,856
Shares redeemed................................. (934,601) (9,462,008) (1,283,965) (13,034,344) (1,791,852) (18,018,860)
Net decrease.................................... (266,689) $ (2,711,124) (527,116) $ (5,362,710) (1,238,956) $(12,450,401)
</TABLE>
TAX FREE INCOME FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
MAY 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..................................... 32,393 $ 317,311 181,417 $ 1,689,450 224,063 $ 2,127,732
Share issued in acquisition of Keystone Texas
Tax Free Fund................................. 0 0 131,228 1,269,729 0 0
Shares issued in reinvestment of
distributions................................. 105,269 1,024,777 243,221 2,380,811 270,624 2,608,685
Shares redeemed................................. (1,038,464) (10,140,338) (1,600,793) (15,690,464) (1,843,241) (17,659,525)
Net decrease.................................... (900,802) $ (8,798,250) (1,044,927) $(10,350,474) (1,348,554) $(12,923,108)
CLASS B
Shares sold..................................... 136,707 $ 1,324,403 332,958 $ 3,194,770 647,077 $ 6,139,897
Share issued in acquisition of Keystone Texas
Tax Free Fund................................. 0 0 374,545 3,592,334 0 0
Shares issued in reinvestment of
distributions................................. 35,437 341,830 80,112 776,860 82,512 790,394
Shares redeemed................................. (568,355) (5,489,766) (773,268) (7,498,073) (625,195) (5,968,412)
Net increase (decrease)......................... (396,211) $ (3,823,533) 14,347 $ 65,891 104,394 $ 961,879
CLASS C
Shares sold..................................... 1,101 $ 10,621 140,724 $ 1,454,967 338,010 $ 3,205,146
Share issued in acquisition of Keystone Texas
Tax Free Fund................................. 0 0 26,855 257,617 0 0
Shares issued in reinvestment of
distributions................................. 16,648 160,577 48,553 471,531 64,840 619,790
Shares redeemed................................. (195,509) (1,900,664) (857,965) (8,352,411) (974,642) (9,212,881)
Net decrease.................................... (177,760) $ (1,729,466) (641,833) $ (6,168,296) (571,792) $ (5,387,945)
</TABLE>
35
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the periods ended May 31, 1997:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
<S> <C> <C>
High Grade Fund*........................................................ $116,031,811 $122,344,118
Short-Intermediate Fund*................................................ 21,730,862 46,574,525
Tax Free Income Fund**.................................................. 64,224,477 78,272,042
</TABLE>
* For the nine months ended May 31, 1997
** For the six months ended May 31, 1997
On May 31, 1997, the composition of unrealized appreciation and depreciation of
investment securities based on the aggregate cost of investments for federal tax
purposes was as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET
TAX UNREALIZED UNREALIZED UNREALIZED
COST APPRECIATION DEPRECIATION APPRECIATION
<S> <C> <C> <C> <C>
High Grade Fund.................................................. $ 96,387,879 $4,291,252 $ (88,538) $4,202,714
Short-Intermediate Fund.......................................... 44,806,201 438,278 0 438,278
Tax Free Income Fund............................................. 107,616,798 4,709,914 (434,799) 4,275,115
</TABLE>
As of May 31, 1997, the Funds had capital loss carryovers for federal income tax
purposes as follows:
<TABLE>
<CAPTION>
EXPIRATION
2002 2003 2004
<S> <C> <C> <C>
High Grade Fund............................ $1,265,000 -- --
Short-Intermediate Fund.................... -- $249,000 $433,000
Tax Free Income Fund....................... 2,704,000 867,00 --
</TABLE>
4. DISTRIBUTION PLANS
Since December 11, 1996, Evergreen Keystone Distributor, Inc. (formerly,
Evergreen Funds Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of The
BISYS Group Inc. ("BISYS") has served as principal underwriter for the Tax Free
Income Fund. Prior to December 11, 1996, Evergreen Keystone Investment Services,
Inc. (formerly, Keystone Investment Distributors Company) ("EKIS"), a
wholly-owned subsidiary of Keystone, served as the principal underwriter for the
Tax Free Income Fund. EKD also serves as the principal underwriter for the High
Grade and Short-Intermediate Funds.
Each Fund has adopted Distribution Plans for each class of shares 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 asset of the class. The expenses are currently limited to 0.25% annually of
the average daily net assets of the Class A shares of the High Grade and Tax
Free Income Funds and limited to 0.10% annually of the average daily net assets
of the Class A shares of the Short-Intermediate Fund. 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 of the Tax Free Income Fund, the
principal underwriter may pay 12b-1 fees 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%.
During the period ended May 31, 1997, 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>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
High Grade Fund............................... $92,644 $240,510 N/A
Short-Intermediate Fund....................... 19,181 52,576 N/A
Tax Free Income Fund.......................... 90,496 154,261 $62,367
</TABLE>
Each of the Distribution Plans for the Tax Free Income Fund may be terminated at
any time by a vote of the Independent Trustees or by a vote of a majority of the
outstanding voting shares of the respective class. However, after the
termination of any Distribution Plan, and subject to the discretion of the
Independent Trustees, payments to EKIS and/or EKD may continue as compensation
for services which had been earned while the Distribution Plan was in effect.
36
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
EKD and/or its predecessor has advised the Funds that it has retained front-end
sales charges resulting from the sales of Class A shares for the High Grade,
Short-Intermediate and Tax Free Income Funds during the period ended May 31,
1997 of $6,389, $3,820 and $9,477, respectively.
Contingent deferred sales charges paid by redeeming shareholders are paid to EKD
or its predecessor.
5. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
First Union National Bank of North Carolina ("FUNB"), a wholly-owned subsidiary
of First Union Corporation ("First Union"), serves as the investment adviser to
the High Grade Fund and is paid a fee computed daily and paid monthly at an
annual rate of 0.50% of the Fund's average daily net assets. EKIS, a subsidiary
of First Union, is the administrator. Prior to March 11, 1997, Evergreen Asset
Management Corp. ("Evergreen Asset"), a wholly owned subsidiary of First Union,
was the administrator. Furman Selz LLC ("Furman Selz") was the sub-administrator
through December 31, 1996. Effective January 1, 1997, BISYS acquired Furman
Selz' mutual fund unit and accordingly BISYS became sub-administrator. The
administrator and sub-administrator for the Fund are entitled to an annual fee
based on the average daily net assets of all funds administered by EKIS for
which First Union or its investment advisory subsidiaries is also the investment
adviser. 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 funds. 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 funds.
Evergreen Asset is the investment adviser for the Short-Intermediate Fund and is
paid a management fee that is computed daily and paid monthly at an annual rate
of 0.50% on the average daily net assets. Out of its fee, Evergreen Asset in
turn pays EKIS for its services as administrator, BISYS for its services as
sub-administrator and Lieber & Company, an affiliate of First Union, for its
services as sub-adviser.
Keystone Investment Management Company ("Keystone"), a subsidiary of First
Union, is the investment adviser for the Tax Free Income Fund. In return for
providing investment management and administrative services to the Tax Free
Income Fund, the Fund pays Keystone a management fee that is calculated daily
and paid monthly. The management fee is computed at an annual rate of 2.00% of
Tax Free Income Fund's gross investment income plus an amount determined by
applying percentage rates starting at 0.50% and declining to 0.25% per annum as
net assets increase, to the average daily net asset value of the Fund.
Effective, January 1, 1997, BISYS became the sub-administrator to the Fund and
is paid by Keystone.
During the period ended May 31, 1997, the investment adviser for the High Grade
and Short-Intermediate Funds waived its management fees in the amounts of
$64,199 and $60,003, respectively.
During the period ended May 31, 1997, High Grade Fund and Tax Free Income Fund
paid or accrued $27,577 and $17,396 to EKIS, 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 Funds. Prior to May 5, 1997,
State Street Bank and Trust Company ("State Street") served as the transfer and
dividend disbursing agent for the High Grade and Short-Intermediate Funds. For
certain accounts for the High Grade and Short-Intermediate Funds, First Union
had been sub-contracted by State Street to maintain shareholder sub-account
records, take fund purchase and redemption orders and answer inquiries. For each
account, First Union is entitled a fee which in aggregate totaled $866 and $288
for the High Grade and Short-Intermediate Funds for the period ended May 31,
1997.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds. As sub-administrator, BISYS compensates the officers of the
Funds.
At May 31, 1997, FUNB owned, directly or beneficially, 22.0% of the outstanding
shares of Short-Intermediate Fund.
37
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 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.
7. ACQUISITIONS
On July 7, 1995 the High Grade Fund acquired the net assets of Evergreen
National Tax Free Fund ("National Fund") and on April 30, 1996 the Tax Free
Income Fund acquired the net assets of Keystone Texas Tax Free Fund ("Texas
Fund") in exchange for Class A, B and C or Y shares. Both acquisitions were
accomplished by a tax-free exchange of the respective shares of each respective
Fund. The value of assets acquired, number of shares issued, unrealized
appreciation acquired and aggregate net assets of each Fund immediately after
the acquisition are as follows:
<TABLE>
<CAPTION>
ACQUIRING ACQUIRED VALUE OF NET NUMBER OF UNREALIZED NET ASSETS
FUND FUND ASSETS ACQUIRED SHARES ISSUED APPRECIATION AFTER ACQUISITION
<S> <C> <C> <C> <C> <C>
High Grade Fund National Fund $28,779,195 2,679,627 $528,003 $ 128,792,690
Tax Free Income Fund Texas Fund 5,119,680 532,628 81,550 140,303,798
</TABLE>
8. DEFERRED TRUSTEES' FEES
Each Independent Trustee of the High Grade and Short-Intermediate Funds may
defer any or all compensation related to their 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 each Fund's Trustees' 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
May 31, 1997, the value of the Trustees deferral account was $3,717 for the High
Grade Fund and $4,985 for the Short-Intermediate Fund.
9. 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 May 31, 1997, the High Grade and Short-Intermediate
Funds had no borrowings under this agreement.
38
<PAGE>
EVERGREEN KEYSTONE
(logo)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Evergreen High Grade Tax Free Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Evergreen High Grade Tax Free Fund
(the "Fund"), one of the Evergreen Investment Trust Portfolios, at May 31, 1997,
and the results of its operations, the changes in its net assets and the
financial highlights for the period September 1, 1996 through May 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 audit. We
conducted our audit 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
audit, which included confirmation of securities at May 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures, provides a reasonable basis for the opinion expressed above. The
financial statements of the Fund for the year ended, and indicated periods prior
to, August 31, 1996 were audited by other independent accountants whose report
dated October 16, 1996 expressed an unqualified opinion.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
July 8, 1997
39
<PAGE>
EVERGREEN KEYSTONE
(logo)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Evergreen Short-Intermediate Municipal Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Evergreen Short-Intermediate Fund
(the "Fund"), one of the Evergreen Municipal Trust Portfolios, at May 31, 1997,
and the results of its operations, the changes in its net assets and the
financial highlights for each of the periods indicated, 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 May 31, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
July 8, 1997
40
<PAGE>
EVERGREEN KEYSTONE
(logo)
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Tax Free Income Fund
We have audited the accompanying statement of assets and liabilities of Keystone
Tax Free Income Fund, including the schedule of investments, as of May 31, 1997,
and the related statements of operations for the six months ended May 31, 1997
and the year ended November 30, 1996, the statements of changes in net assets
for the six months ended May 31, 1997 and for each of the years in the two-year
period ended November 30, 1996, and the financial highlights for the six months
ended May 31, 1997, each of the years in the nine-year period ended November 30,
1996 and the period from February 13, 1987 (Commencement of Operations) to
November 30, 1987 for Class A Shares and for the six months ended May 31, 1997,
each of the years in the three-year period ended November 30, 1996 and the
period from February 1, 1993 (Date of Initial Public Offering) to November 30,
1993, for Class B and Class C Shares. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Tax Free Income Fund as of May 31, 1997, the results of its operations
for the six months ended May 31, 1997 and the year ended November 30, 1996, the
changes in its net assets and the financial highlights for each of the years or
periods specified in the first paragraph above in conformity with generally
accepted accounting principles.
Boston, Massachusetts KPMG Peat Marwick LLP
June 27, 1997
41
<PAGE>
EVERGREEN KEYSTONE
(logo)
ADDITIONAL INFORMATION (Unaudited)
Shareholders of the Keystone Tax Free Income Fund considered and acted upon the
proposals listed below at a special meeting of shareholders held Monday,
December 9, 1996. In addition, below each proposal are the results of that vote.
1. To elect the following Trustees:
<TABLE>
<S> <C> <C>
AFFIRMATIVE WITHHELD
Frederick Amling........................... 9,815,069 199,547
Laurence B. Ashkin......................... 9,812,403 202,213
Charles A. Austin III...................... 9,813,238 207,378
Foster Bam................................. 9,812,719 201,897
George S. Bissell.......................... 9,815,312 199,304
Edwin D. Campbell.......................... 9,812,195 202,421
Charles F. Chapin.......................... 9,814,500 200,116
K. Dun Gifford............................. 9,813,609 201,007
James S. Howell............................ 9,811,512 203,104
Leroy Keith, Jr............................ 9,813,609 201,007
F. Ray Keyser.............................. 9,810,159 204,457
Gerald M. McDonnell........................ 9,811,512 203,104
Thomas L. McVerry.......................... 9,811,512 203,104
William Walt Pettit........................ 9,810,932 203,684
David M. Richardson........................ 9,813,609 201,007
Russell A. Salton, III M.D................. 9,811,487 203,129
Michael S. Scofield........................ 9,813,283 201,333
Richard J. Shima........................... 9,808,652 205,964
Andrew J. Simons........................... 9,813,040 201,576
</TABLE>
2. To approve an Investment Advisory and Management Agreement between Keystone
Tax Free Income Fund and Keystone Investment Management Company:
<TABLE>
<S> <C>
Affirmative............................. 9,365,556
Against................................. 146,890
Abstain................................. 502,170
</TABLE>
FEDERAL INCOME TAX STATUS OF DIVIDENDS (UNAUDITED)
Of the dividends distributed by High Grade, Short-Intermediate and Tax Free
Income Funds for the period ended May 31, 1997, 99.01%, 99.98% and 99.29%,
respectively, is exempt from federal income tax other than alternative
minimum tax.
42
<PAGE>
<TABLE>
<CAPTION>
Evergreen High Grade Tax Free Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
SCHEDULE OF INVESTMENTS (000's omitted)
May 31, 1997 Evergreen High Grade
Tax Free Bond Fund
------------------
Maturity Market
Long-Term Investments - 96.5% Coupon Date Principal Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Alaska - 0.8%
Valdez AK, Marine Terminal Revenue, Pipline Inc. Project, Series B 5.50% 10/1/28
Arizona - 1.7%
Maricopa Cnty. AZ, Creighton Elem. Sch. Dist. No. 14 Series C 1991 (FGIC) 6.50% 7/1/07 1,000 1,125
Salt River Project AZ, Agricultural Improvement, Series C 5.00% 1/1/13
California - 3.7%
California State Department Water Resources Central Valley Project 5.38% 12/1/27
East Bay California Municipal Utility Water Systems 5.00% 6/1/26
Redevelopment Agcy. of the City of San Jose, Tax Allocation Bonds,
Series 1993 (MBIA) 6.00% 8/1/15 2,000 2,145
San Mateo Cnty. Joint Powers Fin. Auth. Lease RB, 1993 Refunding
Series A, (MBIA) 6.50% 7/1/16 500 561
Colorado - 3.0%
Arapahoe Cnty., Pub. Hwy. Auth. Cap. Imp. Trust Fund Hwy RB
(E-470 Proj.) (MBIA) 6.15% 8/31/26 1,000 1,054
Arapahoe Cnty., Pub. Hwy. Auth. Cap. Imp. Trust Fund Sr. Current
Interest Bonds 7.00% 8/31/26 2,000 2,145
City & Cnty. of Denver GO Refunding Bonds, #1 School District,
Series 1994 A, (MBIA) 6.50% 6/1/10 500 560
Florida - 1.7%
Orange Cnty. FL, Hlth. Facs. Auth. Hosp. RB, Orlando Regional Healthcare
Sys., Series 1996C, (MBIA) 6.25% 10/1/16 1,000 1,090
St. Petersburg FL, Excise Tax Refunding 5.15% 10/1/13
Georgia - 4.3%
Atlanta GA, Metropolitan Rapid Transit Auth. Series A, (MBIA) 5.50% 7/1/17 1,000 999
City of Atlanta Airport Facs. RRB, Series 1994 A, (AMBAC) 6.50% 1/1/10 500 558
Municipal Elec. Auth. Georgia Spec. Oblig. Fifth Crossover
Series, Project 1, (AMBAC) 6.40% 1/1/13 1,000 1,102
Municipal Elec. Auth. Georgia Spec. Oblig. Fifth Crossover
Series, Project 1, (MBIA) 6.50% 1/1/17 2,400 2,695
Hawaii - 3.0%
Hawaii Arpt. Sys. RB, Second Series 1990, (FGIC) 7.50% 7/1/20 1,000 1,089
Hawaii State, GO Series CM, (FGIC) 6.00% 12/1/10 2,500 2,680
Idaho - 0.7%
Idaho Hsg. Agcy. Single Family Mortgage Bonds, 1994 Series C-1 Senior
Bonds & Mezzanine Bonds 6.30% 7/1/11 845 870
Illinois - 16.1%
City of Chicago GO, Current Interest Bonds, (Project Series 1995), (AMBAC) 6.13% 1/1/16 2,150 2,229
City of Chicago Water RRB, Series 1993, (FGIC) 6.50% 11/1/15 4,725 5,308
Cook Cnty. GO, Series B 5.38% 11/15/18
Illinois Dev. Fin. Auth. Poll. Ctrl. RRB, Commonwealth Edison Co.
Project Series 1991, (MBIA) 7.25% 6/1/11 2,000 2,182
Illinois Dev. Fin. Auth. Poll. Ctrl. RRB, Commonwealth Edison Co. Project
Series 1994D, (AMBAC) 6.75% 3/1/15 3,000 3,293
Illinois Hlth. Facs. Auth. Hlth. Facs. RRB SSM Hlth. Care, Series
1992 AA, (MBIA) 6.50% 6/1/12 1,750 1,954
Illinois State Sales Tax Revenue 5.50% 6/15/20
Metropolitan Pier + Expo Auth. IL, McCormick Place Expn
Project Series A (AMBAC) 5.25% 6/15/27
Metropolitan Pier + Expo Auth. IL, McCormick Place Expn
Project,Series B, (MBIA) 0.00% 6/15/13 5,625 2,259
Indiana - 2.9%
Indiana Muni. Pwr. Agcy., Pwr. Supply Sys. RRB, 1993 Series B, (MBIA) 6.00% 1/1/13 1,000 1,064
Indiana Trans. Fin. Auth. Hwy. RB, Series 1992A, (MBIA) 6.80% 12/1/16 700 808
Marion Cnty. IN, Middle School First Mortgage Bonds, (MBIA) 6.88% 7/5/11 1,500 1,729
Louisiana - 1.1%
Orleans Parish LA, School Board RB, (MBIA) 9.05% 2/1/10 1,000 1,339
Massachusetts - 2.0%
Massachusetts GO, Series A, (AMBAC) 6.50% 11/1/14 1,000 1,120
Massachusetts Hsg. Fin. Agcy. Hsg. Proj. RB, 1993 Series A, (AMBAC) 6.15% 10/1/15 500 508
Massachusetts State Water Resources Authority, Series B 5.00% 12/1/25
Maryland - 2.0%
Maryland State & Local Facs. GO, First Series 5.00% 3/1/10 2,500 2,456
Maine - 0.9%
Maine Turnpike Authority RB, Series 1994, (MBIA) 7.13% 7/1/08 1,000 1,171
Michigan - 1.5%
Michigan State Hospital Finance Authority Revenue, Henry Ford
Health, Series A 5.25% 11/15/25
Michigan State Trunk Line, Series A 5.50% 10/1/21
Minnesota - 0.4%
Minnesota Hsg. Fin. Agcy. Single Family Mtge. Bonds, 1994 Series H 6.70% 1/1/18 490 514
Nevada- 0.8%
Clark County, School District Building and Renovation Series B 5.25% 6/15/17
New Jersey - 0.8%
New Jersey State Transportation Trust Fund Authority,
Transportation Systems, Series B 5.25% 6/15/16
New Mexico - 0.8%
City of Albuquerque, Arpt. RB, Series 1995 A, (AMBAC) 6.35% 7/1/07 500 540
City of Albuquerque, Arpt. RB, Series 1995 B, (AMBAC) 7.00% 7/1/16 500 501
<CAPTION>
Blanchard Flexible Pro Forma
Tax Free Bond Fund Combined
------------------ ---------
Market Market
Long-Term Investments - 96.5 Principal Value Principal Value
-----------------------------------------------
<S> <C> <C> <C> <C>
Alaska - 0.8%
Valdez AZ, Marine Terminal Revenue, Pipline Inc. Project, Series B 1,000 944 1,000 944
-------------
Arizona - 1.7%
Maricopa Cnty. AZ, Creighton Elem. Sch. Dist. No. 14 Series C 1991 (FGIC) 1,000 1,125
Salt River Project AZ, Agricultural Improvement, Series C 1,000 961 1,000 961
-------------
2,086
-------------
California - 3.7%
California State Department Water Resources Central Valley Project 1,000 964 1,000 964
East Bay California Municipal Utility Water Systems 1,000 912 1,000 912
Redevelopment Agcy. of the City of San Jose, Tax Allocation Bonds,
Series 1993 (MBIA) 2,000 2,145
San Mateo Cnty. Joint Powers Fin. Auth. Lease RB, 1993 Refunding
Series A, (MBIA) 500 561
-------------
4,582
-------------
Colorado - 3.0%
Arapahoe Cnty., Pub. Hwy. Auth. Cap. Imp. Trust Fund Hwy RB
(E-470 Proj.) (MBIA) 1,000 1,054
Arapahoe Cnty., Pub. Hwy. Auth. Cap. Imp. Trust Fund Sr. Current
Interest Bonds 2,000 2,145
City & Cnty. of Denver GO Refunding Bonds, #1 School District,
Series 1994 A, (MBIA) 500 560
-------------
3,759
-------------
Florida - 1.7%
Orange Cnty. FL, Hlth. Facs. Auth. Hosp. RB, Orlando Regional Healthcare
Sys., Series 1996C, (MBIA) 1,000 1,090
St. Petersburg FL, Excise Tax Refunding 1,000 970 1,000 970
-------------
2,060
-------------
Georgia - 4.3%
Atlanta GA, Metropolitan Rapid Transit Auth. Series A, (MBIA) 1,000 999
City of Atlanta Airport Facs. RRB, Series 1994 A, (AMBAC) 500 558
Municipal Elec. Auth. Georgia Spec. Oblig. Fifth Crossover
Series, Project 1, (AMBAC) 1,000 1,102
Municipal Elec. Auth. Georgia Spec. Oblig. Fifth Crossover
Series, Project 1, (MBIA) 2,400 2,695
-------------
5,354
-------------
Hawaii - 3.0%
Hawaii Arpt. Sys. RB, Second Series 1990, (FGIC) 1,000 1,089
Hawaii State, GO Series CM, (FGIC) 2,500 2,680
-------------
3,769
-------------
Idaho - 0.7%
Idaho Hsg. Agcy. Single Family Mortgage Bonds, 1994 Series C-1 Senior
Bonds & Mezzanine Bonds 845 870
-------------
Illinois - 16.1%
City of Chicago GO, Current Interest Bonds, (Project Series 1995), (AMBAC) 2,150 2,229
City of Chicago Water RRB, Series 1993, (FGIC) 4,725 5,308
Cook Cnty. GO, Series B 1,000 961 1,000 961
Illinois Dev. Fin. Auth. Poll. Ctrl. RRB, Commonwealth Edison Co.
Project Series 1991, (MBIA) 2,000 2,182
Illinois Dev. Fin. Auth. Poll. Ctrl. RRB, Commonwealth Edison Co. Project
Series 1994D, (AMBAC) 3,000 3,293
Illinois Hlth. Facs. Auth. Hlth. Facs. RRB SSM Hlth. Care, Series
1992 AA, (MBIA) 1,750 1,954
Illinois State Sales Tax Revenue 1,000 963 1,000 963
Metropolitan Pier + Expo IL, McCormick Place Expn Project Series A 1,000 938 1,000 938
Metropolitan Pier + Expo IL, McCormick Place Expn Project,Series B, (MBIA) 5,625 2,259
-------------
20,087
-------------
Indiana - 2.9%
Indiana Muni. Pwr. Agcy., Pwr. Supply Sys. RRB, 1993 Series B, (MBIA) 1,000 1,064
Indiana Trans. Fin. Auth. Hwy. RB, Series 1992A, (MBIA) 700 808
Marion Cnty. IN, Middle School First Mortgage Bonds, (MBIA) 1,500 1,729
-------------
3,601
-------------
Louisiana - 1.1%
Orleans Parish LA, School Board RB, (MBIA) 1,000 1,339
-------------
Massachusetts - 2.0%
Massachusetts GO, Series A, (AMBAC) 1,000 1,120
Massachusetts Hsg. Fin. Agcy. Hsg. Proj. RB, 1993 Series A, (AMBAC) 500 508
Massachusetts State Water Resources Authority, Series B 1,000 905 1,000 905
-------------
2,533
-------------
Maryland - 2.0%
Maryland State & Local Facs. GO, First Series 2,500 2,456
-------------
Maine - 0.9%
Maine Turnpike Authority RB, Series 1994, (MBIA) 1,000 1,171
-------------
Michigan - 1.5%
Michigan State Hospital Finance Authority Revenue, Henry Ford
Health, Series A 1,000 938 1,000 938
Michigan State Trunk Line, Series A 1,000 965 1,000 965
-------------
1,903
-------------
Minnesota - 0.4%
Minnesota Hsg. Fin. Agcy. Single Family Mtge. Bonds, 1994 Series H 490 514
-------------
Nevada- 0.8%
Clark County, School District Building and Renovation Series B 1,000 957 1,000 957
-------------
New Jersey - 0.8%
New Jersey State Transportation Trust Fund Authority,
Transportation Systems, Series B 1,000 966 1,000 966
-------------
New Mexico - 0.8%
City of Albuquerque, Arpt. RB, Series 1995 A, (AMBAC) 500 540
City of Albuquerque, Arpt. RB, Series 1995 B, (AMBAC) 500 501
-------------
1,041
-------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
New York - 12.9%
Albany Cnty. Airport Auth. RB, (FSA) 5.25% 12/15/10 1,000 981
New York City Mun. Water Fin. Auth., Series B 5.50% 6/15/27
New York State Dormitory Authority Revenues,
Montefiore Medical Center 5.25% 2/1/15
New York State Medical Care Facilities, Hospital Insured
Mortgage, Series A 5.38% 2/15/25
New York State Hsg. Fin. Agcy. RB, Insured Multifamily Mortgage,
Series 1994 B, (AMBAC) 6.35% 8/15/23 1,500 1,539
New York State Local Government Assistance Corporation RB,
Series B (Prerefuned @ $102) 7.38% 4/1/01 2,590 2,895
New York State Local Government Assistance Corporation 5.50% 4/1/21
Port Auth. of NY & NJ, Consolidated 97th Series, (FGIC) 6.50% 7/15/19 500 530
Port Auth. of NY & NJ, Consolidated 104th Series 5.20% 7/15/21
Port Auth. of NY & NJ, Special Obligation, JFK International
Airport Terminal 6, (MBIA) 6.25% 12/1/10 5,000 5,454
North Dakota - 2.5%
Mercer Cnty. ND, Poll. Ctrl. RRB, Basin Elec. Pwr.
Cooperative-Antelope Valley Unit 1 & Common Facs.,
Second 1995 Series (AMBAC) 6.05% 1/1/19 3,000 3,108
Ohio - 2.7%
City of Toledo Hsg. Imp. Bonds, Macy's Proj., Series 1995A, (MBIA) 6.35% 12/1/25 1,500 1,581
Kings Cnty. OH Board of Education Sch. Imp. Bonds, Unltd.
Tax GO, Series 1995, (FGIC) 7.50% 12/1/16 1,000 1,254
Ohio Hsg. Fin. Agcy. Residential Mtge. RB 1995 Series A-2, 6.63% 3/1/26 475 490
South Carolina - 2.8%
South Carolina Port Auth. RB, Series 1991, (AMBAC) 6.63% 7/1/11 3,250 3,468
South Dakota - 3.5%
South Dakota Hlth. & Edl. Facs. Auth. RRB, St. Lukes
Midland Regional Medical Center, Series 1991, (MBIA) 6.63% 7/1/11 4,000 4,304
Tennessee - 2.6%
City of Bristol, Hlth & Edl. Facs. Hosp. RRB (Bristol Mem. Hosp.)
Series 1993, (FGIC) 6.75% 9/1/07 1,200 1,367
Cnty. of Knox TN, Hlth., Edl. & Hsg. Hosp. RRB, Fort Sanders
Alliance Obligated Group, Series 1993, (MBIA) 6.25% 1/1/13 1,700 1,843
Texas - 4.3%
City of Austin TX, Airport Sys. Prior Lien RB, Series 1995 A, (MBIA) 6.13% 11/15/25 1,500 1,533
City of Houston Water Conveyance Sys. Contract COP, Series 1993H, (AMBAC) 7.50% 12/15/14 1,000 1,221
Harris Cnty. TX, Toll Road RB, (Prefunded @ $53.836), (AMBAC) 0.00% 8/15/09 6,000 1,700
San Antonio TX, Electric & Gas Revenue, Series A 5.00% 2/1/14
Utah - 3.7%
Intermountain Power Agency Utah Power Supply Revenue 5.50% 7/1/20
Iron Cnty. UT, Board of Ed. Sch. Bldg. Bonds, Series 1994, (MBIA) 6.40% 1/15/12 2,500 2,675
Salt Lake City, Salt Lake Cnty. Arpt, RB Series 1993A, (FGIC) 6.00% 12/1/12 1,000 1,031
Virginia - 1.8%
Hanover VA, IDA Hosp. RB, Mem. Regional Med. Center Proj.
Series 1995, (MBIA) 6.38% 8/15/18 2,000 2,196
Washington - 2.9%
Port of Seattle WA Revenue, Series A 5.50% 10/1/22
Tacoma WA, Electric Sys. RRB, Series 1994, (FGIC) 6.25% 1/1/15 2,500 2,620
West Virginia - 0.4%
West Virginia Hsg. Dev. Fund Hsg. Fin. Series A 6.05% 5/1/27 500 502
Wisconsin - 6.7%
Superior WI, RRB, Midwest Energy Res. Co. Project,
Series E-1991, (FGIC) 6.90% 8/1/21 4,500 5,276
Wisconsin Hlth. & Edl. Facs. Auth. RB, Wausau Hosps., Inc.
Project Series 1991B, (AMBAC) 6.63% 8/15/11 2,000 2,143
Wisconsin State Transportation Revenue, Series B 5.50% 7/1/22
Puetro Rico - 1.7%
Commonwealth of Puerto Rico, Elec. Pwr. Auth. RB Series B, (MBIA) 6.25% 7/1/10 1,000 1,101
Commonwealth of Puerto Rico, Elec. Pwr. Auth. RRB Series Y, (MBIA) 6.50% 7/1/06 500 558
Commonwealth of Puerto Rico, Hsg. Bank & Fin. Agcy. RB,
(Collateralized by GNMA, FNMA & FHLMC Certificates) 6.10% 10/1/15 500 506
--------------
Total Long Term Investments - (cost $115,526) 99,524
--------------
Short Term Investments - 0.7%
Phenix Cnty. AL, RB, Mead Coated Board, Project B, VRDN 4.15% 10/1/25 100 100
Kansas City Kansas Industrial Revenue, PQ Corportation Project, VRDN 4.10% 8/15/01 800 800
--------------
Total Short Term Investments - (cost $900) 900
--------------
Mutual Fund Shares - 0.7% Shares
------
Federated Tax Free Obligations Fund 167 167
Dreyfus Tax Exempt Cash Management
--------------
Total Mutual Fund Shares - (cost $902) 167
--------------
Total Investments - (cost $117,328) 98.0% 100,591
Other Assets and Liabilities (net) 2.0 1,538
---------- --------------
Total Net Assets 100.0% $102,129
========== ==============
<CAPTION>
<S> <C> <C> <C> <C>
New York - 12.9%
Albany Cnty. Airport Auth. RB, (FSA) 1,000 981
New York City Mun. Water Fin. Auth., Series B 1,000 971 1,000 971
New York State Dormitory Authority Revenues,
Montefiore Medical Center 1,000 963 1,000 963
New York State Medical Care Facilities, Hospital Insured
Mortgage, Series A 1,000 956 1,000 956
New York State Hsg. Fin. Agcy. RB, Insured Multifamily Mortgage,
Series 1994 B, (AMBAC) 1,500 1,539
New York State Local Government Assistance Corporation RB,
Series B (Prerefuned @ $102) 2,590 2,895
New York State Local Government Assistance Corporation 1,000 965 1,000 965
Port Auth. of NY & NJ, Consolidated 97th Series, (FGIC) 500 530
Port Auth. of NY & NJ, Consolidated 104th Series 1,000 950 1,000 950
Port Auth. of NY & NJ, Special Obligation, JFK International
Airport Terminal 6, (MBIA) 5,000 5,454
------------
16,204
------------
North Dakota - 2.5%
Mercer Cnty. ND, Poll. Ctrl. RRB, Basin Elec. Pwr.
Cooperative-Antelope Valley Unit 1 & Common Facs.,
Second 1995 Ser, (AMBAC) 3,000 3,108
------------
Ohio - 2.7%
City of Toledo Hsg. Imp. Bonds, Macy's Proj., Series 1995A, (MBIA) 1,500 1,581
Kings Cnty. OH Board of Education Sch. Imp. Bonds, Unltd.
Tax GO, Series 1995, (FGIC) 1,000 1,254
Ohio Hsg. Fin. Agcy. Residential Mtge. RB 1995 Series A-2, 475 490
------------
3,325
------------
South Carolina - 2.8%
South Carolina Port Auth. RB, Series 1991, (AMBAC) 3,250 3,468
------------
South Dakota - 3.5%
South Dakota Hlth. & Edl. Facs. Auth. RRB, St. Lukes
Midland Regional Medical Center, Series 1991, (MBIA) 4,000 4,304
------------
Tennessee - 2.6%
City of Bristol, Hlth & Edl. Facs. Hosp. RRB (Bristol Mem. Hosp.)
Series 1993, (FGIC) 1,200 1,367
Cnty. of Knox TN, Hlth., Edl. & Hsg. Hosp. RRB, Fort Sanders
Alliance Obligated Group, Series 1993, (MBIA) 1,700 1,843
------------
3,210
------------
Texas - 4.3%
City of Austin TX, Airport Sys. Prior Lien RB, Series 1995 A, (MBIA) 1,500 1,533
City of Houston Water Conveyance Sys. Contract COP, Series 1993H, (AMBAC 1,000 1,221
Harris Cnty. TX, Toll Road RB, (Prefunded @ $53.836), (AMBAC) 6,000 1,700
San Antonio TX, Electric & Gas Revenue, Series A 1,000 944 1,000 944
------------
5,398
------------
Utah - 3.7%
Intermountain Power Agency Utah Power Supply Revenue 1,000 953 1,000 953
Iron Cnty. UT, Board of Ed. Sch. Bldg. Bonds, Series 1994, (MBIA) 2,500 2,675
Salt Lake City, Salt Lake Cnty. Arpt, RB Series 1993A, (FGIC) 1,000 1,031
------------
4,659
------------
Virginia - 1.8%
Hanover VA, IDA Hosp. RB, Mem. Regional Med. Center Proj.
Series 1995, (MBIA) 2,000 2,196
------------
Washington - 2.9%
Port of Seattle WA Revenue, Series A 1,000 975 1,000 975
Tacoma WA, Electric Sys. RRB, Series 1994, (FGIC) 2,500 2,620
------------
3,595
------------
West Virginia - 0.4%
West Virginia Hsg. Dev. Fund Hsg. Fin. Series A 500 502
------------
Wisconsin - 6.7%
Superior WI, RRB, Midwest Energy Res. Co. Project,
Series E-1991, (FGIC) 4,500 5,276
Wisconsin Hlth. & Edl. Facs. Auth. RB, Wausau Hosps., Inc.
Project Series 1991B, (AMBAC) 2,000 2,143
Wisconsin State Transportation Revenue, Series B 1,000 973 1,000 973
------------
8,392
------------
Puetro Rico - 1.7%
Commonwealth of Puerto Rico, Elec. Pwr. Auth. RB Series B, (MBIA) 1,000 1,101
Commonwealth of Puerto Rico, Elec. Pwr. Auth. RRB Series Y, (MBIA) 500 558
Commonwealth of Puerto Rico, Hsg. Bank & Fin. Agcy. RB,
(Collateralized by GNMA, FNMA & FHLMC Certificates) 500 506
------------
2,165
------------ ------------
Total Long Term Investments - (cost $115,526) 20,994 120,518
------------ ------------
Short Term Investments - 0.7%
Phenix Cnty. AL, RB, Mead Coated Board, Project B, VRDN 100 100
Kansas City Kansas Industrial Revenue, PQ Corportation Project, VRDN 800 800
------------
Total Short Term Investments - (cost $900) 900
------------
Mutual Fund Shares - 0.7% Shares Shares
------ -----------
Federated Tax Free Obligations Fund 167 167
Dreyfus Tax Exempt Cash Management 735 735 735 735
------------ ------------
Total Mutual Fund Shares - (cost $902) 735 902
------------ ------------
Total Investments - (cost $117,328) 21,729 122,320
Other Assets and Liabilities (net) 260 1,798
------------ ------------
Total Net Assets $21,989 $124,118
============ ============
</TABLE>
Summary of Abbreviations
AMBAC - American Municipal Bond Assurance Corp.
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Corp.
FHLMC- Federal Home Mortgage Corp.
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance Corp.
GNMA - Government National Mortgage Association
GO - General Obligation Bonds
IDA - Industrial Development Authority
MBIA - Municipal Bond Investors Assurance Corp.
RB - Revenue Bond
RRB - Revenue Refunding Bond
VRDN - Variable Rate Demand Notes are payable on demand at par on no more than
seven calendar day's notice given by the Fund to the issuer or other parties not
affiliated with the issuer. Interest rates are determined and reset by the
issuer daily or weekly depending on the terms of the security. The interest
rates presented for these securities are those in effect at May 31, 1997.
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Evergreen High Grade Tax Free Fund
Pro Forma Combining Financial Statements (unaudited)
Statement of Assets and Liabilities (000's)
May 31, 1997
<TABLE>
<CAPTION>
Evergreen Blanchard
High Grade Tax Flexible Tax-Free Pro Forma
Free Fund Bond Fund Adjustments Combined
------------------------------------------------------ --------------
Assets
<S> <C> <C> <C> <C>
Investments at value (cost $117,327) $100,591 $21,729 $122,320
Cash 0 3 3
Interest receivable 1,898 370 2,268
Receivable for Fund shares sold 107 30 137
Prepaid expenses and other assets 27 24 51
----------------------------------------------------------------------
Total Assets 102,623 22,156 124,779
Liabilities
Dividends payable 141 109 250
Payable for Fund shares redeemed 228 14 242
Due to related parties 19 18 37
Distribution fee payable 53 0 53
Due to custodian 18 0 18
Accrued expenses and other liabilities 34 26 60
----------------------------------------------------------------------
Total Liabilities 493 167 660
Net Assets $102,130 $21,989 $124,119
======================================================================
Net assets are comprised of:
Paid-in capital $99,067 $21,732 $120,799
Undistributed net investment income (accumulated
distributions in excess of investment income) 125 (21) 104
Accumulated net realized loss on investments (1,265) (512) (1,777)
Net unrealized appreciation on investments 4,203 790 4,993
----------------------------------------------------------------------
Net Assets $102,130 $21,989 $124,119
======================================================================
Class A Shares
Net Assets $45,815 $21,989 $67,804
Shares of Beneficial Interest Outstanding 4,207 4,075 (2,054)(a) 6,228
Net Asset Value $10.89 $5.40 $10.89
Maximum Offering Price (4.75%) $11.43 $11.43
Class B Shares
Net Assets $31,874 $31,874
Shares of Beneficial Interest Outstanding 2,927 2,927
Net Asset Value $10.89 $10.89
Class Y Shares
Net Assets $24,441 $24,441
Shares of Beneficial Interest Outstanding 2,245 2,245
Net Asset Value $10.89 $10.89
</TABLE>
a Reflects impact of converting shares of the target fund into the survivor
fund.
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Evergreen High Grade Tax Free Fund
Pro Forma Combining Financial Statements (unaudited)
Statement of Operations (000's)
Year ended May 31, 1997
<TABLE>
<CAPTION>
Evergreen Blanchard
High Grade Tax Flexible Tax-Free Pro Forma
Free Fund Bond Fund Adjustments Combined
------------------------------------------------------- -----------
<S> <C> <C> <C> <C>
Investment Income
Interest income $6,010 $1,250 $7,260
Expenses
Advisory fee 533 168 (57)a 644
Distribution fee 445 56 501
Administrative services fees 47 43 (33)b 57
Transfer agent fee 79 36 (16)c 99
Custodian fee 86 68 (50)b 104
Reports and notices to shareholders 46 25 (16)c 55
Registration and filing fees 67 14 (14)c 67
Professional fees 28 28 (28)c 28
Trustees' fees and expenses 5 3 (2)b 6
Other 26 24 (18)b 32
---------------------------------------------------------------------
Total Expenses 1,362 465 (234) 1,593
Less: Fee waivers and/or reimbursements (116) (240) 236(d) (120)
---------------------------------------------------------------------
Net expenses 1,246 225 2 1,473
---------------------------------------------------------------------
Net investment income 4,764 1,025 (2) 5,787
Net realized and unrealized gain on investments:
Net realized gain on investments 1,145 198 1,343
Net change in unrealized appreciation
(depreciation) on investments 438 700 1,138
---------------------------------------------------------------------
Net realized and unrealized gain on investments 1,583 898 2,481
Net increase in net assets resulting from operations $6,347 $1,923 (2) $8,268
=====================================================================
</TABLE>
a Reflects a decrease based on the surviving fund's fee schedule.
b Reflects an increase (decrease) based on the combined assets of the funds.
c Reflects expected cost saving from combining the two funds.
d Reflects a decrease in fee waivers due to cost savings associated with the
merger.
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Evergreen High Grade Tax Free Fund
Notes to Pro Forma Combining Financial Statements (Unaudited)
May 31, 1997
1. Basis of Combination - The Pro Forma Combining Statement of Assets and
Liabilities, including the Pro Forma Schedule of Investments, and the related
Pro Forma Combining Statement of Operations ("Pro Forma Statements") reflect the
accounts of Evergreen High Grade Tax Free Fund ("Evergreen") and Blanchard
Flexible Tax-Free Bond Fund ("Blanchard") at May 31, 1997 and for the year then
ended.
The Pro Forma Statements give effect to the proposed Agreement and Plan of
Reorganization (the "Reorganization") to be submitted to shareholders of
Blanchard. The Reorganization provides for the acquisition of all assets and
liabilities of Blanchard by Evergreen, in exchange for Class A shares of
Evergreen. Thereafter, there will be a distribution of Class A shares of
Evergreen to shareholders of Blanchard in liquidation and subsequent termination
thereof. As a result of the Reorganization, the shareholders of Blanchard will
become the owners of that number of full and fractional Class A shares of
Evergreen having an aggregate net asset value equal to the aggregate net asset
value of their shares of Blanchard as of the close of business immediately prior
to the date that Blanchard assets are exchanged for Class A shares of Evergreen.
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 investments
practices of Evergreen.
The Pro Forma Statements reflect the expenses of each Fund in carrying out its
obligations under the Reorganization as though the merger occurred at the
beginning of the period presented.
The information contained herein is based on the experience of each Fund for the
year ended May 31, 1997 and is designed to permit shareholders of the
combining mutual funds to evaluate the financial effect of the proposed
Reorganization. The expenses of Blanchard in connection with the Reorganization
(including the cost of any proxy soliciting agents) will be borne by First Union
National Bank of North Carolina.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of each Fund incorporated by reference in the Statement of
Additional Information.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assume the issuance of Class A shares of Evergreen which would have been issued
at May 31, 1997 in connection with the proposed Reorganization. Shareholders of
Blanchard would receive Class A shares of Evergreen based on a conversion ratio
determined on May 31, 1997. The conversion ratio is calculated by dividing the
net asset value of Blanchard by the net asset value per share of the Class A
shares of Evergreen.
3. Pro Forma Operations - The Pro Forma Combining Statement of Operations
assumes similar rates of gross investment income for the investments of each
Fund. Accordingly, the combined gross investment income is equal to the sum of
the Funds' gross investment income. Pro Forma operating expenses include the
actual expenses of the Funds adjusted to reflect the expected expenses of the
combined entity. The investment advisory and distribution fees have been
charged to the combined Fund based on the fee schedule in effect for Evergreen
at the combined level of average net assets for the year ended May 31 , 1997.
<PAGE>
EVERGREEN MUNICIPAL 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 Pre-
Effective Amendment No. 1 to Evergreen Municipal Trust's
Registration Statement on Form N-1A filed on October 8, 1997 -
Registration No. 333-36033 ("Form N-1A Registration Statement").
2. Bylaws. Incorporated by reference to Pre-Effective
Amendment No. 1 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 Municipal Trust Articles II., III.(6)(c),
IV.(3), IV.(8), V., VI., VII. and VIII.
and By-Laws Articles II., III and VIII.
6(a). Form of Investment Advisory Agreement between the
Capital Management Group of First Union National Bank and
Evergreen Municipal Trust. Incorporated by reference to Pre-
Effective Amendment No. 2 to the Form N-1A Registration
Statement.
6(b). Form of Interim Management Contract. Exhibit B to
Prospectus contained in Part A of this Registration Statement.
6(c). Form of Interim Sub-Advisory Agreement. Exhibit C to
Prospectus contained in Part A of this Registration Statement.
7(a). Principal Underwriting Agreement between Evergreen
Distributor, Inc. and Evergreen Municipal Trust. Incorporated by
reference to Pre-Effective Amendment No. 2 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 Pre-Effective Amendment
No. 2 to the Form N-1A Registration Statement.
8. Deferred Compensation Plan. Incorporated by reference
to Pre-Effective Amendment No. 2 to the Form N-1A Registration
Statement.
9. Custody Agreement between State Street Bank and Trust
Company and Evergreen Municipal Trust. Incorporated by reference
to Pre-Effective Amendment No. 2 to the Form N-1A Registration
Statement.
10(a). Rule 12b-1 Distribution Plan. Incorporated by reference
to Pre-Effective Amendment No. 2 to the Form N-1A Registration
Statement.
10(b). Multiple Class Plan. Incorporated by reference to Pre-
Effective Amendment No. 2 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 Price Waterhouse 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
<PAGE>
a prospectus that is a part of this Registration Statement by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c) of
the Securities Act of 1933, the reoffering prospectus will contain the
information called for by the applicable registration form for reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post- Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of Columbus and State of Ohio, on the 5th day of
January, 1998.
EVERGREEN MUNICIPAL
TRUST
By: /s/ William J. Tomko
-----------------------
Name: William J. Tomko
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Post-Effective Amendment No. 1 to the Registration Statement in the
capacities indicated on the 5th day of January, 1998.
Signatures Title
- ---------- -----
/s/William J. Tomko President and
- ------------------ Treasurer
William J. Tomko
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
<PAGE>
/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 Price Waterhouse LLP
14(b) Consent of Deloitte & Touche LLP
17 Form of Proxy
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SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 5, 1998
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Municipal 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 High Grade Tax Free 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. 333-41481)
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 Blanchard Flexible
Tax-Free Bond 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.
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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
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SULLIVAN & WORCESTER LLP
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SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 5, 1998
Blanchard Flexible Tax-Free Bond Fund
Evergreen High Grade Tax Free Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of Blanchard Flexible Tax-Free
Bond Fund by Evergreen High Grade Tax Free 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. Blanchard Flexible Tax-Free
Bond Fund ("Target Fund") is a series of Blanchard Funds, a
Massachusetts business trust.
Evergreen High Grade Tax Free Fund ("Acquiring Fund") is a series of
Evergreen Municipal 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 7, 1998 which describes the proposed transaction, and on the
information provided in such prospectus/proxy statement. We have relied, without
independent verification, upon the factual statements made therein, and assume
that there will be no change in material facts disclosed therein between the
date of this letter and the date of the closing of the
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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.
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
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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
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SULLIVAN & WORCESTER LLP
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Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus/Proxy
Statement (the "Prospectus/Proxy") and Statement of Additional Information
constituting parts of this Registration Statement on Form N-14 (the
"Registration Statement") of Evergreen Municipal Trust of our report dated July
8, 1997, relating to the financial statements and financial highlights of
Evergreen High Grade Tax Free Fund (the "Fund") appearing in the Fund's May 31,
1997 Annual Report to Shareholders, which is also incorporated by reference into
the Registration Statement.
We also consent to the reference to us under the heading "Financial Statements
and Experts" in the Prospectus/Proxy and to the reference to us under the
headings "Financial Highlights" in the Prospectus and "Independent Auditors" and
"Financial Statements" in the Statement of Additional Information, both dated
September 3, 1997, for Evergreen High Grade Tax Free Fund, which are also
incorporated by reference into the Prospectus/Proxy.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
January 5, 1998
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INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Evergreen Municipal Trust on Form N-14 of our report on Blanchard Flexible
Tax-Free Bond Fund dated November 7, 1997, appearing in the Annual Report of The
Blanchard 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
January 5, 1998
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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.
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BLANCHARD FLEXIBLE TAX-FREE BOND FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
C. Grant Anderson, Carol B. Kayworth, Terrence J. Cullen, Dorothy C. Bourassa
and Martin J. Wolin or any of them as Proxies of the undersigned, with full
power of substitution, to vote on behalf of the undersigned all shares of
Blanchard Flexible Tax-Free Bond Fund ("Tax-Free") that the undersigned is
entitled to vote at the special meeting of shareholders of Tax-Free 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
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Signature(s) and Title(s), if applicable
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF BLANCHARD
FUNDS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTION TO
BE TAKEN ON THE FOLLOWING PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED
AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF
TRUSTEES OF BLANCHARD FUNDS RECOMMENDS A VOTE FOR THE PROPOSALS. PLEASE MARK
YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK. EXAMPLE: X
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1. To approve an Agreement and Plan of Reorganization whereby Evergreen
High Grade Tax Free Fund, a series of Evergreen Municipal Trust, will (i)
acquire all of the assets of Tax-Free in exchange for shares of Evergreen High
Grade Tax Free Fund; and (ii) assume certain identified liabilities of Tax-Free,
as substantially described in the accompanying Prospectus/Proxy Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To approve the proposed Interim Management Contract with Virtus
Capital Management, Inc.
- ---- FOR ---- AGAINST ---- ABSTAIN
3. To approve the proposed Interim Sub-Advisory Agreement between
Virtus Capital Management, Inc. and United States Trust Company of New York.
- ---- FOR ---- AGAINST ---- ABSTAIN
4. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
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