1933 Act Registration No. 333-41405
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
EVERGREEN INTERNATIONAL TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on __________pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a) (1)
[ ] on___________ pursuant to paragraph (a) (1)
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on___________pursuant to paragraph (a) (2) of Rule 485
Pursuant to Rule 414 under the Securities Act of 1933, by this
amendment to Registration Statement No. 333-41405 on Form N- 14 of Keystone
Precious Metals Holdings, Inc., a Delaware corporation, the Registrant hereby
adopts the Registration
<PAGE>
Statement of such corporation under
the Securities Act of 1933.
<PAGE>
EVERGREEN INTERNATIONAL TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary; Comparison
of Investment Objectives and
Policies; Risks
4. Information About the Summary; Reasons for the
Transaction Reorganization; Comparative
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
7. Voting Information Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of Keystone
Precious Metals Holdings, Inc.
dated April 30, 1997, as
amended
13. Additional Information Statement of Additional
about the Company Being Information of Blanchard
Acquired Precious Metals Fund, Inc.
dated November 30,
1997
14. Financial Statements Financial Statements dated
October 31, 1997 of Keystone
Precious Metals Holdings,
Inc.; Financial Statements of
Blanchard Precious Metals
Fund, Inc. dated September 30,
1997; Pro Forma Financial
Statements
<PAGE>
Item of Part C of Form N-14 Incorporated by Reference to
Part A Caption - "Comparative
15. Indemnification Information on Shareholders'
Rights - Liability and
Indemnification of Trustees
and Directors"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January 6, 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of the Blanchard Precious Metals Fund, Inc. (the
"Fund"), to inform you of a Special Shareholders' meeting to be held on February
20, 1998. Before that meeting, I would like your vote on the important issues
affecting your Fund as described in the attached Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes three proposals. The first proposal
requests that shareholders consider and act upon an Agreement and Plan of
Reorganization whereby all of the assets of the Fund would be acquired by
Keystone Precious Metals Holdings in exchange for Class A shares of Keystone
Precious Metals Holdings and the assumption by Keystone Precious Metals Holdings
of certain liabilities of the Fund. You will receive shares of Keystone Precious
Metals Holdings having an aggregate net asset value equal to the aggregate net
asset value of your Fund shares. Details about Keystone Precious Metals
Holdings' investment objective, portfolio management team, performance, etc. are
contained in the attached Prospectus/Proxy Statement. The transaction is a
non-taxable event for shareholders.
The second proposal requests shareholder consideration of an Interim Investment
Advisory Agreement between the Fund and Virtus
Capital Management, Inc.
The third and final proposal requests shareholder consideration of an Interim
Sub-Advisory Agreement between Virtus Capital Management, Inc. and Cavelti
Capital Management, Ltd.
Information relating to the Interim Investment Advisory Agreement and the
Interim Sub-Advisory Agreement is contained in the attached Prospectus/Proxy
Statement.
The Board of Directors has approved the proposals and recommends that you vote
FOR these proposals.
<PAGE>
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposals presented and sign and return your proxy card in the enclosed
postage-paid envelope today.
If we do not receive your completed proxy card after several weeks, you may be
contacted by our proxy solicitor, Shareholder Communications Corporation, who
will remind you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
Blanchard Precious Metals Fund, Inc.
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of Blanchard Precious Metals Fund, Inc. ("Precious Metals") will be
held at the offices of the Evergreen Funds, 200 Berkeley Street, 26th Floor,
Boston, Massachusetts 02116 on February 20, 1998 at 2:00 p.m. for the following
purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of November 26, 1997, providing for the acquisition of all
of the assets of Precious Metals by Keystone Precious Metals Holdings ("Keystone
Precious Metals"), a series of the Evergreen International Trust, in exchange
for Class A shares of Keystone Precious Metals and the assumption by Keystone
Precious Metals of certain identified liabilities of Precious Metals. The Plan
also provides for distribution of such shares of Keystone Precious Metals to
shareholders of Precious Metals in liquidation and subsequent termination of
Precious Metals. A vote in favor of the Plan is a vote in favor of the
liquidation and dissolution of Precious Metals.
2. To consider and act upon the Interim Management Contract between
Precious Metals and Virtus Capital Management, Inc.
3. To consider and act upon the Interim Sub-Advisory Agreement between
Virtus Capital Management, Inc. and Cavelti Capital Management, Ltd.
4. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Board of Directors of Precious Metals has fixed the close of
business on December 26, 1997 as the record date for the determination of
shareholders of Precious Metals entitled to notice of and to vote at the Meeting
or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED
<PAGE>
WITHOUT DELAY TO SIGN AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE,
WHICH REQUIRES NO POSTAGE, SO THAT THEIR SHARES MAY BE REPRESENTED AT THE
MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE
EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Directors
John W. McGonigle
Secretary
January 6, 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr. John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JANUARY 6, 1998
Acquisition of Assets of
BLANCHARD PRECIOUS METALS FUND, INC.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
KEYSTONE PRECIOUS METALS HOLDINGS
a series of
Evergreen International Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
Blanchard Precious Metals Fund, Inc. ("Precious Metals") in connection with a
proposed Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Precious Metals for consideration at a Special Meeting of
Shareholders to be held on February 20, 1998 at 2:00 p.m. at the offices of the
Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts 02116, and any
adjournments thereof (the "Meeting"). The Plan provides for all of the assets of
Precious Metals to be acquired by Keystone Precious Metals Holdings ("Keystone
Precious Metals") in exchange for Class A shares of Keystone Precious Metals and
the assumption by Keystone Precious Metals of certain identified liabilities of
Precious Metals (hereinafter referred to as the "Reorganization"). Keystone
Precious Metals and Precious Metals are sometimes hereinafter referred to
individually as the "Fund" and collectively as the "Funds." Following the
Reorganization, Class A shares of Keystone Precious Metals will be distributed
to shareholders of Precious Metals in liquidation of Precious Metals and such
Fund will be terminated. No initial sales charge will be imposed in connection
with the shares of Keystone Precious Metals received by holders of shares of
Precious Metals. As a result of the proposed Reorganization, shareholders of
Precious Metals will receive that number of full and fractional Class A shares
of Keystone Precious Metals having an aggregate net asset value equal to the
aggregate net asset value of such shareholder's shares of Precious Metals. The
Reorganization is being structured as a tax-free reorganization for federal
income tax purposes.
Keystone Precious Metals is a separate series of Evergreen
International Trust, an open-end management investment
<PAGE>
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). The investment objectives of Keystone Precious Metals are to seek
long-term capital appreciation while protecting the purchasing power of
shareholders' capital and, as a secondary objective, to obtain current income.
Keystone Precious Metals invests primarily in common stocks of established
companies directly or indirectly engaged in mining, processing or dealing in
gold or other precious metals and minerals.
The primary investment objective of Precious Metals is to provide
long-term capital appreciation and preservation of purchasing power through
investments in physical precious metals, such as gold, silver, platinum, and
palladium, and in securities of companies involved with precious metals.
Shareholders of Precious Metals are also being asked to approve the
Interim Management Contract with Virtus Capital Management, Inc., a subsidiary
of First Union Corporation ("Virtus") (the "Interim Advisory Agreement"), with
the same terms and fees as the previous advisory agreement between Precious
Metals and Virtus and the Interim Sub-Advisory Agreement between Virtus and
Cavelti Capital Management, Ltd. ("Cavelti Capital") with the same terms and
fees as the previous sub- advisory agreement between Virtus and Cavelti Capital.
The Interim Advisory Agreement and Interim Sub-Advisory Agreement will be in
effect for the period of time between November 28, 1997, the date on which the
merger of Signet Banking Corporation with and into a wholly-owned subsidiary of
First Union Corporation was consummated, and the date of the Reorganization
(scheduled for on or about February 27, 1998).
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Keystone Precious Metals
that shareholders of Precious Metals should know before voting on the
Reorganization. Certain relevant documents listed below, which have been filed
with the Securities and Exchange Commission ("SEC"), are incorporated in whole
or in part by reference. A Statement of Additional Information dated January 6,
1998, relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Keystone Precious Metals dated October 31,
1997 and Precious Metals dated September 30, 1997, has been filed with the SEC
and is incorporated by reference in its entirety into this Prospectus/Proxy
Statement. A copy of such Statement of Additional Information is available upon
request and without charge by writing to Keystone Precious Metals at 200
Berkeley Street, Boston, Massachusetts 02116, or by calling toll-free
1-800-343-2898.
<PAGE>
The Prospectus of Keystone Precious Metals dated April 30, 1997, as
amended, and its Annual Report for the fiscal year ended October 31, 1997 are
incorporated herein by reference in their entirety. Shareholders of Precious
Metals will receive, with this Prospectus/Proxy Statement, copies of the
Prospectus of Keystone Precious Metals. Additional information about Keystone
Precious Metals is contained in its Statement of Additional Information of the
same date which has been filed with the SEC and which is available upon request
and without charge by writing to or calling Keystone Precious Metals at the
address or telephone number listed in the preceding paragraph.
The Prospectus of Precious Metals dated November 30, 1997, insofar as
it relates to Precious Metals only, and not to any other funds described
therein, is incorporated herein in its entirety by reference. Copies of the
Prospectus and related Statement of Additional Information dated the same date,
are available upon request without charge by writing to Precious Metals at the
address listed on the cover page of this Prospectus/Proxy Statement or by
calling toll-free 1-800-829- 3863.
Included as Exhibits A, B and C to this Prospectus/Proxy Statement are
a copy of the Plan, the Interim Advisory Agreement and the Interim Sub-Advisory
Agreement, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk, including
possible
loss of capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES...............................................6
SUMMARY .....................................................................8
Proposed Plan of Reorganization.................................... 9
Tax Consequences....................................................10
Investment Objectives and Policies of the Funds.....................11
Comparative Performance Information for each Fund...................11
Management of the Funds.............................................12
Investment Advisers and Sub-Adviser.................................12
Administrator.......................................................14
Portfolio Manager...................................................14
Distribution of Shares..............................................14
Purchase and Redemption Procedures..................................15
Exchange Privileges.................................................16
Dividend Policy.....................................................16
Risks ...........................................................17
REASONS FOR THE REORGANIZATION...............................................19
Agreement and Plan of Reorganization............................. 22
Federal Income Tax Consequences.....................................24
Pro-forma Capitalization............................................25
Shareholder Information.............................................26
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES.............................27
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS..............................30
Forms of Organization...............................................30
Capitalization......................................................30
Shareholder Liability...............................................31
Shareholder Meetings and Voting Rights........................... 32
Liquidation or Dissolution..........................................32
Liability and Indemnification of Trustees and
Directors................................................................. 33
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT.........................34
Introduction........................................................34
Comparison of the Interim Advisory Agreement and the
Previous Advisory Agreement................................35
Information about Precious Metals' Investment
Adviser......................................................................36
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT.....................37
Introduction........................................................37
Comparison of the Interim Sub-Advisory Agreement
<PAGE>
and the Previous Sub-Advisory Agreement......................................38
ADDITIONAL INFORMATION.......................................................39
VOTING INFORMATION CONCERNING THE MEETING....................................40
FINANCIAL STATEMENTS AND EXPERTS.......................................... 43
LEGAL MATTERS................................................................43
OTHER BUSINESS...............................................................43
APPENDIX A................................................................ 45
APPENDIX B................................................................ 47
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
<PAGE>
COMPARISON OF FEES AND EXPENSES
It is anticipated that on or about January 9, 1998 Keystone Precious
Metals will become a multiple class fund. As of that date the Fund will offer
Class A, Class B and Class C shares. It is further anticipated that at that time
current outstanding shares of Keystone Precious Metals will become Class B
shares of the Fund. On or before January 16, 1998, it is anticipated that any
Class B shares of Keystone Precious Metals purchased prior to January 1, 1995
will convert to Class A shares of the Fund. The amounts for Class A shares of
Keystone Precious Metals set forth in the following tables and in the examples
are based on the expenses of Keystone Precious Metals for the fiscal year ended
October 31, 1997. The amounts for shares of Precious Metals set forth in the
following tables and in the examples are based on the expenses for Precious
Metals for the fiscal year ended September 30, 1997. The pro forma amounts for
Class A shares of Keystone Precious Metals are based on what the combined
expenses would have been for Keystone Precious Metals for the fiscal year ending
October 31, 1997. The pro forma numbers reflect the events described above.
The following tables show for Keystone Precious Metals, Precious Metals
and Keystone Precious Metals pro forma, assuming consummation of the
Reorganization, the shareholder transaction expenses and annual fund operating
expenses associated with an investment in the Class A shares of Keystone
Precious Metals and shares of Precious Metals, as applicable.
Comparison of Class A Shares
of Keystone Precious Metals With
Shares of Precious Metals
<TABLE>
<CAPTION>
Keystone
Keystone Precious Precious
Precious Metals Metals Pro
Metals ------ Forma
---------- ----------
<S> <C> <C> <C>
Shareholder
Transaction Shares Shares Class A
Expenses ------ ------ -------
<PAGE>
Maximum Sales Load None None 4.75%
Imposed on Purchases
(as a percentage of
offering price) (1)
Maximum Sales Load 4.00% None None
Imposed on Reinvested
Dividends (as a
percentage of offering
price)
Contingent Deferred None None None
Sales Charge (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower)
Exchange Fee None None None
Annual Fund Operating
Expenses (as a
percentage of average
daily net assets)
Management Fee 0.70% 1.00% 0.67%
12b-1 Fees (2) 0.25% 0.75% 0.25%
Other Expenses 1.00% 0.46% 0.64%
--------- -------- ---------
Annual Fund Operating 2.48% 2.21% 1.56%
Expenses --------- --------- ---------
--------- --------- ---------
</TABLE>
- ---------------
(1) The 4.75% sales load, as described in the "Examples" paragraph below,
has been waived for Precious Metals' shareholders.
(2) Class A shares of Keystone Precious Metals can pay up to 0.75% of
average daily net assets as a 12b-1 fee. For the foreseeable future,
the Class A 12b-1 fees will be limited to 0.25% of average daily net
assets.
Examples. The following tables show for Keystone Precious Metals and
Precious Metals, and for Keystone Precious Metals pro forma, assuming
consummation of the Reorganization, examples of the cumulative effect of
shareholder transaction expenses and annual fund operating expenses indicated
<PAGE>
above on a $1,000 investment in each class of shares for the periods specified,
assuming a 5% annual return . In the case of Keystone Precious Metals pro forma,
the example does not reflect the imposition of the 4.75% maximum sales load on
purchases of Class A shares since Precious Metals shareholders who receive Class
A shares of Keystone Precious Metals in the Reorganization or who purchase
additional Class A shares of Keystone Precious Metals subsequent to the
Reorganization will not incur any sales load.
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Keystone
Precious Metals $25 $77 $282
$132
Precious Metals $22 $69 $118 $254
Keystone
Precious Metals $16 $49 $85 $186
Pro Forma
Class A
</TABLE>
The purpose of the foregoing examples is to assist Precious Metals
shareholders in understanding the various costs and expenses that an investor in
Keystone Precious Metals would bear directly and indirectly as a result of the
Reorganization as compared with the various direct and indirect expenses
currently borne by a shareholder in Precious Metals. These examples should not
be considered a representation of past or future expenses or annual return.
Actual expenses may be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement,
and, to the extent not inconsistent with such additional information, the
Prospectus of Keystone Precious Metals dated April 30, 1997, as amended, and the
Prospectus of Precious Metals dated November 30, 1997 (which are incorporated
herein by reference), the Plan, the Interim Advisory Agreement and the Interim
Sub- Advisory Agreement, forms of which are attached to this Prospectus/Proxy
Statement as Exhibits A, B and C, respectively.
<PAGE>
Proposed Plan of Reorganization
The Plan provides for the transfer of all of the assets of Precious
Metals in exchange for Class A shares of Keystone Precious Metals and the
assumption by Keystone Precious Metals of certain identified liabilities of
Precious Metals. The identified liabilities consist only of those liabilities
reflected on the Fund's statement of assets and liabilities determined
immediately preceding the Reorganization. The Plan also calls for the
distribution of shares of Keystone Precious Metals to Precious Metals
shareholders in liquidation of Precious Metals as part of the Reorganization. As
a result of the Reorganization, the shareholders of Precious Metals will become
the owners of that number of full and fractional Class A shares of Keystone
Precious Metals having an aggregate net asset value equal to the aggregate net
asset value of the shareholders' shares of Precious Metals, as of the close of
business immediately prior to the date that Precious Metals' assets are
exchanged for shares of Keystone Precious Metals. See "Reasons for the
Reorganization - Agreement and Plan of Reorganization."
The Board of Directors of Precious Metals, including the Directors who
are not "interested persons," as such term is defined in the 1940 Act (the
"Independent Directors"), have concluded that the Reorganization would be in the
best interests of shareholders of Precious Metals, and that the interests of the
shareholders of Precious Metals will not be diluted as a result of the
transactions contemplated by the Reorganization. Accordingly, the Directors have
submitted the Plan for the approval of Precious Metals' shareholders.
THE BOARD OF DIRECTORS OF PRECIOUS METALS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen International Trust, on behalf of Keystone
Precious Metals, have also approved the Plan, and accordingly Keystone Precious
Metals' participation in the Reorganization.
Approval of the Reorganization on the part of Precious Metals will
require the affirmative vote of a majority of Precious Metals' shares voted and
entitled to vote, with all classes voting together as a single class at a
Meeting at which a quorum of the Fund's shares is present. A majority of the
outstanding shares entitled to vote, represented in person or by proxy, is
required to constitute a quorum at the Meeting. See "Voting Information
Concerning the Meeting."
<PAGE>
The merger (the "Merger") of Signet Banking Corporation ("Signet") with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
has been consummated and, as a result, by law the Merger terminated the
investment advisory agreement between Virtus and Precious Metals and the
sub-advisory agreement between Virtus and Cavelti Capital. Prior to consummation
of the Merger, Precious Metals received an order from the SEC which permitted
the implementation, without formal shareholder approval, of a new investment
advisory agreement between the Fund and Virtus and a new sub-advisory agreement
between Virtus and Cavelti Capital for a period of not more than 120 days
beginning on the date of the closing of the Merger and continuing through the
date the Interim Advisory Agreement and Interim Sub-Advisory Agreement are
approved by the Fund's shareholders (but in no event later than April 30, 1998).
The Interim Advisory Agreement and the Interim Sub-Advisory Agreement have the
same terms and fees as the previous investment advisory agreement between
Precious Metals and Virtus and the previous sub-advisory agreement between
Virtus and Cavelti Capital, respectively. The Reorganization is scheduled to
take place on or about February 27, 1998.
Approval of the Interim Advisory Agreement and Interim Sub- Advisory
Agreement requires the affirmative vote of (i) 67% or more of the shares of
Precious Metals present in person or by proxy at the Meeting, if holders of more
than 50% of the shares of Precious Metals outstanding on the record date are
present, in person or by proxy, or (ii) more than 50% of the outstanding shares
of Precious Metals, whichever is less. See "Voting Information Concerning the
Meeting."
If the shareholders of Precious Metals do not vote to approve the
Reorganization, the Directors will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Precious Metals
will have received an opinion of Sullivan & Worcester LLP that the
Reorganization has been structured so that no gain or loss will be recognized by
the Fund or its shareholders for federal income tax purposes as a result of the
receipt of shares of Keystone Precious Metals in the Reorganization. The holding
period and aggregate tax basis of shares of Keystone Precious Metals that are
received by Precious Metals' shareholders will be the same as the holding period
and aggregate tax basis of shares of the Fund previously held by such
shareholders, provided that shares of the Fund are held as capital assets. In
addition, the holding period and tax basis of the assets of Precious Metals in
the hands of
<PAGE>
Keystone Precious Metals as a result of the Reorganization will be the same as
in the hands of the Fund immediately prior to the Reorganization, and no gain or
loss will be recognized by Keystone Precious Metals upon the receipt of the
assets of the Fund in exchange for shares of Keystone Precious Metals and the
assumption by Keystone Precious Metals of certain identified liabilities.
Investment Objectives and Policies of the Funds
The investment objectives and policies of Keystone Precious Metals and
Precious Metals are similar in that both seek capital appreciation primarily
through investments in securities of companies related to precious metals. There
are, however, differences between the Funds' objectives and policies.
The investment objectives of Keystone Precious Metals are to seek
long-term capital appreciation while protecting the purchasing power of
shareholders' capital and secondly, to obtain current income. Keystone Precious
Metals invests primarily in common stocks of established companies directly or
indirectly engaged in mining, processing or dealing in gold or other precious
metals and minerals.
The primary investment objective of Precious Metals is to provide
long-term capital appreciation and preservation of purchasing power through
investments in physical precious metals, such as gold, silver, platinum, and
palladium, and in securities of companies involved with precious metals. The
Fund will ordinarily tend to emphasize precious metals securities over physical
precious metals investments.
See "Comparison of Investment Objectives and Policies" below.
Comparative Performance Information for each Fund
Discussions of the manner of calculation of total return are contained
in the respective Prospectus and Statement of Additional Information of the
Funds. The total return of Keystone Precious Metals and Precious Metals for the
one, five, and if applicable, ten year periods ended September 30, 1997, and for
both Funds for the periods from inception through September 30, 1997 are set
forth in the table below. The calculations of total return assume the
reinvestment of all dividends and capital gains distributions on the
reinvestment date and the deduction of all recurring expenses (including sales
charges) that were charged to shareholders' accounts.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
1 Year 5 Years 10 Years From
Ended Ended Ended Inception
September September September To
30, 30, 30, September Inception
1997 1997 1997 30, 1997 Date
------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
(19.88%) 6.65% (1.82%) 9.58% 1/30/78
Keystone
Precious
Metals
Precious (15.24%) 9.96% N/A 1.27% 6/22/88
Metals
- ---------
</TABLE>
Important information about Keystone Precious Metals is also contained
in management's discussion of Keystone Precious Metals' performance, attached
hereto as Exhibit D. This information also appears in the most recent Annual
Report of Keystone Precious Metals.
Management of the Funds
The overall management of Keystone Precious Metals and of Precious
Metals is the responsibility of, and is supervised by, the Board of Trustees of
Evergreen International Trust and the Board of Directors of Precious Metals,
respectively.
Investment Advisers and Sub-Adviser
Keystone Investment Management Company ("Keystone") serves as
investment adviser to Keystone Precious Metals. Keystone has served as
investment adviser to the Keystone family of mutual funds since 1932 and as
investment adviser to Keystone Precious Metals since 1984. Keystone is an
indirect wholly-owned subsidiary of First Union National Bank ("FUNB"). FUNB is
a subsidiary of First Union , the sixth largest bank holding company in the
United States based on total assets as of September 30, 1997. The Capital
Management Group of FUNB, Evergreen Asset Management Corp. and Keystone manage
the Evergreen family of mutual funds with assets of approximately $40 billion as
of November 30, 1997. For further information regarding Keystone, FUNB and First
Union, see "Fund Management
<PAGE>
and Expenses -Investment Adviser" in the Prospectus of
Keystone Precious Metals.
Keystone manages investments, provides various administrative services
and supervises the daily business affairs of Keystone Precious Metals subject to
the authority of the Evergreen International Trust's Board of Trustees. Keystone
Precious Metals pays Keystone a fee for its services at the annual rate of 0.75%
of the Fund's average daily net assets up to $100,000,000; 0.625% of net assets
between $100,000,000 and $200,000,000; and 0.50% of net assets over
$200,000,000.
Since August 1, 1995, Harbor Capital Management Company, Inc. ("Harbor
Capital"), located at 125 High Street, Boston, Massachusetts 02110, has served
as a consultant to Keystone with respect to Keystone Precious Metals pursuant to
a Consultant Agreement. Under the Consultant Agreement, Harbor Capital provides
Keystone with monthly reports discussing the world's gold bullion markets and
gold stock markets, and advice regarding economic factors an trends in the
precious metals sector. For its services, Harbor Capital receives from Keystone
a fee at the annual rate of 0.10% of Keystone Precious Metals' average daily net
assets. Keystone Precious Metals has no responsibility to pay Harbor Capital's
fee.
Virtus serves as the investment adviser for Precious Metals. As
investment adviser, Virtus is responsible for performing or providing for all
management and administrative services for the Fund. In carrying out its
obligations, Virtus provides or arranges for investment research and supervision
of the Fund's investments; selects and evaluates the performance of the Fund's
sub-adviser, Cavelti Capital; and conducts or arranges for a continuous program
of appropriate sale or other disposition of the Fund's assets, subject at all
times to the direction of the Board of Directors. Virtus compensates Cavelti
Capital from the advisory fee received from Precious Metals. See "Information
Regarding the Interim Sub-Advisory Agreement." For its services as investment
adviser, Virtus receives a fee at an annual rate of 1.00% of Precious Metals'
average daily net assets up to $150,000,000; 0.875% of net assets between
$150,000,000 and $300,000,000; and 0.75% of net assets over $300,000,000.
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Administrator
<PAGE>
Federated Administrative Services ("FAS") provides Precious Metals with
certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to receive a fee for such services at the
following annual rates: 0.15% on the first $250 million of average daily net
assets of the combined assets of the funds in the Blanchard/Virtus mutual fund
family, 0.125% on the next $250 million of such assets, 0.10% on the next $250
million of such assets; and 0.075% on assets in excess of $750 million.
Portfolio Manager
John Madden has been the Portfolio Manager of Keystone Precious Metals
since 1995 and is a Vice President and Senior Portfolio Manager of Keystone.
Before joining Keystone in 1994, Mr. Madden was an investment analyst and then
Vice President at Pioneer Funds, Boston, Massachusetts from 1982 to 1994. He has
over 29 years of investment experience.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of the shares of Keystone Precious Metals. EDI
distributes the Fund's shares directly or through broker-dealers, banks
(including FUNB), or other financial intermediaries. Effective on or about
January 9, 1998, Keystone Precious Metals will offer three classes of shares:
Class A, Class B, and Class C. Each class has separate distribution
arrangements. (See "Distribution -Related Expenses" below.) No class will bear
the distribution expenses relating to the shares of any other class.
In the proposed Reorganization, shareholders of Precious Metals will
receive Class A shares of Keystone Precious Metals. Class A shares of Keystone
Precious Metals currently incur Rule 12b-1 fees of 0.25% per year, while shares
of Precious Metals incur 12b-1 fees at the rate of 0.75% per year. Because the
Reorganization will be effected at net asset value without the imposition of a
sales charge, Keystone Precious Metals shares acquired by shareholders of
Precious Metals pursuant to the proposed Reorganization would not be subject to
any initial sales charge or contingent deferred sales charge as a result of the
Reorganization.
The following is a summary description of charges and fees for the
Class A shares of Keystone Precious Metals which will be received by Precious
Metals shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
<PAGE>
the respective Keystone Precious Metals Prospectus and the Precious Metals
Prospectus and in each Fund's respective
Statement of Additional Information.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees. For a description of the initial sales charges
applicable to purchases of Class A shares, see "Purchase and Redemption of
Shares - How to Buy Shares" in the Prospectus for Keystone Precious Metals.
Holders of shares of Precious Metals who receive Class A shares of Keystone
Precious Metals will be able to purchase additional Class A shares of Keystone
Precious Metals and of any other Evergreen fund at net asset value. No initial
sales charge will be imposed.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectus and Statement of Additional Information.
Distribution-Related Expenses. Keystone Precious Metals has adopted a
Rule 12b-1 plan with respect to its Class A shares under which the Class may pay
for distribution-related expenses at an annual rate which may not exceed 0.75%
of average daily net assets attributable to the Class. Payments with respect to
Class A shares are currently limited to 0.25% of average daily net assets
attributable to the class, which amount may be increased to the full plan rate
for the Fund by the Trustees without shareholder approval.
Precious Metals has adopted a Rule 12b-1 plan with respect to its
shares under which Precious Metals may pay for distribution-related expenses at
an annual rate of 0.75% of average daily net assets.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectus and Statement of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related fees is provided above. Investments in the Funds are not
insured. The minimum initial purchase requirement for Keystone Precious Metals
is $1,000 (except for participants in certain retirement plans, for whom there
is no minimum, and for investments under a Systematic Investment Plan, for which
the minimum is $25) and the minimum investment for Precious Metals is $3,000
($2,000 for qualified pension plans). Precious Metals has a minimum investment
requirement of $200 for
<PAGE>
subsequent investments. There is no minimum for subsequent purchases of shares
of Keystone Precious Metals. Each Fund provides for telephone, mail or wire
redemption of shares at net asset value as next determined after receipt of a
redemption request on each day the New York Stock Exchange ("NYSE") is open for
trading. Additional information concerning purchases and redemptions of shares,
including how each Fund's net asset value is determined, is contained in the
respective Prospectus for each Fund. Each Fund may involuntarily redeem
shareholders' accounts that have less than $1,000 of invested funds. All funds
invested in each Fund are invested in full and fractional shares. The Funds
reserve the right to reject any purchase order.
Exchange Privileges
Precious Metals currently permits shareholders to exchange such shares
for shares of another fund in the Blanchard Group of Funds or for Investment
shares of other funds managed by Virtus. In addition, such shares may be
exchanged for shares of Federated Emerging Markets Fund. Holders of shares of a
class of Keystone Precious Metals generally may exchange their shares for shares
of the same class of any other Evergreen fund. Precious Metals shareholders will
be receiving Class A shares of Keystone Precious Metals in the Reorganization
and, accordingly, with respect to shares of Keystone Precious Metals received by
Precious Metals shareholders in the Reorganization, the exchange privilege is
limited to the Class A shares of other Evergreen funds. No sales charge is
imposed on an exchange. An exchange which represents an initial investment in
another Evergreen fund must amount to at least $1,000. The current exchange
privileges, and the requirements and limitations attendant thereto, are
described in each Fund's respective Prospectus and Statement of Additional
Information.
Dividend Policy
Each Fund distributes its net investment income dividends annually.
Distributions of any net realized gains of a Fund will be made at least
annually. Dividends and distributions are reinvested in additional shares of the
same class of the respective Fund, or paid in cash, as a shareholder has
elected. See the respective Prospectus of each Fund for further information
concerning dividends and distributions.
After the Reorganization, shareholders of Precious Metals who have
elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from Keystone Precious Metals reinvested
in shares of Keystone Precious Metals. Shareholders of Precious Metals who have
elected to receive dividends and/or distributions
<PAGE>
in cash will receive dividends and/or distributions from Keystone Precious
Metals in cash after the Reorganization, although they may, after the
Reorganization, elect to have such dividends and/or distributions reinvested in
additional shares of Keystone Precious Metals.
Each of Keystone Precious Metals and Precious Metals has qualified and
intends to continue to qualify to be treated as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code"). While so
qualified, so long as each Fund distributes all of its net investment company
taxable income and any net realized gains to shareholders, it is expected that a
Fund will not be required to pay any federal income taxes on the amounts so
distributed. A 4% nondeductible excise tax will be imposed on amounts not
distributed if a Fund does not meet certain distribution requirements by the end
of each calendar year. Each Fund anticipates meeting such distribution
requirements.
Risks
Since the investment objectives and policies of each Fund are similar,
the risks involved in investing in each Fund's shares are similar. For a
discussion of each Fund's objectives and policies, see "Comparison of Investment
Objectives and Policies." There is no assurance that investment performances
will be positive and that the Funds will meet their investment objectives.
Precious Metals. The profits of the companies in which both Funds
invest, and ultimately the value of the securities of the Funds, are directly
affected by the price of gold and other precious metals and minerals. The price
of gold and other precious metals and minerals, in turn, is subject to
substantial short-term volatility caused by various conditions, including:
monetary and political developments within a particular country and among
various countries, such as currency devaluations or revaluations and exchange
controls; economic and social conditions such as industrial and commercial
demand, and investment and speculation; and trade restrictions between
countries. Because a significant portion of the world's gold ore reserves is
located in South Africa, the political, social and economic conditions there can
affect local and other gold and gold-related companies.
Foreign Securities. Both Funds invest in foreign securities. Securities
markets of foreign countries in which the Funds may invest are generally not
subject to the same degree of regulation as the U.S. markets and may be more
volatile and less liquid than the major U.S. markets. The differences between
<PAGE>
investing in foreign and U.S. companies include: (1) less publicly available
information about foreign companies; (2) the lack of uniform financial
accounting standards and practices among countries which could impair the
validity of direct comparisons of valuation measures (such as price/earnings
ratios) for securities in different countries; (3) less readily available market
quotations on foreign companies; (4) differences in government regulation and
supervision of foreign stock exchanges, brokers, listed companies, and banks;
(5) differences in legal systems which may affect the ability to enforce
contractual obligations or obtain court judgments; (6) generally lower foreign
stock market volume; (7) the likelihood that foreign securities may be less
liquid or more volatile, which may affect the Fund's ability to purchase or sell
large blocks of securities and thus obtain the best price; (8) transaction
costs, including brokerage charges and custodian charges associated with holding
foreign securities, may be higher; (9) the settlement periods for foreign
securities, which are sometimes longer than those for securities of U.S.
issuers, may affect portfolio liquidity; (10) the possibility that foreign
securities held by a Fund may be traded on days that the Fund does not value its
portfolio securities, such as Saturdays and customary business holidays, and
accordingly, the Fund's net asset value may be significantly affected on days
when shareholders do not have access to the Fund; and (11) political and social
instability, expropriation, and political or financial changes which adversely
affect investment in some countries.
Emerging Markets. Investing in securities of issuers in emerging
markets countries involves exposure to economic systems that are generally less
stable than those of developed countries. Investing in companies in emerging
markets countries may involve exposure to national policies that may restrict
investment by foreigners and undeveloped legal systems governing private and
foreign investments and private property. The typically small size of the
markets for securities issued by companies in emerging markets countries and the
possibility of a low or nonexistent volume of trading in those securities may
also result in a lack of liquidity and in price volatility for those securities.
When a Fund invests in foreign securities, they usually will be
denominated in foreign currencies, and the Fund may temporarily hold funds in
foreign securities. Thus, the value of a Fund's shares may be affected by
changes in exchange rates.
Precious Metals is a non-diversified investment company. As such, there
is no limit on the percentage of assets which can be invested in the securities
of a single issuer. An investment in Precious Metals, therefore, will entail
greater risk than would
<PAGE>
exist in a diversified investment company because the higher percentage of
investments among fewer issuers may result in greater fluctuations in the total
market value of its shares. Any adverse developments affecting the value of the
securities held by Precious Metals will have a greater impact on the total value
of Precious Metals than would be the case if Precious Metals' investments were
diversified among more issuers.
Additional Information. Further information about these risks, as well as
other risks relating to an investment in Keystone Precious Metals, is set forth
in the Prospectus of Keystone Precious Metals at "Risk Factors."
REASONS FOR THE REORGANIZATION
On July 18, 1997, First Union entered into an Agreement and Plan of
Merger with Signet, which provided, among other things, for the Merger of Signet
with and into a wholly-owned subsidiary of First Union. The Merger was
consummated on November 28, 1997. As a result of the Merger it is expected that
FUNB and its affiliates will succeed to the investment advisory and
administrative functions currently performed for Precious Metals by various
units of Signet and various unaffiliated parties. It is also expected that
Signet will no longer, upon completion of the Reorganization and similar
reorganizations of other funds in the Signet mutual fund family, provide
investment advisory or administrative services to investment companies.
At a meeting held on September 16, 1997, the Board of Directors of
Precious Metals considered and approved the Reorganization as in the best
interests of shareholders of Precious Metals and determined that the interests
of existing shareholders of Precious Metals will not be diluted as a result of
the transactions contemplated by the Reorganization. In addition, the Directors
approved the Interim Advisory Agreement and Interim Sub-Advisory Agreement with
respect to Precious Metals.
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise the Blanchard Group of Funds. The
Merger caused, as a matter of law, termination of the investment advisory
agreement between Precious Metals and Virtus and the sub-advisory agreement
between Virtus and Cavelti Capital. Precious Metals has received an order from
the SEC which permits Virtus and Cavelti Capital to continue to act as Precious
Metals' investment adviser and sub-adviser, respectively, without shareholder
approval, for a period of not more than 120 days from the date the Merger was
consummated
<PAGE>
(November 28, 1997) to the date of shareholder approval of a new investment
advisory agreement and sub-advisory agreement. Accordingly, the Directors
considered the recommendations of Signet in approving the proposed
Reorganization.
In approving the Plan, the Directors reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Keystone Precious Metals and Precious Metals. Specifically, Keystone
Precious Metals and Precious Metals have similar investment objectives and
policies and comparable risk profiles. See "Comparison of Investment Objectives
and Policies" below. At the same time, the Board of Directors evaluated the
potential economies of scale associated with larger mutual funds and concluded
that operational efficiencies may be achieved upon the combination of Precious
Metals with an Evergreen fund with a greater level of assets. As of September
30, 1997, Keystone Precious Metals' net assets were approximately $138.8 million
and Precious Metals' net assets were approximately $67.0 million.
In addition, assuming that an alternative to the Reorganization would
be to propose that Precious Metals continue its existence and be separately
managed by Keystone or one of its affiliates, Precious Metals would be offered
through common distribution channels with the similar Keystone Precious Metals.
Precious Metals would also have to bear the cost of maintaining its separate
existence. Signet and Keystone believe that the prospect of dividing the
resources of the Evergreen mutual fund organization between two similar funds
could result in each Fund being disadvantaged due to an inability to achieve
optimum size, performance levels and the greatest possible economies of scale.
Accordingly, for the reasons noted above and recognizing that there can be no
assurance that any economies of scale or other benefits will be realized, Signet
and Keystone believe that the proposed Reorganization would be in the best
interests of each Fund and its shareholders.
The Board of Directors of Precious Metals met and considered the
recommendation of Signet and Keystone and, in addition, considered among other
things, (i) the terms and conditions of the Reorganization; (ii) whether the
Reorganization would result in the dilution of shareholders' interests; (iii)
expense ratios, fees and expenses of Keystone Precious Metals and Precious
Metals; (iv) the comparative performance records of each of the Funds; (v)
compatibility of their investment objectives and policies; (vi) the investment
experience, expertise and resources of Keystone; (vii) the service and
distribution resources available to the Evergreen funds and the broad array of
<PAGE>
investment alternatives available to shareholders of the Evergreen funds; (viii)
the personnel and financial resources of First Union and its affiliates; (ix)
the fact that FUNB will bear the expenses incurred by Precious Metals in
connection with the Reorganization; (x) the fact that Keystone Precious Metals
will assume certain identified liabilities of Precious Metals; and (xi) the
expected federal income tax consequences of the Reorganization.
The Directors also considered the benefits to be derived by
shareholders of Precious Metals from the sale of its assets to Keystone Precious
Metals. In this regard, the Directors considered the potential benefits of being
associated with a larger entity and the economies of scale that could be
realized by the participation in such an entity by shareholders of Precious
Metals.
In addition, the Directors considered that there are alternatives
available to shareholders of Precious Metals, including the ability to redeem
their shares, as well as the option to vote against the Reorganization.
During their consideration of the Reorganization the Directors met with
Fund counsel and counsel to the Independent Directors regarding the legal issues
involved. The Trustees of Evergreen International Trust, on behalf of Keystone
Precious Metals, also concluded at a meeting on September 17, 1997 that the
proposed Reorganization would be in the best interests of shareholders of
Keystone Precious Metals and that the interests of the shareholders of Keystone
Precious Metals would not be diluted as a result of the transactions
contemplated by the Reorganization.
THE BOARD OF DIRECTORS OF PRECIOUS METALS
RECOMMENDS THAT THE SHAREHOLDERS APPROVE
THE PROPOSED REORGANIZATION.
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the
Plan (Exhibit A hereto).
The Plan provides that Keystone Precious Metals will acquire all of the
assets of Precious Metals in exchange for shares of Keystone Precious Metals and
the assumption by Keystone Precious Metals of certain identified liabilities of
Precious Metals on or about February 27, 1998 or such other date as may be
agreed upon by the parties (the "Closing Date"). Prior to the Closing Date,
Precious Metals will endeavor to discharge all of its known liabilities and
<PAGE>
obligations. Keystone Precious Metals will not assume any liabilities or
obligations of Precious Metals other than those reflected in an unaudited
statement of assets and liabilities of Precious Metals prepared as of the close
of regular trading on the NYSE, currently 4:00 p.m. Eastern time, on the
business day immediately prior to the Closing Date. The number of full and
fractional shares of each class of Keystone Precious Metals to be received by
the shareholders of Precious Metals will be determined by multiplying the
respective outstanding class of shares of Precious Metals by a factor which
shall be computed by dividing the net asset value per share of the respective
class of shares of Precious Metals by the net asset value per share of the
respective class of shares of Keystone Precious Metals. Such computations will
take place as of the close of regular trading on the NYSE on the business day
immediately prior to the Closing Date. The net asset value per share of each
class will be determined by dividing assets, less liabilities, in each case
attributable to the respective class, by the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for Keystone
Precious Metals, will compute the value of each Fund's respective portfolio
securities. The method of valuation employed will be consistent with the
procedures set forth in the Prospectus and Statement of Additional Information
of Keystone Precious Metals, Rule 22c-1 under the 1940 Act, and with the
interpretations of such Rule by the SEC's Division of Investment Management.
At or prior to the Closing Date, Precious Metals will have declared a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
the Fund's shareholders (in shares of the Fund, or in cash, as the shareholder
has previously elected) all of the Fund's net investment company taxable income
for the taxable period ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
As soon after the Closing Date as conveniently practicable, Precious
Metals will liquidate and distribute pro rata to shareholders of record as of
the close of business on the Closing Date the full and fractional shares of
Keystone Precious Metals received by Precious Metals. Such liquidation and
distribution will be accomplished by the establishment of accounts in the names
of the Fund's shareholders on the share records of Keystone Precious Metals'
transfer agent. Each account will represent the respective pro rata number of
<PAGE>
full and fractional shares of Keystone Precious Metals due to the Fund's
shareholders. All issued and outstanding shares of Precious Metals, including
those represented by certificates, will be canceled. The shares of Keystone
Precious Metals to be issued will have no preemptive or conversion rights. After
such distributions and the winding up of its affairs, Precious Metals will be
terminated. In connection with such termination, Precious Metals will file with
the SEC an application for termination as a registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Precious Metals' shareholders, accuracy
of various representations and warranties and receipt of opinions of counsel,
including opinions with respect to those matters referred to in "Federal Income
Tax Consequences" below. Notwithstanding approval of Precious Metals'
shareholders, the Plan may be terminated (a) by the mutual agreement of Precious
Metals and Keystone Precious Metals; or (b) at or prior to the Closing Date by
either party (i) because of a breach by the other party of any representation,
warranty, or agreement contained therein to be performed at or prior to the
Closing Date if not cured within 30 days, or (ii) because a condition to the
obligation of the terminating party has not been met and it reasonably appears
that it cannot be met.
The expenses of Precious Metals in connection with the Reorganization
(including the cost of any proxy soliciting agent) will be borne by FUNB whether
or not the Reorganization is consummated. No portion of such expenses will be
borne directly or indirectly by Precious Metals or its shareholders. There are
no liabilities or expected reimbursements in connection with the 12b-1 Plan of
Precious Metals. As a result, no 12b-1 liabilities will be assumed by Keystone
Precious Metals following the Reorganization.
If the Reorganization is not approved by shareholders of Precious
Metals, the Board of Directors of Precious Metals will consider other possible
courses of action in the best interests of shareholders.
Federal Income Tax Consequences
The Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Precious Metals will receive an
opinion of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued
<PAGE>
thereunder, current administrative rules, pronouncements and court decisions,
for federal income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of Precious Metals solely in
exchange for shares of Keystone Precious Metals and the assumption by Keystone
Precious Metals of certain identified liabilities, followed by the distribution
of Keystone Precious Metals' shares by Precious Metals in dissolution and
liquidation of Precious Metals, will constitute a "reorganization" within the
meaning of section 368(a)(1)(C) of the Code, and Keystone Precious Metals and
Precious Metals will each be a "party to a reorganization" within the meaning of
section 368(b) of the Code;
(2) No gain or loss will be recognized by Precious Metals on the
transfer of all of its assets to Keystone Precious Metals solely in exchange for
Keystone Precious Metals' shares and the assumption by Keystone Precious Metals
of certain identified liabilities of Precious Metals or upon the distribution of
Keystone Precious Metals' shares to Precious Metals' shareholders in exchange
for their shares of Precious Metals;
(3) The tax basis of the assets transferred will be the same to
Keystone Precious Metals as the tax basis of such assets to Precious Metals
immediately prior to the Reorganization, and the holding period of such assets
in the hands of Keystone Precious Metals will include the period during which
the assets were held by Precious Metals;
(4) No gain or loss will be recognized by Keystone Precious Metals upon
the receipt of the assets from Precious Metals solely in exchange for the shares
of Keystone Precious Metals and the assumption by Keystone Precious Metals of
certain identified liabilities of Precious Metals;
(5) No gain or loss will be recognized by Precious Metals' shareholders
upon the issuance of the shares of Keystone Precious Metals to them, provided
they receive solely such shares (including fractional shares) in exchange for
their shares of Precious Metals; and
(6) The aggregate tax basis of the shares of Keystone Precious Metals,
including any fractional shares, received by each of the shareholders of
Precious Metals pursuant to the Reorganization will be the same as the aggregate
tax basis of the shares of Precious Metals held by such shareholder immediately
prior to the Reorganization, and the holding period
<PAGE>
of the shares of Keystone Precious Metals, including fractional shares, received
by each such shareholder will include the period during which the shares of
Precious Metals exchanged therefor were held by such shareholder (provided that
the shares of Precious Metals were held as a capital asset on the date of the
Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Precious Metals would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Fund shares and the fair market value of Keystone Precious
Metals shares he or she received. Shareholders of Precious Metals should consult
their tax advisers regarding the effect, if any, of the proposed Reorganization
in light of their individual circumstances. It is not anticipated that the
securities of the combined portfolio will be sold in significant amounts in
order to comply with the policies and investment practices of Keystone Precious
Metals. Since the foregoing discussion relates only to the federal income tax
consequences of the Reorganization, shareholders of Precious Metals should also
consult their tax advisers as to the state and local tax consequences, if any,
of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Keystone
Precious Metals and Precious Metals as of September 30, 1997 and the
capitalization of Keystone Precious Metals on a pro forma basis as of that date,
giving effect to the proposed acquisition of assets at net asset value and the
conversion of 3,900,247 Keystone Precious Metals Class B shares to Class A
shares. See "Comparison of Fees and Expenses." The pro forma data reflects an
exchange ratio of approximately 0.27988 Class A shares of Keystone Precious
Metals issued for each share of Precious Metals.
Capitalization of Keystone Precious Metals,
Precious Metals and Keystone
Precious Metals (Pro Forma)
<PAGE>
<TABLE>
<CAPTION>
Keystone
Keystone
Precious Precious
Metals Metals
-------- ---------
Precious
Metals (After
Reorgani-
zation)
------------
<S> <C> <C> <C>
Net Assets
Shares......................... N/A $67,037,240 N/A
Class A........................ N/A N/A $141,860,060
Class B........................ $63,943,537
$138,766,357 N/A -------------
------------ ------------
Total Net Assets $67,037,240 $205,803,597
$138,766,357
Net Asset Value Per
Share
Shares......................... N/A $5.37 N/A
Class A........................ N/A N/A $19.18
Class B........................ $19.18 N/A $19.18
Shares Outstanding
Shares......................... N/A 12,486,361 N/A
Class A........................ N/A 7,396,168
N/A
Class B........................ N/A 3,333,149
7,233,396 ------------ -------------
------------
All Classes.................... 7,233,396 12,486,361
10,729,317
</TABLE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
Shareholder Information
As of December 26, 1997 (the "Record Date"), there were 11,681,703
shares of beneficial interest of Precious Metals outstanding.
As of November 30, 1997, the officers and Directors of Precious Metals
beneficially owned as a group less than 1% of the outstanding shares of Precious
Metals. To
<PAGE>
Precious Metals' knowledge, the following persons owned beneficially or of
record more than 5% of Precious Metals' total outstanding shares as of November
30, 1997:
<TABLE>
<CAPTION>
Percentage
Percentag of Shares of
e of Class
Shares
No. of Before After
Name and Address Shares Reorgan- Reorgan-
ization ization
<S> <C> <C> <C>
Charles Schwab 9.31% 3.74% Class A
Co. Inc. 1,068,625
101 Montgomery St.
San Francisco, CA
94104-4122
National Financial 5.42% 2.18% Class A
Services Corp. for 622,217
the Exclusive
Benefit of
Customers
Attn. Mutual Funds
Fifth Floor
200 Liberty St.
One World Financial
Center
New York, NY
10281-1003
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectus and Statement of Additional
Information of each Fund. The investment objectives, policies and restrictions
of Keystone Precious Metals can be found in the Prospectus of Keystone Precious
Metals under the caption "Investment Objectives and Policies." The investment
objectives, policies and restrictions of Precious Metals can be found in the
Prospectus of the Fund under the caption "The Funds' Investment Objectives and
Policies." Unlike the investment objectives of Precious Metals, which are
fundamental, the investment objectives of Keystone
<PAGE>
Precious Metals are non-fundamental and can be changed by the Board of Trustees
without shareholder approval.
The investment objectives of Keystone Precious Metals are to provide
shareholders with long-term capital appreciation and with protection of the
purchasing power of their capital and, as a secondary objective, to obtain
current income. Under normal circumstances, Keystone Precious Metals pursues its
objectives by investing at least 80% of its assets in common stocks of companies
that are engaged in, or which receive at least 50% of their revenue from other
companies engaged in, exploration, mining, processing or dealing in precious
metals (gold, silver, platinum and palladium) and minerals, such as diamonds.
For purposes of this policy, a company is considered to be engaged in a business
or activity if at least 50% of the company's assets, revenues or profits are
derived from that business or activity.
Currently, Keystone Precious Metals has a policy of investing a portion
of its assets in domestic or foreign issuers that operate in the Republic of
South Africa, the principal location of the known free-world gold ore reserves.
Keystone Precious Metals generally makes such investments by purchasing American
Depository Receipts. Keystone Precious Metals does not invest directly in
precious metals, but may invest up to 25% of its total assets in common or
preferred stock of wholly-owned subsidiaries that make such investments.
Currently, Keystone Precious Metals has one such subsidiary, Precious Metals
(Bermuda) Ltd.
The investment objective of Precious Metals is to provide long-term
capital appreciation and preservation of purchasing power through investments in
physical precious metals and securities of companies involved with precious
metals.
A secondary objective of Precious Metals is to reduce the risk of loss
of capital and decrease the volatility often associated with precious metals
investments by changing the allocation of the Fund's assets from precious metals
securities to physical precious metals investments and/or investing in
short-term instruments and government securities during periods when the
sub-adviser believes the precious metals markets may experience declines.
For the purpose of Precious Metals, the term "precious metals securities"
refers to the debt and equity securities of domestic and foreign companies
listed on domestic and foreign exchanges which are directly involved in the
exploration, development, mining, refining, manufacturing, dealing or marketing
of precious metals or precious metals products. A
<PAGE>
company will be considered to be "involved in" such activity if it derives more
than 50% of its revenues from or devotes more than 50% of its assets to such
activity. The Fund may invest in (1) publicly-traded common stocks, (2)
securities convertible into common stocks, such as convertible preferred stock,
convertible debentures, convertible rights and warrants (to the extent
permissible by the Fund's investment policies), and (3) debt securities of such
companies, all of which are believed by the sub-adviser to have the potential
for appreciation.
Precious Metals, unlike Keystone Precious Metals, may, from time to
time, invest up to 5% of its assets in unrated foreign debt securities which are
judged by the Fund's sub- adviser to be of at least comparable quality to
lower-rated U.S. debt securities (usually defined as Baa or lower by Moody's
Investors Service or BBB or lower by Standard & Poor's Ratings Group). Precious
Metals may invest up to 49% of its total assets in physical precious metals
through holdings in bullion or precious metals certificates or storage receipts
representing the physical metals.
Precious Metals and Keystone Precious Metals may purchase contracts for
forward delivery of physical precious metals. Forward contracts for precious
metals are contracts between the Fund and institutions dealing in precious
metals for the future receipt or delivery of metals at a price fixed at the time
of the transaction.
Both Funds may invest in derivatives such as options and futures.
Under normal conditions, Precious Metals has at least 65% of its total
assets invested in precious metals securities and physical precious metals
investments. Under other circumstances, the Fund may invest up to 100% of its
assets in short-term instruments, including commercial paper, bank certificates
of deposit, bankers' acceptances and securities of the U.S. government and its
agencies and instrumentalities as well as cash and cash equivalents denominated
in foreign currency.
Neither Keystone Precious Metals nor Precious Metals may invest more
than 5% of its assets in securities of any one issuer or purchase more than 10%
of the outstanding voting securities of any one issuer. However, because
Precious Metals is a non-diversified portfolio for purposes of the 1940 Act,
these restrictions apply to 50% of the assets of Precious Metals. As a
diversified portfolio under the 1940 Act, the same restrictions apply to 75% of
the assets of Keystone
<PAGE>
Precious Metals. Non-diversification may increase investment risks.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectus and Statement of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectus and Statement of Additional Information of each
Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen International Trust and Precious Metals are both open-end
management investment companies registered with the SEC under the 1940 Act which
continuously offer shares to the public. Evergreen International Trust is
organized as a Delaware business trust, and Precious Metals is organized as a
Maryland corporation. Evergreen International Trust is governed by a Declaration
of Trust, By-Laws and a Board of Trustees. Evergreen International Trust is also
governed by applicable Delaware and federal law. Keystone Precious Metals is a
series of Evergreen International Trust. Precious Metals is governed by its
Articles of Incorporation, ByLaws and a Board of Directors, as well as
applicable Maryland and federal law.
As set forth in the Supplement to the Prospectus of Keystone Precious
Metals, effective December 22, 1997, Keystone Precious Metals Holdings, Inc.,
was reorganized (the "Delaware Reorganization") from a Delaware corporation into
a series (Keystone Precious Metals ) of Evergreen International Trust. In
connection with the Delaware Reorganization, the Fund's investment objectives
were reclassified from "fundamental" to "non-fundamental" and therefore may be
changed without shareholder approval; the Fund adopted certain standardized
investment restrictions; and the Fund eliminated or reclassified from
fundamental to non- fundamental certain of the Fund's other fundamental
investment restrictions. On January 9, 1998 Keystone Precious Metals will change
its name to Evergreen Precious Metals Fund.
Capitalization
The beneficial interests in Keystone Precious Metals are represented by an
unlimited number of transferable shares of beneficial interest, $.001 par value
per share. Precious Metals' authorized shares consist of 1,000,000,000 shares of
common stock, par value $.001 per share. Evergreen
<PAGE>
International Trust's Declaration of Trust and Precious Metals' Articles of
Incorporation permit the Trustees or Directors respectively, to allocate shares
into an unlimited number of series, and classes thereof, with rights determined
by the Trustees or Directors, all without shareholder approval. Currently,
Precious Metals has only a single series. Fractional shares may be issued by
either Fund. Each Fund's shares represent equal proportionate interests in the
assets belonging to the Funds. Shareholders of each Fund are entitled to receive
dividends and other amounts as determined by the Trustees or Directors.
Shareholders of each Fund vote separately, by class, as to matters, such as
approval of or amendments to Rule 12b-1 distribution plans, that affect only
their particular class and by series as to matters, such as approval of or
amendments to investment advisory agreements or proposed reorganizations, that
affect only their particular series.
Shareholder Liability
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen International Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of a Delaware trust to liability. To guard
against this risk, the Declaration of Trust of Evergreen International Trust (a)
provides that any written obligation of the Trust may contain a statement that
such obligation may only be enforced against the assets of the Trust or the
particular series in question and the obligation is not binding upon the
shareholders of the Trust; however, the omission of such a disclaimer will not
operate to create personal liability for any shareholder; and (b) provides for
indemnification out of Trust property of any shareholder held personally liable
for the obligations of the Trust. Accordingly, the risk of a shareholder of
Evergreen International Trust incurring financial loss beyond that shareholder's
investment because of shareholder liability is limited to circumstances in
which: (i) the court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) the Trust itself would be
unable to meet its obligations. In light of Delaware law, the nature of the
Trust's business, and the nature of its assets, the risk of personal liability
to a shareholder of Evergreen International Trust is remote.
Shareholder Meetings and Voting Rights
<PAGE>
Neither Evergreen International Trust on behalf of Keystone Precious
Metals nor Precious Metals is required to hold annual meetings of shareholders.
However, a meeting of shareholders for the purpose of voting upon the question
of removal of a Trustee or Director, respectively, must be called when requested
in writing by the holders of at least 10% of the outstanding shares of Evergreen
International Trust or Precious Metals. In addition, each is required to call a
meeting of shareholders for the purpose of electing Trustees or Directors if, at
any time, less than a majority of the Trustees or Directors then holding office
were elected by shareholders. Neither Evergreen International Trust nor Precious
Metals currently intends to hold regular shareholder meetings. Neither Evergreen
International Trust nor Precious Metals permits cumulative voting. For Keystone
Precious Metals and Precious Metals, a majority of the votes cast and entitled
to vote is sufficient to act on a matter (unless otherwise specifically required
by the applicable governing documents or other law, including the 1940 Act).
Under the Declaration of Trust of Evergreen International Trust, each
share of Keystone Precious Metals is entitled to one vote for each dollar of net
asset value applicable to each share. Under the voting provisions governing
Precious Metals, each share is entitled to one vote. The net asset values of the
mutual funds which are each a series of Evergreen International Trust have
different net asset values per share and can be expected to change in relation
to one another in the future. Because of the divergence in net asset values, a
given dollar investment in a fund with a lower net asset value will purchase
more shares and under Precious Metals' voting provisions have more votes, than
the same investment in a fund with a higher net asset value. Under the
Declaration of Trust of Evergreen International Trust, voting power is related
to the dollar value of a shareholder's investment rather than to the number of
shares held.
Liquidation or Dissolution
In the event of the liquidation of Keystone Precious Metals or Precious
Metals the shareholders are entitled to receive, when, and as declared by the
Trustees or Directors, respectively, the excess of the assets belonging to such
Fund or attributable to the class over the liabilities belonging to the Fund or
attributable to the class. In either case, the assets so distributable to
shareholders of the Fund will be distributed among the shareholders in
proportion to the number of shares of a class of the Fund held by them and
recorded on the books of the Fund.
<PAGE>
Liability and Indemnification of Trustees and Directors
The Articles of Incorporation of Precious Metals provide that no
Director or officer shall be liable unless such Director or officer is found to
have acted in bad faith, with willful misfeasance, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
The Articles of Incorporation of Precious Metals provide that a present
or former Director or officer is entitled to indemnification against liabilities
and expenses with respect to claims related to his or her position with the
Fund, provided that no indemnification shall be provided to a Director or
officer against any liability to the Fund or the shareholders by reasons of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen International Trust, a
Trustee is liable to the Trust and its shareholders only for such Trustee's own
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of the office of Trustee or the discharge of such
Trustee's functions. As provided in the Declaration of Trust, each Trustee of
the Trust is entitled to be indemnified against all liabilities against him or
her, including the costs of litigation, unless it is determined that the Trustee
(i) did not act in good faith in the reasonable belief that such Trustee's
action was in or not opposed to the best interests of the Trust; (ii) had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
such Trustee's duties; and (iii) in a criminal proceeding, had reasonable cause
to believe that such Trustee's conduct was unlawful (collectively, "disabling
conduct"). A determination that the Trustee did not engage in disabling conduct
and is, therefore, entitled to indemnification may be based upon the outcome of
a court action or administrative proceeding or by (a) a vote of a majority of
those Trustees who are neither "interested persons" within the meaning of the
1940 Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. The Trust may also advance money for such litigation expenses
provided that the Trustee undertakes to repay the Trust if his or her conduct is
later determined to preclude indemnification and certain other conditions are
met.
The foregoing is only a summary of certain characteristics of the
operations of the Declaration of Trust of Evergreen International Trust,
Articles of Incorporation of Precious Metals, By-Laws, and Delaware and Maryland
law and is not a complete description of those documents or law. Shareholders
<PAGE>
should refer to the provisions of such Declaration of Trust, Articles of
Incorporation, By-Laws, and Delaware and Maryland law directly for more complete
information.
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Directors of Precious Metals recommends that shareholders of
Precious Metals approve the Interim Advisory Agreement. The Merger became
effective on November 28, 1997. Pursuant to an order received from the SEC all
fees payable under the Interim Advisory Agreement will be placed in escrow and
paid to Virtus if shareholders approve the contract within 120 days of its
effective date. The Interim Advisory Agreement will remain in effect until the
earlier of the Closing Date for the Reorganization or two years from its
effective date. The terms of the Interim Advisory Agreement are essentially the
same as the Previous Advisory Agreement (as defined below). The only difference
between the Previous Advisory Agreement and the Interim Advisory Agreement, if
approved by shareholders, is the length of time each Agreement is in effect. A
description of the Interim Advisory Agreement pursuant to which Virtus continues
as investment adviser to Precious Metals, as well as the services to be provided
by Virtus pursuant thereto is set forth below under "Advisory Services." The
description of the Interim Advisory Agreement in this Prospectus/Proxy Statement
is qualified in its entirety by reference to the Interim Advisory Agreement,
attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management, is an indirect wholly-owned subsidiary of
First Union. The address of Virtus is 707 East Main Street, Suite 1300,
Richmond, Virginia 23219. Virtus has served as investment adviser pursuant to an
Investment Advisory Agreement dated July 12, 1995. As used herein, the
Investment Advisory Agreement for Precious Metals is referred to as the
"Previous Advisory Agreement." At a meeting of the Board of Directors of
Precious Metals held on September 16, 1997, the Directors, including a majority
of the Independent Directors, approved the Interim Advisory Agreement for
Precious Metals.
The Directors have authorized Precious Metals to enter into the Interim
Advisory Agreement with Virtus. Such Agreement became effective on November 28,
1997. If the Interim Advisory Agreement for Precious Metals is not approved by
shareholders, the Directors will consider appropriate actions to be taken with
<PAGE>
respect to Precious Metals' investment advisory arrangements at that time. The
Previous Advisory Agreement was last approved by the Directors, including a
majority of the Independent Directors, on May 11, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus is responsible for
managing Precious Metals and overseeing the investment of its assets, subject at
all times to the supervision of the Board of Directors. Virtus selects, monitors
and evaluates the Fund's sub-adviser. Virtus periodically reviews the
sub-adviser's performance record and will make a change, if necessary, subject
to approval of the Board of Directors and shareholders.
FAS currently acts as administrator of Precious Metals. FAS will continue
during the term of the Interim Advisory Agreement as Precious Metals'
administrator for the same compensation as currently received . An affiliate of
FAS currently performs transfer agency services for Precious
Metals' shareholders. Commencing February 9, 1998 Evergreen Service Company
will provide such transfer agency services for the same fees charged by Precious
Metals' current transfer agent. See "Summary - Administrator."
Fees and Expenses. The investment advisory fees and expense limitations for
Precious Metals under the Previous Advisory Agreement and the Interim Advisory
Agreement are identical. See "Summary - Investment Advisers and Sub-Adviser."
Expense Reimbursement. Virtus may, if it deems appropriate, assume
expenses of Precious Metals to the extent that the Fund's expenses exceed such
lower expense limitation as Virtus may, by notice to the Precious Metals,
voluntarily declare to be effective.
The Interim Advisory Agreement contains an identical provision.
Payment of Expenses and Transaction Charges. Under the Previous Advisory
Agreement, Precious Metals was required to pay or cause to be paid all of its
own expenses.
<PAGE>
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to Precious Metals or to any shareholder for any act or
omission in the course of or connected in any way with rendering services or for
any losses that may be sustained in the purchase, holding or sale of any
security.
The Interim Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Advisory Agreement provides that
it may be terminated without penalty by vote of a majority of the outstanding
voting securities of Precious Metals (as defined in the 1940 Act) or by a vote
of its Board of Directors on 60 days' written notice to Virtus or by Virtus on
60 days' written notice to Precious Metals. Also, the Interim Advisory Agreement
will automatically terminate in the event of its assignment (as defined in the
1940 Act). The Previous Advisory Agreement contained identical provisions as to
termination and assignment.
Information about Precious Metals' Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, The Virtus Funds, other funds of the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus is set forth in Appendix A to this Prospectus/Proxy
Statement.
For the fiscal year ended September 30, 1997 and the period from May 1,
1996 to September 30, 1996, Virtus received from Precious Metals management fees
of $744,283 and $442,945, respectively. For the fiscal year ended April 30,
1996, the Fund's investment management fee paid to Virtus and the prior manager
was $840,942. Signet acts as custodian for Precious Metals and received $50,200
for the fiscal year ended September 30, 1997. Commencing on or about January 20,
1998 FUNB will as Precious Metals' custodian during the term of the Interim
Advisory Agreement.
The Board of Directors considered the Interim Advisory Agreement as
part of its overall approval of the Plan. The Board of Directors considered,
among other things, the factors set forth above in "Reasons for the
Reorganization." The Board of
<PAGE>
Directors also considered the fact that there were no material differences
between the terms of the Interim Advisory Agreement and the terms of the
Previous Advisory Agreement.
THE DIRECTORS OF PRECIOUS METALS RECOMMEND
THAT SHAREHOLDERS APPROVE THE
INTERIM ADVISORY AGREEMENT.
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Directors of Precious Metals recommends that shareholders of
Precious Metals approve the Interim Sub-Advisory Agreement. Such Agreement
became effective on November 28, 1997. Pursuant to an order from the SEC, all
fees payable under the Interim Sub-Advisory Agreement will be placed in escrow
and paid to Cavelti Capital if shareholders approve the contract within 120 days
of its effective date. The Interim Sub-Advisory Agreement will remain in effect
until the earlier of the Closing Date for the Reorganization or two years from
its effective date. The terms of the Interim Sub-Advisory Agreement are
essentially the same as the Previous Sub-Advisory Agreement (as defined below).
The only difference between the Previous Sub-Advisory Agreement and the Interim
Sub-Advisory Agreement, if approved by shareholders, is the length of time the
Agreement is in effect. A description of the Interim Sub- Advisory Agreement
pursuant to which Cavelti Capital continues as the investment sub-adviser to
Precious Metals, as well as the services to be provided by Cavelti Capital
pursuant thereto, is set forth below under "Sub-Advisory Services." The
description of the Interim Sub-Advisory Agreement in this Prospectus/Proxy
Statement is qualified in its entirety by reference to the Interim Sub-Advisory
Agreement, attached hereto as Exhibit C.
Cavelti Capital Management, Ltd., 4100 Yonge Street, Willowdale,
Ontario MP2 2B6 Canada, has served as sub- adviser to Precious Metals pursuant
to a Sub- Advisory Agreement dated July 11, 1995 (the "Previous Sub- Advisory
Agreement") and is responsible for the day-to-day management of Precious Metals'
portfolio. See "Summary Investment Advisers and Sub-Adviser." Cavelti Capital is
a Canadian money management firm specializing in bullion and precious metals
mining shares. Peter C. Cavelti, the President of Cavelti Capital, has extensive
experience in the field of precious metals. Cavelti Capital clients include
government agencies, financial institutions, mining companies and Canadian
closed-end funds.
<PAGE>
The Directors have authorized Precious Metals to enter into the Interim
Sub-Advisory Agreement with Virtus and Cavelti Capital. Such Agreement became
effective on November 28, 1997. If the Interim Sub-Advisory Agreement for
Precious Metals is not approved by shareholders, the Directors will consider
appropriate actions to be taken with respect to Precious Metals' investment
sub-advisory arrangements at that time. The Previous Sub- Advisory Agreement was
last approved by the Directors, including a majority of the Independent
Directors, on May 11, 1997.
Comparison of the Interim Sub-Advisory Agreement and the Previous
Sub-Advisory Agreement
Sub-Advisory Services. The management and advisory services to be
provided by Cavelti Capital under the Interim Sub-Advisory Agreement are
identical to those currently provided by Cavelti Capital under the Previous
Sub-Advisory Agreement. Under the Previous Sub-Advisory Agreement, Cavelti
Capital supervised the investment and reinvestment of the cash, securities or
other properties comprising Precious Metals' portfolio, subject at all times to
the direction of Virtus and the policies and control of Precious Metals' Board
of Directors.
Fees and Expenses. The investment sub-advisory fees under the Previous
Sub-Advisory Agreement and the Interim Sub-Advisory Agreement are identical. As
compensation for its sub-advisory services under the Previous Sub-Advisory
Agreement Cavelti Capital was paid by Virtus a monthly fee at the annual rate of
0.30% of the first $150 million of the Fund's average daily net assets; plus
0.2625% of the Fund's average daily net assets in excess of $150 million but
less than $300 million; plus 0.255% of the Fund's average daily net assets in
excess of $300 million.
The fee paid to Cavelti Capital by Virtus for the fiscal year ended
September 30, 1997 was $223,285. The fee paid to Cavelti Capital for the period
May 1, 1996 to September 30, 1996 was $269,873. The fee paid to Cavelti Capital
by Virtus for the period from July 12, 1995 through April 30, 1996 was $228,140.
The names and addresses of the principal executive officers and
directors of Cavelti Capital are set forth in Appendix B to this
Prospectus/Proxy Statement.
Limitation of Liability. The Previous Sub-Advisory Agreement provided
that in the absence of willful misfeasance, bad faith or gross negligence on the
part of Cavelti Capital or its officers, directors, or employees or reckless
disregard by Cavelti Capital of its duties under the Agreement, Cavelti
<PAGE>
Capital shall not be liable to Virtus, Precious Metals or to any shareholder of
Precious Metals for any act or omission in the course of, or connected with,
rendering services thereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. The Interim Sub-Advisory Agreement
contains an identical provision.
Termination; Assignment. The Interim Sub-Advisory Agreement provides
that it may be terminated without penalty by vote of a majority of the
outstanding voting securities of Precious Metals (as defined in the 1940 Act) or
by a vote of a majority of Precious Metals' entire Board of Directors on 60
days' written notice to Cavelti Capital or by Virtus or Cavelti Capital on 60
days' written notice to the other party to the Agreement. Also, the Interim
Sub-Advisory Agreement will automatically terminate in the event of its
assignment (as defined in the 1940 Act). The Previous Sub-Advisory Agreement
contained identical provisions as to termination and assignment.
The Board of Directors considered the Interim Sub-Advisory Agreement as
part of its overall approval of the Plan. The Board of Directors considered,
among other things, the factors set forth above in "Reasons for the
Reorganization." The Board of Directors also considered the fact that there were
no material differences between the terms of the Interim Sub-Advisory Agreement
and the terms of the Previous Sub-Advisory Agreement.
THE DIRECTORS OF PRECIOUS METALS RECOMMEND
THAT SHAREHOLDERS APPROVE THE
INTERIM SUB-ADVISORY AGREEMENT.
ADDITIONAL INFORMATION
Keystone Precious Metals. Information concerning the operation and
management of Keystone Precious Metals is incorporated herein by reference from
the Prospectus dated April 30, 1997, as amended, a copy of which is enclosed,
and Statement of Additional Information dated April 30, 1997. A copy of such
Statement of Additional Information is available upon request and without charge
by writing to Keystone Precious Metals at the address listed on the cover page
of this Prospectus/Proxy Statement or by calling toll-free 1-800- 343-2898.
Precious Metals. Information about the Fund is included in its current
Prospectus dated November 30, 1997 and in the Statement of Additional
Information of the same date, that has been filed with the SEC, all of which are
incorporated herein by reference. Copies of the Prospectus and Statement of
Additional Information are available upon request and without
<PAGE>
charge by writing to Precious Metals at the address listed on the cover page of
this Prospectus/Proxy Statement or by calling toll-free 1-800-829-3863.
Keystone Precious Metals and Precious Metals are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information, including
proxy material, and charter documents with the SEC. These items can be inspected
and copies obtained at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices located at Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661- 2511 and Seven World Trade Center, Suite 1300, New York, New
York 10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Directors of Precious Metals to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116 and at any adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the meeting and a proxy card, is first being mailed to
shareholders of Precious Metals on or about January 6, 1998. Only shareholders
of record as of the close of business on the Record Date will be entitled to
notice of, and to vote at, the Meeting or any adjournment thereof. The holders
of a majority of the outstanding shares entitled to vote, at the close of
business on the Record Date, present in person or represented by proxy, will
constitute a quorum for the Meeting. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting, the proxies named
therein will vote the shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Reorganization, FOR the Interim Advisory Agreement, FOR the Interim Sub-Advisory
Agreement and FOR any other matters deemed appropriate. Proxies that reflect
abstentions and "broker non-votes" (i.e., shares held by brokers or nominees as
to which (i) instructions have not been received from the beneficial owners or
the persons entitled to vote or (ii) the broker or nominee does not have
discretionary voting power on a particular matter) will be counted as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum, but will not be counted as shares voted and will have no effect on
the vote regarding the Plan. However, such "broker non-votes" will have the
effect of being counted as votes against the Interim Advisory Agreement and the
Interim Sub- Advisory Agreement which must be approved by a percentage of the
<PAGE>
shares present at the Meeting or a majority of the outstanding voting
securities. A proxy may be revoked at any time on or before the Meeting by
written notice to the Secretary of Precious Metals, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. Unless revoked, all valid proxies will be
voted in accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby, FOR approval of the Interim Advisory Agreement and FOR approval of the
Interim Sub-Advisory Agreement.
Approval of the Plan will require the affirmative vote of a majority of
the shares voted and entitled to vote at the Meeting at which a quorum of the
Fund's shares is present. Approval of the Interim Advisory Agreement and Interim
Sub-Advisory Agreement will require the affirmative vote of (i) 67% or more of
the outstanding voting securities if holders of more than 50% of the outstanding
voting securities are present, in person or by proxy, at the Meeting, or (ii)
more than 50% of the outstanding voting securities, whichever is less. Each full
share outstanding is entitled to one vote and each fractional share outstanding
is entitled to a proportionate share of one vote.
Proxy solicitations will be made primarily by mail, but proxy
solicitations may also be made by telephone, telegraph or personal solicitations
conducted by officers and employees of Keystone or Signet, their affiliates or
other representatives of Precious Metals (who will not be paid for their
soliciting activities). Shareholder Communications Corporation has been engaged
by Precious Metals to assist in soliciting proxies.
If you wish to participate in the Meeting, you may submit the proxy
card included with this Prospectus/Proxy Statement or attend in person. Any
proxy given by you is revocable.
In the event that sufficient votes to approve the Reorganization are
not received by February 20, 1998, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
<PAGE>
A shareholder who objects to the proposed Reorganization will not be
entitled under either Maryland law or the Articles of Incorporation of Precious
Metals to demand payment for, or an appraisal of, his or her shares. However,
shareholders should be aware that the Reorganization as proposed is not expected
to result in recognition of gain or loss to shareholders for federal income tax
purposes and that, if the Reorganization is consummated, shareholders will be
free to redeem the shares of Keystone Precious Metals which they receive in the
transaction at their then-current net asset value. Shares of Precious Metals may
be redeemed at any time prior to the consummation of the Reorganization.
Shareholders of Precious Metals may wish to consult their tax advisers as to any
differing consequences of redeeming Fund shares prior to the Reorganization or
exchanging such shares in the Reorganization.
Precious Metals does not hold annual shareholder meetings. If the
Reorganization is not approved, shareholders wishing to submit proposals for
consideration for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of Precious Metals
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
The votes of the shareholders of Keystone Precious Metals are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Precious Metals whether other persons are beneficial owners of
shares for which proxies are being solicited and, if so, the number of copies of
this Prospectus/Proxy Statement needed to supply copies to the beneficial owners
of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Keystone Precious Metals as of October 31,
1997, and the financial statements and financial highlights for the periods
indicated therein, have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements and financial highlights of Precious Metals
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of the
<PAGE>
Blanchard Funds for the year ended September 30, 1997 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Keystone
Precious Metals will be passed upon by Sullivan & Worcester LLP, Washington,
D.C.
OTHER BUSINESS
The Directors of Precious Metals do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
THE DIRECTORS OF PRECIOUS METALS RECOMMEND APPROVAL OF THE PLAN, THE
INTERIM ADVISORY AGREEMENT AND THE INTERIM SUB-ADVISORY AGREEMENT, AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF
APPROVAL OF THE PLAN, THE INTERIM ADVISORY AGREEMENT AND THE INTERIM
SUB-ADVISORY AGREEMENT.
January 6, 1998
<PAGE>
APPENDIX A
The names and addresses of the principal executive officers
and directors of Virtus Capital Management, Inc. are as follows:
OFFICERS:
Name Address
- ---- -------
David C. Francis, Chief First Union National Bank
Investment Officer 201 South College Street
Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Clemons Rosson, Vice Virtus Capital Management, Inc.
President, Assistant 707 East Main Street
Secretary Suite 1300
Richmond, Virginia 23219
L. Robert Cheshire, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
John E. Gray, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Dillon S. Harris, Jr., Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
J. Kellie Allen, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
DIRECTORS:
<PAGE>
Name Address
- ---- -------
First Union National Bank
201 South College
David C. Francis Street
Charlotte, North
Carolina 28288-1195
Donald A. McMullen First Union National Bank
201
South College Street
Charlotte, North Carolina 28288-
1195
William M. Ennis First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
<PAGE>
APPENDIX B
The names and addresses of the principal executive officers and directors
of Cavelti Capital Management, Ltd. are as follows:
OFFICERS:
Name Address
- ---- -------
Peter C. Cavelti Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
Heinz Thoma Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
Carolyn Cavelti Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
DIRECTORS:
Name Address
- ---- -------
Peter C. Cavelti Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
Heinz Thoma Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 26th day of November, 1997, by and between the Evergreen International
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to the
Keystone Precious Metals Holdings series (the "Acquiring Fund"), and Blanchard
Precious Metals Fund, Inc., a Maryland corporation, with its principal place of
business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779,(the
"Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund is an open-end, registered investment company
of the management type, and the Acquiring Fund is a separate investment series
of an open-end, registered investment company of the management type and the
Selling Fund owns securities that generally are assets of the character in which
the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Board of Directors of the Selling Fund has determined that
the Selling Fund should exchange all of its assets and certain identified
liabilities for Acquiring Fund
<PAGE>
Shares and that the interests of the existing shareholders of the Selling Fund
will not be diluted as a result of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
<PAGE>
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable time prior to the
Closing Date, furnish the Acquiring Fund with a list of its portfolio securities
and other investments. In the event that the Selling Fund holds any investments
that the Acquiring Fund may not hold, the Selling Fund, if requested by the
Acquiring Fund, will dispose of such securities prior to the Closing Date. In
addition, if it is determined that the Selling Fund and the Acquiring Fund
portfolios, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Selling Fund if requested by the Acquiring Fund will dispose of
a sufficient amount of such investments as may be necessary to avoid violating
such limitations as of the Closing Date. Notwithstanding the foregoing, nothing
herein shall require the Selling Fund to dispose of any investments or
securities if, in the reasonable judgment of the Selling Fund, such disposition
would adversely affect the tax-free nature of the Reorganization or would
violate the Selling Fund's fiduciary duty to its shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately prior
to the Reorganization the Aggregate NASD Cap of the Selling Fund immediately
prior to the Reorganization, in each case calculated in accordance with such
Rule 2830.
<PAGE>
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
<PAGE>
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectuses and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of shares of
the Selling Fund will receive Class A shares of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
<PAGE>
3.2 CUSTODIAN'S CERTIFICATE. Signet Trust Company, as custodian for the
Selling Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Selling Fund's portfolio securities,
cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Closing Date; and (b) all necessary taxes including all
applicable federal and state stock transfer stamps, if any, shall have been
paid, or provision for payment shall have been made, in conjunction with the
delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Blanchard Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
<PAGE>
(a) The Selling Fund is a Maryland Corporation duly organized,
validly existing, and in good standing under the laws of the State of Maryland.
(b) The Selling Fund is a Maryland Corporation that is
registered as an investment company classified as a management company of the
open-end type, and its registration with the Securities and Exchange Commission
(the "Commission") as an investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), is in full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of its Articles of Incorporation or By-Laws or of
any material agreement, indenture, instrument, contract, lease, or other
undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected on the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its
<PAGE>
business or its ability to consummate the transactions herein
contemplated.
(g) The financial statements of the Selling Fund at September
30, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since September 30, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund. All of the issued and outstanding
shares of the Selling Fund will, at the time of the Closing Date, be held by the
persons and in the amounts set forth in the records of the transfer agent as
provided in paragraph 3.4. The Selling Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be
<PAGE>
transferred to the Acquiring Fund pursuant to paragraph 1.2 and full right,
power, and authority to sell, assign, transfer, and deliver such assets
hereunder, and, upon delivery and payment for such assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no restrictions on
the full transfer thereof, including such restrictions as might arise under the
1933 Act, other than as disclosed to the Acquiring Fund and accepted by the
Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2.1 REPRESENTATIONS OF THE ACQUIRING FUND. The
Acquiring Fund represents and warrants to the Selling Fund as
follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type,
<PAGE>
and its registration with the Commission as an investment company under the 1940
Act is in full force and effect.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The financial statements of the Acquiring Fund at February
28, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly reflect the financial condition of the Acquiring
Fund as of such date, and there are no known contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
(g) Since February 28, 1997, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes
<PAGE>
of this subparagraph (g), a decline in the net asset value of the Acquiring Fund
shall not constitute a material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
<PAGE>
(n) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Keystone
Precious Metals Holdings, Inc. (the "Predecessor Fund"), a Delaware corporation,
as of the date hereof. The Acquiring Fund shall deliver to the Selling Fund a
certificate of the Predecessor Fund of even date making the representations set
forth in Section 4.2.1 with respect to the Predecessor Fund to the extent
applicable to the Predecessor Fund as of the date hereof.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. The Selling Fund will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist
the Acquiring Fund in obtaining such information as the Acquiring
<PAGE>
Fund reasonably requests concerning the beneficial ownership of the Selling Fund
shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by KPMG Peat
Marwick LLP and certified by the Selling Fund's President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
5.8 CAPITAL LOSS CARRYFORWARDS. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause KPMG Peat Marwick LLP to issue a letter addressed to
the Acquiring Fund and the Selling Fund, in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
<PAGE>
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund, and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this
<PAGE>
Agreement are duly authorized and upon such delivery will be legally issued and
outstanding and fully paid and non-assessable. No shareholder of the Acquiring
Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which the Acquiring Fund is
a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
<PAGE>
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus and Proxy Statement and related matters
were discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus and Proxy Statement (except to the extent indicated
in paragraph (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the Trust's officers
and other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus and Proxy Statement as
of its date, as of the date of the Selling Fund Shareholders' meeting, and as of
the Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquiring Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquiring Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus and Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of the Selling Fund. Such opinion shall contain such other assumptions
and limitations as shall be in the opinion of Sullivan & Worcester LLP
appropriate to render the opinions expressed therein.
In this paragraph 6.2, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the
<PAGE>
obligations to be performed by it hereunder on or before the Closing Date and,
in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by the Selling
Fund's President or Vice President and the Treasurer or Assistant Treasurer, in
form and substance satisfactory to the Acquiring Fund and dated as of the
Closing Date, to such effect and as to such other matters as the Acquiring Fund
shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of the Selling Fund.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a Maryland corporation duly organized,
validly existing and in good standing under the laws of the State of Maryland
and has the power to own all of its properties and assets and to carry on its
business as presently conducted.
(b) The Selling Fund is a separate investment series of a
Maryland corporation registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
<PAGE>
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or the State of Maryland is required for consummation by the Selling Fund
of the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act, and as may be required under state
securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Selling Fund's Articles of Incorporation or By-laws, or any
provision of any material agreement, indenture, instrument, contract, lease or
other undertaking (in each case known to such counsel) to which the Selling Fund
is a party or by which it or any of its properties may be bound or, to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which the
Selling Fund is a party or by which it is bound.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
Regarding the Interim Advisory Agreement," the Interim Sub- Advisory Agreement
and the Previous Sub-Advisory Agreement, as set forth under the caption
"Information Regarding the Interim Sub-Advisory Agreement" and the description
of voting requirements applicable to approval of the Interim Advisory Agreement
and Interim Sub-Advisory Agreement, as set forth under the caption "Voting
Information Concerning the Meeting," insofar as the latter constitutes a summary
of applicable voting requirements under the Investment Company Act of 1940, as
amended, are, in each case, accurate and fairly present the information required
to be shown by the applicable requirements of Form N-14.
(g) Such counsel does not know of any legal or governmental
proceedings, insofar as they relate to the Selling Fund existing on or before
the date of mailing of the Prospectus and Proxy Statement and the Closing Date,
required to be described in the Prospectus and Proxy Statement or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and
<PAGE>
the Selling Fund is neither a party to nor subject to the provisions of any
order, decree or judgment of any court or governmental body, which materially
and adversely affects its business other than as previously disclosed in the
Prospectus and Proxy Statement.
7.3.2 The Acquiring Fund shall have received on the closing Date an
opinion of C. Grant Anderson, Esq., Assistant Secretary of the Selling Fund, in
form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof has been
paid, and assuming that such shares were issued in accordance with the terms of
the Selling Fund's registration statement, or any amendment thereto, in effect
at the time of such issuance, all issued and outstanding shares of the Selling
Fund are legally issued and fully paid and non-assessable.
Mr. Anderson shall also state that he has reviewed and is familiar with
the contents of the Prospectus and Proxy Statement and, although he is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and Proxy
Statement, on the basis of the foregoing, no facts have come to his attention
that lead him to believe that the Prospectus and Proxy Statement as of its date,
as of the date of the Selling Fund Shareholders' meeting, and as of the Closing
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding the Selling Fund or
necessary, in the light of the circumstances under which they were made, to make
the statements therein regarding the Selling Fund not misleading. Such opinion
may state that he does not express any opinion or belief as to the financial
statements or any financial or statistical data, or as to the information
relating to the Acquiring Fund, contained in the Prospectus and Proxy Statement
or Registration Statement.
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Maryland law, that as Dickstein Shapiro Morin & Oshinsky
LLP and C. Grant Anderson are not admitted to the bar of Maryland, such opinions
are based either upon the review of published statutes, cases and rules and
regulations of the State of Maryland or upon an opinion of Maryland counsel.
<PAGE>
In this paragraph 7.3, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
7.4 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of the Selling Fund's
Articles of Incorporation and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided
<PAGE>
that either party hereto may for itself waive any of such
conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's net investment
company taxable income for all taxable periods ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on or prior to the
Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(C) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
<PAGE>
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of appropriate
officials of the Selling Fund responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that such unaudited
pro forma financial statements do not comply as to form in all material respects
with the applicable accounting requirement of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by
the Acquiring Fund and described in such letter (but not an
<PAGE>
examination in accordance with generally accepted auditing standards), the
Capitalization Table appearing in the Registration Statement and Prospectus and
Proxy Statement has been obtained from and is consistent with the accounting
records of the Selling Fund;
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and Prospectus and
Proxy Statement were prepared based on the valuation of the Selling Fund's
assets in accordance with the Selling Fund's Articles of Incorporation and the
Acquiring Fund's then current prospectus and statement of additional information
pursuant to procedures customarily utilized by the Acquiring Fund in valuing its
own assets;
(e) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing
<PAGE>
standards), the Capitalization Table appearing in the Registration Statement and
Prospectus and Proxy Statement has been obtained from and is consistent with the
accounting records of the Acquiring Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
<PAGE>
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, the respective Trustees, Directors
or officers, to the other party or its Trustees, Directors or officers.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
<PAGE>
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of the State of Maryland,
without giving effect to the conflicts of laws provisions thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 It is expressly agreed that the obligations of the Acquiring Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or employees of the Evergreen International Trust personally,
but shall bind only the trust property of the Acquiring Fund, as provided in the
Declaration of Trust of the Trust. The execution and delivery of this Agreement
have been authorized by the Trust on behalf of the Acquiring Fund and signed by
authorized officers of the Trust, acting as such, and neither such authorization
by such Trustees nor such execution and delivery by such officers shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the trust property of the
Acquiring Fund as provided in the Declaration of Trust of the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN INTERNATIONAL TRUST
ON BEHALF OF KEYSTONE
PRECIOUS METALS HOLDINGS
By:
Name:
Title:
BLANCHARD PRECIOUS METALS
FUND, INC.
By:
Name:
Title:
<PAGE>
EXHIBIT B
BLANCHARD PRECIOUS METALS FUND, INC.
INTERIM MANAGEMENT CONTRACT
This Contract is made this 28th day of November, 1997 between Virtus
Capital Management, Inc., a Maryland corporation having its principal place of
business in Richmond, Virginia (the "Manager"), and Blanchard Precious Metals
Fund, Inc., a Maryland corporation having its principal place of business in
Pittsburgh,
Pennsylvania (the "Corporation").
WHEREAS the Corporation is an open-end management investment company as
that term is defined in the Investment Company Act of 1940, as amended,
and is registered as such with the Securities and Exchange Commission;
and
WHEREAS Manager is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The Corporation hereby appoints Manager as manager for each of the
portfolios ("Funds") of the Corporation which executes an exhibit to this
Contract, and Manager accepts the appointments. Subject to the direction of the
Directors of the Corporation, Manager shall provide or procure on behalf of each
of the Funds all management and administrative services. In carrying out its
obligations under this paragraph, the Manager shall: (i) provide or arrange for
investment research and supervision of the investments of the Funds; (ii) select
and evaluate the performance of each Fund's Portfolio Sub-Adviser; (iii) select
and evaluate the performance of the Administrator; and (iv) conduct or arrange
for a continuous program of appropriate sale or other disposition and
reinvestment of each Fund's assets.
2. Manager, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's investment objective and policies and the
provisions and restrictions contained in the Articles of Incorporation and
By-Laws of the Corporation and as set forth in the Registration Statements and
exhibits as may be on file with the Securities and Exchange Commission.
3. Each Fund shall pay or cause to be paid all of its own expenses and
its allocable share of Corporation expenses, including, without limitation, the
expenses of organizing the
<PAGE>
Corporation and continuing its existence; fees and expenses of Directors and
officers of the Corporation; fees for management services and administrative
personnel and services; expenses incurred in the distribution of its shares
("Shares"), including expenses of administrative support services; fees and
expenses of preparing and printing its Registration Statements under the
Securities Act of 1933 and the Investment Company Act of 1940, as amended, and
any amendments thereto; expenses of registering and qualifying the Corporation,
the Funds, and Shares of the Funds under federal and state laws and regulations;
expenses of preparing, printing, and distributing prospectuses (and any
amendments thereto) to shareholders; interest expense, taxes, fees, and
commissions of every kind; expenses of issue (including cost of Share
certificates), purchase, repurchase, and redemption of Shares, including
expenses attributable to a program of periodic issue; charges and expenses of
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing and mailing costs, auditing, accounting, and
legal expenses; reports to shareholders and governmental officers and
commissions; expenses of meetings of Directors and shareholders and proxy
solicitations therefor; insurance expenses; association membership dues and such
nonrecurring items as may arise, including all losses and liabilities incurred
in administering the Corporation and the Funds. Each Fund will also pay its
allocable share of such extraordinary expenses as may arise including expenses
incurred in connection with litigation, proceedings, and claims and the legal
obligations of the Corporation to indemnify its officers and Directors and
agents with respect thereto.
4. Each of the Funds shall pay to Manager, for all services rendered to
each Fund by Manager hereunder, the fees set forth in the exhibits attached
hereto.
5. If, for any fiscal year, the total of all ordinary business expenses
of the Fund, including all investment advisory fees but excluding distribution
fees, taxes, interest and extraordinary expenses and certain other excludable
expenses, would exceed the most restrictive expense limits imposed by any
statute or regulatory authority of any jurisdiction in which Shares of the Fund
are offered for sale Manager shall reduce its management fee in order to reduce
such excess expenses, but will not be required to reimburse the Fund for any
ordinary business expenses which exceed the amount of its management fee for
such fiscal year. The amount of any such reduction is to be borne by the Manager
and shall be deducted from the monthly management fee otherwise payable to the
Manager during such fiscal year. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the current fiscal year which shall
have elapsed prior to the date hereof and shall include the portion of
<PAGE>
the then current fiscal year which shall have elapsed at the date of termination
of this Agreement.
6. The net asset value of each Fund's Shares as used herein will be
calculated to the nearest 1/10th of one cent.
7. The Manager may from time to time and for such periods as it deems
appropriate reduce its compensation (and, if appropriate, assume expenses of one
or more of the Funds) to the extent that any Fund's expenses exceed such lower
expense limitation as the Manger may, by notice to the Fund, voluntarily declare
to be effective.
8. This Contract shall begin for each Fund as of the date of execution
of the applicable exhibit and shall continue in effect with respect to each Fund
presently set forth on an exhibit (and any subsequent Funds added pursuant to an
exhibit during the initial term of this Contract) until the earlier of the
Closing Date defined in the Agreement and Plan of Reorganization dated as of
November 26, 1997 with respect to each Fund or for two years from the date of
this Contract set forth above and thereafter for successive periods of one year,
subject to the provisions for termination and all of the other terms and
conditions hereof if: (a) such continuation shall be specifically approved at
least annually by the vote of a majority of the Directors of the Corporation,
including a majority of the Directors who are not parties to this Contract or
interested persons of any such party cast in person at a meeting called for that
purpose; and (b) Manager shall not have notified a Fund in writing at least
sixty (60) days prior to the anniversary date of this Contract in any year
thereafter that it does not desire such continuation with respect to that Fund.
If a Fund is added after the first approval by the Directors as described above,
this Contract will be effective as to that Fund upon execution of the applicable
exhibit and will continue in effect until the next annual approval of the
Contract by the Directors and thereafter for successive periods of one year,
subject to approval as described above.
9. Notwithstanding any provision in this Contract, it may be terminated
at any time with respect to any Fund, without the payment of any penalty, by the
Directors of the Corporation or by a vote of the shareholders of that Fund on
sixty (60) days' written notice to Manager.
10. This Contract may not be assigned by Manager and shall
automatically terminate in the event of any assignment. Manager may employ or
contract with such other person, persons, corporation, or corporations at its
own cost and expense as it
<PAGE>
shall determine in order to assist it in carrying out this
Contract.
11. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the obligations or duties under this Contract on the
part of Manager, Manager shall not be liable to the Corporation or to any of the
Funds or to any shareholder for any act or omission in the course of or
connected in any way with rendering services or for any losses that may be
sustained in the purchase, holding, or sale of any security.
12. This Contract may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by the vote of a
majority of the Directors of the Corporation, including a majority of the
Directors who are not parties to this Contract or interested persons of any such
party to this Contract (other than as Directors of the Corporation) cast in
person at a meeting called for that purpose, and where required by Section
15(a)(2) of the Act, on behalf of a Fund by a majority of the outstanding voting
securities of such Fund as defined in Section 2(a)(42) of the Act.
13. The Manager acknowledges that all sales literature for investment
companies (such as the Corporation) are subject to strict regulatory oversight.
The Manager agrees to submit any proposed sales literature for the Corporation
(or any Fund) or for itself or its affiliates which mentions the Corporation (or
any Fund) to the Corporation's distributor for review and filing with the
appropriate regulatory authorities prior to the public release of any such sales
literature, provided, however, that nothing herein shall be construed so as to
create any obligation or duty on the part of the Manager to produce sales
literature for the Corporation (or any Fund). The Corporation agrees to cause
its distributor to promptly review all such sales literature to ensure
compliance with relevant requirements, to promptly advise Manager of any
deficiencies contained in such sales literature, to promptly file complying
sales literature with the relevant authorities, and to cause such sales
literature to be distributed to prospective investors in the Corporation.
14. Notice is hereby given that this instrument is executed on behalf
of the Directors of the Corporation as Directors and not individually and that
the obligations of this instrument are not binding upon any of the Directors, or
any of the officers, employees, agents or shareholders of the Corporation
individually but are binding only upon the assets and property of the
Corporation. Notice is also hereby given that the obligations pursuant to this
instrument of a particular Fund and of the Corporation with respect to that
particular Fund shall be limited solely to the assets of that particular Fund.
<PAGE>
15. This Contract shall be construed in accordance with and governed by
the laws of the Commonwealth of Pennsylvania.
16. This Contract will become binding on the parties hereto upon their
execution of the attached exhibits to this Contract.
<PAGE>
EXHIBIT A
to the
Management Contract
BLANCHARD PRECIOUS METALS FUND, INC.
For all services rendered by Manager hereunder, the above-named Funds
of the Corporation shall pay to Manager and Manager agrees to accept as full
compensation for all services rendered hereunder, an annual management fee equal
to the following percentage ("the applicable percentage") of the average daily
net assets of each Fund
Name of Fund Percentage of Net Assets
Blanchard Precious 1% of the first $150 million
Metals Fund, Inc. of average daily net assets,
.875% of the Fund's
average daily net
assets in excess of
$150 million but not
exceeding $300
million and .75% of
the Fund's average
daily net assets in
excess of $300
million.
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.
The management fee so accrued shall be paid to Manager daily.
<PAGE>
Witness the due execution hereof this 28th day of November, 1997.
Attest: Virtus Capital Management, Inc.
________________________ By: ___________________________
Assistant Secretary Senior Vice President
Attest: Blanchard Precious Metals Fund, Inc.
________________________ By: ____________________________
Assistant Secretary Vice President
<PAGE>
EXHIBIT C
INTERIM SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this 28th day of November, 1997 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the "Manager"), and
CAVELTI CAPITAL MANAGEMENT, LTD., a Canadian money management firm (the
"Portfolio Manager" or "Cavelti") with respect to the following recital of fact:
R E C I T A L
WHEREAS, Blanchard Precious Metals Fund, Inc. (the "Corporation") is
registered as an open-end non-diversified management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules
and regulations promulgated thereunder; and
WHEREAS, the Portfolio Manager is registered as an investment advisor
under the Investment Advisers Act of 1940, as amended, and engages in the
business of acting as an investment advisor; and
WHEREAS, the Corporation is authorized to issue shares of Common Stock
in separate series, with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Corporation intends to initially offer shares in one
series called the BLANCHARD PRECIOUS METALS FUND, INC. (such series, being
referred to as the "Fund"); and
WHEREAS, the Corporation and the Manager have entered into an agreement
to provide for management services for the Fund on the terms and conditions set
forth therein (the "Interim Management Agreement"); and
WHEREAS, the Portfolio Manager proposes to render investment advisory
services to the Manager in connection with the Manager's responsibilities to the
Fund's portfolio on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Investment Management. Cavelti shall act as the
Portfolio Manager for the Fund and shall, in such capacity,
supervise the investment and reinvestment of the cash, securities
<PAGE>
or other properties comprising the Fund's portfolio, subject at all times to the
direction of the Manager and the policies and control of the Corporation's Board
of Directors. Cavelti shall give the Fund the benefit of its best judgment,
efforts and facilities in rendering its services as Portfolio Manager.
2. Investment Analysis and Implementation. In carrying
out its obligation under paragraph 1 hereof, the Portfolio
Manager shall:
(a) use the same skill and care in providing such service as
it uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) obtain and evaluate pertinent information about
significant developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally
or the Fund's portfolio and whether concerning the individual issuers
whose securities are included in the Fund's portfolio or the activities
in which the issuers engage, or with respect to securities which the
Portfolio Manager considers desirable for inclusion in the Fund's
portfolio;
(c) determine which issuers and securities shall be
represented in the Fund's portfolio and regularly report
thereon to the Manager;
(d) formulate and implement continuing programs for the
purchases and sales of the securities of such issuers and regularly
report thereon to the Manager; and
(e) take, on behalf of the Fund, all actions which appear to
the Fund and the Manager necessary to carry into effect such purchase
and sale programs and supervisory functions as aforesaid, including the
placing of orders for the purchase and sale of securities for the Fund
and the prompt reporting to the Manager of such purchases and sales.
3. Broker-Dealer Relationships. The Portfolio Manager is responsible
for decisions to buy and sell securities for the Fund's portfolio, broker-dealer
selection, and negotiation of brokerage commission rates. The Portfolio
Manager's primary consideration in effecting a security transaction will be
execution at the most favorable price. In selecting a broker-dealer to execute
each particular transaction, the Portfolio Manager will take the following into
consideration: the best net price available, the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution
<PAGE>
of the broker-dealer to the investment performance of the Fund on a continuing
basis. Accordingly, the price to the Fund in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies as the Board of Directors may determine, the
Portfolio Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of its
having caused the Fund to pay a broker or dealer for effecting a portfolio
investment transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Portfolio
Manager determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Portfolio Manager's overall responsibilities with respect to the Fund and to its
other clients as to which it exercises investment discretion. The Portfolio
Manager is further authorized to allocate the orders placed by it on behalf of
the Fund to its affiliated broker-dealer or to such brokers and dealers who also
provide research or statistical material, or other services to the Fund or the
Portfolio Manager. Such allocation shall be in such amounts and proportions as
the Portfolio Manager shall determine and the Portfolio Manager will report on
said allocations regularly to Manager indicating the brokers to whom such
allocations have been made and the basis therefor.
4. Control by Board of Directors. Any investment program undertaken by
the Portfolio Manager pursuant to this Agreement, as well as any other
activities undertaken by the Portfolio Manager on behalf of the Fund pursuant
thereto, shall at all times be subject to any directives of the Board of
Directors of the Corporation. The Manager shall provide the Portfolio Manager
with written notice of all such directives, so long as this Agreement remains in
effect.
5. Compliance with Applicable Requirements. In carrying
out its obligations under this Agreement, the Portfolio Manager
shall at all times conform to:
(a) all applicable provisions of the 1940 Act;
(b) the provisions of the Registration Statement of
the Corporation under the Securities Act of 1933 and the
1940 Act; and
(c) any other applicable provisions of state and
federal law.
<PAGE>
6. Expenses. The expenses connected with the Fund shall be borne by the
Portfolio Manager as follows:
The Portfolio Manager shall maintain, at its expense and
without cost to the Manager or the Fund, a trading function in order to carry
out its obligations under subparagraph (e) of paragraph 2 hereof to place orders
for the purchase and sale of portfolio securities for the Fund.
7. Delegation of Responsibilities. Upon request of the Manager and with
the approval of the Corporation's Board of Directors, the Portfolio Manager may
perform services on behalf of the Fund which are not required by this Agreement.
Such services will be performed on behalf of the Fund and the Portfolio
Manager's cost in rendering such services may be billed monthly to the Manager,
subject to examination by the Manager's independent accountants. Payment or
assumption by the Portfolio Manager of any Fund expense that the Portfolio
Manager is not required to pay or assume under this Agreement shall not relieve
the Manager or the Portfolio Manager of any of their obligations to the Fund or
obligate the Portfolio Manager to pay or assume any similar Fund expense on any
subsequent occasions.
8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Portfolio Manager monthly
compensation of the sum of the amounts determined by applying the following
annual rates to the Fund's aggregate daily net assets: .30% of the Fund's net
assets up to the first $150 million; .2625% of the Fund's net assets in excess
of $150 million but less than $300 million; plus .255% of the Fund's net assets
in excess of $300 million. Compensation under this Agreement shall be calculated
and accrued daily and the amounts of the daily accruals shall be paid monthly.
If this Agreement becomes effective subsequent to the first day of a month or
shall terminate before the last day of a month, compensation for that part of
the month this Agreement is in effect shall be prorated in a manner consistent
with the calculation of the fees as set forth above. Payment of the Portfolio
Manager's compensation for the preceding month shall be made as promptly as
possible after the end of each month.
9. Expense Limitation. If, for any fiscal year, the total of all
ordinary business expenses of the Fund, including all investment advisory fees
but excluding brokerage commissions and fees, payments pursuant to the Rule
12b-1 Plan then in effect, taxes, interest and extraordinary expenses such as
litigation, would exceed the most restrictive expense limits imposed by a
statute or regulatory authority of any jurisdiction in which shares of the Fund
are offered for sale, the investment advisory fee, which the Manager would
otherwise receive from the Fund,
<PAGE>
shall be reduced by the amount of such excess. The fee which the Portfolio
Manager would otherwise receive from the Manager pursuant to Paragraph 8 of this
Agreement shall also be reduced proportionately. For example, if the Manager's
fee is reduced by 1/4, the Portfolio Manager's fee from the Manager will also be
reduced by 1/4. Such reduction shall be deducted from the monthly fee otherwise
payable to the Portfolio Manager by the Manager and, if such amount should
exceed such monthly fee, the Portfolio Manager agrees to repay the Manager such
amount of its fee previously received with respect to make up the deficiency no
later than the last day of the first month of the next succeeding fiscal year.
For the purposes of this paragraph, the term "fiscal year" shall exclude the
portion of the current fiscal year which shall have elapsed prior to the date
hereof and shall include the portion of the then current fiscal year which shall
have elapsed at the date of termination of this Agreement.
10. Term. This Agreement shall become effective at the close of
business on the date hereof and shall remain in force and effect until the
earlier of the Closing Date defined in the Agreement and Plan of Reorganization
dated November 26, 1997 with respect to the Fund or for two years after its
effective date, and shall remain in effect thereafter if approved in the manner
set forth in Section 11 hereof.
11. Renewal. Following the expiration of its initial term, the
Agreement shall continue in force and effect from year to year, provided that
such continuance is specifically approved at least annually:
(a) by the Corporation's Board of Directors or by the vote of
a majority of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), and
(b) by the affirmative vote of a majority of the Directors who
are not parties to this agreement or interested persons of a party to
this Agreement (other than as a Director of the Corporation), by votes
cast in person at a meeting specifically called for such purpose.
12. Termination. This Agreement may be terminated at any time, without
the payment of any penalty, by vote of the Corporation's Board of Directors or
by vote of a majority of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), or by the Manager or the Portfolio Manager,
on sixty (60) days' written notice to the other party. This Agreement shall
automatically terminate: (a) in the event of its assignment, the term
"assignment" having the meaning defined in Section 2(a)(4) of the 1940 Act, or
(b) in the event that the
<PAGE>
Interim Management Agreement between the Fund and the Manager shall terminate.
13. Liability of the Portfolio Manager. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the Portfolio Manager
or its officers, directors or employees, or reckless disregard by the Portfolio
Manager of its duties under this Agreement, the Portfolio Manager shall not be
liable to the Manager, the Corporation or to any shareholder of the Corporation
for any act or omission in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding or
sale of any security.
14. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the Manager
for this purpose shall be 707 East Main Street, Suite 1300, Richmond, Virginia
23219, that of the Corporation for this purpose shall be Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779, and the address of the Portfolio
Manager for this purpose shall be 4100 Yonge Street, Willowdale, Ontario M2P 2B6
Canada.
15. Questions of Interpretation. Any questions of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretations thereof, if any, by the
United States Courts or in the absence of any controlling decision of any such
court, by rules, regulations or orders of the Securities and Exchange Commission
issued pursuant to said Act. In addition, where the effect of a requirement of
the 1940 Act reflected in the provision of this Agreement is revised by rule,
regulation or order of the Securities and Exchange Commission, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
By
Title: Senior Vice President Title: Vice President
<PAGE>
Attest: CAVELTI CAPITAL MANAGEMENT, LTD.
By
Title: Title:
<PAGE>
EXHIBIT D
PAGE 3
A Discussion With
Your Fund Manager
[Photo of
John C. Madden, Jr.
Goes Here]
JOHN C. MADDEN, JR. IS A VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER OF
KEYSTONE PRECIOUS METALS HOLDINGS, INC. AND KEYSTONE GLOBAL RESOURCES AND
DEVELOPMENT FUND. A CHARTERED FINANCIAL ANALYST, MR. MADDEN HAS MORE THAN
30 YEARS OF EXPERIENCE IN INVESTMENT RESEARCH AND MANAGEMENT, SPECIALIZING
IN PRECIOUS METALS, NATURAL RESOURCES AND ENERGY. HE HOLDS A BA FROM YALE
UNIVERSITY.
(Q) GIVEN THE RECENT WEAKNESS IN THE GOLD MARKET, WHAT ARE THE REASONS TO OWN A
FUND THAT INVESTS PRIMARILY IN GOLD-RELATED SECURITIES?
(A) Despite recent negative returns, we believe a long-term investment in
gold-related securities adds valuable diversification to any portfolio. Holding
gold-related stocks can help offset market fluctuations, because their
performance generally differs from that of broader stock and bond market
indexes. We've seen ample evidence of this contrarian performance during the
current strong economic cycle. Gold mining stocks can also provide a hedge
against inflation and currency uncertainties. We continue to believe that the
best way to take advantage of the unpredictable nature of these markets is to
maintain exposure to high quality gold stocks.
(Q) WHAT FACTORS CONTRIBUTED TO THE LOW PRICE OF GOLD DURING THE PERIOD?
(A) Real and rumored central bank sales have had a negative effect on bullion
prices since early 1996, related largely to moves by European countries toward
monetary union. But the specific catalyst for the July downturn-- the
announcement by the Australian central bank that they had sold 160 tonnes of
gold, accounting for two-thirds of their holdings-- had an inordinate impact
because it was so unexpected. Australia is not directly associated with the EMU,
and it is also a large gold producer. Bearish gold speculators responded
accordingly. It's also important to remember that market conditions for most
other investments have remained unusually strong this year, diminishing gold's
attraction as a valuable investment.
[Performance Graph Goes Here]
Comparative performance of Keystone Precious Metals Holdings, Inc. and key
market indexes, February 28 - August 31, 1997.
Percentage
Spot Gold KPMH* Lipper Gold Fund Index
- -10.8% -23.2% -26.9%
Financial Times Index:
North America Australia Africa
- -20.7% -27.9% -38.1%
North American gold stocks had the best relative performance.
*Includes reinvested dividends.
<PAGE>
PAGE 4
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
<TABLE>
<CAPTION>
ASSET ALLOCATION
(AS A PERCENTAGE OF
PORTFOLIO ASSETS)
<S> <C> <C>
AUGUST 31, 1997 FEBRUARY 28, 1997
North America 65% 59%
South Africa 23% 27%
Australia 12% 14%
</TABLE>
(Q) DID GEOGRAPHIC DIVERSIFICATION HELP THE FUND'S PERFORMANCE?
(A) Yes, the Fund's overweighting in North American gold stocks helped
performance. All gold-related stocks fared considerably worse than the metal,
but performance varied widely by region. As you can see from the chart, South
African gold stocks declined almost twice as much as stocks of North American
companies, which in turn declined more than the price of gold. North American
companies accounted for 65% of the Fund's holdings as of August 31, 1997.
(Q) WHAT CHANGES DID YOU MAKE IN THE FUND'S PORTFOLIO?
(A) We increased the percentage of North American stocks and pared back holdings
in Australia and South Africa. Some of the shift is due to the differential
performance of these regions, but we did actively increase our exposure to the
stronger North American market during the period. We also expanded the non-gold
holdings of the Fund, specifically in platinum and diamond producers.
(Q) PLEASE DESCRIBE ONE OF THE NON-GOLD HOLDINGS.
(A) Stillwater Mining is a North American miner of palladium and platinum,
metals used in jewelry, electronics and automobile catalytic converters. With
substantial reserves, Stillwater is the largest primary source of platinum and
palladium outside of South Africa. Production is from the Stillwater Complex, a
unique deposit in southern Montana. The stock has underperformed recently, due
to management changes and operating difficulties, but a recently completed
expansion will double ore throughput to 2,000 tons per day next year and reduce
costs, which we believe should help stock performance. A second mine on the same
ore body is also under development, which has the potential of doubling output
again by early in the next decade.
(Q) WHAT ABOUT GOLD STOCKS?
(A) In the gold area, we have added to our holdings of a relatively small U.S.
producer, Canyon Resources. This past spring, Canyon successfully brought on
stream the Briggs mine in southern California, with planned production of 75,000
ounces per year at a cash cost of $240 per ounce. While other prospects for
development exist in the vicinity of Briggs, our main interest in Canyon
involves its joint venture with Phelps Dodge: the MacDonald project in Montana.
The location of this project, along the scenic Blackfoot River, has made the
permitting process quite arduous. However, if the mine goes forward, Canyon will
be a 28% owner of a 300,000 ounce operation to which the stock market is
currently assigning little value.
(Q) WHAT IS YOUR STRATEGY FOR MANAGING THE FUND?
(A) The Fund's objective is to seek long-term capital appreciation and
protection of purchasing power by investing in common stocks of gold-oriented or
other precious metal and minerals companies. As a sector fund, it is likely to
experience greater price fluctuation than more diversified investments, but we
rely on a conservative strategy to reduce the level of volatility. We focus on
companies with growing reserves and expanding production that may have a greater
ability to maintain their value during periods of lower gold prices. We believe
this approach offers Fund investors the advantages of ongoing exposure to the
potential of gold stocks, but with reduced downside risk.
<PAGE>
PAGE 5
TOP 10 HOLDINGS
AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
STOCK (COUNTRY) NET ASSETS
<S> <C>
Newmont Mining Corp. (United States) 11.3
Euro Nevada Mining (Canada) 8.8
Franco Nevada Mining (Canada) 8.5
Pioneer Group (United States) 5.5
Homestake Mining (United States) 4.8
Getchell Gold (Canada) 4.7
Newmont Gold (United States) 4.5
Stillwater Mining (United States) 3.6
Prime Resources Group (Canada) 3.2
Normandy Mining (Australia) 3.1
</TABLE>
Growth of an Investment
[Performance Growth Graph Goes Here]
Growth of an investment in Keystone Precious Metals Holdings, Inc.
In Thousands
A $10,000 investment in Keystone Precious Metals Holdings, Inc. made on August
31, 1987 with all distributions reinvested was worth $8,350 on August 31, 1997.
Past performance is no guarantee of future results.
(Q) WHAT IS YOUR OUTLOOK FOR THE GOLD MARKET?
(A) Over the past few years, gold investments have had a difficult time
competing against a strong U.S. economy, a long bull market for stocks, a strong
dollar and minimal inflation. Under these circumstances, investors haven't
needed what gold has to offer, and without investment appeal, the price has
languished. While demand, particularly in emerging countries, is still positive,
gold as an investment will only move up substantially when its perceived value
relative to other financial assets improves. Looking ahead, we do not expect the
lows we saw this past summer to continue, and believe the price will recover
modestly by the end of the year. Longer term, any number of economic or
investment scenarios could improve the environment for gold. In particular,
forthcoming decisions regarding the European Monetary Union will be critical.
We believe the companies in your Fund's portfolio are in a good position to
benefit from even modest increases in the price of the metal.
*
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400
CHARLOTTE, N.C. 28288-1195
<PAGE>
PAGE 6
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 99.0%
<C> <C> <S> <C>
AUSTRALIA-- 12.3%
2,899,200 * Acacia Resources Ltd............ $ 3,190,932
800,000 Delta Gold NL................... 986,160
3,381,582 Normandy Mining Ltd............. 4,094,039
3,500,000 * Perilya Mines NL................ 1,515,194
1,052,000 Plutonic Resources NL........... 2,994,992
1,376,304 Ross Mining NL.................. 787,693
799,600 Sons of Gwalia Ltd.............. 2,522,838
16,091,848
CANADA-- 33.7%
100,100 * Aber Resources Ltd.............. 1,312,314
26,000 Agnico Eagle Mines Ltd.......... 227,553
104,700 Barrick Gold Corp............... 2,368,147
400,000 * Bema Gold Corp.................. 2,103,368
750,000 Euro Nevada Mining Ltd.......... 11,480,281
470,000 Franco Nevada Mining Ltd........ 11,155,411
179,700 * Getchell Gold Corp.............. 6,109,800
50,000 * International Precious Metals
Corp.......................... 353,125
150,000 * Kinross Gold Corp............... 646,875
337,100 * Orvana Minerals Corp............ 1,214,118
524,800 * Prime Resources Group Inc....... 4,233,935
300,000 * Repadre Capital Corp............ 1,620,745
185,300 * TVX Gold Inc.................... 961,244
429,000 * Vengold Inc..................... 154,511
43,941,427
SOUTH AFRICA-- 22.6%
289,520 * Ashanti Goldfields Ltd. GDR**... 3,003,770
2,932,916 * Avgold Ltd. ADR................. 2,675,665
150,000 Avmin Ltd. ADR.................. 1,837,500
110,000 De Beers Centenary.............. 3,505,275
45,200 De Beers Consolidated Mines Ltd.
ADR........................... 1,446,400
300,000 Elandsrand Gold Mining Ltd.
ADR........................... 1,023,120
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
SOUTH AFRICA-- CONTINUED
283,000 Free St Consolidated Gold Mines
Ltd. ADR...................... $ 1,432,687
75,000 Free State Consolidated Gold
Mines Ltd..................... 379,676
267,000 * Harmony Gold Mining Ltd ADR..... 1,294,710
150,000 * Harmony Gold Mining Ltd......... 727,379
300,000 * Randgold & Exploration Co.
Ltd........................... 1,055,100
70,000 Randgold Resources Inc.**....... 962,500
72,800 Rustenberg Platinum Holdings.... 1,237,515
18,500 Vaal Reefs Exploration & Mining
Ltd........................... 922,733
638,000 Vaal Reefs Exploration & Mining
Ltd. ADR...................... 3,209,937
288,585 * Western Areas Gold Mining Ltd.
ADR........................... 2,414,331
20,900 Western Deep Levels Ltd......... 501,172
75,000 Western Deep Levels Ltd. ADR.... 1,809,375
29,438,845
UNITED STATES-- 30.4%
499,000 * Canyon Resource Corp............ 1,122,750
448,000 Homestake Mining Co............. 6,272,000
135,000 Newmont Gold Co................. 5,838,750
347,650 Newmont Mining Corp............. 14,709,941
220,000 Pioneer Group Inc............... 7,136,250
220,900 * Stillwater Mining Company....... 4,638,900
39,718,591
TOTAL COMMON STOCKS
(COST $136,134,202)............. 129,190,711
TOTAL LONG-TERM INVESTMENTS
(COST $136,134,202)............................ 129,190,711
</TABLE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
BLANCHARD PRECIOUS METALS FUND, INC.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
KEYSTONE PRECIOUS METALS HOLDINGS
a Series of
EVERGREEN INTERNATIONAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Blanchard Precious Metals
Fund, Inc. ("Precious Metals"), to Keystone Precious Metals Holdings ("Keystone
Precious Metals"), a series of Evergreen International Trust, in exchange for
Class A shares of beneficial interest, $.001 par value per share, of Keystone
Precious Metals, consists of this cover page and the following described
documents, each of which is attached hereto and incorporated by reference
herein:
(1) The Statement of Additional Information of Keystone Precious
Metals dated April 30, 1997 , as amended;
(2) The Statement of Additional Information of Precious Metals
dated November 30, 1997;
(3) Annual Report of Precious Metals for the year ended September
30, 1997;
(4) Annual Report of Keystone Precious Metals for the year ended
October 31, 1997; and
(5) Pro Forma Combining Financial Statements (unaudited) dated
October 31, 1997.
<PAGE>
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Keystone Precious Metals and Precious Metals dated January 6, 1998.
A copy of the Prospectus/Proxy Statement may be obtained without charge by
calling or writing to Keystone Precious Metals or Precious Metals at the
telephone numbers or addresses set forth above.
The date of this Statement of Additional Information is January 6,
1998.
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
APRIL 30, 1997
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Precious Metals Holdings, Inc. (the "Fund") dated April 30, 1997, as
supplemented from time to time. You may obtain a copy of the prospectus from the
Fund's principal underwriter, Evergreen Keystone Distributor, Inc., or your
broker-dealer.
TABLE OF CONTENTS
Page
The Fund............................................................2
Service Providers...................................................2
Investment Restrictions.............................................3
Distributions and Taxes.............................................6
Valuation of Securities.............................................7
Brokerage...........................................................8
Sales Charge........................................................9
Distribution Plan..................................................11
Directors and Officers.............................................12
Investment Adviser.................................................16
Consultant.........................................................17
Principal Underwriter..............................................18
Sub-administrator..................................................19
Expenses...........................................................19
Standardized Total Return and
Yield Quotations.................................................20
Financial Statements...............................................21
Additional Information.............................................21
Appendix..........................................................A-1
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
The Fund's primary investment objective is to provide shareholders with
long-term capital appreciation and with protection of the purchasing power of
their capital. Obtaining current income is a secondary objective. Keystone
Investment Management Company ("Keystone") serves as the Fund's investment
adviser.
Certain information about the Fund is contained in its prospectus. This
statement of additional information ("SAI") provides additional information
about the Fund that may be of interest to some investors.
- --------------------------------------------------------------------------------
SERVICE PROVIDERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERVICE PROVIDER
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Investment adviser (referred to Keystone Investment Management Company, 200
Berkeley in this SAI as "Keystone") Street, Boston, Massachusetts 02116 (Keystone is a wholly-owned
subsidiary of First Union Keystone, Inc. ("First
Union Keystone"), also located at 200 Berkeley Street,
Boston, Massachusetts 02116)
Principal underwriter (referred Evergreen Keystone Distributor, Inc. (formerly Evergreen
to in this SAI as "EKD") Funds Distributor, Inc.), 125 W. 55th Street, New York,
New York 10019
Marketing services agent and Evergreen Keystone Investment Services, Inc. (formerly
predecessor to EKD (referred to Keystone Investment Distributors Company), 200 Berkeley
in this SAI as "EKIS") Street, Boston, Massachusetts 02116
Sub-administrator (referred to in The BISYS Group, Inc., or an affiliate, 3435 Stelzer Road,
this SAI as "BISYS") Columbus, Ohio 43219
Transfer and dividend disbursing Evergreen Keystone Service Company (formerly Keystone
agent (referred to in this SAI as Investor Resource Center, Inc.), 200 Berkeley Street,
"EKSC") Boston, Massachusetts 02116 (EKSC is a wholly-owned
subsidiary of Keystone)
Independent auditors KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, Certified Public Accountants
Custodian State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental and may not
be changed without the vote of a majority of the Fund's outstanding voting
shares (as defined in the Investment Company Act of 1940, as amended (the "1940
Act")). Unless otherwise stated, all references to the Fund's assets are in
terms of current market value.
The Fund may not do the following:
(1) issue any senior securities;
(2) sell securities short, unless at the time it owns an equal amount
of such securities or, by virtue of ownership of convertible or exchangeable
securities, it has the right to obtain through conversion or exchange of such
other securities an amount equal to the securities sold short, in which case the
Fund will retain such securities as long as it is in a short position;
(3) purchase or sell securities on margin, but it may obtain such
short-term credits as may be necessary for the clearance of purchased and sold
securities;
(4) invest in oil and gas interests, puts, calls, straddles, spreads
and options, except that the Fund may write covered call options traded on the
London Stock Exchange, a national securities exchange or the over-the-counter
market and purchase call options to close out previously written call options;
this restriction shall not apply to the extent the investments of one or more
domestic or foreign wholly-owned subsidiaries in metals or minerals contracts
might be considered options;
(5) borrow money, except that the Fund may (a) borrow money from banks
for emergency or extraordinary purposes in aggregate amounts up to 5% of its net
assets and (b) enter into reverse repurchase agreements;
(6) underwrite the securities of other issuers, except to the extent
that, in connection with the disposition of securities of the type referred to
in subparagraph (12) below, the Fund may be deemed to be an underwriter under
certain U.S. securities laws;
(7) invest more than 5% of its total assets taken at market value in
the securities of any one issuer, not including securities of the U.S.
government and its instrumentalities and the securities of one or more domestic
or foreign wholly-owned subsidiaries;
(8) purchase or sell real estate or interests therein or real estate
mortgages, provided that the foregoing shall not prevent the Fund from
purchasing or selling (a) readily marketable securities which are secured by
interests in real estate and (b) readily marketable securities of companies
which deal in real estate, including real estate investment trusts;
(9) purchase or sell commodities or commodity contracts, except that
the Fund may invest in the securities of one or more domestic or foreign
wholly-owned subsidiaries which deal in precious metals and minerals and
contracts relating thereto subject to the limitation that no such investment may
be made if at the time thereof the fair value of all such investments exceeds,
or by virtue of such investment would exceed, an amount equal to 25% of the then
market value of the Fund's total assets, and except also that the Fund may
engage in currency or other financial futures and related options transactions;
(10) make loans to other persons, except through the investment of up
to 25% of the total assets of the Fund in one or more domestic or foreign
wholly-owned subsidiaries; for the purposes of this restriction, the purchase of
a portion of an issue of bonds, notes, debentures or other obligations
distributed publicly, whether or not the purchase is made upon the original
issuance of such securities, will not be deemed to be the making of a loan;
(11) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis, or collateral
arrangement with respect to the writing of options on securities, are not deemed
to be a pledge of assets;
(12) invest more than 15% of its net assets in securities for which
market quotations are not readily available, or in repurchase agreements
maturing in more than seven days; except that this restriction shall not apply
to the Fund's investments in one or more domestic or foreign wholly-owned
subsidiaries, and except also that the Fund may write covered call options
traded on the over-the-counter market and purchase call options to close out
existing positions;
(13) invest more than 5% of the value of the Fund's total assets in the
securities of any issuers which have a record of less than three years
continuous operation, including the similar operations of predecessors or
parents, or equity securities of issuers which are not readily marketable,
except that this restriction shall not apply to the Fund's investments in one or
more domestic or foreign wholly-owned subsidiaries;
(14) purchase the securities of any other investment company, except
that it may make such a purchase (a) in the open market involving no commission
or profit to a sponsor or dealer, other than the customary broker's commission,
and (b) as part of a merger, consolidation or acquisition of assets; provided
that immediately after any such purchase (a) not more than 10% of the Fund's
total assets would be invested in such securities and (b) not more than 3% of
the voting stock of such company would be owned by the Fund;
(15) purchase or retain the securities of any issuer if the Treasurer
of the Fund has knowledge that those officers and/or Directors of the Fund or
its investment adviser who own individually more than 1/2 of 1% of the
securities of such issuer together own more than 5% of the securities of such
issuer;
(16) invest in companies for the purpose of exercising control or
management, except for one or more domestic or foreign wholly-owned
subsidiaries; or
(17) acquire, directly or indirectly, more than 10% of the voting
securities of any issuer other than one or more domestic or foreign wholly-owned
subsidiaries.
For purposes of Investment Restriction (1) the definition of senior
securities is deemed not to include the borrowings described in Investment
Restriction (5) and reverse repurchase agreements.
The Fund's purchase of securities of other investment companies, as
described in Investment Restriction (14), results in the layering of expenses,
such that shareholders indirectly bear a proportionate share of the expenses of
those investment companies, including operating costs, investment advisory and
administrative fees.
As a matter of practice, the Fund treats reverse repurchase agreements
as borrowings subject to the limitations of the 1940 Act. For further
information about reverse repurchase agreements, see the section on "Additional
Investment Information" in the Fund's prospectus. Also, as a matter of practice,
the Fund does not pledge its assets except in the course of portfolio trading.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
Additional restrictions adopted by the Fund, which may be changed by
the Fund's Board of Directors and which are more restrictive than the
fundamental restrictions adopted by the Fund's shareholders, provide that (1)
the Fund shall not purchase the securities of any other investment company,
including unit investment trusts; (2) assets of the Fund may not be pledged or
otherwise encumbered nor transferred or assigned for the purpose of securing a
debt, except in the course of portfolio trading; and (3) the Fund may not borrow
money, except that it may borrow from banks on a temporary basis to facilitate
the redemption of shares or for extraordinary purposes and with the consent of
the Fund's custodian bank with respect to the conditions of the loan.
If a percentage limit is satisfied at the time of investment,
a later increase or decrease resulting from a change in value of a
security or a decrease in Fund assets is not a violation of the limit.
The Fund pursues its objectives by investing, under normal
circumstances, at least 80% of its assets in common stocks of companies that are
engaged in, or receive at least 50% of their revenue from other companies
engaged in, exploration, mining, processing or dealing in gold, gold bullion or
other precious metals and minerals such as silver, platinum, palladium and
diamonds. (A company will be considered to be engaged in a business or activity
if at least 50% of its assets, reserves or profits are from that business or
activity.)
The Fund invests in securities of South African mining companies only
after considering such factors as profitability of operations, adequacy of ore
reserves and the prices at which the metals and minerals mined by these
companies are selling in the free market.
When investing in securities of South African companies or other
foreign issuers, the Fund may purchase American Depositary Receipts ("ADRs").
ADRs are negotiable certificates issued by a United States ("U.S.") bank
representing the right to receive securities of a foreign issuer deposited in
that bank or a correspondent bank. While there are variations as to
marketability, ADRs representing shares of most of the better known South
African gold mining and mining finance companies are characterized by relatively
active trading markets. The Fund may purchase the foreign securities directly
when it is in its best interests to do so. The Fund will purchase only foreign
securities that are listed on recognized domestic or foreign securities
exchanges.
The Fund's normal expectation in purchasing a security is that its
anticipated performance level will be reached over the longer rather than
shorter term, although the rate of portfolio turnover will not be a limiting
factor when portfolio changes are deemed appropriate. It is anticipated,
however, that the Fund's annual portfolio turnover rate, exclusive of
investments made in or by any subsidiary, will not exceed 100%. A 100% portfolio
turnover rate would occur, for example, if the value of the lesser of cost of
purchases or proceeds from sales of portfolio securities for a particular year
equaled the average monthly value of portfolio securities owned during such
year, excluding in each case short-term securities. The turnover rate may also
be affected by cash requirements for redemptions of the Fund's shares. A high
turnover rate would result in increased costs to the Fund for brokerage
commissions or their equivalent.
The Fund will not invest directly in precious metals and minerals or
contracts relating thereto. Any wholly-owned subsidiary of the Fund, however,
may invest in precious metals and minerals, subject to the limitation that no
investment in precious metals and minerals may be made by any wholly-owned
subsidiary or subsidiaries of the Fund if at the time thereof the market value
of all such investments by subsidiaries exceeds, or by virtue of such investment
would exceed, an amount equal to 25% of the then market value of the Fund's
total assets. In the event that, because of fluctuations in the market value of
a subsidiary's investments or in the market value of the Fund's total assets, or
other reasons, the Fund's investments in a subsidiary or subsidiaries represent
more than 25% of the market value of the Fund's total assets, the Fund will not
be required to take any action to reduce such investments, although it will do
so when it is in its best interests.
In making purchases of precious metals and minerals, a wholly-owned
subsidiary may utilize contracts that contemplate delivery of the metal or
mineral at a future date, provided in each case that it instructs the custodian
of its assets to segregate and maintain in a separate account cash or short-term
U.S. government securities at least equal to the aggregate contract price less
the aggregate margin deposit. A wholly-owned subsidiary may, from time
to time, engage in short-term trading in metals and minerals, that is, selling
metals and minerals held for a relatively brief period of time, usually less
than three months. Short-term trading will be used primarily to preserve capital
when a subsidiary anticipates there will be a market decline, or to realize gain
after a market increase when a subsidiary anticipates that continued increases
are unlikely. A wholly-owned subsidiary will engage in short-term trading only
if it believes that the transaction, net of costs, including any commissions,
will be in the best interest of the Fund. Whether short-term trading will be
advantageous to a subsidiary will depend on its anticipation and evaluation of
relevant market factors. A wholly-owned subsidiary will not engage in any
activity other than investing in precious metals and minerals, or contracts
relating thereto.
A wholly-owned subsidiary will not incur any obligations for which the
Fund may be directly or indirectly liable. The assets of a wholly-owned
subsidiary will be held either by the Fund's custodian or by a foreign branch of
a major U.S. banking institution.
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund will make distributions to its shareholders of dividends from
net investment income and net realized capital gains, if any, annually in shares
or, at the option of the shareholder, in cash. (Distributions or ordinary income
may be eligible in whole or in part for the corporate 70% dividends received
deduction.) Shareholders who have not opted, prior to the record date for any
distribution, to receive cash will have the number of distributed shares
determined on the basis of the Fund's net asset value per share computed at the
end of the ex-dividend day after adjustment for the distribution. Net asset
value is used in computing the number of shares in both gains and income
distribution reinvestments. Account statements and/or checks, as appropriate,
will be mailed to shareholders within seven days after the Fund pays the
distribution. Unless the Fund receives instructions to the contrary from a
shareholder before the record date, it will assume that the shareholder wishes
to receive that distribution and future gains and income distributions in
shares. Instructions continue in effect until changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder regardless of how long the shareholder has held Fund shares. If such
shares are held less than six months and redeemed at a loss, however, the
shareholder will recognize a long- term capital loss on such shares to the
extent of the long-term capital gain distribution received in connection with
such shares. If the net asset value of the Fund's shares is reduced below a
shareholder's cost by a capital gains distribution, such distribution, to the
extent of the reduction, would be a return of investment though taxable as
stated above. Since distributions of capital gains depend upon profits actually
realized from the sale of securities by the Fund, they may or may not occur. The
foregoing comments relating to the taxation of dividends and distributions paid
on the Fund's shares relate solely to federal income taxation. Such dividends
and distributions may also be subject to state and local taxes.
Any capital gains realized by any wholly-owned subsidiary and paid as a
dividend by such subsidiary to the Fund will be treated as ordinary income (and
not as capital gains) by the Fund and taken into consideration in computing the
Fund's net income.
When the Fund makes a distribution, it intends to distribute only its
net capital gains and such income as has been predetermined, to the best of the
Fund's ability, to be taxable as ordinary income. Shareholders of the Fund will
be advised annually of the federal income tax status of distributions.
If more than 50% of the value of the Fund's total assets at the end of
a fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to the Fund's shareholders, a
shareholder will be required to include in his gross income both actual
dividends and the amount the Fund advises him is his pro rata portion of income
taxes withheld by foreign governments from interest and dividends paid on the
Fund's investments. The shareholder will be entitled, however, to take the
amount of his share of such foreign taxes withheld as a credit against his
United States income tax, or to treat his share of the foreign tax withheld as
an itemized deduction from his gross income, if that should be to his advantage.
In substance, this policy enables the shareholder to benefit from the same
foreign tax credit or deduction that he would have received if he had been the
individual owner of foreign securities and had paid foreign income tax on the
income therefrom. As in the case of individuals receiving income directly from
foreign sources, the above described tax credit and deductions are subject to
certain limitations.
- --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined as
follows:
(1) Investments, including ADRs, are usually valued at the closing
sales price or, in the absence of sales and for over-the-counter securities, the
mean of bid and asked quotations. Management values the following securities at
prices it deems in good faith to be fair: (a) securities for which complete
quotations are not readily available; and (b) listed securities if, in the
opinion of management, the last sales price does not reflect a current value or
if no sale occurred. ADRs, certificates representing shares of foreign
securities deposited in domestic and foreign banks, are traded and valued in
U.S. dollars. Those securities traded in foreign currency amounts are translated
into United States dollars as follows: market value of investments, assets and
liabilities at the daily rate of exchange; purchases and sales of investments,
income and expenses at the rate of exchange prevailing on the respective dates
of such transactions. Net unrealized foreign exchange gains/losses are a
component of unrealized appreciation/depreciation on investments.
(2) Short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which, when combined with accrued interest,
approximates market. Short-term investments maturing in more than sixty days
when purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market.
(3) The Fund's Board of Directors values the following securities at
prices it deems in good faith to be fair: (a) securities, including restricted
securities, for which complete quotations are not readily available; (b) listed
securities if, in the Board's opinion, the last sales price does not reflect a
current market value or if no sale occurred; (c) the Fund's investment in any
subsidiary; and (d) other assets.
- --------------------------------------------------------------------------------
BROKERAGE
- --------------------------------------------------------------------------------
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund,
2. the efficiency with which the transaction is effected,
3. the broker's ability to effect the transaction where a large
block is involved,
4. the broker's readiness to execute potentially difficult
transactions in the future,
5. the financial strength and stability of the broker,
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information
("research services"), and
7. the Fund's management weighs these considerations in
determining the overall reasonableness of the brokerage
commissions paid.
Should the Fund or Keystone receive services from a broker, the Fund
would consider such services to be in addition to, and not in lieu of, the
services Keystone is required to perform under the Advisory Agreement. Keystone
believes that the cost, value and specific application of such services are
generally indeterminable and cannot be practically allocated between the Fund
and its other clients who may indirectly benefit from the availability of such
information. Similarly, the Fund may indirectly benefit from information made
available as a result of transactions effected for Keystone's other clients.
Under the Advisory Agreement, Keystone is permitted to pay higher brokerage
commissions for brokerage and research services in accordance with Section 28(e)
of the Securities Exchange Act of 1934. In the event Keystone follows such a
practice, it will do so on a basis that is fair and equitable to the Fund.
The Fund's Board of Directors has determined that the Fund may consider
sales of Fund shares as a factor when selecting brokers to execute portfolio
transactions, subject to the requirements of best execution described above.
BROKERAGE COMMISSIONS
The Fund expects that purchases and sales of securities will be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark-up or reflect a dealer's mark-down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers,
unless more favorable prices are otherwise obtainable.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, EKD, or any of their affiliated persons, as defined in
the 1940 Act.
The Board of Directors periodically reviews the Fund's brokerage
policy. In the event of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the Board of Directors may change,
modify or eliminate any of the foregoing practices.
- --------------------------------------------------------------------------------
SALES CHARGE
- --------------------------------------------------------------------------------
The Fund may charge a contingent deferred sales charge (a "CDSC") when
you redeem certain of its shares within four calendar years after the month in
which you purchase the shares. The Fund charges a CDSC as reimbursement for
certain expenses, such as commissions or shareholder servicing fees, that it has
incurred in connection with the sale of its shares (see "Distribution Plan"). If
imposed, the Fund deducts the CDSC from the redemption proceeds you would
otherwise receive. CDSCs attributable to your shares are, to the extent
permitted by the National Association of Securities Dealers, Inc. ("NASD"), paid
to EKD or its predecessor.
CALCULATING THE CDSC
The CDSC is a declining percentage of the lesser of (1) the net asset
value of the shares you redeemed, or (2) the net asset value at time of purchase
of such shares. The CDSC is calculated according to the following schedule:
REDEMPTION TIMING CDSC
During the calendar year of purchase....................4.00%
During the first calendar year after the
year of purchase......................................3.00%
During the second calendar
year after the year of purchase.......................2.00%
During the third calendar year
after the year of purchase............................1.00%
Thereafter..............................................0.00%
In determining whether a CDSC is payable and, if so, the percentage
charge applicable, the Fund will first redeem shares not subject to a CDSC and
will then redeem shares you have held the longest.
CDSC WAIVERS. The Fund does not impose a CDSC when the amount you are
redeeming represents:
1. an increase in the value of the shares redeemed above the
total cost of such shares due to increase in the net asset
value per share of the Fund;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares you have held for all or part of more than four
consecutive calendar years;
4. shares that are held in the accounts of a shareholder who has
died or become disabled;
5. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
6. automatic withdrawals from the ERISA plan of a shareholder who
is a least 59 1/2 years old;
7. shares in an account that the Fund has closed because the
account has an aggregate net asset value of less than $1,000;
8. automatic withdrawals under a Systematic Withdrawal Plan of up
to 1% per month of your initial account balance;
9. withdrawals consisting of loan proceeds to a retirement plan
participant;
10. financial hardship withdrawals made by a retirement plan
participant;
11. withdrawals consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan;
12. shares purchased by a bank or trust company in a single
account in the name of such bank or trust company as trustee
if the initial investment in shares of the Fund, any other
Keystone Classic Fund and/or any Evergreen Keystone Fund, is
at least $500,000 and any commission paid by the Fund and such
other fund at the time of such purchase is not more than 1% of
the amount invested;
13. shares purchased by certain Directors, Trustees, officers and
employees of the Fund, Keystone, EKD and certain of their
affiliates, and to members of the immediate families of such
persons; and
14. shares purchased by registered representatives of firms with
dealers agreements with EKD.
EXCHANGES. The Fund does not charge a CDSC on exchanges of shares
between funds in the Keystone Classic Fund Family that have adopted distribution
plans pursuant to Rule 12b-1 under the 1940 Act. If you do exchange shares of
one such fund for shares of another such fund, the Fund will deem the calendar
year of the exchange, for purposes of any future CDSC, to be the year the shares
tendered for exchange were originally purchased.
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DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear the expenses of distributing their shares if
they comply with various conditions, including the adoption of a distribution
plan containing certain provisions set forth in Rule 12b-1. The Fund bears some
of the costs of selling its shares under a distribution plan adopted pursuant to
Rule 12b-1 (the "Distribution Plan").
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of the average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. The NASD limits such annual expenditures to 1.00%, of
which 0.75% may be used to pay such distribution costs and 0.25% may be used to
pay shareholder service fees. The NASD also limits the aggregate amount that the
Fund may pay for such distribution costs to 6.25% of gross share sales since the
inception of the Fund's Distribution Plan plus interest at the prime rate plus
1.00% on unpaid amounts thereof (less any CDSCs paid by shareholders to EKD or
EKIS).
Payments under the Distribution Plan are currently made to EKD (which
may reallow all or part to others, such as broker-dealers) (1) as commissions
for Fund shares sold; (2) as shareholder service fees in respect of shares
maintained by the recipient and outstanding on the Fund's books for specific
periods; and (3) as interest. Amounts paid or accrued to EKD and EKIS in the
aggregate may not exceed the annual limitation referred to above. EKD generally
reallows to broker-dealers or others a commission equal to 4.00% of the price
paid for each Fund share sold. In addition, EKD generally reallows to
broker-dealers or others a shareholder service fee at a rate of 0.25% per annum
of the net asset value of shares maintained by such recipient and outstanding on
the books of the Fund for specified periods.
If the Fund is unable to pay EKD a commission on a new sale because the
annual maximum (0.75% of average daily net assets) has been reached, EKD
intends, but is not obligated, to continue to accept new orders for the purchase
of Fund shares and to pay commissions and service fees to broker-dealers in
excess of the amount it currently receives from the Fund ("Advances"). While the
Fund is under no contractual obligation to reimburse such Advances, EKD and
EKIS, its predecessor, intend to seek full reimbursement for Advances from the
Fund (together with interest at the prime rate plus 1.00%) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
permitted limits. If the Fund's Independent Directors (Directors who are not
interested persons, as defined in the 1940 Act, and who have no direct or
indirect financial interest in the operation of the Fund's Distribution Plan or
any agreement related thereto) authorize such payments, the effect will be to
extend the period of time during which the Fund incurs the maximum amount of
costs allowed by the Distribution Plan.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above, and the amounts
and purposes of expenditures under the Distribution Plan must be reported to the
Independent Directors quarterly. The Independent Directors may
require or approve changes in the implementation or operation of the
Distribution Plan, and may require that total expenditures by the Fund under the
Distribution Plan be kept within limits lower than the maximum amount permitted
by the Distribution Plan as stated above. If such costs are not limited by the
Independent Directors, such costs could, for some period of time, be higher than
such costs permitted by most other plans presently adopted by other investment
companies.
The Distribution Plan may be terminated at any time by vote of the
Independent Directors, or by vote of a majority of the outstanding shares of the
Fund. If the Distribution Plan is terminated, EKD will ask the Independent
Directors to take whatever action they deem appropriate under the circumstances
with respect to payment of Advances.
Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of both (1) the Fund's Board of Directors and (2) the Independent Directors
cast in person at a meeting called for the purpose of voting on such amendment.
While the Distribution Plan is in effect, the Fund is required to
commit the selection and nomination of candidates for Independent Directors to
the discretion of the Independent Directors.
The Independent Directors of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plan have
benefitted the Fund.
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DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
The Directors and officers of the Fund, their principal occupations and
some of their affiliations over the last five years are as follows:
FREDERICK AMLING: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Professor, Finance Department, George Washington
University; President, Amling & Company (investment
advice); and former Member, Board of Advisers, Cre
dito Emilano (banking).
LAURENCE B. ASHKIN: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all funds in the Evergreen
Family of Funds other than Evergreen Investment
Trust; real estate developer and construction
consultant; and President of Centrum Equities and
Centrum Properties, Inc.
CHARLES A. AUSTIN III: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Investment Counselor to Appleton Partners, Inc.; and
former Managing Director, Seaward Management
Corporation (investment advice).
FOSTER BAM: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds other than Evergreen
Investment Trust; Partner in the law firm of
Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell Group Ltd.
(manufacturer of office furnishings and
accessories), Waste Disposal Equipment Acquisition
Corporation and Rehabilitation Corporation of
America (rehabilitation hospitals).
*GEORGE S. BISSELL: Chief Executive Officer of the Fund and each of the
other funds in the Keystone Families of Funds;
Chairman of the Board and Director of the Fund;
Chairman of the Board and Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and
Chairman of its Investment Committee); former
Director and Chairman of the Board of Hartwell
Keystone; and former Chairman of the Board, Director
and Chief Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Principal, Padanaram Associates, Inc.; and former
Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds; and
former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice Presi dent, The
London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Asso ciates
(environmental consulting); and former Director,
Keystone Investments, Inc. and Keystone.
JAMES S. HOWELL: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman and Trustee or Director of all the funds in
the Evergreen Family of Funds; former Chairman of
the Distribution Foundation for the Carolinas; and
former Vice President of Lance Inc. (food
manufacturing).
LEROY KEITH, JR.: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman of the Board and Chief Executive Officer,
Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix
Series Fund, Phoenix Multi-Portfolio Fund, and The
Phoenix Big Edge Series Fund; and former President,
Morehouse College.
F. RAY KEYSER, JR.: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman and Of Counsel, Keyser, Crowley & Meub,
P.C.; Member, Governor's (VT) Council of Eco nomic
Advisers; Chairman of the Board and Director,
Central Vermont Public Service Corporation and Lahey
Hitchcock Clinic; Director, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand
Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Com pany,
Inc., and the Investment Company Institute; former
Director and President, Associated Industries of
Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow
Financial Corp.; and former Director and Chairman of
the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONNELL: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; and Sales Representative
with Nucor-Yamoto, Inc. (steel producer).
THOMAS L. MCVERRY: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; former Vice President and
Director of Rexham Corporation; and former Director
of Carolina Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; and Partner in the law
firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds; Vice
Chair and former Executive Vice President, DHR
International, Inc. (executive recruitment); former
Senior Vice President, Boyden International Inc.
(executive recruit ment); and Director, Commerce and
Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
RUSSELL A. SALTON, III MD: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; Medical Director, U.S.
Health Care/Aetna Health Services; and former
Managed Health Care Consultant; former President,
Primary Physician Care.
MICHAEL S. SCOFIELD: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; and Attorney, Law Offices
of Michael S. Scofield.
RICHARD J. SHIMA: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman, Environmental Warranty, Inc. (insurance
agency); Executive Consultant, Drake Beam Morin,
Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Hartford
Hospital, Old State House Association, Middlesex
Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees,
Hartford Graduate Center; Trustee, Greater Hartford
YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corpora tion;
former Trustee, Kingswood-Oxford School; and former
Managing Director and Consultant, Russell Miller,
Inc.
ANDREW J. SIMONS: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky
& Armentano, P.C.; Adjunct Professor of Law and
former Associate Dean, St. John's University School
of Law; Adjunct Professor of Law, Touro College
School of Law; and former President, Nassau County
Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Families of Funds; President and Treasurer of all
the funds in the Evergreen Family of Funds; Senior
Managing Director, Furman Selz LLC since 1992;
Managing Director from 1984 to 1992; Consultant,
BISYS Fund Services since 1996; 230 Park Avenue,
Suite 910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Families of Funds; Secretary of all
of the funds in the Evergreen Family of Funds;
Senior Vice President and Director of Administration
and Regulatory Services, BISYS Fund Services since
1995; Vice President/Assistant General Counsel,
Alliance Capital Management from 1988 to 1995; 3435
Stelzer Road, Columbus, Ohio.
* This Director may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
The Fund does not pay any direct remuneration to any officer or
Director who is an "affiliated person" of Keystone or any of its affiliates. See
"Investment Adviser." During the fiscal year ended February 28, 1997, the
unaffiliated Directors received retainers or fees totaling $7,175 from the Fund.
For the year December 31, 1996, aggregate compensation received by Independent
Trustees on a fund complex wide basis (which includes over 30 mutual funds) was
$411,000. As of March 31, 1997, the Directors and officers beneficially owned
less than 1.00% of the Fund's then outstanding shares.
Except as set forth above, the address of all of the Fund's Directors
and the address of the Fund is 200 Berkeley Street, Boston, Massachusetts
02116-5034.
Set forth below for each of the Independent Directors receiving in
excess of $60,000 for the fiscal period of March 1, 1996 through February 28,
1997 is the aggregate compensation paid to such Independent Directors by the
Evergreen Keystone Funds:
Total
Compensation
From
Aggregate Registrant
Compensation and Fund
from Complex Paid
Name Registrant To Director
- ------------------------- ------------ -------------
James S. Howell $0 $66,000
Russell A Salton, III M.D. $0 $61,000
Michael S. Scofield $0 $61,000
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INVESTMENT ADVISER
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Subject to the general supervision of the Fund's Board of Directors,
Keystone provides investment advice, management and administrative services to
the Fund.
On December 11, 1996, the predecessor corporation to First Union
Keystone, Keystone Investments, Inc. ("Keystone Investments") and indirectly
each subsidiary of Keystone Investments, including Keystone, were acquired (the
"Acquisition") by First Union National Bank of North Carolina ("FUNB"), a
wholly-owned subsidiary of First Union. Keystone Investments was acquired by
FUNB by merger into a wholly-owned subsidiary of FUNB, which entity then assumed
the First Union Keystone name and succeeded to the business of the predecessor
corporation. Contemporaneously with the Acquisition, the Fund entered into a new
investment advisory agreement with Keystone and into a principal underwriting
agreement with EKD, an indirect wholly-owned subsidiary of The BISYS Group, Inc.
("BISYS"). The new investment advisory agreement (the "Advisory Agreement") was
approved by the shareholders of the Fund on December 9, 1996, and became
effective on December 11, 1996.
First Union Keystone and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $140 billion in consolidated assets as of
December 31, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, Keystone and Evergreen Asset Management
Corp., a wholly-owned subsidiary of FUNB, manage or otherwise oversee the
investment of over $60 billion in assets belonging to a wide range of clients,
including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Directors, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees and expenses of
Independent Directors; (5) brokerage commissions, brokers' fees and expenses;
(6) issue and transfer taxes; (7) costs and expenses under the Distribution
Plan; (8) taxes and trust fees payable to governmental agencies; (9) the cost
of share certificates; (10) fees and expenses of the registration and
qualification of the Fund and its shares with the Securities and Exchange
Commission ("SEC")or under state or
other securities laws; (11) expenses of preparing, printing and mailing
prospectuses, statements of additional information, notices, reports and proxy
materials to shareholders of the Fund; (12) expenses of shareholders' and
Directors' meetings; (13) charges and expenses of legal counsel for the Fund and
for the Independent Directors of the Fund on matters relating to the Fund; and
(14) charges and expenses of filing annual and other reports with the SEC and
other authorities, and all extraordinary charges and expenses of the Fund.
The Fund pays Keystone a fee for its services at the annual rate set
forth below:
Aggregate Net
Asset Value of Fund
Management Fee Shares
- --------------------------------------------------------------------------
3/4 of 1% of the first $ 100,000,000, plus
5/8 of 1% of the next $ 100,000,000, plus
1/2 of 1% of amounts over $ 200,000,000.
Keystone's fee is computed as of the close of business each business day and
payable monthly.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Directors of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Directors cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Directors or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its assignment.
- --------------------------------------------------------------------------------
CONSULTANT
- --------------------------------------------------------------------------------
Since August 1, 1995, Harbor Capital has served as a consultant to
Keystone with respect to the Fund and its subsidiary pursuant to a Consultant
Agreement. In accordance with the terms of the Consultant Agreement, Harbor
Capital provides Keystone with monthly reports discussing the world's gold
bullion markets and gold stock markets, and advice regarding economic factors
and trends in the precious metals sectors. For its services under the Consultant
Agreement, Harbor Capital receives from Keystone a fee at the annual rate of
0.10% of the Fund's average daily net assets.
The Consultant Agreement shall continue in effect from year to year if
the parties thereto agree. The Consultant Agreement may be terminated by either
party, without penalty, on 60 days' written notice to the other party. Neither
party may assign the Consultant Agreement without the consent of the other
party.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") with EKD. EKD, which is not affiliated with First
Union, replaces EKIS as the Fund's principal underwriter. EKIS may no longer
serve as principal underwriter of the Fund due to regulatory restrictions
imposed by the Glass-Steagall Act upon national banks such as FUNB and their
affiliates, that prohibit such entities from acting as the underwriters of
mutual fund shares. While EKIS may no longer serve as principal underwriter of
the Fund as discussed above, EKIS may continue to receive compensation from the
Fund or EKD in respect of underwriting and distribution services performed prior
to the termination of EKIS as principal underwriter. In addition, EKIS may also
be compensated by EKD for the provision of certain marketing support services to
EKD at an annual rate of up to 0.75% of the average daily net assets of the
Fund, subject to certain restrictions.
EKD, as agent, has agreed to use its best efforts to find purchasers
for the shares. EKD may retain and employ representatives to promote
distribution of the shares and may obtain orders from broker-dealers and
others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that EKD will bear the expense of preparing, printing, and
distributing advertising and sales literature and prospectuses used by it. In
its capacity as principal underwriter, EKD or EKIS, its predecessor, may receive
payments from the Fund pursuant to the Fund's Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (1) by a vote of a
majority of the Independent Directors, and (2) by vote of majority of the
Directors, in each case, cast in person at a meeting called for that purpose.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Directors or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its assignment.
From time to time, if, in EKD's judgment, it could benefit the sales of
Fund shares, EKD may provide to selected broker-dealers promotional materials
and selling aids, including, but not limited to, personal computers, related
software, and Fund data files.
- --------------------------------------------------------------------------------
SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
BISYS, or an affiliate, provides personnel to serve as officers of the
Fund, and provides certain administrative services to the Fund pursuant to a
sub-administrator agreement. For its services under that agreement, BISYS
receives from Keystone a fee based on the aggregate average daily net assets of
the Fund at a rate based on the total assets of all mutual funds administered by
BISYS for which FUNB affiliates also serve as investment adviser. The
sub-administrator fee is calculated in accordance with the following schedule:
Aggregate Average Daily Net Assets Of Mutual Funds
Sub-Administrator Administered By BISYS For Which Any Affiliate Of
Fee FUNB Serves As Investment Adviser
- --------------------------------------------------------------------------------
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
The total assets of the mutual funds for which FUNB affiliates also
serve as investment advisers were approximately $29.2 billion as of February 28,
1997.
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY FEE
For each of the Fund's last three fiscal years, the table below lists
the total dollar amounts paid by the Fund to Keystone for investment
advisory services rendered. For more information, see "Investment Adviser."
Percent of Fund's Fee Paid to
Average Net Assets Keystone under
represented by the Advisory
Fiscal Year Ended Keystone's Fee Agreement
- ------------------- ----------------------- -----------------------
February 28, 1997 0.69% $1,322,411
February 29, 1996 0.69% $1,354,605
February 28, 1995 0.68% $1,396,523
DISTRIBUTION PLAN EXPENSES
For the fiscal year ended February 28, 1997, the Fund paid $1,923,248
to EKD or EKIS under its Distribution Plan. For more information, see
"Distribution Plan."
UNDERWRITING COMMISSIONS
For each of the Fund's last three fiscal years, the table below lists
the aggregate dollar amounts of underwriting commissions (front-end sales
charges, plus distribution fees, plus CDSCs) paid with respect to the public
distribution of the Fund's shares. The table also indicates the aggregate dollar
amount of underwriting commissions retained by EKD or EKIS. For more
information, see "Principal Underwriter" and "Sales Charges."
Aggregate Dollar Amount of
Aggregate Dollar Amount of Underwriting Commissions
Fiscal Year Ended Underwriting Commissions Retained by EKD or EKIS
- ------------------ --------------------------- --------------------------
February 28, 1997 $2,088,781 $1,058,137
February 29, 1996 $2,102,338 $920,700
February 28, 1995 $2,179,660 $255,046
BROKERAGE COMMISSIONS
Fiscal Year Ended Brokerage Commissions Paid
- ------------------------- --------------------------------------
February 28, 1997 $477,545
February 29, 1996 $438,893
February 28, 1995 $523,800
- --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for the Fund as they may appear from time to
time in advertisements are calculated by finding the average annual compounded
rates of return over the one, five and ten year periods on a hypothetical $1,000
investment which would equate the initial amount invested to the ending
redeemable value. To the initial investment all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the
relevant periods.
The cumulative total returns of the Fund for the one, five and ten year
periods ended February 28, 1997 were -7.89% (including CDSCs), 64.62% and
66.16%, respectively. The compounded average annual rates of return for the one,
five and ten year periods ended February 28, 1997 were -7.89% (including CDSCs),
10.48% and 5.21%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund presently does not
intend to advertise current yield.
Any given total return or current yield quotations should not be
considered representative of the Fund's total return or current yield for any
future period.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the SEC:
Schedule of Investments as of February 28, 1997;
Financial Highlights for each of the years in the ten-year period ended
February 28, 1997;
Statement of Assets and Liabilities as of February 28, 1997;
Statement of Operations for the year ended February 28, 1997;
Statements of Changes in Net Assets for each of the years in the
two-year period ended February 28, 1997;
Notes to Financial Statements; and
Independent Auditors' Report dated March 31, 1997.
A copy of the Fund's Annual Report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, or by calling EKSC toll free at 1-800-343-2898.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
To the best of the Fund's knowledge, as of March 31, 1997, the
following was the only shareholder of record who owned 5% or more the Fund's
outstanding shares:
% OF FUND
Merrill Lynch Pierce Fenner & Smith 13.42%
For Sole Benefit of Its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorize payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1.00% of the Fund's net
assets in any 90-day period. Securities delivered in payment of redemptions
would be valued at the same value assigned to them in computing the net asset
value per share and would, to the extent permitted by law, be readily
marketable. Shareholders receiving such securities would incur brokerage costs
upon sale of the securities.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this statement of additional information or in supplemental sales
literature issued by the Fund or EKD, and no person is entitled to rely on any
information or representation not contained therein.
The Fund's prospectus and this statement of additional information omit
certain information contained in the registration statement filed with the SEC,
which may be obtained from the SEC's principal office in Washington, D.C. upon
payment of the fee prescribed by the rules and regulations promulgated by the
SEC.
<PAGE>
A-1
APPENDIX
MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper are limited to those rated
A-1 by Standard & Poor's Ratings Group ("S&P"), PRIME-1 by Moody's Investors
Service ("Moody's") or F-1 by Fitch Investors Service, Inc. ("Fitch").
These ratings and other money market instruments are described as follows:
COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. The issuer's long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry.
The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
The rating F-1 is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S government include a variety
of Treasury securities that differ only in their interest rates, maturities and
dates of issuance. Treasury bills have maturities of one year or less. Treasury
notes have maturities of one to ten years, and Treasury bonds generally have
maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities include direct obligations of the U.S. Treasury and
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Banks, Federal
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, The Tennessee Valley Authority, District of
Columbia Armory Board and Federal National Mortgage Association.
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A-2
Some obligations of U.S. government agencies and instrumentalities,
such as Treasury bills and Government National Mortgage Association ("GNMA")
pass-through certificates, are supported by the full faith and credit of the
U.S.; others, such as securities of Federal Home Loan Banks, by the right of the
issuer to borrow from the Treasury; still others, such as bonds issued by the
Federal National Mortgage Association, a private corporation, are supported only
by the credit of the instrumentality. Because the U.S. government is not
obligated by law to provide support to an instrumentality it sponsors, the Fund
will invest in the securities issued by such an instrumentality only when
Keystone determines that the credit risk with respect to the instrumentality
does not make its securities unsuitable investments. U.S. government securities
will not include international agencies or instrumentalities in which the U.S.
government, its agencies or instrumentalities participate, such as the World
Bank, the Asian Development Bank or the InterAmerican Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
CERTIFICATES OF DEPOSITS
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks, including their branches abroad and of U.S. branches
of foreign banks, which are members of the Federal Reserve System or the Federal
Deposit Insurance Corporation, and have at least $1 billion in deposits as of
the date of their most recently published financial statements. The Fund will
not acquire time deposits or obligations issued by the International Bank for
Reconstruction and Development, the Asian Development Bank or the Inter-American
Development Bank. Additionally, the Fund currently does not intend to purchase
such foreign securities (except to the extent that certificates of deposit of
foreign branches of U.S. banks may be deemed foreign securities) or purchase
certificates of deposit, bankers' acceptances or other similar obligations
issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
OPTIONS TRANSACTIONS
The Fund is authorized to write (i.e., sell) covered call options and to
purchase call options, including purchasing call options to close out covered
call options previously written. A call option obligates a writer to sell and
gives a purchaser the right to buy the underlying security at the stated
exercise price at any time until the stated expiration date.
The Fund will only write call options that are covered, which means
that the Fund will own the underlying security (or other securities, such as
convertible securities, which are acceptable for escrow) when it writes the call
option and until the Fund's obligation to sell the underlying security is
10787
<PAGE>
A-3
extinguished by exercise or expiration of the call option or the purchase of a
call option covering the same underlying security and having the same exercise
price and expiration date. The Fund may write a call option on any portfolio
security for which call options are available and listed on the London Stock
Exchange or a national securities exchange. The Fund will receive a premium for
writing a call option but will give up, until the expiration date, the
opportunity to profit from an increase in the underlying security's price above
the exercise price. The Fund will retain the risk of loss from a decrease in the
price of the underlying security. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked options which the Fund will not do) but capable
of enhancing the Fund's total returns.
The premium received by the Fund for writing a covered call option will
be recorded as a liability in the Fund's statement of assets and liabilities.
This liability will be adjusted daily to the option's current market value,
which will be the latest sale price at the time as of which the net asset value
per share of the Fund is computed (the close of the New York Stock Exchange),
or, in the absence of such sale, at the latest bid quotation. The liability will
be extinguished upon expiration of the option, the purchase of an identical
option in a closing transaction or delivery of the underlying security upon
exercise of the option.
The London Options Clearing House is the issuer of, and the obligor on,
every option traded on the London Stock Exchange and will be the issuer of, and
the obligor on, those covered call options written by the Fund which are traded
on the London Stock Exchange. The Fund will be required to make escrow
arrangements to secure its obligation to deliver to the London Options Clearing
House the underlying security of each such covered call option which the Fund
writes.
The Options Clearing Corporation is the issuer of, and the obligor on,
every option traded on a national securities exchange and will be the issuer of,
and the obligor on, those covered call options written by the Fund which are
traded on a national securities exchange. The Fund will be required to make
escrow arrangements to secure its obligation to deliver to The Options Clearing
Corporation the underlying security of each such covered call option which the
Fund writes.
Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions would fail to
meet their obligations to the Fund. In addition, the abililty to terminate
over-the-counter option positions may be more limited than in the case of
exchange traded options positions. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities.
The Fund will purchase call options to close out a covered call option
it has written. When it appears that a covered call option written by the Fund
is likely to be exercised, the Fund may consider it appropriate to avoid having
to sell the underlying security. Or, the Fund may wish to extinguish a covered
call option, which it has written in order to be free to sell the underlying
security, to realize a profit on the previously written call option or to write
another covered call option on the underlying security. In all such instances,
the Fund can close out the previously written call option by purchasing a call
option on the same underlying security with the same exercise price and
expiration date. (The Fund may, under certain circumstances, also be able to
transfer a previously written call option.) The Fund will realize a short-term
capital gain if the amount paid to purchase the call option plus transaction
costs is less than the premium received for writing the covered call option. The
Fund will realize a short-term capital loss if the amount paid to purchase the
call option plus transaction costs is greater than the premium received for
writing the covered call option.
A previously written call option can be closed out by purchasing an
identical call option only in a secondary market for the call option. Although
the Fund will generally write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary
10787
<PAGE>
A-4
market will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event it might not be possible to
effect a closing transaction in a particular option. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction, it will
not be able to sell the underlying securities until the option expires or it
delivers the underlying securities upon exercise.
If a substantial number of the call options written by the Fund are
exercised, the Fund's rate of portfolio turnover may exceed historical levels.
This would result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing of
covered call options and the purchase of call options to close out previously
written options. Such brokerage commissions are normally higher than those
applicable to purchases and sales of portfolio securities.
In the past the Fund has qualified for, and elected to receive, the
special tax treatment afforded regulated investment companies under Subchapter M
of the Code. Although the Fund intends to continue to qualify for such tax
treatment, in order to do so it must, among other things, derive less than 30%
of its gross income from gains from the sale or other disposition of securities
held for less than three months. Because of this, the Fund may be restricted in
the writing of call options where the underlying securities have been held less
than three months, in the writing of covered call options which expire in less
than three months and in effecting closing purchases with respect to options
which were written less than three months earlier. As a result, the Fund may
elect to forego otherwise favorable investment opportunities and may elect to
avoid or delay effecting closing purchases or selling portfolio securities, with
the risk that a potential loss may be increased or a potential gain may be
reduced or turned into a loss.
Under the Code, gain or loss attributable to a closing transaction and
premiums received by the Fund for writing a covered call option which is not
exercised may constitute short-term capital gain or loss. Under provisions of
the Tax Reform Act of 1986, effective for taxable years beginning after October
22, 1986, a gain on an option transaction which qualifies as a "designated
hedge" transaction under Treasury regulations may be offset by realized or
unrealized losses on such designated transaction. The netting of gain against
such losses could result in a reduction in gross income from options
transactions for purposes of the 30 percent test.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market
10787
<PAGE>
A-5
decline or change in interest rates, and, by doing so, provide an alternative to
the liquidation of the Fund's securities positions and the resulting transaction
costs.
The Fund intends to engage in options transactions that are related to
currency and other financial futures contracts for the hedging purposes and in
connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the U.S. are The Board of Trade of
the City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
the Fund, as seller, to deliver the type of financial instrument specified in
the contract at a specified future time for a specified price. The purchase of
an interest rate futures contract creates an obligation by the Fund, as
purchaser, to accept delivery of the type of financial instrument specified at a
specified future time for a specified price. The specific securities delivered
or accepted, respectively, at settlement date, are not determined until at or
near that date. The determination is in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Currently interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, GNMA certificates, 90-day domestic bank
certificates of deposit, 90-day commercial paper, and 90-day Eurodollar
certificates of deposit. It is expected that futures contracts trading in
additional financial instruments will be authorized. The standard contract size
is $100,000 for futures contracts in U.S. Treasury bonds, U.S.
10787
<PAGE>
A-6
Treasury notes and GNMA certificates, and $1,000,000 for the other designated
contracts. While U.S. Treasury bonds, U.S. Treasury bills and U.S. Treasury
notes are backed by the full faith and credit of the U.S. government and GNMA
certificates are guaranteed by a U.S. government agency, the futures contracts
in U.S. government securities are not obligations of the U.S. Treasury.
INDEX BASED FUTURES CONTRACTS/STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in
the index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently stock index futures contracts can be purchased or sold on the
S&P Index of 500 Stocks, the S&P Index of 100 Stocks, the New York Stock
Exchange Composite Index, the Value Line Index and the Major Market Index. It is
expected that futures contracts trading in additional stock indices will be
authorized. The standard contract size is $500 times the value of the index.
The Fund does not believe that differences between existing stock
indices will create any differences in the price movements of the stock index
futures contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
OTHER INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transac-tions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments called variation margin, to the Broker and from the
Broker, are made on a daily basis as the value of the underlying instrument or
index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position
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A-7
would be less valuable, and the Fund would be required to make a variation
margin payment to the Broker. At any time prior to expiration of the futures
contract, the Fund may elect to close the position. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its Custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price, the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs,
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e., on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase, after allowance for
transaction costs represents the profit or loss to the Fund.
There can be no assurance, however, that the Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on currency and other financial futures contracts are similar
to options on stocks except that an option on a currency or other financial
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) rather than to purchase or
sell currency or other instruments making up a financial futures index at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account. This amount
represents the amount by which the market price of the futures contract at
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and value of the futures contract.
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The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on currency or other financial
futures contracts is analagous to the purchase of protective puts on individual
stocks, where an absolute level of protection is sought below which no
additional economic loss would be incurred by the Fund. Put options may be
purchased to hedge a portfolio of stocks or debt instruments or a position in
the futures contract upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of a call option on a currency or other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock, which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or the price of the underlying
financial instrument or index itself, the purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on futures contracts may be purchased to
hedge against an interest rate increase or a market advance when the Fund is not
fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and
other financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result
thereof, more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to margin deposits on
such futures contracts.
The Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Fund owns, or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by the Fund,
an amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
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FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and
are influenced, among other things, by changes in stock prices, market
conditions, prevailing interest rates and anticipation of future stock prices,
market movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. In addition,
futures contract transactions involve the remote risk that a party may be unable
to fulfill its obligations and that the amount of the obligation will be beyond
the ability of the clearing broker to satisfy. A decision of whether, when and
how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a
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futures contract, the Fund will establish a segregated account in con-nection
with its futures contracts which will hold cash or cash equivalents equal in
value to the current value of the under-lying instruments or indices less the
margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS.
In addition to the risks described above for currency and other
financial futures contracts, there are several special risks relating to options
on futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund
invests in foreign securities they usually will be denominated in foreign
currencies and the Fund temporarily may hold funds in foreign currencies. Thus,
the Fund's share value will be affected by changes in exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Fund may enter into
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rate between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.
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CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the U.S. is regulated under the Commodity Exchange Act by the CFTC
and NFA. Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to only engage in currency futures contracts for
hedging purposes and not for speculation. The Fund may engage in currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
Currently, currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark and Swiss Francs,
C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen and 1,000,000 for the
Peso. In contrast to Forward Currency Exchange Contracts which can be traded at
any time, only four value dates per year are available, the third Wednesday of
March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a
variety of currencies in both the U.S. and Europe. On the Philadelphia Stock
Exchange, for example, contracts for half the size of the corresponding futures
contracts on the Chicago Board - Options Exchange are traded with up to nine
months maturity in Deutsche Marks, British Pound Sterling, Japanese Yen, Swiss
Francs and Canadian Dollars. Options can be exercised at any time during the
contract life, and require a deposit subject to normal margin requirements.
Since a futures contract must be exercised, the Fund must continually make up
the margin balance. As a result, a wrong price move could result in the Fund
losing more than the original investment, as it cannot walk away from the
futures contract as it can an option contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in
connection with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is
analagous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of foreign stocks or foreign debt instruments or a position in the foreign
currency upon which the put option is based.
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PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock, which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or the price of the foreign stock or foreign debt instruments, purchase
of a call option may be less risky than the ownership of the foreign currency or
the foreign securities. The Fund would purchase a call option on a foreign
currency to hedge against an increase in the foreign currency or a foreign
market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exposure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Fund enters into a foreign exchange contract, it faces a
risk, however small, that the counterparty will not perform under the contract.
As a result there is a credit risk, although no extension of "credit" is
intended. To limit credit risk, the Fund intends to evaluate the
creditworthiness of each other party. The Fund does not intend to trade more
than 5% of its net assets under foreign exchange contracts with one party.
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Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone difference between
the U.S. and foreign nations. If the Fund sells small sterling it generally must
pay pounds to a counterparty earlier in the day than it will be credited with
dollars in New York. In the intervening hours, the buyer can go into bankruptcy
or can be declared insolvent. Thus, the dollars may never be credited to the
Fund.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents or limits on inflows of investment funds from abroad. Governments take
such measures for example to improve control over the domestic banking system or
to influence the pattern of receipts and payments between residents and
foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payment interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payment mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.
Other changes in official regulations influence international
investment transactions. If one of the factors affecting the buying or selling
of a currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payment restrictions in recent years, or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberal-izations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain), or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through
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another. Outside the major industrial countries, relatively free foreign
exchange markets are rare and controls on foreign currency transactions are
extensive.
Another aspect of country risk has to do with the possibility that the
Fund may be dealing with a foreign trader whose home country is facing a
payments problem. Even though the foreign trader intends to perform on its
foreign exchange contracts, the contracts are tied to other external liabilities
the country has incurred. As a result performance may be delayed, and can result
in unanticipated cost to the Fund. This aspect of country risk is a major
element in the Fund's credit judgment as to with whom it will deal and in what
amounts.
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EXHIBIT A
GLOSSARY OF TERMS
CLASS OF OPTIONS. Options covering the same underlying security.
CLEARING CORPORATION. The Options Clearing Corporation, TransCanada
Options, Inc., The European Options Clearing Corporation B.v., or the London
Options Clearing House.
CLOSING PURCHASE TRANSACTION. A transaction in which an investor who is
obligated as a writer of an option or seller of a futures contract terminates
his obligation by purchasing on an Exchange an option of the same series as the
option previously written or futures contract identical to the futures contract
previously sold, as the case may be. (Such a purchase does not result in the
ownership of an option or futures contract.)
CLOSING SALE TRANSACTION. A transaction in which an investor who is the
holder or buyer of an outstanding option or futures contract liquidates his
position as a holder or buyer by selling an option of the same series as the
option previously purchased or futures contract identical to the futures
contract previously purchased. (Such sale does not result in the investor
assuming the obligations of a writer or seller.)
COVERED CALL OPTION WRITER. A writer of a call option who, so long as
he remains obligated as a writer, owns the shares of the underlying security or
if the writer holds on a share for share basis a call on the same security where
the exercise price of the call held is equal to or less than the exercise price
of the call written, or, if greater than the exercise price of the call written,
the difference is maintained by the writer in cash, U.S. Treasury bills or other
high-grade, short-term obligations in a segregated account with the writer's
broker or custodian.
COVERED PUT OPTION WRITER. A writer of a put option who, so long as he
remains obligated as a writer, has deposited Treasury bills with a value equal
to or greater than the exercise price with a securities depository and has
pledged them to the Options Clearing Corporation for the account of the
broker-dealer carrying the writer's position or if the writer holds on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written, or, if less than the exercise price of the put written, the
difference is maintained by the writer in cash, U.S. Treasury bills or other
high-grade, short-term obligations in a segregated account with the writer's
broker or custodian.
SECURITIES EXCHANGE. A securities exchange on which call and put
options are traded. The U.S. Exchanges are as follows: The Chicago Board Options
Exchange; American Stock Exchange; New York Stock Exchange; Philadelphia Stock
Exchange; and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange; in the
Netherlands, the European Options Exchange; and in the United Kingdom, the Stock
Exchange (London).
Those issuers whose common stocks have been approved by the Exchanges
as underlying securities for options transactions are published in various
financial publications.
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COMMODITIES EXCHANGE. A commodities exchange on which futures contracts
are traded which is regulated by exchange rules that have been approved by the
Commodity Futures Trading Commission. The U.S. exchanges are as follows: The
Chicago Board of Trade of the City of Chicago; Chicago Mercantile Exchange;
International Monetary Market (a division of the Chicago Mercantile Exchange);
the Kansas City Board of Trade; and the New York Futures Exchange.
EXERCISE PRICE. The price per unit at which the holder of a call option
may purchase the underlying security upon exercise or the holder of a put option
may sell the underlying security upon exercise.
EXPIRATION DATE. The latest date when an option may be exercised or a
futures contract must be completed according to its terms.
HEDGING. An action taken by an investor to neutralize an investment
risk by taking an investment position which will move in the opposite direction
as the risk being hedged so that a loss (or gain) on one will tend to be offset
by a gain (or loss) on the other.
OPTION. Unless the context otherwise requires, the term "option" means
either a call or put option issued by a Clearing Corporation, as defined above.
A call option gives a holder the right to buy from such Clearing Corporation the
number of shares of the underlying security covered by the option at the stated
exercise price by the filing of an exercise notice prior to the expiration time
of the option. A put option gives a holder the right to sell to a Clearing
Corporation the number of shares of the underlying security covered by the put
at the stated exercise price by the filing of an exercise notice prior to the
expiration time of the option. The Fund will sell ("write") and purchase puts
only on U.S. Exchanges.
OPTION PERIOD. The time during which an option may be exercised,
generally from the date the option is written through its expiration date.
PREMIUM. The price of an option agreed upon between the buyer and
writer or their agents in a transaction on the floor of an Exchange.
SERIES OF OPTIONS. Options covering the same underlying security and
having the same exercise price and expiration date.
STOCK INDEX. A stock index assigns relative values to the common stocks
included in the index, and the index fluctuates with changes in the market
values of the common stocks so included.
INDEX BASED FUTURES CONTACT. An index based futures contract is a
bilateral agreement pursuant to which a party agrees to buy or deliver at
settlement an amount of cash equal to $500 times the difference between the
closing value of an index on the expiration date and the price at which the
futures contract is originally struck. Index based futures are traded on
Commodities Exchanges. Currently index based futures contracts can be purchased
or sold with respect to the Standard & Poor's Corporation (S&P) 500 Stock Index
and S&P 100 Stock Index on the Chicago Mercantile Exchange, the New York Stock
Exchange Composite Index on the New York Futures Exchange and the Value Line
Stock Index and Major Market Index on the Kansas City Board of Trade.
UNDERLYING SECURITY. The security subject to being purchased upon the
exercise of a call option or subject to being sold upon the exercise of a put
option.
<PAGE>
SUPPLEMENT TO THE STATEMENTS
OF ADDITIONAL INFORMATION OF
Evergreen Aggressive Growth Fund, Evergreen American Retirement Fund, Evergreen
Emerging Markets Growth Fund, Evergreen Florida High Income Municipal Bond Fund,
Evergreen Foundation Fund, Evergreen Fund, Evergreen Georgia Municipal Bond
Fund, Evergreen Global Leaders Fund, Evergreen Growth and Income Fund, Evergreen
High Grade Tax Free Fund, Evergreen Income and Growth Fund, Evergreen
Intermediate Term Government Securities Fund, Evergreen International Equity
Fund, Evergreen Institutional Money Market Fund, Evergreen Institutional Tax
Exempt Money Market Fund, Evergreen Institutional Treasury Money Market Fund,
Evergreen Micro Cap Fund, Evergreen Money Market Fund, Evergreen North Carolina
Municipal Bond Fund, Evergreen Short-Intermediate Bond Fund, Evergreen
Short-Intermediate Municipal Fund, Evergreen Small Cap Equity Income Fund,
Evergreen South Carolina Municipal Bond Fund, Evergreen Tax Strategic Foundation
Fund, Evergreen U.S. Government Fund, Evergreen Utility Fund, Evergreen Value
Fund, Evergreen Virginia Municipal Bond Fund, Evergreen Capital Preservation and
Income Fund, Evergreen Fund for Total Return, Evergreen Natural Resources Fund,
Evergreen Omega Fund, Evergreen Strategic Income Fund, Evergreen California Tax
Free Fund, Evergreen Massachusetts Tax Free Fund, Evergreen Missouri Tax Free
Fund, Evergreen New York Tax Free Fund, Evergreen Pennsylvania Tax Free Fund,
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone Quality Bond Fund (B-1), Keystone Small
Company Growth Fund (S-4), Keystone Strategic Growth Fund (K- 2), Keystone
Growth and Income Fund (S-1), Evergreen Select Adjustable Rate Fund, Evergreen
Select Small Cap Growth Fund, Keystone International Fund, Keystone Precious
Metals Holdings, and Keystone Tax Free Fund (each a "Fund" and, collectively,
the "Funds")
The Statements of Additional Information of each of the Funds are
hereby supplemented as follows:
STANDARDIZED FUNDAMENTAL INVESTMENT RESTRICTIONS
Each of the above Funds, except Keystone Balanced Fund (K-1), Keystone
Diversified Bond Fund (B-2), Keystone Small Company Growth Fund (S-4), and
Keystone Tax Free Fund, has adopted the following standardized fundamental
investment restrictions. These restrictions may be changed only by a vote of
Fund shareholders.
1. Diversification of Investments
The Fund may not make any investment inconsistent with the Fund's
classification as a diversified [non-diversified] investment company
under the Investment Company Act of 1940.
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2. Concentration of a Fund's Assets in a Particular Industry. ([All Funds
other than those listed below.)
The Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than
securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities [or in the case of Money Market Funds domestic
bank money instruments]).
For Evergreen Utility Fund
The Fund will concentrate its investments in the utilities industry.
For Keystone Precious Metals Holdings
The Fund will concentrate its investments in industries related to the
mining, processing or dealing in gold or other precious metals and
minerals.
3. Issuance of Senior Securities
Except as permitted under the Investment Company Act of 1940, the Fund
may not issue senior securities.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by
applicable law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed an underwriter in connection with the
disposition of its portfolio securities.
6. Investment in Real Estate
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in (a)
securities directly or indirectly secured by real estate, or (b)
securities issued by companies that invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on
commodities except to the extent that the Fund may engage in financial
futures contracts and related options and currency contracts and
related options and may otherwise do so in accordance with
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applicable law and without registering as a commodity pool operator
under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may
lend its portfolio securities in accordance with applicable law. The
acquisition of investment instruments shall not be deemed to be the
making of a loan.
9. Investment in Federally Tax Exempt Securities
The following Funds have also adopted a standardized fundamental
investment restriction in regard to investments in federally tax-exempt
securities:
<TABLE>
<CAPTION>
<S> <C>
Evergreen Tax Strategic Foundation Fund Evergreen High Grade Tax Free Fund
Evergreen Georgia Municipal Bond Fund Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund Evergreen Virginia Municipal Bond Fund
Evergreen New York Tax Free Fund Evergreen Massachusetts Tax Free Fund
Evergreen California Tax Free Fund Evergreen Pennsylvania Tax Free Fund
Evergreen Institutional Tax Exempt Money Market Fund Evergreen Missouri Tax Free Fund
Evergreen Short-Intermediate Municipal Fund
</TABLE>
The Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for Funds with the words tax exempt, tax free or municipal in their names.
ELIMINATION OF CERTAIN NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The nonfundamental investment restrictions described below have been
eliminated by each Fund listed under such restriction:
1. PROHIBITION ON INVESTMENT IN UNSEASONED ISSUERS
Evergreen Fund, Growth and Income Fund, Income and Growth Fund,
American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Growth and Income Fund (S-1), Omega Fund, Precious
Metals Holding, Strategic Growth Fund (K- 2), High Income Bond Fund
(B-4), Capital Preservation and Income Fund, Select Adjustable Rate
Fund, Strategic Income Fund, Fund for Total Return, International Fund
2. PROHIBITION ON INVESTMENT IN COMPANIES FOR THE PURPOSE OF EXERCISING
CONTROL OR MANAGEMENT
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, Value
Fund, Intermediate Term Government Securities Fund, Foundation Fund,
American Retirement Fund, Emerging Markets Growth Fund, International
Equity Fund, Global Leaders Fund, Money Market Fund, Florida High
Income Municipal Bond Fund, Short-Intermediate Municipal Fund, Growth
and Income Fund (S-1), Precious Metals Holdings, Strategic Growth Fund
(K-2), High Income Bond Fund (B-4), Fund for Total Return,
International Fund
3. PROHIBITION ON INVESTMENT IN COMPANIES IN WHICH TRUSTEES OR OFFICERS OF
THE FUNDS ALSO HOLD SHARES ABOVE CERTAIN PERCENTAGE LEVELS
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Intermediate Term Government Securities Fund, Foundation
Fund, American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Precious Metals Holdings, Inc.
4. Prohibition on Investment of More Than 5% of a Fund's Net Assets in
Warrants, With No More Than 2% of Net Assets Being Invested in Warrants
That Are Listed NEW YORK NOR AMERICAN STOCK EXCHANGES
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund,
Short-Intermediate Municipal Fund
5. PROHIBITION ON INVESTMENT IN OIL, GAS OR OTHER MINERAL EXPLORATION OR
DEVELOPMENT PROGRAMS
Evergreen Fund, MicroCap Fund, Aggressive Growth Fund, Growth and
Income Fund, Small Cap Equity Fund, Income and Growth Fund, Value Fund,
Intermediate Term Government Securities Fund, Foundation Fund, American
Retirement Fund, Money Market Fund, Florida High Income Municipal Bond
Fund, Short-Intermediate Municipal Fund, High Grade Tax Free Fund,
Precious Metals Holdings, Inc.
6. PROHIBITION ON JOINT TRADING ACCOUNTS
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Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund, Florida High
Income Municipal Bond Fund
7. PROHIBITION ON INVESTMENT IN OTHER INVESTMENT COMPANIES. [Note: The
Funds may invest in such companies to the extent permitted by the
Investment Company Act of 1940 and the rules thereunder.]
Growth and Income Fund, Utility Fund, Small Cap Equity Income Fund,
Income and Growth Fund, Value Fund, Short-Intermediate Bond Fund,
Intermediate Term Government Securities Fund, Foundation Fund, Tax
Strategic Foundation Fund, American Retirement Fund, High Grade Tax
Free Fund, Growth and Income Fund (S-1), Omega Fund, Precious Metals
Holdings, Strategic Growth Fund (K-2), High Income Bond Fund (B-4),
Select Adjustable Rate Fund, Strategic Income Fund, Fund for Total
Return, Global Opportunities Fund, International Fund, Massachusetts
Tax Free Fund, New York Tax Free Fund, Pennsylvania Tax Free Fund,
California Tax Free Fund and Missouri Tax Free Fund.
RECLASSIFICATION OF ALL OTHER FUNDAMENTAL INVESTMENT RESTRICTIONS
All investment restrictions other than those described above as having been
standardized or eliminated have been reclassified from fundamental to
nonfundamental and, as, such, may be changed by the Funds' Boards of Trustees at
any time without a shareholder vote.
TRUSTEES
The Trustees and executive officers of each Trust, their ages, and
their principal occupations during the last five years are shown below:
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of
the Evergreen Group of Mutual Funds and Trustee. Retired Vice President
of Lance Inc. (food manufacturing); Chairman of the Distribution Comm.
Foundation for the Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park,
Charlotte, NC- Trustee. Medical Director, U.S. Healthcare of Charlotte,
North Carolina since 1996; President, Primary Physician Care from 1990
to 1996.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street, Suite 980, Charlotte,
NC-Trustee. Attorney, Law Offices of Michael S. Scofield since 1969.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC - Trustee.
Sales Representative with Nucor-Yamoto Inc. (steel producer) since
1988.
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THOMAS L. McVERRY (58), 4419 Parkview Drive, Charlotte, NC - Trustee.
Director of Carolina Cooperative Federal Credit Union since 1990 and
Rexham Corporation from 1988 to 1990; Vice President of Rexham
Industries, Inc. (diversified manufacturer) from 1989 to 1990; Vice
President - Finance and Resources, Rexham Corporation from 1979 to
1990.
WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC - Trustee. Partner in the law firm Holcomb and Pettit,
P.A. since 1990.
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL -
Trustee. Real estate developer and construction consultant since 1980;
President of Centrum Equities since 1987 and Centrum Properties, Inc.
since 1980.
CHARLES A. AUSTIN III (61), Trustee. Investment counselor to Appleton
Partners, Inc.; former Managing Director, Seaward Management
Corporation (investment advice); and former Director, Executive Vice
President and Treasurer, State Street Research & Management Company
(investment advice).
K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and
Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chief Executive
Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher &
Associates (environmental consulting); President, Oldways Preservation
and Exchange Trust (education); and former Director, Keystone
Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund
and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
DAVID M. RICHARDSON (55) Trustee. Executive Vice President, DMR
International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of
the Evergreen Group of Mutual Funds. Chairman, Environmental Warranty,
Inc., and Consultant, Drake Beam Morin, Inc. (executive outplacement);
Director of Connecticut Natural Gas Corporation, Trust Company of
Connecticut, Hartford Hospital, Old State House Association, and
Enhance Financial Services, Inc.; Chairman, Board of Trustees, Hartford
YMCA; former Director; Executive Vice President, and Vice Chairman of
The Travelers Corporation.
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<PAGE>
EXECUTIVE OFFICERS
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY -
President and Treasurer. Consultant to BISYS Fund Services since 1996.
Senior Managing Director, Furman Selz LLC since 1992, Managing Director
from 1984 to 1992.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH - Secretary.
Senior Vice President/Director of Administration and Regulatory
Services, BISYS Fund Services since April 1995. Vice
President/Assistant General Counsel, Alliance Capital Management from
1988 to 1995.
The officers of the Trusts are officers and/or employees of The BISYS
Group, Inc. ("BISYS Group"), except for Mr. Pileggi, who is a consultant to The
BISYS Group. The BISYS Group is an affiliate of Evergreen Distributor, Inc.
("EDI"), the distributor of each class of shares of each Fund.
No officer or Trustee of the Trusts owned more than 1.0% of any class
of shares of any of the Funds as of November 30, 1997.
DISTRIBUTION PLANS
The following is added to the disclosure under the caption "Distribution Plan"
Class A and B shares are made available to employer-sponsored retirement or
savings plans ("Plans") without a sales charge if:
(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch and, on
the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the Plan has $3 million or more in assets invested in broker/dealer
funds not advised or managed by Merrill Lynch Asset Management, L.P. ("MLAM")
that are made available pursuant to a Services Agreement between Merrill Lynch
and the Fund's principal underwriter or distributor and in Funds advised or
managed by MLAM (collectively, the "Applicable Investments"); or
(ii) the Plan is recordkept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has $3 million or more
in assets, excluding money market funds, invested in Applicable Investments; or
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(iii) the Plan has 500 or more eligible employees, as determined by the Merrill
Lynch plan conversion manager, on the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares convert to Class A shares once the Plan has reached $5 million
invested in Applicable Investments. The Plan will receive a Plan level share
conversion.
The following is added to the Statement of Additional Information of each of
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone International Fund, Keystone Precious
Metals Holdings, Keystone Quality Bond Fund (B-1), Keystone Small Company Growth
Fund (S-4), Keystone Strategic Growth Fund (K-2), Keystone Growth and Income
Fund (S-1) and Keystone Tax Free Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DISTRIBUTION PLANS AND AGREEMENTS
Distribution fees are accrued daily and paid monthly on Class A, Class
B and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B shares and Class C shares are
designed to permit an investor to purchase such shares through broker-dealers
without the assessment of a front-end sales charge, and, in the case of Class C
shares, without the assessment of a contingent deferred sales charge after the
first year following the month of purchase, while at the same time permitting
the Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares and
the Class C shares are the same as those of the front-end sales charge and
distribution fee with respect to the Class A shares in that in each case the
sales charge and/or distribution fee provide for the financing of the
distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its Class A, Class B and Class C shares (each a
"Plan" and collectively, the "Plans"), the Treasurer of each Fund reports the
amounts expended under the Plans and the purposes for which such expenditures
were made to the Trustees of the Trust for their review on a quarterly basis.
Also, each Plan provides that the selection and nomination of the disinterested
Trustees are committed to the discretion of such disinterested Trustees then in
office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the
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latter may in turn pay part or all of such compensation to brokers or other
persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Trust or by vote
of the holders of a majority of the outstanding voting securities of that Class
and, in either case, by a majority of the Independent Trustees of the Trust who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related thereto.
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<PAGE>
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to each Fund and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class A, Class B and Class C shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B and Class C shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class A, Class B and Class C shares.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (i) by a Fund without penalty
at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
disinterested Trustees, or (ii) by the Distributor. To terminate any
Distribution Agreement, any party must give the other parties 60 days' written
notice; to terminate a Plan only, the Fund need give no notice to the
Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
HOW THE FUNDS OFFER SHARES TO THE PUBLIC
You may buy shares of a Fund through the Funds' distributor,
broker-dealers that have entered into special agreements with the Funds'
distributor or certain other financial institutions. Each Fund offers four
classes of shares that differ primarily with respect to sales
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<PAGE>
charges and distribution fees. Depending upon the class of shares, you will pay
an initial sales charge when you buy a Fund's shares, a contingent deferred
sales charge (a "CDSC") when you redeem a Fund's shares or no sales charges at
all.
Purchase Alternatives
CLASS A SHARES
With certain exceptions, when you purchase Class A shares you will pay
a maximum sales charge of 4.75%. (The prospectus contains a complete table of
applicable sales charges and a discussion of sales charge reductions or waivers
that may apply to purchases.) If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, the Funds will charge a CDSC
of 1.00% if you redeem during the month of your purchase and the 12-month period
following the month of your purchase. See "Calculation of Contingent Deferred
Sales Charge" below.
CLASS B SHARES
The Funds offer Class B shares at net asset value (without a front-end
load). With certain exceptions, however, the Funds will charge a CDSC of 1.00%
on shares you redeem within 72 months after the month of your purchase. The
Funds will charge CDSCs at the following rate:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase..........................5.00%
Second twelve-month period following the month of purchase...............4.00%
Third twelve-month period following the month of purchase................3.00%
Fourth twelve-month period following the month of purchase...............3.00%
Fifth twelve-month period following the month of purchase................2.00%
Sixth twelve-month period following the month of purchase................1.00%
Thereafter...............................................................0.00%
Class B shares that have been outstanding for seven years after the month of
purchase will automatically convert to Class A shares without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificate to ESC.
CLASS C SHARES
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Funds
offer Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Funds will charge a
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CDSC of 1.00% on shares you redeem within 12-months after the month of your
purchase. See "Contingent Deferred Sales Charge" below.
CLASS Y SHARES
No CDSC is imposed on the redemption of Class Y shares. Class Y shares
are not offered to the general public and are available only to (1) persons who
at or prior to December 31, 1994 owned shares in a mutual fund advised by
Evergreen Asset Management Corp. ("Evergreen Asset"), (2) certain institutional
investors and (3) investment advisory clients of the Capital Management Group of
First Union National Bank ("FUNB"), Evergreen Asset, Keystone Investment
Management Company, or their affiliates. Class Y shares are offered at net asset
value without a front-end or back-end sales charge and do not bear any Rule
12b-1 distribution expenses.
Contingent Deferred Sales Charge
The Funds charge a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plan"). If imposed, the Funds
deduct the CDSC from the redemption proceeds you would otherwise receive. The
CDSC is a percentage of the lesser of (1) the net asset value of the shares at
the time of redemption or (2) the shareholder's original net cost for such
shares. Upon request for redemption, to keep the CDSC a shareholder must pay as
low as possible, a Fund will first seek to redeem shares not subject to the CDSC
and/or shares held the longest, in that order. The CDSC on any redemption is, to
the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the Principal Underwriter or its predecessor.
SALES CHARGE WAIVERS OR REDUCTIONS
Reducing Class a Front-end Loads
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
COMBINED PURCHASES
You can reduce your sales charge by combining purchases of Class A
shares of multiple Evergreen funds. For example, if you invested $75,000 in each
of two different Evergreen funds, you would pay a sales charge based on a
$150,000 purchase (i.e., 3.75% of the offering price, rather than 4.75%).
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RIGHTS OF ACCUMULATION
You can reduce your sales charge by adding the value of Class A shares
of Evergreen funds you already own to the amount of your next Class A
investment. For example, if you hold Class A shares valued at $99,999 and
purchase an additional $5,000, the sales charge for the $5,000 purchase would be
at the next lower sales charge of 3.75%, rather than 4.75%.
LETTER OF INTENT
You can, by completing the "Letter of Intent" section of the
application, purchase Class A shares over a 13-month period and receive the same
sales charge as if you had invested all the money at once. All purchases of
Class A shares of an Evergreen fund during the period will qualify as Letter of
Intent purchases.
Shares That Are Not Subject to a Sales Charge or CDSC
WAIVER OF SALES CHARGES
The Funds may sell their shares at net asset value without an initial
sales charge to:
1. purchases of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax
sheltered annuity or TSA plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan") or
a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust
departments and registered investment advisers;
4. investment advisers, consultants or financial planners who
place trades for their own accounts or the accounts of their
clients and who charge such clients a management, consulting,
advisory or other fee;
5. clients of investment advisers or financial planners who place
trades for their own accounts if the accounts are linked to
master accounts of such investment advisers or financial
planners on the books of the broker-dealer through whom shares
are purchased;
6. institutional clients of broker-dealers, including retirement
and deferred compensation plans and the trusts used to fund
these plans, which place trades through an omnibus account
maintained with a Fund by the broker-dealer;
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7. employees of FUNB, its affiliates, Evergreen Distributor,
Inc., any broker-dealer with whom Evergreen Distributor, Inc.,
has entered into an agreement to sell shares of the Funds, and
members of the immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen funds, the Distributor or their affiliates and to
the immediate families of such persons; or
9. a bank or trust company in a single account in the name of
such bank or trust company as trustee if the initial
investment in or any Evergreen fund made pursuant to this
waiver is at least $500,000 and any commission paid at the
time of such purchase is not more than 1.00% of the amount
invested.
With respect to items 8 and 9 above, each Fund will only sell shares to
these parties upon the purchasers written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. The Funds will not charge any
CDSC on redemptions by such purchasers.
WAIVER OF CDSCS
The Funds do not impose a CDSC when the shares you are redeeming
represent:
1. an increase in the share value above the net cost of such
shares;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares that are in the account of a shareholder who has died
or become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder
who is a least 59 1/2 years old;
6. shares in an account that we have closed because the account
has an aggregate net asset value of less than $1,000;
7. an automatic withdrawal under an Systematic Income Plan of up
to 1.00% per month of your initial account balance;
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8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan
that purchased Class C shares (this waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially
all of its assets).
EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of
any other Evergreen fund, as described under the section entitled "Exchanges" in
a Fund's prospectus. Before you make an exchange, you should read the prospectus
of the Evergreen fund into which you want to exchange. The Trust's Board of
Trustees reserves the right to discontinue, alter or limit the exchange
privilege at any time.
HOW THE FUNDS VALUE SHARES
How and When a Fund Calculates its Net Asset Value per Share ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as
described in the Prospectus. A Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of each Fund is calculated by dividing the value of a Fund's
net assets attributable to that class by all of the shares issued for that
class.
How a Fund Values the Securities it Owns
Current values for a Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or on the NMS prior to
the time of the valuation, provided that a sale has occurred.
(2) Securities traded in the over-the-counter market, other than on
NMS, are valued at the mean of the bid and asked prices at the time of
valuation.
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(3) Short-term investments maturing in more than sixty days for which
market quotations are readily available, are valued at current market value.
(4) Short-term investments maturing in sixty days or less (including
all master demand notes) are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market.
(5) Short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market.
(6) Securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS if, in
the Fund's opinion, the last sales price does not reflect a current market value
or if no sale occurred; and other assets are valued at prices deemed in good
faith to be fair under procedures established by the Board of Trustees.
SHAREHOLDER SERVICES
As described in the prospectus, a shareholder may elect to receive his
or her dividends and capital gains distributions in cash instead of shares.
However, ESC will automatically convert a shareholder's distribution option so
that the shareholder reinvests all dividends and distributions in additional
shares when it learns that the postal or other delivery service is unable to
deliver checks or transaction confirmations to the shareholder's address of
record. The Funds will hold the returned distribution or redemption proceeds in
a non interest-bearing account in the shareholder's name until the shareholder
updates his or her address. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
December 22, 1997
22943
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD PRECIOUS METALS FUND, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus dated November 30, 1997 (the
"Prospectus"), pursuant to which Blanchard Precious Metals Fund, Inc. (the
"FUND" or the "COMPANY") is offered. Please retain this document for future
reference.
To obtain the Prospectus please call the FUND at 1-800-829-3863.
TABLE OF CONTENTS Page
Investment Objective and Policies 2
Investment Restrictions 10
Computation of Net Asset Value 11
Performance Information 12
Portfolio Transaction 13
Dividends, Capital Gains Distributions
and Tax Matters 14
The Management of the Fund 20
Management Services 24
Portfolio Management Services 25
Custodian 25
Administrative Services 25
Distribution Plan 25
Description of the FUND 26
Shareholder Reports 26
MANAGER
Virtus Capital Management, Inc.
PORTFOLIO ADVISER
Cavelti Capital Management, Ltd.
DISTRIBUTOR
Federated Securities Corp.
CUSTODIAN
Signet Trust Company
TRANSFER AGENT
Federated Shareholder Services Company
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Dated: November 30, 1997
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the FUND are set forth in the FUND's
Prospectus which refers to the following investment strategies and additional
information:
OPTIONS AND FUTURES STRATEGIES
Through the writing and purchase of options and the purchase and sale
of stock index futures contracts, interest rate futures contracts, foreign
currency futures contracts and related options on such futures contracts, Virtus
Capital Management, Inc. ("VCM") may at times seek to hedge against a decline in
the value of securities included in the FUND's portfolio or an increase in the
price of securities which it plans to purchase for the FUND or to reduce risk or
volatility while seeking to enhance investment performance. Expenses and losses
incurred as a result of such hedging strategies will reduce the FUND's current
return.
The ability of the FUND to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices, U.S.
Government securities and foreign currencies are relatively new and still
developing. Although the FUND will not enter into an option or futures position
unless a liquid secondary market for such option or futures contract is believed
by FUND management to exist, there is no assurance that the FUND will be able to
effect closing transactions at any particular time or at an acceptable price.
Reasons for the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume; or (vi) one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market thereon would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
Low initial margin deposits made upon the opening of a futures position
and the writing of an option involve substantial leverage. As a result,
relatively small movements in the price of the contract can result in
substantial unrealized gains or losses. However, to the extent the FUND
purchases or sells futures contracts and options on futures contracts and
purchases and writes options on securities and securities indexes for hedging
purposes, any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset, in whole or in part, by increases in the
value of securities held by the FUND or decreases in the prices of securities
the FUND intends to acquire. It is impossible to predict the amount of trading
interest that may exist in various types of options or futures. Therefore, no
assurance can be given that the FUND will be able to utilize these instruments
effectively for the purposes stated below. Furthermore, the FUND's ability to
engage in options and futures transactions may be limited by tax considerations.
Although the FUND will only engage in options and futures transactions for
limited purposes, it will involve certain risks which are described in the
Prospectus. The FUND will not engage in options and futures transactions for
leveraging purposes.
WRITING COVERED OPTIONS ON SECURITIES
The FUND may write covered call options and covered put options on
optionable securities of the types in which it is permitted to invest from time
to time as Cavelti Capital Management, Ltd., the FUND's portfolio adviser (the
"Portfolio Manager"), determines is appropriate in seeking to attain its
objective. Call options written by the FUND give the holder the right to buy the
underlying securities from the FUND at a stated exercise price; put options give
the holder the right to sell the underlying security to the FUND at a stated
price.
The FUND may write only covered options, which means that, so long as
the FUND is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the FUND will
maintain, in a segregated account, cash or short-term U.S. Government securities
with a value equal to or greater than the exercise price of the underlying
securities or will hold a purchased put option with a higher strike price than
the put written. The FUND may also write combinations of covered puts and calls
on the same underlying security.
<PAGE>
The FUND will receive a premium from writing a put or call option,
which increases the FUND's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, the FUND
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the FUND assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its market value at the
time it is exercised resulting in a potential capital loss if the purchase price
is less than the underlying security's current market value minus the amount of
the premium received, unless the security subsequently appreciates in value.
The FUND may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The FUND will realize a
profit or loss from such transaction if the cost of such transaction is less or
more, respectively, than the premium received from the writing of the option. In
the case of a put option, any loss so incurred may be partially or entirely
offset by the premium received from a simultaneous or subsequent sale of a
different put option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by unrealized appreciation of the underlying security owned
by the FUND.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES
The FUND may purchase put options to protect its portfolio holdings in
an underlying security against a decline in market value. Such hedge protection
is provided during the life of the put option since the FUND, as holder of the
put option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. In order
for a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the FUND will reduce any
profit it might otherwise have realized in the underlying security by the
premium paid for the put option and by transaction costs.
The FUND may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the FUND, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the FUND will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES
The FUND may purchase and sell options on stock indices and stock index
futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. Currently, index options traded include the S&P 100 Index,
the S&P 500 Index, the NYSE Composite Index, the AMEX Market Value Index, the
National Over-the-Counter Index and other standard broadly based stock market
indices.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
<PAGE>
If the Portfolio Manager expects general stock market prices to rise,
it might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the FUND's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the Portfolio Manager expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does in fact decline, the value of some or all of the equity
securities in the FUND's portfolio may also be expected to decline, but that
decrease would be offset in part by the increase in the value of the FUND's
position in such put option or futures contract.
PURCHASE AND SALE OF INTEREST RATE FUTURES
The FUND may purchase and sell interest rate futures contracts on U.S.
Treasury bills, notes and bonds for the purpose of hedging fixed income and
interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
The FUND may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the fixed income securities held by the FUND will
fall, thus reducing the net asset value of the FUND. This interest rate risk can
be reduced without employing futures as a hedge by selling long-term fixed
income securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs to the FUND in the form of dealer spreads and
brokerage commissions.
The sale of interest rate futures contracts provides an alternative
means of hedging against rising interest rates. As rates increase, the value of
the FUND's short position in the futures contracts will also tend to increase,
thus offsetting all or a portion of the depreciation in the market value of the
FUND's investments which are being hedged. While the FUND will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES CONTRACTS
The FUND may purchase and write call and put options on stock index and
interest rate futures contracts. The FUND may use such options on futures
contracts in connection with its hedging strategies in lieu of purchasing and
writing options directly on the underlying securities or stock indices or
purchasing and selling the underlying futures. For example, the FUND may
purchase put options or write call options on stock index futures or interest
rate futures, rather than selling futures contracts, in anticipation of a
decline in general stock market prices or rise in interest rates, respectively,
or purchase call options or write put options on stock index or interest rate
futures, rather than purchasing such futures, to hedge against possible
increases in the price of equity securities or debt securities, respectively,
which the FUND intends to purchase.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS
In order to hedge its portfolio and to protect it against possible
variations in foreign exchange rates pending the settlement of securities
transactions, the FUND may buy or sell foreign currencies or may deal in forward
currency contracts. The FUND may also invest in currency futures contracts and
related options. If a decline in exchange rates for a particular currency is
anticipated, the FUND may sell a currency futures contract or a call option
thereon or purchase a put option on such futures contract as a hedge. If it is
anticipated that exchange rates will rise, the FUND may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in a
particular currency the FUND intends to purchase. These futures contracts and
related options thereon will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the FUND
will be covered.
<PAGE>
A currency futures contract sale creates an obligation by the FUND, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by the FUND, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract or let the option expire.
The FUND will write (sell) only covered put and call options on
currency futures. This means that the FUND will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. The FUND will, so long as it is
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by the FUND in cash, Treasury
bills, or other high-grade short-term obligations in a segregated account with
its custodian. If at the close of business on any day the market value of the
call purchased by the FUND falls below 100% of the market value of the call
written by the FUND, the FUND will so segregate an amount of cash, Treasury
bills or other high grade short-term obligations equal in value to the
difference. Alternatively, the FUND may cover the call option through
segregating with the custodian an amount of the particular foreign currency
equal to the amount of foreign currency per futures contract option multiplied
by the number of options written by the FUND. In the case of put options on
currency futures written by the FUND, the FUND will hold the aggregate exercise
price in cash, Treasury bills, or other high grade short-term obligations in a
segregated account with its custodian, or own put options on currency futures or
short currency futures, with the difference, if any, between the market value of
the put written and the market value of the puts purchased or the currency
futures sold maintained by the FUND in cash, Treasury bills or other high grade
short-term obligations in a segregated account with its custodian. If at the
close of business on any day the market value of the put options purchased or
the currency futures sold by the FUND falls below 100% of the market value of
the put options written by the FUND, the FUND will so segregate an amount of
cash, Treasury bills or other high grade short-term obligations equal in value
to the difference.
If other methods of providing appropriate cover are developed, the FUND
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements.
In connection with transactions in stock index options, stock index
futures, interest rate futures, foreign currency futures and related options on
such futures, the FUND will be required to deposit as "initial margin" an amount
of cash and short-term U.S. Government securities equal to from 5% to 10% of the
contract amount. Thereafter, subsequent payments (referred to as "variation
margin") are made to and from the broker to reflect changes in the value of the
futures contract.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The value of the FUND's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the FUND may incur costs in connection
with conversions between various currencies. The FUND will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign currencies. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties at a price set at the time of the contract.
These contracts are traded directly or indirectly between currency traders
(usually large commercial banks) and their customers. While the pursuit of
foreign currency gain is not a primary objective of the FUND, the FUND may, from
time to time, hold foreign currency to realize such gains. (These gains
constitute non-qualifying income that is subject to the 10% limitation with
respect to the "Income Requirement" of Subchapter M of the Internal Revenue Code
of 1986, as amended, which is discussed herein under "Dividends, Capital Gains
Distributions and Tax Matters.")
<PAGE>
The FUND will enter into forward foreign currency exchange contracts as
described hereafter. When the FUND enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to establish
the U.S. dollar cost or proceeds. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the FUND will be able to protect itself
against a possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains which might result from a
positive change in such currency relationships.
When the Portfolio Manager believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell an amount of foreign currency
approximating the value of some or all of the FUND's portfolio securities
denominated in such foreign currency. The forecasting of short-term currency
market movement is extremely difficult and the successful execution of a
short-term hedging strategy is highly uncertain. The FUND does not intend to
enter into such forward contracts on a regular or continuous basis, and will not
do so if, as a result, the FUND would have more than 25% of the value of its
total assets committed to such contracts. The FUND will also not enter into such
forward contracts or maintain a net exposure in such contracts where the FUND
would be obligated to deliver an amount of foreign currency in excess of the
value of the FUND's portfolio securities or other assets denominated in that
currency. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment decisions made
with regard to overall strategies. However, the Trustees of the FUND believe
that it is important to have the flexibility to enter into such forward
contracts when the Portfolio Manager determines that the best interests of the
FUND will be served. The FUND's custodian bank will segregate cash or marketable
high grade debt securities in an amount not less than the value of the FUND's
total assets committed to foreign currency exchange contracts entered into under
this type of transaction. If the value of the securities segregated declines,
additional cash or securities will be added on a daily basis, i.e.,
marked-to-market, so that the segregated amount will not be less than the amount
of the FUND's commitments with respect to such contracts.
Generally, the FUND will not enter into a forward foreign currency
exchange contract with a term of greater than one year. At the maturity of the
contract, the FUND may either sell the portfolio security and make delivery of
the foreign currency, or may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the FUND to purchase, on the same maturity
date, the same amount of foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for the FUND to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the FUND is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the FUND is obligated to
deliver.
If the FUND retains the portfolio security and engages in an offsetting
transaction, the FUND will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the FUND
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between entering into a forward contract for the sale of a
foreign currency and the date the FUND enters into an offsetting contract for
the purchase of the foreign currency, the FUND will realize a gain to the extent
the price of the currency the FUND has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the FUND
will suffer a loss to the extent the price of the currency the FUND has agreed
to purchase exceeds the price of the currency the FUND has agreed to sell.
The FUND's dealing in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, the FUND is not
required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Portfolio Manager. It also should be realized that this method of protecting
the value of the FUND's portfolio securities against the decline in the value of
a currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which one can achieve at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain which might result should
the value of such currency increase.
<PAGE>
ADDITIONAL RISKS OF FUTURES CONTRACTS AND RELATED OPTIONS AND FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS
The market prices of futures contracts may be affected by certain
factors. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the securities
and futures markets. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions.
In addition, futures contracts in which the FUND may invest may be
subject to commodity exchange imposed limitations on fluctuations in futures
contract prices during a single day. Such regulations are referred to as "daily
price fluctuation limits" or "daily limits". During a single trading day no
trades may be executed at prices beyond the daily limit. Once the price of a
futures contract has increased or decreased by an amount equal to the daily
limit, positions in those futures cannot be taken or liquidated unless both a
buyer and seller are willing to effect trades at or within the limit. Daily
limits, or regulatory intervention in the commodity markets, could prevent the
FUND from promptly liquidating unfavorable positions and adversely affect
operations and profitability.
Forward foreign currency exchange contracts ("forward contracts") are
not traded on contract markets regulated by the Commodity Futures Trading
Commission ("CFTC") and are not regulated by the SEC. Rather, forward contracts
are traded through financial institutions acting as market-makers. In the
forward currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
In addition, futures contracts and related options, and forward
contracts may be traded on foreign exchanges, to the extent permitted by the
CFTC. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (a) other complex
foreign political and economic factors, (b) lesser availability than in the
United States of data on which to make trading decisions, (c) delays in the
FUND's ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States and the United Kingdom, (d) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, and (e) lesser trading volume.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions by which the FUND purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon price on an agreed upon date within a number of days (usually not
more than seven days) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value (at least equal to the amount of
the agreed upon resale price and marked-to-market daily) of the underlying
security. While it does not presently appear possible to eliminate all risks
from these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delay and costs to the FUND in
connection with bankruptcy proceedings) it is the policy of the FUND to limit
repurchase agreements to those member banks of the Federal Reserve System and
primary dealers in U.S. Government securities who are believed by the FUND's
Directors to present minimum credit risk. Repurchase agreements maturing in more
than seven days are considered, for the purposes of the FUND's investment
restrictions, to be illiquid securities. No more than 10% of the FUND's net
assets may be held in illiquid securities (see "Investment Restrictions").
RATINGS OF DEBT INSTRUMENTS
The four highest ratings of Moody's Investors Service, Inc. ("Moody's")
for U.S. corporate and municipal bonds are Aaa, Aa, A and Baa. Bonds rated Aaa
are judged by Moody's to be of the best quality. Bonds rated Aa are judged to be
of high quality by all standards. Together with the Aaa group, they comprise
what are generally known as high-grade bonds. Moody's states that Aa bonds are
rated lower than the best bonds because margins of protection or other elements
make their long-term risks appear somewhat larger than the long-term risks for
Aaa bonds. Bonds
<PAGE>
which are rated A by Moody's possess many favorable investment attributes and
are considered "upper medium grade obligations." Factors giving security to
principal and interest of A rated bonds are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Bonds that are rated Baa are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and have speculative characteristics as
well.
The four highest ratings of Standard & Poor's Corporation ("S&P") for
U.S. bonds are AAA, AA, A and BBB. Bonds rated AAA have the highest rating
assigned by S&P to an obligation. Capacity to pay interest and repay principal
is extremely strong. Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only in a small
degree. Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. Bonds rated BBB are considered on the
borderline between definitely sound obligations and obligations where the
speculative element begins to predominate.
RATINGS OF COMMERCIAL PAPER
Commercial paper rated A-1 by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements; the issuer has access
to at least two additional channels of borrowing; basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances; the issuer's
industry is well established and the issuer has a strong position within the
industry and the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3.
The rating P-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
REGULATORY MATTERS
In connection with its proposed futures and options transactions, the
FUND has filed with the Commodity Futures Trading Commission ("CFTC") a notice
of eligibility for exemption from the definition of (and therefore from CFTC
regulation as) a "commodity pool operator" under the Commodity Exchange Act. The
FUND has represented in its notice of eligibility that:
(i) it will not purchase or sell futures or options on futures
contracts or stock indices if as a result the sum of the
initial margin deposits on its existing futures contracts and
related options positions and premiums paid for options on
futures contracts or stock indices would exceed 5% of the
FUND's assets; and
(ii) with respect to each futures contract purchased or long
position in an option contract, the FUND will set aside in a
segregated account cash or cash equivalents in an amount equal
to the market value of such contracts less the initial margin
deposit.
The Staff of the SEC has taken the position that the purchase and sale
of futures contracts and the writing of related options may involve senior
securities for the purposes of the restrictions contained in Section 18 of the
Investment Company Act of 1940 (the "1940 Act") on investment companies issuing
senior securities. However, the staff has issued letters declaring that it will
not recommend enforcement action under Section 18 if an investment company:
(i) sells futures contracts to offset expected declines in the
value of the investment company's portfolio securities,
provided the value of such futures contracts does not exceed
the total market value of those securities (plus such
additional amount as may be necessary because of differences
in the volatility factor of the portfolio securities vis-a-vis
the futures contracts);
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(ii) writes call options on futures contracts, stock indexes or
other securities, provided that such options are covered by
the investment company's holding of a corresponding long
futures position, by its ownership of portfolio securities
which correlate with the underlying stock index or otherwise;
(iii) purchases futures contracts, provided the investment company
establishes a segregated account ("cash segregated account")
consisting of cash or cash equivalents in an amount equal to
the total market value of such futures contracts less the
initial margin deposited therefor; and
(iv) writes put options on futures contracts, stock indices or
other securities, provided that such options are covered by
the investment company's holding of a corresponding short
futures position, by establishing a cash segregated account in
an amount equal to the value of its obligation under the
option, or otherwise.
The FUND will conduct its purchases and sales of futures contracts and
writing of related options transactions in accordance with the foregoing.
ADDITIONAL INFORMATION REGARDING PRECIOUS METALS AND PRECIOUS METALS SECURITIES
The production and marketing of gold and precious metals may be
affected by the action of certain governments and changes in existing
governments. For example, the mining of gold is highly concentrated in a few
countries. In current order of magnitude of production of gold bullion, the five
largest producers of gold are the Republic of South Africa, the Union of Soviet
Socialist Republics, Canada, Brazil and the United States. Economic and
political conditions prevailing in these countries may have a direct effect on
the production and marketing of newly produced gold and sales of central bank
gold holdings. It is expected that a majority of gold mining companies in which
the FUND will invest will be located within the United States and Canada.
Prices of Precious Metals Securities can be volatile and tend to
experience greater volatility than the prices of physical precious metals. This
is due to the fact that the costs of mining precious metals remain relatively
fixed, so that an increase or decrease in the price of precious metals has a
direct and greater than proportional effect on the profitability of precious
metals mining companies. Investments tied to precious metals characteristically
involve high risk because of precious metals' price volatility. The price of
precious metals is affected by factors such as cyclical economic conditions,
political events and monetary policies of various countries. During periods of
rising precious metals prices, the FUND will tend to emphasize investments in
Precious Metals Securities.
PORTFOLIO TURNOVER
As a result of its investment policies, the FUND expects to engage in a
substantial number of portfolio transactions. However, the FUND's portfolio
turnover rate is not expected to exceed 100%. A 100% portfolio turnover rate
would occur if 100% of the securities owned by the FUND were sold and either
repurchased or replaced by it within one year. The FUND's portfolio turnover
rate is, generally, the percentage computed by dividing the lesser of FUND's
purchases or sales exclusive of short-term securities and bullion, by the
average value of the FUND's total investments exclusive of short-term securities
and bullion. The portfolio turnover rates for the fiscal year ended September
30, 1997, and for the period from May 1, 1996 through September 30, 1996, and
for the fiscal years ended April 30, 1996 and 1995, were 97%, 36%, 176% and
116%, respectively. High portfolio turnover involves correspondingly greater
brokerage commissions, other transaction costs, and a possible increase in
short-term capital gains or losses. Shareholders are taxed on any such net gains
at ordinary income rate.
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INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means respectively the vote of the lesser of (i) 67% or more of the shares
of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions.
1. As a non-diversified management investment company, the FUND has the
following restrictions: (a) with respect to 50% of the FUND's total
assets, the FUND may not invest more than 5% of its total assets, at
market value, in the securities of one issuer (except the securities of
the U.S. Government, its agencies and instrumentalities) and (b) with
respect to the other 50% of the FUND's total assets, the FUND may not
invest more than 25% of the market value of its total assets in a
single issuer (except the securities of the U.S. Government, its
agencies and instrumentalities). These two restrictions,
hypothetically, could give rise to the FUND having as few as twelve
issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities
of any single company; (b) more than 5% of its total assets would be
invested in the securities of companies (including predecessors) that
have been in continuous operation for less than 3 years; (c) 25% or
more of its total assets would be concentrated in companies within any
one industry except the FUND may invest 25% or more of its assets in
Precious Metals Securities as defined in the Prospectus and (d) more
than 5% of total assets would be invested in warrants or rights or
invest more than 2% of its total assets if such warrants are not listed
on the New York Stock Exchange.
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 10% of the
market value of its total assets). The FUND will not purchase
securities while borrowing is in excess of 5% of the market value of
its total assets.
4. The FUND will not make loans of money or securities other than (a)
through the purchase of publicly distributed debt securities in
accordance with its investment objective and (b) through repurchase
agreements.
5. The FUND may not invest more than 10% of its total assets in the
securities of other investment companies or purchase more than 3% of
any other investment company's voting securities.
6. The FUND may not knowingly purchase or otherwise acquire securities
which are subject to legal or contractual restrictions on resale or for
which there is no readily available market if, as a result thereof,
more than 10% of the assets of the FUND (taken at market value) would
be invested in such securities, including repurchase agreements with
maturity dates in excess of 7 days.
7. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND
may pledge securities having a value at the time of pledge not
exceeding 10% of the market value of the FUND's total assets.
8. The FUND may not purchase or sell commodity contracts, except for
futures contracts and related options as described under "Investment
Objective and Policies" in the Prospectus and this Statement of
Additional Information.
9. The FUND may not buy any securities or other property on margin
(except for options and futures trading and for such short term credits
as are necessary for the clearance of transactions) or engage in short
sales.
10. The FUND may not invest in companies for the purpose of exercising
control or management.
11. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter in the resale of
any portfolio securities.
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12. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers
and Directors of the FUND and the officers and directors of VCM, who
individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of
such outstanding securities.
13. The FUND may not purchase or sell real estate (although it may
purchase securities secured by real estate interests or interests
therein, or issued by companies or investment trusts which invest in
real estate or interests therein).
14. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs; provided, however, that if
consistent with the objectives of the FUND, the FUND may purchase
securities of issuers whose principal business activities fall within
such areas.
15. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
Time) on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Years Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the FUND's portfolio securities are determined
as follows:
o according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on
more than one exchange, the price on the primary market for
that security, as determined by the Adviser or sub-adviser, is
used.);
o according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded
over-the-counter;
o for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term
obligations with remaining maturities of 60 days or less at
the time of purchase, may be valued at amortized cost; or
o at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate; maturity;
type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Directors determine in good
faith that another method of valuing options positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and asked prices.
The Fund will value bullion at the closing spot price based on exchange
quotations.
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TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from
the closing of the New York Stock Exchange. In computing the net asset value,
the FUND values foreign securities at the latest closing price on the exchange
on which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates are determined when such rates
are made available to the FUND at times prior to the close of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into U.
S. dollars at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Directors, although the actual
calculation may be done by others.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to shareholders, performance will be stated in
terms of total return, rather than in terms of yield. The total return basis
combines principal and dividend income changes for the periods shown. Principal
changes are based on the difference between the beginning and closing net asset
values for the period and assume reinvestment of dividends and distributions
paid by the FUND. Dividends and distributions are comprised of net investment
income and net realized capital gains. Under the rules of the SEC, funds
advertising performance must include total return quotes calculated according to
the following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods or at the end of the
1, 5 or 10 year periods (or fractional
portion thereof)
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
The FUND's aggregate annualized total return, reflecting the initial
investment and reinvestment of all dividends and distributions, for the fiscal
year ended September 30, 1997, and for the period from May 1, 1996 through
September 30, 1996 was (15.24%) and (8.90%), respectivley. For the fiscal year
ended April 30, 1996 and since inception (June 22, 1988 through September 30,
1997) the FUND's aggregate annualized rates of return were 37.03% and 1.27%,
respectively.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or the Standard & Poor's 500 Stock
Index or the Dow Jones Industrial Average, the FUND calculates its aggregate
total return for the specified periods of time by assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment
dates. Percentage increases are determined by subtracting the initial net asset
value of the investment from the ending net asset value and by dividing the
remainder by the beginning
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net asset value. The FUND does not, for these purposes, deduct the pro rata
share of the account opening fee which was in effect until December 1994 from
the initial value invested. The FUND will, however, disclose the pro rata share
of the account opening fee and will disclose that the performance data does not
reflect such non-recurring charge and that inclusion of such charge would reduce
the performance quoted. Such alternative total return information will be given
no greater prominence in such advertising than the information prescribed under
SEC rules and all advertisements containing performance data will include a
legend disclosing that such performance data represent past performance and that
the investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than their
original cost.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Manager subject to the supervision of VCM
and the Board of Directors and pursuant to authority contained in the Investment
Advisory Contract and Sub-Advisory Agreements between the FUND and VCM, and VCM
and the Portfolio Manager. In selecting such brokers or dealers, the Portfolio
Manager will consider various relevant factors, including, but not limited to
the best net price available, the size and type of the transaction, the nature
and character of the markets for the security to be purchased or sold, the
execution efficiency, settlement capability, and financial condition of the
broker-dealer firm, the broker-dealer's execution services rendered on a
continuing basis and the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to the Portfolio Manager for the
FUND's use, which in the opinion of the Board of Directors are reasonable and
necessary to the FUND's normal operations. Those services may include economic
studies, industry studies, security analysis or reports, sales literature and
statistical services furnished either directly to the FUND or to the Portfolio
Manager. Such allocation shall be in such amounts as VCM shall determine and the
Portfolio Manager shall report regularly to VCM who will in turn report to the
Board of Directors on the allocation of brokerage for such services.
The receipt of research from broker-dealers may be useful to the
Portfolio Manager in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers who
have executed orders on behalf of the Portfolio Manager's other clients may be
useful to the Portfolio Manager in carrying out its obligations to the FUND. The
receipt of such research may not reduce the Portfolio Manager's normal
independent research activities.
The Portfolio Manager is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are authorized
to use Federated Securities Corp. (the "Distributor"), and the Portfolio Manager
or their affiliated broker-dealers on an agency basis, to effect a substantial
amount of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from brokerage commissions earned by the Distributor as a result of
FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory Contract
does not provide for any reduction in the management fee as a result of profits
resulting from brokerage commissions effected through the Distributor. In
addition, the Sub-Advisory Agreement between VCM and the Portfolio Manager does
not provide for any reduction in the advisory fees as a result of profits
resulting from brokerage commissions effected through the Portfolio Manager or
any affiliated brokerage firms. For the the fiscal year ended September 30,
1997, and for the period from May 1, 1996 through September 30, 1996, and for
the fiscal years ended April 30, 1996, 1995 and 1994, the FUND incurred
brokerage commission expenses of $354,829, $305,931, $514,423, $395,000 and
$654,000, respectively, from the purchase and sale of portfolio securities.
The Board of Directors had adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the Investment Company Act of 1940 (the
"1940 Act") which requires that the commissions paid the Distributor or to the
Portfolio Manager or to their affiliated broker-dealers must be "reasonable and
fair compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time." The Rule and the
procedures also contain review requirements and require VCM to furnish reports
to the Directors and to maintain records in connection with such reviews.
<PAGE>
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commission
which other brokers or dealers would have charged for effecting such
transactions provided the Portfolio Manager determines in good faith that such
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by such executing brokers or dealers viewed in terms
of a particular transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of the Portfolio Manager. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in accordance with a formula considered by VCM to be equitable
to each, taking into consideration such factors as size of account,
concentration of holdings, investment objectives, tax status, cash availability,
purchase cost, holding period and other pertinent factors relative to each
account. In some cases this system could have a detrimental effect on the price
or volume of the security as far as the FUND is concerned. In other cases,
however, the ability of the FUND to participate in volume transactions will
produce better execution results for the FUND.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess of
net short-term capital gain over net long-term capital loss) for the taxable
year (the "Distribution Requirement"), and satisfies certain other requirements
of the Code that are described below. Please note that the below-listed and
defined "Short-Short Gain Test" has been repealed pursuant to the Taxpayer
Relief Act of 1997, effective for taxable years beginning after the date of
enactment. For purposes of the FUND, the effective date of the repeal will be
October 1, 1997. Distributions by the FUND made during the taxable year or,
under specified circumstances, within twelve months after the close of the
taxable year, will be considered distributions of income and gains of the
taxable year and can therefore satisfy the Distribution Requirement.
If the FUND has a net capital loss (i.e., the excess of capital losses
over capital gains) for any year, the amount thereof may be carried forward up
to eight years and treated as a short-term capital loss which can be used to
offset capital gains in such years.
In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the FUND may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the FUND from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the FUND at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
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In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In addition, under the rules of
Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a foreign currency
forward contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Section 1256, will generally be treated as ordinary income or
loss.
In general, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss (except for Section 1256 forward
foreign currency contracts, which are subject to the Section 988 Rules). The
FUND may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments of the FUND
that are not Section 1256 contracts. The Internal Revenue Service has held in
several private rulings that gains arising from Section 1256 contracts will be
treated for purposes of the Short-Short Gain Test as being derived from
securities held for not less than three months if the gains arise as a result of
a constructive sale under Code Section 1256.
The FUND may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the FUND invests in a PFIC, it may elect to
treat the PFIC as a qualifying electing fund (a "QEF") in which event the FUND
will each year have ordinary income equal to its pro rata share of the PFIC's
ordinary earnings for the year and long-term capital gain equal to its pro rata
share of the PFIC's net capital gain for the year, regardless of whether the
FUND receives distributions of any such ordinary earnings or net capital gain
from the PFIC. If the FUND does not (because it is unable to, chooses not to or
otherwise) elect to treat the PFIC as a QEF, then in general (i) any gain
recognized by the FUND upon a sale or other disposition of its interest in the
PFIC or any "excess distribution" (as defined) received by the FUND from the
PFIC will be allocated ratably over the FUND's holding period of its interest in
the PFIC, (ii) the portion of such gain or excess distribution so allocated to
the year in which the gain is recognized or the excess distribution is received
shall be included in the FUND's gross income for such year as ordinary income
(and the distribution of such portion by the
<PAGE>
FUND to shareholders will be taxable as an ordinary income dividend, but such
portion will not be subject to tax at the FUND level), (iii) the FUND shall be
liable for tax on the portions of such gain or excess distribution so allocated
to prior years in an amount equal to, for each such prior year, (A) the amount
of gain or excess distribution allocated to such prior year multiplied by the
highest corporate tax rate in effect for such prior year plus (B) interest on
the amount determined under clause (A) for the period from the due date for
filing a return for such prior year until the date for filing a return for the
year in which the gain is recognized or the excess distribution is received at
the rates and methods applicable to underpayments of tax for such period, and
(iv) the distribution by the FUND to shareholders of the portions of such gain
or excess distribution so allocated to prior years (net of the tax payable by
the FUND thereon) will again be taxable to the shareholders as an ordinary
income dividend.
Under recently proposed Treasury Regulations a Fund can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the FUND's adjusted tax basis
in that share ("mark to market gain"). Such mark to market gain will be included
by the Fund as ordinary income, such gain will not be subject to the Short-Short
Gain Test, and the FUND's holding period with respect to such PFIC stock
commences on the first day of the next taxable year. If the Fund makes such
election in the first taxable year it holds PFIC stock, the Fund will include
ordinary income from any mark to market gain, if any, and will not incur the tax
described in the previous paragraph.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option. However, with regard to forward currency
contracts, there does not appear to be any formal or informal authority which
identifies the issuer of such instrument.
Although the FUND's management and the Portfolio Manager will endeavor
to manage the FUND's portfolio so that the FUND's investment in Physical
Precious Metals Investments (as defined in the Prospectus) does not result in
its failure to satisfy the asset diversification test or the source of income
requirement described above, the FUND's management reserves the right to depart
from this policy whenever, in its sole judgment, it is deemed in the best
interests of the FUND and its shareholders to do so. If for any taxable year the
FUND does not qualify as a regulated investment company, all of its taxable
income (including its net capital gain) will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and
such distributions will be taxable as ordinary dividends to the extent of the
FUND's current and accumulated earnings and profits. Such distributions
generally will be eligible for the dividends-received deduction in the case of
corporate shareholders. According to an Internal Revenue Service announcement of
Treasury regulations to be promulgated, if the FUND qualifies and elects to be
taxed as a regulated investment company after not qualifying as a regulated
investment company for more than one year, the FUND will be subject to federal
income tax on the amount of the net unrealized gain on its assets at the time of
requalification (or, if the FUND so elects, at the time such net unrealized gain
is recognized during the following ten year period).
<PAGE>
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year ended on October 31 of such calendar year (or, at the election
of a regulated investment company having a taxable year ending November 30 or
December 31, for its taxable year (a "taxable year election")). The balance of
such income must be distributed during the next calendar year. For the foregoing
purposes, a regulated investment company is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determine ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its investment company taxable income for each taxable year.
Such distributions will be taxable to shareholders as ordinary income and
treated as dividends for federal income tax purposes, but they will qualify for
the 70% dividends-received deduction for corporations only to the extent
discussed below.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Met capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his or her shares or whether such
gain was recognized by the FUND prior to the date on which the shareholder
acquired his shares.
Ordinary income dividends paid by the FUND with respect to a taxable
year will qualify for the 70% dividends-received deduction generally available
to corporations (other than corporations, such as "S" corporations, which are
not eligible for the deduction because of their special characteristics and
other than for purposes of special taxes such as the accumulated earnings tax
and the personal holding company tax) to the extent of the amount of qualifying
dividends received by the FUND from domestic corporations for the taxable year.
A dividend received by the FUND will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the FUND has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c)(3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the FUND has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical stock; (2) to the extent that the FUND is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (I) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the FUND of (ii) by application of Code Section 246(b) which in
general limits the dividends-received deduction to 70% of the shareholder's
taxable income (determined without regard to the dividends-received deduction
and certain other items).
Alternative Minimum Tax ("ATM") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at the rate of 26% (or
28% for taxable income in excess of $175,000) for noncorporate taxpayers and 20%
for corporate taxpayers on the excess of the taxpayer's alternative minimum
taxable income ("AMTI") over an exemption amount. In addition, under the
Superfund Amendments and Reauthorization Act of 1986, a tax is imposed for
taxable years beginning after 1986 and before 1996 at the rate of 0.12% on the
excess of a corporate taxpayer's AMTI (determined without regard to the
deduction for this tax and the AMT net operating loss deduction) over $2
million. The corporate dividends received deduction is not itself an item of tax
preference that must be added back to taxable income or is otherwise disallowed
in determining a corporate's AMTI. However, corporate shareholders will
generally be required to take the full amount of any dividend received from the
FUND into account (without a dividends-received deduction) in determining its
adjusted current earnings, which are used in computing an additional corporate
preference item (i.e., 75% of the excess of a corporate taxpayer's adjusted
current earnings over its AMTI (determined without regard to this item and the
AMT net operating loss deduction)) includable in AMTI.
<PAGE>
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the FUND may elect to "pass through" to the FUND's shareholders the amount of
foreign taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the FUND, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
FUND representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax advisor regarding the
potential application of foreign tax credits.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the precedes of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code
<PAGE>
Section 246(c)(3) and (4) (discussed above in connection with the
dividends-received deduction for corporations) generally will apply in
determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from deduction against this gross
income or a credit against this U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as having
been paid. Such a foreign shareholder would generally be exempt from U.S.
federal income tax on gains realized on the sale of shares of the FUND and
capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholder, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax
consequences is bases on the Code and the Treasury Regulation issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expresses herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
<PAGE>
THE MANAGEMENT OF THE FUND
Officers and Directors are listed with their addresses, birthdates, and present
positions with Blanchard Precious Metals Fund, and principal occupations.
JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND DIRECTOR OF THE FUND; Chairman and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research;
Chairman and Director, Federated Research Corp. and
Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and
Director or Trustee of the Funds. Mr. Donahue is
the father of J. Christopher Donahue, Executive
Vice President of the Trust.
THOMAS G. BIGLEY
15 OLD TIMBER TRAIL
PITTSBURGH, PA
BIRTHDATE: FEBRUARY 3, 1934 DIRECTOR OF THE FUND; Chairman of the Board,
Children's Hospital of Pittsburgh formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000
Group, Inc.; Director, Member of Executive
Committee, University of Pittsburgh; Director or
Trustee of the Funds.
.
JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL DIRECTOR OF THE FUND; President, Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or
Trustee in private real estate ventures in
Southwest Florida; formerly, President, Naples
Property Management, Inc. and Northgate Village
Development Corporation; Director or Trustee of the
Funds.
WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA DIRECTOR OF THE FUND; Director and Member of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC
Bank Corp. and Director, Ryan Homes, Inc.; Director
or Trustee of the Funds.
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA DIRECTOR OF THE FUND; Attorney-at-law; Director,
BIRTHDATE: MAY 18, 1922 The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
<PAGE>
LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA DIRECTOR OF THE FUND; Professor of Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown;
Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Director or Trustee of the
Funds.
EDWARD L. FLAHERTY, JR.@
MILLER AMENT HENNY & KOCHUBA
205 ROSS STREET DIRECTOR OF THE FUND; Attorney of Counsel, Miller,
PITTSBURGH, PA Ament, Henny & Kochuba; Director, Eat'N Park
BIRTHDATE: JUNE 18, 1924 Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Director or
Trustee of the Funds. .
EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE: OCTOBER 22, 1930 PRESIDENT, TREASURER AND DIRECTOR OF THE Vice
Chairman, Treasurer, and Trustee, Federated
Investors; Vice President, Federated Advisers,
Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice President
and Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company; Trustee or
Director of some of the Funds; President, Executive
Vice President and Treasurer of some of the Funds.
PETER E. MADDEN
ONE ROYAL PALM WAY
100 ROYAL PALM WAY
PALM BEACH, FL DIRECTOR OF THE FUND; Consultant; Former State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation;
Director or Trustee of the Funds.
JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA DIRECTOR OF THE FUND; President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
<PAGE>
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA
BIRTHDATE:
SEPTEMBER 14, 1925 DIRECTOR OF THE FUND; Professor, International
Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center, Inc.,
National Defense University, and U.S. Space
Foundation; President Emeritus, University of
Pittsburgh; Founding Chairman; National Advisory
Council for Environmental Policy and Technology,
Federal Emergency Management Advisory Board and
Czech Management Center, Prague; Director or
Trustee of the Funds.
MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA DIRECTOR OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning; Director
or Trustee of the Funds.
J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND; President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research:; President and Director, Federated
Research Corp. and Federated Global Research Corp.;
President, Passport Research, Ltd.; Trustee,
Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated
Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some
of the Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Trustee of the Trust.
JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE: OCTOBER 26, 1938 EXECUTIVE VICE PRESIDENT, AND SECRETARY OF THE
FUND; Executive Vice President, Secretary, and
Trustee, Federated Investors; Trustee, Federated
Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and
Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated
Shareholder Services; Director, Federated
Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the
Funds.
<PAGE>
RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND; Executive Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director, Federated
Securities Corp.; President or Vice President of
some of the Funds; Director or Trustee of some of
the Funds.
JOESEPH S. MACHI
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT AND ASSISTANT TREASURER; Vice
BIRTHDATE: MAY 22, 1962 President and Assistant Treasurer of some of the
Funds.
* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for
U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds;
The Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
FUND OWNERSHIP
As of October 29, 1997, Officers and Directors own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of October 29, 1997, the
following shareholders owned 5% or more of the outstanding shares of the FUND:
Charles Schwab & Co., Inc., San Francisco, CA, owned approximately 1,163,337
shares (9.60%), and National Financial Services Corp., New York, NY, for the
exclusive benefit of its customers, owned approximately 727,618 shares (6.00%).
<PAGE>
OFFICERS AND TRUSTEES COMPENSATION
<TABLE>
<CAPTION>
- -------------------------------------- ------------------------- -------------------------------------
AGGREGATE COMPENSATION TOTAL COMPENSATION PAID TO TRUSTEES
NAME, POSITION FROM THE COMPANY* FROM THE FUND AND FUND COMPLEX**
WITH THE COMPANY
- -------------------------------------- ------------------------- -------------------------------------
- -------------------------------------- ------------------------- -------------------------------------
<S> <C> <C>
John F. Donahue, Chairman and $0 $0 for the Fund Complex
Director
Thomas G. Bigley, Director $205 $3,217 for the Fund Complex
John T. Conroy, Jr., Director $226 $3,538 for the Fund Complex
William J. Copeland, Director $226 $3,538 for the Fund Complex
James E. Dowd, Trustee $226 $3,538 for the Fund Complex
Lawrence D. Ellis, M.D., Director $205 $3,217 for the Fund Complex
Edward L. Flaherty, Jr., Director $226 $3,538 for the Fund Complex
Edward C. Gonzales, President and $0 $0 for the Fund Complex
Director
Peter E. Madden, Director $205 $3,217 for the Fund Complex
John E. Murray, Jr., J.D., S.J.D., $205 $3,217 for the Fund Complex
Director
Wesley W. Posvar, Director $205 $3,217 for the Fund Complex
Marjorie P. Smuts $205 $3,217 for the Fund Complex
Director
</TABLE>
* The aggregate compensation for the fiscal year ended 9/30/97 is provided for
the COMPANY which is comprised of one portfolio.
** The total compensation is provided for the Fund Complex, which consists of
the COMPANY, The Virtus Funds, and the Trust. The information is provided for
Blanchard Funds and Blanchard Precious Metals Fund, Inc. and The Virtus Funds
for the fiscal year ended 9/30/97.
MANAGEMENT SERVICES
MANAGER OF THE FUND
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a wholly-owned subsidiary of Signet Banking Corporation. Because of the
internal controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.
The Manager shall not be liable to the Fund, or any shareholder of any
of the Fund for any losses that may be sustained in the purchase, holding, or
sale of any security or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Fund.
MANAGEMENT FEES
For its services, VCM receives an annual management fee as described in
the prospectus. VCM became the FUND's Manager on July 12, 1995. Prior to July
12, 1995, Sheffield Management Company served as the FUND's Manager. For the
fiscal year ended September 30, 1997, and for the period from May 1, 1996
through September 30, 1996, VCM earned $774,283 and $442,945, respectively, none
of which was voluntarily waived. For the fiscal year ended April 30, 1996, VCM
earned $675,300 and Sheffield Management Company earned $165,642. For the fiscal
years ended April 30, 1995 and 1994, the aggregate amounts paid or accrued by
the Fund to the Sheffield Management Company under the then existing management
agreement were $765,766 and $602,610, respectively. The prior manager was not
required to reimburse the Fund for any expenses during the years ended April 30,
1995 and 1994.
<PAGE>
PORTFOLIO MANAGEMENT SERVICES
Pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement")
between VCM and the portfolio manager, Cavelti Capital Management, Ltd. (the
"Portfolio Manager"), VCM has delegated to the Portfolio Manager the authority
and responsibility to make and execute decisions for the Fund within the
framework of the FUND's investment policies, subject to review by VCM and the
Board of Directors of the Fund. Under the terms of the Sub-Advisory Agreement,
the Portfolio Manager has discretion to purchase and sell securities, except as
limited by the FUND's investment objective, policies and restrictions.
The Sub-Advisory Agreement provides for the payment to the Portfolio
Manager, by VCM, of monthly compensation based on the FUND's average daily net
assets for providing investment advice to the Fund and managing the investment
of the assets of the Fund. These fees are determined by applying the following
annual rates to the FUND's average daily net assets: .30% of the FUND's net
assets up to the first $150 million; .2625% of the FUND's net assets in excess
of $150 million but less than $300 million; and .225% of the FUND's net assets
in excess of $300 million. The Agreement provides that the Portfolio Manager's
fee shall be reduced proportionately based on the ratio of the Portfolio
Manager's fee to VCM's fee in the event VCM's fee is reduced as a result of a
state expense limitation. For the fiscal year ended September 30, 1997, and for
the period from May 1, 1996 through September 30, 1996, the aggregate amount
paid or accrued by VCM to the Portfolio Manager under the Sub-Advisory Agreement
was $223,284 and $132,884, respectively. For the fiscal year ended April 30,
1996, the aggregate amounts paid or accrued by VCM or the prior manager to the
Portfolio Manager under the Sub-Advisory Agreement was $263,638. For the fiscal
years ended April 30, 1995 and 1994, the aggregate amounts paid or accrued by
the prior manager to the Portfolio Manager under the Sub-Advisory Agreement were
$227,033 and $170,058, respectively.
The Sub-Advisory Agreement, dated July 11, 1995, was approved by the
FUND's Directors on March 24, 1995 and the FUND's shareholders on July 11, 1995.
The Sub-Advisory Agreement provides that it may be terminated without penalty by
either the Fund or the Portfolio Manager at any time by the giving of 60 days'
written notice to the other and terminates automatically in the event of
"assignment", as defined in the Investment Company Act. The Sub-Advisory
Agreement provides that, unless sooner terminated, it shall continue in effect
from year to year only so long as such continuance is specifically approved at
least annually by either the Board of Directors of the Fund or by a vote of the
majority of the outstanding voting securities of the Fund, provided, that in
either event, such continuance is also approved by the vote of the majority of
the Directors who are not parties cast in person at a meeting called for the
purpose of voting on such approval.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of the
Fund. Under the Custodian Agreement, Signet Trust Company holds the Funds'
portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. The custodian receives a fee at an annual rate
of .05% on the first $10 million of average net assets of each of the six
respective portfolios and .025% on average net assets in excess of $10 million.
There is a $20 fee imposed on each transaction. The custodian fee received
during any fiscal year shall be at least $1,000 per Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus. For the fiscal year ended September 30, 1997,
and for the period from May 1, 1996 through September 30, 1996, and for the
fiscal year ended April 30, 1996, Federated Administrative Services earned
$78,467, $42,307 and $73,038, respectively, in administrative services fees. For
the fiscal years ended April 30, 1995 and 1994, the administrative services fees
were included as part of the Management fee.
DISTRIBUTION PLAN
The Fund has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company of 1940. The Plan provides that the Funds' Distributor
shall act as the Distributor of shares, and it permits the payment of fees to
brokers and dealers for distribution and administrative services and to
administrators for administrative services. The Plan is designed to (I)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investment of
client account designations, and addresses; and providing such other services as
the Director reasonably requests. For the fiscal year ended September 30, 1997,
and for the period from May 1, 1996 through September 30, 1996, and for the
fiscal year ended April 30, 1996, the FUND accrued payments under the Plan
amounting to $558,212, $332,209 and $630,406, respectively.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Directors expected that the
Fund will be able to achieve a more predictable flow of cash for investment
purposes and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
The FUND is a Maryland corporation. The FUND's authorized shares
consist of 1,000,000,000 shares of common stock, par value $.001 per share.
Shares of the FUND entitle the holders to one vote per share. The shares have no
preemptive or conversion rights. The voting and dividend rights, the right of
redemption and the privilege of exchange are described in the Prospectus. Shares
are fully paid and non-assessable.
The FUND may be terminated upon the sale of its assets to another
open-end management investment company if approved by the vote of the holders of
a majority of the outstanding shares of the FUND. The FUND may also be
terminated upon liquidation and distribution of its assets, if approved by a
majority shareholder vote of the FUND. Shareholders of the FUND shall be
entitled to receive distributions as a class of the assets belonging to the
FUND. The assets of the FUND received for the issue or sale of the shares of the
FUND and all income earnings and the proceeds thereof, subject only to the
rights of creditors, are specifically allocated to the FUND, and constitute the
underlying assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
The financial statements for the fiscal year ended September 30, 1997,
are incorporated herein by reference from the FUND's Annual Report dated
September 30, 1997. A copy of the FUND'S Annual Report may be obtained without
charge by contacting Signet Financial Services, Inc. at 1-800-829-3863.
Cusip 093254100
G01386-10
- -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
- -------------------------------------------------------------------------------
Dear Investor:
I'm pleased to present the Annual Report to Shareholders for the Blanchard Group
of Funds. This report covers the funds' fiscal year, which is the period from
October 1, 1996 through September 30, 1997.
For greater efficiency in printing and mailing, this report now combines
information for all funds. It begins with a commentary by the portfolio manager,
and follows with a complete list of holdings and financial statements for each
fund.
A fund-by-fund summary for the period follows:
. BLANCHARD GLOBAL GROWTH FUND
The fund's diversified portfolio of U.S. and foreign stocks and bonds+ produced
a solid total return of 13.20%* through dividends totaling $0.21 per share and
capital gains totaling $2.26 per share. Assets in the fund totaled more than $62
million at the end of the period.
. BLANCHARD PRECIOUS METALS FUND, INC.
Due to extremely weak market conditions, the fund's portfolio of precious metals
investments and securities of mining companies produced a negative total return
of (15.24%).* While the fund paid dividends totaling $0.30 per share and capital
gains totaling $2.25 per share, the fund's share price fell from $8.90 to $5.37
as prices of the fund's holdings declined with the market. The fund's assets
closed the period at $67 million.
. BLANCHARD FLEXIBLE INCOME FUND
The fund's diversified portfolio of fixed income securities paid monthly
dividends totaling $0.31 per share and recorded a $0.14 per share increase in
net asset value. As a result, the fund achieved a total return of 9.53%.* The
fund's assets reached $155 million.
. BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
The fund's conservative portfolio of fixed income securities produced a total
return of 7.24%* through monthly dividends totaling $0.17 per share, and a $0.04
per share increase in net asset value. Assets in the fund totaled more than $133
million.
. BLANCHARD FLEXIBLE TAX-FREE BOND FUND
Designed for tax-sensitive investors, this fund paid federally tax-free
dividends totaling $0.25 per share.** Through this income stream and a $0.25 per
share increase in net asset value, the fund achieved a total return of 9.59%.*
Assets reached $24 million.
- -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE (CONTINUED)
- -------------------------------------------------------------------------------
Thank you for pursuing your financial goals through the Blanchard Group of
Funds. If you are not already doing so, consider reinvesting your earnings
automatically in additional shares. It's a convenient way to gain the advantage
of compounding--and increase your opportunity to participate in key financial
markets over time.
Sincerely,
/s/ Edward C. Gonzales
Edward C. Gonzales
President
November 15, 1997
+Foreign investing involves special risks including currency risk, increased
volatility of foreign securities, and differences in auditing and other
financial standards.
*Performance quoted reflects past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
**Income may be subject to the federal alternative minimum tax and state and
local taxes.
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Global Growth Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A1 omitted. See Appendix."]
The Blanchard Global Growth Fund's total return (price change plus
reinvestment of distributions) for the year ending September 30, 1997 was
13.20%. By comparison, the Morgan Stanley World Index (MSCI World) rose 24.12%,
and the Salomon Brothers World Government Bond Index (WGBI) was up 2.41% for the
same period.*
During the past year, equity markets substantially outperformed bond markets
around the globe. It appears the markets have priced in a continued period of
strong economic growth with low inflation. Equity markets in Continental Europe
performed better than the rest of the world, mainly because corporate earnings
have increased. Corporate earnings increased due to a pick up in economic
growth, and an increase in exports (due to their weaker currencies), as well as
from gains in productivity. Among the major stock markets, only
*The Morgan Stanley World Index is based on the share prices of approximately
1,600 companies listed on the stock exchanges of 22 countries. The Salomon
Brothers World Government Bond Index is comprised of 17 Government bond markets
whose eligibility is determined based on market capitalization and investment
criteria; a market's issues must total at least US$20 billion, DM30 billion,
and 2.5 trillion for three consecutive months, after which it will be added to
the SBWGBI at the end of the following quarter. These indices are unmanaged.
Actual investment cannot be made in an index.
the Japanese stock market declined during the past year. The low interest rate
environment in Japan has yet to spur economic growth, as the deregulation of the
financial industry has been slow.
The Blanchard Global Growth Fund benefited from its exposure to equities,
since equities posted higher returns than bonds. However, our allocation across
equity markets did not help performance. We were overweighted in Continental
Europe and Japan and underweighted in the United States. Our currency hedging
strategy added value, since the U.S. Dollar strengthened against most currencies
in Continental Europe and Japan. We continue to hedge a portion of our Japanese
Yen, Swiss Franc, and Dutch Guilder exposure.
During the past year, the Blanchard Global Growth Fund sold equities in favor
of fixed income securities, as the result of strong equity performance during
the past year. We also shifted a portion of the fund out of U.S. equities and
into foreign equities. Continental Europe and Japan offer more attractive
values, since the U.S. equity market has appreciated substantially in the past
few years. We believe the gloom has been overdone in Japan, and the stock market
reflects attractive long-term value.
Thank you for your continued patronage.
Sincerely,
/s/ Thomas B. Hazuka
Thomas B. Hazuka, Ph.D.
Chief Investment Officer
Mellon Capital Management Corporation
Portfolio Manager of the
Blanchard Global Growth Fund
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Precious Metals Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A2 omitted. See Appendix."]
THE YEAR IN REVIEW
One year ago, gold was trading around the $380 level and concerns were
mounting that the International Monetary Fund, or IMF, was likely to sell 5
million ounces of gold to fund capital projects in developing countries. This
and other concerns, such as the strengthening U.S. dollar, moved us to adopt a
more defensive posture in the portfolio to reflect the increasing likelihood
that the gold price would come under pressure.
This turned out to be quite an understatement, as large sales of gold by
central banks, particularly the Dutch and Australians, drove the yellow metal
sharply lower. Central bank sales are almost impossible to forecast except for
the general expectation that they do occur every year, but generally in
quantities that don't disrupt the market. This is partly because other central
banks tend to buy about half of the gold sold by their sister institutions. In
the 1990's, central bank gold sales have netted out to about 7.5 million ounces
per year when central bank buying is accounted for.
Surprisingly, the past year has not been terribly out of the ordinary. About
15 million ounces of central bank gold has been sold, with perhaps 9 million of
this not taken up by other central bank purchases. Ordinarily, one would not
expect the price of gold to swoon by as much as 19% (from $380 to $308) in
response. However, this time was different in a very significant way.
Aggressive speculative short sales of gold accompanied every announcement of a
central bank sale. Large quantities of gold have been borrowed from central
banks at a borrowing cost of 2-3% per annum and sold in the marketplace in what
turned out to be a successful effort to drive the gold price lower. These
speculators have correctly assumed that gold buyers will be timid in the face of
a growing perception that some banks are less willing to hold onto their sizable
gold holdings.
Estimates of the quantity of gold borrowed and sold short range as high as
2,000 metric tons, which is about 65 million ounces! Clearly, this swamps the
actual amount of gold sold by the banks and amply explains the sharp gold price
decline, which has in turn pushed most gold equities dramatically lower. In line
with the gold price decline, the Blanchard Precious Metals Fund declined by
15.24% in the past year.
A LOOK AHEAD
The dominant theme of increasing and long-lasting central bank gold sales
continues to weigh heavily on the bullion price as 1997 draws to a close. In
recent days, the focal point of the issue has become the potential for sales of
Swiss gold reserves starting in the year 2000. These sales could come about in
response to a change in the Swiss constitution, which would eliminate or reduce
the requirement for a gold backstop in the money supply. Complicating the issue
is the proposal to create a Solidarity Foundation for charitable purposes, which
would be funded in part by gold bullion sales, perhaps as much as 800 metric
tons (about 26 million ounces).
These proposals would both require political approval, followed by popular
approval in a national referendum. If successful, the gold would be sold
gradually over a period of five to eight years. The worst-case scenario at
present seems to be the addition of 9 million ounces of gold to the annual
supply-demand equation, which would last 5 years. Putting this into perspective,
the annual gold market is currently sized at 130 million ounces of gold, so this
is a manageable quantity. However, the larger issue is whether a significant
change in central bank attitudes toward gold is at hand. If central banks are
more willing to part with their gold in the years ahead, then gold will settle
into a lower trading range than we have become accustomed to in the past ten
years. If instead, the net supply of
central bank gold remains at less than ten million ounces per year as in the
past, then we can look forward to an explosive rally in the gold market as the
huge outstanding short position is bought back.
We lean toward the latter scenario, particularly since gold is now trading
below the cost of production for about one quarter of the global gold mining
community! New mining projects are being canceled or deferred and the supply of
newly mined gold and scrap is now falling. Nonetheless, caution is the order of
the day until we discern a more predictable upward path for the gold price.
Thank you for your continued patronage.
Sincerely,
/s/ Peter C. Cavelti
Peter C. Cavelti
Chairman and CEO
Cavelti Capital Management Ltd.
Portfolio Manager of the
Blanchard Precious Metals Fund, Inc.
Dear Shareholders,
Enclosed please find the annual report for your Blanchard Flexible Income Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A3 omitted. See Appendix."]
The past year has been one of relatively good economic growth and declining
inflation. The Federal Reserve Board (the "Fed") has continued its policy of
promoting price stability and the market has responded by pushing bonds yields
lower.
The fund has benefited from this environment as the investments in high yield
bonds* and mortgage backed securities have not only earned attractive yields,
but have also appreciated in price. The third allocation, U.S. Treasurys, has
provided the anchor to the portfolio.
Looking forward, we are increasingly concerned with the tight labor markets
and high resource utilization currently existing in the U.S. In order to relieve
these pressures, higher interest rates will probably be required. However, if
the Fed continues to be vigilant in its fight against inflation, significant
interest rate increases should not be in the offing.
*Lower rated bonds involve a higher degree of risk than investment grade bonds
in return for higher yield potential.
While the markets will undoubtedly have bouts of volatility, relative
stability may remain the norm. In this environment, the fund should continue to
benefit from its prudent blend of financial assets.
Thank you for your continued patronage.
Sincerely,
/s/ Jack D. Burks
Jack D. Burks
Managing Director of OFFITBANK
Portfolio Manager of the
Blanchard Flexible Income Fund
Dear Shareholders,
Enclosed please find the annual report for your Blanchard Short-Term Flexible
Income Fund for the fiscal year ended September 30, 1997.
["Graphic representation A4 omitted. See Appendix."]
The past year has been one of relatively good economic growth and declining
inflation. The Federal Reserve Board (the "Fed") has continued its policy of
promoting price stability and the market has responded by pushing bond yields
lower.
The fund has benefited from this environment as the investments in high yield
bonds* and mortgage backed securities have not only earned attractive yields,
but have also appreciated in price. The third allocation, U.S. Treasurys, has
provided the anchor to the portfolio.
Looking forward, we are increasingly concerned with the tight labor markets
and high resource utilization currently existing in the U.S. In order to relieve
these pressures, higher interest rates will probably be required. However, if
the Fed continues to be vigilant in its fight against inflation, significant
interest rate increases should not be in the offing.
*Lower rated bonds involve a higher degree of risk than investment grade bonds
in return for higher yield potential.
While the markets will undoubtedly have bouts of volatility, relative
stability may remain the norm. In this environment, the fund should continue to
benefit from its prudent blend of financial assets.
Thank you for your continued patronage.
Sincerely,
/s/ Jack D. Burks
Jack D. Burks
Managing Director of OFFITBANK
Portfolio Manager of the
Blanchard Short-Term Flexible Income Fund
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Flexible Tax-Free
Bond Fund for the fiscal year ended September 30, 1997.
["Graphic representation A5 omitted. See Appendix."]
The past fiscal year was an excellent one for investors in the Blanchard
Flexible Tax-Free Bond Fund. Interest rates declined during the first fiscal
quarter, but rose sharply in early 1997 as the Federal Reserve Board raised
interest rates to slow an extremely strong economy and quell inflation fears.
Although the economy continued to grow at a 3.5% - 4% rate over the next two
quarters, inflation continued moderate with the consumer price index rising only
2.2% over the past 12 months. Consequently, interest rates declined during the
final two quarters of the fund's fiscal year.
The Blanchard Flexible Tax-Free Bond Fund was invested in a portfolio of
longer-term, high-quality tax exempt bonds, with a maturity of approximately 20
years for most of the year. During the latter part of the fiscal year, cash
reserves were raised to reduce the average maturity of the fund in anticipation
of possible interest rate increases.
Overall, the fund had an excellent year, posting a total return of 9.59%
versus 8.43% for the Lehman Brothers Current Municipal Bond Index.+
Additionally, the fund was ranked #31 by Lipper Analytical Services out of 233
funds in its category of general municipal debt funds for total cumulative
reinvested performance for the twelve month period ended 9/30/97. The fund also
outperformed the Lipper General Municipal Debt Fund average of 8.59%.++
Morningstar has awarded the Blanchard Flexible Tax-Free Bond Fund its 4-star
rating for risk-adjusted performance for the overall period ended 9/30/97 in its
category of 1,374 municipal funds.*
Naturally, past performance is no guarantee of future performance. As with any
fixed income fund, investment return, yield, and principal value will vary with
changing market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original purchase price.
Thank you for your continued patronage.
Sincerely,
/s/ Kenneth J. McAlley
Kenneth J. McAlley
Executive Vice President
United States Trust Company of New York
Portfolio Manager of the
Blanchard Flexible Tax-Free Bond Fund
+Lehman Brothers Municipal Index is an unmanaged broad market performance
benchmark for the tax-exempt bond market. To be included in the Lehman
Brothers Municipal Bond Index, bonds must have a minimum credit rating of at
least Baa. Actual investments cannot be made in an index.
++Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the respective categories indicated. Lipper rankings and figures do not
reflect sales charges.
*Morningstar proprietary ratings reflect risk-adjusted performance through
9/30/97. The ratings are subject to change every month. Past performance is
not a guarantee of future results. Morningstar ratings are calculated from the
fund's three-year returns in excess of 90-day Treasury bill returns, and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The fund received 4 stars for the three-year period. It was rated among 1,374
municipal funds for the three-year period. The top ten percent of the funds in
the category receive 5 stars, the next 22.5% receive 4 stars, and the next 35%
receive 3 stars. The rating shown does not reflect certain management fees
which were waived during the period. If reflected, they may have impacted the
rating.
BLANCHARD GLOBAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------ -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--29.8%
-------------------------------------
AUSTRIA--0.1%
------------------------------
BANKING--0.0%
------------------------------
100 Bank Austria, AG $ 4,865
------------------------------
100 (a)Bank Austria AG, Rights 226
------------------------------ -----------
Total 5,091
------------------------------ -----------
CHEMICALS--0.0%
------------------------------
200 Lenzing AG 11,821
------------------------------ -----------
FINANCIAL SERVICES--0.0%
------------------------------
100 Creditanstalt-Bankverein 6,298
------------------------------
200 Creditanstalt-Bankverein, Pfd. 10,422
------------------------------ -----------
Total 16,720
------------------------------ -----------
PETROLEUM--0.1%
------------------------------
150 OMV AG 22,375
------------------------------ -----------
RUBBER & MISC. MATERIALS--0.0%
------------------------------
200 Radex-Heraklith 8,299
------------------------------ -----------
STEEL--0.0%
------------------------------
100 Boehler-Uddeholm 8,403
------------------------------ -----------
UTILITIES--0.0%
------------------------------
100 Oest Elektrizitats, Class A 7,081
------------------------------ -----------
TOTAL AUSTRIA 79,790
------------------------------ -----------
BRAZIL--0.0%
------------------------------
7,481 Rhodia-Ster S.A., GDR 18,702
------------------------------ -----------
DENMARK--0.1%
------------------------------
BANKING--0.1%
------------------------------
200 Den Danske Bank 21,787
------------------------------
400 Unidanmark, Class A 25,978
------------------------------ -----------
Total 47,765
------------------------------ -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------ ------------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-------------------------------------
DENMARK--CONTINUED
------------------------------
COMMUNICATIONS EQUIPMENT--0.0%
------------------------------
200 Tele Danmark AS, Class B $ 10,492
------------------------------ ------------
ENVIRONMENTAL SERVICES--0.0%
------------------------------
100 Danisco 5,662
------------------------------ ------------
INDUSTRIAL SERVICES--0.0%
------------------------------
100 Nkt Holding 7,728
------------------------------ ------------
MISCELLANEOUS--0.0%
------------------------------
300 Korn-Og Foderstof 9,363
------------------------------ ------------
TRANSPORTATION-AIR--0.0%
------------------------------
400 SAS Danmark AS 6,717
------------------------------ ------------
TOTAL DENMARK 87,727
------------------------------ ------------
FINLAND--0.2%
------------------------------
BANKING--0.0%
------------------------------
3,950 Merita Ltd, Class A 18,739
------------------------------ ------------
ELECTRICAL EQUIPMENT--0.1%
------------------------------
250 Nokia AB, Class K 23,672
------------------------------
500 Nokia AB-A 47,534
------------------------------ ------------
Total 71,206
------------------------------ ------------
MISCELLANEOUS--0.1%
------------------------------
36 Rauma Oy 748
------------------------------
1,300 UPM-Kymmene OY 36,118
------------------------------ ------------
Total 36,866
------------------------------ ------------
NON-FERROUS METALS--0.0%
------------------------------
500 Outokumpu Oy 9,119
------------------------------ ------------
TRADING COMPANY--0.0%
------------------------------
750 Kesko 10,560
------------------------------ ------------
TOTAL FINLAND 146,490
------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------------
FRANCE--0.7%
----------------------------------------
AUTOMOBILE--0.0%
----------------------------------------
150 Peugeot S.A. $ 19,772
---------------------------------------- -----------
BEVERAGE--0.2%
----------------------------------------
310 LVMH (Moet-Hennessy) 65,891
---------------------------------------- -----------
BROADCASTING--0.0%
----------------------------------------
150 Havas S.A. 10,182
---------------------------------------- -----------
BUILDING MATERIALS--0.1%
----------------------------------------
255 Compagnie de St. Gobain 39,329
----------------------------------------
280 Lafarge-Coppee 20,521
---------------------------------------- -----------
Total 59,850
---------------------------------------- -----------
CHEMICALS--0.1%
----------------------------------------
1,122 Rhone-Poulenc, Class A 44,633
---------------------------------------- -----------
FINANCIAL SERVICES--0.1%
----------------------------------------
260 AXA 17,442
----------------------------------------
230 Compagnie Financiere de Paribas, Class A 17,058
---------------------------------------- -----------
Total 34,500
---------------------------------------- -----------
MOTOR VEHICLE PARTS--0.0%
----------------------------------------
384 Michelin, Class B 21,813
---------------------------------------- -----------
PHARMACEUTICALS--0.2%
----------------------------------------
220 L'Oreal 88,072
----------------------------------------
290 Sanofi S.A. 26,934
---------------------------------------- -----------
Total 115,006
---------------------------------------- -----------
RETAILERS-BROADLINE--0.0%
----------------------------------------
60 Pinault-Printemps-Redoute S.A. 28,146
---------------------------------------- -----------
RETAILERS SPECIALTY--0.0%
----------------------------------------
275 Castorama Dubois Investisse 29,574
---------------------------------------- -----------
UTILITIES--0.0%
----------------------------------------
170 Lyonnaise des Eaux S.A. 18,970
---------------------------------------- -----------
TOTAL FRANCE 448,337
---------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------------
GERMANY--2.6%
-----------------------------------------
AIRLINES--0.1%
-----------------------------------------
2,500 Deutsche Lufthansa AG $ 49,237
----------------------------------------- -----------
AUTOMOTIVE & RELATED--0.1%
-----------------------------------------
1,000 Daimler Benz AG 82,515
----------------------------------------- -----------
BANKING--0.4%
-----------------------------------------
2,250 Bayerische Hypotheken-Und Wechsel-Bank AG 96,140
-----------------------------------------
2,700 Deutsche Bank AG 190,090
----------------------------------------- -----------
Total 286,230
----------------------------------------- -----------
CHEMICALS--0.2%
-----------------------------------------
4,500 Bayer AG 179,165
----------------------------------------- -----------
ELECTRICAL EQUIPMENT--0.6%
-----------------------------------------
5,650 Siemens AG 381,634
----------------------------------------- -----------
HEALTHCARE-GENERAL--0.1%
-----------------------------------------
1,500 Merck KGAA 57,302
----------------------------------------- -----------
INSURANCE-LIFE--0.6%
-----------------------------------------
1,500 Allianz AG Holding 361,895
----------------------------------------- -----------
MULTI-INDUSTRY--0.2%
-----------------------------------------
218 Viag AG 97,566
----------------------------------------- -----------
STEEL--0.1%
-----------------------------------------
200 Thyssen AG 46,634
----------------------------------------- -----------
UTILITIES-ELECTRIC--0.2%
-----------------------------------------
2,050 RWE AG 99,254
----------------------------------------- -----------
TOTAL GERMANY 1,641,432
----------------------------------------- -----------
HONG KONG--1.1%
-----------------------------------------
BANKING--0.2%
-----------------------------------------
4,844 Bank Of East Asia 18,093
-----------------------------------------
6,000 Hang Seng Bank, Ltd. 73,856
-----------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------
HONG KONG--CONTINUED
----------------------------------
BANKING--CONTINUED
----------------------------------
1,545 HSBC Holdings PLC $ 51,713
----------------------------------
1,200 Wing Lung Bank 7,118
---------------------------------- -----------
Total 150,780
---------------------------------- -----------
BROADCASTING--0.0%
----------------------------------
2,000 Television Broadcasting 7,082
---------------------------------- -----------
ENTERTAINMENT & RECREATION--0.0%
----------------------------------
3,000 Hong Kong & Shang Hot 3,644
----------------------------------
4,000 Shangri-La Asia 4,110
---------------------------------- -----------
Total 7,754
---------------------------------- -----------
FINANCIAL SERVICES--0.0%
----------------------------------
6,000 Peregrine Investment 10,196
---------------------------------- -----------
MULTI-INDUSTRY--0.2%
----------------------------------
9,000 Hutchison Whampoa 88,686
----------------------------------
3,000 Swire Pacific, Ltd. 22,971
---------------------------------- -----------
Total 111,657
---------------------------------- -----------
PROPERTY--0.1%
----------------------------------
2,000 Hysan Development Co., Ltd. 5,983
----------------------------------
5,033 New World Development Co., Ltd. 30,440
----------------------------------
4,000 Wharf Holdings Ltd. 14,732
---------------------------------- -----------
Total 51,155
---------------------------------- -----------
REAL ESTATE--0.3%
----------------------------------
5,000 Cheung Kong 56,216
----------------------------------
10,000 Sun Hung Kai Properties 117,601
---------------------------------- -----------
Total 173,817
---------------------------------- -----------
TELECOMMUNICATIONS--0.2%
----------------------------------
34,843 Hong Kong Telecommunications, Ltd. 78,800
---------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------
HONG KONG--CONTINUED
---------------------------------
UTILITIES--0.1%
---------------------------------
9,000 China Light and Power Co., Ltd. $ 49,548
---------------------------------
12,000 Hong Kong and China Gas Co., Ltd. 24,735
--------------------------------- -----------
Total 74,283
--------------------------------- -----------
TOTAL HONG KONG 665,524
--------------------------------- -----------
IRELAND--0.3%
---------------------------------
BANKING--0.0%
---------------------------------
1 Bank of Ireland PLC 7
--------------------------------- -----------
BUILDING MATERIALS--0.3%
---------------------------------
14,329 CRH PLC 163,425
--------------------------------- -----------
TOTAL IRELAND 163,432
--------------------------------- -----------
ITALY--1.0%
---------------------------------
AUTOMOTIVE & RELATED--0.2%
---------------------------------
37,510 Fiat SPA 133,859
---------------------------------
4,180 Fiat SPA 7,434
--------------------------------- -----------
Total 141,293
--------------------------------- -----------
BANKING--0.1%
---------------------------------
5,300 Banca Commerciale Italiana 15,229
---------------------------------
600 Imi 6,437
--------------------------------- -----------
Total 21,666
--------------------------------- -----------
BROADCASTING--0.0%
---------------------------------
3,500 Mediaset SPA 18,046
--------------------------------- -----------
FINANCE-0.0%
---------------------------------
6,200 Credito Italiano 16,774
--------------------------------- -----------
PAPER PRODUCTS--0.0%
---------------------------------
1,000 Burgo (Cartiere) SPA 6,488
--------------------------------- -----------
PETROLEUM--0.3%
---------------------------------
26,000 Eni SPA 163,729
--------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------------
ITALY--CONTINUED
---------------------------------------
RUBBER & MISC. MATERIALS--0.0%
---------------------------------------
2,300 Pirelli SPA $ 6,742
--------------------------------------- -----------
TELECOMMUNICATIONS--0.4%
---------------------------------------
46,000 Telecom Italia Mobile SPA 182,545
---------------------------------------
9,944 Telecom Italia SPA 66,249
--------------------------------------- -----------
Total 248,794
--------------------------------------- -----------
UTILITIES--0.0%
---------------------------------------
1,200 Edison SPA 6,458
--------------------------------------- -----------
TOTAL ITALY 629,990
--------------------------------------- -----------
JAPAN--10.3%
---------------------------------------
AIRLINES-0.0%
---------------------------------------
2,000 Japan Airlines Co. 7,276
--------------------------------------- -----------
AUTOMOTIVE & RELATED--1.0%
---------------------------------------
2,000 Denso Corp. 48,562
---------------------------------------
3,000 Honda Motor Co., Ltd. 104,666
---------------------------------------
5,000 Nissan Motor Co., Ltd. 29,833
---------------------------------------
15,000 Toyota Motor Credit Corp. 459,932
--------------------------------------- -----------
Total 642,993
--------------------------------------- -----------
BANKING--1.7%
---------------------------------------
9,000 Asahi Bank, Ltd. 52,208
---------------------------------------
18,000 Bank of Tokyo-Mitsubishi, Ltd. 343,084
---------------------------------------
9,000 Fuji Bank, Ltd., Tokyo 99,196
---------------------------------------
8,000 Industrial Bank of Japan, Ltd., Tokyo 99,445
---------------------------------------
6,000 Mitsubishi Trust & Banking Corp., Tokyo 93,478
---------------------------------------
4,000 Mitsui Trust & Banking 19,922
---------------------------------------
15,000 Sakura Bank, Ltd., Tokyo 71,725
---------------------------------------
10,000 Sumitomo Bank, Ltd., Osaka 150,825
---------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------
JAPAN--CONTINUED
-----------------------------------
BANKING--CONTINUED
-----------------------------------
8,000 Tokai Bank, Ltd., Nagoya $ 66,230
----------------------------------- -----------
Total 996,113
----------------------------------- -----------
BUILDING & CONSTRUCTION-0.0%
-----------------------------------
1,000 Obayashi Corp. 6,041
----------------------------------- -----------
BUILDING MATERIALS--0.0%
-----------------------------------
3,000 Takara Standard Co. 21,331
----------------------------------- -----------
CAPITAL GOODS--0.2%
-----------------------------------
13,000 Asahi Glass Co., Ltd. 101,052
----------------------------------- -----------
CHEMICALS & RELATED--0.4%
-----------------------------------
12,000 Daicel Chemical Industries 30,728
-----------------------------------
6,000 Sekisui Chemical Co. 45,198
-----------------------------------
1,000 Shin-Etsu Chemical Co. 27,513
-----------------------------------
6,000 Sumitomo Bakelite Co., Ltd. 42,562
-----------------------------------
2,000 Sumitomo Chemical Co. 7,342
-----------------------------------
3,000 Takeda Chemical Industries 89,998
----------------------------------- -----------
Total 243,341
----------------------------------- -----------
CHEMICAL-SPECIALTY--0.3%
-----------------------------------
2,000 Fuji Photo Film Co. 82,539
-----------------------------------
5,000 Shiseido Co. 80,385
----------------------------------- -----------
Total 162,924
----------------------------------- -----------
COMMUNICATION EQUIPMENT--0.3%
-----------------------------------
8,000 Matsushita Electric Industrial Co. 144,526
-----------------------------------
1 NTT Data Communications Systems Co. 45,330
----------------------------------- -----------
Total 189,856
----------------------------------- -----------
COMPUTERS--0.2%
-----------------------------------
6,000 Fujitsu, Ltd. 75,081
-----------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ---------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------------
JAPAN--CONTINUED
----------------------------------------
COMPUTERS--CONTINUED
----------------------------------------
6,000 NEC Corp. $ 73,092
---------------------------------------- -----------
Total 148,173
---------------------------------------- -----------
CONSUMER ELECTRONIC--0.4%
----------------------------------------
1,000 Rohm Co. 117,676
----------------------------------------
6,000 Sharp Corp. 54,695
----------------------------------------
1,000 Sony Corp. 94,473
---------------------------------------- -----------
Total 266,844
---------------------------------------- -----------
ELECTRONICS & ELECTRICAL EQUIPMENT--0.9%
----------------------------------------
500 Advantest 49,308
----------------------------------------
2,000 Canon Sales Co., Inc. 39,446
----------------------------------------
5,000 Canon, Inc. 146,267
----------------------------------------
16,000 Hitachi, Ltd. 139,223
----------------------------------------
600 Kyocera Corp. 39,231
----------------------------------------
1,000 Mitsubishi Corp. 9,696
----------------------------------------
1,000 Murata Manufacturing 43,258
----------------------------------------
1,000 Tokyo Electron, Ltd. 61,076
----------------------------------------
4,000 Yamatake-Honeywell 56,352
---------------------------------------- -----------
Total 583,857
---------------------------------------- -----------
FINANCIAL SERVICES--0.8%
----------------------------------------
2,200 Credit Saison Co., Ltd. 59,799
----------------------------------------
4,000 Daiwa Securities Co., Ltd. 24,530
----------------------------------------
134,000 (a)Nikkei 300 Stock Index List Fund 304,268
----------------------------------------
7,000 Nomura Securities Co., Ltd. 91,075
----------------------------------------
3,000 Yamaichi Securities Co., Ltd. 6,166
---------------------------------------- -----------
Total 485,838
---------------------------------------- -----------
FOOD PROCESSING--0.1%
----------------------------------------
3,000 House Foods Corp. 50,965
---------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------
JAPAN--CONTINUED
-----------------------------------
HOUSING & CONSTRUCTION--0.1%
-----------------------------------
13,000 Taisei Corp. $ 48,587
----------------------------------- -----------
INSURANCE--0.2%
-----------------------------------
11,000 Sumitomo Marine & Fire 76,117
-----------------------------------
4,000 Tokio Marine and Fire Insurance Co. 48,065
----------------------------------- -----------
Total 124,182
----------------------------------- -----------
MACHINERY--0.3%
-----------------------------------
14,000 Komatsu, Ltd. 78,313
-----------------------------------
4,000 Mori Seiki Co. 46,739
-----------------------------------
4,000 Takuma Co., Ltd. 39,778
----------------------------------- -----------
Total 164,830
----------------------------------- -----------
NON-RESIDENTIAL CONSTRUCTION--0.1%
-----------------------------------
7,000 Sekisui House, Ltd. 66,711
----------------------------------- -----------
OIL & RELATED--0.0%
-----------------------------------
8,000 Mitsubishi Oil Co. 21,480
----------------------------------- -----------
PAPER PRODUCTS--0.0%
-----------------------------------
2,000 Nippon Paper Industries Co. 10,972
----------------------------------- -----------
PHARMACEUTICALS--0.4%
-----------------------------------
6,000 Chugai Pharmaceutical Co. 51,711
-----------------------------------
4,000 Kaken Pharmaceutical 13,823
-----------------------------------
2,000 Sankyo Co., Ltd. 69,280
-----------------------------------
4,000 Shionogi and Co. 24,894
-----------------------------------
3,000 Yamanouchi Pharmaceutical Co., Ltd. 74,086
----------------------------------- -----------
Total 233,794
----------------------------------- -----------
PHOTO EQUIPMENT & SUPPLIES--0.0%
-----------------------------------
1,000 Nikon Corp. 15,745
----------------------------------- -----------
PRINTING-COMMERCIAL--0.0%
-----------------------------------
1,000 Dai Nippon Printing Co., Ltd. 21,381
----------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------
JAPAN--CONTINUED
----------------------------------
REAL ESTATE--0.2%
----------------------------------
8,000 Mitsubishi Estate Co., Ltd. $ 116,682
---------------------------------- -----------
RETAIL--0.3%
----------------------------------
1,000 Daiei, Inc. 5,519
----------------------------------
5,000 Hankyu Department Stores, Inc. 41,435
----------------------------------
1,000 Isetan Co. 9,613
----------------------------------
2,000 Ito Yokado Co., Ltd. 108,395
---------------------------------- -----------
Total 164,962
---------------------------------- -----------
RUBBER & MISC. MATERIALS--0.1%
----------------------------------
3,000 Bridgestone Corp. 72,097
---------------------------------- -----------
SHIPBUILDING--0.2%
----------------------------------
27,000 Mitsubishi Heavy Industries, Ltd. 147,899
---------------------------------- -----------
STEEL--0.1%
----------------------------------
44,000 NKK Corp. 59,070
----------------------------------
9,000 Nippon Steel Co. 19,839
---------------------------------- -----------
Total 78,909
---------------------------------- -----------
TELECOMMUNICATIONS--0.9%
----------------------------------
62 Nippon Telegraph & Telephone Corp. 570,316
---------------------------------- -----------
TEXTILE & APPAREL--0.1%
----------------------------------
6,000 Nisshinbo Industries 39,728
---------------------------------- -----------
TRADING COMPANY--0.3%
----------------------------------
15,000 Itochu Corp. 51,960
----------------------------------
22,000 Marubeni Corp. 72,926
----------------------------------
4,000 Onward Kashiyama Co., Ltd. 57,678
---------------------------------- -----------
Total 182,564
---------------------------------- -----------
TRANSPORTATION--0.4%
----------------------------------
12 East Japan Railway Co. 56,286
----------------------------------
35,000 (a)Kawasaki Kisen Kaisha, Ltd. 38,286
----------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
--------------------------------------
JAPAN--CONTINUED
-------------------------------
TRANSPORTATION--CONTINUED
-------------------------------
28,000 Kinki Nippon Railway $ 159,874
------------------------------- -----------
Total 254,446
------------------------------- -----------
UTILITIES--0.3%
-------------------------------
900 Kansai Electric Power Co., Inc. 16,035
-------------------------------
1,000 Sumitomo Electric Industries 14,337
-------------------------------
8,100 Tokyo Electric Power Co. 155,731
------------------------------- -----------
Total 186,103
------------------------------- -----------
TOTAL JAPAN 6,427,992
------------------------------- -----------
NETHERLANDS--0.7%
-------------------------------
BANKING--0.1%
-------------------------------
1,621 ABN-Amro Hldgs N.V. 32,822
------------------------------- -----------
CONSUMER & RELATED--0.0%
-------------------------------
200 Heineken N.V. 35,080
------------------------------- -----------
FOOD PROCESSING--0.1%
-------------------------------
200 Unilever N.V. 42,687
------------------------------- -----------
HOUSEHOLD DURABLES--0.1%
-------------------------------
600 Philips Electronics N.V. 50,766
------------------------------- -----------
INSURANCE--0.2%
-------------------------------
315 Aegon N.V. 25,228
-------------------------------
1,065 Ahold N.V. 28,788
-------------------------------
1,436 ING Groep N.V. 65,945
------------------------------- -----------
Total 119,961
------------------------------- -----------
PETROLEUM--0.2%
-------------------------------
2,600 Royal Dutch Petroleum 145,526
------------------------------- -----------
TOTAL NETHERLANDS 426,842
------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------
NEW ZEALAND--0.1%
---------------------------------
BUILDING MATERIALS--0.0%
---------------------------------
5,552 Fletcher Challenge Energy $ 6,936
--------------------------------- -----------
FOREST PRODUCTS--0.1%
---------------------------------
8,300 Carter Holt Harvey 18,026
---------------------------------
222 Fletcher Challenge Forests 277
--------------------------------- -----------
Total 18,303
--------------------------------- -----------
TELECOMMUNICATIONS--0.0%
---------------------------------
3,900 Telecom Corp. of New Zealand 19,788
--------------------------------- -----------
TOTAL NEW ZEALAND 45,027
--------------------------------- -----------
NORWAY--0.2%
---------------------------------
ENERGY--0.1%
---------------------------------
1,000 Norsk Hydro AS 59,591
--------------------------------- -----------
FOREST PRODUCTS--0.1%
---------------------------------
300 Norske Skogindustrier AS, Class A 11,271
---------------------------------
200 Norske Skogindustrier AS, Class B 6,867
--------------------------------- -----------
Total 18,138
--------------------------------- -----------
INSURANCE-LIFE--0.0%
---------------------------------
1,300 (a)Storebrand ASA 9,329
--------------------------------- -----------
MULTI-INDUSTRY--0.0%
---------------------------------
200 Aker AS, Class A 3,743
---------------------------------
40 Aker AS, Class B 681
---------------------------------
100 Orkla Borregaard AS, Class A 8,837
--------------------------------- -----------
Total 13,261
--------------------------------- -----------
NON-FERROUS METALS--0.0%
---------------------------------
400 Elkem AS, Class A 7,092
--------------------------------- -----------
TOTAL NORWAY 107,411
--------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ -------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------
SOUTH AFRICA--0.1%
--------------------------------
MINERAL PRODUCTS--0.1%
--------------------------------
20,000 Billiton PLC $ 77,030
-------------------------------- -----------
SPAIN--0.8%
--------------------------------
BANKING--0.1%
--------------------------------
300 Argentaria SA 17,947
--------------------------------
900 Banco Bilbao Vizcaya SA 27,705
--------------------------------
1,200 Banco Santander 39,311
-------------------------------- -----------
Total 84,963
-------------------------------- -----------
PETROLEUM--0.1%
--------------------------------
1,100 Repsol SA 47,531
-------------------------------- -----------
REAL ESTATE--0.3%
--------------------------------
6,000 Vallehermosa SA 165,405
-------------------------------- -----------
TELECOMMUNICATIONS--0.1%
--------------------------------
2,200 Telefonica de Espana 69,123
-------------------------------- -----------
UTILITIES--0.2%
--------------------------------
2,400 Endesa SA 51,209
--------------------------------
400 Gas Natural SDG SA 21,063
--------------------------------
2,200 Iberdrola SA 27,045
--------------------------------
600 Union Elec Fenosa 5,205
-------------------------------- -----------
Total 104,522
-------------------------------- -----------
TOTAL SPAIN 471,544
-------------------------------- -----------
SWEDEN--0.7%
--------------------------------
BANKING--0.0%
--------------------------------
1,500 Skand Enskilda BKN, Class A 18,188
--------------------------------
300 Svenska Handelsbanken, Stockholm 10,399
-------------------------------- -----------
Total 28,587
-------------------------------- -----------
COMMUNICATIONS--0.2%
--------------------------------
2,300 Telefonaktiebolaget LM Ericsson 110,491
-------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------------------------
SWEDEN--CONTINUED
-------------------------------------------------
MISCELLANEOUS--0.2%
-------------------------------------------------
2,600 Scania AB, Class A 78,814
-------------------------------------------------
2,600 Scania AB, Class B $ 78,814
------------------------------------------------- -----------
Total 157,628
------------------------------------------------- -----------
PHARMACEUTICALS--0.3%
-------------------------------------------------
8,800 Astra AB, Class A 162,372
------------------------------------------------- -----------
TOTAL SWEDEN 459,078
------------------------------------------------- -----------
SWITZERLAND--7.6%
-------------------------------------------------
AIRLINES-0.1%
-------------------------------------------------
30 Sairgroup 40,120
------------------------------------------------- -----------
BANKING--1.2%
-------------------------------------------------
600 Credit Suisse Group 81,064
-------------------------------------------------
200 Schweizerische Bankgesellschaft (UBS) 46,755
-------------------------------------------------
300 Schweizerische Bankgesellschaft (UBS) 350,454
-------------------------------------------------
900 Schweizerischer Bankverein 243,193
------------------------------------------------- -----------
Total 721,466
------------------------------------------------- -----------
BUILDING PRODUCTS--0.1%
-------------------------------------------------
50 Holderbank Financiere Glaris AG, Class B 47,442
-------------------------------------------------
100 Holderbank Financiere Glaris AG, Class R 19,527
------------------------------------------------- -----------
Total 66,969
------------------------------------------------- -----------
COMMERCIAL SERVICES--0.0%
-------------------------------------------------
15 SGS Societe Generale de Surveillance Holding S.A. 26,248
------------------------------------------------- -----------
ELECTRICAL EQUIPMENT--0.3%
-------------------------------------------------
95 ABB AG 139,913
-------------------------------------------------
10 Schindler Holding AG 12,445
-------------------------------------------------
50 Sulzer AG 38,023
------------------------------------------------- -----------
Total 190,381
------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ -------------------------------------------------------- ------------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------------------------------
SWITZERLAND--CONTINUED
--------------------------------------------------------
FOOD PROCESSING--1.1%
--------------------------------------------------------
500 Nestle SA $ 696,507
-------------------------------------------------------- ------------
HEALTHCARE-GENERAL--1.6%
--------------------------------------------------------
100 Roche Holding AG 1,015,677
-------------------------------------------------------- ------------
HOUSEHOLD PRODUCTS--0.4%
--------------------------------------------------------
600 Zurich Versicherungsgesellschaft 261,139
-------------------------------------------------------- ------------
HUMAN RESOURCES--0.1%
--------------------------------------------------------
200 Adecco S.A. 80,446
-------------------------------------------------------- ------------
INSURANCE-LIFE--0.5%
--------------------------------------------------------
190 Schw Rueckversicherungs 284,922
-------------------------------------------------------- ------------
METAL & MINING--0.1%
--------------------------------------------------------
75 Alusuisse Lonza Holding AG 73,002
-------------------------------------------------------- ------------
MISCELLANEOUS--2.0%
--------------------------------------------------------
790 Novartis AG 1,211,909
-------------------------------------------------------- ------------
RETAIL-RESTAURANTS--0.0%
--------------------------------------------------------
50 Valora Holding AG 10,640
-------------------------------------------------------- ------------
UNASSIGNED--0.1%
--------------------------------------------------------
50 Societe Suisse pour la Microelectronique et l'Horlogerie 29,772
--------------------------------------------------------
200 Societe Suisse pour la Microelectronique et l'Horlogerie 27,537
-------------------------------------------------------- ------------
Total 57,309
-------------------------------------------------------- ------------
TOTAL SWITZERLAND 4,736,735
-------------------------------------------------------- ------------
UNITED KINGDOM--3.2%
--------------------------------------------------------
AEROSPACE--0.1%
--------------------------------------------------------
1,900 British Aerospace PLC 50,307
-------------------------------------------------------- ------------
BANKING--0.6%
--------------------------------------------------------
7,100 Lloyds TSB Group PLC 95,311
--------------------------------------------------------
18,028 National Westminster Bank PLC, London 272,242
-------------------------------------------------------- ------------
Total 367,553
-------------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
--------------------------------------------------------
UNITED KINGDOM--CONTINUED
-------------------------------------------------
BROADCASTING--0.4%
-------------------------------------------------
900 British Sky Broadcasting Group PLC $ 6,809
-------------------------------------------------
27,500 Carlton Communications PLC 227,572
------------------------------------------------- -----------
Total 234,381
------------------------------------------------- -----------
DIVERSIFIED OPERATIONS--0.2%
-------------------------------------------------
19,334 Williams Holdings PLC 115,040
------------------------------------------------- -----------
FOOD PROCESSING--0.2%
-------------------------------------------------
14,300 Allied Domecq PLC 113,334
------------------------------------------------- -----------
HEALTH CARE--0.5%
-------------------------------------------------
33,224 Smithkline Beecham Corp. 324,121
------------------------------------------------- -----------
MACHINERY--0.3%
-------------------------------------------------
8,800 Siebe PLC 176,949
------------------------------------------------- -----------
MULTI-INDUSTRY--0.3%
-------------------------------------------------
7,500 Hanson PLC, ADR 180,938
------------------------------------------------- -----------
OIL & RELATED--0.2%
-------------------------------------------------
10,370 British Petroleum Co. PLC 156,347
------------------------------------------------- -----------
PHARMACEUTICALS--0.2%
-------------------------------------------------
4,800 Glaxo Wellcome PLC 107,036
------------------------------------------------- -----------
PUBLISHING--0.2%
-------------------------------------------------
12,722 EMI Group PLC 124,933
------------------------------------------------- -----------
RETAIL--0.0%
-------------------------------------------------
5,468 Thorn EMI 12,318
------------------------------------------------- -----------
TELECOMMUNICATIONS--0.0%
-------------------------------------------------
1,125 Cable & Wireless 9,578
------------------------------------------------- -----------
TOTAL UNITED KINGDOM 1,972,835
------------------------------------------------- -----------
TOTAL FOREIGN SECURITIES SECTOR (IDENTIFIED COST
$18,032,118) 18,605,918
------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
--------- --------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--9.9%
-------------------------------------------------------------
ARGENTINA--0.3%
---------------------------------------------------
PETROLEUM--0.3%
---------------------------------------------------
21,385 Compania Naviera Perez Companc S.A., Class B $ 172,398
--------------------------------------------------- ------------
BRAZIL--1.4%
---------------------------------------------------
BANKING--0.1%
---------------------------------------------------
7,000,000 Banco Bradesco S.A., Pfd. 73,794
--------------------------------------------------- ------------
BASIC INDUSTRY--0.6%
---------------------------------------------------
4,387 (a)Cia Acos Especiais Itabira-Acesita, ADR 16,937
---------------------------------------------------
3,207 (a)Companhia Energetica de Minas Gerais, ADR 176,219
---------------------------------------------------
7,400 Companhia Vale Do Rio Doce, ADR 181,017
--------------------------------------------------- ------------
Total 374,173
--------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.6%
---------------------------------------------------
2,750 Telecomunicacoes Brasileras, ADR 354,063
--------------------------------------------------- ------------
STEEL--0.0%
---------------------------------------------------
1,211,792 Cia Acos Especiais Itabira-Acesita, Pfd. 2,632
--------------------------------------------------- ------------
UTILITIES--0.1%
---------------------------------------------------
150,000 Centrais Eletricas Brasileiras S.A., Pfd., Series B 84,887
---------------------------------------------------
6,588 Light Servicos de Eletricidade S.A. 2,820
--------------------------------------------------- ------------
Total 87,707
--------------------------------------------------- ------------
TOTAL BRAZIL 892,369
--------------------------------------------------- ------------
CHILE--0.8%
---------------------------------------------------
CONSUMER DURABLES--0.2%
---------------------------------------------------
4,200 Compania Cervecerias Unidas S.A., ADR 120,750
--------------------------------------------------- ------------
ENGINEERING-BUSINESS SERVICES--0.3%
---------------------------------------------------
5,319 Chilgener S.A., ADR 145,940
--------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
---------------------------------------------------
2,525 Compania Telecomunicacion Chile, ADR 81,747
--------------------------------------------------- ------------
UTILITIES--0.2%
---------------------------------------------------
3,750 (b)Chilectra S.A., ADR 118,378
--------------------------------------------------- ------------
TOTAL CHILE 466,815
--------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ------------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
--------------------------------------------------------------
COLOMBIA--0.4%
------------------------------------------------------
BANKING--0.3%
------------------------------------------------------
2,600 Banco Ganadero S.A., ADR, Class B $ 104,000
------------------------------------------------------
5,500 Banco Industrial Colombiano, ADR 98,313
------------------------------------------------------ ------------
Total 202,313
------------------------------------------------------ ------------
MISCELLANEOUS--0.1%
------------------------------------------------------
3,500 Cementos Diamante S.A., GDR 45,500
------------------------------------------------------ ------------
TOTAL COLOMBIA 247,813
------------------------------------------------------ ------------
GREECE--0.0%
------------------------------------------------------
BANKING--0.0%
------------------------------------------------------
422 Ergo Bank S.A. 28,267
------------------------------------------------------ ------------
INDIA--0.3%
------------------------------------------------------
CHEMICALS--0.1%
------------------------------------------------------
5,700 Indian Petrochemicals, GDR 58,397
------------------------------------------------------ ------------
STEEL--0.0%
------------------------------------------------------
5,500 Steel Authority of India, GDR 35,888
------------------------------------------------------ ------------
TEXTILES--0.2%
------------------------------------------------------
4,300 Reliance Industries, Ltd., GDR 98,631
------------------------------------------------------ ------------
TOTAL INDIA 192,916
------------------------------------------------------ ------------
INDONESIA--0.3%
------------------------------------------------------
BANKING--0.2%
------------------------------------------------------
275,626 (a)PT Bank Dagang Nasional 54,455
------------------------------------------------------
39,374 (a)PT Bank Dagang Nasional, Warrants 2/14/2000 2,274
------------------------------------------------------
260,814 (a)PT Bank International Indonesia 75,311
------------------------------------------------------
32,072 (a)PT Bank International Indonesia, Warrants 1/17/2000 2,720
------------------------------------------------------ ------------
Total 134,760
------------------------------------------------------ ------------
CAPITAL GOODS--0.1%
------------------------------------------------------
3,100 (a)PT Indosat, ADR 81,375
------------------------------------------------------ ------------
TOTAL INDONESIA 216,135
------------------------------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------------------- -----------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
----------------------------------------------------
KOREA--0.6%
---------------------------------------------
AUTOMOBILE--0.0%
---------------------------------------------
2,066 Hyundai Motor Service Co., Pfd. $ 13,999
--------------------------------------------- -----------
CAPITAL GOODS--0.1%
---------------------------------------------
3,284 (a)Anam Industrial Co., Ltd. 52,400
--------------------------------------------- -----------
COMPUTERS--0.1%
---------------------------------------------
5,750 Anam Industrial Co., Ltd., Pfd. 33,934
--------------------------------------------- -----------
ELECTRONICS & ELECTRICAL--0.0%
---------------------------------------------
2 (a)Samsung Electronics Co. 193
---------------------------------------------
18 (b)Samsung Electronics Co., GDR 968
--------------------------------------------- -----------
Total 1,161
--------------------------------------------- -----------
HOUSING & CONSTRUCTION--0.0%
---------------------------------------------
9,000 (a)Kumho Construction & Engineering Co., Pfd. 21,836
--------------------------------------------- -----------
MACHINERY--0.0%
---------------------------------------------
6,000 (a)(b)Daewoo Heavy Industries, Pfd. 23,213
--------------------------------------------- -----------
MULTI-INDUSTRY--0.2%
---------------------------------------------
2,283 (a)(b)Dong Bang Forwarding Co. 118,516
---------------------------------------------
913 (a)Dong Bang Forwarding Co., Rights 14,222
--------------------------------------------- -----------
Total 132,738
--------------------------------------------- -----------
PETROLEUM--0.1%
---------------------------------------------
2,571 (a)Yukong, Ltd. 47,767
--------------------------------------------- -----------
UTILITIES--0.1%
---------------------------------------------
3,200 (a)Korea Electric Power Corp. 70,995
--------------------------------------------- -----------
TOTAL KOREA 398,043
--------------------------------------------- -----------
MALAYSIA--0.9%
---------------------------------------------
AIRLINES--0.1%
---------------------------------------------
25,000 Malaysian Airline System 40,071
--------------------------------------------- -----------
BANKING--0.2%
---------------------------------------------
14,000 Commerce Asset Holdings Berhad 15,708
---------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------------ ----------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-------------------------------------------------------------
MALAYSIA--CONTINUED
------------------------------------------------------
BANKING--CONTINUED
------------------------------------------------------
1,750 (a)Commerce Asset Holdings Berhad, Warrants 12/31/2002 $ 566
------------------------------------------------------
25,000 RHB Capital BHD 29,591
------------------------------------------------------
12,000 Malayan Banking Berhad 60,291
------------------------------------------------------ ----------
Total 106,156
------------------------------------------------------ ----------
BEVERAGES--0.1%
------------------------------------------------------
40,000 Guinness Anchor Berhad 61,648
------------------------------------------------------ ----------
FOREST PRODUCTS--0.0%
------------------------------------------------------
10,000 Jaya Tiasa Holdings 27,587
------------------------------------------------------ ----------
INDUSTRIAL COMPONENT--0.0%
------------------------------------------------------
9,000 United Engineers, Ltd. 28,851
------------------------------------------------------ ----------
LEISURE & RECREATION--0.1%
------------------------------------------------------
12,000 Genting Berhad 37,358
------------------------------------------------------ ----------
MULTI-INDUSTRY--0.1%
------------------------------------------------------
35,000 Sime Darby Berhad 72,821
------------------------------------------------------ ----------
NON RESIDENTIAL CONSTRUCTION--0.1%
------------------------------------------------------
47,000 Renong Berhad 46,359
------------------------------------------------------ ----------
TELECOMMUNICATIONS--0.1%
------------------------------------------------------
13,500 Telekom Malaysia Berhad 40,988
------------------------------------------------------ ----------
UTILITIES--0.1%
------------------------------------------------------
18,000 Petronas Gas Berhad 53,263
------------------------------------------------------ ----------
TOTAL MALAYSIA 515,102
------------------------------------------------------ ----------
MEXICO--1.4%
------------------------------------------------------
FINANCIAL SERVICES--0.3%
------------------------------------------------------
4,900 (a)Carso Global Telecom, ADR 41,592
------------------------------------------------------
4,900 (a)Grupo Carso S.A. de C.V., Class A1, ADR 78,898
------------------------------------------------------
16,000 (a)Grupo Financiero Banamex Accivel, Class B 50,450
------------------------------------------------------
1,140 (a)Grupo Financiero Banamex Accivel, Class L 3,345
------------------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ------------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
--------------------------------------------------------------
MEXICO--CONTINUED
------------------------------------------------------
FINANCIAL SERVICES--CONTINUED
------------------------------------------------------
68 Grupo Financiero Inbursa, S.A. de C.V., Class B, ADR $ 1,504
------------------------------------------------------ ------------
Total 175,789
------------------------------------------------------ ------------
INDUSTRIAL & RELATED--0.1%
------------------------------------------------------
11,000 Apasco S.A. de C.V. 83,668
------------------------------------------------------ ------------
MULTI-INDUSTRY--0.2%
------------------------------------------------------
12,791 Alfa, S.A. de C.V., Class A 120,173
------------------------------------------------------ ------------
PAPER PRODUCTS--0.2%
------------------------------------------------------
25,000 Kimberly-Clark de Mexico 130,792
------------------------------------------------------ ------------
TELECOMMUNICATIONS--0.5%
------------------------------------------------------
110,000 Telefonos de Mexico 286,679
------------------------------------------------------ ------------
TELECOMMUNICATION SERVICES--0.1%
------------------------------------------------------
4,000 Grupo Televisa S.A. 71,094
------------------------------------------------------ ------------
TOTAL MEXICO 868,195
------------------------------------------------------ ------------
PHILIPPINES--0.1%
------------------------------------------------------
BANKING--0.0%
------------------------------------------------------
1,935 Metro Bank and Trust Co. 17,247
------------------------------------------------------ ------------
OIL & RELATED--0.1%
------------------------------------------------------
400,000 (a)Belle Corp. 52,174
------------------------------------------------------
80,000 (a)Belle Corp., warrants 10/6/2000 0
------------------------------------------------------ ------------
Total 52,174
------------------------------------------------------ ------------
TOTAL PHILIPPINES 69,421
------------------------------------------------------ ------------
PORTUGAL--0.6%
------------------------------------------------------
ENGINEERING-BUSINESS SERVICES--0.1%
------------------------------------------------------
Sonae Investimentos Sociedade Gestora de Participacoes
1,500 Sociais, S.A. 59,303
------------------------------------------------------ ------------
FINANCIAL SERVICES--0.2%
------------------------------------------------------
6,000 Banco Commercial Portugues, Class R 126,709
------------------------------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------------------
PORTUGAL--CONTINUED
----------------------------------------------------
FOOD & BEVERAGE--0.2%
----------------------------------------------------
1,399 Estabelecimentos Jeronimo Martins & Filho SGPS, S.A. $ 107,681
---------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
----------------------------------------------------
2,000 Portugal Telecom S.A. 86,751
---------------------------------------------------- ------------
TOTAL PORTUGAL 380,444
---------------------------------------------------- ------------
SINGAPORE--0.3%
----------------------------------------------------
BANKING--0.1%
----------------------------------------------------
3,000 Development Bank of Singapore, Ltd. 30,598
----------------------------------------------------
6,000 Oversea-Chinese Banking Corp., Ltd. 41,582
---------------------------------------------------- ------------
Total 72,180
---------------------------------------------------- ------------
BROADCASTING--0.0%
----------------------------------------------------
1,000 Singapore Press Holdings, Ltd. 14,711
---------------------------------------------------- ------------
ENTERTAINMENT & RECREATION--0.0%
----------------------------------------------------
3,000 Hotel Properties, Ltd. 3,707
---------------------------------------------------- ------------
MACHINERY--0.0%
----------------------------------------------------
1,250 Keppel Corp. 4,985
----------------------------------------------------
2,000 Van Der Horst, Ltd. 2,733
---------------------------------------------------- ------------
Total 7,718
---------------------------------------------------- ------------
PROPERTY--0.1%
----------------------------------------------------
2,000 City Developments, Ltd. 12,945
----------------------------------------------------
3,000 DBS Land Ltd. 7,297
----------------------------------------------------
2,000 First Capital Corp., Ltd. 4,472
----------------------------------------------------
9,000 United Overseas Bank, Ltd. 35,829
---------------------------------------------------- ------------
Total 60,543
---------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
----------------------------------------------------
13,000 Singapore Telecommunications 22,014
---------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------
SINGAPORE--CONTINUED
----------------------------------------
TRANSPORTATION-AIR--0.0%
----------------------------------------
3,000 Singapore Airlines, Ltd. $ 22,164
---------------------------------------- ------------
TOTAL SINGAPORE 203,037
---------------------------------------- ------------
SOUTH AFRICA--1.8%
----------------------------------------
BANKING--0.2%
----------------------------------------
7,186 Amalgamated Banks of South Africa 48,955
----------------------------------------
2,515 Nedcor, Ltd. 54,234
----------------------------------------
1,000 Standard Bank Investment Corp., Ltd. 44,523
---------------------------------------- ------------
Total 147,712
---------------------------------------- ------------
CHEMICAL--0.2%
----------------------------------------
9,000 Sasol, Ltd. 124,075
---------------------------------------- ------------
COAL--0.0%
----------------------------------------
419 Anglo American Coal Corp., Ltd. 24,454
---------------------------------------- ------------
ENTERTAINMENT--0.1%
----------------------------------------
62,743 Sun International (South Africa), Ltd. 38,503
---------------------------------------- ------------
FINANCIAL SERVICES--0.2%
----------------------------------------
312 (a)Dimension Data Holdings, Ltd. 1,305
----------------------------------------
4,500 Free State Consolidated Gold Mines, Ltd. 26,553
----------------------------------------
6,000 Malbak Limited 8,754
----------------------------------------
7,000 Rembrandt Group, Ltd. 63,384
---------------------------------------- ------------
Total 99,996
---------------------------------------- ------------
FOOD & BEVERAGE--0.0%
----------------------------------------
672 Foodcorp., Ltd. 4,326
---------------------------------------- ------------
HOUSEHOLD PRODUCTS--0.0%
----------------------------------------
837 Ellerine Holdings, Ltd. 6,645
----------------------------------------
81 (a)JD Group, Ltd. 613
---------------------------------------- ------------
Total 7,258
---------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
--------- -------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
------------------------------------------------------------
SOUTH AFRICA--CONTINUED
--------------------------------------------------
INDUSTRIAL MANUFACTURING--0.2%
--------------------------------------------------
6,045 Barlow Ltd. $ 69,069
--------------------------------------------------
1,030 Anglo American Industrial Corp., Ltd. 38,676
-------------------------------------------------- ------------
Total 107,745
-------------------------------------------------- ------------
INSURANCE--0.3%
--------------------------------------------------
27,826 LibLife Strategic Investments, Ltd. 96,127
--------------------------------------------------
3,000 Liberty Life Association of Africa, Ltd. 87,544
-------------------------------------------------- ------------
Total 183,671
-------------------------------------------------- ------------
LODGING & RESTAURANT--0.2%
--------------------------------------------------
4,068 South African Breweries, Ltd. 118,055
-------------------------------------------------- ------------
MEDICAL-DRUGS--0.0%
--------------------------------------------------
989 South African Druggists, Ltd. 6,451
-------------------------------------------------- ------------
METALS & MINING--0.4%
--------------------------------------------------
3,000 Anglo American Platinum Corp., Ltd. 51,979
--------------------------------------------------
1,500 Anglo American Corporation of South Africa Limited 76,762
--------------------------------------------------
3,300 De Beers Centenary AG 96,299
--------------------------------------------------
4,000 Gencor Ltd. 9,441
-------------------------------------------------- ------------
Total 234,481
-------------------------------------------------- ------------
RETAIL-DIVERSIFIED--0.0%
--------------------------------------------------
2,284 New Clicks Holdings, Ltd. 2,960
-------------------------------------------------- ------------
TOTAL SOUTH AFRICA 1,099,687
-------------------------------------------------- ------------
TAIWAN--0.4%
--------------------------------------------------
MISCELLANEOUS--0.1%
--------------------------------------------------
7,018 (a)Walsin Lihwa Wire, GDR 56,846
-------------------------------------------------- ------------
NON-RESIDENTIAL CONSTRUCTION--0.1%
--------------------------------------------------
10,902 (a)Tuntex Distinct Corp., GDR 62,414
-------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- ------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------------------
TAIWAN--CONTINUED
------------------------------------------------
TECHNOLOGY--0.2%
------------------------------------------------
4,213 (a)Macronix International Co., Ltd., ADR $ 94,529
------------------------------------------------ ------------
TOTAL TAIWAN 213,789
------------------------------------------------ ------------
THAILAND--0.3%
------------------------------------------------
BANKING--0.1%
------------------------------------------------
27,000 Krung Thai Bank PLC 18,223
------------------------------------------------
13,500 Siam Commercial Bank 43,884
------------------------------------------------ ------------
Total 62,107
------------------------------------------------ ------------
BUILDING MATERIALS--0.0%
------------------------------------------------
2,000 Siam Cement Co., Ltd 32,837
------------------------------------------------ ------------
COMMUNICATIONS--0.1%
------------------------------------------------
35,000 (a)TelecomAsia Corp. 28,444
------------------------------------------------
9,000 United Communication Industry Public Co., Ltd. 26,777
------------------------------------------------ ------------
Total 55,221
------------------------------------------------ ------------
PETROLEUM--0.1%
------------------------------------------------
4,500 PTT Exploration and Production Public Co. 60,248
------------------------------------------------ ------------
TOTAL THAILAND 210,413
------------------------------------------------ ------------
TURKEY--0.0%
------------------------------------------------
MULTI-INDUSTRY--0.0%
------------------------------------------------
349 Koc Yatirim Ve Sanayi Mamulleri Pazarlama S.A. 132
------------------------------------------------ ------------
TOTAL EMERGING MARKETS SECURITIES SECTOR 6,174,976
(IDENTIFIED COST $6,248,756)
------------------------------------------------ ------------
COMMERCIAL PAPER--28.8%
-----------------------------------------------------------
FINANCE--28.8%
------------------------------------------------
$3,000,000 Ford Motor Credit Corp., 5.50%, 12/12/1997 2,969,670
------------------------------------------------
3,000,000 General Electric Capital Corp., 5.50%, 10/8/1997 2,996,792
------------------------------------------------
3,000,000 Hertz Corp., 5.50%, 12/12/1997 2,969,670
------------------------------------------------
3,000,000 Monte Rosa Capital Corp., 5.54%, 10/2/1997 2,999,538
------------------------------------------------
New Center Asset Trust, A1/P1 Series, 5.53%,
3,000,000 10/6/1997 2,997,696
------------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
FOREIGN VALUE
CURRENCY PAR IN U.S.
AMOUNT DOLLARS
------------ -------------------------------------------------- -----------
<C> <S> <C>
COMMERCIAL PAPER--CONTINUED
---------------------------------------------------------------
FINANCE--CONTINUED
--------------------------------------------------
$ 3,000,000 Sheffield Receivables Corp., 5.54%, 10/2/1997 $ 2,999,538
-------------------------------------------------- -----------
TOTAL COMMERCIAL PAPER (IDENTIFIED COST
$17,927,564) 17,932,904
-------------------------------------------------- -----------
U.S. FIXED INCOME SECURITIES SECTOR--10.7%
---------------------------------------------------------------
GOVERNMENT/AGENCY--10.7%
--------------------------------------------------
1,500,000 United States Treasury Bill, 12/11/1997 1,485,591
--------------------------------------------------
325,000 United States Treasury Bond, 7.25%, 8/15/2022 355,427
--------------------------------------------------
500,000 United States Treasury Bond, 7.50%, 11/15/2016 556,730
--------------------------------------------------
1,200,000 United States Treasury Bond, 7.625%, 11/15/2022 1,368,528
--------------------------------------------------
1,430,000 United States Treasury Bond, 11.75%, 11/15/2014 2,076,432
--------------------------------------------------
400,000 United States Treasury Note, 6.25%, 2/15/2003 404,000
--------------------------------------------------
350,000 United States Treasury Receipt PO Strip, 8/15/2005 216,097
--------------------------------------------------
350,000 United States Treasury Receipt IO Strip, 2/15/2005 223,298
-------------------------------------------------- -----------
TOTAL U.S. FIXED INCOME SECURITIES SECTOR
(IDENTIFIED COST $6,431,631) 6,686,103
-------------------------------------------------- -----------
FOREIGN FIXED INCOME SECURITIES SECTOR--17.1%
---------------------------------------------------------------
DENMARK--0.9%
--------------------------------------------------
3,310,000 Denmark--Bullet, Bond, 8.00%, 3/15/2006 562,497
-------------------------------------------------- -----------
FRANCE--3.7%
--------------------------------------------------
10,500,000 France (Govt. of), 6.50%, 10/25/2006 1,909,509
--------------------------------------------------
2,150,000 France O.A.T., Bond, 7.25%, 4/25/2006 409,622
-------------------------------------------------- -----------
Total 2,319,131
-------------------------------------------------- -----------
GERMANY--3.4%
--------------------------------------------------
1,040,000 Republic of Germany, Bond, 6.25%, 4/26/2006 620,604
--------------------------------------------------
287,000 Republic of Germany, Deb., 7.125%, 12/20/2002 178,442
--------------------------------------------------
1,065,000 Germany (Fed. Republic), 6.50%, 7/15/2003 646,130
--------------------------------------------------
1,140,000 Germany (Fed. Republic), Bond, 6.00%, 1/5/2006 669,438
-------------------------------------------------- -----------
Total 2,114,614
-------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
FOREIGN VALUE
CURRENCY PAR IN U.S.
AMOUNT DOLLARS
------------ --------------------------------------------------- -----------
<C> <S> <C>
FOREIGN FIXED INCOME SECURITIES SECTOR--CONTINUED
----------------------------------------------------------------
ITALY--1.2%
---------------------------------------------------
$880,000,000 Buoni Poliennali Del Tes, Deb., 10.50%, 4/15/1998 $ 519,182
---------------------------------------------------
310,000,000 Italy (Republic of), Deb., 10.50%, 4/1/2005 227,162
--------------------------------------------------- -----------
Total 746,344
--------------------------------------------------- -----------
NETHERLANDS--3.1%
---------------------------------------------------
1,690,000 Dutch Government Bond, 5.75%, 2/15/2007 864,572
---------------------------------------------------
580,000 Netherlands Government Bond, 7.50%, 4/15/2010 337,602
---------------------------------------------------
880,000 Dutch Government Bond, 7.25%, 10/1/2004 493,875
---------------------------------------------------
410,000 Netherlands Government Bond, 7.00%, 2/15/2003 225,363
--------------------------------------------------- -----------
Total 1,921,412
--------------------------------------------------- -----------
SPAIN--1.3%
---------------------------------------------------
104,600,000 Kingdom of Spain, Deb., 12.25%, 3/25/2000 817,732
--------------------------------------------------- -----------
SWEDEN--0.4%
---------------------------------------------------
1,600,000 Sweden (Kingdom of), 10.25%, 5/5/2000 236,091
--------------------------------------------------- -----------
UNITED KINGDOM--3.1%
---------------------------------------------------
245,000 United Kingdom Treasury Bond, 8.00%, 12/7/2015 455,561
---------------------------------------------------
239,000 United Kingdom Treasury, 7.75%, 9/8/2006 417,789
---------------------------------------------------
400,000 United Kingdom Treasury, 8.50%, 7/16/2007 737,321
---------------------------------------------------
190,000 United Kingdom Treasury, 9.75%, 8/27/2002 346,591
--------------------------------------------------- -----------
Total 1,957,262
--------------------------------------------------- -----------
TOTAL FOREIGN FIXED INCOME SECURITIES SECTOR
(IDENTIFIED COST $10,804,770) 10,675,083
--------------------------------------------------- -----------
(C) REPURCHASE AGREEMENT--1.9%
----------------------------------------------------------------
1,176,958 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(at amortized cost) 1,176,958
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $60,621,797)(D) $61,251,942
--------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- -------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $261,075 which represents 0.4% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $60,689,138 The
net unrealized appreciation of investments on a federal tax basis amounts to
$562,804 which is comprised of $2,899,362 appreciation and $2,336,558
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($62,197,366) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depositary Receipt
GDR--Global Depositary Receipt
IO--Interest Only
PO--Principal Only
PLC--Public Limited Company
SPA--Standby Purchase Agreement
STRIP--Separate Trading of Registered Interest & Principal of Securities
(See Notes which are an integral part of the Financial Statements)
BLANCHARD PRECIOUS METALS FUND, INC.
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
--------- -------------------------------- -----------
<C> <S> <C>
EQUITIES--84.5%
------------------------------------------
METALS & MINING--84.5%
--------------------------------
AUSTRALIA--1.0%
--------------------------------
600,000 (a)Croesus Mining NL $ 152,449
--------------------------------
1,000,000 (a)Laverton Gold NL 148,820
--------------------------------
1,258,000 (a)(b)Lone Star Exploration NL 200,253
--------------------------------
1,300,000 (a)Lone Star Exploration NL 215,500
-------------------------------- -----------
Total 717,022
-------------------------------- -----------
CANADA--53.0%
--------------------------------
1,640,000 (a)Ariel Resources, Ltd. 367,859
--------------------------------
421,000 Cambior, Inc. 4,736,840
--------------------------------
229,600 (a)Dayton Mining Corp. 803,600
--------------------------------
1,405,500 (a)(b)Eldorado Gold Corp., Ltd. 3,823,798
--------------------------------
230,000 (a)First Silver Reserve, Inc. 183,061
--------------------------------
95,200 Franco-Nevada Mining Corp., Ltd. 2,242,148
--------------------------------
721,000 (a)Geomaque Explorations, Ltd. 1,930,249
--------------------------------
50,000 (a)Goldcorp, Inc., Class A 318,750
--------------------------------
401,500 (a)Golden Knight Resources, Inc. 1,191,093
--------------------------------
316,000 (a)Greenstone Resources, Ltd. 3,235,339
--------------------------------
510,000 (a)Kinross Gold Corp. 2,836,875
--------------------------------
194,300 (a)Philex Gold, Inc. 773,235
--------------------------------
135,000 Placer Dome, Inc. 2,581,875
--------------------------------
4,115,069 (a)Santa Cruz Gold, Inc. 1,488,755
--------------------------------
1,260,000 (a)TVX Gold, Inc. 7,840,527
--------------------------------
466,000 (a)Viceroy Resource Corp. 1,180,131
-------------------------------- -----------
Total 35,534,135
-------------------------------- -----------
</TABLE>
BLANCHARD PRECIOUS METALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- ---------------------------------------------------- -----------
<C> <S> <C>
EQUITIES--CONTINUED
---------------------------------------------------------------
GHANA--4.8%
----------------------------------------------------
290,000 Ashanti Goldfields Co., GDR $ 3,190,000
---------------------------------------------------- -----------
SOUTH AFRICA--5.0%
----------------------------------------------------
551,700 East Rand Gold & Uranium Co., Ltd., ADR 764,325
----------------------------------------------------
200,000 Free State Consolidated Gold Mines Ltd., ADR 1,218,750
----------------------------------------------------
255,000 Vaal Reefs Explorations & Mining Co., Ltd., ADR 1,370,625
---------------------------------------------------- -----------
Total 3,353,700
---------------------------------------------------- -----------
UNITED STATES--20.7%
----------------------------------------------------
1,425,000 (a)Canyon Resources Corp. 3,918,750
----------------------------------------------------
260,000 Homestake Mining Co. 3,981,250
----------------------------------------------------
626,500 (a)Meridian Gold, Inc. 3,093,344
----------------------------------------------------
64,500 Newmont Mining Corp. 2,898,469
---------------------------------------------------- -----------
Total 13,891,813
---------------------------------------------------- -----------
TOTAL EQUITIES (IDENTIFIED COST $78,030,194) 56,686,670
---------------------------------------------------- -----------
WARRANTS--1.3%
---------------------------------------------------------------
227,500 (a)Atlas Corp., Warrants (expire 12/15/99) 1,138
----------------------------------------------------
75,000 (a)Canyon Resources Corp., Warrants (expire 3/20/99) --
----------------------------------------------------
(a)(b)Geomaque Explorations Ltd., Warrants (expire 870,084
325,000 3/19/99)
---------------------------------------------------- -----------
TOTAL WARRANTS (IDENTIFIED COST $827,565) 871,222
---------------------------------------------------- -----------
PREFERRED STOCK--0.8%
---------------------------------------------------------------
UNITED STATES--0.8%
----------------------------------------------------
25,000 Freeport-McMoRan Copper & Gold, Inc., Cumulative
Pfd., Series SILV (IDENTIFIED COST $432,868) 528,125
---------------------------------------------------- -----------
U.S. TREASURY SECURITIES--7.8%
---------------------------------------------------------------
U.S. TREASURY BILL--7.8%
----------------------------------------------------
$5,300,000 12/11/1997 (IDENTIFIED COST $5,248,217) 5,249,088
---------------------------------------------------- -----------
</TABLE>
BLANCHARD PRECIOUS METALS FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- --------------------------------------------------- -----------
<C> <S> <C>
(C) REPURCHASE AGREEMENT--8.2%
--------------------------------------------------------------
$5,492,706 CS First Boston Corp., 6.05%, dated 9/30/1997, due
10/1/1997 (at amortized cost) $ 5,492,706
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $90,031,550)(D) $68,827,811
--------------------------------------------------- -----------
</TABLE>
(a) Non-income producing security.
(b) Certain of these securities are subject to restrictions on resale under
Federal Securities laws. At September 30, 1997, these securities amounted to
$4,894,135 with represents 7.3% of net assets.
(c) The repurchase agreements is fully collateralized by U.S.government and/or
agency obligations based on market prices at the date of the portfolio.
(d) The cost of investments for federal tax purposes amounts to $90,719,260. The
net unrealized depreciation of investments on a federal tax basis amounts to
$20,522,951 which is comprised of $1,599,113 appreciation and $22,122,064
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($67,037,240) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
GDR--Global Depository Receipt
(See Notes which are an integral part of the Financial Statements)
BLANCHARD FLEXIBLE INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--26.6%
---------------------------------------------------------------
AEROSPACE--1.1%
-------------------------------------------------
$ 1,700,000 Sequa Corp., Sr. Note, 8.75%, 12/15/2001 $ 1,738,250
------------------------------------------------- ------------
CONSUMER RELATED--1.3%
-------------------------------------------------
Host Marriot Travel Plaza, Sr. Note, 9.50%, 1,062,500
1,000,000 5/15/2005
-------------------------------------------------
John Q. Hammons Hotels, 1st Mtg. Bond, 8.875%, 1,015,000
1,000,000 2/15/2004
------------------------------------------------- ------------
Total 2,077,500
------------------------------------------------- ------------
FINANCE--3.5%
-------------------------------------------------
Americo Life, Inc., Sr. Sub. Note, 9.25%, 1,548,750
1,500,000 6/1/2005
-------------------------------------------------
1,000,000 Navistar Financial Corp. Owner Trust 1995-A , Sr.
Sub. Note, 8.875%, 11/15/1998 1,024,241
-------------------------------------------------
Presidential Life Corp., Sr. Note, 9.50%, 1,556,250
1,500,000 12/15/2000
-------------------------------------------------
Reliance Group Holdings, Inc., Sr. Note, 9.00%, 1,306,250
1,250,000 11/15/2000
------------------------------------------------- ------------
Total 5,435,491
------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.6%
-------------------------------------------------
1,000,000 EnviroSource, Inc., Sr. Note, 9.75%, 6/15/2003 1,005,000
------------------------------------------------- ------------
OIL REFINING--1.5%
-------------------------------------------------
2,250,000 PDV America, Sr. Note, 7.25%, 8/1/1998 2,267,957
------------------------------------------------- ------------
PAPER/FOREST PRODUCTS/CONTAINERS--4.9%
-------------------------------------------------
Doman Industries, Ltd., Sr. Note, 8.75%, 995,000
1,000,000 3/15/2004
-------------------------------------------------
1,250,000 Fort Howard Corp., Sr. Sub. Note, 9.00%, 2/1/2006 1,358,749
-------------------------------------------------
1,000,000 Maxxam Group, Inc., Sr. Note, 11.25%, 8/1/2003 1,065,000
-------------------------------------------------
1,000,000 Repap New Brunswick, 1st Priority Sr. Secd. Note,
9.875%, 7/15/2000 1,012,500
-------------------------------------------------
1,000,000 Repap Wisconsin, Inc., 1st Priority Sr. Secd.
Note, 9.25%, 2/1/2002 1,058,750
-------------------------------------------------
2,000,000 (a)Stone Container Finance Co. CDA, Company
Guarantee, 11.50%, 8/15/2006 2,130,000
------------------------------------------------- ------------
Total 7,619,999
------------------------------------------------- ------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
REAL ESTATE DEVELOPMENT--1.0%
-------------------------------------------------
Granite Development Partners, Sr. Note, Series B, $ 1,477,500
$ 1,500,000 10.83%, 11/15/2003
------------------------------------------------- ------------
RETAIL TRADE--0.7%
-------------------------------------------------
(a)Nine West Group, Inc., Sr. Note, 8.375%, 1,010,000
1,000,000 8/15/2005
------------------------------------------------- ------------
SERVICES--2.0%
-------------------------------------------------
1,000,000 (a)Calpine Corp., Sr. Note, 8.75%, 7/15/2007 1,022,500
-------------------------------------------------
HMH Properties, Inc., Sr. Note, Series B, 9.50%, 1,057,500
1,000,000 5/15/2005
-------------------------------------------------
Prime Hospitality Corp., Sr. Sub. Note, 9.75%, 1,060,000
1,000,000 4/1/2007
------------------------------------------------- ------------
Total 3,140,000
------------------------------------------------- ------------
STEEL--1.7%
-------------------------------------------------
1,500,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 1,552,500
-------------------------------------------------
Bethlehem Steel Corp., Sr. Note, 10.375%, 1,080,000
1,000,000 9/1/2003
------------------------------------------------- ------------
Total 2,632,500
------------------------------------------------- ------------
TELECOMMUNICATIONS/CABLE--2.0%
-------------------------------------------------
Centennial Cellular Corp., Sr. Note, 8.875%, 1,020,000
1,000,000 11/1/2001
-------------------------------------------------
Lenfest Communications Inc., Sr. Note, 8.375%, 1,007,500
1,000,000 11/1/2005
-------------------------------------------------
Teleport Communications Group, Inc., Sr. Note, 1,097,500
1,000,000 9.875%, 7/1/2006
------------------------------------------------- ------------
Total 3,125,000
------------------------------------------------- ------------
TRANSPORTATION--4.1%
-------------------------------------------------
Eletson Holdings, Inc., 1st Mtg. Note, 9.25%, 1,541,250
1,500,000 11/15/2003
-------------------------------------------------
1,389,000 Piedmont Aviation, 10.15%, 3/28/2003 1,451,505
-------------------------------------------------
852,000 Piedmont Aviation, 9.90%, 1/15/2001 862,650
-------------------------------------------------
1,500,000 Sea Containers Ltd., Sr. Note, 9.50%, 7/1/2003 1,552,500
-------------------------------------------------
896,000 USAir, Inc., 9.90%, 1/15/2001 885,920
------------------------------------------------- ------------
Total 6,293,825
------------------------------------------------- ------------
UTILITIES-ELECTRIC--2.2%
-------------------------------------------------
1,000,000 Cleveland Electric Illuminating Co., 1st Mtg.
Bond, 9.50%, 5/15/2005 1,090,000
-------------------------------------------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
UTILITIES-ELECTRIC--CONTINUED
-------------------------------------------------
$ 2,218,808 (a)Tucson Electric Power Co., 10.21%, 1/1/2009 $ 2,307,561
------------------------------------------------- ------------
Total 3,397,561
------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST 41,220,583
$39,374,399)
------------------------------------------------- ------------
FOREIGN SECURITIES--1.0%
---------------------------------------------------------------
TELECOMMUNICATIONS--1.0%
-------------------------------------------------
CAD 2,000,000 Rogers Cablesystems, Ltd., Sr. Secd. Note, 9.65%,
1/15/2014 (IDENTIFIED COST $1,511,716) 1,545,948
------------------------------------------------- ------------
MORTGAGE BACKED SECURITIES--31.1%
---------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--31.1%
-------------------------------------------------
35,403 Pool E00434, 7.00%, 5/1/2011 35,809
-------------------------------------------------
975,488 Pool E00466, 7.00%, 1/1/2012 986,676
-------------------------------------------------
993,214 Pool E00497, 7.00%, 7/1/2012 1,004,139
-------------------------------------------------
1,627,552 Pool E20217, 7.00%, 1/1/2011 1,646,202
-------------------------------------------------
3,643,090 Pool E20271, 7.00%, 11/1/2011 3,684,872
-------------------------------------------------
702,239 Pool E64769, 7.00%, 7/1/2011 710,292
-------------------------------------------------
264,596 Pool E64891, 7.00%, 7/1/2011 267,631
-------------------------------------------------
1,498,267 Pool E65184, 7.00%, 8/1/2011 1,515,450
-------------------------------------------------
440,315 Pool E65186, 7.00%, 8/1/2011 445,365
-------------------------------------------------
58,006 Pool E65399, 7.00%, 9/1/2011 58,671
-------------------------------------------------
459,199 Pool E65450, 7.00%, 10/1/2011 464,466
-------------------------------------------------
283,376 Pool E65454, 7.00%, 10/1/2011 286,626
-------------------------------------------------
163,361 Pool E65468, 7.00%, 10/1/2011 165,235
-------------------------------------------------
2,208,871 Pool E65490, 7.00%, 10/1/2011 2,234,205
-------------------------------------------------
2,821,959 Pool E65503, 7.00%, 10/1/2011 2,854,324
-------------------------------------------------
304,766 Pool E65597, 7.00%, 10/1/2011 308,261
-------------------------------------------------
241,313 Pool E65645, 7.00%, 11/1/2011 244,080
-------------------------------------------------
643,716 Pool E65660, 7.00%, 11/1/2011 651,099
-------------------------------------------------
786,446 Pool E65690, 7.00%, 11/1/2011 795,466
-------------------------------------------------
1,523,500 Pool E65702, 7.00%, 11/1/2011 1,540,973
-------------------------------------------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- --------------------------------------------- ------------
<C> <S> <C>
MORTGAGE BACKED SECURITIES--CONTINUED
-----------------------------------------------------------
$ 945,741 Pool E65703, 7.00%, 11/1/2011 $ 956,588
---------------------------------------------
1,908,905 Pool E65712, 7.00%, 12/1/2011 1,930,799
---------------------------------------------
326,516 Pool E65717, 7.00%, 11/1/2011 330,261
---------------------------------------------
1,026,390 Pool E65723, 7.00%, 11/1/2011 1,038,161
---------------------------------------------
409,609 Pool E65750, 7.00%, 11/1/2011 414,307
---------------------------------------------
34,080 Pool E65759, 7.00%, 12/1/2011 34,471
---------------------------------------------
3,252,636 Pool E67171, 7.00%, 7/1/2012 3,288,412
---------------------------------------------
2,981,906 Pool E67276, 7.00%, 8/1/2012 3,014,704
---------------------------------------------
30,851 Pool G10524, 7.00%, 5/1/2011 31,205
---------------------------------------------
596,894 Pool G10556, 7.00%, 7/1/2011 603,740
---------------------------------------------
298,671 Pool G10590, 7.00%, 10/1/2011 302,097
---------------------------------------------
16,291,034 Pool G10690, 7.00%, 7/1/2012 16,470,219
--------------------------------------------- ------------
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED 48,314,806
COST $47,988,240)
--------------------------------------------- ------------
U.S. TREASURY--37.5%
-----------------------------------------------------------
U.S. TREASURY BONDS--13.7%
---------------------------------------------
20,000,000 7.25%, 5/15/2004 21,256,240
--------------------------------------------- ------------
U.S. TREASURY NOTES--23.8%
---------------------------------------------
35,000,000 7.00%, 7/15/2006 36,914,047
--------------------------------------------- ------------
TOTAL U.S. TREASURY (IDENTIFIED COST 58,170,287
$56,623,205)
--------------------------------------------- ------------
(B)REPURCHASE AGREEMENT--2.9%
-----------------------------------------------------------
4,512,438 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) 4,512,438
--------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $153,764,062
$150,009,998)(C)
--------------------------------------------- ------------
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $6,470,061 which represents 4.2% of net assets.
(b) The repurchase agreement is fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $150,009,998.
The net unrealized appreciation of investments on a federal tax basis
amounts to $3,754,064 which is comprised of $3,781,564 appreciation and
$27,500 depreciation at September 30, 1997.
BLANCHARD FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
Note: The categories of investments are shown as a percentage of net assets
($155,222,701) at September 30, 1997.
The following acronyms are used throughout this portfolio:
CAD--Canadian Dollars
CDA--Community Development Administration
(See Notes which are an integral part of the Financial Statements)
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS--4.5%
---------------------------------------------------------------
FINANCIAL SERVICES--0.4%
---------------------------------------------------
$ 4,796 CMC Securities Corp. 1993-A, Series 1993-A, Class
A2, 7.50%, 2/25/2023 $ 4,785
---------------------------------------------------
583,666 Merrill Lynch Mortgage Investors, Series 1990-I,
Class A, 9.20%, 1/15/2011 583,223
--------------------------------------------------- ------------
Total 588,008
--------------------------------------------------- ------------
GOVERNMENT/AGENCY--4.1%
---------------------------------------------------
1,892,678 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-3,
Series 1992-3, Class A2, 6.45%, 10/25/2019 1,896,823
---------------------------------------------------
1,283,183 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-3,
Series 1992-3, Class A3, 6.05%, 6/25/2021 1,287,200
---------------------------------------------------
1,412,944 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-6,
Series 1992-6, Class A4, 7.36%, 11/25/2025 1,423,542
---------------------------------------------------
774,275 Resolution Trust Corp. Mtg. Pass-Thru 1992-C1,
Series 1992-C1, Class A1, 8.80%, 8/25/2023 781,778
--------------------------------------------------- ------------
Total 5,389,343
--------------------------------------------------- ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(IDENTIFIED COST $5,841,278) 5,977,351
--------------------------------------------------- ------------
CORPORATE BONDS--29.3%
---------------------------------------------------------------
AEROSPACE/DEFENSE--0.4%
---------------------------------------------------
500,000 Sequa Corp., Sr. Note, 8.75%, 12/15/2001 511,250
--------------------------------------------------- ------------
AIRLINES--0.1%
---------------------------------------------------
200,000 USAir, Inc., 9.80%, 1/15/2000 208,250
--------------------------------------------------- ------------
CHEMICALS--1.9%
---------------------------------------------------
500,000 Borden Chemicals & Plastics Operating, Note, 9.50%,
5/1/2005 528,750
---------------------------------------------------
Harris Chemical North America, Inc., Sr. Note, 523,750
500,000 10.25%, 7/15/2001
---------------------------------------------------
300,000 ISP Holdings, Inc., Sr. Note, 9.00%, 10/15/2003 315,000
---------------------------------------------------
500,000 Kaiser Aluminum & Chemical Corp., Sr. Note, 9.875%,
2/15/2002 522,500
---------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------------- ------------
<C> <S> <C>
CHEMICALS--CONTINUED
-------------------------------------------------
$ 600,000 SIFTO Canada, Inc., Sr. Note, 8.50%, 7/15/2000 $ 612,000
------------------------------------------------- ------------
Total 2,502,000
------------------------------------------------- ------------
CONSUMER RELATED--4.0%
-------------------------------------------------
750,000 Chiquita Brands International Inc., Sr. Note,
9.625%, 1/15/2004 795,000
-------------------------------------------------
800,000 HMH Properties, Inc., Sr. Note, Series B, 9.50%,
5/15/2005 846,000
-------------------------------------------------
2,460,000 RJR Nabisco, Inc., Note, 8.75%, 7/15/2007 2,615,172
-------------------------------------------------
1,000,000 Revlon Consumer Products Corp., Note, 9.375%,
4/1/2001 1,037,500
------------------------------------------------- ------------
Total 5,293,672
------------------------------------------------- ------------
CONTAINERS-PAPER/PLASTIC--0.8%
-------------------------------------------------
500,000 Container Corp. of America, Sr. Note, 11.25%,
5/1/2004 555,000
-------------------------------------------------
500,000 Sea Containers Ltd., 9.50%, 7/1/2003 517,500
------------------------------------------------- ------------
Total 1,072,500
------------------------------------------------- ------------
ENERGY MINERALS--1.4%
-------------------------------------------------
2,000,000 USX Marathon Group, 5.75%, 7/1/2001 1,962,500
------------------------------------------------- ------------
ENTERTAINMENT--4.2%
-------------------------------------------------
1,000,000 Caesars World, Inc., Sr. Sub. Note, 8.875%,
8/15/2002 1,037,500
-------------------------------------------------
1,000,000 Harrah's Operations, Inc., Sr. Sub. Note, 8.75%,
3/15/2000 1,027,500
-------------------------------------------------
405,000 Host Marriot Travel Plazas Inc., Sr. Note, 9.50%,
5/15/2005 430,312
-------------------------------------------------
900,000 Station Casinos, Inc., Sr. Sub. Note, 9.625%,
6/1/2003 904,500
-------------------------------------------------
1,000,000 Time Warner Entertainment Co. LP, Note, 9.625%,
5/1/2002 1,116,927
-------------------------------------------------
600,000 Trump Atlantic City Associations, Company
Guarantee, 11.25%, 5/1/2006 584,250
-------------------------------------------------
500,000 Viacom, Inc., Sub. Deb., 8.00%, 7/7/2006 500,000
------------------------------------------------- ------------
Total 5,600,989
------------------------------------------------- ------------
FINANCIAL SERVICES--1.9%
-------------------------------------------------
500,000 Navistar Financial Corp. Owner Trust 1995-A , Sr.
Sub. Note, 8.875%, 11/15/1998 512,120
-------------------------------------------------
500,000 Presidential Life Corp., Sr. Note, 9.50%,
12/15/2000 518,750
-------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
FINANCIAL SERVICES--CONTINUED
---------------------------------------------------
$ 1,000,000 Reliance Group Holdings, Inc., Sr. Note, 9.00%,
11/15/2000 $ 1,045,000
---------------------------------------------------
500,000 Williams Scotsman, Inc., Sr. Note, 9.875%, 6/1/2007 512,500
--------------------------------------------------- ------------
Total 2,588,370
--------------------------------------------------- ------------
INDUSTRIAL RELATED--2.9%
---------------------------------------------------
850,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 879,750
---------------------------------------------------
350,000 Bethlehem Steel Corp., Sr. Note, 10.375%, 9/1/2003 378,000
---------------------------------------------------
500,000 Exide Corp., Sr. Note, 10.75%, 12/15/2002 531,250
---------------------------------------------------
500,000 Fort Howard Corp., Sr. Sub. Note, 9.00%, 2/1/2006 543,499
---------------------------------------------------
700,000 John Q. Hammon Hotels, 1st Mtg. Bond, 8.875%,
2/15/2004 710,500
---------------------------------------------------
500,000 Unisys Corp., Deb., 9.50%, 7/15/1998 503,750
---------------------------------------------------
300,000 Unisys Corp., Sr. Note, 10.625%, 10/1/1999 311,250
--------------------------------------------------- ------------
Total 3,857,999
--------------------------------------------------- ------------
OIL REFINING--1.1%
---------------------------------------------------
1,000,000 Clark Oil Refining and Corp. Del, Sr. Note, 10.50%,
12/1/2001 1,035,000
---------------------------------------------------
500,000 PDV America Inc., Sr. Note, 7.25%, 8/1/1998 503,991
--------------------------------------------------- ------------
Total 1,538,991
--------------------------------------------------- ------------
PAPER PRODUCTS--2.0%
---------------------------------------------------
500,000 Repap New Brunswick Inc., 1st Priority Sr. Secd.
Note, 9.875%, 7/15/2000 506,250
---------------------------------------------------
500,000 Repap New Brunswick Inc., Sr. Note, 9.0625%,
7/15/2000 495,000
---------------------------------------------------
700,000 Repap Wisconsin, Inc., 1st Priority Sr. Secd. Note,
9.25%, 2/1/2002 741,125
---------------------------------------------------
700,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 714,875
---------------------------------------------------
200,000 Stone Container Corp., Sr. Sub. Note, 11.00%,
8/15/1999 208,500
--------------------------------------------------- ------------
Total 2,665,750
--------------------------------------------------- ------------
PRINTING & PUBLISHING--0.5%
---------------------------------------------------
600,000 World Color Press Inc., Sr. Sub. Note, 9.125%,
3/15/2003 630,750
--------------------------------------------------- ------------
RETAIL TRADE--0.7%
---------------------------------------------------
1,000,000 Nine West Group, Inc., Sr. Note, 8.375%, 8/15/2005 1,010,000
--------------------------------------------------- ------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
SERVICES--1.2%
---------------------------------------------------
$ 600,000 Fleming Cos., Inc., Sr. Note, 10.625%, 12/15/2001 $ 642,000
---------------------------------------------------
500,000 Marcus Cable Operating Co. LP, Sr. Disc. Note,
0/13.50%, 8/1/2004 453,750
---------------------------------------------------
500,000 Prime Hospitality Corp., 1st Mtg. Bond, 9.25%,
1/15/2006 526,875
--------------------------------------------------- ------------
Total 1,622,625
--------------------------------------------------- ------------
STEEL--0.6%
---------------------------------------------------
750,000 Wheeling Pittsburgh Corp., Sr. Note, 9.375%,
11/15/2003 774,375
--------------------------------------------------- ------------
TELECOMMUNICATIONS--4.0%
---------------------------------------------------
750,000 Centennial Cellular Corp., Sr. Note, 8.875%,
11/1/2001 765,000
---------------------------------------------------
750,000 Century Communications, Corp., Sr. Note, 9.75%,
2/15/2002 795,000
---------------------------------------------------
1,000,000 Comcast Corp., Sr. Sub. Deb., 9.375%, 5/15/2005 1,075,000
---------------------------------------------------
1,000,000 Videotron Group Ltd., Sr. Note, 10.625%, 2/15/2005 1,110,000
---------------------------------------------------
1,000,000 Lenfest Communications Inc., Sr. Note, 8.375%,
11/1/2005 1,007,500
---------------------------------------------------
500,000 Olympus Communications LP, Sr. Note, 10.625%,
11/15/2006 544,375
--------------------------------------------------- ------------
Total 5,296,875
--------------------------------------------------- ------------
TEXTILE PRODUCTS--0.4%
---------------------------------------------------
500,000 Dominion Textile USA Inc., Sr. Note, 8.875%,
11/1/2003 513,750
--------------------------------------------------- ------------
UTILITIES-ELECTRIC--1.2%
---------------------------------------------------
500,000 Jones Intercable, Inc., Sr. Note, 9.625%, 3/15/2002 537,500
---------------------------------------------------
1,000,000 Long Island Lighting Co., Deb., 7.30%, 7/15/1999 1,016,131
--------------------------------------------------- ------------
Total 1,553,631
--------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $37,300,571) 39,204,277
--------------------------------------------------- ------------
CORPORATE NOTE--0.8%
---------------------------------------------------------------
TELECOMMUNICATIONS--0.8%
---------------------------------------------------
1,000,000 Rogers Cablesystems Ltd., Note, 9.625%, 8/1/2002
(identified cost $1,006,758) 1,075,000
--------------------------------------------------- ------------
U.S. TREASURY OBLIGATIONS--61.8%
---------------------------------------------------------------
U.S. TREASURY NOTES--61.8%
---------------------------------------------------
15,000,000 5.75%, 12/31/1998 15,009,375
---------------------------------------------------
20,000,000 6.125%, 5/15/1998 20,075,000
---------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS--CONTINUED
---------------------------------------------------------------
U.S. TREASURY NOTES--CONTINUED
---------------------------------------------------
$20,000,000 6.25%, 3/31/1999 $ 20,143,740
---------------------------------------------------
27,000,000 6.875%, 8/31/1999 27,514,674
--------------------------------------------------- ------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST
$82,053,737) 82,742,789
--------------------------------------------------- ------------
(B)REPURCHASE AGREEMENT--2.9%
---------------------------------------------------------------
3,832,176 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997 (at amortized cost) 3,832,176
--------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $130,034,520)(C) $132,831,593
--------------------------------------------------- ------------
</TABLE>
(a) Denotes variable rate securities which show current rate.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $130,034,520.
The net unrealized appreciation of investments on a federal tax basis
amounts to $2,797,073 which is comprised of $2,812,462 appreciation and
$15,389 depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($133,877,535) at September 30, 1997.
The following acronym is used throughout this portfolio:
LP--Limited Partnership
(See Notes which are an integral part of the Financial Statements)
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--94.5%
--------------------------------------------------------
ALASKA--4.1%
---------------------------------------------
$1,000,000 Valdez, AK Marine Terminal, Revenue Refunding
Bonds (Series B), 5.50% (BP Pipeline Inc.),
10/1/2028 AA $ 983,917
--------------------------------------------- -----------
CALIFORNIA--8.1%
---------------------------------------------
1,000,000 California State Department of Water
Resources, Revenue Refunding Bonds, 5.375%
(Original Issue Yield: 5.67%), 12/1/2027 AAA 994,002
---------------------------------------------
1,000,000 East Bay Municipal Utility District, CA,
Water System Subordinated Refunding Revenue
Bonds (Series 1996), 5.00% (FGIC
INS)/(Original Issue Yield: 5.39%), 6/1/2026 AAA 947,502
--------------------------------------------- -----------
Total 1,941,504
--------------------------------------------- -----------
FLORIDA--8.0%
---------------------------------------------
1,000,000 Dade County, FL Water & Sewer System, Revenue
Bonds, 5.25% (FGIC INS)/(Original Issue
Yield: 5.70%), 10/1/2026 AAA 979,577
---------------------------------------------
1,000,000 Florida State Board of Education Capital
Outlay, GO UT, (Series A), 5.00% (Original
Issue Yield: 5.40%), 6/1/2027 AA+ 948,163
--------------------------------------------- -----------
Total 1,927,740
--------------------------------------------- -----------
ILLINOIS--16.5%
---------------------------------------------
1,000,000 Cook County, IL, GO UT Refunding Bonds (Series B), 5.375% (MBIA
INS)/(Original Issue
Yield: 5.72%), 11/15/2018 AAA 1,001,236
---------------------------------------------
1,000,000 Illinois Health Facilities Authority, Revenue
Bonds Daily VRDNs (Healthcorp Affiliates) Aaa 1,000,000
---------------------------------------------
1,000,000 Illinois State Sales Tax, Refunding Revenue
Bonds (Series Q), 5.50% (Original Issue
Yield: 6.202%), 6/15/2020 AAA 1,000,000
---------------------------------------------
1,000,000 Metropolitan Pier & Exposition Authority, IL,
Revenue Refunding Bonds, 5.25% (McCormick
Plan Expansion Project)/(AMBAC INS)/(Original
Issue Yield: 5.90%), 6/15/2027 AAA 972,077
--------------------------------------------- -----------
Total 3,973,313
--------------------------------------------- -----------
</TABLE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
--------------------------------------------------------
INDIANA--4.2%
---------------------------------------------
$1,000,000 Purdue University, IN, Student Fees Revenue
Bonds (Series H), Weekly VRDNs (Purdue
University, IN LOC) AA- $ 1,000,000
--------------------------------------------- -----------
MASSACHUSETTS--3.9%
---------------------------------------------
1,000,000 Massachusetts Water Resources Authority,
Water Revenue Bonds, 5.00% (Original Issue
Yield: 5.35%), 12/1/2025 AAA 942,362
--------------------------------------------- -----------
MICHIGAN--4.1%
---------------------------------------------
1,000,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds,
5.25% (Henry Ford Health System, MI)/(Original Issue Yield:
5.70%), 11/15/2025 AA 984,047
--------------------------------------------- -----------
NEVADA--4.1%
---------------------------------------------
1,000,000 Clark County, NV School District, GO UT,
5.25% (Original Issue Yield: 5.83%),
6/15/2017 AAA 996,268
--------------------------------------------- -----------
NEW JERSEY--4.2%
---------------------------------------------
1,000,000 New Jersey State Transportation Trust Fund
Agency, Revenue Bonds, 5.25% (Original Issue
Yield: 5.70%), 6/15/2016 A+ 1,004,261
--------------------------------------------- -----------
NEW YORK--20.8%
---------------------------------------------
1,000,000 New York City Municipal Water Finance
Authority, Revenue Bonds, 5.50% (Original
Issue Yield: 5.855%), 6/15/2027 AAA 1,003,925
---------------------------------------------
1,000,000 New York State Dormitory Authority, Revenue
Bonds, 5.25% (Monte Fiore Medical
Center)/(AMBAC and FHA INSs)/(Original Issue
Yield: 5.53%), 2/1/2015 AAA 1,006,724
---------------------------------------------
1,000,000 New York State Local Government Assistance
Corp., Refunding Revenue Bonds (Series B),
5.50% (Original Issue Yield: 5.97%), 4/1/2021 A 1,003,043
---------------------------------------------
1,000,000 New York State Medical Care Facilities
Finance Agency, Revenue Refunding Bonds,
5.375% (Presbyterian Hospital)/(Original
Issue Yield: 5.52%), 2/15/2025 AAA 995,669
---------------------------------------------
1,000,000 Port Authority of New York and New Jersey,
Revenue Bonds (104th Series), 5.20% (AMBAC
INS)/(Original Issue Yield: 5.35%), 7/15/2021 AAA 990,487
--------------------------------------------- -----------
Total 4,999,848
--------------------------------------------- -----------
</TABLE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
--------------------------------------------------------
TEXAS--8.2%
---------------------------------------------
$1,000,000 Coastal Bend Health Facilities Development
Corp., TX, Revenue Bonds Weekly VRDNs
(Incarnate World Health Systems)/(First
National Bank of Chicago LOC) Aa3 $ 1,000,000
---------------------------------------------
1,000,000 San Antonio, TX, Electric & Gas, Revenue Refunding Bonds, 5.00%
(Original Issue Yield:
5.275%), 2/1/2014 AA 980,250
--------------------------------------------- -----------
Total 1,980,250
--------------------------------------------- -----------
WASHINGTON--4.2%
---------------------------------------------
1,000,000 Port of Seattle, WA, Revenue Bonds, 5.50%
(FGIC INS)/(Original Issue Yield: 5.80%),
10/1/2022 AAA 1,008,212
--------------------------------------------- -----------
WISCONSIN--4.2%
---------------------------------------------
1,000,000 Wisconsin State Transportation, Revenue Bonds
(Series B), 5.50% (Original Issue Yield:
5.912%), 7/1/2022 AA- 1,004,466
--------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST
$21,420,079) 22,746,188
--------------------------------------------- -----------
MUTUAL FUND SHARES--4.2%
--------------------------------------------------------
999,900 Dreyfus Tax Exempt Cash Management (AT NET
ASSET VALUE) 999,900
--------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST
$22,419,979)(A) $23,746,088
--------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
(a) The cost of investments for federal tax purposes amounts to $22,419,979. The
unrealized appreciation of investments on a federal tax basis amounts to
$1,326,109 at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($24,076,686) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company FHA--Federal Housing Administration GO--General Obligation
INS--Insured LOC--Letter of Credit MBIA--Municipal Bond Investors Assurance
UT--Unlimited Tax VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROUP OF FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD BLANCHARD
BLANCHARD BLANCHARD BLANCHARD SHORT -TERM FLEXIBLE
GLOBAL PRECIOUS METALS FLEXIBLE FLEXIBLE TAX-FREE
GROWTH FUND FUND, INC. INCOME FUND INCOME FUND BOND FUND
- ------------------------ ----------- --------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
- ------------------------
Investments in
repurchase agreements $ 1,176,958 $ 5,492,706 $ 4,512,438 $ 3,832,176 $ --
- ------------------------
Investments in
securities 60,074,984 63,335,105 149,251,624 128,999,417 23,746,088
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total investments in
securities, at value $61,251,942 $68,827,811 $153,764,062 $132,831,593 $23,746,088
- ------------------------
Cash -- -- -- -- 72
- ------------------------
Income receivable 330,910 191,606 2,362,460 2,479,981 365,497
- ------------------------
Receivable for
investments sold 1,820,484 485,614 -- -- --
- ------------------------
Receivable for shares
sold 1,350 1,250,418 72,325 46,320 41,115
- ------------------------
Net receivable for
foreign currency
exchange contracts sold 150,030 -- -- -- --
- ------------------------
Deferred organizational
costs -- -- 15,094 17,490 16,399
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total assets 63,554,716 70,755,449 156,213,941 135,375,384 24,169,171
- ------------------------ ----------- ----------- ------------ ------------ -----------
LIABILITIES:
- ------------------------
Payable for investments
purchased 1,024,123 2,114,799 -- -- --
- ------------------------
Payable for shares
redeemed 60,354 605,097 272,640 497,950 24,696
- ------------------------
Income distribution
payable -- -- 446,081 75,908 40,374
- ------------------------
Payable to Bank -- 803,519 -- 625,000 --
- ------------------------
Payable for forward
foreign currency
exchange contracts -- -- 7,439 -- --
- ------------------------
Payable for taxes
withheld 7,796 3,188 -- --
- ------------------------
Payable for daily
variation margin 63,340 -- -- -- --
- ------------------------
Accrued expenses 201,737 191,606 265,080 298,991 27,415
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total liabilities 1,357,350 3,718,209 991,240 1,497,849 92,485
- ------------------------ ----------- ----------- ------------ ------------ -----------
NET ASSETS CONSIST OF:
- ------------------------
Paid in capital 53,368,473 92,377,394 168,418,381 140,351,915 23,120,612
- ------------------------
Net unrealized
appreciation
(depreciation) of
investments, translation
of assets and
liabilities in foreign
currency, and futures
contracts 821,161 (21,203,902) 3,746,717 2,798,583 1,326,109
- ------------------------
Accumulated net realized
gain (loss) on
investments, foreign
currency transactions,
and futures contracts 7,100,967 (5,605,824) (16,630,125) (9,171,223) (354,461)
- ------------------------
Distributions in excess
of/Undistributed net
investment income 906,765 1,469,572 (312,272) (101,740) (15,574)
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total Net Assets $62,197,366 $67,037,240 $155,222,701 $133,877,535 $24,076,686
- ------------------------ ----------- ----------- ------------ ------------ -----------
NET ASSET VALUE,
OFFERING PRICE AND
REDEMPTION PROCEEDS PER
SHARE: $ 10.54 $ 5.37 $ 4.98 $ 3.04 $ 5.56
- ------------------------ ----------- ----------- ------------ ------------ -----------
Shares Outstanding 5,899,615 12,486,361 31,152,932 44,036,295 4,328,344
- ------------------------ ----------- ----------- ------------ ------------ -----------
Investments, at
identified cost $60,621,797 $90,031,550 $150,009,998 $130,034,520 $22,419,979
- ------------------------ ----------- ----------- ------------ ------------ -----------
Investments, at tax cost $60,689,138 $90,719,260 $150,009,998 $130,034,520 $22,419,979
- ------------------------ ----------- ----------- ------------ ------------ -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROUP OF FUNDS
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD BLANCHARD
BLANCHARD BLANCHARD BLANCHARD SHORT -TERM FLEXIBLE
GLOBAL PRECIOUS METALS FLEXIBLE FLEXIBLE TAX-FREE
GROWTH FUND FUND, INC. INCOME FUND INCOME FUND BOND FUND
- ------------------------ ----------- --------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------
Dividends $ 376,712(a) $ 675,606(c) $ -- $ -- $ --
- ------------------------
Interest 2,434,670(b) 631,572 13,043,023 10,247,264 1,236,154
- ------------------------ ---------- ------------ ----------- ----------- ----------
Total income 2,811,382 1,307,178 13,043,023 10,247,264 1,236,154
- ------------------------ ---------- ------------ ----------- ----------- ----------
EXPENSES:
- ------------------------
Management fee 645,955 744,283 1,273,719 1,095,713 169,751
- ------------------------
Administrative personnel
and services fee 75,000 78,467 165,355 142,259 75,000
- ------------------------
Custodian fees 63,163 50,200 68,539 48,762 16,080
- ------------------------
Transfer and dividend
disbursing agent fees
and expenses 118,177 77,453 317,118 343,119 37,447
- ------------------------
Directors'/Trustees'
fees 2,098 2,544 3,267 3,420 1,598
- ------------------------
Auditing fees 20,726 21,698 20,688 12,277 26,804
- ------------------------
Legal fees 2,939 2,290 1,764 1,653 85
- ------------------------
Portfolio accounting
fees 49,714 54,606 57,885 49,725 43,386
- ------------------------
Distribution services
fee 484,467 558,212 424,573 365,238 56,584
- ------------------------
Share registration costs 11,775 21,568 12,098 13,477 11,706
- ------------------------
Printing and postage 61,840 28,849 33,894 48,635 7,825
- ------------------------
Insurance premiums 2,255 1,873 1,665 2,288 1,412
- ------------------------
Taxes 495 697 495 495 --
- ------------------------
Miscellaneous 2,018 1,786 34,211 18,580 17,258
- ------------------------ ---------- ------------ ----------- ----------- ----------
Total expenses 1,540,622 1,644,526 2,415,271 2,145,641 464,936
- ------------------------ ---------- ------------ ----------- ----------- ----------
WAIVERS--
- ------------------------
Waiver of management fee -- -- -- (129,528) (142,067)
- ------------------------
Waiver of administrative
personnel and services
fee -- -- -- -- (39,951)
- ------------------------
Waiver of distribution
services fee -- -- -- -- (56,584)
- ------------------------ ---------- ------------ ----------- ----------- ----------
Total waivers -- -- -- (129,528) (238,602)
- ------------------------ ---------- ------------ ----------- ----------- ----------
Net expenses 1,540,622 1,644,526 2,415,271 2,016,113 226,334
- ------------------------ ---------- ------------ ----------- ----------- ----------
Net investment income
(loss) 1,270,760 (337,348) 10,627,752 8,231,151 1,009,820
- ------------------------ ---------- ------------ ----------- ----------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS, FOREIGN
CURRENCY, AND FUTURES
CONTRACTS:
- ------------------------
Net realized gain (loss)
on investments, foreign
currency transactions,
and futures contracts 8,407,403 (2,561,982) 2,191,827 483,971 285,298
- ------------------------
Net change in unrealized
appreciation
(depreciation) of
investments, translation
of assets and liablities
in foreign currency, and
futures contracts (1,721,197) (9,413,528) 2,926,980 1,694,128 784,728
- ------------------------ ---------- ------------ ----------- ----------- ----------
Net realized and
unrealized gain (loss)
on investments 6,686,206 (11,975,510) 5,118,807 2,178,099 1,070,026
- ------------------------ ---------- ------------ ----------- ----------- ----------
Change in net assets
resulting from
operations $7,956,966 $(12,312,858) $15,746,559 $10,409,250 $2,079,846
- ------------------------ ---------- ------------ ----------- ----------- ----------
</TABLE>
(a) Net of Foreign taxes withheld $33,962.
(b) Net of Foreign taxes withheld $4,228.
(c) Net of Foreign taxes withheld $47,201.
(See Notes which are an integral part of the Financial Statements)
THE BLANCHARD GROUP OF FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD GLOBAL BLANCHARD PRECIOUS
GROWTH FUND METALS FUND, INC.
--------------------------------------- ----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
---------------- ------------- ------------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS:
----------------
OPERATIONS--
----------------
Net investment
income/operating
(loss) $ 1,270,760 $ 465,544 $ 295,860 $ (337,348) $ (500,885) $ (1,069,928)
----------------
Net realized
gain (loss) on
investments,
foreign currency
transactions and
futures
contracts 8,407,403 6,148,207 8,019,815 (2,561,982) 10,615,594 13,950,013
----------------
Net change in
unrealized
appreciation/depreciation
of investments,
translation of
assets and
liablities in
foreign
currency, and
futures
contracts (1,721,197) (5,394,534) 5,636,916 (9,413,528) (19,953,719) 13,616,081
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
operations 7,956,966 1,219,217 13,952,591 (12,312,858) (9,839,010) 26,496,166
---------------- ----------- ----------- ----------- ----------- ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS--
----------------
Distributions
from net
investment
income (1,170,525) -- (295,860) (2,843,687) -- --
----------------
Distributions
from net
realized gains (12,602,965) (20,849,369) -- --
----------------
Distributions in
excess of net
investment
income -- -- (274,732) -- -- --
----------------
Tax return of
capital -- -- -- -- -- --
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
distributions
to shareholders (13,773,490) -- (570,592) (23,693,056) -- --
---------------- ----------- ----------- ----------- ----------- ----------- ------------
SHARE
TRANSACTIONS--
----------------
Proceeds from
sale of shares 10,109,624 8,636,590 5,765,409 60,617,474 35,684,735 103,376,874
----------------
Net asset value
of shares issued
to shareholders
in payment of
distributions
declared 13,095,694 -- 548,261 21,735,905 -- --
----------------
Cost of shares
redeemed (23,098,557) (13,130,249) (35,601,975) (67,198,114) (67,247,212) (75,865,525)
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
share
transactions 106,761 (4,493,659) (29,288,305) 15,155,265 (31,562,477) 27,511,349
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets (5,709,763) (3,274,442) (15,906,306) (20,850,649) (41,401,487) 54,007,515
----------------
NET ASSETS:
----------------
Beginning of
period 67,907,129 71,181,571 87,087,877 87,887,889 129,289,376 75,281,861
---------------- ----------- ----------- ----------- ----------- ----------- ------------
End of period $62,197,366 $67,907,129 $71,181,571 $67,037,240 $87,887,889 $129,289,376
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Undistributed
net investment
income included
in net assets at
end of period $ 906,765 $ 818,136 $ -- $ 1,469,572 $ 2,856,971 $ 1,904,789
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Net gain (loss)
as computed for
federal tax
purposes $ 7,911,101 $ 6,561,362 $ 5,881,028 $ 76,050 $ 9,039,433 $ 12,174,374
---------------- ----------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
BLANCHARD FLEXIBLE
INCOME FUND
--------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996
- --------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS:
- ---------------------------
OPERATIONS--
- ---------------------------
Net investment
income/operating
(loss) $10,627,752 $ 5,059,729 $ 14,539,300
- ---------------------------
Net realized
gain (loss) on
investments,
foreign currency
transactions and
futures
contracts 2,191,827 175,174 480,236
- ---------------------------
Net change in
unrealized
appreciation/depreciation
of investments,
translation of
assets and
liablities in
foreign
currency, and
futures
contracts 2,926,980 2,016,909 5,042,160
- --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
operations 15,746,559 7,251,812 20,061,696
- --------------------------- -------------- -------------- --------------
DISTRIBUTIONS TO
SHAREHOLDERS--
- ---------------------------
Distributions
from net
investment
income (10,302,558) (5,012,727) (15,359,777)
- ---------------------------
Distributions
from net
realized gains -- -- --
- ---------------------------
Distributions in
excess of net
investment
income -- -- --
- ---------------------------
Tax return of
capital (342,877) (48,762) --
- --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
distributions
to shareholders (10,645,435) (5,061,489) (15,359,777)
- --------------------------- -------------- -------------- --------------
SHARE
TRANSACTIONS--
- ---------------------------
Proceeds from
sale of shares 33,454,106 13,294,718 60,702,516
- ---------------------------
Net asset value
of shares issued
to shareholders
in payment of
distributions
declared 8,400,717 4,042,963 11,757,432
- ---------------------------
Cost of shares
redeemed (79,085,787) (38,410,603) (133,349,811)
- --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
share
transactions (37,230,964) (21,072,922) (60,889,863)
- --------------------------- -------------- -------------- --------------
Change in net
assets (32,129,840) (18,882,599) (56,187,944)
- ---------------------------
NET ASSETS:
- ---------------------------
Beginning of
period 187,352,541 206,235,140 262,423,084
- --------------------------- -------------- -------------- --------------
End of period $155,222,701 $187,352,541 $ 206,235,140
- --------------------------- -------------- -------------- --------------
Undistributed
net investment
income included
in net assets at
end of period $ -- $ -- $ --
- --------------------------- -------------- -------------- --------------
Net gain (loss)
as computed for
federal tax
purposes $ 1,771,520 $ (1,335,786) $ (3,223,064)
- --------------------------- -------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE BLANCHARD GROUP OF FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD SHORT-TERM BLANCHARD FLEXIBLE
FLEXIBLE INCOME FUND TAX-FREE BOND FUND
------------------------------------------ -----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
- ------------------------ ------------- ------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
- ------------------------
OPERATIONS--
- ------------------------
Net investment income $ 8,231,151 $ 3,640,476 $ 3,088,222 $ 1,009,820 $ 461,956 $ 960,342
- ------------------------
Net realized gain (loss)
on investments, foreign
currency transactions
and futures contracts 483,971 (42,344) 511,538 285,298 39,445 891,432
- ------------------------
Net change in unrealized
appreciation/
depreciation of
investments, translation
of assets and liablities
in foreign currency, and
futures contracts 1,694,128 526,658 767,013 784,728 594,290 (406,293)
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from
operations 10,409,250 4,124,790 4,366,773 2,079,846 1,095,691 1,445,481
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS--
- ------------------------
Distributions from net
investment income (8,210,879) (3,150,985) (3,088,222) (1,005,915) (445,952) (960,342)
- ------------------------
Distributions from net
realized gains (45,361) -- -- -- -- --
- ------------------------
Distributions in excess
of net investment income -- -- (4,918) -- -- (8,706)
- ------------------------
Tax return of capital -- (529,561) -- -- -- --
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from
distributions to
shareholders (8,256,240) (3,680,546) (3,093,140) (1,005,915) (445,952) (969,048)
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
SHARE TRANSACTIONS--
- ------------------------
Proceeds from sale of
shares 34,559,663 12,700,025 13,369,396 10,279,470 6,936,750 26,287,368
- ------------------------
Proceeds from shares
issued in connection
with the acquisition of
Blanchard Short-Term
Global Income Fund -- -- 174,188,041 -- -- --
- ------------------------
Net asset value of
shares issued to
shareholders in payment
of distributions
declared 7,218,527 3,194,311 2,652,603 919,487 411,088 750,232
- ------------------------
Cost of shares redeemed (68,087,183) (36,071,531) (37,161,711) (10,766,336) (8,149,963) (24,287,075)
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from share
transactions (26,308,993) (20,177,195) 153,048,329 432,621 (802,125) 2,750,525
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets (24,155,983) (19,732,951) 154,321,962 1,506,552 (152,386) 3,226,958
- ------------------------
NET ASSETS:
- ------------------------
Beginning of period 158,033,518 177,766,469 23,444,507 22,570,134 22,722,520 19,495,562
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
End of period $133,877,535 $158,033,518 $177,766,469 $ 24,076,686 $22,570,134 $ 22,722,520
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Undistributed net
investment income
included in net assets
at end of period $ -- $ -- $ -- $ -- $ -- $ --
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Net gain (loss) as
computed for federal tax
purposes $ 483,971 $ 87,710 $ 493,015 $ -- $ -- $ --
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
[This Page Intentionally Left Blank]
63
BLANCHARD GROUP OF FUNDS
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NET REALIZED AND DISTRIBUTIONS
UNREALIZED FROM NET
GAIN/(LOSS) REALIZED GAINS
NET ON INVESTMENTS, ON INVESTMENTS,
YEAR NET ASSET INVESTMENT FUTURES DISTRIBUTIONS DISTRIBUTIONS FUTURES
ENDED VALUE INCOME/ CONTRACTS, AND TOTAL FROM FROM NET IN EXCESS OF TAX CONTRACTS, AND
APRIL30/ BEGINNING OPERATING FOREIGN CURRENCY INVESTMENT INVESTMENT NET INVESTMENT RETURN FOREIGN CURRENCY
SEPTEMBER 30, OF PERIOD (LOSS) TRANSACTIONS OPERATIONS INCOME INCOME(E) OF CAPITAL TRANSACTIONS
- ------------- --------- ---------- ---------------- ---------- ------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BGGF
1993 $ 9.92 0.25 0.32 0.57 (0.30) -- -- (0.19)
1994 $10.00 0.03 1.29 1.32 -- -- -- (1.28)
1995 $10.04 0.08 (0.19) (0.11) -- -- -- --
1996 $ 9.71 0.04 1.86 1.90 (0.04) (0.04) -- --
1996(a) $11.53 0.08 0.13 0.21 -- -- -- --
1997 $11.74 0.23 1.04 1.27 (0.21) -- -- (2.26)
BPMF
1993 $ 5.04 (0.08)(h) 1.87(h) 1.79 -- -- -- --
1994 $ 6.83 (0.11)(h) 2.01(h) 1.90 -- -- -- --
1995 $ 8.73 (0.02) (0.41) (0.43) -- -- (0.09) (0.03)
1996 $ 7.12 (0.10) 2.75 2.65 -- -- -- --
1996(a) $ 9.77 (0.10) (0.77) (0.87) -- -- -- --
1997 $ 8.90 (0.02) (0.96) (0.98) (0.30) -- -- (2.25)
BFIF
1993(b) $ 5.00 0.21 0.09 0.30 (0.21) -- -- --
1994 $ 5.09 0.40 (0.17) 0.23 (0.36) -- (0.03) (0.08)
1995 $ 4.85 0.30 (0.13) 0.17 (0.00)(i) -- (0.31) --
1996 $ 4.71 0.28 0.10 0.38 (0.31) -- -- --
1996(a) $ 4.78 0.15 0.04 0.19 (0.13) -- (0.00)(i) --
1997 $ 4.84 0.30 0.15 0.45 (0.30) -- (0.01) --
BSTFIF
1993(c) $ 3.00 0.00(i) 0.00(i) 0.00(i) (0.00)(i) -- -- (0.00)(i)
1994 $ 3.00 0.17 (0.06) 0.11 (0.17) -- -- (0.01)
1995 $ 2.93 0.15 -- 0.15 (0.14) (0.00)(i) -- --
1996 $ 2.94 0.22 -- 0.22 (0.17) (0.00)(i) -- --
1996(a) $ 2.99 0.07 0.01 0.08 (0.06) (0.00)(i) (0.01) --
1997 $ 3.00 0.17 0.04 0.21 (0.17) -- -- (0.00)(i)
BFTFBF
1994(d) $ 5.00 0.18 (0.20) (0.02) (0.18) -- -- (0.03)
1995 $ 4.77 0.24 0.26 0.50 (0.23) (0.01) -- --
1996 $ 5.03 0.22 0.13 0.35 (0.22) -- -- --
1996(a) $ 5.16 0.11 0.15 0.26 (0.11) -- -- --
1997 $ 5.31 0.25 0.25 0.50 (0.25) -- -- --
<CAPTION>
DISTRIBUTIONS
IN EXCESS OF
NET REALIZED
GAINS ON
INVESTMENTS,
YEAR FUTURES
ENDED CONTRACTS, AND
APRIL30/ FOREIGN CURRENCY
SEPTEMBER 30, TRANSACTIONS(E)
- ------------- ----------------
<S> <C>
BGGF
1993 --
1994 --
1995 (0.22)
1996 --
1996(a) --
1997 --
BPMF
1993 --
1994 --
1995 (1.06)
1996 --
1996(a) --
1997 --
BFIF
1993(b) --
1994 --
1995 --
1996 --
1996(a) --
1997 --
BSTFIF
1993(c) --
1994 --
1995 --
1996 --
1996(a) --
1997 --
BFTFBF
1994(d) --
1995 --
1996 --
1996(a) --
1997 --
</TABLE>
* Computed on an annualized basis.
(a) The Funds have changed their fiscal year end from April 30 to September 30.
Reflects operations for the period from May 1, 1996 to September 30, 1996.
(b) Reflects operations for the period from November 2, 1992 (commencement of
operations) to April 30, 1993.
(c) Reflects operations for the period from April 16, 1993 (commencement of
operations) to April 30, 1993.
(d) Reflects operations for the period from August 12, 1993 (commencement of
operations) to April 30, 1994.
(e) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(f) Based on net asset value.
(g) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(h) Calculated based on average shares outstanding-prior years amounts restated
for comparative purposes.
(i) Less than one cent per share.
(j) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
------------------------------------
NET
INVESTMENT NET ASSETS,
NET ASSET INCOME/ EXPENSE END AVERAGE PORTFOLIO
TOTAL VALUE, AND TOTAL OPERATING WAIVER/ OF PERIOD COMMISSIONS TURNOVER
DISTRIBUTIONS OF PERIOD RETURN(F) EXPENSES (LOSS) REIMBURSEMENT(G) (000 OMITTED) RATE PAID(J) RATE
- ------------- ---------- --------- -------- ---------- ---------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.49) $10.00 6.08% 2.40% 1.72% -- $ 84,780 -- 138%
(1.28) $10.04 12.91% 2.61% 0.67% -- $109,805 -- 166%
(0.22) $ 9.71 (1.04%) 2.51% 0.76% -- $ 87,088 -- 221%
(0.08) $11.53 19.68% 2.54% 0.38% -- $ 71,182 -- 91%
-- $11.74 1.91% 2.52%* 1.60%* -- $ 67,907 $0.0040 47%
(2.47) $10.54 13.20% 2.39% 1.97% -- $ 62,197 $0.0049 49%
-- $ 6.83 35.50% 3.24% (1.46%) -- $ 32,636 -- 66%
-- $ 8.73 27.80% 2.46% (1.21%) -- $ 68,092 -- 174%
(1.18) $ 7.12 (4.39%) 2.49% (1.48%) -- $ 75,282 -- 116%
-- $ 9.77 37.03% 2.36% (1.27%) -- $129,289 -- 176%
-- $ 8.90 (8.90%) 2.32%* (1.13%)* -- $ 87,888 $0.0199 36%
(2.55) $ 5.37 (15.24%) 2.21% (0.45%) -- $ 67,037 $0.0125 97%
(0.21) $ 5.09 6.17% 0.20%* 9.02%* -- $315,845 -- 129%
(0.47) $ 4.85 4.11% 1.30% 7.10% -- $550,254 -- 346%
(0.31) $ 4.71 3.74% 1.58% 6.52% -- $262,423 -- 455%
(0.31) $ 4.78 8.06% 1.56% 6.06% -- $206,235 -- 347%
(0.13) $ 4.84 3.95% 1.59%* 7.38%* 0.01%* $187,353 -- 87%
(0.31) $ 4.98 9.53% 1.42% 6.26% -- $155,223 -- 101%
(0.00)(i) $ 3.00 0.15% 3.03%* 3.89%* -- $ 2,000 -- 36%
(0.18) $ 2.93 3.72% 0.63% 5.64% 1.42% $ 42,381 -- 212%
(0.14) $ 2.94 5.34% 1.38% 4.80% 0.75% $ 23,445 -- 84%
(0.17) $ 2.99 7.47% 1.44% 5.49% 0.40% $177,766 -- 291%
(0.07) $ 3.00 2.61% 1.39%* 5.26%* 0.25%* $158,034 -- 21%
(0.17) $ 3.04 7.24% 1.38% 5.63% 0.09% $133,878 -- 80%
(0.21) $ 4.77 (0.48%) 0.00%* 6.79%* 2.22%* $ 23,267 -- 190%
(0.24) $ 5.03 10.74% 1.00% 4.87% 1.17% $ 19,496 -- 170%
(0.22) $ 5.16 6.86% 1.05% 4.43% 1.25% $ 22,723 -- 275%
(0.11) $ 5.31 5.02% 1.01%* 4.83%* 1.23%* $ 22,570 -- 25%
(0.25) $ 5.56 9.59% 1.00% 4.46% 1.05% $ 24,077 -- 163%
</TABLE>
BLANCHARD GROUP OF FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
(1) ORGANIZATION
Blanchard Group of Funds consists of Blanchard Funds (the "Trust") and Blanchard
Precious Metals Fund, Inc. (the "Company") which are registered under the
Investment Company Act of 1940, as amended (the "Act"), as open-end management
investment companies. The Trust consists of six portfolios. The financial
statements of the following portfolios (individually referred to as the "Fund",
or collectively as the "Funds") are presented herein:
<TABLE>
<CAPTION>
PORTFOLIO NAME DIVERSIFICATION INVESTMENT OBJECTIVE
-------------- --------------- --------------------
<S> <C> <C>
Blanchard Global Growth Fund diversified Long-term capital growth.
("BGGF")
Blanchard Precious Metal Fund, non- Long-term capital appreciation and
Inc. ("BPMF") diversified preservation of purchasing power
through investments in
physical precious metals,
such as gold, silver,
platinum and palladium, and
in securities of companies
involved in precious metals.
A secondary objective of the
Fund is to reduce the risk of
loss of capital and decrease
the volatility often
associated with precious
metals investments by
changing the allocation of
its assets from precious
metals securities to physical
precious metals and/or
investing in short-term
instruments and government
securities during periods
when the Fund's portfolio
manager believes the precious
metals markets may experience
declines.
Blanchard Flexible Income Fund diversified High current income while seeking
("BFIF") opportunities for capital appreciation.
Blanchard Short-Term Flexible diversified High current income while seeking
Income Fund ("BSTFIF") opportunities for capital appreciation.
Blanchard Flexible Tax-Free Bond diversified High level of current interest income
Fund ("BFTFBF") exempt from federal income tax,
consistent with the preservation of
capital.
</TABLE>
In addition, the Trust offers Blanchard Asset Allocation Fund which is presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, and unlisted securities
and private placement securities are generally valued at the mean of the
latest bid and asked price as furnished by an independent pricing service.
Listed equity foreign valued at the last sale price reported on a national
securities exchange. Short-term foreign and domestic securities are valued at
the prices provided by an independent pricing service. However, short-term
foreign or domestic securities purchased with remaining maturities of sixty
days or less may be valued at amortized cost, which approximates fair market
value. Investments in open-end regulated investment companies are valued at
net asset value. Foreign government and corporate bonds are valued at the last
sales price reported on a national exchange. If the last sales price is not
available the securities are valued at the mean of the latest bid and ask
price as furnished by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Funds to require a custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Funds to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Funds' adviser to be creditworthy pursuant to guidelines and/or standards
reviewed or established by the Board of Trustees (the "Trustees"). Risks may
arise from the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Funds could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code").
Distributions in excess of net investment income were the result of certain
book and tax timing differences. These distributions do not represent a return
of capital for federal income tax purposes.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions. In addition, BPMF and BFIF reclassed a tax
return of capital. The following reclassifications have been made to the
financial statements as of September 30, 1997.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT
FUND PAID-IN ACCUMULATED NET INCOME/ DISTRIBUTIONS IN EXCESS
NAME CAPITAL REALIZED GAIN/LOSS OF NET INVESTMENT INCOME
------------ --------- ------------------ -------------------------------
<S> <C> <C> <C>
BGGF -- $ 11,606 $ (11,606)
BPMF $ 120,846 (1,911,826) 1,790,980
BFIF (342,877) (258,682) 601,559
</TABLE>
Net investment income, net realized gain/losses, and net assets were not
affected by this change.
FEDERAL TAXES--It is the Funds' policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
Withholding taxes on foreign interest have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
At September 30, 1997, BFIF, BSTFIF, and BFTFBF, for federal tax purposes, had
capital loss carryforwards, as noted below, which will reduce the Funds
taxable income arising from future net realized gain on investments, if any,
to the extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to relieve
the Funds of any liability for federal tax.
<TABLE>
<CAPTION>
FUNDS TOTAL TAX LOSS CARRYFORWARD
------ ---------------------------
<S> <C>
BFIF $16,630,124
BSTFIF 9,125,862
BFTFBF 354,460
</TABLE>
Pursuant to the Code, such capital loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
BFIF BSTFIF
---------------------------------------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT EXPIRATION YEAR EXPIRATION AMOUNT
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
2002 $12,071,274 2003 $9,125,862
2003 3,223,064
2004 1,335,786
</TABLE>
<TABLE>
<CAPTION>
BFTFBF
------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C> <C> <C>
2003 $354,460
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
Additionally, net capital losses, as noted below, attributable to security
transactions incurred after October 31, 1996 are treated as arising on October
1, 1997 the first day of the Funds' next taxable year.
<TABLE>
<CAPTION>
FUND TOTAL TAX LOSS PUSHFORWARD
---- --------------------------
<S> <C>
BPMF $4,504,362
BFIF 157,286
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
FUTURES CONTRACTS--BGGF purchases stock index futures contracts to manage
cashflows, enhance yield, and to potentially reduce transaction costs. Upon
entering into a stock index futures contract with a broker, the Fund is
required to deposit in a segregated account a specified amount of cash or U.S.
government securities. Futures contracts are valued daily and unrealized gains
or losses are recorded in a "variation margin" account. Daily, the Fund
receives from or pays to the broker a specified amount of cash based upon
changes in the variation margin account. When a contract is closed, the Fund
recognizes a realized gain or loss. For the period ended September 30, 1997,
BGGF had realized gains on futures contracts of $5,426,009. Futures contracts
have market risks, including the risk that the change in the value of the
contract may not correlate with changes in the value of the underlying
securities.
At September 30, 1997, BGGF had outstanding futures contracts as set forth
below:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION APPRECIATION
DATE CONTRACTS TO RECEIVE POSITION (DEPRECIATION)
----------- -------------------- -------- --------------
<S> <C> <C> <C>
December 1997 20 S&P 500 Long $332,326
December 1997 4 Long Gilt Long 17,265
December 1997 5 Notional Long 3,412
December 1997 7 CAC 40 Long 773
December 1997 7 Bund Long 15,831
December 1997 3 DAX Long 28,979
December 1997 221 Nikkei 300 Long (195,176)
December 1997 12 T Bond Long 43,438
December 1997 11 T Note Long 20,875
December 1997 5 ALL--Ords Long 253
December 1997 5 FT-SE Long 81,577
--------
Net Unrealized Appreciation on
Futures Contracts $349,553
</TABLE>
FOREIGN EXCHANGE CONTRACTS--BGGF, BPMF, BFIF, and BSTFIF may enter into
foreign currency exchange contracts as a way of managing foreign exchange rate
risk. BGGF, BPMF, BFIF, and BSTFIF may enter into these contracts for the
purchase or sale of a specific foreign currency at a
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
fixed price on a future date as a hedge or cross hedge against either specific
transactions or portfolio positions. The objective of the Funds foreign
currency hedging transactions is to reduce the risk that the U.S. dollar value
of the Funds foreign currency denominated securities will decline in value due
to changes in foreign currency exchange rates. All foreign currency exchange
contracts are "marked to market" daily at the applicable translation rates
resulting in unrealized gains or losses. Realized gains or losses are recorded
at the time the foreign currency exchange contract is offset by entering into
a closing transaction or by the delivery or receipt of the currency. Risk may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. At
September 30, 1997, only BGGF and BFIF had outstanding foreign exchange
contracts as set forth below:
BGGF
<TABLE>
<CAPTION>
CONTRACTS TO IN UNREALIZED
SETTLEMENT DELIVER/ EXCHANGE CONTRACTS AT APPRECIATION
DATE RECEIVE FOR VALUE (DEPRECIATION)
---------------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
CONTRACTS PURCHASED:
Australian Dollar 10/2/97 517,000 $ 388,913 $ 387,621 $ 1,292
Australian Dollar 1/5/98 330,000 240,059 240,195 (136)
Swiss Franc 10/2/97 7,812,500 5,368,856 5,372,931 (4,075)
Deutsche Mark 12/23/97 3,787,600 2,147,104 2,155,278 (8,174)
French Franc 10/2/97-1/5/98 15,903,400 2,662,152 2,687,859 (25,707)
British Pound 12/23/97 907,200 1,457,870 1,457,897 (27)
Netherlands Guilder 10/2/97 3,975,000 1,998,692 1,997,458 1,234
<CAPTION>
CONTRACTS SOLD:
<S> <C> <C> <C> <C> <C>
Swiss Franc 10/2/97-12/23/97 14,772,000 10,111,286 10,205,532 94,246
Deutsche Mark 12/23/97 971,000 552,489 552,533 44
French Franc 10/2/97 9,246,200 1,553,066 1,558,737 5,671
British Pound 12/23/97 127,000 204,286 204,093 (193)
Japanese Yen 12/18/97 414,228,700 3,460,752 3,472,727 11,975
Netherlands Guilder 10/2/97-12/23/97 7,950,000 3,931,396 4,005,276 73,880
--------
Net Unrealized Appreciation on Foreign Exchange Contracts $150,030
========
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
BFIF
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS AT APPRECIATION
DATE DELIVER/RECEIVE FOR VALUE (DEPRECIATION)
---------- --------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Contracts Sold:
Canadian Dollar 12/15/97 2,200,000 $1,591,320 $1,598,759 ($7,439)
-------
Net Unrealized Depreciation on Foreign Exchange Contracts ($7,439)
-------
</TABLE>
FOREIGN CURRENCY TRANSLATION--The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies ("FC") are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and
collected or paid are adjusted when reported by the custodian bank. The Funds
does not isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales of
FCs, currency gains or losses realized between the trade and settlement dates
on securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at fiscal year
end, resulting from changes in the exchange rate.
RESTRICTED SECURITIES--Restricted securities are securities that may only be
resold upon registration under federal or international securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities may
be resold in the secondary market in transactions exempt from registration.
Such restricted securities may be determined to be liquid under criteria
established by the Board of Trustees. The Fund will not incur any registration
costs upon such resales. The Funds' restricted securities are valued at the
price provided by dealers in the secondary market or, if no market prices are
available, at the fair value as determined by the Fund's pricing committee.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
Additional information on each restricted security held by BGGF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
----------------------------- ---------------- ----------------
<S> <C> <C>
Chilectra S.A. ADR 7/19/96 $91,177
Daewoo Heavy Industries, Pfd. 2/3/95-4/12/95 49,952
Samsung Electronics Co., GDR 1/3/95 917
Dong Bang Forwarding Co. 2/3/95-5/29/95 74,380
</TABLE>
Additional information on each restricted security held by BPMF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
--------------------------- ----------------- ----------------
<S> <C> <C>
Eldorado Gold Corp. Ltd. 04/08/96-08/14/97 $433,523
Geomaque Explorations Ltd.,
Warrants 3/11/97 827,565
Lone Star Exploration 2/26/96-3/26/97 587,746
</TABLE>
Additional information on each restricted security held by BFIF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
--------------------------- ------------------ ----------------
<S> <C> <C>
Calpine Corp. 7/2/1997 $ 996,412
Nine West Group, Inc. 7/1/1997 999,012
Stone Container Finance Co. 8/9/1996 2,000,000
Tucson Electric Power Co. 2/10/1993-12/22/93 2,098,170
</TABLE>
CHANGE IN FISCAL YEAR--The Funds changed their fiscal year-end from April 30
to September 30 beginning May 1, 1996.
DEFERRED EXPENSES--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
over a period not to exceed five years from each Fund's commencement date.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Articles of Incorporation permit the Directors to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
BGGF BPMF
--------------------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED
1997 1996 1996 1997 1996 APRIL 30, 1996
------------- ------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 973,160 748,872 559,635 9,876,823 3,728,778 11,891,108
Shares issued to
shareholders in payment
of distributions
declared 1,381,403 -- 52,311 3,428,378 -- --
Shares redeemed (2,237,898) (1,137,138) (3,413,086) (10,697,610) (7,081,402) (9,230,002)
----------- ----------- ----------- ----------- ----------- -----------
Net change resulting
from share transactions 116,665 (388,266) (2,801,140) 2,607,591 (3,352,624) 2,661,106
=========== =========== =========== =========== =========== ===========
<CAPTION>
BFIF BSTFIF
--------------------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
------------- ------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 6,828,666 2,777,685 12,498,920 11,452,843 4,248,564 4,477,310
Shares issued in
connection with the
acquisition of Blanchard
Short-Term Global Income
Fund -- -- -- -- -- 57,869,781
Shares issued to
shareholders in payment
of distributions
declared 1,711,576 844,211 2,424,612 2,391,887 1,070,524 888,044
Shares redeemed (16,127,237) (8,034 ,939) (27,527,713) (22,560,468) (12,096,346) (11,691,202)
----------- ----------- ----------- ----------- ----------- -----------
Net change resulting
from share transactions (7,586,995) (4,413,043) (12,604,181) (8,715,738) (6,777,258) 51,543,933
=========== =========== =========== =========== =========== ===========
<CAPTION>
BFTFBF
---------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996
------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,901,018 1,341,280 5,015,985
Shares issued to
shareholders in payment
of distributions
declared 169,611 78,775 142,764
Shares redeemed (1,995,557) (1,571,250) (4,631,991)
----------- ----------- -----------
Net change resulting
from share transactions 75,072 (151,195) 526,758
=========== =========== ===========
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(4) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEE--Virtus Capital Management, Inc., the Trust's manger (the
"Manager"), receives for its services an annual management fee based on a
percentage of each Fund's average daily net assets (see below).
<TABLE>
<CAPTION>
FUND ANNUAL RATE
------ -----------------------------------------------------------------------
<C> <S>
BGGF 1.00% of the first 150 million, 0.875% of the excess of 150 million but
not exceeding 300 million, 0.75% in excess of 300 million
BPMF 1.00% of the first 150 million, 0.875% of the excess of 150 million but
not exceeding 300 million, 0.75% in excess of 300 million
BFIF 0.75%
BSTFIF 0.75%
BFTFBF 0.75%
</TABLE>
The Manager may voluntarily choose to waive a portion of its fee. The Manager
can modify or terminate this voluntary waiver at any time at its sole
discretion.
SUB-ADVISORY FEE--To provide portfolio advisory services for the Funds, the
Manager has entered into sub-advisory agreements with the sub-advisers listed
below. Under the terms of each sub-advisory agreement, the Manager will pay each
sub-adviser a fee based on a percentage of each Fund's average daily net assets
(see below).
<TABLE>
<CAPTION>
FUND SUB-ADVISER ANNUAL RATE
------ --------------------------------------- -------------------------------
<C> <C> <S>
BGGF Mellon Capital Mortgage Corp. 0.375% of the first $100
million, 0.350% of the excess
of $100 million but not
exceeding $150 million, 0.325%
of the excess of $150 million
BPMF Cavelti Capital Management, Ltd. 0.30% of the first $150
million, 0.2625% of the excess
of $150 million but less than
$300 million, and 0.255% in
excess of $300 million
BFIF OFFITBANK 0.30% of the first $25 million,
0.25% of the next $25 million,
and 0.20% in excess of $50
million
BSTFIF OFFITBANK 0.30% of the first $25 million,
0.25% of the next $25 million,
and 0.20% in excess of $50
million
BFTFBF United States Trust Company of New York 0.20%
</TABLE>
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Funds with administrative
personnel and services. The fee paid to FAS is based on the level of average
aggregate daily net assets of the Funds and The Virtus Funds for the period. FAS
may voluntarily choose to waive a portion of its fee. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $75,000 per portfolio. FAS can modify or terminate this voluntary waiver
at any time at its sole discretion.
DISTRIBUTION SERVICES FEE--The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, each
Fund will reimburse Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
result in the sale of the Fund's Investment Shares. The Plan provides that the
Funds may incur distribution expenses up to 0.25% of the average daily net
assets of the BFIF, BSTFIF, and BFTFBF and up to 0.75% of the average daily net
assets of BGGF and BPMF, annually, to reimburse FSC. The distributor may
voluntarily choose to waive any portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Funds.
The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Funds' accounting records
for which it receives a fee. The fee is based on the level of each Fund's
average net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Signet Trust Company is the Funds' custodian for which it
receives a fee. The fee is based on the level of each Fund's average net assets
for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--The Funds' Manager paid the organization expenses of
the Funds listed below incurred prior to the public offering of its shares. The
Funds reimbursed the Manager for these expenses and has deferred and is
amortizing such expenses over five years from the date of commencement of the
Funds operations. Organizational expenses paid is as follows:
<TABLE>
<CAPTION>
FUND ORGANIZATIONAL EXPENSES
- ------ -----------------------
<S> <C>
BFIF $151,712
BSTFIF 80,724
BFTFBF 89,448
</TABLE>
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended September 30, 1997 were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ------ ------------ -----------
<S> <C> <C>
BGGF $ 44,853,363 $18,165,537
BPMF 63,481,368 66,049,224
BFIF 164,757,771 202,202,473
BSTFIF 109,275,828 128,141,491
BFTFBF 35,259,413 35,460,535
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(6) CONCENTRATION OF CREDIT RISK
BGGF, BPMF, and BFIF invest in securities of non-U.S. issuers. The political or
economic developments within a particular country or region may have an adverse
effect on the ability of domiciled issuers to meet their obligations.
Additionally, political or economic developments may have an effect on the
liquidity and volatility of portfolio securities and currency holdings.
(7) PROPOSED FUND MERGER
On July 18, 1997, Signet Banking Corporation ("Signet") entered into a
definitive Agreement and Plan of Reorganization whereby Signet was acquired by
First Union Corporation ("First Union"). It is anticipated that the merger will
be consummated on or about November 28, 1997.
As a result of this First Union merger, First Union will succeed to the
investment advisory and functions formerly performed for the Funds by various
units of Signet and various unaffiliated parties.
The Board of Trustees/Directors of the Funds has approved an Agreement and Plan
of Reorganization pursuant to which, on or about February 27, 1998, all of the
assets, and certain liabilities of the Funds would be acquired in exchange for
shares of similarly managed funds (the "Acquiring Funds") that is advised by
affiliates of First Union. The reorganization would result in the liquidation
and termination of the Funds. Pursuant to the reorganization, shareholders of
the Funds will receive, tax-free, the number of shares of the Acquiring Funds
having a value equal to the value of their shares immediately prior to the
reorganization. Consummation of the reorganization is subject to approval of the
shareholders of the Funds.
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of Blanchard Group of Funds:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Blanchard Group of Funds (comprising the
following portfolios: Blanchard Global Growth Fund, Blanchard Precious Metals
Fund, Inc., Blanchard Flexible Income Fund, Blanchard Short- Term Flexible
Income Fund, Blanchard Flexible Tax-Free Bond Fund) as of September 30, 1997,
and the related statements of operations for the year then ended, the statements
of changes in net assets for the year ended September 30, 1997 and the period
ended September 30, 1996, and the financial highlights for the periods ended in
1997 and 1996. The financial highlights for the periods ended in 1993, 1994 and
1995 were audited by other auditors, whose reports thereon dated June 20, 1995,
expressed an unqualified opinion. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Blanchard Group of
Funds as of September 30, 1997, the results of its operations, the changes in
its net assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
As more fully described in Note 7, in November, 1997 the Funds are expected to
enter into an Agreement and Plan of Reorganization, pursuant to which (subject
to Fund shareholder approval) on or about February 27, 1998, all of the assets,
and certain liabilities of the Funds would be acquired in exchange for shares of
similarly managed funds that are advised by affiliates of First Union
Corporation. The reorganization would result in the liquidation and termination
of the Funds.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
November 7, 1997
TRUSTEES/DIRECTORS OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
William J. Copeland President and Treasurer
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. John W. McGonigle
Edward C. Gonzales Executive Vice President and
Peter E. Madden Secretary
John E. Murray, Jr. Joseph S. Machi
Wesley W. Posvar Vice President and Assistant
Marjorie P. Smuts Treasurer
Richard B. Fisher
Vice President
C. Grant Anderson
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contain facts concerning
its objective and policies, management fees, expenses and other information.
PORTFOLIO ADVISERS B L A N C H A R D
Global Growth Fund GLOBAL GROWTH FUND
Mellon Capital Management Corp.
Precious Metals Fund, Inc. PRECIOUS METALS FUND, INC.
Cavelti Capital Management Ltd.
Flexible Income Fund FLEXIBLE INCOME FUND
OFFITBANK
Short-Term Flexible Income Fund SHORT-TERM FLEXIBLE INCOME FUND
OFFITBANK
Flexible Tax-Free Bond Fund FLEXIBLE TAX-FREE BOND FUND
United States Trust Company of New York
The Blanchard Group of Funds are available through Signet(R) Financial Services,
Inc., member NASD, and are advised by an affiliate, Virtus Capital Management,
Inc., which is
compensated for this service.
- ---------------------------------------------
INVESTMENT PRODUCTS ARE NOT DEPOSITS,
OBLIGATIONS OF, OR GUARANTEED BY ANY
BANK. THEY ARE NOT INSURED BY THE FDIC.
THEY INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL INVESTED.
- ---------------------------------------------
Federated Securities Corporation is the ANNUAL REPORT
distributor of the Funds. SEPTEMBER 30, 1997
Managed by: Virtus Capital
Management, Inc.
G01684-12
CUSIP 093212603/093212405/093265106/093212306/093254100
(2431)AR1197
A1. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Global Growth Fund (the "Fund") is represented by a broken line. The Standard &
Poor's 500 Index (the "S&P 500") is represented by a solid line. The line graph
is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 4/30/98 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$20,006 and $44,582, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, five-year, ten-year and the since inception (6/1/86) periods ended
9/30/97, which were 13.20%, 10.51%, 6.44% and 8.97%, respectively.
A2. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Precious Metals Fund (the "Fund") is represented by a broken line. The Toronto
Stock Exchange Gold & Silver Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Toronto Stock Exchange Gold & Silver
Index. The "x" axis reflects computation periods from 6/23/88 to 9/30/97. The
"y" axis reflects the cost of the investment. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to the
Toronto Stock Exchange Gold & Silver Index; the ending values were $11,167and
$13,936, respectively. The legend in the upper middle quadrant of the graphic
presentation indicates the Fund's Average Annual Total Return for the one-year,
five-year, and the since inception (6/23/88) periods ended 9/30/97, which were
(15.24%), 9.96%, and 1.27%, respectively.
A3. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Income Fund (the "Fund") is represented by a broken line. The Merrill
Lynch Aggregate Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Merrill Lynch Aggregate Bond Index.
The "x" axis reflects computation periods from 11/2/92 to 9/30/97. The "y" axis
reflects the cost of the investment. The right margin reflects the ending value
of the hypothetical investment in the Fund as compared to the Merrill Lynch
Aggregate Bond Index; the ending values were $14,003 and $14,387, respectively.
The legend in the upper middle quadrant of the graphic presentation indicates
the Fund's Average Annual Total Return for the one-year, and the since inception
(11/2/92) periods ended 9/30/97, which were 9.53% and 7.25%, respectively.
A4. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Short-Term Flexible Income Fund (the "Fund") is represented by a broken line.
The Merrill Lynch Short-Term Govenment Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Fund and the Merrill Lynch Short-Term
Govenment Index. The "x" axis reflects computation periods from 4/16/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Merrill Lynch Short-Term Govenment Index; the ending values were $12,940
and $12,709, respectively. The legend in the upper middle quadrant of the
graphic presentation indicates the Fund's Average Annual Total Return for the
one-year, and the since inception (4/16/93) periods ended 9/30/97, which were
7.24% and 5.95%, respectively.
A5. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Tax-Free Bond Fund (the "Fund") is represented by a broken line. The
Lehman Brothers Current Municipal Bond Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Fund and the Lehman Brothers Current
Municipal Bond Index. The "x" axis reflects computation periods from 8/12/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Lehman Brothers Current Municipal Bond Index; the ending values were
$13,553 and $12,485, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, and the since inception (8/12/93) periods ended 9/30/97, which
were 9.59% and 7.63%, respectively.
A6. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Asset Alocation Fund (the "Fund") is represented by a broken line. The Standard
& Poor's 500 Index (the "S&P 500") is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 6/6/96 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$14,534 and $14,571, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year and the since inception (6/6/96) periods ended 9/30/97, which were
38.64%, 33.03%, respectively.
PAGE 1
- ---------------------------------------------------------
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
Dear Shareholders:
It often seems that when international investment
diversification makes the most intellectual sense, it makes the
least emotional sense.
In general, gold funds experienced very disappointing
performance during the 12 months that ended on October 31,
1997. This disappointing performance extended to the Keystone
Precious Metals Holding, Inc. even though it did better than
the average gold-oriented fund and outperformed the gold
market, as measured by the Financial Times Gold Mines Index. It
was a period during which speculators took advantage of rumors
to drive the price of gold to its lowest point in more than a
decade.
It's easy to see why some investors might question the value
of a gold fund. It just seems more comfortable to invest in a
stock or bond fund, which historically have provided good,
positive returns.
(Photo of
William M. Ennis)
WILLIAM M. ENNIS
THE ADVANTAGES OF DIVERSIFICATION
We continue to believe in your fund's long-term strategy. Gold-oriented
investments can be a strong tool of diversification and have the potential to
offset negative performance in other markets and act as a hedge against the
possibility of inflation. In addition, gold and gold-oriented stocks now are
considered by many investment experts to be attractively priced relative to
other types of investments that have enjoyed better recent performance.
We cannot predict when gold and the stocks of gold mining companies are likely
to return to favor. However, we still believe in the value of diversifying part
of your portfolio in a gold fund, and we will continue to manage your Fund
conservatively, emphasizing the stocks of high quality companies.
At Evergreen Funds, we encourage you to remain focused on your long-term goals
and to remain disciplined in your personal investment strategies. No one can
confidently say whether next year's market will follow last year's pattern, or
whether trends will reverse themselves so that last year's lagging strategy
becomes next year's winning strategy. We can say, however, that the most likely
winners in the long run are those who consistently follow long-term investment
strategies.
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 Funds 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 for you to find all the funds of the Evergreen
Family, to which you have exchange privileges, under one heading in newspapers
and electronic services.
-- CONTINUED--
<PAGE>
PAGE 2
- ---------------------------------------------------------
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
What will not change will be our commitment to provide you with the finest
investment products and shareholder services possible.
If you should have any questions about these changes or other issues affecting
your investments, we encourage you to consult your financial adviser or call
Evergreen Funds at 1-800-343-2898.
Sincerely,
/s/ William M. Ennis
William M. Ennis
MANAGING DIRECTOR
<PAGE>
PAGE 3
- ---------------------------------------------------------
A Discussion With
Your Fund Manager
(photo of John C. Madden, Jr.)
JOHN C. MADDEN, JR. IS A VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER OF
KEYSTONE PRECIOUS METALS HOLDING, INC. A CHARTERED FINANCIAL ANALYST, MR.
MADDEN HAS MORE THAN 30 YEARS OF EXPERIENCE IN INVESTMENT RESEARCH AND
MANAGEMENT, SPECIALIZING IN PRECIOUS METALS, NATURAL RESOURCES, AND
ENERGY. HE HOLDS A B.A. FROM YALE UNIVERSITY.
Please note that we have changed the Fund's fiscal year end from February 28 to
October 31. The next report you receive will be a semiannual report for the
period ending April 30, 1998, which you should receive in June 1998.
Q HOW DID THE FUND PERFORM DURING THE PAST TWELVE MONTHS?
A Keystone Precious Metals Holdings, Inc. produced a total return of -31.55% for
the twelve-month period which ended October 31, 1997. This compares to
- -33.2% for the Lipper Gold Fund Index, comprised of ten mutual funds, and -33.9%
for the Financial Times Gold Mines Index. Your Fund's modest outperformance
during this difficult period can be attributed to its greater exposure to North
American stocks than many other funds its size, and its relative underweighting
in the small exploration companies that were particularly hard hit in this
market.
Q HOW WOULD YOU CHARACTERIZE THE GOLD BULLION MARKET OVER THE PAST YEAR?
A The past year, in fact the past 18 months, has been a very difficult period
for gold-related investments. Since its peak in February, 1996, the price of
gold has dropped over $100 per ounce. In the past twelve months, depending on
their location, stock prices of gold mining companies have declined anywhere
from 25% to 50% or more. Gold is now the lowest it has been since the mid-1980s.
The XAU, an index comprised primarily of North American gold stocks, is
approaching low levels last seen in 1993.
Q WHAT FACTORS INFLUENCED THE PRICE OF GOLD DURING THE PERIOD?
A Increasingly, the market has been controlled by traders who are aware of the
last of investor interest in the metal and have managed to profit from this by
keeping downward pressure on the price. Their efforts have been helped along by
the steady flow of news and rumors regarding central bank sales, IMF sales and
company forward selling. Most recently, a report that Switzerland might sell a
significant portion of its reserves to set up a humanitarian fund drove the
price down to a new yearly low, regardless of the fact that any sales are years
away and must first be approved by a country-wide vote. Sentiment has become so
negative that even the currency turmoil that might ordinarily be expected to
buoy the gold markets has thus far had little positive effect.
<PAGE>
PAGE 4
- ---------------------------------------------------------
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
Q GIVEN THE RECENT WEAKNESS IN THE GOLD MARKET, WHAT ARE THE REASONS TO OWN A
FUND THAT INVESTS PRIMARILY IN GOLD-RELATED SECURITIES?
A While recent returns have been negative, we continue to believe that long-term
investment in gold-related securities adds valuable diversification to any
portfolio. Gold-related stocks can help offset market fluctuations, because
their performance generally differs from that of broader stock and bond market
indexes. We've seen ample evidence of this contrarian performance during the
current strong financial market cycle. Gold mining stocks can also provide a
hedge against inflation and currency uncertainties. We continue to believe that
the best way to take advantage of the unpredictable nature of these markets is
to maintain exposure to high quality gold stocks.
Q HOW DID THE FUND'S GEOGRAPHIC ALLOCATIONS CHANGE OVER THE YEAR?
A We increased the Fund's exposure to North American gold stock during the year,
which helped its performance relative to the indices. Part of the change in
allocation percentages is related to active buying and selling, while the rest
can be attributed to the differential relative performance in these regions. For
example, South African gold stocks declined twice as much as stocks in North
American companies over the past year.
Q PLEASE DESCRIBE SOME OF THE FUND'S HOLDINGS.
A Positive structural changes in the South African mining industry and low stock
prices have created some attractive opportunities. One of the companies we have
been examining is Harmony Gold Mining, a former member of the Randgold &
Exploration Co. Ltd. portfolio, which is attempting to make significant
operating changes. While traditionally classified as a marginal operation,
Harmony has demonstrated its ability to profitably handle large quantities of
low-grade ore. Management has acquired several neighboring
Comparative performance of Keystone Precious Metals Holdings, Inc. and key
market indexes, October 31, 1996-October 31, 1997
(A bar graph appears here with the following plot points.)
Spot Gold -17.9%
KPMH* -31.5%
Lipper Gold Fund Index -33.2%
Financial Times Index
North America -24.9%
Australia -42.3%
Africa -49.8%
North American gold stocks had the best relative performance.
*Includes reinvested dividends.
ASSET ALLOCATION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
<TABLE>
<CAPTION>
OCTOBER 31, 1997 OCTOBER 31, 1996
<S> <C> <C>
- ---------------------------------------------------------------
North America 66% 56%
- ---------------------------------------------------------------
South Africa 22% 26%
- ---------------------------------------------------------------
Australia 12% 18%
- ---------------------------------------------------------------
</TABLE>
properties and will attempt to realize cost savings and grade improvements by
combining these operations. Annual production is slated to approach 1.0 million
ounces over the next two to three years, up from 0.68 million in 1997.
We have also positioned ourselves to participate in another promising
restructuring through the purchase of Gencor Ltd., another South African
company. The planned merger of Gencor Ltd. and Ashanti Goldfields will create
one of the largest gold companies in the world.
<PAGE>
PAGE 5
- ---------------------------------------------------------
Q WHAT ABOUT NON-GOLD COMPANIES?
A We continue to look for non-gold assets to diversify the portfolio. Our most
recent purchase is SouthernEra Resources Ltd., a diamond company with a
promising new discovery in South Africa that it shares with Randgold. The nature
of the deposit and the local topography suggest that low-cost surface mining and
shallow underground mining will be possible, and that production could start as
early as next year.
Q WHAT IS YOUR STRATEGY FOR MANAGING THE FUND?
A The Fund's objective is to seek long-term capital appreciation and protection
of purchasing power by investing in gold-oriented or other precious metal and
minerals companies. As a sector fund, it is likely to experience greater price
fluctuation than more diversified investments, but we rely on a conservative
strategy to reduce the level of volatility. We focus on companies with growing
reserves and expanding production that may have a greater ability to maintain
their value during periods of lower gold prices. We believe this approach offers
Fund investors the advantages of ongoing exposure to the potential of gold
stocks, but with reduced downside risk.
Q WHAT IS YOUR OUTLOOK FOR THE GOLD MARKET?
A Gold continues to languish in the absence of investor interest, despite
problems in various stock and currency markets around the world. This year it
reached low levels not seen since 1993-- a year that also saw a major upward
move in gold stocks. We would not be surprised to see this happen again, but it
would probably not occur unless the stock market correction becomes more serious
and concerns spread to credit markets as well. In the final analysis, as long as
investors are content to move out of stocks and into bonds, gold lacks appeal.
When this dynamic changes, gold will again become attractive, and the best
companies will prove to be rewarding investments.
TOP 10 HOLDINGS
AS OF OCTOBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
STOCK (COUNTRY) NET ASSETS
<S> <C>
- -------------------------------------------------------------
Newmont Mining Corp. (United States) 10.9
- -------------------------------------------------------------
Euro Nevada Mining (Canada) 8.9
- -------------------------------------------------------------
Franco Nevada Mining (Canada) 8.7
- -------------------------------------------------------------
Pioneer Group (United States) 5.9
- -------------------------------------------------------------
Getchell Gold (Canada) 5.8
- -------------------------------------------------------------
Homestake Mining (United States) 5.3
- -------------------------------------------------------------
Stillwater Mining (United States) 4.1
- -------------------------------------------------------------
De Beers Centenary (South Africa) 3.3
- -------------------------------------------------------------
Normandy Mining (Australia) 3.3
- -------------------------------------------------------------
Prime Resources Group (Canada) 3.1
- -------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 6
- ---------------------------------------------------------
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
Growth of an Investment
Growth of an investment in
Keystone Precious Metals Holdings, Inc.
(A graph appears here with the following plot points.)
Initial Dividend
Investment Reinvestment
---------- ------------
(In Thousands)
10/31/87 10,000 10,000
10/89 6,371 10,337
10/91 5,749 9,588
10/93 8,461 14,218
10/95 7,632 12,887
10/97 5,800 10,224
<TABLE>
<CAPTION>
HISTORICAL PERFORMANCE AS OF OCTOBER 31, 1997
<S> <C>
- ----------------------------------------------------------
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C>
1 year w/o sales charge -31.55%
1 year w/sales charge* -33.51%
5 years 20.28%
10 years 2.24%
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
<S> <C>
1 year w/o sales charge -31.55%
1 year w/sales charge* -33.51%
5 years 3.76%
10 years 0.22%
</TABLE>
*THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 3.0% FOR THOSE INVESTORS WHO
SOLD FUND SHARES AFTER ONE CALENDAR YEAR.
INTERNATIONAL INVESTING INVOLVES INCREASED RISK AND VOLATILITY.
Comparison of a change in value of a $10,000 investment in Keystone Precious
Metals Holdings, Inc., the Standard & Poor's 500 Index and the Consumer Price
Index.
(A graph appears here with the following plot points.)
Fund CPI S&P 500
(In Thousands)
10/87 10,000 10,000 10,000
10/89 10,337 10,895 10,716
10/91 9,588 11,919 13,229
10/93 14,218 12,637 16,710
10/95 12,887 13,332 21,939
10/97 10,224 14,001 35,960
#Consumer Price Index
Past performance is no guarantee of future results. The one-year return reflects
the deduction of the Fund's 3% contingent deferred sales charge for the shares
held for at least one year.
<PAGE>
PAGE 7
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
- ---------------------------------------------------------------
<CAPTION>
COMMON STOCKS-- 98.5%
<C> <C> <S> <C>
AUSTRALIA-- 11.8%
GOLD MINING-- 9.2%
800,000 Delta Gold NL................. $ 675,120
3,381,582 Normandy Mining Ltd........... 3,686,052
3,500,000 * Perilya Mines NL **........... 1,058,392
1,052,000 Plutonic Resources Ltd........ 1,879,141
1,376,304 Ross Mining NL................ 754,951
799,600 Sons of Gwalia Ltd. **........ 2,120,505
------------
10,174,161
------------
METALS & MINING-- 2.6%
2,899,200 * Acacia Resources Ltd.......... 2,895,185
------------
TOTAL AUSTRALIA............... 13,069,346
------------
CANADA-- 37.5%
GOLD MINING-- 30.0%
26,000 Agnico Eagle Mines Ltd........ 183,560
650,000 Euro Nevada Mining Ltd........ 9,869,798
420,000 Franco Nevada Mining Ltd...... 9,700,217
179,700 * Getchell Gold Corp............ 6,469,200
100,000 * Greenstone Resources Ltd...... 815,979
300,000 * Kinross Gold Corp............. 1,256,250
337,100 * Orvana Minerals Corp.......... 729,524
524,800 Prime Resources Group, Inc.... 3,500,280
185,300 * TVX Gold, Inc................. 787,525
------------
33,312,333
------------
METALS & MINING-- 7.5%
100,100 * Aber Resources Ltd............ 1,179,026
154,700 Barrick Gold Corp............. 3,166,775
338,500 * Bema Gold Corp................ 1,080,817
50,000 * International Precious Metals
Corp........................ 233,594
300,000 * Repadre Capital Corp.......... 1,490,049
100,000 * SouthernEra Resources Ltd..... 1,046,582
429,000 * Vengold, Inc. **.............. 210,033
------------
8,406,876
------------
TOTAL CANADA.................. 41,719,209
------------
SOUTH AFRICA-- 22.2%
GOLD MINING-- 9.9%
2,932,916 * Avgold Ltd. **................ 2,011,142
358,000 Free State Consolidated Gold
Mines Ltd................... 1,826,265
18,500 Vaal Reefs Exploration &
Mining Ltd.................. 798,047
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
- ---------------------------------------------------------------
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
SOUTH AFRICA-- CONTINUED
638,000 Vaal Reefs Exploration &
Mining Ltd., ADR............ $ 2,731,437
288,585 Western Areas Gold Mining
Ltd., ADR................... 1,685,019
20,900 Western Deep Levels Ltd....... 434,286
75,000 Western Deep Levels Ltd.,
ADR......................... 1,565,625
------------
11,051,821
------------
METALS & MINING-- 12.3%
72,800 Anglo-American Platinum
Holdings.................... 1,111,855
289,520 Ashanti Goldfields Ltd. GDR... 2,859,010
150,000 Avmin Ltd., ADR............... 1,275,000
155,200 De Beers Centenary............ 3,702,225
300,000 Elandsrand Gold Mining Co.
Ltd., ADR **................ 854,010
500,000 Gencor Ltd.................... 1,122,078
350,000 * Harmony Gold Mining Ltd....... 1,207,273
67,000 * Harmony Gold Mining Ltd., ADR
**.......................... 231,103
300,000 * Randgold & Exploration Co.
Ltd......................... 648,312
70,000 * Randgold Resources, Inc. **
+........................... 665,000
------------
13,675,866
------------
TOTAL SOUTH AFRICA............ 24,727,687
------------
UNITED STATES-- 27.0%
GOLD MINING-- 16.2%
473,000 Homestake Mining Co........... 5,853,375
347,650 Newmont Mining Corp........... 12,167,750
------------
18,021,125
------------
METALS & MINING-- 10.8%
499,000 * Canyon Resource Corp.......... 842,062
220,000 Pioneer Group Inc............. 6,558,750
220,900 * Stillwater Mining Co.......... 4,583,675
------------
11,984,487
------------
TOTAL UNITED STATES........... 30,005,612
------------
TOTAL COMMON STOCKS
(COST-- $135,286,955)......... 109,521,854
------------
</TABLE>
<PAGE>
PAGE 8
- ---------------------------------------------------------
EVERGREEN PRECIOUS METALS HOLDINGS, INC.
SCHEDULE OF INVESTMENTS-- OCTOBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- ---------------------------------------------------------------
<CAPTION>
REPURCHASE AGREEMENTS-- 2.5%
<C> <C> <S> <C>
$2,738,000 Keystone Joint Repurchase
Agreement, Investments in
repurchase agreements, in a
joint trading account,
purchased 10/31/97, 5.73%,
maturing 11/3/97, maturity
value $2,739,290 (a)
(cost-- $2,738,000)......... $ 2,738,000
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------
TOTAL INVESTMENTS--
(COST-- $138,024,955)................. 101.0% 112,259,854
INVESTMENT IN
WHOLLY-OWNED
UNCONSOLIDATED
FOREIGN
SUBSIDIARY............................ 0.7%
PRECIOUS METALS (BERMUDA) LTD......... 820,345
FOREIGN CURRENCY
HOLDINGS (COST-- $41,311)............. 0.0% 40,586
OTHER ASSETS AND
LIABILITIES-- NET..................... (1.7%) (1,948,083)
--------- ------------
NET ASSETS.............................. 100% $111,172,702
--------- ------------
</TABLE>
* Non-income producing securities.
** Illiquid securities. The total market value of these illiquid securities at
October 31, 1997 is $7,150,185 (6.4%).
+ Securities that may be resold to "qualified institutional buyers" under Rule
144A of the Securities Act of 1933. These securities have been determined to
be liquid under guidelines established by the Board of Directors.
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices plus accrued interest at October
31, 1997.
LEGEND OF PORTFOLIO ABBREVIATIONS:
ADR American Depository Receipts
GDR Global Depository Receipts
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts to Buy:
<S> <C> <C> <C> <C>
UNREALIZED
EXCHANGE U.S. VALUE AT IN EXCHANGE APPRECIATION
DATE CONTRACTS TO RECEIVE OCTOBER 31, 1997 FOR U.S. $ (DEPRECIATION)
- ---------------------------------------------------------------------------------------------------------------------------
10/31/97 9,950 Australian Dollar $ 70,290 $74,456 $ (4,166)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 9
- ---------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED
EIGHT-MONTH -------------------------------------------------
PERIOD ENDED FEB. 28, FEB. 29, FEB. 28, FEB. 28,
OCT. 31, 1997 (D) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF PERIOD $ 23.94 $ 26.35 $ 19.30 $ 25.09 $ 14.38
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS (B):
Net investment income (loss) (0.14) (0.26) (0.25) (0.13) (0.17)
Net realized and unrealized gains (losses) on investments
and foreign currency related transactions (7.93) (1.16) 7.30 (5.54) 10.88
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (8.07) (1.42) 7.05 (5.67) 10.71
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0 0 0 (0.12) 0
Distributions in excess of net investment income 0 0 0 0 0
Distributions from realized capital gains 0 (0.99) 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0 (0.99) 0 (0.12) 0
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 15.87 $ 23.94 $ 26.35 $ 19.30 $ 25.09
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (A) (33.71%) (5.16%) 36.53% (22.70%) 74.48%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total Expenses 2.48%(c) 2.33% 2.28% 2.33% 2.34%
Total Expenses excluding indirectly paid expenses 2.48%(c) 2.31% 2.26% N/A N/A
Net investment income (loss) (1.04%)(c) (1.08%) (1.08%) (0.54%) (0.75%)
PORTFOLIO TURNOVER RATE 19% 41% 39% 75% 73%
AVERAGE COMMISSION RATE PAID $ 0.02672 $0.01636 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (THOUSANDS) $ 111,173 $190,108 $217,270 $ 171,193 $200,489
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------
FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29,
1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF PERIOD $ 15.37 $ 14.22 $ 19.15 $ 16.82 $ 15.50 $ 17.31
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS (B):
Net investment income (loss) (0.12) (0.02) 0 0.06 0.05 (0.01)
Net realized and unrealized gains (losses) on investments
and foreign currency related transactions (0.76) 1.30 (4.61) 2.27 1.59 (0.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.88) 1.28 (4.61) 2.33 1.64 (0.18)
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0 0 (0.06) 0 (0.12) (0.41)
Distributions in excess of net investment income (0.11) (0.13) (0.26) 0 0 0
Distributions from realized capital gains 0 0 0 0 (0.20) (1.22)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.11) (0.13) (0.32) 0 (0.32) (1.63)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 14.38 $ 15.37 $ 14.22 $ 19.15 $ 16.82 $ 15.50
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (A) (5.74%) 9.07% (24.37%) 13.85% 10.64% (2.86%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total Expenses 2.83% 2.70% 2.76% 2.20% 1.68% 1.84%
Total Expenses excluding indirectly paid expenses N/A N/A N/A N/A N/A N/A
Net investment income (loss) (0.86%) (0.14%) (0.02%) 0.32% 0.28% (0.05%)
PORTFOLIO TURNOVER RATE 58% 53% 68% 95% 82% 62%
AVERAGE COMMISSION RATE PAID N/A N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (THOUSANDS) $114,364 $131,356 $150,200 $195,837 $222,079 $222,646
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Annualized.
(d) The Fund changed its fiscal year end from February 28 to October 31,
effective October 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 10
- ---------------------------------------------------------
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------
ASSETS
Investments at value (identified
cost-- $138,024,955) $112,259,854
Investment in wholly-owned unconsolidated
foreign subsidiary, at fair value 820,345
Foreign currency, at value (identified
cost-- $41,311) 40,586
- ------------------------------------------------------------
Total investments 113,120,785
Cash 436
Receivable for investments sold 264,387
Dividends and interest receivable 240,912
Receivable for Fund shares sold 109,927
Prepaid expenses and other assets 39,289
- ------------------------------------------------------------
Total assets 113,775,736
- ------------------------------------------------------------
LIABILITIES
Payable for Fund shares redeemed 2,282,149
Due to related parties 83,431
Accrued expenses and other liabilities 237,454
- ------------------------------------------------------------
Total liabilities 2,603,034
- ------------------------------------------------------------
NET ASSETS $111,172,702
- ------------------------------------------------------------
NET ASSETS REPRESENTED BY
Paid-in capital $131,737,025
Accumulated net investment loss (2,757)
Accumulated net realized gain on investments
and foreign currency related transactions 5,208,377
Net unrealized depreciation on investments
and foreign currency related transactions (25,769,943)
- ------------------------------------------------------------
Total net assets applicable to outstanding
shares of beneficial interest ($15.87 a
share on 7,003,255 shares outstanding) $111,172,702
- ------------------------------------------------------------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT-MONTH
PERIOD ENDED YEAR ENDED
OCTOBER 31, 1997(A) FEBRUARY 28, 1997
<S> <C> <C>
- ------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of
withholding tax of
$79,350 and $138,290,
respectively) $ 1,274,282 $ 2,084,778
Interest 95,571 285,499
- ------------------------------------------------------------
Total income 1,369,853 2,370,277
- ------------------------------------------------------------
EXPENSES
Management fee $ 678,437 $ 1,322,411
Distribution Plan
expenses 950,284 1,923,248
Transfer agent fees 413,682 805,132
Trustees fees 11,573 8,743
Miscellaneous 340,282 406,118
- ------------------------------------------------------------
Total expenses 2,394,258 4,465,652
Less: Indirectly paid
expenses (4,726) (31,743)
- ------------------------------------------------------------
Net expenses 2,389,532 4,433,909
- ------------------------------------------------------------
Net investment loss (1,019,679) (2,063,632)
- ------------------------------------------------------------
EQUITY IN EARNINGS OF
WHOLLY-OWNED
UNCONSOLIDATED
FOREIGN SUBSIDIARY 13,054 69,764
- ------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
RELATED TRANSACTIONS
Net realized gain on
investments 3,399,855 14,615,767
Net realized loss on
foreign currency
related transactions (11,697) (591,050)
- ------------------------------------------------------------
Net realized gain on
investments and
foreign currency
related transactions 3,388,158 14,024,717
- ------------------------------------------------------------
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currency
related transactions (61,446,526) (17,875,249)
- ------------------------------------------------------------
Net realized and
unrealized loss on
investments and
foreign currency
related transactions (58,058,368) (3,850,532)
- ------------------------------------------------------------
Net decrease in net
assets resulting from
operations $ (59,064,993) $ (5,844,400)
- ------------------------------------------------------------
</TABLE>
(a) The Fund changed its fiscal year end from February 28 to October 31,
effective October 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
- ---------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
EIGHT-MONTH ----------------------------
PERIOD ENDED FEBRUARY 28, FEBRUARY 29,
OCTOBER 31, 1997(A) 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment loss $ (1,019,679) $ (2,063,632) $ (2,123,645)
Equity in earnings of wholly-owned unconsolidated foreign
subsidiary 13,054 69,764 21,316
Net realized gain on investments and foreign currency related
transactions 3,388,158 14,024,717 15,952,451
Net change in unrealized appreciation (depreciation) on
investments and foreign currency related transactions (61,446,526) (17,875,249) 50,472,865
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (59,064,993) (5,844,400) 64,322,987
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net realized gains on investments and foreign currency related
transactions 0 (7,301,560) 0
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 83,990,548 618,026,217 376,204,823
Payment for shares redeemed (103,860,464) (638,015,009) (394,450,262)
Net asset value of shares issued in reinvestment of
distributions 0 5,971,990 0
- ------------------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share
transactions (19,869,916) (14,016,802) (18,245,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (78,934,909) (27,162,762) 46,077,548
NET ASSETS
Beginning of period 190,107,611 217,270,373 171,192,825
- ------------------------------------------------------------------------------------------------------------------------
End of period [including undistributed net investment income
(accumulated net investment loss) as follows:
October 31, 1997-- ($2,757)
February 28, 1997-- $4,722,048
February 29, 1996-- ($55,852)] $ 111,172,702 $190,107,611 $217,270,373
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Fund changed its fiscal year end from February 28 to October 31,
effective October 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 12
- ---------------------------------------------------------
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Keystone Precious Metals Holdings, Inc., (the "Fund") is a Delaware corporation
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end management investment company.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. 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
The Fund values investments traded on an established exchange on the basis of
the last sales price on the exchange where primarily traded. The Fund values
securities traded in the over-the-counter market at the mean between the bid and
asked prices. Securities for which 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 Directors.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held by the custodian on the Fund's behalf. The
Fund monitors the adequacy of the collateral daily and will require the seller
to provide additional collateral in the event the market value of the securities
pledged falls below the carrying value of the repurchase agreement, including
accrued interest. The 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 Directors.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the 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.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States ("U.S.")
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses 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 is 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.
<PAGE>
PAGE 13
- ---------------------------------------------------------
D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated in
a foreign currency and to hedge certain foreign currency assets or liabilities.
Forward contracts are recorded at the forward rate and are marked-to-market
daily. Realized gains and losses arising from such transactions are included in
net realized gain (loss) on foreign currency related transactions. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract and is subject to the credit risk that the other
party will not fulfill their obligations under the contract. Forward contracts
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date or in the case of some foreign securities, on the date
thereafter when the Fund is made aware of the dividend. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable. Capital
gains realized on some foreign securities are subject to foreign taxes which are
accrued as applicable.
F. FEDERAL TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund will not incur any federal
income tax liability since it is expected to distribute all of its net
investment company taxable income and net taxable capital gains, if any, to its
shareholders. The Fund also intends to avoid any excise tax liability by making
the required distributions under the Code. Accordingly, no provision for federal
taxes is required.
G. DISTRIBUTIONS
The Fund distributes net investment income and net capital gains, if any, at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. 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 of net operating
losses generated by the Fund.
H. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, the
Funds may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the
<PAGE>
PAGE 14
- ---------------------------------------------------------
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
other party will not fulfill their obligations under the contract. Futures
contracts also involve elements of market risk in excess of the amount reflected
in the statement of assets and liabilities.
3. INVESTMENT IN FOREIGN SUBSIDIARY
Precious Metals (Bermuda) Ltd., the Fund's wholly-owned foreign subsidiary, was
acquired in May 1975 and has as its primary objective the acquisition of
precious metals. The Fund accounts for its investments in the subsidiary under
the equity method of accounting. At October 31, 1997, the fair value of the
Fund's
investment in the foreign subsidiary was determined as follows:
<TABLE>
<S> <C>
Cash and cash equivalents $836,980
Accrued expenses (16,635)
- ---------------------------------------------------------
$820,345
- ---------------------------------------------------------
</TABLE>
4. CAPITAL SHARE TRANSACTIONS
The Fund has an unlimited number of shares of beneficial interest with a par
value of $1.00 authorized. Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
EIGHT-MONTH
PERIOD ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 FEBRUARY 28, 1997 FEBRUARY 29, 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Shares sold 4,394,845 25,602,726 16,257,907
Shares redeemed (5,332,804) (26,171,322) (16,883,225)
Shares issued in reinvestment of distributions 0 264,364 0
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease (937,959) (304,232) (625,318)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and foreign currencies) for the eight-month period ended
October 31, 1997 were $26,781,165 and $51,525,168, respectively. On October 31,
1997, the cost of investments for federal income tax purposes was $143,199,857,
gross unrealized appreciation of investments was $17,201,719 and gross
unrealized depreciation of investments was $47,116,788, resulting in net
unrealized depreciation of $29,915,069 for federal income tax purposes
6. DISTRIBUTION PLAN
Evergreen Distributors, Inc. ("EDI"), formerly Evergreen Keystone Distributors,
Inc., a wholly-owned subsidiary of The BISYS Group, Inc. ("BISYS") serves as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Investment Services, Inc. ("EIS"), formerly Evergreen Keystone Investment
Services, Inc. ("EKIS"), a wholly-owned subsidiary of Keystone, served as the
Fund's principal underwriter.
The Fund has adopted a Distribution Plan, as allowed by Rule 12b-1 of the 1940
Act. The Distribution Plan permits the Fund to reimburse its principal
underwriter for costs related to selling shares of the Fund and for various
other services. These costs, which consist primarily of commissions and services
fees to broker-dealers who sell shares of the fund, are paid by shareholders
through expenses called "Distribution Plan expenses". Under the Distribution
Plan, the Fund pays a distribution fee which may not exceed 1.00% of the Fund's
average daily net assets. Distribution Plan expenses are calculated daily and
paid monthly.
The principal underwriter may pay distribution costs greater than the
allowable annual amounts the Fund is permitted to pay. The Fund may reimburse
the principal underwriter for such excess amounts in later years with annual
interest at the prime rate plus 1.00%.
EDI intends to seek full payment of such distribution costs from the Fund at
such time in the future as, and to the extent that, payment thereof by the Fund
shares would be within permitted limits.
<PAGE>
PAGE 15
- ---------------------------------------------------------
The Distribution Plan may be terminated at any time by vote of the Independent
Directors or by vote of a majority of the shareholders. However, after the
termination of any Distribution Plan, and subject to the discretion of the
Independent Directors, payments to EIS and/or EDI may continue as compensation
for services which had been provided while the Distribution Plan was in effect.
7. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Keystone, a subsidiary of First Union Corporation ("First Union"), is the
investment advisor for the Fund. In return for providing investment management
and administrative services to the Fund, the Fund pays Keystone a management
fee, calculated daily and paid monthly, at an annual rate of 1.00% of the
average daily net asset value of the Fund. Keystone has entered into a
Sub-Investment Advisory Agreement with Equitilink International Management
Limited ("EIML"), under which EIML provides Keystone with investment research
and advice and may provide investment supervision or furnish an investment
program for certain assets of the Fund. For its services, EIML receives from
Keystone a monthly fee equal to (1) 20% of Keystone's net fee for such month for
services rendered in a non-discretionary capacity, plus (2) 10% of Keystone's
net fee for such month for services rendered in a discretionary capacity.
During the eight-month period ended October 31, 1997, the Fund paid or accrued
$15,528 to Keystone for certain administrative services.
Evergreen Service Company ("ESC"), formerly Evergreen Keystone Service Company
("EKSC"), a wholly-owned subsidiary of Keystone, serves as the transfer and
dividend disbursing agent for the Fund.
BISYS Fund Services, Inc., an affiliate of EDI, serves as the Fund's
sub-administrator. As sub-administrator, BISYS Fund Services, Inc. provides the
officers of the Fund. For this service, BISYS Fund Services, Inc. is paid a fee
by Keystone, which is not a Fund expense. Officers of the Fund and affiliated
Directors receive no compensation directly from the Fund.
8. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
9. CONCENTRATION OF RISK
The Fund invests a substantial portion of its assets in issuers involved in gold
mining and metals and mining industries. This concentration may result in the
Fund being more affected by economic and political developments affecting those
industries than a comparable general equity mutual fund.
10. DISTRIBUTION TO SHAREHOLDERS
A long-term capital gain distribution of $0.81 per share was declared payable on
November 17, 1997 to shareholders of record November 13, 1997. This distribution
is not reflected in the accompanying financial statements.
<PAGE>
PAGE 16
- ---------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE DIRECTORS AND SHAREHOLDERS
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
We have audited the accompanying statement of assets and liabilities of Keystone
Precious Metals Holdings, Inc. including the schedule of investments, as of
October 31, 1997, and the related statements of operations for the eight-month
period ended October 31, 1997 and the year ended February 28, 1997, the
statements of changes in net assets for the eight-month period ended October 31,
1997 and each of the years in the two-year period ended February 28, 1997 and
the financial highlights for the eight-month period ended October 31, 1997 and
each of the years in the ten-year period ended February 28, 1997. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Precious Metals Holdings, Inc. as of October 31, 1997, the results of
its operations for the eight-month period ended October 31, 1997 and the year
ended February 28, 1997, the changes in its net assets for the eight-month
period ended October 31, 1997 and each of the years in the two-year period ended
February 28, 1997 and the financial highlights for the periods specified in the
first paragraph above in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
November 26, 1997
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Funds, contact your
financial adviser or call Evergreen Funds.
<TABLE>
<C> <S>
NOT
FDIC MAY LOSE VALUE
INSURED NO BANK GUARANTEE
EVERGREEN DISTRIBUTOR, INC.
Evergreen is a Service Mark of Evergreen
Investment Services, Inc. Copyright 1997.
</TABLE>
542305 (Recycle logo appears here)
KEYSTONE
(Photo Exists in Film ONLY.
Will See on Dylux)
PRECIOUS METALS
HOLDINGS, INC.
(Evergreen logo appears here)
Evergreen Funds
Since 1942
ANNUAL REPORT
OCTOBER 31, 1997
<PAGE>
EVERGREEN KEYSTONE FUNDS
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
200 Berkeley Street
Boston, MA 02116-5034
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, D.C.
Attn: File Room
Re: Keystone Precious Metals Holdings, Inc.
File No. 811-2303
CCC # azz*ud8s
CIK # 0000079951
Commissioners:
Please be advised that the 10/31/97 Annual Report for the above referenced Fund
was submitted to your office on January 2, 1998, via electronic transmission
(EDGAR).
Any questions or comments about this document should be directed to the
undersigned at (617) 210-3265.
Very Truly Yours,
/s/ Liz Snee
Liz Snee
Assistant Vice President
<PAGE>
Keystone Precious Metals Holdings, Inc.
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
PORTFOLIO OF INVESTMENTS (000's omitted)
October 31, 1997
<TABLE>
<CAPTION>
Keystone Precious Blanchard
Metals Holdings, Inc. Precious Metals Fund, Inc. Proforma Combined
------------------------- ----------------------------- ------------------
Market Market Market
Shares Value Shares Value Adjustments Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCKS (94.7%)
AUSTRALIA (8.5%)
Gold Mining (6.5%)
Croesus Mining NL 600 122 600 122
Delta Gold NL 800 675 800 675
First Silver Reserve Inc. 468 464 468 464
Normandy Mining Ltd. 3,382 3,686 3,382 3,686
Perilya Mines NL (a) (b) 3,500 1,058 3,500 1,058
Plutonic Resources NL 1,052 1,879 1,052 1,879
Ross Mining NL 1,376 755 1,376 755
Sons of Gwalia Ltd. (b) 800 2,121 800 2,121
- ------------------------------------------------------------------------------------------------------------------------------------
10,174 586 10,760
Metals and Mining (2.0%)
Acacia Resources (a) 2,899 2,895 2,899 2,895
Laverton Gold NL 1,000 81 1,000 81
Lone Star Exploration 750 79 750 79
Lone Star Exploration 1,258 125 1,258 125
Lone Star Exploration NL 550 55 550 55
- ------------------------------------------------------------------------------------------------------------------------------------
2,895 340 3,235
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL AUSTRALIA 13,069 926 13,995
- ------------------------------------------------------------------------------------------------------------------------------------
CANADA (41.8%)
Gold Mining (35.1%)
Agnico Eagle Mines Ltd. 26 184 26 184
Cambior Inc. 461 3,598 461 3,598
Eldorado Gold Corp New. 1,406 2,693 1,406 2,693
Euro-Nevada Mining Ltd. 650 9,870 650 9,870
Franco-Nevada Mining Corp. Ltd. 420 9,700 95 2,199 515 11,899
Freeport McMoran Copper, ADR 25 459 25 459
Geomaque Expls Ltd. Com 746 1,456 746 1,456
Getchell Gold Corp. (a) 180 6,468 180 6,468
Goldcorp Inc. 100 550 100 550
Greenstone Resources Ltd. (a) 100 816 392 3,199 492 4,015
Kinross Gold Corp. (a) 300 1,256 510 2,136 810 3,392
Orvana Minerals Corp. (a) 337 730 337 730
Philex Gold Inc. 194 607 194 607
Prime Resources Group Inc. (a) 525 3,500 525 3,500
Rio Narcea Gold Mining Inc. 4 12 4 12
Santa Cruz Gold Inc. 4,115 1,285 4,115 1,285
TVX Gold Inc. (a) 185 788 1,260 5,498 1,445 6,286
Viceroy Resource Corp. 466 992 466 992
- ------------------------------------------------------------------------------------------------------------------------------------
33,312 24,684 57,996
Metals and Mining (6.7%)
Aber Resources Ltd. (a) 100 1,179 100 1,179
Ariel Resources Ltd. 1,640 314 1,640 314
Barrick Gold 155 3,166 155 3,166
Bema Gold Corp. (a) 339 1,081 339 1,081
East Rand Gold & Uranium Co. Ltd., ADR 752 961 752 961
Golden Knight Res Inc. 502 1,388 502 1,388
International Precious Metals Corp (a) 50 234 50 234
Repadre Capital Corp. (a) 300 1,490 300 1,490
SouthernEra Resources Ltd. (a) 100 1,047 100 1,047
Vengold Inc. (a) (b) 429 210 429 210
- ------------------------------------------------------------------------------------------------------------------------------------
8,407 2,663 11,070
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CANADA 41,719 27,347 69,066
- ------------------------------------------------------------------------------------------------------------------------------------
SOUTH AFRICA (18.0%)
Gold Mining (8.0%)
Avgold Ltd. ADR (a) (b) 2,933 2,011 2,933 2,011
Free State Consolidated Gold Mines Ltd. ADR 358 1,826 200 1,025 558 2,851
Vaal Reefs Exploration & Mining Ltd. 19 798 19 798
Vaal Reefs Exploration & Mining Ltd. ADR 638 2,732 255 1,100 893 3,832
Western Areas Gold Mining Ltd. ADR (a) 289 1,685 289 1,685
Western Deep Levels Ltd. 21 434 21 434
Western Deep Levels Ltd. ADR 75 1,566 75 1,566
- ------------------------------------------------------------------------------------------------------------------------------------
11,052 2,125 13,177
Metals and Mining (10.0%)
Anglo-American Platinum Holdings 73 1,112 73 1,112
Ashanti Goldfields Ltd. (GDR) (a)(b) 290 2,859 290 2,864 580 5,723
Avmin Ltd. ADR 150 1,275 150 1,275
DeBeers Centenary 155 3,703 155 3,703
Elandsrand Gold Mining Ltd. ADR (b) 300 854 300 854
Gencor Ltd. 500 1,122 500 1,122
Harmony Gold Mining Ltd., ADR (a) 67 231 67 231
Harmony Gold Mining Ltd. (a) 350 1,207 350 1,207
Randgold & Exploration Co. Ltd. (a) 300 648 300 648
Randgold Resources Inc. (a) (b) (c) 70 665 70 665
- ------------------------------------------------------------------------------------------------------------------------------------
13,676 2,864 16,540
</TABLE>
<PAGE>
Keystone Precious Metals Holdings, Inc.
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
PORTFOLIO OF INVESTMENTS (000's omitted)
October 31, 1997
<TABLE>
<CAPTION>
Keystone Precious Blanchard
Metals Holdings, Inc. Precious Metals Fund, Inc. Proforma Combined
--------------------- -------------------------- -----------------
Market Market Market
Shares Value Shares Value Adjustments Shares Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL SOUTH AFRICA 24,728 4,989 29,717
- -----------------------------------------------------------------------------------------------------------------------------------
UNITED STATES (26.4%)
Gold Mining (16.4%)
Dayton Mining Corp 230 574 230 574
Homestake Mining Co. 473 5,853 260 3,214 733 9,067
Meridian Gold Inc. 777 3,155 777 3,155
Newmont Mining Corp. 348 12,168 63 2,205 411 14,373
- -----------------------------------------------------------------------------------------------------------------------------------
18,021 9,148 27,169
Metals and Mining (10.0%)
Canyon Resource Corp. (a) 499 842 1,425 2,405 1,924 3,247
Pioneer Group Inc. 220 6,559 220 6,559
Placer Dome Inc. 135 2,093 135 2,093
Stillwater Mining Company (a) 221 4,584 221 4,584
- -----------------------------------------------------------------------------------------------------------------------------------
11,985 4,498 16,483
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES 30,006 13,646 43,652
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 109,522 46,908 156,430
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
WARRANTS (0.4%) (a) Shares Shares
------ ------
<S> <C> <C> <C> <C> <C>
Atlas Corp Warrants, expire 12/15/99 228 2 228 2
Canyon Resource Corp. Warrants, expire 1999 75 0 75 0
Geomaque Expls Ltd. Spl Warrants, expire 12/15/99 325 634 325 634
- -----------------------------------------------------------------------------------------------------------------------------------
Total Warrants 0 636 636
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM INVESTMENTS (Cost -
$135,287, $86,441, and $221,728, respectively) 109,522 47,544 157,066
===================================================================================================================================
<CAPTION>
Principal Amount Principal Amount Principal Amount
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Short Term Investments (3.0%)
Federal Home Loan Bank Discount Notes
1/21/98, 1% 5,000 4,940 5,000 4,940
Repurchase Agreements (1.7%)
Keystone Joint Repurchase Agreement, Investments
in repurchase agreements, in a joint trading account
purchased 10/31/97, 5.73%, maturing 11/3/97,
maturing value $2,739 (d) (cost, $2,738) 2,738 2,738 2,738 2,738
CS First Boston, purchased 10/31/97, 5.67%,
maturing 11/31/97, maturing value $4,627 (cost $4,627) 4,627 4,627
- -----------------------------------------------------------------------------------------------------------------------------------
Total Repurchase Agreements 2,738 4,627 7,365
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost - $138,025, 91,068,
and $229,093, respectively) 112,260 57,111 169,371
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN WHOLLY-OWNED
UNCONSOLIDATED FOREIGN SUBSIDIARY (0.5%)
Precious Metals (Bermuda) Ltd. 820 0 820
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY HOLDINGS
(Cost - $41) 41 0 41
OTHER ASSETS AND LIABILITIES -- NET ((0.03%)) (1,948) (3,015) 0 (4,963)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $111,173 $54,096 $165,269
===================================================================================================================================
</TABLE>
(a) Non-incoming producing security.
(b) Illiquid securities. The total market value of these illiquid securities at
October 31, 1997 is $7,150 (6.4%) of net assets.
(c) Securities that may be resold to "qualified institutional buyers" under
Rule 144A of the Securities Act of 1933. These securities have been
determined to be liquid under guidelines established by the Board of
Directors.
(d) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at August 29, 1997.
Legend of Portfolio Abbreviations:
ADR - American Depository Receipt
GDR - Global Depository Receipt
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Forward Foreign Currency Exchange Contracts to Buy:
<TABLE>
<CAPTION>
Unrealized
Exchange U.S. Value at In Exchange Appreciation
Date Contracts to Receive October 31, 1997 for U.S. $ (Depreciation)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/31/1997 9,950 Australian Dollar $70,290 $74,456 $(4,166)
</TABLE>
<PAGE>
Keystone Precious Metals Holdings, Inc.
Pro Forma Combining Financial Statements (unaudited)
Statement of Assets and Liabilities (000's)
October 31, 1997
<TABLE>
<CAPTION>
Keystone Blanchard
Precious Metals Precious Metals Pro Forma
Holdings, Inc. Fund, Inc. Adjustments Combined
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments at value (cost $138,066, $91,068 and
$229,134, respectively) $112,260 $57,111 $169,371
Investment in wholly-owned unconsolidated
foreign subsidiary, at fair value 820 0 820
Foreign currency, at value (identified cost - $41) 41 0 41
- -----------------------------------------------------------------------------------------------------------------------------------
Total investments 113,121 57,111 170,232
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends and interest receivable 241 51 292
Receivable for investment sold 264 0 264
Receivable for Fund shares sold 110 126 236
Prepaid expenses and other assets 39 0 39
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets 113,775 57,288 171,063
Liabilities:
Due to custodian bank 0 13 13
Payable for investments purchased 0 2,253 2,253
Payable for Fund shares redeemed 2,282 711 2,993
Due to related parties 83 59 142
Accrued expenses and other liabilities 237 156 393
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,602 3,192 5,794
Net Assets $111,173 $54,096 $165,269
===================================================================================================================================
Net assets are comprised of:
Paid-in capital $131,737 $94,392 $226,129
Undistributed net investment income (accumulated
distributions in excess of investment income) (3) (14,126) (14,129)
Accumulated net realized gain (loss) on investments
and foreign currency related transactions 5,209 7,787 12,996
Net unrealized depreciation on investments
and foreign currency related transactions (25,770) (33,957) (59,727)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets $111,173 $54,096 $165,269
===================================================================================================================================
Net Assets $111,173 $54,096 $165,269
Shares of Beneficial Interest Outstanding 7,003 12,137 (8,726)(a) 10,414
Net Asset Value $15.87 $4.46 $15.87
</TABLE>
(a) Reflects impact of converting shares of the target fund.
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Keystone Precious Metals Holdings, Inc.
Pro Forma Combining Financial Statements (unaudited)
Statement of Operations (000's)
October 31, 1997
<TABLE>
<CAPTION>
Keystone Blanchard
Precious Metals Precious Metals Pro Forma
Holdings, Inc. Fund, Inc. Adjustments Combined
--------------------------------------------------- ---------
<S> <C> <C> <C> <C>
Investment Income:
Dividend income (net of withholding taxes of $104,
34 and $138, respectively) $2,101 $678 $2,779
Interest income 140 641 781
---------------------------------------------------------------
Total investment income 2,241 1,319 0 3,560
---------------------------------------------------------------
Expenses:
Management fee 1,084 726 (304)(a) 1,506
Distribution Plan expenses 1523 545 2,068
Transfer agent fee 679 71 4 (b) 754
Custodian fee 159 107 (32)(c) 234
Printing 105 28 4 (b) 137
Registration fees 84 22 (22)(c) 84
Professional fees 96 25 11 (b) 132
State tax expense 74 1 (1)(c) 74
Directors' fees and expenses 15 3 4 (b) 22
Administrative service fees 3 77 (70)(c) 10
Miscellaneous 12 3 29 (b) 44
- --------------------------------------------------------------------------------------------------------------------------------
Total Expenses 3,834 1,608 (377) 5,065
Less: Fee waivers and/or reimbursements (36) (32) 0 (68)
- --------------------------------------------------------------------------------------------------------------------------------
Net expenses 3,798 1,576 (377) 4,997
- --------------------------------------------------------------------------------------------------------------------------------
Net investment loss (1,557) (257) 377 (1,437)
Equity in earnings of wholly-owned unconsolidated
foreign subsidiary 71 0 71
Net realized and unrealized gain (loss) on investments and
foreign currency related transactions
Net realized gain (loss) on investments and foreign
currency related transactions 5,904 (2,807) 3,097
Net change in unrealized appreciation
(depreciation) on investments (55,549) (23,022) (78,571)
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (49,645) (25,829) 0 (75,474)
- --------------------------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations ($51,131) ($26,086) $377 ($76,840)
================================================================================================================================
</TABLE>
(a) Reflects a decrease based on surviving Fund's fee schedule and pro forma
combined assets.
(b) Reflects an increase based on combined assets.
(c) Reflects expected cost savings when the Funds are combined.
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Keystone Precious Metals Holdings, Inc.
Notes to Pro Forma Combining Financial Statements (Unaudited)
October 31, 1997
1. Basis of Combination - The Pro Forma Statement of Assets and Liabilities,
including the Pro Forma Portfolio of Investments, and the related Pro Forma
Statement of Operations ("Pro Forma Statements") reflect the accounts of
Keystone Precious Metals Holdings, Inc. ("Keystone") and Blanchard Precious
Metals Fund, Inc. ("Blanchard") at October 31, 1997 and for the year then ended.
The Pro Forma Statements give effect to the proposed transfer of all assets and
liabilities of Blanchard shares in exchange for shares of Keystone. The Pro
Forma Statements reflect the expense of each Fund in carrying out its
obligations under the Agreement and Plan of Reorganization (the
"Reorganization") as though the merger occurred at the beginning of the period
presented.
Under the Reorganization, Keystone will acquire substantially all of the assets
and assume certain identified liabilities of Blanchard. Thereafter, there will
be a distribution of such shares of Keystone to shareholders of Blanchard in
liquidation and subsequent termination thereof. The information contained herein
is based on the experience of each Fund for the year ended October 31, 1997 and
is designed to permit shareholders of the consolidating mutual funds to evaluate
the financial effect of the proposed Reorganization. The expenses of Blanchard
and Keystone in connection with the Reorganization (including the cost of any
proxy soliciting agents), will be borne by First Union National Bank of North
Carolina. It is not anticipated that the securities of the combined portfolio
will be sold in significant amounts in order to comply with the policies and
investment practices of Keystone.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of each Fund incorporated by reference in the Statements of
Additional Information.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assume the issuance of additional shares of Keystone, which would have been
issued at October 31, 1997 in connection with the proposed Reorganization. The
amount of additional shares assumed to be issued was calculated based on the net
assets of Blanchard as of October 31, 1997 of $54,096 (reported in 000's),
respectively, and the net asset value per share of Keystone of $15.87.
Additional shares issued were converted and distributed to the aforementioned
Fund according to its relative share value conversion ratio.
The Pro Forma shares outstanding of 10,414 (reported in 000's) consist of 3,411
(reported on 000's) additional shares of Keystone to be issued in the proposed
reorganization, as calculated above, in addition to the shares of Keystone
outstanding as of October 31, 1997.
3. Pro Forma Operations - The Pro Forma Statement of Operations assumes similar
rates of gross investment income for the investments of each Fund. Accordingly,
the combined gross investment income is equal to the sum of each Fund's gross
investment income. Pro Forma operating expenses include the actual expenses of
each Fund and the combined Fund, with certain expenses adjusted to reflect the
expected expenses of the combined entity. The investment advisory and
distribution fees have been charged to the combined Fund based on the fee
schedule in effect for Keystone at the combined level of average net assets for
the year ended October 31, 1997.
<PAGE>
EVERGREEN INTERNATIONAL
TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees and Directors" under the caption "Comparative
Information on Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust
. Incorporated by reference to the
Registrant's Registration Statement on Form N-1A filed on
December 12, 1997 - Registration No. 333-42195. ("Form N-1A
Registration Statement").
2. Bylaws. Incorporated by reference to the Form N-
1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit A to Prospectus contained in
Part A of this Registration Statement.
5. Declaration of Trust Articles II., III.(6)(c), IV.(3), IV.(8), V., VI., VII.,
and VIII. and By-Laws Articles II., III.
and VIII.
6(a). Form of Investment Advisory Agreement between Keystone Investment
Management Company and the Registrant. Incorporated by reference to the Form
N-1A Registration Statement.
6(b). Form of Interim Management Contract. Exhibit B to
Prospectus contained in Part A of this Registration Statement.
6(c). Form of Interim Sub-Advisory Agreement. Exhibit C to
Prospectus contained in Part A of this Registration Statement.
7(a). Distribution Agreement between Evergreen Distributor,
Inc. and
<PAGE>
the Registrant. Incorporated by reference to the Form N-1A
Registration Statement.
7(b). Form of Dealer Agreement for Class A, Class B and Class C shares used by
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
8. Deferred Compensation Plan.
Incorporated by reference to the Form N-1A Registration
Statement.
9. Custody Agreement between State Street Bank and Trust
Company and
the Registrant. Incorporated by reference to the Form
N-1A Registration Statement.
10(a). Rule 12b-1 Distribution Plan.
Incorporated by reference to the Form N-1A Registration
Statement.
10(b). Multiple Class Plan.
Incorporated by reference to the Form N-1A Registration
Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. Filed herewith.
13. Not applicable.
14(a). Consent of KPMG Peat Marwick LLP. Filed herewith.
14(b). Consent of Deloitte & Touche LLP. Filed herewith.
15. Not applicable.
16. Powers of Attorney. Previously filed.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
<PAGE>
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post- Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of Columbus and State of Ohio, on the 5th day of
January, 1998.
EVERGREEN
INTERNATIONAL TRUST
By: /s/William J. Tomko
-----------------------
Name: William J. Tomko
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Post-Effective Amendment No. 1 to the Registration Statement in the
capacities indicated on the 5th day of January, 1998.
Signatures Title
- ---------- -----
/s/William J. Tomko President and
- --------------------- Treasurer
William J. Tomko
/s/Laurence B. Ashkin* Director
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin* Director
- ---------------------
Charles A. Austin
/s/K. Dun Gifford* Director
- ---------------------
K. Dun Gifford
/s/James S. Howell* Director
- ---------------------
James S. Howell
/s/Leroy Keith, Jr.* Director
<PAGE>
- ---------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Director
- ---------------------
Gerald M. McDonnell
/s/Thomas L. McVerry* Director
- ---------------------
Thomas L. McVerry
/s/William Walt Pettit* Director
- ---------------------
William Walt Pettit
/s/David M. Richardson* Director
- ---------------------
David M. Richardson
/s/Russell A. Salton III* Director
- ---------------------
Russell A. Salton III
/s/Michael S. Scofield* Director
- ---------------------
Michael S. Scofield
/s/Richard J. Shima* Director
- ---------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
12 Tax Opinion and Consent of Sullivan & Worcester LLP
14(a) Consent of KPMG Peat Marwick LLP
14(b) Consent of Deloitte & Touche LLP
17 Form of Proxy
- ---------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 2, 1998
Evergreen International Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen International Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 17, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Keystone Precious Metals Holdings (the "Acquiring Fund"), a series of the Trust.
We understand that the Trust is about to file Post- Effective Amendment No. 1 to
its Registration Statement on Form N-14 (Registration No. 333-41405) for the
purpose of registering shares of the Acquiring Fund under the Securities Act of
1933, as amended (the "1933 Act"), in connection with the proposed acquisition
by the Acquiring Fund of all of the assets of Blanchard Precious Metals Fund,
Inc. (the "Acquired Fund"), a Maryland corporation with transferable shares, in
exchange solely for shares of the Acquiring Fund and the assumption by the
Acquiring Fund of certain identified liabilities of the Acquired Fund pursuant
to an Agreement and Plan of Reorganization, the form of which is included in the
Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and
the District of Columbia and generally do not purport to be familiar with the
laws of the State of Delaware.
<PAGE>
To the extent that the conclusions based on the laws of the State of Delaware
are involved in the opinion set forth herein below, we have relied, in rendering
such opinions, upon our examination of Chapter 38 of Title 12 of the Delaware
Code Annotated, as amended, entitled "Treatment of Delaware Business Trusts"
(the "Delaware business trust law") and on our knowlege of interpretation of
analogous common law of The Commonwealth of Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on February 20, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 5, 1998
Blanchard Precious Metals Fund, Inc.
Keystone Precious Metals Holdings
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of Blanchard Precious Metals
Fund, Inc. by Keystone Precious Metals Holdings
Ladies and Gentlemen:
You have asked for our opinion as to certain Federal income tax
consequences of the transactions described below:
Parties to the Transaction. Blanchard Precious Metals Fund,
Inc. ("Target Fund") is a Maryland corporation.
Keystone Precious Metals Holdings ("Acquiring Fund") is a
series of Evergreen International Trust, a Delaware business
trust.
Description of Proposed Transaction. Acquiring Fund will issue its
shares to Target Fund and assume certain stated liabilities of Target Fund, in
exchange for all of the assets of Target Fund. Target Fund will then immediately
dissolve and distribute all of the Acquiring Fund shares which it holds to its
shareholders pro rata in proportion to their shareholdings in Target Fund, in
complete redemption of all outstanding shares of Target Fund.
Scope of Review and Assumptions. In rendering our opinion, we have
reviewed and relied upon the form of Agreement and Plan of Reorganization (the
"Reorganization Agreement") between Acquiring Fund and Target Fund dated as of
November 26, 1997 which is enclosed in a draft prospectus/proxy statement to be
dated January 6, 1998 which describes the proposed transaction, and on the
information provided in such prospectus/proxy statement. We have relied, without
independent verification, upon the factual statements made therein, and assume
that there will be no change in material facts disclosed therein between the
date of this letter and the date of the closing of the
<PAGE>
transaction. We further assume that the transaction will be carried out in
accordance with the Reorganization Agreement.
Representations. Written representations, copies of which are attached
hereto, have been made to us by the appropriate officers of Target Fund and of
Acquiring Fund, and we have without independent verification relied upon such
representations in rendering our opinions.
Opinions
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, we have the following opinions:
1. The acquisition by Acquiring Fund of all of the assets of Target
Fund solely in exchange for voting shares of Acquiring Fund and assumption of
certain specified liabilities of Target Fund followed by the distribution by
Target Fund of said Acquiring Fund shares to the shareholders of Target Fund in
exchange for their Target Fund shares will constitute a reorganization within
the meaning of ss. 368(a)(1)(C) of the Code, and Acquiring Fund and Target Fund
will each be "a party to a reorganization" within the meaning of ss. 368(b) of
the Code.
2. No gain or loss will be recognized to Target Fund upon the transfer
of all of its assets to Acquiring Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of certain specified liabilities
of Target Fund, or upon the distribution of such Acquiring Fund voting shares to
the shareholders of Target Fund in exchange for all of their Target Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of any liabilities of Target
Fund.
4. The basis of the assets of Target Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund
immediately prior to the transfer, and the holding period of the assets of
Target Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Target Fund.
5. The shareholders of Target Fund will recognize no gain or loss upon
the exchange of all of their Target Fund shares solely for Acquiring Fund voting
shares.
<PAGE>
6. The basis of the Acquiring Fund voting shares to be received by the
Target Fund shareholders will be the same as the basis of the Target Fund shares
surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Target Fund shareholders will include the period during which
the Target Fund shares surrendered in exchange therefor were held, provided the
Target Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in such
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen International Trust
We consent to the use of our report dated November 26, 1997 for Keystone
Precious Metals Holdings incorporated by reference herein and to the reference
to our firm under the caption "FINANCIAL STATEMENTS AND EXPERTS" in the
prospectus/proxy statement.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Boston Massachusetts
January 5, 1998
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Evergreen International Trust on Form N-14 of our report on Blanchard Precious
Metals Fund, Inc. dated November 7, 1997, appearing in the Annual Report of the
Blanchard Funds for the year ended September 30, 1997, and to the reference to
us under the heading "Financial Statements and Experts" in the Prospectus/Proxy
Statement, which is part of this Registration Statement.
/s/Delloitte & Touche LLP
- -------------------------
DELLOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 5, 1998
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
BLANCHARD PRECIOUS METALS FUND, INC.
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
C. Grant Anderson, Carol B. Kayworth, Patricia F. Conner, Ann M. Scanlon and
Catherine C. Ryan or any of them as Proxies of the undersigned, with full power
of substitution, to vote on behalf of the undersigned all shares of Blanchard
Precious Metals Fund, Inc. ("Precious Metals") that the undersigned is entitled
to vote at the special meeting of shareholders of Precious Metals to be held at
2:00 p.m. on Friday, February 20, 1998 at the offices of the Evergreen Funds,
200 Berkeley Street, Boston, Massachusetts 02116, and at any adjournments
thereof, as fully as the undersigned would be entitled to vote if personally
present.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON
THIS PROXY. If joint owners, EITHER may sign this
Proxy. When signing as attorney, executor,
administrator, trustee, guardian, or custodian for a
minor, please give your full title. When signing on
behalf of a corporation or as a partner for a
partnership, please give the full corporate or
partnership name and your title, if any.
Date , 199
----------------------------------------
----------------------------------------
Signature(s) and Title(s), if applicable
-1-
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PRECIOUS
METALS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTION
TO BE TAKEN ON THE FOLLOWING PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE
VOTED AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF
DIRECTORS OF PRECIOUS METALS RECOMMENDS A VOTE FOR THE PROPOSALS. PLEASE MARK
YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK. EXAMPLE: X
---
1. To approve an Agreement and Plan of Reorganization whereby Keystone
Precious Metals Holdings, a series of Evergreen International Trust, will (i)
acquire all of the assets of Precious Metals in exchange for shares of Keystone
Precious Metals Holdings; and (ii) assume certain identified liabilities of
Precious Metals, as substantially described in the accompanying Prospectus/Proxy
Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To approve the proposed Interim Management Contract with Virtus
Capital Management, Inc.
- ---- FOR ---- AGAINST ---- ABSTAIN
3. To approve the proposed Interim Sub-Advisory Agreement between Virtus
Capital Management, Inc. and Cavelti Capital Management, Ltd.
- ---- FOR ---- AGAINST ---- ABSTAIN
4. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
<PAGE>
