1997 Semiannual
Report
[Evergreen Funds logo appears here]
Evergreen Funds(SM)
SINCE 1932
Evergreen
Long Term
Bond Funds
<PAGE>
Table of Contents
Letter to Shareholders ............... 1
Evergreen Strategic Income Fund
Fund at a Glance .................. 2
Portfolio Manager Interview ...... 3
Evergreen U.S. Government Fund
Fund at a Glance .................. 5
Portfolio Manager Interview ...... 6
Financial Highlights
Evergreen Strategic Income Fund ... 8
Evergreen U.S. Government Fund ... 11
Schedule of Investments
Evergreen Strategic Income Fund ... 13
Evergreen U.S. Government Fund ... 18
Statements of Assets and Liabilities 19
Statements of Operations ............ 20
Statements of Changes in Net Assets -
Six months ended October 31, 1997 21
Statements of Changes in Net Assets -
Prior Periods ..................... 22
Combined Notes to Financial
Statements ........................... 23
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Evergreen Funds
Evergreen Funds is one of the nation's fastest growing investment companies with
more than $40 billion in assets under management.
With 65 mutual funds to choose among and acclaimed service and operations
capabilities, investors enjoy a broader range of quality investment products and
services designed to meet their needs.
The Evergreen Funds employ intensive, research-driven investment strategies
executed by over 90 research analysts and portfolio managers. The fund company
remains dedicated to meeting the needs of investors and their advisors in a
global economy. Look to the Evergreen Funds to provide a distinctive level of
service and excellence in investment management.
This semiannual report must be preceded or accompanied by a prospectus of an
Evergreen fund contained herein. The prospectus contains more complete
information, including fees and expenses, and should be read carefully before
investing or sending money.
<TABLE>
<S> <C> <C>
Mutual Funds: ARE NOT FDIC INSURED May lose value (bullet) Are not bank guaranteed
</TABLE>
Evergreen Funds Distributor, Inc.
<PAGE>
<PAGE>
Letter to Shareholders
----------------------
December, 1997
Dear Shareholders:
The past six months have been an excellent
(Photo of period for most investors in fixed income mutual
William M. Ennis funds, and the shareholders of the Evergreen
appears here) U.S. Government Fund and the Evergreen Strategic
Income Fund have been able to enjoy the
William M. Ennis benefits.
Managing Director
The bond market enjoyed an extremely favorable
environment, as moderate economic growth and an
apparent absence of any serious inflation
resulted in a period in which interest rates
steadily declined. In fact, the 30-year Treasury
Bond's yield fell eight-tenths of one percent,
or 80 basis points, to finish the six month
fiscal period on October 31, 1997 at 6.15%.
While the yield, or income, of bond funds tended
to go down, the prices of bonds tended to
increase, giving investors strong positive real
returns, even after allowing for inflation.
Bond funds are designed to provide investors with more current income and
greater potential protection of principal than an equity fund. Of course, they
cannot be expected to provide the growth opportunities of an equity fund, which
invests primarily in stocks. Bond funds are successful when they produce steady
income and relative stability of prices as they have during the past year.
At Evergreen Funds, we believe bond funds have a place in virtually every
investor's portfolio, both because of their income and because they help
diversify and reduce the risk of the total portfolio of investments. During any
short-term period, an undiversified portfolio of stock funds may give the
appearance of a performance advantage over a diversified mix of stock, bond and
international funds. However, over the long term, proper diversification can
help smooth out the bumps in the market and provide greater consistency.
The right measure of diversification is different for each investor. This is why
we encourage investors to consult with a financial advisor, who can help
determine the right mix of investments for each person, given his or her
objectives and risk tolerances.
Upcoming Developments
In the next few weeks and months, shareholders of Evergreen and Keystone funds
will begin to notice some changes. The Evergreen Keystone Funds are becoming the
Evergreen Funds. On October 31, 1997, Keystone America Funds adopted the name of
Evergreen and in early 1998 the original Keystone Fund Family will take the
Evergreen name.
We believe that by putting all the funds under the umbrella name of Evergreen
Funds we will be creating a simpler and more cohesive image. Importantly, we
expect to create substantial cost savings for shareholders as a result of
consolidating prospectuses, annual reports, legal registrations and other
materials. It also will be easier to find all the funds of the Evergreen Family,
to which you have exchange privileges, under one heading in newspapers and
electronic services.
What will not change will be our commitment to provide you with the finest
investment products and shareholder services possible.
If you have any questions about these changes or other issues affecting your
investments, we encourage you to consult your financial advisor or call
Evergreen Funds at 1-800-343-2898.
Sincerely,
/s/ William M. Ennis
William M. Ennis
Managing Director
1
<PAGE>
EVERGREEN
Strategic Income Fund
Fund at a Glance as of October 31, 1997
We were pleased with the Fund's performance, particularly in light of the
difficult environment that affected many of the world's financial markets.
Portfolio
Management
----------------------------------------
[Photo of Prescott B. Crocker appears here]
Prescott B. Crocker
Senior Vice President
Keystone Investment
Management Company
- --------------------------------------------------------------------------------
PERFORMANCE AND RETURNS
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Inception Date 4/14/87 2/1/93 2/1/93 1/13/97
- --------------------------------------------------------------------------------
Average Annual Returns* ..
- --------------------------------------------------------------------------------
6 months with sales charge 2.22% 1.89% 5.90% 7.39%
- --------------------------------------------------------------------------------
6 months w/o sales charge 7.32% 6.89% 6.90% 7.39%
- --------------------------------------------------------------------------------
One year with sales charge 4.43% 3.66% 7.67% -
- --------------------------------------------------------------------------------
One year w/o sales charge 9.64% 8.66% 8.67% -
- --------------------------------------------------------------------------------
5 years 8.96% - - -
- --------------------------------------------------------------------------------
10 years 8.07% - - -
- --------------------------------------------------------------------------------
Since Inception 7.24% 7.84% 8.13% -
- --------------------------------------------------------------------------------
Cumulative Total Return
since inception 109.28% 43.14% 45.00% 4.31%
- --------------------------------------------------------------------------------
30-day SEC yield 6.19% 5.72% 5.72% 6.72%
- --------------------------------------------------------------------------------
6 month dividends per share $ 0.25 $0.23 $0.23 $0.25
- --------------------------------------------------------------------------------
</TABLE>
*Adjusted for maximum applicable sales charge.
- --------------------------------------------------------------------------------
LONG TERM GROWTH
[Graph appears below with the following information:]
Consumer Lehman Brothers Aggregate
Class A Shares Price Index Bond Index
10/87 9525 10000 10000
10/89 11079 10895 12471
10/91 11535 11919 15349
10/93 17864 12637 18861
10/95 18131 13332 21011
10/97 21734 14001 24217
Comparisons of a $10,000 investment in Keystone Strategic Income Fund, Class A
shares, versus a similar investment in the Lehman Aggregate Bond Index (LABI)
and the Consumer Price Index (CPI).
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholder
investing in the different classes. The investment return and principal value
will fluctuate so that an investor's shares when redeemed, may be worth more or
less than original cost. The Lehman Aggregate 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 October 31, 1997.
- --------------------------------------------------------------------------------
INVESTMENT STYLE
Morningstar's Style Box is based on a portfolio date as of
9/30/97.
[GRAPHIC
APPEARS
HERE] The Fixed-Income Style Box placement is based on a fund's
average effective maturity or duration and the average
credit rating of the bond portfolio.
Source: 1997 Morningstar, Inc.
2
<PAGE>
EVERGREEN
Strategic Income Fund
Portfolio Manager Interview
- --------------------------------------------------------------------------------
How were the Fund's assets invested as of October 31, 1997?
The Fund was invested as follows: high yield corporate bonds - 39%; U.S.
government and agency securities -25%; foreign government bonds - 25% and
foreign corporate bonds - 4%. Foreign holdings included the government
securities of, among others, the United Kingdom, Venezuela, Germany,
Denmark and Canada; and corporate investments in Mexico, Brazil, Canada and
Sweden.
----------------------------------------------
PORTFOLIO COMPOSITION
(as a percentage of net assets)
[PIE CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
(as a percentatge of net assets)
High Yield Corporate Bonds 39%
U.S. Government and Agency Securities 25%
Foreign Government Bonds 25%
Repurchase agreement and other assets
and liabilities (net) 7%
Foreign Corporate Bonds 4%
- --------------------------------------------------------------------------------
How did the Fund perform?
We were pleased with the Fund's performance, particularly in light of the
difficult environment that affected many of the world's financial markets.
For the six months ended October 31, 1997, the Fund's Class A shares
returned 7.32%, unadjusted for sales charge. This compares favorably to an
average return of 6.52% for the same time period for the multi-sector funds
followed by Lipper Analytical Services1.
(1) Lipper Analytical Services, Inc. is an independent mutual funds
performance monitor. The Lipper Average does not include sales charges and
if included, the average may be lower.
- --------------------------------------------------------------------------------
What strategies did you use in managing the fund?
We directed the Fund's investment strategy on relative security value and
potential for capital appreciaton. We emphasized high yield holdings and
long-term government bonds in the U.S., as our economy continued to grow
moderately in the absence of any inflationary pressures. In the foreign
sector, we continued to focus on the so-called "high yield" European
countries and sought to reduce risk in emerging market countries. The
Fund's U.S. investments accounted for approximately two-thirds of net
assets, with long-term government bonds providing significant total return
when interest rates were falling. The Fund's high yield investments
involved those sectors and securities that we believed would benefit from
the healthy economic climate. These included the cable industry, radio and
broadcasting, energy and telecommunications.
We maintained the Fund's investment in the government bonds of the
so-called "high yield" European countries, which include Sweden, Italy and
Spain. The yields on these bonds have fallen, pushing prices higher
relative to the benchmark, Germany, as these countries prepare for entry
into the European Monetary Union. We also managed the fund's positions in
the emerging markets closely. We reduced the fund's holdings in emerging
markets by 50% through September 1997, eliminating holdings in Indonesia
and selling 80% of the holdings in Brazil.
- --------------------------------------------------------------------------------
What was the investment environment like in each of the sectors in which
the Fund invests?
The environments in the U.S. and Europe were positive throughout the
reporting period. The emerging markets generated strong returns for most of
the period, but then experienced a sharp and rapid sell-off in response to
the Asian currency crisis.
3
<PAGE>
EVERGREEN
Strategic Income Fund
Portfolio Manager Interview
Returns in the high yield sector have been attractive over the past six
months, turning around from a weak start early in the year. Lower-rated
securities benefited from the economy's strength, as a healthy business
atmosphere helped to improve the creditworthiness of the underlying
companies by increasing profits and reducing the need to borrow. Investors
seeking higher yields turned to the high yield sector, willing to take
additional credit risk, given the solid economic conditions. In the final
weeks of the reporting period, some of the stock market's turbulence
spilled over into high yield bonds, erasing some of the sector's gains.
This was not surprising, since there is a historic correlation between the
behavior of the two markets. We continue to believe there is value in the
high yield sector and that the recent softness in prices will be temporary
in nature.
U.S. government and agency securities and foreign government bonds
comprised approximately half of the portfolio, in recognition of their
potential returns in a period of very low inflation. In the U.S., the
investment environment was extremely favorable. Interest rates ended the
period lower, although price movement was erratic as signs of economic
strength caused investors to become concerned about future inflation. The
benchmark 30-year U.S. Treasury peaked at a 7.17% yield in April 1997 and
stood at 6.15% on October 31, 1997. In Europe, the environment has been
positive for bonds, as countries continued to make the efforts to meet the
stringent fiscal, economic and monetary standards that have been
established to join the European Monetary Union. The low level of inflation
in much of Europe has resulted in their "real" interest rates or the
interest rate received by the investor after it has been adjusted for
inflation - being very attractive.
Portfolio
Characteristics
Total Net Assets $206,653,976
- --------------------------------------------------------------------------------
Average Credit Quality A
- --------------------------------------------------------------------------------
Average Maturity 12 years
- --------------------------------------------------------------------------------
Average Duration 6.93 years
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Did the recent Asian currency crisis affect the portfolio's performance?
The Asian currency crisis, which created turbulence in the world's currency
and stock markets at the end of this reporting period, had a minor effect
on the portfolio's investment performance. The fund's emerging markets
position was adversely affected, but since we had significantly reduced
that sector prior to the crisis, we believe the impact to total return was
minimal. This type of market disruption serves as a reminder of the
benefits provided by the fund's flexible and diverse investment parameters.
- --------------------------------------------------------------------------------
What is your outlook for the next six months?
In the U.S. and Europe, we look for a continuation of many of the trends we
have witnessed over the past six months. We believe the U.S. economy should
grow at a pace of 2.5%-3%, with inflation of approximately 2% and
declining. In Europe, we expect the driving force to remain countries'
efforts to meet the requirements to join European Monetary Union, which is
scheduled to take place on January 1, 1999. The market for emerging country
debt appears to have stabilized and is recovering some of its losses. While
we will exercise extreme prudence in this sector, we recognize the monetary
and fiscal efforts being made by some of the emerging market governments
are correcting underlying structural problems and we expect prices to
improve further over time. As always, we will employ a conservative
investment approach, seeking attractive relative value and opportunity for
price appreciation.
4
<PAGE>
EVERGREEN
U.S. Government Fund
Fund at a Glance as of October 31, 1997
Our analysis proved both timely and accurate as our decision to lengthen the
Fund's duration over the six month period was largely responsible for the Fund's
solid performance.
Portfolio
Management
----------------------------------------
[PHOTO OF ROLLIN C. WILLIAMS, CFA APPEARS BELOW:]
Rollin C. Williams, CFA
Senior Vice President
and
Senior Fixed Income
Portfolio Manager
- --------------------------------------------------------------------------------
PERFORMANCE AND RETURNS
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Inception Date 1/11/93 1/11/93 9/2/94 9/2/93
- --------------------------------------------------------------------------------
Average Annual Returns* ..
6 months with sales charge 1.24% 0.88% 4.88% 6.42%
- --------------------------------------------------------------------------------
6 months w/o sales charge 6.28% 5.88% 5.88% 6.42%
- --------------------------------------------------------------------------------
One year with sales charge 2.74% 2.06% 6.06% 8.13%
- --------------------------------------------------------------------------------
One year w/o sales charge 7.86% 7.06% 7.06% 8.13%
- --------------------------------------------------------------------------------
Since Inception 5.16% 5.20% 7.09% 5.73%
- --------------------------------------------------------------------------------
Cumulative Total Return since
inception 27.37% 27.60% 24.23% 26.28%
- --------------------------------------------------------------------------------
30-day SEC yield 5.20% 4.71% 4.71% 5.71%
- --------------------------------------------------------------------------------
6 month dividends per share $0.31 $0.27 $0.27 $0.32
- --------------------------------------------------------------------------------
</TABLE>
*Adjusted for maximum applicable sales charge.
- --------------------------------------------------------------------------------
LONG TERM GROWTH
[Graph appears below with the following information:]
Consumer Lehman Brothers Intermediate
Class A Shares Price Index Government Bond Index
1/93 9525 10000 10000
10/93 10258 10268 10827
10/94 9852 10536 10641
10/95 11251 10833 11898
10/96 11808 11156 12572
10/97 12737 11377 13551
Comparisons of a $10,000 investment in Evergreen U.S. Government Fund, Class A
shares, versus a similar investment in the Lehman Brothers Intermediate
Government Bond Index (LBIGBI), and the Consumer Price Index (CPI).
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholder
investing in the different classes. The investment return and principal value
will fluctuate so that an investor's shares when redeemed, may be worth more or
less than original cost. The Lehman Brothers Intermediate Government 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 October 31, 1997.
- --------------------------------------------------------------------------------
INVESTMENT STYLE
Morningstar's Style Box is based on a portfolio date as of
9/30/97.
[GRAPHIC
APPEARS
BELOW] The Fixed-Income Style Box placement is based on a fund's
average effective maturity or duration and the average
credit rating of the bond portfolio.
Source: 1997 Morningstar, Inc.
5
<PAGE>
EVERGREEN
U.S. Government Fund
Portfolio Manager Interview
- --------------------------------------------------------------------------------
How did the Fund perform during the fiscal period?
Evergreen U.S. Government Fund performed well during the six-month period
ended October 31, as the Fund's Class Y shares returned 6.42%. Class A
returned 6.28%, Class B returned 5.88%, and Class C returned 5.88%,
unadjusted for the maximum sales charges. Performance was aided by falling
interest rates which, overall, had a positive effect on bond prices. In
addition, solid returns can be attributed to our strategy of lengthening
duration, which ultimately enhanced performance within this environment of
declining interest rates.
- --------------------------------------------------------------------------------
What was the economic environment like during this period?
The economy continued to grow at a solid pace, but did so without any
evidence of inflationary pressure. This low-inflation environment persisted
despite the fact that unemployment remained below the historically low rate
of 5%. Conversely, consumer confidence soared, evidenced by strong retail
sales. The strong U.S. economy along with benign inflation allowed the
Federal Reserve Board to leave key short-term interest rates unchanged
during the six-month period. The Fed Funds rate currently stands at 5.5%,
where it has been since the Fed last increased rates on March 25, 1997.
Low inflation and the Federal Reserve Board's non-intervention policy
served as catalysts which allowed interest rates to decline over the course
of the fiscal period. For the six months ended October 31, yields on the
30-year Treasury bond drifted 80 basis points lower, to 6.15%.
- --------------------------------------------------------------------------------
What was your strategy in managing the portfolio?
As I stated in our report in June of 1997, "we expect over the next few
months that the duration of the Fund will be aggressively extended to take
advantage of opportunities as interest rates peak and start to decline."
Our analysis proved both timely and accurate as our decision to lengthen
the fund's duration over the six month period was largely responsible for
the Fund's solid performance. Duration was extended from 4.27 years to 4.47
years over the course of the six month period. The longer duration was
achieved, in part, through the purchase of securities maturing in 2017 and
2027, while selling small mortgage-backed positions and some shorter
Treasury positions. As benign inflationary figures continued to emerge, and
interest rates steadily declined, the Fund's increased duration had a
positive impact on performance.
From a sector standpoint, our exposure to mortgage-backed securities -
which stood at 53.6% on April 30 - was decreased to 48.0%. Conversely, our
position in U.S.
Treasuries and Agencies was increased and currently stands at 50.3%.
----------------------------------------------
PORTFOLIO COMPOSITION
(as a percentage of net assets)
U.S. Treasury Obligations 50.3%
Mortgage-backed securities 48.0%
Repurchase agreement and other
assets and liabilities (net) 1.7%
It is also worth noting that on August 1, the Keystone Government
Securities Fund was merged into the Fund. As a result of the combination, a
number of smaller mortgage-backed securities were liquidated to reduce the
number of holdings in the combined funds. The merger increased net assets
by $40.3 million, or approximately 14%.
6
<PAGE>
EVERGREEN
U.S. Government Fund
Portfolio Manager Interview
- --------------------------------------------------------------------------------
What is your outlook going forward?
Looking ahead, we will continue to monitor the economic data for signs of
increased inflation which could lead to higher interest rates in 1998.
Historically, strong economic growth combined with extremely tight labor
markets have resulted in inflationary pressure, in turn pushing interest
rates higher. However, inflation has remained extremely benign despite
strong growth and low unemployment. Furthermore, the Federal Reserve Board
has tended not to take isolated steps in moving short-term interest rates
in any direction. As a result, we believe that the increase in the Fed
Funds rate on March 25, is not an isolated event, and any signs of upward
price pressure will give the Fed cause to increase interest rates. We will
continue to monitor emerging economic data and will respond to any changes
in the economy or markets by adjusting the Fund's duration and sector
allocations accordingly.
The strategy of the Evergreen U.S. Government Fund continues to be to
provide the investor with a high quality portfolio that offers attractive
income.
Portfolio
Characteristics
Total Net Assets $327,284,479
- --------------------------------------------------------------------------------
Average Credit Quality AAA
- --------------------------------------------------------------------------------
Average Maturity 9.19 years
- --------------------------------------------------------------------------------
Average Duration 4.47 years
- --------------------------------------------------------------------------------
7
<PAGE>
EVERGREEN
Strategic Income Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Ended
October 31, 1997 (b) Nine Months Ended
(Unaudited) April 30, 1997 (d)
<S> <C> <C>
CLASS A SHARES
Net asset value beginning of period $ 6.82 $ 6.77
=========== ===========
- -----------------------------------------------------------------------------------------------------
Income from investment operations
- -----------------------------------------------------------------------------------------------------
Net investment income 0.25 0.37
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency related transactions 0.24 0.09
----------- -----------
- -----------------------------------------------------------------------------------------------------
Total from investment operations 0.49 0.46
----------- -----------
- -----------------------------------------------------------------------------------------------------
Less distributions from
- -----------------------------------------------------------------------------------------------------
Net investment income ( 0.25) ( 0.38)
- -----------------------------------------------------------------------------------------------------
In excess of investment income 0 ( 0.03)
- -----------------------------------------------------------------------------------------------------
Tax basis return of capital 0 0
- -----------------------------------------------------------------------------------------------------
Net realized gains on investments and foreign currency
related transactions 0 0
----------- -----------
- -----------------------------------------------------------------------------------------------------
Total distributions ( 0.25) ( 0.41)
----------- -----------
- -----------------------------------------------------------------------------------------------------
Net asset value end of period $ 7.06 $ 6.82
=========== ===========
- -----------------------------------------------------------------------------------------------------
Total Return (a) 7.32% 6.80%
- -----------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 1.31%(c) 1.28%(c)
- -----------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses 1.31%(c) 1.26%(c)
- -----------------------------------------------------------------------------------------------------
Expenses excluding reimbursement 1.31%(c) 1.28%(c)
- -----------------------------------------------------------------------------------------------------
Net investment income 7.10%(c) 7.28%(c)
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate 110% 86%
- -----------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 64,683 $ 58,725
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended July 31,
1996 1995 1994 (b) 1993
<S> <C> <C> <C> <C>
CLASS A SHARES
Net asset value beginning of period $ 6.89 $ 7.35 $ 7.86 $ 7.02
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------
Income from investment operations
- --------------------------------------------------------------------------------------------------------
Net investment income 0.54 0.64 0.61 0.69
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency related transactions ( 0.09) ( 0.45) ( 0.44) 0.89
-------- -------- -------- --------
- --------------------------------------------------------------------------------------------------------
Total from investment operations 0.45 0.19 0.17 1.58
-------- -------- -------- --------
- --------------------------------------------------------------------------------------------------------
Less distributions from
- --------------------------------------------------------------------------------------------------------
Net investment income ( 0.52) ( 0.60) ( 0.61) ( 0.72)
- --------------------------------------------------------------------------------------------------------
In excess of investment income 0 ( 0.03) ( 0.03) ( 0.02)
- --------------------------------------------------------------------------------------------------------
Tax basis return of capital ( 0.05) ( 0.02) ( 0.04) 0
- --------------------------------------------------------------------------------------------------------
Net realized gains on investments and foreign currency
related transactions 0 0 0 0
-------- -------- -------- --------
- --------------------------------------------------------------------------------------------------------
Total distributions ( 0.57) ( 0.65) ( 0.68) ( 0.74)
-------- -------- -------- --------
- --------------------------------------------------------------------------------------------------------
Net asset value end of period $ 6.77 $ 6.89 $ 7.35 $ 7.86
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------
Total Return (a) 6.84% 3.00% 1.86% 24.13%
- --------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 1.30% 1.33% 1.32% 1.80%
- --------------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses 1.28% - - -
- --------------------------------------------------------------------------------------------------------
Expenses excluding reimbursement 1.30% 1.33% 1.32% 1.80%
- --------------------------------------------------------------------------------------------------------
Net investment income 8.05% 9.31% 7.79% 9.50%
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate 101% 95% 92% 151%
- --------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 68,118 $ 85,970 $105,181 $ 85,793
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------------------------------------
1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
CLASS A SHARES (continued)
Net asset value beginning of period $ 6.10 $ 7.17 $ 9.02 $ 9.36 $ 10.04
========= ========= ========= ========= ==========
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.78 0.89 1.03 1.10 1.05
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency related transactions 0.89 ( 1.01) ( 1.79) ( 0.31) ( 0.65)
--------- --------- --------- --------- ----------
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.67 ( 0.12) ( 0.76) 0.79 0.40
--------- --------- --------- --------- ----------
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions from
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income ( 0.75) ( 0.89) ( 1.04) ( 1.11) ( 1.08)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of investment income 0 ( 0.06) ( 0.05) 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Tax basis return of capital 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Net realized gains on investments and foreign currency
related transactions 0 0 0 ( 0.02) 0
--------- --------- --------- --------- ----------
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions ( 0.75) ( 0.95) ( 1.09) ( 1.13) ( 1.08)
--------- --------- --------- --------- ----------
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 7.02 $ 6.10 $ 7.17 $ 9.02 $ 9.36
========= ========= ========= ========= ==========
- -------------------------------------------------------------------------------------------------------------------------------
Total Return (a) 28.73% 0.54% ( 8.55%) 9.00% 4.49%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 2.09% 2.00% 2.00% 1.81% 1.28%
- -------------------------------------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Expenses excluding reimbursement 2.12% 2.25% 2.01% 1.90% 2.08%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 11.73% 15.23% 12.91% 12.06% 10.98%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 95% 82% 36% 73% 46%
- -------------------------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 70,459 $ 70,246 $ 83,106 $ 138,499 $ 114,310
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Annualized.
(d) The Fund changed its fiscal year end from July 31 to April 30 during the
period.
See Combined Notes to Financial Statements.
8
<PAGE>
EVERGREEN
Strategic Income Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Ended
October 31, 1997 (b) Nine Months Ended
(Unaudited) April 30, 1997 (d)
<S> <C> <C>
CLASS B SHARES
Net asset value beginning of period $ 6.85 $ 6.81
=========== ===========
- ----------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------
Net investment income 0.23 0.34
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions 0.24 0.07
----------- -----------
- ----------------------------------------------------------------------------------------
Total from investment operations 0.47 0.41
----------- -----------
- ----------------------------------------------------------------------------------------
Less distributions from
- ----------------------------------------------------------------------------------------
Net investment income ( 0.23) ( 0.34)
- ----------------------------------------------------------------------------------------
In excess of net investment income 0 ( 0.03)
- ----------------------------------------------------------------------------------------
Tax basis return of capital 0 0
----------- -----------
- ----------------------------------------------------------------------------------------
Total distributions ( 0.23) ( 0.37)
----------- -----------
- ----------------------------------------------------------------------------------------
Net asset value end of period $ 7.09 $ 6.85
=========== ===========
- ----------------------------------------------------------------------------------------
Total Return (a) 6.89% 6.06%
- ----------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 2.08%(c) 2.04%(c)
- ----------------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses 2.08%(c) 2.02%(c)
- ----------------------------------------------------------------------------------------
Net investment income 6.33%(c) 6.52%(c)
- ----------------------------------------------------------------------------------------
Portfolio turnover rate 110% 86%
- ----------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 118,072 $ 110,082
- ----------------------------------------------------------------------------------------
<CAPTION>
Year Ended July 31,
February 1, 1993
(Date of Initial
Public Offering)
1996 1995 1994 (b) to July 31, 1993
<S> <C> <C> <C> <C>
CLASS B SHARES
Net asset value beginning of period $ 6.92 $ 7.38 $ 7.89 $ 7.07
========= ========= ========= ===========
- ------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------
Net investment income 0.50 0.60 0.55 0.24
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions ( 0.09) ( 0.47) ( 0.44) 0.92
--------- --------- --------- -----------
- ------------------------------------------------------------------------------------------------------
Total from investment operations 0.41 0.13 0.11 1.16
--------- --------- --------- -----------
- ------------------------------------------------------------------------------------------------------
Less distributions from
- ------------------------------------------------------------------------------------------------------
Net investment income ( 0.47) ( 0.55) ( 0.55) ( 0.24)
- ------------------------------------------------------------------------------------------------------
In excess of net investment income 0 ( 0.03) ( 0.03) ( 0.10)
- ------------------------------------------------------------------------------------------------------
Tax basis return of capital ( 0.05) ( 0.01) ( 0.04) 0
--------- --------- --------- -----------
- ------------------------------------------------------------------------------------------------------
Total distributions ( 0.52) ( 0.59) ( 0.62) ( 0.34)
--------- --------- --------- -----------
- ------------------------------------------------------------------------------------------------------
Net asset value end of period $ 6.81 $ 6.92 $ 7.38 $ 7.89
========= ========= ========= ===========
- ------------------------------------------------------------------------------------------------------
Total Return (a) 6.21% 2.12% 1.10% 16.75%
- ------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 2.07% 2.06% 2.07% 2.37% (c)
- ------------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses 2.05% - - -
- ------------------------------------------------------------------------------------------------------
Net investment income 7.28% 8.58% 7.11% 7.18%(c)
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate 101% 95% 92% 151%
- ------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 123,389 $ 149,091 $ 162,866 $ 35,415
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
October 31, 1997 (b) Nine Months Ended
(Unaudited) April 30, 1997 (d)
<S> <C> <C>
CLASS C SHARES
Net asset value beginning of period $ 6.84 $ 6.80
=========== ===========
- ----------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------
Net investment income 0.23 0.33
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions 0.24 0.08
----------- -----------
- ----------------------------------------------------------------------------------------
Total from investment operations 0.47 0.41
----------- -----------
- ----------------------------------------------------------------------------------------
Less distributions from
- ----------------------------------------------------------------------------------------
Net investment income ( 0.23) ( 0.34)
- ----------------------------------------------------------------------------------------
In excess of net investment income 0 ( 0.03)
- ----------------------------------------------------------------------------------------
Tax basis return of capital 0 0
----------- -----------
- ----------------------------------------------------------------------------------------
Total distributions ( 0.23) ( 0.37)
----------- -----------
- ----------------------------------------------------------------------------------------
Net asset value end of period $ 7.08 $ 6.84
=========== ===========
- ----------------------------------------------------------------------------------------
Total Return (a) 6.90% 6.07%
- ----------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 2.08%(c) 2.04%(c)
- ----------------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses 2.08%(c) 2.03%(c)
- ----------------------------------------------------------------------------------------
Net investment income 6.34%(c) 6.52%(c)
- ----------------------------------------------------------------------------------------
Portfolio turnover rate 110% 86%
- ----------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 22,661 $ 24,304
- ----------------------------------------------------------------------------------------
<CAPTION>
Year Ended July 31,
February 1, 1993
(Date of Initial
Public Offering)
1996 1995 1994 (b) to July 31, 1993
<S> <C> <C> <C> <C>
CLASS C SHARES
Net asset value beginning of period $ 6.92 $ 7.37 $ 7.88 $ 7.07
========== ========== ========== ===========
- ------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------
Net investment income 0.49 0.59 0.55 0.24
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions ( 0.09) ( 0.45) ( 0.44) 0.91
---------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------
Total from investment operations 0.40 0.14 0.11 1.15
---------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------
Less distributions from
- ------------------------------------------------------------------------------------------------------
Net investment income ( 0.47) ( 0.55) ( 0.55) ( 0.24)
- ------------------------------------------------------------------------------------------------------
In excess of net investment income 0 ( 0.03) ( 0.03) ( 0.10)
- ------------------------------------------------------------------------------------------------------
Tax basis return of capital ( 0.05) ( 0.01) ( 0.04) 0
---------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------
Total distributions ( 0.52) ( 0.59) ( 0.62) ( 0.34)
---------- ---------- ---------- -----------
- ------------------------------------------------------------------------------------------------------
Net asset value end of period $ 6.80 $ 6.92 $ 7.37 $ 7.88
========== ========== ========== ===========
- ------------------------------------------------------------------------------------------------------
Total Return (a) 6.07% 2.27% 1.09% 16.61%
- ------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 2.07% 2.08% 2.07% 2.25%(c)
- ------------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses 2.05% - - -
- ------------------------------------------------------------------------------------------------------
Net investment income 7.29% 8.56% 7.09% 7.35%(c)
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate 101% 95% 92% 151%
- ------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 31,816 $ 46,221 $ 59,228 $ 19,706
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges
(b) Calculation based on average shares outstanding.
(c) Annualized.
(d) The Fund changed its fiscal year end from July 31 to April 30 during the
period.
See Combined Notes to Financial Statements.
9
<PAGE>
EVERGREEN
Strategic Income Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
January 13, 1997
Six Months Ended (Date of Initial
October 31, 1997 (b) Public Offering)
(Unaudited) to April 30, 1997
<S> <C> <C>
CLASS Y SHARES
Net asset value beginning of period $ 6.65 $ 7.03
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.25 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign currency related 0.24 ( 0.20)
transactions ---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.49 ( 0.20)
---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions from
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income ( 0.25) ( 0.17)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income 0 ( 0.01)
---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions ( 0.25) ( 0.18)
---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 6.89 $ 6.65
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 7.39% ( 2.87%)
- -----------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 1.04%(a) 0.00%(a)
- -----------------------------------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses 1.04%(a) 0.00%(a)
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 6.83%(a) 0.00%(a)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 110% 86%
- -----------------------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 1,237 $ 0
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Calculation based on average shares outstanding.
See Combined Notes to Financial Statements.
10
<PAGE>
EVERGREEN
U.S. Government Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended October 31, Ten Months
1997 Ended Year Ended
(Unaudited) April 30, 1997 (d) June 30, 1996
<S> <C> <C> <C>
CLASS A SHARES
Net asset value beginning of period $ 9.39 $ 9.42 $ 9.65
=========== =========== ==========
- ----------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------
Net investment income 0.31 0.52 0.63
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.27 ( 0.03) ( 0.23)
----------- ----------- ----------
- ----------------------------------------------------------------------------------------------
Total from investment operations 0.58 0.49 0.40
----------- ----------- ----------
- ----------------------------------------------------------------------------------------------
Less distributions from net
investment income ( 0.31) ( 0.52) ( 0.63)
----------- ----------- ----------
- ----------------------------------------------------------------------------------------------
Net asset value end of period $ 9.66 $ 9.39 $ 9.42
=========== =========== ==========
- ----------------------------------------------------------------------------------------------
Total Return (b) 6.28% 5.30% 4.28%
- ----------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 1.02%(a) 0.98%(a) 0.99%
- ----------------------------------------------------------------------------------------------
Expenses excluding indirectly paid
expenses 1.02%(a) 0.98%(a) -
- ----------------------------------------------------------------------------------------------
Expenses excluding waivers and/or
reimbursements 1.02%(a) 0.98%(a) 0.99%
- ----------------------------------------------------------------------------------------------
Net investment income 6.38%(a) 6.60%(a) 6.61%
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate 5% 12% 23%
- ----------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 37,329 $ 17,913 $ 20,345
- ----------------------------------------------------------------------------------------------
<CAPTION>
January 11, 1993
Six Months (Date of Initial
Ended Year Ended Public Offering) to
June 30, 1995 (c) December 31, 1994 December 31, 1993
<S> <C> <C> <C>
CLASS A SHARES
Net asset value beginning of period $ 9.07 $ 10.05 $ 10.00
=========== =========== ============
- ----------------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income 0.33 0.66 0.68
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.58 ( 0.98) 0.05
----------- ----------- ------------
- ----------------------------------------------------------------------------------------------------
Total from investment operations 0.91 ( 0.32) 0.73
----------- ----------- ------------
- ----------------------------------------------------------------------------------------------------
Less distributions from net
investment income ( 0.33) ( 0.66) ( 0.68)
----------- ----------- ------------
- ----------------------------------------------------------------------------------------------------
Net asset value end of period $ 9.65 $ 9.07 $ 10.05
=========== =========== ============
- ----------------------------------------------------------------------------------------------------
Total Return (b) 10.17% ( 3.18%) 7.43%
- ----------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 1.04%(a) 0.96% 0.68%(a)
- ----------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid
expenses - - -
- ----------------------------------------------------------------------------------------------------
Expenses excluding waivers and/or
reimbursements 1.05%(a) 1.00% 0.99%(a)
- ----------------------------------------------------------------------------------------------------
Net investment income 7.07%(a) 6.97% 6.93%(a)
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate 0% 19% 39%
- ----------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 22,445 $ 23,706 $ 38,851
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended October 31, Ten Months
1997 Ended Year Ended
(Unaudited) April 30, 1997 (d) June 30, 1996
<S> <C> <C> <C>
CLASS B SHARES
Net asset value beginning of period $ 9.39 $ 9.42 $ 9.65
=========== =========== =========
- -----------------------------------------------------------------------------------------------
Income from investment operations
- -----------------------------------------------------------------------------------------------
Net investment income 0.28 0.46 0.56
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.26 ( 0.03) ( 0.23)
----------- ----------- ---------
- -----------------------------------------------------------------------------------------------
Total from investment operations 0.54 0.43 0.33
----------- ----------- ---------
- -----------------------------------------------------------------------------------------------
Less distributions from net
investment income ( 0.27) ( 0.46) ( 0.56)
----------- ----------- ---------
- -----------------------------------------------------------------------------------------------
Net asset value end of period $ 9.66 $ 9.39 $ 9.42
=========== =========== =========
- -----------------------------------------------------------------------------------------------
Total Return (b) 5.88% 4.65% 3.50%
- -----------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 1.77%(a) 1.73%(a) 1.74%
- -----------------------------------------------------------------------------------------------
Expenses excluding indirectly paid
expenses 1.77%(a) 1.73%(a) -
- -----------------------------------------------------------------------------------------------
Expenses excluding waivers and/or
reimbursements 1.77%(a) 1.73%(a) 1.74%
- -----------------------------------------------------------------------------------------------
Net investment income 5.68%(a) 5.85%(a) 5.85%
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 5% 12% 23%
- -----------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 145,591 $ 142,371 $ 165,988
- -----------------------------------------------------------------------------------------------
<CAPTION>
January 11, 1993
Six Months (Date of Initial
Ended Year Ended Public Offering) to
June 30, 1995 (c) December 31, 1994 December 31, 1993
<S> <C> <C> <C>
CLASS B SHARES
Net asset value beginning of period $ 9.07 $ 10.05 $ 10.00
=========== =========== ============
- ---------------------------------------------------------------------------------------------------
Income from investment operations
- ---------------------------------------------------------------------------------------------------
Net investment income 0.29 0.61 0.63
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.58 ( 0.98) 0.05
----------- ----------- ------------
- ---------------------------------------------------------------------------------------------------
Total from investment operations 0.87 ( 0.37) 0.68
----------- ----------- ------------
- ---------------------------------------------------------------------------------------------------
Less distributions from net
investment income ( 0.29) ( 0.61) ( 0.63)
----------- ----------- ------------
- ---------------------------------------------------------------------------------------------------
Net asset value end of period $ 9.65 $ 9.07 $ 10.05
=========== =========== ============
- ---------------------------------------------------------------------------------------------------
Total Return (b) 9.76% ( 3.75%) 6.91%
- ---------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 1.79%(a) 1.54% 1.19%(a)
- ---------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid
expenses - - -
- ---------------------------------------------------------------------------------------------------
Expenses excluding waivers and/or
reimbursements 1.80%(a) 1.58% 1.50%(a)
- ---------------------------------------------------------------------------------------------------
Net investment income 6.32%(a) 6.42% 6.44%(a)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate 0% 19% 39%
- ---------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 192,490 $ 195,571 $ 236,696
- ---------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
(d) The Fund changed its fiscal year end from June 30 to April 30.
See Combined Notes to Financial Statements.
11
<PAGE>
EVERGREEN
U.S. Government Fund
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Ended
October 31, 1997 Ten Months Ended
(Unaudited) April 30, 1997 (d)
<S> <C> <C>
CLASS C SHARES
Net asset value beginning of period $ 9.39 $ 9.42
=========== ===========
- -----------------------------------------------------------------------------------
Income from investment operations
- -----------------------------------------------------------------------------------
Net investment income 0.28 0.46
- -----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.26 ( 0.03)
----------- -----------
- -----------------------------------------------------------------------------------
Total from investment operations 0.54 0.43
----------- -----------
- -----------------------------------------------------------------------------------
Less distributions from net investment
income ( 0.27) ( 0.46)
----------- -----------
- -----------------------------------------------------------------------------------
Net asset value end of period $ 9.66 $ 9.39
=========== ===========
- -----------------------------------------------------------------------------------
Total Return (b) 5.88% 4.65%
- -----------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 1.78%(a) 1.73%(a)
- -----------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses 1.78%(a) 1.73%(a)
- -----------------------------------------------------------------------------------
Expenses excluding waivers and/or
reimbursements 1.78%(a) 1.73%(a)
- -----------------------------------------------------------------------------------
Net investment income 5.57%(a) 5.85%(a)
- -----------------------------------------------------------------------------------
Portfolio turnover rate 5% 12%
- -----------------------------------------------------------------------------------
Net assets end of period (thousands) $ 6,260 $ 455
- -----------------------------------------------------------------------------------
<CAPTION>
September 2, 1994
(Date of Initial
Year Ended Six Months Ended Public Offering) to
June 30, 1996 June 30, 1995 (c) December 31, 1994
<S> <C> <C> <C>
CLASS C SHARES
Net asset value beginning of period $ 9.65 $ 9.07 $ 9.39
========== =========== ============
- ------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------
Net investment income 0.56 0.29 0.20
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments ( 0.23) 0.58 ( 0.32)
---------- ----------- ------------
- ------------------------------------------------------------------------------------------------------
Total from investment operations 0.33 0.87 ( 0.12)
---------- ----------- ------------
- ------------------------------------------------------------------------------------------------------
Less distributions from net investment
income ( 0.56) ( 0.29) ( 0.20)
---------- ----------- ------------
- ------------------------------------------------------------------------------------------------------
Net asset value end of period $ 9.42 $ 9.65 $ 9.07
========== =========== ============
- ------------------------------------------------------------------------------------------------------
Total Return (b) 3.50% 9.76% ( 1.30%)
- ------------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 1.74% 1.79%(a) 1.71%(a)
- ------------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid expenses - - -
- ------------------------------------------------------------------------------------------------------
Expenses excluding waivers and/or
reimbursements 1.74% 1.80%(a) 1.75%(a)
- ------------------------------------------------------------------------------------------------------
Net investment income 5.87% 6.36%(a) 6.70%(a)
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate 23% 0% 19%
- ------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 649 $ 350 $ 266
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
October 31, 1997 Ten Months Ended Year Ended
(Unaudited) April 30, 1997 (d) June 30, 1996
<S> <C> <C> <C>
CLASS Y SHARES
Net asset value beginning of period $ 9.39 $ 9.42 $ 9.65
=========== =========== =========
- ----------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------
Net investment income 0.32 0.54 0.66
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.27 ( 0.03) ( 0.23)
----------- ----------- ---------
- ----------------------------------------------------------------------------------------------
Total from investment operations 0.59 0.51 0.43
----------- ----------- ---------
- ----------------------------------------------------------------------------------------------
Less distributions from net
investment income ( 0.32) ( 0.54) ( 0.66)
----------- ----------- ---------
- ----------------------------------------------------------------------------------------------
Net asset value end of period $ 9.66 $ 9.39 $ 9.42
=========== =========== =========
- ----------------------------------------------------------------------------------------------
Total Return 6.42% 5.52% 4.54%
- ----------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 0.77%(a) 0.73%(a) 0.74%
- ----------------------------------------------------------------------------------------------
Expenses excluding indirectly paid
expenses 0.77%(a) 0.73%(a) -
- ----------------------------------------------------------------------------------------------
Expenses excluding waivers and/or
reimbursements 0.77%(a) 0.73%(a) 0.74%
- ----------------------------------------------------------------------------------------------
Net investment income 6.67%(a) 6.85%(a) 6.86%
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate 5% 12% 23%
- ----------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 138,104 $ 127,099 $ 121,569
- ----------------------------------------------------------------------------------------------
<CAPTION>
September 2, 1993
(Date of Initial
Six Months Ended Year Ended Public Offering) to
June 30, 1995 (c) December 31, 1994 December 31, 1993
<S> <C> <C> <C>
CLASS Y SHARES
Net asset value beginning of period $ 9.07 $ 10.05 $ 10.25
=========== =========== ============
- ---------------------------------------------------------------------------------------------------
Income from investment operations
- ---------------------------------------------------------------------------------------------------
Net investment income 0.34 0.69 0.25
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.58 ( 0.98) ( 0.20)
----------- ----------- ------------
- ---------------------------------------------------------------------------------------------------
Total from investment operations 0.92 ( 0.29) 0.05
----------- ----------- ------------
- ---------------------------------------------------------------------------------------------------
Less distributions from net
investment income ( 0.34) ( 0.69) ( 0.25)
----------- ----------- ------------
- ---------------------------------------------------------------------------------------------------
Net asset value end of period $ 9.65 $ 9.07 $ 10.05
=========== =========== ============
- ---------------------------------------------------------------------------------------------------
Total Return 10.30% ( 2.94%) 0.49%
- ---------------------------------------------------------------------------------------------------
Ratios/supplemental data
Ratios to average net assets
Expenses 0.79%(a) 0.71% 0.48%(a)
- ---------------------------------------------------------------------------------------------------
Expenses excluding indirectly paid
expenses - - -
- ---------------------------------------------------------------------------------------------------
Expenses excluding waivers and/or
reimbursements 0.80%(a) 0.75% 0.79%(a)
- ---------------------------------------------------------------------------------------------------
Net investment income 7.31%(a) 7.27% 7.20%(a)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate 0% 19% 39%
- ---------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $ 16,934 $ 15,595 $ 14,486
- ---------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
(d) The Fund changed its fiscal year end from June 30 to April 30.
See Combined Notes to Financial Statements.
12
<PAGE>
EVERGREEN
Strategic Income Fund
Schedule of Investments
October 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
CORPORATE BONDS - 37.6%
Chemical & Agricultural
Products - 1.3%
$ 1,000,000 Freedom Chemicals,
Company,
Sr. Notes (Subord.),
10.63%, 10/15/06 ... $ 1,125,000
1,000,000 Polymer Group,
Incorporated,
Sr. Notes (Subord.),
Series B,
9.00%, 7/1/07 ...... 1,000,000
500,000 Texas Petrochemicals
Corporation,
Sr. Notes (Subord.),
11.13%, 7/1/06 ...... 550,000
------------
2,675,000
------------
Communication Systems &
Services - 6.3%
1,550,000 Adelphia Communications
Corporation,
Sr. Notes, Series B,
9.88%, 3/1/07 ...... 1,592,625
250,000 Adelphia Communications
Corporation,
Sr. Notes,
10.50%, 7/15/04 (e) 261,250
1,000,000 Comcast Cellular
Holdings,
Incorporated,
Sr. Notes,
9.50%, 5/1/07 (e) ... 1,035,000
2,000,000 Diamond Cable
Communications
Company,
Sr. Disc. Notes,
(Eff. Yield 11.78%)
(d),
0.00%, 9/30/04 ...... 1,680,000
500,000 Diamond Cable
Communications PLC,
Sr. Disc. Notes,
(Eff. Yield 10.48%)
(d),
0.00%, 2/15/07 ...... 323,750
250,000 Frontiervision,
Sr. Notes,
11.00%, 10/15/06 ... 270,000
1,000,000 Fundy Cable Limited,
Sr. Secd. 2nd Priority
Notes,
11.00%, 11/15/05 ... 1,062,500
500,000 Intermedia Capital
Partners,
Sr. Notes,
11.25%, 8/1/06 ...... 545,000
1,250,000 Marcus Cable Operations
Limited
Partnership,
Sr. Disc. Notes
(Subord.),
(Eff. Yield 10.07%)
(d),
0.00%, 8/1/04 ...... 1,131,250
McLeod USA,
Incorporated:
300,000 Sr. Notes,
9.25%, 7/15/07 (e) 306,000
1,250,000 Sr. Disc. Notes
(Eff. Yield 9.84%) (d)
0.00%, 3/1/07 (e) ... 862,500
1,000,000 Rogers Cablesystems
Limited,
Sr. Deb. (Subord.),
10.13%, 9/1/12 ...... 1,050,000
500,000 Rogers Cantel,
Sr. Secd. Deb.,
9.38%, 6/1/08 ...... 528,750
Principal
Amount Value
<S> <C> <C>
CORPORATE BONDS - continued
Communication Systems & Services - continued
TCI Satellite Entertainment,
Incorporated:
$ 250,000 Sr. Disc. Notes,
(Subord.)
12.25%, 2/15/07 (e) $ 160,000
750,000 Sr. Disc. Notes,
(Subord.)
10.88%, 2/15/07 (e) 780,000
650,000 Telewest Communications
PLC,
Sr. Disc. Deb.,
(Eff. Yield 10.11%)
(d),
0.00%, 10/1/07 ...... 487,500
1,000,000 Vanguard Cellular
Systems,
Incorporated,
Sr. Deb.,
9.38%, 4/15/06 ...... 1,015,000
------------
13,091,125
------------
Consumer Products &
Services - 1.6%
575,000 Drypers Corporation,
Sr. Notes, Series B,
10.25%, 6/15/07 ... 577,875
4,000,000 Revlon Worldwide
Corporation,
Sr. Secd. Disc. Notes,
Series B,
(Eff. Yield 11.54%)(d),
0.00%, 3/15/01 (e) 2,740,000
------------
3,317,875
------------
Diversified
Companies - 0.2%
500,000 Cinemark USA,
Incorporated,
Sr. Notes (Subord.),
Series B,
9.63%, 8/1/08 ...... 515,000
------------
Energy - 4.8%
1,325,000 Benton Oil and Gas
Company,
Sr. Notes,
9.38%, 11/1/07 (e) 1,325,000
1,000,000 Clark USA,
Incorporated,
Sr. Notes, Series B,
10.88%, 12/1/05 ... 1,085,000
1,000,000 Dawson Production
Services,
Incorporated,
Sr. Notes,
9.38%, 2/1/07 ...... 1,050,000
1,000,000 Energy Corporation of
America,
Sr. Notes (Subord.),
Series A,
9.50%, 5/15/07 ...... 1,005,000
1,250,000 HS Resources,
Incorporated,
Sr. Notes (Subord.),
9.25%, 11/15/06 ... 1,284,375
1,500,000 Petsec Energy
Incorporated,
Sr. Notes (Subord.),
9.50%, 6/15/07 (e) 1,533,750
500,000 Plains Resources,
Incorporated,
Sr. Notes (Subord.),
Series B,
10.25%, 3/15/06 ... 532,500
2,000,000 Transamerican Energy
Corporation,
Sr. Secd. Notes,
11.50%, 6/15/02 (e) 2,050,000
------------
9,865,625
------------
</TABLE>
13
<PAGE>
EVERGREEN
Strategic Income Fund
Schedule of Investments (continued)
October 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
CORPORATE BONDS - continued
Finance &
Insurance - 1.2%
$ 1,850,000 PNC Student Loan
Trust I,
6.73%, 1/25/07 ... $ 1,899,719
800,000 PTC International
Finance BV,
Sr. Notes (Subord.),
(Eff. Yield 10.14%)
(d),
0.00%, 7/1/07 (e) 512,000
------------
2,411,719
------------
Food & Beverage
Products - 3.3%
825,000 AFC Enterprises,
Incorporated,
Sr. Notes (Subord.),
10.25%, 5/15/07 ... 866,250
500,000 Chiquita Brands
International,
Incorporated,
Sr. Notes,
9.63%, 1/15/04 ... 522,500
1,500,000 FRD Acquisition
Company,
Sr. Notes, Series B,
12.50%, 7/15/04 ... 1,612,500
4,336,000 Iowa Select Farms,
Series A, Sr. Notes,
(Eff. Yield 16.62%)
(d)
(8/2/94-$2,243,310),
0.00%, 2/15/04 (b) 3,205,171
500,000 Ralphs Grocery
Company,
Sr. Notes (Subord.),
11.00%, 6/15/05 ... 547,500
------------
6,753,921
------------
Forest
Products - 0.4%
375,000 Four M Corporation,
Sr. Secd. Notes,
Series B,
12.00%, 6/1/06 ... 400,313
350,000 Printpack,
Incorporated,
Sr. Notes (Subord.),
Series B,
10.63%, 8/15/06 ... 365,750
------------
766,063
------------
Gaming &
Leisure - 4.5%
1,000,000 Boyd Gaming
Corporation,
Sr. Notes (Subord.),
9.50%, 7/15/07 (e) 1,015,000
2,488,391 Grand Palais Casino,
Incorporated,
Sr. Secd. PIK Notes,
(8/15/94 -
$2,488,391),
18.25%, 11/1/97 (a) 25
(b) (c)
1,000,000 Hollywood Park,
Incorporated,
Sr. Notes (Subord.),
9.50%, 8/1/07 (e) 1,075,000
850,000 Horseshoe Gaming,
Sr. Notes,
9.38%, 6/15/07 (e) 873,375
1,000,000 Lodgenet
Entertainment
Corporation,
Sr. Notes,
10.25%, 12/15/06 (e) 1,031,250
1,500,000 Majestic Star Casino
LLC,
Sr. Secd. Notes,
12.75%, 5/15/03 ... 1,642,500
Principal
Amount Value
<S> <C> <C>
CORPORATE BONDS - continued
Gaming & Leisure - continued
$ 1,000,000 Showboat,
Incorporated,
Sr. Notes (Subord.),
13.00%, 8/1/09 ... $ 1,160,000
1,000,000 Sun World
International,
Incorporated,
1st Mtge. Notes,
11.25%, 4/15/04 (e) 1,072,500
1,450,000 Trump Atlantic City
Associates,
1st Mtge. Notes,
11.25%, 5/1/06 ... 1,428,250
------------
9,297,900
------------
Healthcare Products &
Services - 0.5%
1,000,000 Integrated Health
Services,
Incorporated,
Sr. Notes (Subord.),
9.50%, 9/15/07 (e) 1,015,000
------------
Manufacturing -
Distribution - 1.1%
1,000,000 Interlake
Corporation,
Sr. Notes,
12.00%, 11/15/01 1,100,000
1,000,000 Unisys Corporation,
Sr. Notes,
11.75%, 10/15/04 1,140,000
------------
2,240,000
------------
Metal Products &
Services - 0.7%
1,000,000 Oxford Automotive,
Incorporated,
Sr. Notes (Subord.),
10.13%, 6/15/07 (e) 1,020,000
550,000 Republic Engineered
Steels,
Incorporated,
1st Mtge. Notes,
9.88%, 12/15/01 ... 528,000
------------
1,548,000
------------
Paper &
Packaging - 1.0%
500,000 Consumers
International,
Incorporated,
Sr. Secd. Notes,
10.25%, 4/1/05 (e) 535,000
1,500,000 Delta Mills,
Incorporated,
Sr. Notes,
9.63%, 9/1/07 (e) 1,515,000
------------
2,050,000
------------
Publishing,
Broadcasting &
Entertainment - 2.6%
1,000,000 Big Flower Press
Holdings,
Incorporated,
Sr. Notes (Subord.),
8.88%, 7/1/07 ... 1,000,000
1,625,000 Capstar Broadcasting
Partners,
Sr. Disc. Notes,
12.75%, 2/1/09 ... 1,121,250
1,450,000 Echostar Satellite
Broadcast
Corporation,
Sr. Secd. Disc.
Notes,
(Eff. Yield 10.05%)
(d),
0.00%, 3/15/04 ... 1,167,250
</TABLE>
14
<PAGE>
EVERGREEN
Strategic Income Fund
Schedule of Investments (continued)
October 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
CORPORATE BONDS - continued
Publishing, Broadcasting &
Entertainment - continued
$ 1,000,000 SFX Broadcasting, Incorporated,
Sr. Notes (Subord.), Series B,
10.75%, 5/15/06 ............ $ 1,085,000
1,000,000 Sinclair Broadcast Group,
Incorporated,
Sr. Notes (Subord.),
10.00%, 9/30/05 ............ 1,020,000
-----------
5,393,500
-----------
Retailing & Wholesale - 1.5%
1,000,000 Finlay Fine Jewerly Corporation,
Sr. Notes,
10.63%, 5/1/03 ............... 1,052,500
1,000,000 Hollywood Entertainment
Corporation,
Sr. Notes (Subord.),
10.63%, 8/15/04 (e) ......... 1,015,000
1,000,000 Jitney Jungle Stores America,
Incorporated,
Sr. Notes (Subord.),
10.38%, 9/15/07 (e) ......... 1,040,000
-----------
3,107,500
-----------
Telecommunication Services &
Equipment - 5.5%
1,500,000 Acme Television,
Sr. Disc. Notes,
(Eff. Yield 11.32%) (d),
0.00%, 9/30/04 (e) ......... 1,072,500
2,450,000 Brooks Fiber Properties,
Incorporated,
Sr. Disc. Notes,
11.88%, 11/1/06 ............ 1,914,062
500,000 BTI Telecom Corporation,
Sr. Notes,
10.50%, 9/15/07 (e) ......... 500,000
2,000,000 Comtel Brasileira,
10.75%, 9/26/04 ............ 2,129,420
1,700,000 Intermedia Communications
Incorporated,
Sr. Disc. Notes, Series B,
(Eff. Yield 9.93%) (d),
0.00%, 7/15/07 ............... 1,113,500
2,400,000 Nextel Communications,
Incorporated,
Sr. Disc. Notes,
(Eff. Yield 11.17%) (d),
0.00%, 10/31/07 (e) ......... 1,320,000
1,000,000 Talton Holdings, Incorporated,
Sr. Notes,
11.00%, 6/30/07 (e) ......... 1,060,000
525,000 Teleport Communications Group,
Sr. Notes,
9.88%, 7/1/06 ............... 569,625
1,000,000 Teleport Communications Group,
Sr. Disc. Notes,
(Eff. Yield 8.97%) (d),
0.00%, 7/1/07 ............... 782,500
900,000 Tricom SA,
Sr. Notes,
11.38%, 9/1/04 (e) ......... 873,000
-----------
11,334,607
-----------
Principal
Amount Value
<S> <C> <C>
CORPORATE BONDS - continued
Transportation - 1.1%
$ 1,000,000 Coach USA, Incorporated,
9.38%, 7/1/07 ............... $ 985,000
500,000 Eletson Holdings, Incorporated,
9.25%, 11/15/03 ............ 505,000
850,000 Stena AB,
Sr. Notes,
8.75%, 6/15/07 ............... 852,125
-----------
2,342,125
-----------
Total Corporate Bonds
(cost $78,165,451)............ 77,724,960
-----------
U.S. TREASURY OBLIGATIONS - 13.1%
U.S. Treasury Bonds: .........
7,723,000 7.88%, 2/15/21 ............ 9,268,836
5,000,000 6.63%, 2/15/27 ............ 5,301,550
U.S. Treasury Notes: .........
6,900,000 6.63%, 4/30/02 ............ 7,127,493
5,250,000 6.00%, 6/30/99 ............ 5,280,345
-----------
Total U.S. Treasury Obligations
(cost $25,596,776)............ 26,978,224
-----------
MORTGAGE-BACKED SECURITIES - 13.2%
1,986,654 FNMA,
7.73%, 9/1/97 ............... 2,083,503
2,435,831 FHLMC Participation Certificate,
Pool #846298,
7.46%, 9/1/97 ............... 2,536,699
3,015,073 FHLMC Participation Certificate,
Pool #607352,
7.93%, 9/1/97 ............... 3,180,902
4,255,037 FNMA,
Pool #322356,
7.00%, 9/1/25 ............... 4,285,589
5,666,367 FNMA,
Pool #324193,
7.00%, 9/1/25 ............... 5,707,051
7,420,283 GNMA,
Pool #780163,
6.50%, 7/15/09 ............... 7,472,447
1,984,206 Independent National Mortgage
Corporation,
7.85%, 9/1/97 (e) ............ 2,007,570
-----------
Total Mortgage-Backed Securities
(cost $26,823,822) ......... 27,273,761
-----------
FOREIGN BONDS (U.S. DOLLARS) - 8.6%
500,000 Azteca Holdings SA DE CV,
Sr. Secd. Notes,
11.00%, 6/15/02 (e) ......... 490,000
Grupo Industrial Durango S.A.,
Notes:
2,500,000 12.00%, 7/15/01 ............ 2,600,000
1,000,000 12.63%, 8/1/03 ............ 1,070,000
1,425,000 TV Azteca SA DE CV,
Sr. Notes, Series B,
10.50%, 2/15/07 ............ 1,403,625
</TABLE>
15
<PAGE>
EVERGREEN
Strategic Income Fund
Schedule of Investments (continued)
October 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
FOREIGN BONDS (U.S. DOLLARS) - continued
$ 5,000,000 United Mexican States,
9.88%, 1/15/07 ............... $ 5,050,000
8,468,000 Venezuela Republic,
9.25%, 9/15/27 ............... 7,155,460
-----------
Total Foreign Bonds (U.S. Dollars)
(cost $18,984,072) ............ 17,769,085
-----------
FOREIGN BONDS (NON U.S. DOLLARS) - 20.7%
Denmark (Kingdom of), Deb.:
3,750,000
DKK 7.00%, 12/15/04 ............... 610,791
2,000,000
DKK 9.00%, 11/15/98 ............... 318,889
34,875,000
DKK 8.00%, 5/15/03 ............... 5,921,407
400,000 European Investment Bank,
GBP 7.63%, 12/7/06 ............... 704,447
3,365,000 Exide Holdings,
DEM 9.13%, 4/15/04 ............... 1,952,083
10,350,000 Germany (Republic of), Deb.,
DEM 6.88%, 5/12/05 ............... 6,517,534
Italy (Republic of):
1,105,000,000
ITL 9.50%, 2/1/06 ............... 792,950
6,595,000,000
ITL 6.75%, 2/1/07 ............... 4,052,828
1,000,000 Microcell Telecommunications,
CAD Sr. Disc. Notes,
(Eff. Yield 15.78%) (d),
0.00%, 10/15/07 (e) ............ 397,346
4,000,000 Ontario Province Canada,
CAD 7.50%, 1/19/06 ............... 3,188,219
4,000,000 Quebec Province Canada,
CAD 7.75%, 3/30/06 ............... 3,205,733
1,000,000 Rogers Communications
CAD Incorporated,
Sr. Notes,
8.75%, 7/15/07 ............... 713,804
32,000,000 Spain (Government of):
ESP 11.45%, 8/30/98 ............... 230,931
23,000,000
ESP 12.25%, 3/25/00 ............... 182,963
4,200,000 Sweden (Kingdom of):
SEK 10.25%, 5/5/03 ............... 669,828
30,000,000
SEK 6.00%, 2/9/05 ............... 3,953,724
5,268,000 United Kingdom Treasury,
GBP 7.25%, 12/7/07 ............... 9,291,360
-----------
Total Foreign Bonds (Non U.S.
Dollars)
(cost $43,391,948) ............ 42,704,837
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS AND WARRANTS - 0.8% Food & Beverage Products - 0.1%
117,800 Iowa Select Farms,
Warrants (2/4/94-$955,122) (a)(b) $ 294,500
----------
Gaming - 0.6%
104,514 Casino America, Incorporated (a) 307,010
19,582 Casino America, Incorporated,
Warrants (a) .................. 196
170,042 Colorado Gaming and Entertainment
Company (a) .................. 935,231
87,342 Grand Palais Casino,
Incorporated,
Warrants (8/15/94-$57) (a) (b) 87
72,794 Grand Palais Casino,
Incorporated, Series A,
Warrants (8/15/94-$727) (a) (b) 73
39,706 Grand Palais Casino,
Incorporated, Series B,
Warrants (8/15/94-$397) (a) (b) 39
350,735 Grand Palais Casino,
Incorporated, Series C,
Warrants (8/15/94-$3,507) (a) (b) 351
160,136 Grand Palais Casino,
Incorporated, Series D,
Warrants (8/15/94-$0) (a) (b) 160
----------
1,243,147
----------
Telecommunication Service &
Equipment - 0.1%
3,717 Nextel Communications,
Incorporated (a) ............... 97,804
4,820 Nextel Communications,
Incorporated (a)
Warrants ..................... 4,820
----------
102,624
----------
Total Common Stocks and Warrants
(cost $3,094,289)............... 1,640,271
----------
PREFERRED STOCK - 0.5%
Finance & Insurance - 0.5%
(cost $2,106,054)
2,156 Ampex, Incorporated (a) (b) (c) 1,093,092
----------
</TABLE>
16
<PAGE>
EVERGREEN
Strategic Income Fund
Schedule of Investments (continued)
October 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C> <C>
REPURCHASE AGREEMENT - 5.3%
(Cost $10,968,000)
$10,968,000 Keystone Joint Repurchase
Agreement (Investments in
repurchase agreements, in a
joint
trading, account, dated
10/31/97,
maturity value $10,973,240) (f),
5.73%, 11/3/97 ............... $ 10,968,000
------------
Total Investments
(cost $209,130,412) 99.8% 206,152,230
Other Assets and
Liabilities - Net ... 0.2 501,746
----- ------------
Net Assets ......... 100.0% $206,653,976
===== ============
</TABLE>
(a) Non-income producing.
(b) All or a portion of these securities are either (1) restricted securities
(i.e., securities which may not be publicly sold without registration under
the Federal Securities Act of 1933) or (2) illiquid securities, and are
valued using market quotations where readily available. In the absence of
market quotations, the securities are valued based upon their fair value
determined under procedures approved by the Board of Trustees. The Fund may
make investments in an amount up to 15% of the value of the Fund's net
assets in such securities. The date of acquisition and cost are set forth in
parentheses after the description of each restricted security. On the date
of acquisition there were no market quotations on similiar securities and
the securities were valued at acquisition cost. At October 31, 1997, the
fair value of these restricted securities was $4,593,498 (2.22% of the
Fund's net assets).
(c) Securities which have defaulted on payment of interest and/or principal. The
Fund has stopped accruing income on these securities. At October 31, 1997,
the face value of these securities was $1,093,117 (0.53% of the Fund's net
assets).
(d) Effective yield (calculated at the date of purchase) is the yield at which
the bond accretes on an annual basis until its maturity date.
(e) Securities that may be resold to "quailified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
(f) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at October 31, 1997.
Legend of Portfolio Abbreviations:
CAD Canadian Dollar
DEM German Deutsche Mark
DKK Danish Krone
ESP Spanish Peseta
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
GBP Pound Sterling
GNMA Government National Mortgage Association
ITL Italian Lira
SEK Swedish Krona
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts to Sell:
Net Unrealized
U.S. $ Value at In Exchange Appreciation
Exchange Date Contracts to Deliver October 31, 1997 for U.S. $ (Depreciation)
- --------------- ------------------------------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
1/16/98 8,000,000 Canadian Dollars 5,698,229 5,794,582 $ 96,353
1/21/98 40,000,000 Deutsche Mark 23,312,238 22,704,053 (608,185)
1/2/98 5,000,000 Pound Sterling 8,366,591 8,062,000 (304,591)
</TABLE>
See Combined Notes to Financial Statements.
17
<PAGE>
EVERGREEN
U.S. Government Fund
Schedule of Investments
October 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C> <C>
MORTGAGE-BACKED SECURITIES - 48.0%
Federal Home Loan Mortgage
Corp. - 10.1%
$14,129,056 6.50%, 04/01/26 ............... $ 13,931,531
1,750,000 7.80%, 09/12/16 ............... 1,896,828
5,009,832 8.00%, 07/01/17 - 04/01/22 ...... 5,236,154
3,418,367 8.50%, 02/01/17 - 10/01/17 ...... 3,605,624
3,189,870 9.00%, 11/01/19 - 04/01/21 ...... 3,447,014
1,215,139 9.50%, 09/01/20 ............... 1,312,496
1,703,352 10.00%, 12/01/19 - 08/01/21 ... 1,859,370
1,740,605 10.50%, 12/01/19 ............... 1,911,402
------------
33,200,419
------------
Federal National Mortgage
Assn. - 14.7%
4,709,003 6.50%, 01/01/24 ............... 4,631,013
17,172,668 7.00%, 08/01/25 - 09/01/25 ...... 17,231,651
11,661,168 7.50%, 07/01/23 - 07/01/25 ...... 11,919,906
11,049,857 8.00%, 08/01/25 ............... 11,472,514
1,604,956 9.50%, 06/01/22 ............... 1,722,821
1,043,385 11.00%, 01/01/16 ............... 1,159,305
------------
48,137,210
------------
Government National Mortgage
Assn. - 23.2%
3,739,625 6.50%, 10/15/25 ............... 3,704,397
18,121,806 7.00%, 12/15/22 - 12/15/25 ...... 18,238,741
10,158,640 7.50%, 02/15/22 - 03/15/23 ...... 10,396,758
19,139,734 8.00%, 02/15/23 - 08/15/24 ...... 19,944,968
10,600,052 8.50%, 12/15/21 - 07/15/24 ...... 11,147,062
5,105,144 9.00%, 01/15/20 - 06/15/21 ...... 5,451,339
5,196,275 9.50%, 05/15/17 - 02/15/21 ...... 5,629,842
1,143,160 10.00%, 12/15/18 ............... 1,253,190
------------
75,766,297
------------
Total Mortgage-Backed Securities
(cost $155,104,117) ............ 157,103,926
------------
U.S. TREASURY OBLIGATIONS - 50.3%
U.S. Treasury Bonds - 22.6%
7,800,000 6.38%, 8/15/27 .................. 8,041,316
7,520,000 7.88%, 2/15/21 .................. 9,021,654
8,100,000 8.50%, 2/15/20 .................. 10,302,196
3,650,000 8.75%, 11/15/08 ............... 4,158,723
3,080,000 8.75%, 8/15/20 .................. 4,017,478
Principal
Amount Value
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS - continued
U.S. Treasury Bonds - continued
$14,010,000 8.88%, 8/15/17 .................. $ 18,226,141
6,000,000 8.88%, 2/15/19 .................. 7,861,878
9,300,000 9.25%, 2/15/16 .................. 12,392,259
------------
74,021,645
------------
U.S. Treasury Notes - 27.7%
3,500,000 6.00%, 6/30/99 .................. 3,521,879
1,500,000 6.25%, 5/31/99 .................. 1,514,064
7,500,000 6.25%, 6/30/02 .................. 7,647,660
3,000,000 6.75%, 4/30/00 .................. 3,074,064
12,000,000 7.75%, 11/30/99 ............... 12,491,256
9,800,000 7.75%, 1/31/00 .................. 10,225,692
21,500,000 7.88%, 11/15/99 ............... 22,413,771
1,600,000 7.88%, 11/15/04 ............... 1,783,501
6,850,000 8.25%, 7/15/98 .................. 6,976,300
6,680,000 8.88%, 11/15/97 ............... 6,688,357
13,700,000 9.25%, 8/15/98 .................. 14,085,326
------------
90,421,870
------------
Total U. S. Treasury Obligations
(cost $166,233,860) ............ 164,443,515
------------
REPURCHASE AGREEMENT - 0.6%
(cost $2,011,045)
2,011,045 Donaldson, Lufkin & Jenrette
Securities Corp.,5.68% dated
10/31/97, due 11/3/97, maturity
value
$2,011,997 (Collateralized by
$1,850,000 U.S. Treasury Notes,
6.375% due 5/15/00 and $88,000
U.S. Treasury Bonds, 9.25%, due
2/15/16, total value including
accrued
interest $2,052,227) ............ 2,011,045
------------
Total Investments
(cost $323,349,022) ...... 98.9% 323,558,486
Other Assets And
Liabilities - Net ...... 1.1 3,725,993
----- ------------
Net Assets ............... 100.0% $327,284,479
===== ============
</TABLE>
See Combined Notes to Financial Statements.
18
<PAGE>
EVERGREEN
Long Term Bond Funds
Statements of Assets and Liabilities
October 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Strategic U.S.
Income Government
Fund Fund
---------------- ----------------
<S> <C> <C>
Assets
Investments at market value (identified cost - $209,130,412 and $323,349,022, $ 206,152,230 $ 323,558,486
respectively)
Cash .................................................................................... 700,364 0
Interest receivable ..................................................................... 3,803,750 4,607,562
Receivable for Fund shares sold ......................................................... 286,305 286,951
Unrealized appreciation on forward foreign currency exchange contracts .................. 96,353 0
Receivable for investments sold ......................................................... 84,445 0
Receivable for closed forward foreign currency exchange contracts ..................... 12,289 0
Prepaid expenses and other assets ...................................................... 59,718 57,906
- ------------------------------------------------------------------------------------------ ------------- -------------
Total assets ........................................................................ 211,195,454 328,510,905
- ------------------------------------------------------------------------------------------ ------------- -------------
Liabilities
Payable for investments purchased ...................................................... 2,353,194 0
Unrealized depreciation on forward foreign currency exchange contracts .................. 912,776 0
Payable for Fund shares redeemed ...................................................... 553,076 409,011
Distributions to shareholders ......................................................... 449,685 450,324
Due to related parties .................................................................. 115,823 143,161
Distribution fee payable ............................................................... 108,638 137,157
Accrued expenses and other liabilities ................................................ 48,286 86,773
- ------------------------------------------------------------------------------------------ ------------- -------------
Total liabilities ..................................................................... 4,541,478 1,226,426
- ------------------------------------------------------------------------------------------ ------------- -------------
Net assets .............................................................................. $ 206,653,976 $ 327,284,479
========================================================================================== ============= =============
Net assets represented by
Paid-in capital ........................................................................ $ 270,820,957 $ 345,052,546
Accumulated distributions in excess of net investment income ........................... (570,304) 0
Accumulated net realized loss on investments and foreign currency related transactions (59,827,532) (17,977,531)
Net unrealized appreciation (depreciation) on investments and foreign currency related
transactions (3,769,145) 209,464
- ------------------------------------------------------------------------------------------ ------------- -------------
Total net assets ..................................................................... $ 206,653,976 $ 327,284,479
========================================================================================== ============= =============
Net assets consists of
Class A ................................................................................. $ 64,682,935 $ 37,329,413
Class B ................................................................................. 118,072,444 145,590,981
Class C ................................................................................. 22,661,423 6,260,001
Class Y ................................................................................. 1,237,174 138,104,084
- ------------------------------------------------------------------------------------------ ------------- -------------
$ 206,653,976 $ 327,284,479
========================================================================================= ============= =============
Shares outstanding
Class A ................................................................................. 9,165,147 3,862,891
Class B ................................................................................. 16,652,601 15,064,865
Class C ................................................................................. 3,200,001 647,823
Class Y ................................................................................. 179,674 14,290,367
- ------------------------------------------------------------------------------------------ ------------- -------------
Net asset value per share
Class A ................................................................................. $ 7.06 $ 9.66
========================================================================================== ============= =============
Class A - Offering price (based on sales charge of 4.75%) .............................. $ 7.41 $ 10.14
========================================================================================== ============= =============
Class B ................................................................................. $ 7.09 $ 9.66
========================================================================================== ============= =============
Class C ................................................................................. $ 7.08 $ 9.66
========================================================================================== ============= =============
Class Y ................................................................................. $ 6.89 $ 9.66
========================================================================================== ============= =============
</TABLE>
See Combined Notes to Financial Statements.
19
<PAGE>
EVERGREEN
Long Term Bond Funds
Statements of Operations
Six Months Ended October 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Strategic U.S.
Income Government
Fund Fund
-------------- ---------------
<S> <C> <C>
Investment income
Interest (Net of foreign withholding taxes of $2,672 and $0, respectively)............... $ 8,461,776 $11,482,206
Other income ........................................................................... 103,125 0
- ------------------------------------------------------------------------------------------ ----------- -----------
8,564,901 11,482,206
----------- -----------
Expenses
Distribution Plan expenses ............................................................ 773,664 775,981
Management fee ........................................................................ 652,569 771,774
Transfer agent fees ..................................................................... 265,957 182,558
Custodian fees ........................................................................ 47,274 52,355
Professional fees ..................................................................... 21,463 16,699
Trustees' fees and expenses ............................................................ 18,845 7,655
Administrative services fees ............................................................ 16,698 53,704
Other ................................................................................. 74,449 104,290
- ------------------------------------------------------------------------------------------ ----------- -----------
Total expenses ........................................................................ 1,870,919 1,965,016
Less: Indirectly paid expenses ......................................................... (673) (187)
- ------------------------------------------------------------------------------------------ ----------- -----------
Net expenses ........................................................................... 1,870,246 1,964,829
- ------------------------------------------------------------------------------------------ ----------- -----------
Net investment income .................................................................. 6,694,655 9,517,377
========================================================================================== =========== ===========
Net realized and unrealized gain (loss) on investments and foreign currency related
transactions
Realized gain (loss) on:
Investments ........................................................................... 4,585,991 (320,586)
Foreign currency related transactions ................................................ 422,255 0
- ------------------------------------------------------------------------------------------ ----------- -----------
Net realized gain (loss) on investments and foreign currency related transactions ...... 5,008,246 (320,586)
- ------------------------------------------------------------------------------------------ ----------- -----------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................................... 2,388,577 8,759,667
Foreign currency related transactions ................................................ (754,873) 0
- ------------------------------------------------------------------------------------------ ----------- -----------
Net change in unrealized appreciation (depreciation) on investments and foreign related 1,633,704 8,759,667
- ------------------------------------------------------------------------------------------ ----------- -----------
transactions
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign currency related 6,641,950 8,439,081
- ------------------------------------------------------------------------------------------ ----------- -----------
transactions
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations .................................... $13,336,605 $17,956,458
========================================================================================== =========== ===========
</TABLE>
See Combined Notes to Financial Statements.
20
<PAGE>
EVERGREEN
Long Term Bond Funds
Statements of Changes in Net Assets
Six Months Ended October 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Strategic U.S.
Income Government
Fund Fund
---------------- ----------------
<S> <C> <C>
Operations
Net investment income .................................................................. $ 6,694,655 $ 9,517,377
Net realized gain (loss) on investments and foreign currency related transactions ...... 5,008,246 (320,586)
Net change in unrealized appreciation (depreciation) on investments and foreign currency 1,633,704 8,759,667
- ------------------------------------------------------------------------------------------ ------------- -------------
related transactions
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ................................. 13,336,605 17,956,458
- ------------------------------------------------------------------------------------------ ------------- -------------
Distributions to shareholders from
Net investment income
Class A .............................................................................. (2,242,865) (870,690)
Class B .............................................................................. (3,685,302) (4,113,220)
Class C .............................................................................. (748,280) (95,444)
Class Y .............................................................................. (12,114) (4,438,230)
- ------------------------------------------------------------------------------------------ ------------- -------------
Total distributions to shareholders ................................................... (6,688,561) (9,517,584)
- ------------------------------------------------------------------------------------------ ------------- -------------
Capital share transactions
Shares issued in connection with the acquisition of:
Keystone World Bond Fund ............................................................... 13,364,630 0
Keystone Government Securities Fund ................................................... 0 41,845,369
Proceeds from shares sold ............................................................... 24,767,014 20,943,869
Proceeds from reinvestment of distributions ............................................. 3,609,205 6,505,914
Payment for shares redeemed ............................................................ (34,845,268) (38,288,095)
- ------------------------------------------------------------------------------------------ ------------- -------------
Net increase in net assets resulting from capital share transactions .................. 6,895,581 31,007,057
- ------------------------------------------------------------------------------------------ ------------- -------------
Total increase in net assets ......................................................... 13,543,625 39,445,931
Net assets
Beginning of period ..................................................................... 193,110,351 287,838,548
- ------------------------------------------------------------------------------------------ ------------- -------------
End of period ........................................................................... $ 206,653,976 $ 327,284,479
========================================================================================== ============= =============
Undistributed net investment income (accumulated distributions in excess of net $ (570,304) $ 0
========================================================================================== ============= =============
investment income)
===========================================================================================
</TABLE>
See Combined Notes to Financial Statements
21
<PAGE>
EVERGREEN
Long Term Bond Funds
Statements of Changes in Net Assets
Prior Periods
<TABLE>
<CAPTION>
Strategic Income Fund
------------------------------------
Nine Months Ended Year Ended
April 30, 1997* July 31, 1996
------------------- ----------------
<S> <C> <C>
Operations
Net investment income ................................. $ 10,700,165 $ 19,336,690
Net realized gain (loss) on investments and foreign
currency related transactions ........................ 5,462,277 (3,931,838)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency related transactions (2,698,555) 247,245
- ---------------------------------------------------------- ------------- -------------
Net increase in net assets resulting from operations ... 13,463,887 15,652,097
- ---------------------------------------------------------- ------------- -------------
Distributions to shareholders from
Net investment income .................................
Class A ................................................ (3,484,550) (5,945,153)
Class B ................................................ (5,810,734) (9,706,657)
Class C ................................................ (1,404,882) (2,690,979)
Class Y ................................................ 0 0
In excess of net investment income .....................
Class A ................................................ (256,701) 0
Class B ................................................ (428,067) 0
Class C ................................................ (103,495) 0
Tax basis return of capital ...........................
Class A ................................................ 0 (564,217)
Class B ................................................ 0 (921,197)
Class C ................................................ 0 (255,384)
- ---------------------------------------------------------- ------------- -------------
Total distributions to shareholders .................. (11,488,429) (20,083,587)
- ---------------------------------------------------------- ------------- -------------
Capital share transactions
Proceeds from shares sold .............................. 25,911,778 28,128,495
Proceeds from shares issued in acquisition of Evergreen
U.S. Government Securities Fund ........................ 0 0
Proceeds from reinvestment of distributions ............ 6,009,396 10,567,921
Payment for shares redeemed ........................... (64,109,043) (92,224,304)
- ---------------------------------------------------------- ------------- -------------
Net increase (decrease) in net assets resulting from
capital share transactions ........................... (32,187,869) (53,527,888)
- ---------------------------------------------------------- ------------- -------------
Total increase (decrease) in net assets ............... (30,212,411) (57,959,378)
Net assets
Beginning of period .................................... 223,322,762 281,282,140
- ---------------------------------------------------------- ------------- -------------
End of period .......................................... $ 193,110,351 $ 223,322,762
========================================================== ============= =============
Undistributed net income (accumulated distributions in
excess of net investment income) ........................ $ (576,398) $ (1,169,996)
========================================================== ============= =============
<CAPTION>
U.S. Government Fund
-----------------------------------
Ten Months Ended Year Ended
April 30, 1997** June 30, 1996
------------------ ----------------
<S> <C> <C>
Operations
Net investment income ................................. $ 15,898,690 $ 18,766,488
Net realized gain (loss) on investments and foreign
currency related transactions ........................ (3,340,851) (3,731,984)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency related transactions 2,370,773 (3,860,415)
- ----------------------------------------------------------- ------------- -------------
Net increase in net assets resulting from operations ... 14,928,612 11,174,089
- ----------------------------------------------------------- ------------- -------------
Distributions to shareholders from
Net investment income .................................
Class A ................................................ (1,050,495) (1,406,673)
Class B ................................................ (7,610,760) (10,727,964)
Class C ................................................ (35,021) (28,511)
Class Y ................................................ (7,202,207) (6,603,340)
In excess of net investment income .....................
Class A ................................................ 0 0
Class B ................................................ 0 0
Class C ................................................ 0 0
Tax basis return of capital ...........................
Class A ................................................ 0 0
Class B ................................................ 0 0
Class C ................................................ 0 0
- ----------------------------------------------------------- ------------- -------------
Total distributions to shareholders .................. (15,898,483) (18,766,488)
- ----------------------------------------------------------- ------------- -------------
Capital share transactions
Proceeds from shares sold .............................. 26,211,170 138,179,343
Proceeds from shares issued in acquisition of Evergreen
U.S. Government Securities Fund ........................ 0 5,739,713
Proceeds from reinvestment of distributions ............ 10,717,216 11,871,813
Payment for shares redeemed ........................... (56,670,711) (71,866,685)
- ----------------------------------------------------------- ------------- -------------
Net increase (decrease) in net assets resulting from
capital share transactions ........................... (19,742,325) 83,924,184
- ----------------------------------------------------------- ------------- -------------
Total increase (decrease) in net assets ............... (20,712,196) 76,331,785
Net assets
Beginning of period .................................... 308,550,744 232,218,959
- ----------------------------------------------------------- ------------- -------------
End of period .......................................... $ 287,838,548 $ 308,550,744
=========================================================== ============= =============
Undistributed net income (accumulated distributions in
excess of net investment income) ........................ $ 207 $ 0
=========================================================== ============= =============
</TABLE>
* During the period, the Strategic Income Fund changed its fiscal year end from
July 31 to April 30.
** During the period, the U.S. Government Fund changed its fiscal year end from
June 30 to April 30.
See Combined Notes to Financial Statements.
22
<PAGE>
Combined Notes to Financial Statements (Unaudited)
1. ORGANIZATION
The Evergreen Long Term Bond Funds consist of Evergreen Strategic Income Fund
(formerly Keystone Strategic Income Fund) ("Strategic Income Fund") and
Evergreen U.S. Government Fund ("U.S. Government Fund") both of which are
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as diversified, open-end management investment companies. Strategic
Income Fund and U.S. Government Fund (a separate series of Evergreen Investment
Trust) are collectively referred to herein as the "Funds".
The Funds offer Class A, Class B, Class C and Class Y shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B and Class C shares
are sold without a front-end sales charge, but pay a higher ongoing distribution
fee than Class A. Class B shares are sold subject to a contingent deferred sales
charge that is payable upon redemption and decreases depending on how long the
shares have been held. Class B shares of Strategic Income Fund purchased after
January 1, 1997 will automatically convert to Class A shares after seven years.
Class B shares of Strategic Income Fund purchased prior to January 1, 1997
retain their existing conversion rights. Class C shares are sold subject to a
contingent deferred sales charge payable on shares redeemed within one year
after the month of purchase. Class Y shares are sold at net asset value and are
not subject to contingent deferred sales charges or distribution fees. Class Y
shares are sold only to investment advisory clients of First Union Corporation
("First Union") and its affiliates, certain institutional investors or Class Y
shareholders of record of certain other funds managed by First Union and its
affiliates as of December 30, 1994.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
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
U.S. government obligations held by the Funds are valued at the mean between the
over-the-counter bid and asked prices. Corporate bonds, other fixed-income
securities, and mortgage and other asset-backed securities are valued at prices
provided by an independent pricing service. In determining a price for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and analysis of various
relationships between similar securities which are generally recognized by
institutional traders.
The Strategic Income Fund values securities traded on a national securities
exchange or included on the NASDAQ National Market System ("NMS") at the last
reported sales price on the exchange where primarily traded. The Fund values
securities traded on an exchange or NMS for which there has been no sale and
other securities traded in the over-the-counter market at the mean between the
last reported bid and asked price.
Securities for which valuations are not readily available from an independent
pricing service or market quotations are not readily available (including
restricted securities) are valued at fair value as determined in good faith
according to procedures established by the Board of Trustees.
Short term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value. Short term investments with
greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
Each Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held by the custodian on the Fund's behalf. Each
Fund monitors the adequacy of the collateral daily and will require the seller
to provide additional collateral in the event the market value of the securities
pledged falls below the carrying value of the repurchase agreement, including
accrued interest. Each Fund will only enter into repurchase agreements with
banks and other financial institutions which are deemed by the investment
advisor to be creditworthy pursuant to guidelines established by the Board of
Trustees.
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Strategic Income Fund, along with certain other funds managed by Keystone
Investment Management Company ("Keystone"), may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are fully collateralized by U.S. Treasury and/or
federal agency obligations.
23
<PAGE>
<PAGE>
Combined Notes to Financial Statements (Unaudited) (continued)
C. Reverse Repurchase Agreements
To obtain short-term financing, Strategic Income Fund may enter into reverse
repurchase agreements with qualified third-party broker-dealers. Interest on the
value of reverse repurchase agreements is based upon competitive market rates at
the time of issuance. At the time the Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with the
custodian containing qualifying assets having a value not less than the
repurchase price, including accrued interest. If the counterparty to the
transaction is rendered insolvent, the ultimate realization of the securities to
be repurchased by the Fund may be delayed or limited.
D. Foreign Currency
The books and records of the Funds are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, other assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment securities transactions, foreign currency related transactions, and
the difference between the amounts of interest and dividends recorded on the
books of the Fund and the amount actually received and are included in realized
gain (loss) on foreign currency related transactions. The portion of foreign
currency gains and losses related to fluctuations in exchange rates between the
initial purchase trade date and subsequent sale trade date is included in
realized gain (loss) on foreign currency related transactions.
E. Forward Foreign Currency Exchange Contracts
The Strategic Income Fund may enter into forward foreign currency exchange
contracts ("forward contracts") to settle portfolio purchases and sales of
securities denominated in a foreign currency and to hedge certain foreign
currency assets or liabilities. Forward contracts are recorded at the forward
rate and marked-to-market daily. Realized gains and losses arising from such
transactions are included in net realized gain (loss) on foreign currency
related transactions. The Fund bears the risk of an unfavorable change in the
foreign currency exchange rate underlying the forward contract and is subject to
the credit risk that the other party will not fulfill their obligations under
the contract. Forward contracts involve elements of market risk in excess of the
amount reflected in the statement of assets and liabilities.
F. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date.
G. Federal Taxes
The Funds have qualified and intend to continue to qualify as regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Funds will not incur any federal income tax liability since
they are expected to distribute all of their net investment company taxable
income, net tax-exempt income and net capital gains, if any, to their
shareholders. The Funds also intend to avoid any excise tax liability by making
the required distributions under the Code. Accordingly, no provision for federal
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.
H. 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 paydown
gains (losses) and for foreign currency related transactions.
I. 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.
24
<PAGE>
Combined Notes to Financial Statements (Unaudited) (continued)
J. Organization Expenses
Organizational expenses for the U.S. Government Fund were initially borne by the
Fund's prior administrator. The U.S. Government Fund agreed to reimburse such
expenses during the five-year period following its commencement of operations.
As a result of the change in the administration agreement, First Union purchased
the remaining unreimbursed organizational expenses from the prior administrator.
For the six months ended October 31, 1997, the U.S. Government Fund paid $5,566
in unreimbursed organization expenses. As of October 31, 1997 there were no
unreimbursed organization expenses for the U.S.
Government Fund.
3. CAPITAL SHARE TRANSACTIONS
Strategic Income Fund has an unlimited number of shares of beneficial interest
with no par value authorized. U.S. Government Fund has an unlimited number of
shares of beneficial interest with a par value of $0.0001 authorized. Shares of
beneficial interest of the Funds are currently divided into Class A, Class B,
Class C and Class Y. Transactions in shares of the Funds were as follows:
- --------------------------------------------------------------------------------
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Six Months Ended Nine Months Ended
October 31, 1997 April 30, 1997
-------------------------------- --------------------------------
Shares Amount Shares Amount
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Class A
Shares issued in connection with acquisition of
Keystone World Bond Fund ..................... 1,077,718 $ 7,661,303 - -
Shares sold .................................... 735,680 5,161,974 722,925 $ 5,021,195
Shares issued in reinvestment of distributions 170,677 1,200,982 280,932 1,940,819
Shares redeemed ................................. (1,432,679) (10,063,504) (2,450,268) (16,920,382)
- ------------------------------------------------- ------------ -------------- -------------- --------------
Net increase (decrease) ........................ 551,396 $ 3,960,755 (1,446,411) $ (9,958,368)
- ------------------------------------------------- ------------ -------------- -------------- --------------
Class B
Shares issued in connection with acquisition of
Keystone World Bond Fund ..................... 645,853 $ 4,612,694 - -
Shares sold .................................... 2,457,090 17,319,192 2,590,485 $ 18,030,379
Shares issued in reinvestment of distributions 272,149 1,921,488 448,617 3,114,373
Shares redeemed ................................. (2,794,421) (19,709,194) (5,099,176) (35,510,240)
- ------------------------------------------------- ------------ -------------- -------------- --------------
Net increase (decrease) ........................ 580,671 $ 4,144,180 (2,060,074) $(14,365,488)
- ------------------------------------------------- ------------ -------------- -------------- --------------
Class C
Shares issued in connection with acquisition of
Keystone World Bond Fund ..................... 152,895 $ 1,090,633 - -
Shares sold .................................... 147,490 1,038,294 413,449 $ 2,860,197
Shares issued in reinvestment of distributions 67,719 477,579 137,625 954,204
Shares redeemed ................................. (720,735) (5,061,036) (1,679,415) (11,678,421)
- ------------------------------------------------- ------------ -------------- -------------- --------------
Net decrease .................................... (352,631) $ (2,454,530) (1,128,341) $ (7,864,020)
================================================= ============ ============== ============== ==============
<CAPTION>
Year Ended
July 31, 1996
--------------------------------
Shares Amount
--------------- ----------------
<S> <C> <C>
Class A
Shares issued in connection with acquisition of
Keystone World Bond Fund ..................... - -
Shares sold .................................... 862,737 $ 5,908,665
Shares issued in reinvestment of distributions 493,925 3,365,004
Shares redeemed ................................. (3,779,494) (25,781,907)
- ---------------------------------------------------------------- --------------
Net increase (decrease) ........................ (2,422,832) $(16,508,238)
- ---------------------------------------------------------------- --------------
Class B
Shares issued in connection with acquisition of
Keystone World Bond Fund ..................... - -
Shares sold .................................... 2,657,436 $ 18,284,154
Shares issued in reinvestment of distributions 781,880 5,354,257
Shares redeemed ................................. (6,840,568) (46,918,273)
- ---------------------------------------------------------------- --------------
Net increase (decrease) ........................ (3,401,252) $(23,279,862)
- ---------------------------------------------------------------- --------------
Class C
Shares issued in connection with acquisition of
Keystone World Bond Fund ..................... - -
Shares sold .................................... 573,201 $ 3,935,676
Shares issued in reinvestment of distributions 270,184 1,848,660
Shares redeemed ................................. (2,845,554) (19,524,124)
- ---------------------------------------------------------------- --------------
Net decrease .................................... (2,002,169) $(13,739,788)
================================================================ ==============
</TABLE>
<TABLE>
<CAPTION>
January 13, 1997
Commencement of
Class (Operations)
Six Months Ended Through
October 31, 1997 April 30, 1997
-------------------------- ------------------
Shares Amount Shares Amount
----------- -------------- -------- -------
<S> <C> <C> <C> <C>
Class Y
Shares sold ................................. 180,020 $1,247,554 1 $7
Shares issued in reinvestment of distributions 1,324 9,156 - -
Shares redeemed .............................. (1,671) (11,534) - -
- ----------------------------------------------- -------- ----------- -------- --
Net increase ................................. 179,673 $1,245,176 1 $7
=============================================== ======== =========== ======== ==
</TABLE>
25
<PAGE>
Combined Notes to Financial Statements (Unaudited) (continued)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
Six Months Ended Ten Months Ended
October 31, 1997 April 30, 1997
-------------------------------- ---------------------------------
Shares Amount Shares Amount
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Class A
Shares issued in connection with the acquisition of
Keystone Government Securities Fund ............... 2,239,125 $ 21,547,304 - -
Shares sold ....................................... 227,176 2,174,699 294,513 $ 2,785,151
Shares issued in reinvestment of distributions ... 55,554 530,624 60,924 575,792
Shares redeemed .................................... (566,802) (5,397,165) (606,651) (5,738,805)
- ---------------------------------------------------- ------------ ------------- ------------ --------------
Net increase (decrease) ........................... 1,955,053 $ 18,855,462 (251,214) $ (2,377,862)
- ---------------------------------------------------- ------------ ------------- ------------ --------------
Class B
Shares issued in connection with the acquisition of
Keystone Government Securities Fund ............... 1,507,183 $ 14,503,355 - -
Shares sold ....................................... 295,418 2,823,500 776,060 $ 7,347,686
Shares issued in reinvestment of distributions ... 216,902 2,068,558 394,931 3,733,484
Shares redeemed .................................... (2,118,823) (20,182,103) (3,621,913) (34,238,311)
- ---------------------------------------------------- ------------ ------------- ------------ --------------
Net decrease ....................................... (99,320) $ (786,690) (2,450,922) $ (23,157,141)
- ---------------------------------------------------- ------------ ------------- ------------ --------------
Class C
Shares issued in connection with the acquisition of
Keystone Government Securities Fund ............... 602,218 $ 5,794,710 - -
Shares sold ....................................... 43,295 410,297 28,184 $ 265,064
Shares issued in reinvestment of distributions ... 6,377 61,018 1,432 13,539
Shares redeemed .................................... (52,545) (501,194) (50,056) (470,176)
- ---------------------------------------------------- ------------ ------------- ------------ --------------
Net increase (decrease) ........................... 599,345 $ 5,764,831 (20,440) $ (191,573)
- ---------------------------------------------------- ------------ ------------- ------------ --------------
Class Y
Shares issued in connection with the acquisition of
Evergreen U.S. Government Securities Fund ......... - - - -
Shares sold ....................................... 1,634,483 $ 15,535,373 1,675,475 $ 15,813,269
Shares issued in reinvestment of distributions ... 403,218 3,845,714 676,410 6,394,401
Shares redeemed .................................... (1,284,708) (12,207,633) (1,715,716) (16,223,419)
- ---------------------------------------------------- ------------ ------------- ------------ --------------
Net increase ....................................... 752,993 $ 7,173,454 636,169 $ 5,984,251
==================================================== ============ ============= ============ ==============
<CAPTION>
Year Ended
June 30, 1996
---------------------------------
Shares Amount
--------------- -----------------
<S> <C> <C>
Class A
Shares issued in connection with the acquisition of
Keystone Government Securities Fund ............... - -
Shares sold ....................................... 786,564 $ 7,560,325
Shares issued in reinvestment of distributions ... 78,565 755,991
Shares redeemed .................................... (1,032,918) (9,892,163)
- ----------------------------------------------------------------- --------------
Net increase (decrease) ........................... (167,789) $ (1,575,847)
- ----------------------------------------------------------------- --------------
Class B
Shares issued in connection with the acquisition of
Keystone Government Securities Fund ............... - -
Shares sold ....................................... 1,702,353 $ 16,401,640
Shares issued in reinvestment of distributions ... 533,686 5,138,748
Shares redeemed .................................... (4,576,583) (43,960,576)
- ----------------------------------------------------------------- --------------
Net decrease ....................................... (2,340,544) $ (22,420,188)
- ----------------------------------------------------------------- --------------
Class C
Shares issued in connection with the acquisition of
Keystone Government Securities Fund ............... - -
Shares sold ....................................... 43,395 $ 420,990
Shares issued in reinvestment of distributions ... 1,437 13,783
Shares redeemed .................................... (12,168) (117,297)
- ----------------------------------------------------------------- --------------
Net increase (decrease) ........................... 32,664 $ 317,476
- ----------------------------------------------------------------- --------------
Class Y
Shares issued in connection with the acquisition of
Evergreen U.S. Government Securities Fund ......... 590,505 $ 5,739,713
Shares sold ....................................... 11,801,163 113,796,388
Shares issued in reinvestment of distributions ... 620,463 5,963,291
Shares redeemed .................................... (1,866,525) (17,896,649)
- ----------------------------------------------------------------- --------------
Net increase ....................................... 11,145,606 $ 107,602,743
================================================================= ==============
</TABLE>
4. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the six months ended October 31,
1997:
<TABLE>
<S> <C> <C> <C> <C>
Cost of Proceeds
Purchases from Sales
-------------------------- ---------------------------
U.S. Non-U.S. U.S. Non-U.S.
Government Government Government Government
----------- ---------- ----------- ----------
Strategic Income Fund ...... $44,801,030 $183,312,858 $54,912,996 $165,982,307
U.S. Government Fund ...... 54,545,936 - 13,740,843 -
</TABLE>
The average daily balance of reverse repurchase agreements outstanding for the
Strategic Income Fund during the six months ended October 31, 1997 was
approximately $2,176,989 at a weighted average interest rate of 5.64%. The
maximum amount outstanding under reverse repurchase agreements during the six
months ended October 31, 1997 for Strategic Income Fund was $4,035,547
(including accrued interest). There were no reverse repurchase agreements
outstanding at October 31, 1997.
As of April 30, 1997, the Funds had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
Expiration
-----------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005
--------- ------------- ------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Strategic Income Fund $28,000 $11,547,000 $12,170,000 - $5,288,000 $35,072,000 -
U.S. Government Fund ... - - 1,978,000 $6,521,000 - 2,973,000 $3,134,000
</TABLE>
5. DISTRIBUTION PLANS
Evergreen Distributor, Inc. (formerly, Evergreen Keystone Distributor, Inc.)
("EDI"), a wholly-owned subsidiary of The BISYS Group Inc. ("BISYS"), serves as
principal underwriter to the Funds.
26
<PAGE>
Combined Notes to Financial Statements (Unaudited) (continued)
Each Fund has adopted Distribution Plans for each class of shares, except Class
Y, as allowed by Rule 12b-1 of the 1940 Act. Distribution plans permit a fund to
reimburse its principal underwriter for costs related to selling shares of the
fund and for various other services. These costs, which consist primarily of
commissions and service fees to broker-dealers who sell shares of the fund, are
paid by the fund 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. Class B and Class C also pay distribution
fees equal to 0.75% of the average daily net assets of the class. Distribution
Plan expenses are calculated daily and paid monthly.
During the six months ended October 31, 1997, amounts paid to EDI pursuant to
each Fund's Class A, Class B and Class C Distribution Plans were as follows
<TABLE>
<CAPTION>
Class A Class B Class C
--------- ---------- ---------
<S> <C> <C> <C>
Strategic Income Fund ...... $73,990 $581,620 $118,054
U.S. Government Fund ...... 34,126 724,732 17,123
</TABLE>
With respect to Class B and Class C shares, the principal underwriter may pay
distribution fees greater than the allowable annual amounts the Fund is
permitted to pay under the Distribution Plans. Strategic Income Fund may
reimburse the principal underwriter for such excess amounts in later years with
annual interest at prime plus 1.00%. EDI intends to seek full payment of such
distribution costs from Strategic Income 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.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, for Strategic Income Fund, after the
termination of any Distribution Plan and subject to the discretion of the
Independent Trustees, payments to EDI may continue as compensation for services
which had been provided while the Distribution Plan was in effect.
6. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED
TRANSACTIONS
Keystone, a subsidiary of First Union, is the investment adviser for Strategic
Income Fund. In return for providing investment management and administrative
services to Strategic 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 Strategic 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. First Union serves as the investment adviser to the U.S. Government
Fund and is paid a management fee that is computed and paid monthly at an annual
rate of 0.50% of the Fund's average daily net assets.
Evergreen Investment Services, Inc. (formerly, Evergreen Keystone Investments,
Inc.) ("EIS"), a wholly-owned subsidiary of Keystone, is the administrator and
BISYS is the sub-administrator for each Fund. As sub-administrator to the Funds,
BISYS provides the officers of the Fund. The administrator and sub-administrator
for each Fund are entitled to an annual fee based on the average daily net
assets of the funds administered by EIS for which First Union or its investment
advisory subsidiaries are also the investment advisers. The administration fee
is calculated by applying percentage rates, which start at 0.05% and decline to
0.01% per annum as net assets increase, to the average daily net asset value of
the Fund. The sub-administration fee is calculated by applying percentage rates,
which start at 0.01% and decline to 0.004% per annum as net assets increase, to
the average daily net asset value of the Fund. For the Strategic Income Fund,
the sub-administration fee is paid by Keystone and is not a fund expense.
During the six months ended October 31, 1997, Strategic Income Fund and U.S.
Government Fund paid or accrued to EIS $16,698 and $44,176, respectively, for
certain administrative services.
Evergreen Service Company ("ESC") (formerly, Evergreen Keystone Service
Company), a wholly-owned subsidiary of Keystone, serves as the transfer and
dividend disbursing agent for the Strategic Income Fund. Effective May 5, 1997,
ESC also began providing transfer and dividend disbursing agent services for
U.S. Government Fund that were formerly provided by State Street Bank and Trust
Company ("State Street"). For certain accounts, First Union had been
sub-contracted by State Street to maintain shareholder sub-account records, take
fund purchase and redemption orders and answer inquiries. For each account of
U.S. Government Fund, First Union earned a fee which in aggregate totaled
$22,320 for the six months ended October 31, 1997.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds.
27
<PAGE>
Combined Notes to Financial Statements (Unaudited) (continued)
7. 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.
8. DEFERRED TRUSTEES' FEES
Each Independent Trustee of U.S. Government Fund may defer any or all
compensation related to performance of their duties as Trustees. The Trustees'
deferred balances are allocated to deferral accounts, which are included in the
accrued expenses for the Fund. The investment performance of the deferral
accounts are based on the investment performance of certain Evergreen Funds. Any
gains earned or losses incurred in the deferral accounts are reported in the
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 October 31, 1997, the value of the Trustees
deferral account for U.S. Government Fund was $13,984.
9. FINANCING AGREEMENT
On October 31, 1996, a financing agreement among 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 among 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 six months ended October 31, 1997, U.S. Government Fund had no
borrowings under this agreement.
10. ACQUISITIONS
Effective August 1, 1997 the Strategic Income Fund acquired substantially all
the assets and assumed certain liabilities of Keystone World Bond Fund in
exchange for Class A, Class B and Class C shares of Strategic Income Fund and
the U.S. Government Fund acquired substantially all the assets and assumed
certain liabilities of Keystone Government Securities Fund in exchange for Class
A, Class B and Class C shares of U.S. Government Fund. These 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 (depreciation) acquired and the aggregate net assets of each fund
immediately after the acquisition are as follows:
<TABLE>
<CAPTION>
Number of Net Assets
Acquiring Acquired Value of Net Shares Unrealized After
Fund Fund Assets Acquired Issued Appreciation Acquisition
- ---------------------------- ---------------------------- ----------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Keystone World
Strategic Income Fund Bond Fund $13,364,630 1,876,466 $646,958 $209,617,315
Keystone
U.S. Government Fund ... Government Securities Fund 41,845,369 4,348,526 776,840 330,218,346
</TABLE>
Effective on the close of business on July 7, 1995, U.S. Government Fund
acquired the net assets of Evergreen U.S. Government Securities Fund. The net
assets were exchanged through a non-taxable exchange for 590,505 Class Y shares
of the U.S. Government Fund. The acquired net assets consisted primarily of
portfolio securities with an unrealized appreciation of $24,133. The aggregate
net assets of Evergreen U.S. Government Securities Fund immediately prior to the
acquisition was $5,739,713. The aggregate net assets of U.S. Government Fund
immediately after the acquisition were $233,475,732.
28
<PAGE>
541075 Rev.01
64078 12/97
