<PAGE>
File Nos. 33-11050/
811-4947
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 21 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22 [X]
KEYSTONE STRATEGIC INCOME FUND
(Exact name of Registrant as specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(617) 210-3200
Rosemary D. Van Antwerp, Esq., 200 Berkeley Street, Boston, MA
02116-5034
Name and Address of Agent for Service
It is proposed that this filing will become effective
___ immediately upon filing pursuant to paragraph (b)
X on September 1, 1997 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2) of Rule 485.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has registered an indefinite amount of its securities under the Securities Act
of 1933. A Rule 24f-2 Notice for Registrant's fiscal year ended April 30, 1997
was filed June 27, 1997.
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed Proposed
Title of Share Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Per Offering Registration
Registered Registered Unit* Price** Fee
<S> <C> <C> <C> <C>
Shares of
Beneficial
Interest,
$0.0001
Par Value 9,228,859 $7.03 $64,878,878 $0
</TABLE>
* Computed under Rule 457(d) on the basis of the offering price per
share at the close of business on August 6, 1997.
** The calculation of the maximum aggregate offering price is made
pursuant to Rule 24e-2 under the Investment Company Act of 1940.
9,228,859 shares of the Fund were redeemed during its fiscal period
ended April 30, 1997. Of such shares, none were used for a reduction pursuant
to Rule 24f-2 during the current year. All of such shares are being used for a
reduction in this filing.
<PAGE>
KEYSTONE STRATEGIC INCOME FUND
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 21 to REGISTRATION STATEMENT
This Post-Effective Amendment No. 21 to Registration Statement No. 33-11050
consists of the following pages, items of information and documents.
The Facing Sheet
The Contents Page
The Cross-Reference Sheet
PART A
Prospectus
PART B
Statement of Additional Information
PART C
PART C - OTHER INFORMATION - ITEMS 24(a) and 24(b)
Financial Statements
Independent Auditors' Report
Exhibit Listing
PART C - OTHER INFORMATION - ITEMS 25-32 - AND SIGNATURE PAGES
Number of Holders of Securities
Indemnification
Business and Other Connections
Principal Underwriter
Location of Accounts and Records
Signatures
Exhibits
<PAGE>
KEYSTONE STRATEGIC INCOME FUND
CROSS REFERENCE SHEET
(as required by Rule 481(a))
N-1A Item No. Location in Prospectus(es)
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis and Fee Table Overview of the Fund(s);
Expense Information
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Cover Page; Description of
the Funds; Other
Information
Item 5. Management of the Fund Management of the Fund(s);
Other Information
Item 6. Capital Stock and Other Securities Dividends, Distributions and
Taxes; Other Information
Item 7. Purchase of Securities Being Offered Purchase and Redemption of
Shares
Item 8. Redemption or Repurchase Purchase and Redemption of
Shares
Item 9. Pending Legal Proceedings Not Applicable
Location in Statement of
Part B Additional Information
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
Item 13. Investment Objectives and Policies Investment Objectives and
Policies;Investment
Restrictions; Non-
Fundamental Operating
Policies; and Certain
Risk Considerations
Item 14. Management of the Fund Management; Trustees
Item 15. Control Persons and Principal Management
Holders of Securities
Item 16. Investment Advisory and Other Services Investment Advisers;
Purchase of Shares
Item 17. Brokerage Allocation Allocation of Brokerage
Item 18. Capital Stock and Other Securities Purchase of Shares;
General Information About
the Funds
Item 19. Purchase, Redemption and Pricing of Distribution Plans and
Securities Being Offered Agreements; Purchase
of Shares; Net Asset Value
Item 20. Tax Status Additional Tax Information
Item 21. Underwriters Distribution Plans and
Agreements; Purchase of
Shares
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
<PAGE>
KEYSTONE STRATEGIC INCOME FUND
PART A
PROSPECTUS
<PAGE>
PROSPECTUS September 1, 1997
EVERGREEN KEYSTONE LONG-TERM BOND FUNDS [Logo Goes Here]
EVERGREEN U.S. GOVERNMENT FUND
KEYSTONE STRATEGIC INCOME FUND
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
The Evergreen Keystone Long-Term Bond Funds (the "Funds") are
designed to provide investors with a selection of investment alternatives
which seek to provide a high level of current income. This Prospectus
provides information regarding the Class A, Class B and Class C shares
offered by the Funds. Each Fund is, or is a series of, an open-end,
diversified, management investment company. This Prospectus sets forth
concise information about the Funds that a prospective investor should know
before investing. The address of the Funds is 200 Berkeley Street, Boston,
Massachusetts 02116.
A Statement of Additional Information for the Funds dated
September 1, 1997, as supplemented from time to time, has been filed with
the Securities and Exchange Commission and is incorporated by reference
herein. The Statement of Additional Information provides information
regarding certain matters discussed in this Prospectus and other matters
which may be of interest to investors, and may be obtained without charge
by calling the Evergreen Keystone Funds at (800) 343-2898. There can be no
assurance that the investment objective of any Fund will be achieved.
Investors are advised to read this Prospectus carefully.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, 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 RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
KEEP THIS PROSPECTUS FOR FUTURE REFERENCE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
OVERVIEW OF THE FUNDS 2
EXPENSE INFORMATION 3
FINANCIAL HIGHLIGHTS 4
DESCRIPTION OF THE FUNDS
Investment Objectives and Policies 8
Investment Practices and Restrictions 10
MANAGEMENT OF THE FUNDS
Investment Advisers 15
Portfolio Managers 16
Administrator 16
Sub-Administrator 16
Distribution Plans and Agreements 16
PURCHASE AND REDEMPTION OF SHARES
How to Buy Shares 17
How to Redeem Shares 20
Exchange Privilege 22
Shareholder Services 22
Effect of Banking Laws 23
OTHER INFORMATION
Dividends, Distributions and Taxes 24
General Information 25
</TABLE>
OVERVIEW OF THE FUNDS
The following is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus. See "Description of the
Funds" and "Management of the Funds".
The investment adviser to EVERGREEN U.S. GOVERNMENT FUND is the Capital
Management Group of First Union National Bank, a subsidiary of First Union
Corporation, the sixth largest bank holding company in the United States. The
investment adviser to KEYSTONE STRATEGIC INCOME FUND is Keystone Investment
Management Company, a subsidiary of First Union National Bank.
EVERGREEN U.S. GOVERNMENT FUND seeks a high level of current income
consistent with stability of principal.
KEYSTONE STRATEGIC INCOME FUND seeks high current income from interest on
debt securities. Secondarily, the Fund considers potential for growth of capital
in selecting securities.
THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF EITHER FUND WILL
BE ACHIEVED.
2
<PAGE>
EXPENSE INFORMATION
The table set forth below summarizes the shareholder transaction costs
associated with an investment in each Class A, Class B and Class C Shares of
each Fund. For further information see "Purchase and Redemption of Shares" and
"General Information -- Other Classes of Shares".
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES Class A Shares Class B Shares
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as 4.75% None
a % of offering price)
Contingent Deferred Sales Charge (as a % of None 5% during the first year, 4% during the second
original purchase price or redemption year, 3% during the third and fourth years, 2%
proceeds, whichever is lower) during the fifth year, 1% during the sixth
year and 0% after the sixth year
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES Class C Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases (as None
a % of offering price)
Contingent Deferred Sales Charge (as a % of 1% during the
original purchase price or redemption first year and 0%
proceeds, whichever is lower) thereafter
</TABLE>
The following tables show for each Fund the estimated annual operating
expenses (as a percentage of average net assets) attributable to each Class of
shares, together with examples of the cumulative effect of such expenses on a
hypothetical $1,000 investment in each Class for the periods specified assuming
(i) a 5% annual return, and (ii) redemption at the end of each period and,
additionally for Class B and Class C, no redemption at the end of each period.
In the following examples (i) the expenses for Class A shares assume
deduction of the maximum sales charge at the time of purchase, (ii) the expenses
for Class B shares and Class C shares assume deduction at the time of redemption
(if applicable) of the maximum contingent deferred sales charge applicable for
that time period, and (iii) the expenses for Class B shares reflect the
conversion to Class A shares seven years after purchase (years eight through
ten, therefore, reflect Class A expenses).
EVERGREEN U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
EXAMPLES
Assuming Redemption Assuming no
ANNUAL OPERATING EXPENSES at End of Period Redemption
Class A Class B Class C Class A Class B Class C Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees .50% .50% .50% After 1 Year $ 57 $ 68 $ 28 $ 18 $ 18
12b-1 Fees* .25% .75% .75% After 3 Years $ 77 $ 84 $ 54 $ 54 $ 54
Shareholder Service Fees -- .25% .25% After 5 Years $ 99 $ 114 $ 94 $ 94 $ 94
Other Expenses .23% .23% .23% After 10 Years $ 162 $ 175 $ 204 $ 175 $ 204
Total .98% 1.73% 1.73%
</TABLE>
KEYSTONE STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
EXAMPLES
Assuming Redemption Assuming no
ANNUAL OPERATING EXPENSES at End of Period Redemption
Class A Class B Class C Class A Class B Class C Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees .64% .64% .64% After 1 Year $ 60 $ 71 $ 31 $ 21 $ 21
12b-1 Fees* .23% .75% .75% After 3 Years $ 86 $ 94 $ 64 $ 64 $ 64
Shareholder Service Fees -- .25% .25% After 5 Years $ 114 $ 130 $ 110 $ 110 $ 110
Other Expenses .41% .40% .40% After 10 Years $ 195 $ 208 $ 237 $ 208 $ 237
Total 1.28% 2.04% 2.04%
</TABLE>
*Class A shares can pay up to 0.75% of average assets as a 12b-1 fee. For the
foreseeable future, the Class A Shares' 12b-1 fees will be limited to 0.25% of
average net assets for each Fund.
From time to time, each Fund's investment adviser may, at its discretion,
reduce or waive its fees or reimburse the Funds for certain of their expenses in
order to reduce their expense ratios. Each Fund's investment adviser may cease
these waivers and reimbursements at any time.
The purpose of the foregoing table is to assist an investor in
understanding the various costs and expenses that an investor in each Class of
shares of the Funds will bear directly or indirectly. The amounts set forth both
in the table and in the examples for EVERGREEN U.S. GOVERNMENT FUND are based on
the experience of the Fund for the ten-month period ended April 30, 1997. The
amounts set forth both in the table and examples for Keystone Strategic Income
Fund are based on the experience of the Fund for the nine-month period ended
April 30, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OR ANNUAL RETURN. ACTUAL EXPENSES AND ANNUAL RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN. For a more complete description of the various
costs and expenses borne by the Funds see "Management of the Funds". As a result
of asset-based sales charges, long-term
3
<PAGE>
shareholders may pay more than the economic equivalent of the maximum front-end
sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
FINANCIAL HIGHLIGHTS
The tables on the following pages present, for each Fund, financial
highlights for a share outstanding throughout each period indicated. The
information in the tables for the five most recent fiscal periods or the life of
a Fund if shorter has been audited by KPMG Peat Marwick LLP, the Funds'
independent auditors. The tables appear in the Funds' annual report to
shareholders and should be read in conjunction with each Fund's financial
statements and related notes, which also appear, together with the independent
auditors' report, in the Funds' annual report to shareholders. The Funds'
financial statements, related notes, and independent auditors' report are
incorporated by reference into the Funds' Statement of Additional Information.
Further information about each Fund's performance is contained in the
Funds' annual report to shareholders, which may be obtained without charge.
EVERGREEN U.S. GOVERNMENT FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
JANUARY 11, 1993
TEN MONTHS YEAR SIX MONTHS YEAR (COMMENCEMENT OF
ENDED ENDED ENDED ENDED OPERATIONS) TO
APRIL 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1997 (d) 1996 1995 (c) 1994 1993
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value beginning of period.............. $ 9.42 $ 9.65 $ 9.07 $ 10.05 $ 10.00
Income from investment operations:
Net investment income.......................... 0.52 0.63 0.33 0.66 0.68
Net realized and unrealized gain (loss) on
investments.................................. (0.03) (0.23 ) 0.58 (0.98) 0.05
Total from investment operations............. 0.49 0.40 0.91 (0.32) 0.73
Less distributions from net investment income.... (0.52) (0.63 ) (0.33) (0.66) (0.68)
Net asset value end of period.................... $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 10.05
TOTAL RETURN (b)................................. 5.30% 4.28% 10.17% (3.18%) 7.43%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Expenses....................................... 0.98%(a) 0.99% 1.04%(a) 0.96% 0.68%(a)
Expenses excluding waivers and/or
reimbursements............................... 0.98%(a) 0.99% 1.05%(a) 1.00% 0.99%(a)
Expenses excluding indirectly paid expenses.... 0.98%(a) -- -- -- --
Net investment income.......................... 6.60%(a) 6.61% 7.07%(a) 6.97% 6.93%(a)
Portfolio turnover rate.......................... 12% 23% 0% 19% 39%
Net assets end of period (thousands)............. $ 17,913 $20,345 $ 22,445 $ 23,706 $ 38,851
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
(d) The Fund changed its fiscal year end from June 30 to April 30 during the
current period.
4
<PAGE>
EVERGREEN U.S. GOVERNMENT FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
JANUARY 11, 1993
TEN MONTHS YEAR SIX MONTHS YEAR (COMMENCEMENT OF
ENDED ENDED ENDED ENDED OPERATIONS) TO
APRIL 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1997 (d) 1996 1995 (c) 1994 1993
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value beginning of period.............. $ 9.42 $ 9.65 $ 9.07 $ 10.05 $ 10.00
Income from investment operations:
Net investment income.......................... 0.46 0.56 0.29 0.61 0.63
Net realized and unrealized gain (loss) on
investments.................................. (0.03) (0.23) 0.58 (0.98) 0.05
Total from investment operations............. 0.43 0.33 0.87 (0.37) 0.68
Less distributions from net investment income.... (0.46) (0.56) (0.29) (0.61) (0.63)
Net asset value end of period.................... $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 10.05
TOTAL RETURN (b)................................. 4.65% 3.50% 9.76% (3.75%) 6.91%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Expenses....................................... 1.73%(a) 1.74% 1.79%(a) 1.54% 1.19%(a)
Expenses excluding waivers and
reimbursements............................... 1.73%(a) 1.74% 1.80%(a) 1.58% 1.50%(a)
Expenses excluding indirectly paid expenses.... 1.73%(a) -- -- -- --
Net investment income.......................... 5.85%(a) 5.85% 6.32%(a) 6.42% 6.44%(a)
Portfolio turnover rate.......................... 12% 23% 0% 19% 39%
Net assets end of period (thousands)............. $142,371 $165,988 $192,490 $195,571 $236,696
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
(d) The Fund changed its fiscal year end from June 30 to April 30 during the
current period.
EVERGREEN U.S. GOVERNMENT FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
SEPTEMBER 2, 1994
TEN MONTHS YEAR SIX MONTHS (DATE OF INITIAL
ENDED ENDED ENDED PUBLIC OFFERING)
APRIL 30, JUNE 30, JUNE 30, TO
1997 (d) 1996 1995 (c) DECEMBER 31, 1994
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value beginning of period............................... $ 9.42 $ 9.65 $ 9.07 $ 9.39
Income from investment operations:
Net investment income........................................... 0.46 0.56 0.29 0.20
Net realized and unrealized gain (loss) on investments.......... (0.03) (0.23 ) 0.58 (0.32)
Total from investment operations.............................. 0.43 0.33 0.87 (0.12)
Less distributions from net investment income..................... (0.46) (0.56 ) (0.29) (0.20)
Net asset value end of period..................................... $ 9.39 $ 9.42 $ 9.65 $ 9.07
TOTAL RETURN (b).................................................. 4.65% 3.50% 9.76% (1.30%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Expenses........................................................ 1.73%(a) 1.74% 1.79%(a) 1.71%(a)
Expenses excluding waivers and reimbursements................... 1.73%(a) 1.74% 1.80%(a) 1.75%(a)
Expenses excluding indirectly paid expenses..................... 1.73%(a) -- -- --
Net investment income........................................... 5.85%(a) 5.87% 6.36%(a) 6.70%(a)
Portfolio turnover rate........................................... 12% 23% 0% 19%
Net assets end of period (thousands).............................. $ 455 $ 649 $ 350 $ 266
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
(d) The Fund changed its fiscal year end from June 30 to April 30 during the
current period.
5
<PAGE>
KEYSTONE STRATEGIC INCOME FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, 1997 YEAR ENDED JULY 31,
(d) 1996 1995 1994 (c) 1993
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value beginning of period............................ $ 6.77 $ 6.89 $ 7.35 $ 7.86 $ 7.02
Income from investment operations:
Net investment income........................................ 0.37 0.54 0.64 0.61 0.69
Net realized and unrealized gain (loss) on investments and
foreign currency related transactions...................... 0.09 (0.09) (0.45) (0.44) 0.89
Total from investment operations........................... 0.46 0.45 0.19 0.17 1.58
Less distributions from:
Net investment income........................................ (0.38) (0.52) (0.60) (0.61) (0.72)
In excess of investment income............................... (0.03) 0 (0.03) (0.03) (0.02)
Tax basis return of capital.................................. 0 (0.05) (0.02) (0.04) 0
Net realized gains on investments and foreign currency
related transactions....................................... 0 0 0 0 0
Total distributions........................................ (0.41) (0.57) (0.65) (0.68) (0.74)
Net asset value end of period.................................. $ 6.82 $ 6.77 $ 6.89 $ 7.35 $ 7.86
TOTAL RETURN (a)............................................... 6.80% 6.84% 3.00% 1.86% 24.13%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Expenses..................................................... 1.28%(c) 1.30% 1.33% 1.32% 1.80%
Expenses excluding reimbursement............................. 1.28%(c) 1.30% 1.33% 1.32% 1.80%
Expenses excluding indirectly paid expenses.................. 1.26%(c) 1.28% -- -- --
Net investment income........................................ 7.28%(c) 8.05% 9.31% 7.79% 9.50%
Portfolio turnover rate........................................ 86% 101% 95% 92% 151%
Net assets end of period (thousands)........................... $58,725 $68,118 $85,970 $105,181 $85,793
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 13, 1987
(COMMENCEMENT
YEAR ENDED JULY 31, OF OPERATIONS) TO
1992 1991 1990 1989 1988 JULY 31, 1987
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA: (CONTINUED)
Net asset value beginning of period.................. $ 6.10 $ 7.17 $ 9.02 $ 9.36 $ 10.04 $ 10.00
Income from investment operations:
Net investment income.............................. 0.78 0.89 1.03 1.10 1.05 0.22
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions..................................... 0.89 (1.01) (1.79) (0.31) (0.65) 0
Total from investment operations................. 1.67 (0.12) (0.76) 0.79 0.40 0.22
Less distributions from:
Net investment income.............................. (0.75) (0.89) (1.04) (1.11) (1.08) (0.18)
In excess of investment income..................... 0 (0.06) (0.05) 0 0 0
Tax basis return of capital........................ 0 0 0 0 0 0
Net realized gains on investments and foreign
currency related transactions.................... 0 0 0 (0.02) 0 0
Total distributions.............................. (0.75) (0.95) (1.09) (1.13) (1.08) (0.18)
Net asset value end of period........................ $ 7.02 $ 6.10 $ 7.17 $ 9.02 $ 9.36 $ 10.04
TOTAL RETURN (a)..................................... 28.73% 0.54% (8.55%) 9.00% 4.49% 2.20%(e)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Expenses........................................... 2.09% 2.00% 2.00% 1.81% 1.28% 1.00%(e)
Expenses excluding reimbursement................... 2.12% 2.25% 2.01% 1.90% 2.08% 6.08%(e)
Expenses excluding indirectly paid expenses........ -- -- -- -- -- --
Net investment income.............................. 11.73% 15.23% 12.91% 12.06% 10.98% 10.12%(e)
Portfolio turnover rate.............................. 95% 82% 36% 73% 46% 13%
Net assets end of period (thousands)................. $70,459 $70,246 $83,106 $138,499 $114,310 $ 8,191
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Annualized.
(d) The Fund changed its fiscal year end from July 31 to April 30 during the
current period.
(e) Annualized for the period from April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
6
<PAGE>
KEYSTONE STRATEGIC INCOME FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
NINE MONTHS ENDED (DATE OF INITIAL
APRIL 30, 1997 YEAR ENDED JULY 31, PUBLIC OFFERING)
(d) 1996 1995 1994 (c) TO JULY 31, 1993
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value beginning of period............... $ 6.81 $ 6.92 $ 7.38 $ 7.89 $ 7.07
Income from investment operations:
Net investment income........................... 0.34 0.50 0.60 0.55 0.24
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions.................................. 0.07 (0.09) (0.47) (0.44) 0.92
Total from investment operations.............. 0.41 0.41 0.13 0.11 1.16
Less distributions from:
Net investment income........................... (0.34) (0.47) (0.55) (0.55) (0.24)
In excess of net investment income.............. (0.03) 0 (0.03) (0.03) (0.10)
Tax basis return of capital..................... 0 (0.05) (0.01) (0.04) 0
Total distributions........................... (0.37) (0.52) (0.59) (0.62) (0.34)
Net asset value end of period..................... $ 6.85 $ 6.81 $ 6.92 $ 7.38 $ 7.89
TOTAL RETURN (a).................................. 6.06% 6.21% 2.12% 1.10% 16.75%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Expenses........................................ 2.04%(c) 2.07% 2.06% 2.07% 2.37%(c)
Expenses excluding indirectly paid expenses..... 2.02%(c) 2.05% -- -- --
Net investment income........................... 6.52%(c) 7.28% 8.58% 7.11% 7.18%(c)
Portfolio turnover rate........................... 86% 101% 95% 92% 151%
Net assets end of period (thousands).............. $ 110,082 $123,389 $149,091 $162,866 $ 35,415
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Annualized.
(d) The Fund changed its fiscal year end from July 31 to April 30 during the
current period.
KEYSTONE STRATEGIC INCOME FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
NINE MONTHS ENDED (DATE OF INITIAL
APRIL 30, 1997 YEAR ENDED JULY 31, PUBLIC OFFERING)
(d) 1996 1995 1994 (b) TO JULY 31, 1993
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value beginning of period................. $ 6.80 $ 6.92 $ 7.37 $ 7.88 $ 7.07
Income from investment operations:
Net investment income............................. 0.33 0.49 0.59 0.55 0.24
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions.................................... 0.08 (0.09) (0.45) (0.44 ) 0.91
Total from investment operations................ 0.41 0.40 0.14 0.11 1.15
Less distributions from:
Net investment income............................. (0.34) (0.47) (0.55) (0.55 ) (0.24)
In excess of net investment income................ (0.03) 0 (0.03) (0.03 ) (0.10)
Tax basis return of capital....................... 0 (0.05) (0.01) (0.04 ) 0
Total distributions............................. (0.37) (0.52) (0.59) (0.62 ) (0.34)
Net asset value end of period....................... $ 6.84 $ 6.80 $ 6.92 $ 7.37 $ 7.88
TOTAL RETURN (a).................................... 6.07% 6.07% 2.27% 1.09% 16.61%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Expenses.......................................... 2.04%(c) 2.07% 2.08% 2.07% 2.25%(c)
Expenses excluding indirectly paid expenses....... 2.03%(c) 2.05% -- -- --
Net investment income............................. 6.52%(c) 7.29% 8.56% 7.09% 7.35%(c)
Portfolio turnover rate............................. 86% 101% 95% 92% 151%
Net assets end of period (thousands)................ $24,304 $ 31,816 $46,221 $59,228 $ 19,706
</TABLE>
(a) Excluding applicable sales charges
(b) Calculation based on average shares outstanding.
(c) Annualized.
(d) The Fund changed its fiscal year end from July 31 to April 30 during the
current period.
7
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DESCRIPTION OF THE FUNDS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective is fundamental and may not be changed
without shareholder approval.
In addition to the investment policies detailed below, each Fund may
employ certain additional investment strategies which are discussed in
"Investment Practices and Restrictions", below. There can be no assurance that
any Fund's investment objective will be achieved.
EVERGREEN U.S. GOVERNMENT FUND
The investment objective of EVERGREEN U.S. GOVERNMENT FUND is to achieve
a high level of current income consistent with stability of principal. The Fund
will invest in debt instruments issued or guaranteed by the U.S. government, its
agencies, or instrumentalities ("U.S. Government Securities"), and is suitable
for conservative investors seeking high current yields plus relative safety. It
permits an investor to participate in a portfolio that benefits from active
management of a blend of securities and maturities to maximize the opportunities
and minimize the risks created by changing interest rates.
In addition to U.S. Government Securities, the Fund may invest in:
Securities representing ownership interests in mortgage pools
("mortgage-backed securities"). The yield and maturity characteristics of
mortgage-backed securities correspond to those of the underlying mortgages, with
interest and principal payments including prepayments (i.e. paying remaining
principal before the mortgage's scheduled maturity) passed through to the holder
of the mortgage-backed securities. The yield and price of mortgage-backed
securities will be affected by prepayments which substantially shorten effective
maturities. Thus, during periods of declining interest rates, prepayments may be
expected to increase, requiring the Fund to reinvest the proceeds at lower
interest rates, making it difficult to effectively lock in high interest rates.
Conversely, mortgage-backed securities may experience less pronounced declines
in value during periods of rising interest rates.
Securities representing ownership interests in a pool of assets
("asset-backed securities"), for which automobile and credit card receivables
are the most common collateral. Because much of the underlying collateral is
unsecured, asset-backed securities are structured to include additional
collateral and/or additional credit support to protect against default. The
Fund's investment adviser evaluates the strength of each particular issue of
asset-backed security, taking into account the structure of the issue and its
credit support. (See "Investment Practices and Restrictions -- Risk
Characteristics of Asset-Backed Securities".)
Collateralized mortgage obligations ("CMOs") issued by single-purpose,
stand-alone entities. A CMO is a mortgage-backed security that manages the risk
of prepayment by separating mortgage pools into short, medium and long term
portions. These portions are generally retired in sequence as the underlying
mortgage loans in the mortgage pool are repaid. Similarly, as prepayments are
made, the portion of CMO first to mature will be retired prior to its maturity,
thus having the same effect as the prepayment of mortgages underlying a
mortgage-backed security. The issuer of a series of CMOs may elect to be treated
as a Real Estate Mortgage Investment Conduit (a "REMIC"), which has certain
special tax attributes. The Fund will invest only in CMOs which are rated AAA by
a nationally recognized statistical rating organization and which may be: (a)
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. Government Securities; or (c) securities in which the
proceeds of the issuance are invested in mortgage securities and payment of the
principal and interest are supported by the credit of an agency or
instrumentality of the U.S. government.
The Fund may invest up to 20% of its total assets in CMOs and commercial
paper which matures in 270 days or less so long as at least two of its ratings
are high quality ratings by nationally recognized statistical rating
organizations. Such ratings would include A-1 or A-2 by Standard & Poor's
Ratings Group ("S&P"), Prime-1 or Prime-2 by Moody's Investors Service
("Moody's"), or F-1 or F-2 by Fitch Investors Service, L.P. and bonds and other
debt securities rated Baa or higher by Moody's or BBB or higher by S&P, or
which, if unrated, are considered to be of comparable quality by the investment
adviser.
8
<PAGE>
Bonds rated Baa by Moody's or BBB by S&P have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to weaken such bonds' prospects for principal and interest payments than
higher rated bonds. However, like the higher rated bonds, these securities are
considered to be investment grade. (See the description of the rating categories
contained in the Statement of Additional Information.)
KEYSTONE STRATEGIC INCOME FUND
The investment objective of KEYSTONE STRATEGIC INCOME FUND is high
current income from interest on debt securities. Secondarily, the Fund considers
potential for growth of capital in selecting securities. The Fund intends to
allocate its assets principally between eligible domestic high yield, high risk
bonds and debt securities of foreign governments and foreign corporations. In
addition, the Fund will, from time to time, allocate a portion of its assets to
U.S. Government Securities. This allocation will be made on the basis of
Keystone's assessment of global opportunities for high income. From time to
time, the Fund may invest 100% of its assets in U.S. or foreign securities.
The Fund may invest in:
Domestic High Yield Bonds. The Fund may invest principally in domestic
high yield, high risk bonds, commonly known as "junk bonds." High-yield bonds in
which the fund may invest include zero coupon bonds and payment-in-kind
securities ("PIKs"), debentures, convertible debentures, fixed, increasing and
adjustable rate bonds, stripped bonds, mortgage bonds, mortgage backed
securities, corporate notes (including convertible notes) with maturities at the
date of issue of at least five years (which may be senior or junior to other
bonds), equipment trust certificates, and units consisting of bonds with stock
or warrants to buy stock attached. For information about the risks of investing
in high-yield bonds, see the section entitled "Investment Practices and
Restrictions."
Foreign Securities. The Fund may invest in debt obligations (which may be
denominated in U.S. dollars or in non-U.S. currencies) issued or guaranteed by
foreign corporations, certain supranational entities (such as the World Bank),
foreign governments, their agencies and instrumentalities, and debt obligations
issued by U.S. corporations denominated in non-U.S. currencies. These debt
obligations may include bonds, debentures, notes and short-term obligations.
U.S. Government Securities. The Fund may invest in U.S. Government
Securities, including zero coupon U.S. Treasury securities, mortgage-backed
securities and money market instruments.
While the Fund may invest in securities of any maturity, it is currently
expected that the Fund will not invest in securities with maturities of more
than 30 years.
Other Eligible Securities
Under ordinary circumstances, the Fund may also invest a limited portion
of its assets in the securities described below. When, in the investment
adviser's opinion, market conditions warrant, the Fund may invest up to 100% of
its assets for temporary defensive purposes in the money market securities
described below.
Equity Securities. The Fund may invest in preferred stocks, including
adjustable rate and convertible preferred stocks, common stocks and other equity
securities, including convertible securities and warrants, which may be used to
create other permissible investments. Such investments must be consistent with
the Fund's primary objective of seeking a high level of current income or be
acquired as part of a unit combining income and equity securities. In addition,
the Fund may invest in limited partnerships, including master limited
partnerships.
Money Market Securities. The Fund may invest in the following types of
money market securities: (1) obligations issued or guaranteed by the U.S.
government its agencies or instrumentalities of the U.S. government; (2)
commercial paper, including master demand notes, that at the date of investment
is rated A-1, the highest grade by S&P, Prime-1, the highest grade by Moody's,
or, if not rated by such services, is issued by a company that at the date of
investment has an outstanding issue rated A or better by S&P or Moody's; (3)
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in assets that
are members of the Federal Deposit Insurance Corporation, including U.S.
branches of foreign banks and foreign branches of U.S. banks; and (4)
obligations of U.S. corporations that at the date of investment are rated A or
better by S&P or Moody's.
9
<PAGE>
INVESTMENT PRACTICES AND RESTRICTIONS
Risk Factors. Bond prices move inversely to interest rates, i.e. as interest
rates decline the values of the bonds increase, and vice versa. The longer the
maturity of a bond, the greater the exposure to market price fluctuations. The
same market factors are reflected in the share price or net asset value of bond
funds which will vary with interest rates. In addition, certain of the
obligations in which each Fund may invest may be variable or floating rate
instruments, which may involve a conditional or unconditional demand feature,
and may include variable amount master demand notes. While these types of
instruments may, to a certain degree, offset the risk to principal associated
with rising interest rates, they would not be expected to appreciate in a
falling interest rate environment.
Defensive Investments. The Funds may invest without limitation in high quality
money market instruments, such as notes, certificates of deposit or bankers'
acceptances, or U.S. government securities if, in the opinion of each Fund's
investment adviser, market conditions warrant a temporary defensive investment
strategy.
Downgrades. If any security invested in by any of the Funds loses its rating or
has its rating reduced after the Fund has purchased it, the Fund is not required
to sell or otherwise dispose of the security, but may consider doing so.
Repurchase Agreements. The Funds may invest in repurchase agreements. A
repurchase agreement is an agreement by which a Fund purchases a security
(usually U.S. Government Securities) for cash and obtains a simultaneous
commitment from the seller (usually a bank or broker/dealer) to repurchase the
security at an agreed-upon price and specified future date. The repurchase price
reflects an agreed-upon interest rate for the time period of the agreement. The
Funds' risk is the inability of the seller to pay the agreed-upon price on the
delivery date. However, this risk is tempered by the ability of the Fund to sell
the security in the open market in the case of a default. In such a case, a Fund
may incur costs in disposing of the security which would increase Fund expenses.
The Funds' investment adviser will monitor the creditworthiness of the firms
with which the Funds enter into repurchase agreements.
When-Issued and Delayed Delivery Transactions. The Funds may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which a Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause a
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, a Fund may pay more or less than the market value of the securities
on the settlement date. The Funds may dispose of a commitment prior to
settlement if the investment adviser deems it appropriate to do so. In addition,
the Funds may enter into transactions to sell their purchase commitments to
third parties at current market values and simultaneously acquire other
commitments to purchase similar securities at later dates. The Funds may realize
short-term profits or losses upon the sale of such commitments.
Lending of Portfolio Securities. In order to generate additional income, the
Funds may lend portfolio securities on a short-term or long-term basis to
broker/dealers, banks, or other institutional borrowers of securities. The Funds
will only enter into loan arrangements with creditworthy borrowers and will
receive collateral in the form of cash or U.S. Government Securities equal to at
least 100% of the value of the securities loaned. As a matter of fundamental
investment policy which cannot be changed without shareholder approval, the
Funds will not lend any of their assets except portfolio securities up to 15%
(in the case of KEYSTONE STRATEGIC INCOME FUND) or one-third (in the case of
EVERGREEN U.S. GOVERNMENT FUND) of the value of their total assets. There is the
risk that when lending portfolio securities, the securities may not be available
to a Fund on a timely basis and the Fund may, therefore, lose the opportunity to
sell the securities at a desirable price. In addition, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Options and Futures. The Funds may engage in options and futures transactions.
Options and futures transactions are intended to enable a Fund to manage market,
interest rate or exchange rate risk, and the Funds do not use these transactions
for speculation or leverage.
The Funds may attempt to hedge all or a portion of their portfolios
through the purchase of both put and call options on their portfolio securities
and listed put options on financial futures contracts for portfolio securities.
KEYSTONE STRATEGIC INCOME FUND may also purchase call options on financial
futures contracts. The Funds may also write covered call options on their
portfolio securities to attempt to increase their current income. The Funds will
maintain their positions in securities, option rights, and segregated cash
subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out only on an exchange which provides
a secondary market for an option of the same series.
10
<PAGE>
The Funds may write (i.e., sell) covered call and put options. By writing
a call option, a Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price. By
writing a put option, a Fund becomes obligated during the term of the option to
purchase the securities underlying the option at the exercise price if the
option is exercised. The Funds also may write straddles (combinations of covered
puts and calls on the same underlying security). The Funds may only write
"covered" options. This means that so long as a Fund is obligated as the writer
of a call option, it will own the underlying securities subject to the option
or, in the case of call options on U.S. Treasury bills, the Fund might own
substantially similar U.S. Treasury bills. A Fund will be considered "covered"
with respect to a put option it writes if, so long as it is obligated as the
writer of the put option, it deposits and maintains with its custodian in a
segregated account liquid assets having a value equal to or greater than the
exercise price of the option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be realized
on the underlying securities alone. The Funds receive a premium from writing a
call or put option which they retain whether or not the option is exercised. By
writing a call option, the Funds might lose the potential for gain on the
underlying security while the option is open, and by writing a put option the
Funds might become obligated to purchase the underlying securities for more than
their current market price upon exercise.
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of instrument called for in the
contract ("going short"), and the buyer, who agrees to take delivery of the
instrument ("going long") at a certain time in the future. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government. If a Fund would enter into financial futures contracts
directly to hedge its holdings of fixed income securities, it would enter into
contracts to deliver securities at an undetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding period. A Fund
would "go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates.
The Funds may also enter into currency and other financial futures
contracts and write options on such contracts. The Funds intend to enter into
such contracts and related options for hedging purposes. The Funds will enter
into futures on securities, currencies, or index-based futures contracts in
order to hedge against changes in interest or exchange rates or securities
prices. A futures contract on securities or currencies is an agreement to buy or
sell securities or currencies during a designated month at whatever price exists
at that time. A futures contract on a securities index does not involve the
actual delivery of securities, but merely requires the payment of a cash
settlement based on changes in the securities index. The Funds do not make
payment or deliver securities upon entering into a futures contract. Instead,
they put down a margin deposit, which is adjusted to reflect changes in the
value of the contract and which remains in effect until the contract is
terminated.
The Funds may sell or purchase currency and other financial futures
contracts. When a futures contract is sold by a Fund, the profit on the contract
will tend to rise when the value of the underlying securities or currencies
declines and to fall when the value of such securities or currencies increases.
Thus, the Funds sell futures contracts in order to offset a possible decline in
the profit on their securities or currencies. If a futures contract is purchased
by a Fund, the value of the contract will tend to rise when the value of the
underlying securities or currencies increases and to fall when the value of such
securities or currencies declines.
The Funds may enter into closing purchase and sale transactions in order
to terminate a futures contract and may buy or sell put and call options for the
purpose of closing out their options positions. The Funds' ability to enter into
closing transactions depends on 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. As a result, there
can be no assurance that the Funds will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Funds are not able to enter into an offsetting transaction, the Funds will
continue to be required to maintain the margin deposits on the contract and to
complete the contract according to its terms, in which case the Funds would
continue to bear market risk on the transaction.
Risk Characteristics of Options and Futures. Although options and futures
transactions are intended to enable the Funds to manage market, exchange, or
interest rate risks, these investment devices can be highly volatile, and the
Funds' use of them can result in poorer performance (i.e., the Funds' returns
may be reduced). A Fund's attempt to use such investment devices for hedging
purposes may not be successful. Successful futures strategies require the
ability to predict future movements in securities prices, interest rates and
other economic factors. When the Funds use financial futures contracts and
options on financial futures contracts as hedging devices, there is a risk
11
<PAGE>
that the prices of the securities subject to the financial futures contracts and
options on financial futures contracts may not correlate perfectly with the
prices of the securities in the Funds' portfolios. This may cause the financial
futures contract and any related options to react to market changes differently
than the portfolio securities. In addition, each Fund's investment adviser could
be incorrect in its expectations and forecasts about the direction or extent of
market factors, such as interest rates, securities price movements, and other
economic factors. Even if a Fund's investment adviser correctly predicts
interest rate movements, a hedge could be unsuccessful if changes in the value
of a Fund's futures position did not correspond to changes in the value of its
investments. In these events, the Funds may lose money on the financial futures
contracts or the options on financial futures contracts. It is not certain that
a secondary market for positions in financial futures contracts or for options
on financial futures contracts will exist at all times. Although each Fund's
investment adviser will consider liquidity before entering into financial
futures contracts or options on financial futures contracts transactions, there
is no assurance that a liquid secondary market on an exchange will exist for any
particular financial futures contract or option on a financial futures contract
at any particular time. The Funds' ability to establish and close out financial
futures contracts and options on financial futures contract positions depends on
this secondary market. If a Fund is unable to close out its position due to
disruptions in the market or lack of liquidity, the Fund may lose money on the
futures contract or option, and the losses to the Fund could be significant.
Zero-Coupon and Stripped Securities. The Funds may invest in zero-coupon and
stripped securities. Zero-coupon securities in which the Funds may invest are
debt obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of the Funds may fluctuate over a greater range than shares of other
mutual funds investing in securities making current distributions of interest
and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment banking firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities". Under the
STRIPS program, the Funds will be able to have their beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidence
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
Foreign Investments. KEYSTONE STRATEGIC INCOME FUND may invest in foreign
securities, which may involve additional risks. Specifically, they may be
affected by the strength of foreign currencies relative to the U.S. dollar, or
by political or economic developments in foreign countries. Accounting
procedures and government supervision may be less stringent than those
applicable to U.S. companies. There may be less publicly available information
about a foreign company than about a U.S. company. Foreign markets may be less
liquid or more volatile than U.S. markets and may offer less protection to
investors. It may also be more difficult to enforce contractual obligations
abroad than would be the case in the United States because of differences in the
legal systems. Foreign securities
12
<PAGE>
may be subject to foreign taxes, which may reduce yield, and may be less
marketable than comparable U.S. securities. All these factors are considered by
each Fund's investment adviser before making any of these types of investments.
Risk Characteristics of Asset-Backed Securities. The Funds may invest in
asset-backed securities. Asset-backed securities are created by the grouping of
certain governmental, government-related and private loans, receivables and
other lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities and mortgage backed securities are
generally subject to higher prepayment risks than most other types of debt
instruments. Prepayment risks on mortgage securities tend to increase during
periods of declining mortgage interest rates, because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Depending upon
market conditions, the yield that the Funds receive from the reinvestment of
such prepayments, or any scheduled principal payments, may be lower than the
yield on the original mortgage security. As a consequence, mortgage securities
may be a less effective means of "locking in" interest rates than other types of
debt securities having the same stated maturity and may also have less potential
for capital appreciation. For certain types of asset pools, such as CMOs,
prepayments may be allocated to one tranche of securities ahead of other
tranches, in order to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Funds to the extent that
the prepaid mortgage securities were purchased at a market premium over their
stated amount. Conversely, the prepayment of mortgage securities purchased at a
market discount from their stated principal amount will accelerate the
recognition of interest income by the Funds which would be taxed as ordinary
income when distributed to the shareholders. The credit characteristics of
asset-backed securities also differ in a number of respects from those of
traditional debt securities. The credit quality of most asset-backed securities
depends primarily upon the credit quality of the assets underlying such
securities, how well the entity issuing the securities is insulated from the
credit risk of the originator or any other affiliated entities, and the amount
and quality of any credit enhancement to such securities.
Risk Characteristics of High Yield Bonds. KEYSTONE STRATEGIC INCOME FUND may
invest in high yield bonds. While investment in high yield bonds provides
opportunities to maximize return over time, investors should be aware of the
following risks associated with high yield bonds:
(1) High yield bonds are rated below investment grade, i.e., BB or lower
by S&P or Ba or lower by Moody's. Securities so rated are considered
predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments.
(2) The lower ratings of these securities reflect a greater possibility
that adverse changes in the financial condition of the issuer or in general
economic conditions, or both, or an unanticipated rise in interest rates may
impair the ability of the issuer to make payments of interest and principal,
especially if the issuer is highly leveraged. Such issuer's ability to meet its
debt obligations may also be adversely affected by specific corporate
developments or the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. Also, an economic
downturn or an increase in interest rates may increase the potential for default
by the issuers of these securities.
(3) Their value may be more susceptible to real or perceived adverse
economic, company or industry conditions and publicity than is the case for
higher quality securities.
(4) Their value, like those of other fixed income securities, fluctuates
in response to changes in interest rates, generally rising when interest rates
decline and falling when interest rates rise. For example, if interest rates
increase after a fixed income security is purchased, the security, if sold prior
to maturity, may return less than its cost. The prices of below-investment grade
bonds, however, are generally less sensitive to interest rate changes than the
prices of higher-rated bonds, but are more sensitive to adverse or positive
economic changes or individual corporate developments.
(5) The secondary market for such securities may be less liquid at
certain times than the secondary market for higher quality debt securities,
which may adversely effect (i) the market price of the security, (ii) the
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Fund's ability to dispose of particular issues and (iii) the Fund's ability to
obtain accurate market quotations for purposes of valuing its assets.
(6) Zero coupon bonds and PIKs involve additional special considerations.
For example, zero coupon bonds pay no interest to holders prior to maturity of
interest. PIKs are debt obligations that provide that the issuer may, at its
option, pay interest on such bonds in cash or in the form of additional debt
obligations. Such investments may experience greater fluctuation in value due to
changes in interest rates than debt obligations that pay interest currently.
Even though these investments do not pay current interest in cash, the Fund is,
nonetheless, required by tax laws to accrue interest income on such investments
and to distribute such amounts at least annually to shareholders. Thus, the Fund
could be required at times to liquidate investments in order to fulfill its
intention to distribute substantially all of its net income as dividends. The
Fund will not be able to purchase additional income producing securities with
cash used to make such distributions, and its current income ultimately may be
reduced as a result.
The generous income sought by the Fund is ordinarily associated with
securities in the lower rating categories of the recognized rating agencies or
with securities that are unrated. Such securities are generally rated BB or
lower by S&P or Ba or lower by Moody's. The Fund may invest in securites that
are rated as low as D by S&P or C- by Moody's. The Fund may also invest in
unrated securities that, in the investment adviser's judgment, offer comparable
yields and risks as securities that are rated. It is possible for securities
rated D or C-, respectively, to have defaulted on payments of principal and/or
interest at the time of investment. The Statement of Additional Information
describes these rating categories. The Fund intends to invest in D rated debt
only in cases when, in the investment adviser's judgment, there is a distinct
prospect of improvement in the issuer's financial position as a result of the
completion of reorganization or otherwise.
The investment adviser considers the ratings of S&P and Moody's assigned
to various securities, but does not rely solely on these ratings because (1) S&P
and Moody's assigned ratings are based largely on historical financial data and
may not accurately reflect the current financial outlook of companies; and (2)
there can be large differences among the current financial conditions of issuers
within the same category.
The following table shows the weighted average percentages of the Fund's
assets invested at the end of each month during the nine-month fiscal period
ended April 30, 1997 in securities assigned to the various rating categories and
in unrated securities determined by the investment adviser to be of comparable
quality. The rated asset percentages shown have received equivalent ratings from
S&P and Moody's except where ratings are "split," i.e., different between S&P
and Moody's. In such instances, the higher of the two ratings is shown and the
lower rating is no more than one grade below the higher one. For the purposes of
the table, only the S&P rating system is used. Since the percentages in this
table are based on month-end averages throughout the fiscal period, they do not
reflect the Fund's holdings at any one point in time. The percentages in each
category may be higher or lower on any day than those shown in the table below.
<TABLE>
<CAPTION>
*UNRATED SECURITIES
OF COMPARABLE
RATED SECURITIES QUALITY AS
AS PERCENTAGE OF PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
<S> <C> <C>
AAA 24.93% 0.00%
AA 10.72% 0.00%
A 3.06% 0.00%
BBB 0.11% 0.00%
BBB split 0.45% N/A
BB 8.97% 0.39%
BB split 11.18% N/A
B 21.63% 5.82%
B split 0.36% N/A
CCC 0.00% 0.01%
D 0.00% 1.03%
Unrated* 7.25%
U.S. Governments,
equities and others 11.34%
TOTAL 100.00%
</TABLE>
14
<PAGE>
Since the Fund takes an aggressive approach to investing, the investment
adviser attempts to maximize the return by controlling risk through
diversification, credit analysis, review of sector and industry trends, interest
rate forecasts and economic analysis. The investment adviser's analysis of
securities focuses on factors such as interest or dividend coverage, asset
values, earning prospects and the quality of management of the company. In
making investment recommendations, the investment adviser also considers current
income, potential for capital appreciation, maturity structure, quality
guidelines, coupon structure, average yield, yield to maturity and the
percentage of zero coupon bonds, PIKs and non-accruing items in the Fund's
portfolio.
Income and yields on high yield, high risk securities, as on all
securities, will fluctuate over time.
Borrowing. As a matter of fundamental policy, the Funds may not borrow money
except as a temporary measure to facilitate redemption requests or for
extraordinary or emergency purposes. The proceeds from borrowings may be used to
facilitate redemption requests which might otherwise require the untimely
disposition of portfolio securities. The specific limits applicable to borrowing
by each Fund are set forth in the Statement of Additional Information.
Restricted and Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities. Illiquid securities include certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISERS
The management of each Fund is supervised by the Trustees of the Trust
under which the Fund has been established ("Trustees"). The Capital Management
Group ("CMG") of First Union National Bank ("FUNB") serves as investment adviser
to EVERGREEN U.S. GOVERNMENT FUND. FUNB is a subsidiary of First Union
Corporation ("First Union"), the sixth largest bank holding company in the
United States.
Keystone Investment Management Company ("Keystone") has been retained by
KEYSTONE STRATEGIC INCOME FUND to serve as investment adviser. Keystone has
provided investment advisory and management services to investment companies and
private accounts since it was organized in 1932. Keystone is a subsidiary of
FUNB.
First Union is headquartered in Charlotte, North Carolina, and had $143
billion in consolidated assets as of June 30, 1997. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the United States. CMG, Keystone and Evergreen Asset
Management Corporation ("Evergreen Asset"), a wholly owned subsidiary of FUNB,
manage or otherwise oversee the investment of over $66 billion in assets as of
June 30, 1997, belonging to a wide range of clients, including the Evergreen
Keystone Funds. First Union Brokerage Services, Inc. ("FUBS"), a wholly-owned
subsidiary of FUNB, is a registered broker-dealer that is principally engaged in
providing retail brokerage services consistent with its federal banking
authorizations. First Union Capital Markets Corp., a wholly-owned subsidiary of
First Union, is a registered broker-dealer principally engaged in providing,
consistent with its federal banking authorizations, private placement,
securities dealing, and underwriting services.
CMG manages investments and supervises the daily business affairs of
EVERGREEN U.S. GOVERNMENT FUND and, as compensation therefor, is entitled to
receive an annual fee equal to 0.50 of 1% of the Fund's average daily net
assets.
Keystone acts as investment adviser to KEYSTONE STRATEGIC INCOME FUND and
manages the Fund's investments, provides various administrative services and
supervises the Fund's daily business affairs, subject to the authority of the
Trustees. As payment for its services, Keystone is entitled to receive from
KEYSTONE STRATEGIC INCOME FUND a fee, calculated on annual basis, equal to 2.0%
of gross dividend and interest income of the Fund plus 0.50% of the first
$100,000,000 of the aggregate net asset value of the shares of the Fund, plus
0.45% of the next $100,000,000, plus 0.40% of the next $100,000,000, plus 0.35%
of the next $100,000,000, plus 0.30% of the next $100,000,000, plus 0.25% of
amounts over $500,000,000, computed as of the close of business each business
day and paid monthly.
15
<PAGE>
The total annualized operating expenses of each Fund for the fiscal
period ended April 30, 1997, expressed as a percentage of average net assets on
an annual basis, are set forth in the section entitled "Financial Highlights."
Such expenses reflect all voluntary expense reimbursements which may be revised
or terminated at any time.
PORTFOLIO MANAGERS
Rollin C. Williams, a Vice President of FUNB, has been the Portfolio
Manager of EVERGREEN U.S. GOVERNMENT FUND since its inception in 1992. Mr.
Williams, who has over 28 years investment management experience, was Head of
Fixed Income Investments at Dominion Trust Company from 1988 until its
acquisition by First Union.
The Portfolio Manager of KEYSTONE STRATEGIC INCOME FUND is Prescott B.
Crocker. Mr. Crocker is a Senior Vice President, Senior Portfolio Manager and
Head of the High Yield Bond Team at Keystone. Mr. Crocker joined Keystone in
1997 and initially served as the manager of the domestic high yield bond portion
of the Fund's portfolio. From 1993 until he joined Keystone, Mr. Crocker held
various positions at Boston Security Counsellors, including President and Chief
Investment Officer, and was Managing Director and Portfolio Manager at Northstar
Investment Management. Mr. Crocker has 25 years of experience in fixed income
investment management.
ADMINISTRATOR
Evergreen Keystone Investment Services, Inc. ("EKIS") serves as
administrator to EVERGREEN U.S. GOVERNMENT FUND, subject to the supervision and
control of the Trustees of the Evergreen Investment Trust. As administrator EKIS
provides facilities, equipment and personnel to the EVERGREEN U.S. GOVERNMENT
FUND and is entitled to receive an administration fee from the Fund based on the
aggregate average daily net assets of all the mutual funds for which CMG,
Evergreen Asset or Keystone serve as investment adviser, calculated in
accordance with the following schedule:
<TABLE>
<CAPTION>
Administration Fee
<S> <C>
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% on assets in excess of $30 billion
</TABLE>
EKIS also provides facilities, equipment and personnel to KEYSTONE
STRATEGIC INCOME FUND on behalf of the Fund's investment adviser.
SUB-ADMINISTRATOR
BISYS Fund Services, Inc. ("BISYS"), an affiliate of Evergreen Keystone
Distributor, Inc. ("EKD"), distributor for the Evergreen Keystone Funds, serves
as sub-administrator to the Funds and is entitled to receive a fee based on the
aggregate average daily net assets of all the mutual funds for which CMG,
Evergreen Asset or Keystone serve as investment adviser, calculated in
accordance with the following schedule:
<TABLE>
<CAPTION>
Sub-Administration Fee
<S> <C>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
</TABLE>
The total assets of the mutual funds for which FUNB affiliates serve as
investment advisers were approximately $30.5 billion as of June 30, 1997.
DISTRIBUTION PLANS AND AGREEMENTS
Distribution Plans. Each Fund's Class A, Class B and Class C shares pay for the
expenses associated with the distribution of its shares according to a
distribution plan that it has adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act") (each a "Plan" or collectively
the "Plans"). Under the Plans, each Fund may incur distribution-related and
shareholder servicing-related expenses which are based upon a maximum annual
rate as a percent of each Fund's average daily net assets attributable to the
Class, as follows:
16
<PAGE>
<TABLE>
<S> <C>
Class A shares 0.75%, currently limited to 0.25%
Class B shares 1.00%
Class C shares 1.00%
</TABLE>
Of the amount that each Class may pay under its respective Plan, up to
0.25% may constitute a service fee to be used to compensate organizations, which
may include each Fund's investment adviser or its affiliates, for personal
services rendered to shareholders and/or the maintenance of shareholder
accounts. The Funds may not pay any distribution or services fees during any
fiscal period in excess of the amounts set forth above.
Distribution Agreements. Each Fund has also entered into a distribution
agreement (each a "Distribution Agreement" or collectively the "Distribution
Agreements") with EKD. Pursuant to the Distribution Agreements, each Fund will
compensate EKD for its services as distributor based upon the maximum annual
rate as a percent of each Fund's average daily net assets attributable to the
Class, as follows:
<TABLE>
<S> <C>
Class A shares 0.25%
Class B shares 1.00%
Class C shares 1.00%
</TABLE>
The Distribution Agreements provide that EKD will use the distribution
fee received from a Fund for payments (i) to compensate broker-dealers or other
persons for distributing shares of the Fund, including interest and principal
payments made in respect of amounts paid to broker-dealers or other persons that
have been financed (EKD may assign its rights to receive compensation under the
Plans to secure such financings), (ii) to otherwise promote the sale of shares
of the Fund, and (iii) to compensate broker-dealers, depository institutions and
other financial intermediaries for providing administrative, accounting and
other services with respect to the Fund's shareholders. FUNB or its affiliates
may finance the payments made by EKD to compensate broker-dealers or other
persons for distributing shares of the Fund.
In the case of KEYSTONE STRATEGIC INCOME FUND the compensation paid to
EKD under its Distribution Agreement is only with respect to shares of the Fund
sold on or after December 1, 1996. In consideration of the services rendered by
the distributor of the Class B and Class C shares of KEYSTONE STRATEGIC INCOME
FUND sold prior to December 1, 1996, namely EKIS, the Fund's Trustees have
determined to continue the payments called for under the distribution agreements
in effect between the Fund and EKIS with respect to the assets of the Fund
represented by such shares.
Since EKD's compensation under the Distribution Agreements is not
directly tied to the expenses incurred by EKD, the amount of compensation
received by it under the Distribution Agreements during any year may be more or
less than its actual expenses and may result in a profit to EKD. Distribution
expenses incurred by EKD in one fiscal year that exceed the level of
compensation paid to EKD for that year may be paid from distribution fees
received from a Fund in subsequent fiscal years.
The Plans are in compliance with the Conduct Rules of the National
Association of Securities Dealers, Inc. which effectively limit the annual
asset-based sales charges and service fees that a mutual fund may pay on a class
of shares to an annual rate of 0.75% and 0.25%, respectively, of the average
aggregate annual net assets attributable to that class. The rules also limit the
aggregate of all front-end, deferred and asset-based sales charges imposed with
respect to a class of shares by a mutual fund that also charges a service fee to
6.25% of cumulative gross sales of shares of that class, plus interest on the
unpaid amount at the prime rate plus 1% per annum.
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
You may purchase shares of any of the Funds through broker-dealers, banks
or other financial intermediaries, or directly through EKD. In addition, you may
purchase shares of any of the Funds by mailing to that Fund, c/o Evergreen
Keystone Service Company ("EKSC"), P.O. Box 2121, Boston, Massachusetts 02106-
2121, a completed Application and a check payable to the Fund. You may also
telephone 1-800-343-2898 to obtain the number of an account to which you can
wire or electronically transfer funds and then send in a completed Application.
The minimum initial investment is $1,000, which may be waived in certain
situations. Subsequent
17
<PAGE>
investments in any amount may be made by check, by wiring federal funds, by
direct deposit or by an electronic funds transfer.
There is no minimum amount for subsequent investments. Investments of $25
or more are allowed under the Systematic Investment Plan. See the Application
for more information. Only Class A, Class B and Class C shares are offered
through this Prospectus (see "General Information" -- "Other Classes of
Shares").
Class A Shares-Front-End Sales Charge Alternative. You may purchase Class A
shares of each Fund at net asset value plus an initial sales charge on purchases
under $1,000,000. You may purchase $1,000,000 or more of Class A shares without
a front-end sales charge; however, a contingent deferred sales charge ("CDSC")
equal to the lesser of 1% of the purchase price or the redemption value will be
imposed on shares redeemed during the month of purchase and the 12- month period
following the month of purchase. The schedule of charges for Class A shares is
as follows:
Initial Sales Charge
<TABLE>
<CAPTION>
As a % of the Net As a % of the Commission to Dealer/Agent
Amount of Purchase Amount Invested Offering Price as a % of Offering Price
<S> <C> <C> <C>
Less than $ 50,000 4.99% 4.75% 4.25%
$ 50,000 - $ 99,999 4.71% 4.50% 4.25%
$ 100,000 - $ 249,999 3.90% 3.75% 3.25%
$ 250,000 - $ 499,999 2.56% 2.50% 2.00%
$ 500,000 - $ 999,999 2.04% 2.00% 1.75%
1.00% of the amount invested up
to $2,999,999;
.50% of the amount invested over
$1,000,000 or more None None $2,999,999, up to $4,999,999;
and
.25% of the excess over
$4,999,999
</TABLE>
No front-end sales charges are imposed on Class A shares purchased by (a)
institutional investors, which may include bank trust departments and registered
investment advisers; (b) investment advisers, consultants or financial planners
who place trades for their own accounts or the accounts of their clients and who
charge such clients a management, consulting, advisory or other fee; (c) clients
of investment advisers or financial planners who place trades for their own
accounts if the accounts are linked to the master account of such investment
advisers or financial planners on the books of the broker-dealer through whom
shares are purchased; (d) institutional clients of broker-dealers, including
retirement and deferred compensation plans and the trusts used to fund these
plans, which place trades through an omnibus account maintained with a Fund by
the broker-dealer; (e) shareholders of record on October 12, 1990 in any series
of Evergreen Investment Trust in existence on that date, and the members of
their immediate families; (f) current and retired employees of FUNB and its
affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Funds, and members of the immediate families of
such employees; (g) and upon the initial purchase of an Evergreen Keystone fund
by investors reinvesting the proceeds from a redemption within the preceding
thirty days of shares of other mutual funds, provided such shares were initially
purchased with a front-end sales charge or subject to a CDSC. Certain
broker-dealers or other financial institutions may impose a fee on transactions
in shares of the Funds.
Class A shares may also be purchased at net asset value by a corporation
or certain other qualified retirement plan or a non-qualified deferred
compensation plan or a Title I tax sheltered annuity or TSA plan sponsored by an
organization having 100 or more eligible employees, or a TSA plan sponsored by a
public education entity having 5,000 or more eligible employees.
In connection with sales made to plans of the type described in the
preceding sentence EKD will pay broker-dealers and others concessions at the
rate of 0.50% of the net asset value of the shares purchased. These payments are
subject to reclaim in the event the shares are redeemed within twelve months
after purchase.
When Class A shares are sold, EKD will normally retain a portion of the
applicable sales charge and pay the balance to the broker-dealer or other
financial intermediary through whom the sale was made. EKD may also pay fees to
banks from sales charges for services performed on behalf of the customers of
such banks in connection with the purchase of shares of the Funds. In addition
to compensation paid at the time of sale, entities whose clients have purchased
Class A shares may receive a trailing commission equal to 0.25% of the average
daily value on an annual basis of Class A shares held by their clients. Certain
purchases of Class A shares may
18
<PAGE>
qualify for reduced sales charges in accordance with a Fund's Concurrent
Purchases, Rights of Accumulation, Letter of Intent, certain Retirement Plans
and Reinstatement Privilege. Consult the Application for additional information
concerning these reduced sales charges.
Class B Shares -- Deferred Sales Charge Alternative. You may purchase Class B
shares at net asset value without an initial sales charge. However, you may pay
a CDSC if you redeem shares within six years after the month of purchase. The
amount of the CDSC (expressed as a percentage of the lesser of the current net
asset value or original cost) will vary according to the number of years from
the month of purchase of Class B shares as set forth below.
<TABLE>
<CAPTION>
CDSC
Redemption Timing Imposed
<S> <C>
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%
No CDSC is imposed on amounts redeemed thereafter.
</TABLE>
The CDSC is deducted from the amount of the redemption and is paid to EKD
or its predecessor. Class B shares are subject to higher distribution and/or
shareholder service fees than Class A shares for a period of seven years after
the month of purchase (after which it is expected that they will convert to
Class A shares without imposition of a front-end sales charge). The higher fees
mean a higher expense ratio, so Class B shares pay correspondingly lower
dividends and may have a lower net asset value than Class A shares. The Funds
will not normally accept any purchase of Class B shares in the amount of
$250,000 or more.
At the end of the period ending seven years after the end of the calendar
month in which the shareholder's purchase order was accepted, Class B shares
will automatically convert to Class A shares and will no longer be subject to a
higher distribution services fee (and, with respect to EVERGREEN U.S. GOVERNMENT
FUND, the Shareholder Service Plan Fee) imposed on Class B shares. Such
conversion will be on the basis of the relative net asset values of the two
Classes, without the imposition of any sales load, fee or other charge. The
purpose of the conversion feature is to reduce the distribution services fee
paid by holders of Class B shares that have been outstanding long enough for the
Distributor to have been compensated for the expenses associated with the sale
of such shares.
Class C Shares -- Level-Load Alternative. Class C shares are only offered
through broker-dealers who have special distribution agreements with EKD. You
may purchase Class C shares at net asset value without any initial sales charge
and, therefore, the full amount of your investment will be used to purchase Fund
shares. However, you will pay a 1.00% CDSC, if you redeem shares during the
month of purchase and the 12-month period following the month of purchase. No
CDSC is imposed on amounts redeemed thereafter. Class C shares incur higher
distribution and/or shareholder service fees than Class A shares but, unlike
Class B shares, do not convert to any other class of shares of a Fund. The
higher fees mean a higher expense ratio, so Class C shares pay correspondingly
lower dividends and may have a lower net asset value than Class A shares. The
Funds will not normally accept any purchase of Class C shares in the amount of
$500,000 or more. No CDSC will be imposed on Class C shares purchased by
institutional investors, and through employee benefit and savings plans eligible
for the exemption from front-end sales charges described under "Class A
Shares-Front End Sales Charge Alternative," above. Broker-dealers and other
financial intermediaries whose clients have purchased Class C shares may receive
a trailing commission equal to 0.75% of the average daily value of such shares
on an annual basis held by their clients more than one year from the date of
purchase. The payment of trailing commissions will commence immediately with
respect to shares eligible for exemption from the CDSC normally applicable to
Class C shares.
Contingent Deferred Sales Charge. Shares obtained from dividend or distribution
reinvestment are not subject to a CDSC. Any CDSC imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net asset value at the time of
purchase of such shares.
No CDSC is imposed on a redemption of shares of the Fund in the event of
(1) death or disability of the shareholder; (2) a lump-sum distribution from a
401(k) plan or other benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder
19
<PAGE>
is at least 59 1/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000; (5) automatic withdrawals under
the Systematic Withdrawal Plan of up to 1.00% per month of the shareholder's
initial account balance; (6) withdrawals consisting of loan proceeds to a
retirement plan participant; (7) financial hardship withdrawals made by a
retirement plan participant; or (8) withdrawals consisting of returns of excess
contributions or excess deferral amounts made to a retirement plan participant.
The Funds may also sell Class A, Class B or Class C shares at net asset
value without any initial sales charge or a CDSC to certain Directors, Trustees,
officers and employees of the Funds, Keystone, FUNB, Evergreen Asset, EKD and
certain of their affiliates, and to members of the immediate families of such
persons, to registered representatives of firms with dealer agreements with EKD,
and to a bank or trust company acting as a trustee for a single account.
How the Funds Value their Shares. The net asset value of each Class of shares of
a Fund is calculated by dividing the value of the amount of the Fund's net
assets attributable to that Class by the number of outstanding shares of that
Class. Shares are valued each day the New York Stock Exchange (the "Exchange")
is open as of the close of regular trading (currently 4:00 p.m. Eastern time).
The securities in a Fund are valued at their current market value determined on
the basis of market quotations or, if such quotations are not readily available,
such other methods as the Trustees believe would accurately reflect fair value.
Non-dollar denominated securities will be valued as of the close of the Exchange
at the closing price of such securities in their principal trading markets.
General. The decision as to which Class of shares is more beneficial to you
depends on the amount of your investment and the length of time you will hold
it. If you are making a large investment, thus qualifying for a reduced sales
charge, you might consider Class A shares. If you are making a smaller
investment, you might consider Class B shares since 100% of your purchase is
invested immediately and since such shares will convert to Class A shares, which
incur lower ongoing distribution and/or shareholder service fees, after seven
years. If you are unsure of the time period of your investment, you might
consider Class C shares since there are no initial sales charges and, although
there is no conversion feature, the CDSC only applies to redemptions made during
the first year. Consult your financial intermediary for further information. The
compensation received by dealers and agents may differ depending on whether they
sell Class A, Class B or Class C shares. There is no size limit on purchases of
Class A shares.
In addition to the discount or commission paid to broker-dealers, EKD may
from time to time pay to broker-dealers additional cash or other incentives that
are conditioned upon the sale of a specified minimum dollar amount of shares of
a Fund and/or other Evergreen Keystone Funds. Such incentives will take the form
of payment for attendance at seminars, lunches, dinners, sporting events or
theater performances, or payment for travel, lodging and entertainment incurred
in connection with travel by persons associated with a broker-dealer and their
immediate family members to urban or resort locations within or outside the
United States. Such a dealer may elect to receive cash incentives of equivalent
amount in lieu of such payments. EKD may also limit the availability of such
incentives to certain specified dealers. EKD from time to time sponsors
promotions involving FUBS, an affiliate of each Fund's investment adviser, and
select broker-dealers, pursuant to which incentives are paid, including gift
certificates and payments in amounts up to 1% of the dollar amount of shares of
a Fund sold. Awards may also be made based on the opening of a minimum number of
accounts. Such promotions are not being made available to all broker-dealers.
Certain broker-dealers may also receive payments from EKD or a Fund's investment
adviser over and above the usual trail commissions or shareholder servicing
payments applicable to a given Class of shares.
Additional Purchase Information. As a condition of this offering, if a purchase
is canceled due to nonpayment or because an investor's check does not clear, the
investor will be responsible for any loss a Fund or the Fund's investment
adviser incurs. If such investor is an existing shareholder, a Fund may redeem
shares from an investor's account to reimburse the Fund or its investment
adviser for any loss. In addition, such investors may be prohibited or
restricted from making further purchases in any of the Evergreen Keystone Funds.
The Funds will not accept third party checks other than those payable directly
to a shareholder whose account has been in existence at least thirty days.
HOW TO REDEEM SHARES
You may "redeem" ( i.e., sell) your shares in a Fund to the Fund for
cash, (at the net redemption value) on any day the Exchange is open, either
directly by writing to the Fund, c/o EKSC, or through your financial
intermediary. The amount you will receive is based on the net asset value
adjusted for fractions of a cent (less any applicable CDSC) next calculated
after the Fund receives your request in proper form. Proceeds generally will be
20
<PAGE>
sent to you within seven days. However, for shares recently purchased by check,
a Fund will not send proceeds until it is reasonably satisfied that the check
has been collected (which may take up to 15 days). Once a redemption request has
been telephoned or mailed, it is irrevocable and may not be modified or
canceled.
Redeeming Shares Through Your Financial Intermediary. A Fund must receive
instructions from your financial intermediary before 4:00 p.m. (Eastern time)
for you to receive that day's net asset value (less any applicable CDSC). Your
financial intermediary is responsible for furnishing all necessary documentation
to a Fund and may charge you for this service. Certain financial intermediaries
may require that you give instructions earlier than 4:00 p.m. (Eastern time).
Redeeming Shares Directly by Mail or Telephone. Send a signed letter of
instruction or stock power form to the Fund, c/o EKSC, the registrar, transfer
agent and dividend-disbursing agent for each Fund. Stock power forms are
available from your financial intermediary, EKSC, and many commercial banks.
Additional documentation is required for the sale of shares by corporations,
financial intermediaries, fiduciaries and surviving joint owners. Signature
guarantees are required for all redemption requests for shares with a value of
more than $50,000. Currently, the requirement for a signature guarantee has been
waived on redemptions of $50,000 or less when the account address of record has
been the same for a minimum period of 30 days. Each Fund and EKSC reserve the
right to withdraw this waiver at any time. A signature guarantee must be
provided by a bank or trust company (not a Notary Public), a member firm of a
domestic stock exchange or by other financial institutions whose guarantees are
acceptable under the Securities Exchange Act of 1934 and EKSC's policies.
Shareholders may withdraw amounts of $1,000 or more (up to $50,000) from
their accounts by calling the telephone number on the front page of this
Prospectus between the hours of 8:00 a.m. and 5:30 p.m. (Eastern time) each
business day (i.e., any weekday exclusive of days on which the Exchange or
EKSC's offices are closed). The Exchange is closed on New Year's Day, Martin
Luther King Day, Presidents Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Redemption requests received
after 4:00 p.m. (Eastern time) will be processed using the net asset value
determined on the next business day. Such redemption requests must include the
shareholder's account name, as registered with a Fund, and the account number.
During periods of drastic economic or market changes, shareholders may
experience difficulty in effecting telephone redemptions. If you cannot reach
the Fund by telephone, you should follow the procedures for redeeming by mail or
through a broker-dealer as set forth herein. The telephone redemption service is
not made available to shareholders automatically. Shareholders wishing to use
the telephone redemption service must complete the appropriate sections on the
Application and choose how the redemption proceeds are to be paid. Redemption
proceeds will either (i) be mailed by check to the shareholder at the address in
which the account is registered or (ii) be wired to an account with the same
registration as the shareholder's account in a Fund at a designated commercial
bank.
In order to insure that instructions received by EKSC are genuine when
you initiate a telephone transaction, you will be asked to verify certain
criteria specific to your account. At the conclusion of the transaction, you
will be given a transaction number confirming your request, and written
confirmation of your transaction will be mailed the next business day. Your
telephone instructions will be recorded. Redemptions by telephone are allowed
only if the address and bank account of record have been the same for a minimum
period of 30 days. Each Fund reserves the right at any time to terminate,
suspend, or change the terms of any redemption method described in this
Prospectus, except redemption by mail, and to impose fees.
Except as otherwise noted, the Funds, EKSC and EKD will not assume
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing, over the Evergreen Keystone Express Line, or by
telephone. EKSC will employ reasonable procedures to confirm that instructions
received over the Evergreen Keystone Express Line or by telephone are genuine.
The Funds, EKSC and EKD will not be liable when following instructions received
over the Evergreen Keystone Express Line or by telephone that EKSC reasonably
believes are genuine.
Evergreen Keystone Express Line. The Evergreen Keystone Express Line offers you
specific fund account information and price and yield quotations as well as the
ability to do account transactions, including investments, exchanges and
redemptions. You may access the Evergreen Keystone Express Line by dialing toll
free 1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a
week.
General. The sale of shares is a taxable transaction for federal income tax
purposes. The Funds may temporarily suspend the right to redeem their shares
when (1) the Exchange is closed, other than customary weekend and holiday
closings; (2) trading on the Exchange is restricted; (3) an emergency exists and
the Funds cannot dispose
21
<PAGE>
of their investments or fairly determine their value; or (4) the Securities and
Exchange Commission ("SEC") so orders. The Funds reserve the right to close an
account that through redemption has fallen below $1,000 and has remained so for
thirty days. Shareholders will receive sixty days' written notice to increase
the account value to at least $1,000 before the account is closed. The Funds
have elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which
each Fund is obligated to redeem shares solely in cash, up to the lesser of
$250,000 or 1% of a Fund's total net assets, during any ninety day period for
any one shareholder.
EXCHANGE PRIVILEGE
How to Exchange Shares. You may exchange some or all of your shares for shares
of the same Class in the other Evergreen Keystone Funds through your financial
intermediary by calling or writing to EKSC or by using the Evergreen Keystone
Express Line as described above. Once an exchange request has been telephoned or
mailed, it is irrevocable and may not be modified or canceled. Exchanges will be
made on the basis of the relative net asset values of the shares exchanged next
determined after an exchange request is received. An exchange which represents
an initial investment in another Evergreen Keystone fund is subject to the
minimum investment and suitability requirements of each Fund.
Each of the Evergreen Keystone funds has different investment objectives
and policies. For complete information, a prospectus of the fund into which an
exchange will be made should be read prior to the exchange. An exchange order
must comply with the requirement for a redemption or repurchase order and must
specify the dollar value or number of shares to be exchanged. An exchange is
treated for federal income tax purposes as a redemption and purchase of shares
and may result in the realization of a capital gain or loss. Shareholders are
limited to five exchanges per calendar year, with a maximum of three per
calendar quarter. This exchange privilege may be modified or discontinued at any
time by the Fund upon sixty days' notice to shareholders and is only available
in states in which shares of the fund being acquired may lawfully be sold.
No CDSC will be imposed in the event shares are exchanged for shares of
the same class of other Evergreen Keystone Funds. If you redeem shares, the CDSC
applicable to the shares of the Evergreen or Keystone Fund originally purchased
for cash is applied. Also, Class B shares will continue to age following an
exchange for the purpose of conversion to Class A shares and for the purpose of
determining the amount of the applicable CDSC.
Exchanges Through Your Financial Intermediary. A Fund must receive exchange
instructions from your financial intermediary before 4:00 p.m. (Eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to a Fund and may charge
you for this service.
Exchanges By Telephone And Mail. Exchange requests received by a Fund after 4:00
p.m. (Eastern time) will be processed using the net asset value determined at
the close of the next business day. During periods of drastic economic or market
changes, shareholders may experience difficulty in effecting telephone
exchanges. You should follow the procedures outlined below for exchanges by mail
if you are unable to reach EKSC by telephone. If you wish to use the telephone
exchange service you should indicate this on the Application. As noted above,
each Fund will employ reasonable procedures to confirm that instructions for the
redemption or exchange of shares communicated by telephone are genuine. A
telephone exchange may be refused by a Fund or EKSC if it is believed advisable
to do so. Procedures for exchanging Fund shares by telephone may be modified or
terminated at any time. Written requests for exchanges should follow the same
procedures outlined for written redemption requests in the section entitled "How
to Redeem Shares"; however, no signature guarantee is required.
SHAREHOLDER SERVICES
The Funds offer the following shareholder services. For more information
about these services or your account, contact your financial intermediary, EKSC
or call the toll-free number on the front page of this Prospectus. Some services
are described in more detail in the Application.
Systematic Investment Plan. Under a Systematic Investment Plan, you may invest
as little as $25 per month to purchase shares of a Fund with no minimum initial
investment required.
Telephone Investment Plan. You may invest not less than $100 or more than
$10,000 per investment into an existing account. Telephone investment requests
received by 4:00 p.m. (Eastern time) will be credited to a shareholder's account
the day the request is received. Shares purchased under the Systematic
Investment Plan or Telephone Investment Plan may not be redeemed for ten days
from the date of investment.
22
<PAGE>
Systematic Withdrawal Plan. When an account of $10,000 or more is opened or when
an existing account reaches that size, you may participate in the Systematic
Withdrawal Plan by filling out the appropriate part of the Application. Under
this Plan, you may receive (or designate a third party to receive) payments in a
stated amount of at least $75, or a maximum of 1.0% per month or 3.0% per
quarter of the total net asset value of your account when the Plan was
established. Fund shares will be redeemed as necessary to meet withdrawal
payments. All participants must elect to have their dividends and capital gain
distributions reinvested automatically. Any applicable CDSC will be waived with
respect to redemptions occurring under a Systematic Withdrawal Plan during a
calendar year to the extent that such redemptions do not exceed 12% of (i) the
initial value of the account plus (ii) the value, at the time of purchase, of
any subsequent investments. Excessive withdrawals may decrease or deplete the
value of your account. Moreover, because of the effect of the applicable sales
charge, a Class A investor should not make continuous purchases of a Fund's
shares while participating in a Systematic Withdrawal Plan.
Investments Through Employee Benefit and Savings Plans. Certain qualified and
non-qualified benefit and savings plans may make shares of the Funds and the
other Evergreen Keystone funds available to their participants. Investments made
by such employee benefit plans may be exempt from front-end sales charges if
they meet the criteria set forth under "Class A Shares-Front End Sales Charge
Alternative". Evergreen Asset, Keystone or CMG may provide compensation to
organizations providing administrative and recordkeeping services to plans which
make shares of the Evergreen Keystone funds available to their participants.
Automatic Reinvestment Plan. For the convenience of investors, all dividends and
distributions are automatically reinvested in full and fractional shares of a
Fund at the net asset value per share at the close of business on the record
date, unless otherwise requested by a shareholder in writing. If the transfer
agent does not receive a written request for subsequent dividends and/or
distributions to be paid in cash at least three full business days prior to a
given record date, the dividends and/or distributions to be paid to a
shareholder will be reinvested.
Dollar Cost Averaging. Through dollar cost averaging you can invest a fixed
dollar amount each month or each quarter in any Evergreen Keystone fund. This
results in more shares being purchased when the selected Fund's net asset value
is relatively low and fewer shares being purchased when the Fund's net asset
value is relatively high and may result in a lower average cost per share than a
less systematic investment approach.
Prior to participating in dollar cost averaging, you must establish an
account in an Evergreen Keystone fund. You should designate on the Application
(i) the dollar amount of each monthly or quarterly investment you wish to make
and (ii) the Fund in which the investment is to be made. Thereafter, on the
first day of the designated month, an amount equal to the specified monthly or
quarterly investment will automatically be redeemed from your initial account
and invested in shares of the designated fund.
If you are a Class A investor and paid a sales charge on your initial
purchase, the shares purchased will be eligible for Rights of Accumulation and
the sales charge applicable to the purchase will be determined accordingly. In
addition, the value of shares purchased will be included in the total amount
required to fulfill a Letter of Intent. If a sales charge was not paid on the
initial purchase, a sales charge will be imposed at the time of subsequent
purchases, and the value of shares purchased will become eligible for Rights of
Accumulation and Letters of Intent.
Two Dimensional Investing. You may elect to have income and capital gains
distributions from any class of Evergreen Keystone fund shares you own
automatically invested to purchase the same class of shares of any other
Evergreen Keystone fund. You may select this service on your Application and
indicate the Evergreen Keystone fund(s) into which distributions are to be
invested. The value of shares purchased will be ineligible for Rights of
Accumulation and Letters of Intent.
Tax Sheltered Retirement Plans. The Funds have various retirement plans
available to eligible investors, including Individual Retirement Accounts
(IRAs); Rollover IRAs; Simplified Employee Pension Plans (SEPs); Savings
Incentive Match Plan for Employees (SIMPLEs); Tax Sheltered Annuity Plans;
403(b)(7) Plans; 401(k) Plans; Keogh Plans; Profit-Sharing Plans; and Money
Purchase Plans. For details, including fees and application forms, call toll
free 1-800-247-4075 or write to EKSC.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Funds. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser, transfer agent or custodian to a registered open-end
investment company and may also act as
23 60041B
<PAGE>
agent in connection with the purchase of shares of such an investment company
upon the order of its customer. Keystone and CMG are subject to and in
compliance with the aforementioned laws and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in CMG or Keystone being prevented from
continuing to perform the services required under the investment advisory
contract or from acting as agent in connection with the purchase of shares of a
Fund by its customers. If CMG or Keystone were prevented from continuing to
provide the services called for under the investment advisory agreement, it is
expected that the Trustees would identify, and call upon each Fund's
shareholders to approve, a new investment adviser. If this were to occur, it is
not anticipated that the shareholders of any Fund would suffer any adverse
financial consequences.
OTHER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
For each Fund, net income dividends, if any, are declared daily and paid
monthly. Distributions of any net realized capital gains of the Funds will be
made annually or more frequently. Dividends and distributions generally are
taxable in the year in which they are paid, except any dividends paid in January
that were declared in the previous calendar quarter will be treated as paid in
December of the previous year. Income dividends and capital gain distributions
are automatically reinvested in additional shares of the Fund making the
distribution at the net asset value per share at the close of business on the
record date, unless the shareholder has made a written request for payment in
cash.
Each Fund has qualified and intends to continue to qualify to be treated
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). While so qualified, it is expected that each Fund will not
be required to pay any Federal income taxes on that portion of its investment
company taxable income and any net realized capital gains it distributes to
shareholders. The Code imposes a 4% nondeductible excise tax on regulated
investment companies, such as the Funds, to the extent they do not meet certain
distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements. Most shareholders of the
Funds normally will have to pay Federal income taxes and any state or local
taxes on the dividends and distributions they receive from a Fund whether such
dividends and distributions are made in cash or in additional shares. Questions
on how any distributions will be taxed to the investor should be directed to the
investor's own tax adviser.
Following the end of each calendar year, every shareholder of the Funds
will be sent applicable tax information and information regarding the dividends
and capital gain distributions made during the calendar year.
A Fund may be subject to foreign withholding taxes which would reduce the
yield on its investments. Tax treaties between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of a Fund who are
subject to United States Federal income tax may be entitled, subject to certain
rules and limitations, to claim a Federal income tax credit or deduction for
foreign income taxes paid by a Fund. See the Statement of Additional Information
for additional details. A Fund's transactions in options, futures and forward
contracts may be subject to special tax rules. These rules can affect the
amount, timing and characteristics of distributions to shareholders.
Each Fund is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gain distributions, if any, and
redemptions) paid to certain shareholders. In order to avoid this backup
withholding requirement, you must certify on the Application, or on a separate
form supplied by State Street, that your social security or taxpayer
identification number is correct and that you are not currently subject to
backup withholding or are exempt from backup withholding. A shareholder who
acquires Class A shares of a Fund and sells or otherwise disposes of such shares
within ninety days of acquisition may not be allowed to include certain sales
charges incurred in acquiring such shares for purposes of calculating gain and
loss realized upon a sale or exchange of shares of the Fund.
The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. As the foregoing
discussion is for general information only, you should also review the
discussion of "Additional Tax
24
<PAGE>
Information" contained in the Statement of Additional Information. In addition,
you should consult your own tax adviser as to the tax consequences of
investments in the Funds, including the application of state and local taxes
which may be different from Federal income tax consequences described above.
GENERAL INFORMATION
Portfolio Transactions. Consistent with the Rules of Conduct of the National
Association of Securities Dealers, Inc., and subject to seeking best price and
execution, a Fund may consider sales of its shares as a factor in the selection
of dealers to enter into portfolio transactions with the Fund.
Organization. EVERGREEN U.S. GOVERNMENT FUND is a separate investment series of
Evergreen Investment Trust (formerly First Union Funds), which is a
Massachusetts business trust organized in 1984. KEYSTONE STRATEGIC INCOME FUND
is a Massachusetts business trust organized in 1986. The Funds do not intend to
hold annual shareholder meetings; shareholder meetings will be held only when
required by applicable law. Shareholders have available certain procedures for
the removal of Trustees.
A shareholder in each Class of a Fund will be entitled to his or her
share of all dividends and distributions from a Fund's assets, based upon the
relative value of such shares to those of other Classes of the Fund, and, upon
redeeming shares, will receive the then current net asset value of the Class of
shares of the Fund represented by the redeemed shares less any applicable CDSC.
Each Trust named above is empowered to establish, without shareholder approval,
additional investment series, which may have different investment objectives,
and additional Classes of shares for any existing or future series. If an
additional series or Class were established in a Fund, each share of the series
or Class would normally be entitled to one vote for all purposes. Generally,
shares of each series and Class would vote together as a single Class on
matters, such as the election of Trustees, that affect each series and Class in
substantially the same manner. Class A, Class B, Class C and Class Y shares have
identical voting, dividend, liquidation and other rights, except that each Class
bears, to the extent applicable, its own distribution and transfer agency
expenses as well as any other expenses applicable only to a specific Class. Each
Class of shares votes separately with respect to Rule 12b-1 distribution plans
and other matters for which separate Class voting is appropriate under
applicable law. Shares are entitled to dividends as determined by the Trustees
and, in liquidation of a Fund, are entitled to receive the net assets of the
Fund.
Custodian. State Street Bank and Trust Company, P.O. Box 9021, Boston,
Massachusetts 02205-9827 acts as each Fund's custodian.
Registrar, Transfer Agent and Dividend-Disbursing Agent. Evergreen Keystone
Service Company, P.O. Box 2121, Boston, Massachusetts 02106-2121 serves as each
Fund's registrar, transfer agent and dividend-disbursing agent.
Principal Underwriter. EKD, an affiliate of BISYS, is located at 125 W. 55th
Street, New York, New York 10019, and is the principal underwriter of the Funds.
BISYS also acts as sub-administrator to the Funds and provides personnel to
serve as officers of the Funds.
Other Classes of Shares. Each Fund currently offers four classes of shares,
Class A, Class B, Class C and Class Y, and may in the future offer additional
classes. Class Y shares are not offered by this Prospectus and are only
available to (i) persons who at or prior to December 31, 1994, owned shares in a
mutual fund advised by Evergreen Asset, (ii) certain institutional investors and
(iii) investment advisory clients of CMG, Evergreen Asset, Keystone or their
affiliates. The dividends payable with respect to Class A, Class B and Class C
shares will be less than those payable with respect to Class Y shares due to the
distribution and shareholder servicing-related expenses borne by Class A, Class
B and Class C shares and the fact that such expenses are not borne by Class Y
shares.
Performance Information. From time to time, the Funds may quote their "total
return" or "yield" for a specified period in advertisements, reports or other
communications to shareholders. Total return and yield are computed separately
for Class A, Class B, Class C and Class Y shares. A Fund's total return for each
such period is computed by finding, through the use of a formula prescribed by
the SEC, the average annual compounded rate of return over the period that would
equate an assumed initial amount invested to the value of the investment at the
end of the period. For purposes of computing total return, dividends and capital
gains distributions paid on shares of a Fund are assumed to have been reinvested
when paid and the maximum sales charges applicable to purchases of a Fund's
shares are assumed to have been paid. Yield is a way of showing the rate of
income the Fund earns on its investments as a percentage of the Fund's share
price. The Fund's yield is calculated according to accounting methods that are
standardized by the SEC for all stock and bond funds. Because yield accounting
methods differ from the method used for other accounting purposes, the Fund's
yield may not equal its distribution rate, the income paid to your account or
the net investment income reported in the Fund's financial statements. To
25
<PAGE>
calculate yield, the Fund takes the interest and dividend income it earned from
its portfolio of investments (as defined by the SEC formula) for a 30-day period
(net of expenses), divides it by the average number of shares entitled to
receive dividends, and expresses the result as an annualized percentage rate
based on the Fund's share price at the end of the 30-day period. This yield does
not reflect gains or losses from selling securities.
Performance data for each Class of shares will be included in any
advertisement or sales literature using performance data of a Fund. These
advertisements may quote performance rankings or ratings of a Fund by financial
publications or independent organizations such as Lipper Analytical Services,
Inc. and Morningstar, Inc. or compare a Fund's performance to various indices. A
Fund may also advertise in items of sales literature an "actual distribution
rate" which is computed by dividing the total ordinary income distributed (which
may include the excess of short-term capital gains over losses) to shareholders
for the latest twelve month period by the maximum public offering price per
share on the last day of the period. Investors should be aware that past
performance may not be indicative of future results.
In marketing a Fund's shares, information may be provided that is
designed to help individuals understand their investment goals and explore
various financial strategies. Such information may include publications
describing general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting; a questionnaire designed to
help create a personal financial profile; and an action plan offering investment
alternatives. The information provided to investors may also include discussions
of other Evergreen Keystone funds, products, and services, which may include:
retirement investing; brokerage products and services; the effects of periodic
investment plans and dollar cost averaging; saving for college; and charitable
giving. In addition, the information provided to investors may quote financial
or business publications and periodicals, including model portfolios or
allocations, as they relate to fund management, investment philosophy, and
investment techniques. The materials may also reprint, and use as advertising
and sales literature, articles from EVERGREEN KEYSTONE EVENTS, a quarterly
magazine provided free of charge to Evergreen Keystone fund shareholders.
Liability Under Massachusetts Law. Under Massachusetts law, Trustees and
shareholders of a business trust may, in certain circumstances, be held
personally liable for its obligations. The Declaration of Trust under which each
Fund operates provides that no Trustee or shareholder will be personally liable
for the obligations of the Trust and that every written contract made by the
Trust contain a provision to that effect. If any Trustee or shareholder were
required to pay any liability of the Trust, that person would be entitled to
reimbursement from the general assets of the Trust.
Additional Information. This Prospectus and the Statement of Additional
Information, which has been incorporated by reference herein, do not contain all
the information set forth in the Registration Statements filed by the Trusts
with the SEC under the Securities Act of 1933, as amended. Copies of the
Registration Statements may be obtained at a reasonable charge from the SEC or
may be examined, without charge, at the offices of the SEC in Washington, D.C.
26
<PAGE>
INVESTMENT ADVISERS
Capital Management Group of First Union National Bank, 210 South College
Street, Charlotte, North Carolina, 28228
EVERGREEN U.S. GOVERNMENT FUND
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116-5034
KEYSTONE STRATEGIC INCOME FUND
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Keystone Service Company, P.O. Box 2121, Boston, Massachusetts
02106-2121
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
DISTRIBUTOR
Evergreen Keystone Distributor, Inc., 125 W. 55th Street, New York, New York
10019
541291
<PAGE>
PROSPECTUS September 1, 1997
EVERGREEN KEYSTONE LONG-TERM BOND FUNDS [Logo Goes Here]
EVERGREEN U.S. GOVERNMENT FUND
KEYSTONE STRATEGIC INCOME FUND
CLASS Y SHARES
The Evergreen Keystone Long-Term Bond Funds (the "Funds") are
designed to provide investors with a selection of investment alternatives
which seek to provide a high level of current income. This Prospectus
provides information regarding the Class Y shares offered by the Funds.
Each Fund is, or is a series of, an open-end, diversified, management
investment company. This Prospectus sets forth concise information about
the Funds that a prospective investor should know before investing. The
address of the Funds is 200 Berkeley Street, Boston, Massachusetts 02116.
A "Statement of Additional Information" for the Funds dated
September 1, 1997, as supplemented from time to time, has been filed with
the Securities and Exchange Commission and is incorporated by reference
herein. The Statement of Additional Information provides information
regarding certain matters discussed in this Prospectus and other matters
which may be of interest to investors, and may be obtained without charge
by calling the Evergreen Keystone Funds at (800) 343-2898. There can be no
assurance that the investment objective of any Fund will be achieved.
Investors are advised to read this Prospectus carefully.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY 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 RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
KEEP THIS PROSPECTUS FOR FUTURE REFERENCE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
OVERVIEW OF THE FUNDS 2
EXPENSE INFORMATION 3
FINANCIAL HIGHLIGHTS 4
DESCRIPTION OF THE FUNDS
Investment Objectives and Policies 5
Investment Practices and Restrictions 7
MANAGEMENT OF THE FUNDS
Investment Advisers 12
Portfolio Managers 13
Administrator 13
Sub-Administrator 13
PURCHASE AND REDEMPTION OF SHARES
How to Buy Shares 13
How to Redeem Shares 14
Exchange Privilege 15
Shareholder Services 16
Effect of Banking Laws 17
OTHER INFORMATION
Dividends, Distributions and Taxes 17
General Information 18
</TABLE>
OVERVIEW OF THE FUNDS
The following is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus. See "Description of the
Funds" and "Management of the Funds".
The investment adviser to EVERGREEN U.S. GOVERNMENT FUND is the Capital
Management Group of First Union National Bank, a subsidiary of First Union
Corporation, the sixth largest bank holding company in the United States. The
investment adviser to KEYSTONE STRATEGIC INCOME FUND is Keystone Investment
Management Company, a subsidiary of First Union National Bank.
EVERGREEN U.S. GOVERNMENT FUND seeks a high level of current income
consistent with stability of principal.
KEYSTONE STRATEGIC INCOME FUND seeks high current income from interest on
debt securities. Secondarily, the Fund considers potential for growth of capital
in selecting securities.
THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF EITHER FUND WILL
BE ACHIEVED.
2
<PAGE>
EXPENSE INFORMATION
The table set forth below summarizes the shareholder transaction costs
associated with an investment in the Class Y Shares of each Fund. For further
information see "Purchase and Redemption of Shares".
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases None
Sales Charge on Dividend Reinvestments None
Contingent Deferred Sales Charge None
Redemption Fee None
Exchange Fee (only applies after 4 exchanges per
year) $ 5.00
</TABLE>
The following table shows for the Fund the estimated annual operating
expenses (as a percentage of average net assets) attributable to Class Y shares,
together with examples of the cumulative effect of such expenses on a
hypothetical $1,000 investment for the periods specified assuming (i) a 5%
annual return and (ii) redemption at the end of each period.
EVERGREEN U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
ANNUAL OPERATING
EXPENSES EXAMPLE
<S> <C> <C> <C>
Advisory Fees .50%
After 1 Year $ 7
12b-1 Fees --
After 3 Years $23
Other Expenses .23%
After 5 Years $41
After 10 Years $91
Total .73%
</TABLE>
KEYSTONE STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
ANNUAL OPERATING
EXPENSES EXAMPLE
<S> <C> <C> <C>
Advisory Fees .64%
After 1 Year $ 11
12b-1 Fees --
After 3 Years $ 33
Other Expenses .40%
After 5 Years $ 57
After 10 Years $127
Total 1.04%
</TABLE>
From time to time, each Fund's investment adviser may, at its discretion,
reduce or waive its fees or reimburse the Funds for certain of their expenses in
order to reduce their expense ratios. Each Fund's investment adviser may cease
these waivers and reimbursements at any time.
The purpose of the foregoing table is to assist an investor in
understanding the various costs and expenses that an investor in the Y Class
shares of the Funds will bear directly or indirectly. The amounts set forth both
in the table and in the examples are based on the experience of EVERGREEN U.S.
GOVERNMENT FUND for the ten-month period ended April 30, 1997 and of Keystone
Strategic Income Fund for the nine-month period ended April 30, 1997. THE
EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
ANNUAL RETURN. ACTUAL EXPENSES AND ANNUAL RETURN MAY BE GREATER OR LESS THAN
THOSE SHOWN. For a more complete description of the various costs and expenses
borne by the Funds see "Management of the Funds." As a result of asset-based
sales charges, long-term shareholders may pay more than the economic equivalent
of the maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The tables on the following pages present, for each Fund, financial
highlights for a share outstanding throughout each period indicated. The
information in the tables for the five most recent fiscal periods or the life of
a Fund if shorter has been audited by KPMG Peat Marwick LLP, the Funds'
independent auditors. The tables appear in the Funds' annual report to
shareholders and should be read in conjunction with each Fund's financial
statements and related notes, which also appear, together with the independent
auditors' report, in the Funds' annual report to shareholders. The Funds'
financial statements, related notes, and independent auditors' report are
incorporated by reference into the Funds' Statement of Additional Information.
Further information about each Fund's performance is contained in the
Funds' annual report to shareholders, which may be obtained without charge.
EVERGREEN U.S. GOVERNMENT FUND -- CLASS Y SHARES
<TABLE>
<CAPTION>
SIX SEPTEMBER 2, 1993
TEN MONTHS YEAR MONTHS YEAR (DATE OF INITIAL
ENDED ENDED ENDED ENDED PUBLIC OFFERING)
APRIL 30, JUNE 30, JUNE 30, DECEMBER 31, TO
PER SHARE DATA: 1997 (d) 1996 1995 (c) 1994 DECEMBER 31, 1993
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period................. $ 9.42 $ 9.65 $ 9.07 $ 10.05 $ 10.25
Income from investment operations:
Net investment income............................. 0.54 0.66 0.34 0.69 0.25
Net realized and unrealized gain (loss) on
investments..................................... (0.03) (0.23) 0.58 (0.98) (0.20)
Total from investment operations................ 0.51 0.43 0.92 (0.29) 0.05
Less distributions from net investment income....... (0.54) (0.66) (0.34 ) (0.69) (0.25)
Net asset value end of period....................... $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 10.05
TOTAL RETURN (b).................................... 5.52% 4.54% 10.30% (2.94%) 0.49%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Expenses.......................................... 0.73%(a) 0.74% 0.79%(a) 0.71% 0.48%(a)
Expenses excluding waivers and reimbursements..... 0.73%(a) 0.74% 0.80%(a) 0.75% 0.79%(a)
Expenses excluding indirectly paid expenses....... 0.73%(a) -- -- -- --
Net investment income............................. 6.85%(a) 6.86% 7.31%(a) 7.27% 7.20%(a)
Portfolio turnover rate............................. 12% 23% 0% 19% 39%
Net assets end of period (thousands)................ $ 127,099 $121,569 $16,934 $ 15,595 $14,486
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
(d) The Fund changed its fiscal year end from June 30 to April 30 during the
current period.
KEYSTONE STRATEGIC INCOME FUND -- CLASS Y SHARES
<TABLE>
<CAPTION>
JANUARY 13, 1997
(COMMENCEMENT
OF CLASS
OPERATIONS)
TO
PER SHARE DATA: APRIL 30, 1997
<S> <C>
Net asset value beginning of period..................................................................... $ 7.03
Income from investment operations:
Net investment income................................................................................. 0
Net realized and unrealized loss on investments and foreign currency related transactions............. (0.20)
Total from investment operations.................................................................... (0.20)
Less distributions from:
Net investment income................................................................................. (0.17)
In excess of net investment income.................................................................... (0.01)
Total distributions................................................................................. (0.18)
Net asset value end of period........................................................................... $ 6.65
TOTAL RETURN............................................................................................ (2.87%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Expenses.............................................................................................. 0.00%(a)
Expenses excluding indirectly paid expenses........................................................... 0.00%(a)
Net investment income................................................................................. 0.00%(a)
Portfolio turnover rate................................................................................. 86%
Net assets end of period................................................................................ $ 7
</TABLE>
(a) Annualized.
4
<PAGE>
DESCRIPTION OF THE FUNDS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective is fundamental and may not be changed
without shareholder approval.
In addition to the investment policies detailed below, each Fund may
employ certain additional investment strategies which are discussed in
"Investment Practices and Restrictions". There can be no assurance that any
Fund's investment objective will be achieved.
EVERGREEN U.S. GOVERNMENT FUND
The investment objective of EVERGREEN U.S. GOVERNMENT FUND is to achieve
a high level of current income consistent with stability of principal. The Fund
will invest in debt instruments issued or guaranteed by the U.S. government, its
agencies, or instrumentalities ("U.S. Government Securities"), and is suitable
for conservative investors seeking high current yields plus relative safety. It
permits an investor to participate in a portfolio that benefits from active
management of a blend of securities and maturities to maximize the opportunities
and minimize the risks created by changing interest rates.
In addition to U.S. Government Securities, the Fund may invest in:
Securities representing ownership interests in mortgage pools
("mortgage-backed securities"). The yield and maturity characteristics of
mortgage-backed securities correspond to those of the underlying mortgages, with
interest and principal payments including prepayments (I.E. paying remaining
principal before the mortgage's scheduled maturity) passed through to the holder
of the mortgage-backed securities. The yield and price of mortgage-backed
securities will be affected by prepayments which substantially shorten effective
maturities. Thus, during periods of declining interest rates, prepayments may be
expected to increase, requiring the Fund to reinvest the proceeds at lower
interest rates, making it difficult to effectively lock in high interest rates.
Conversely, mortgage-backed securities may experience less pronounced declines
in value during periods of rising interest rates.
Securities representing ownership interests in a pool of assets
("asset-backed securities"), for which automobile and credit card receivables
are the most common collateral. Because much of the underlying collateral is
unsecured, asset-backed securities are structured to include additional
collateral and/or additional credit support to protect against default. The
Fund's investment adviser evaluates the strength of each particular issue of
asset-backed security, taking into account the structure of the issue and its
credit support. (See "Investment Practices and Restrictions, -- Risk
Characteristics of Asset-Backed Securities".)
Collateralized mortgage obligations ("CMOs") issued by single-purpose,
stand-alone entities. A CMO is a mortgage-backed security that manages the risk
of prepayment by separating mortgage pools into short, medium and long term
portions. These portions are generally retired in sequence as the underlying
mortgage loans in the mortgage pool are repaid. Similarly, as prepayments are
made, the portion of CMO first to mature will be retired prior to its maturity,
thus having the same effect as the prepayment of mortgages underlying a
mortgage-backed security. The issuer of a series of CMOs may elect to be treated
as a Real Estate Mortgage Investment Conduit (a "REMIC"), which has certain
special tax attributes. The Fund will invest only in CMOs which are rated cAAA
by a nationally recognized statistical rating organization and which may be: (a)
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. Government Securities; or (c) securities in which the
proceeds of the issuance are invested in mortgage securities and payment of the
principal and interest are supported by the credit of an agency or
instrumentality of the U.S. government.
The Fund may invest up to 20% of its total assets in CMOs and commercial
paper which matures in 270 days or less so long as at least two of its ratings
are high quality ratings by nationally recognized statistical rating
organizations. Such ratings would include A-1 or A-2 by Standard & Poor's
Ratings Group ("S&P"), Prime-1 or Prime-2 by Moody's Investor Service
("Moody's"), or F-1 or F-2 by Fitch Investors Service, L.P. and bonds and other
debt securities rated Baa or higher by Moody's or BBB or higher by S&P, or
which, if unrated, are considered to be of comparable quality by the investment
adviser.
5
<PAGE>
Bonds rated Baa by Moody's or BBB by S&P have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to weaken such bonds' prospects for principal and interest payments than
higher rated bonds. However, like the higher rated bonds, these securities are
considered to be investment grade. (See the description of the rating categories
contained in the Statement of Additional Information.)
KEYSTONE STRATEGIC INCOME FUND
The investment objective of KEYSTONE STRATEGIC INCOME FUND is high
current income from interest on debt securities. Secondarily, the Fund considers
potential for growth of capital in selecting securities. The Fund intends to
allocate its assets principally between eligible domestic high yield, high risk
bonds and debt securities of foreign governments and foreign corporations. In
addition, the Fund will, from time to time, allocate a portion of its assets to
U.S. government securities. This allocation will be made on the basis of
Keystone's assessment of global opportunities for high income. From time to
time, the Fund may invest 100% of its assets in U.S. or foreign securities.
The Fund may invest in:
Domestic High Yield Bonds. The Fund may invest principally in domestic
high yield, high risk bonds, commonly known as "junk bonds." High-yield bonds in
which the fund may invest include zero coupon bonds and payment-in-kind
securities ("PIKs"), debentures, convertible debentures, fixed, increasing and
adjustable rate bonds, stripped bonds, mortgage bonds, mortgage backed
securities, corporate notes (including convertible notes) with maturities at the
date of issue of at least five years (which may be senior or junior to other
bonds), equipment trust certificates, and units consisting of bonds with stock
or warrants to buy stock attached. For information about the risks of investing
in high-yield bonds, see the section entitled "Investment Practices and
Restrictions."
Foreign Securities. The Fund may invest in debt obligations (which may be
denominated in U.S. dollars or in non-U.S. currencies) issued or guaranteed by
foreign corporations, certain supranational entities (such as the World Bank),
foreign governments, their agencies and instrumentalities, and debt obligations
issued by U.S. corporations denominated in non-U.S. currencies. These debt
obligations may include bonds, debentures, notes and short-term obligations.
U.S. Government Securities. The Fund may invest in U.S. Government
Securities, including zero coupon U.S. Treasury securities, mortgage-backed
securities and money market instruments.
While the Fund may invest in securities of any maturity, it is currently
expected that the Fund will not invest in securities with maturities of more
than 30 years.
Other Eligible Securities
Under ordinary circumstances, the Fund may also invest a limited portion
of its assets in the securities described below. When, in the investment
adviser's opinion, market conditions warrant, the Fund may invest up to 100% of
its assets for temporary defensive purposes in the money market securities
described below. When the Fund is investing for temporary defensive purposes, it
is not pursuing its investment objective.
Equity Securities. The Fund may invest in preferred stocks, including
adjustable rate and convertible preferred stocks, common stocks and other equity
securities, including convertible securities and warrants, which may be used to
create other permissible investments. Such investments must be consistent with
the Fund's primary objective of seeking a high level of current income or be
acquired as part of a unit combining income and equity securities. In addition,
the Fund may invest in limited partnerships, including master limited
partnerships.
Money Market Securities. The Fund may invest in the following types of
money market securities: (1) obligations issued or guaranteed by the U.S.
government its agencies or instrumentalities of the U.S. government; (2)
commercial paper, including master demand notes, that at the date of investment
is rated A-1, the highest grade by S&P, Prime-1, the highest grade by Moody's,
or, if not rated by such services, is issued by a company that at the date of
investment has an outstanding issue rated A or better by S&P or Moody's; (3)
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in assets that
are members of the Federal Deposit Insurance Corporation, including U.S.
branches of foreign banks and foreign branches of U.S. banks; and (4)
obligations of U.S. corporations that at the date of investment are rated A or
better by S&P or Moody's.
6
<PAGE>
INVESTMENT PRACTICES AND RESTRICTIONS
Risk Factors. Bond prices move inversely to interest rates, i.e. as interest
rates decline the values of the bonds increase, and vice versa. The longer the
maturity of a bond, the greater the exposure to market price fluctuations. The
same market factors are reflected in the share price or net asset value of bond
funds which will vary with interest rates. In addition, certain of the
obligations in which each Fund may invest may be variable or floating rate
instruments, which may involve a conditional or unconditional demand feature,
and may include variable amount master demand notes. While these types of
instruments may, to a certain degree, offset the risk to principal associated
with rising interest rates, they would not be expected to appreciate in a
falling interest rate environment.
Defensive Investments. The Funds may invest without limitation in high quality
money market instruments, such as notes, certificates of deposit or bankers'
acceptances, or U.S. government securities if, in the opinion of each Fund's
investment adviser, market conditions warrant a temporary defensive investment
strategy.
Downgrades. If any security invested in by any of the Funds loses its rating or
has its rating reduced after the Fund has purchased it, the Fund is not required
to sell or otherwise dispose of the security, but may consider doing so.
Repurchase Agreements. The Funds may invest in repurchase agreements. A
repurchase agreement is an agreement by which a Fund purchases a security
(usually U.S. Government Securities) for cash and obtains a simultaneous
commitment from the seller (usually a bank or broker/dealer) to repurchase the
security at an agreed-upon price and specified future date. The repurchase price
reflects an agreed-upon interest rate for the time period of the agreement. The
Funds' risk is the inability of the seller to pay the agreed-upon price on the
delivery date. However, this risk is tempered by the ability of the Fund to sell
the security in the open market in the case of a default. In such a case, a Fund
may incur costs in disposing of the security which would increase Fund expenses.
The Funds' investment adviser will monitor the creditworthiness of the firms
with which the Funds enter into repurchase agreements.
When-Issued and Delayed Delivery Transactions. The Funds may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which a Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause a
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, a Fund may pay more or less than the market value of the securities
on the settlement date. The Funds may dispose of a commitment prior to
settlement if the investment adviser deems it appropriate to do so. In addition,
the Funds may enter into transactions to sell their purchase commitments to
third parties at current market values and simultaneously acquire other
commitments to purchase similar securities at later dates. The Funds may realize
short-term profits or losses upon the sale of such commitments.
Lending of Portfolio Securities. In order to generate additional income, the
Funds may lend portfolio securities on a short-term or long-term basis to
broker/dealers, banks, or other institutional borrowers of securities. The Funds
will only enter into loan arrangements with creditworthy borrowers and will
receive collateral in the form of cash or U.S. government securities equal to at
least 100% of the value of the securities loaned. As a matter of fundamental
investment policy which cannot be changed without shareholder approval, the
Funds will not lend any of their assets except portfolio securities up to 15%
(in the case of KEYSTONE STRATEGIC INCOME FUND) or one-third (in the case of
EVERGREEN U.S. GOVERNMENT FUND) of the value of their total assets. There is the
risk that when lending portfolio securities, the securities may not be available
to a Fund on a timely basis and the Fund may, therefore, lose the opportunity to
sell the securities at a desirable price. In addition, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Options and Futures. The Funds may engage in options and futures transactions.
Options and futures transactions are intended to enable a Fund to manage market,
interest rate or exchange rate risk, and the Funds do not use these transactions
for speculation or leverage.
The Funds may attempt to hedge all or a portion of their portfolios
through the purchase of both put and call options on their portfolio securities
and listed put options on financial futures contracts for portfolio securities.
KEYSTONE STRATEGIC INCOME FUND may also purchase call options on financial
futures contracts. The Funds may also write covered call options on their
portfolio securities to attempt to increase their current income. The Funds will
maintain their positions in securities, option rights, and segregated cash
subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out only on an exchange which provides
a secondary market for an option of the same series.
7
<PAGE>
The Funds may write (i.e., sell) covered call and put options. By writing
a call option, a Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price. By
writing a put option, a Fund becomes obligated during the term of the option to
purchase the securities underlying the option at the exercise price if the
option is exercised. The Funds also may write straddles (combinations of covered
puts and calls on the same underlying security). The Funds may only write
"covered" options. This means that so long as a Fund is obligated as the writer
of a call option, it will own the underlying securities subject to the option
or, in the case of call options on U.S. Treasury bills, the Fund might own
substantially similar U.S. Treasury bills. A Fund will be considered "covered"
with respect to a put option it writes if, so long as it is obligated as the
writer of the put option, it deposits and maintains with its custodian in a
segregated account liquid assets having a value equal to or greater than the
exercise price of the option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be realized
on the underlying securities alone. The Funds receive a premium from writing a
call or put option which they retain whether or not the option is exercised. By
writing a call option, the Funds might lose the potential for gain on the
underlying security while the option is open, and by writing a put option the
Funds might become obligated to purchase the underlying securities for more than
their current market price upon exercise.
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of instrument called for in the
contract ("going short"), and the buyer, who agrees to take delivery of the
instrument ("going long") at a certain time in the future. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government. If a Fund would enter into financial futures contracts
directly to hedge its holdings of fixed income securities, it would enter into
contracts to deliver securities at an undetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding period. A Fund
would "go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates.
The Funds may also enter into currency and other financial futures
contracts and write options on such contracts. The Funds intend to enter into
such contracts and related options for hedging purposes. The Funds will enter
into futures on securities, currencies, or index-based futures contracts in
order to hedge against changes in interest or exchange rates or securities
prices. A futures contract on securities or currencies is an agreement to buy or
sell securities or currencies during a designated month at whatever price exists
at that time. A futures contract on a securities index does not involve the
actual delivery of securities, but merely requires the payment of a cash
settlement based on changes in the securities index. The Funds do not make
payment or deliver securities upon entering into a futures contract. Instead,
they put down a margin deposit, which is adjusted to reflect changes in the
value of the contract and which remains in effect until the contract is
terminated.
The Funds may sell or purchase currency and other financial futures
contracts. When a futures contract is sold by a Fund, the profit on the contract
will tend to rise when the value of the underlying securities or currencies
declines and to fall when the value of such securities or currencies increases.
Thus, the Funds sell futures contracts in order to offset a possible decline in
the profit on their securities or currencies. If a futures contract is purchased
by a Fund, the value of the contract will tend to rise when the value of the
underlying securities or currencies increases and to fall when the value of such
securities or currencies declines.
The Funds may enter into closing purchase and sale transactions in order
to terminate a futures contract and may buy or sell put and call options for the
purpose of closing out their options positions. The Funds' ability to enter into
closing transactions depends on 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. As a result, there
can be no assurance that the Funds will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Funds are not able to enter into an offsetting transaction, the Funds will
continue to be required to maintain the margin deposits on the contract and to
complete the contract according to its terms, in which case the Funds would
continue to bear market risk on the transaction.
Risk Characteristics of Options and Futures. Although options and futures
transactions are intended to enable the Funds to manage market, exchange, or
interest rate risks, these investment devices can be highly volatile, and the
Funds' use of them can result in poorer performance (i.e., the Funds' returns
may be reduced). A Fund's attempt to use such investment devices for hedging
purposes may not be successful. Successful futures strategies require the
ability to predict future movements in securities prices, interest rates and
other economic factors. When the Funds use financial futures contracts and
options on financial futures contracts as hedging devices, there is a risk
8
<PAGE>
that the prices of the securities subject to the financial futures contracts and
options on financial futures contracts may not correlate perfectly with the
prices of the securities in the Funds' portfolios. This may cause the financial
futures contract and any related options to react to market changes differently
than the portfolio securities. In addition, each Fund's investment adviser could
be incorrect in its expectations and forecasts about the direction or extent of
market factors, such as interest rates, securities price movements, and other
economic factors. Even if each Fund's investment adviser correctly predicts
interest rate movements, a hedge could be unsuccessful if changes in the value
of a Fund's futures position did not correspond to changes in the value of its
investments. In these events, the Funds may lose money on the financial futures
contracts or the options on financial futures contracts. It is not certain that
a secondary market for positions in financial futures contracts or for options
on financial futures contracts will exist at all times. Although each Fund's
investment adviser will consider liquidity before entering into financial
futures contracts or options on financial futures contracts transactions, there
is no assurance that a liquid secondary market on an exchange will exist for any
particular financial futures contract or option on a financial futures contract
at any particular time. The Funds' ability to establish and close out financial
futures contracts and options on financial futures contract positions depends on
this secondary market. If a Fund is unable to close out its position due to
disruptions in the market or lack of liquidity, the Fund may lose money on the
futures contract or option, and the losses to the Fund could be significant.
Zero-Coupon and Stripped Securities. The Funds may invest in zero-coupon and
stripped securities. Zero-coupon securities in which the Funds may invest are
debt obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of the Funds may fluctuate over a greater range than shares of other
mutual funds investing in securities making current distributions of interest
and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment banking firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities". Under the
STRIPS program, the Funds will be able to have their beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidence
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
Foreign Investments. KEYSTONE STRATEGIC INCOME FUND may invest in foreign
securities, which may involve additional risks. Specifically, they may be
affected by the strength of foreign currencies relative to the U.S. dollar, or
by political or economic developments in foreign countries. Accounting
procedures and government supervision may be less stringent than those
applicable to U.S. companies. There may be less publicly available information
about a foreign company than about a U.S. company. Foreign markets may be less
liquid or more volatile than U.S. markets and may offer less protection to
investors. It may also be more difficult to enforce contractual obligations
abroad than would be the case in the United States because of differences in the
legal systems. Foreign securities
9
<PAGE>
may be subject to foreign taxes, which may reduce yield, and may be less
marketable than comparable U.S. securities. All these factors are considered by
each Fund's investment adviser before making any of these types of investments.
Risk Characteristics of Asset-Backed Securities. The Funds may invest in
asset-backed securities. Asset-backed securities are created by the grouping of
certain governmental, government-related and private loans, receivables and
other lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities and mortgage backed securities are
generally subject to higher prepayment risks than most other types of debt
instruments. Prepayment risks on mortgage securities tend to increase during
periods of declining mortgage interest rates, because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Depending upon
market conditions, the yield that the Funds receive from the reinvestment of
such prepayments, or any scheduled principal payments, may be lower than the
yield on the original mortgage security. As a consequence, mortgage securities
may be a less effective means of "locking in" interest rates than other types of
debt securities having the same stated maturity and may also have less potential
for capital appreciation. For certain types of asset pools, such as CMOs,
prepayments may be allocated to one tranche of securities ahead of other
tranches, in order to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Funds to the extent that
the prepaid mortgage securities were purchased at a market premium over their
stated amount. Conversely, the prepayment of mortgage securities purchased at a
market discount from their stated principal amount will accelerate the
recognition of interest income by the Funds which would be taxed as ordinary
income when distributed to the shareholders. The credit characteristics of
asset-backed securities also differ in a number of respects from those of
traditional debt securities. The credit quality of most asset-backed securities
depends primarily upon the credit quality of the assets underlying such
securities, how well the entity issuing the securities is insulated from the
credit risk of the originator or any other affiliated entities, and the amount
and quality of any credit enhancement to such securities.
Risk Characteristics of High Yield Bonds. KEYSTONE STRATEGIC INCOME FUND may
invest in high yield bonds. While investment in high yield bonds provides
opportunities to maximize return over time, investors should be aware of the
following risks associated with high yield bonds:
(1) High yield bonds are rated below investment grade, i.e., BB or lower
by S&P or Ba or lower by Moody's. Securities so rated are considered
predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments.
(2) The lower ratings of these securities reflect a greater possibility
that adverse changes in the financial condition of the issuer or in general
economic conditions, or both, or an unanticipated rise in interest rates may
impair the ability of the issuer to make payments of interest and principal,
especially if the issuer is highly leveraged. Such issuer's ability to meet its
debt obligations may also be adversely affected by specific corporate
developments or the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. Also, an economic
downturn or an increase in interest rates may increase the potential for default
by the issuers of these securities.
(3) Their value may be more susceptible to real or perceived adverse
economic, company or industry conditions and publicity than is the case for
higher quality securities.
(4) Their value, like those of other fixed income securities, fluctuates
in response to changes in interest rates, generally rising when interest rates
decline and falling when interest rates rise. For example, if interest rates
increase after a fixed income security is purchased, the security, if sold prior
to maturity, may return less than its cost. The prices of below-investment grade
bonds, however, are generally less sensitive to interest rate changes than the
prices of higher-rated bonds, but are more sensitive to adverse or positive
economic changes or individual corporate developments.
(5) The secondary market for such securities may be less liquid at
certain times than the secondary market for higher quality debt securities,
which may adversely effect (i) the market price of the security, (ii) the
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<PAGE>
Fund's ability to dispose of particular issues and (iii) the Fund's ability to
obtain accurate market quotations for purposes of valuing its assets.
(6) Zero coupon bonds and PIKs involve additional special considerations.
For example, zero coupon bonds pay no interest to holders prior to maturity of
interest. PIKs are debt obligations that provide that the issuer may, at its
option, pay interest on such bonds in cash or in the form of additional debt
obligations. Such investments may experience greater fluctuation in value due to
changes in interest rates than debt obligations that pay interest currently.
Even though these investments do not pay current interest in cash, the Fund is,
nonetheless, required by tax laws to accrue interest income on such investments
and to distribute such amounts at least annually to shareholders. Thus, the Fund
could be required at times to liquidate investments in order to fulfill its
intention to distribute substantially all of its net income as dividends. The
Fund will not be able to purchase additional income producing securities with
cash used to make such distributions, and its current income ultimately may be
reduced as a result.
The generous income sought by the Fund is ordinarily associated with
securities in the lower rating categories of the recognized rating agencies or
with securities that are unrated. Such securities are generally rated BB or
lower by S&P or Ba or lower by Moody's. The Fund may invest in securites that
are rated as low as D by S&P or C- by Moody's. The Fund may also invest in
unrated securities that, in the investment adviser's judgment, offer comparable
yields and risks as securities that are rated. It is possible for securities
rated D or C-, respectively, to have defaulted on payments of principal and/or
interest at the time of investment. The Statement of Additional Information
describes these rating categories. The Fund intends to invest in D rated debt
only in cases when, in the investment adviser's judgment, there is a distinct
prospect of improvement in the issuer's financial position as a result of the
completion of reorganization or otherwise.
The investment adviser considers the ratings of S&P and Moody's assigned
to various securities, but does not rely solely on these ratings because (1) S&P
and Moody's assigned ratings are based largely on historical financial data and
may not accurately reflect the current financial outlook of companies; and (2)
there can be large differences among the current financial conditions of issuers
within the same category.
The following table shows the weighted average percentages of the Fund's
assets invested at the end of each month during the nine-month fiscal period
ended April 30, 1997 in securities assigned to the various rating categories and
in unrated securities determined by the investment adviser to be of comparable
quality. The rated asset percentages shown have received equivalent ratings from
S&P and Moody's except where ratings are "split," i.e., different between S&P
and Moody's. In such instances, the higher of the two ratings is shown and the
lower rating is no more than one grade below the higher one. For the purposes of
the table, only the S&P rating system is used. Since the percentages in this
table are based on month-end averages throughout the fiscal period, they do not
reflect the Fund's holdings at any one point in time. The percentages in each
category may be higher or lower on any day than those shown in the table below.
<TABLE>
<CAPTION>
*UNRATED SECURITIES
OF COMPARABLE
RATED SECURITIES QUALITY AS
AS PERCENTAGE OF PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
<S> <C> <C>
AAA 24.93% 0.00%
AA 10.72% 0.00%
A 3.06% 0.00%
BBB 0.11% 0.00%
BBB split 0.45% N/A
BB 8.97% 0.39%
BB split 11.18% N/A
B 21.63% 5.82%
B split 0.36% N/A
CCC 0.00% 0.01%
D 0.00% 1.03%
Unrated* 7.25%
U.S. Governments,
equities and others 11.34%
TOTAL 100.00%
</TABLE>
11
<PAGE>
Since the Fund takes an aggressive approach to investing, the investment
adviser attempts to maximize the return by controlling risk through
diversification, credit analysis, review of sector and industry trends, interest
rate forecasts and economic analysis. The investment adviser's analysis of
securities focuses on factors such as interest or dividend coverage, asset
values, earning prospects and the quality of management of the company. In
making investment recommendations, the investment adviser also considers current
income, potential for capital appreciation, maturity structure, quality
guidelines, coupon structure, average yield, yield to maturity and the
percentage of zero coupon bonds, PIKs and non-accruing items in the Fund's
portfolio.
Income and yields on high yield, high risk securities, as on all
securities, will fluctuate over time.
Borrowing. As a matter of fundamental policy, the Funds may not borrow money
except as a temporary measure to facilitate redemption requests or for
extraordinary or emergency purposes. The proceeds from borrowings may be used to
facilitate redemption requests which might otherwise require the untimely
disposition of portfolio securities. The specific limits applicable to borrowing
by each Fund are set forth in the Statement of Additional Information.
Restricted and Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities. Illiquid securities include certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISERS
The management of each Fund is supervised by the Trustees of the Trust
under which the Fund has been established ("Trustees"). The Capital Management
Group ("CMG") of First Union National Bank ("FUNB") serves as investment adviser
to EVERGREEN U.S. GOVERNMENT FUND. FUNB is a subsidiary of First Union
Corporation ("First Union"), the sixth largest bank holding company in the
United States.
Keystone Investment Management Company ("Keystone") has been retained by
KEYSTONE STRATEGIC INCOME FUND to serve as investment adviser. Keystone has
provided investment advisory and management services to investment companies and
private accounts since it was organized in 1932. Keystone is a subsidiary of
FUNB.
First Union is headquartered in Charlotte, North Carolina, and had $143
billion in consolidated assets as of June 30, 1997. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the United States. CMG, Keystone and Evergreen Asset
Management Corporation ("Evergreen Asset"), a wholly owned subsidiary of FUNB,
manage or otherwise oversee the investment of over $66 billion in assets as of
June 30, 1997, belonging to a wide range of clients, including the Evergreen
Keystone Funds. First Union Brokerage Services, Inc. ("FUBS"), a wholly-owned
subsidiary of FUNB, is a registered broker-dealer that is principally engaged in
providing retail brokerage services consistent with its federal banking
authorizations. First Union Capital Markets Corp., a wholly-owned subsidiary of
First Union, is a registered broker-dealer principally engaged in providing,
consistent with its federal banking authorizations, private placement,
securities dealing, and underwriting services.
CMG manages investments and supervises the daily business affairs of
EVERGREEN U.S. GOVERNMENT FUND and, as compensation therefor, is entitled to
receive an annual fee equal to 0.50 of 1% of the Fund's average daily net
assets.
Keystone acts as investment adviser to KEYSTONE STRATEGIC INCOME FUND and
manages the Fund's investments, provides various administrative services and
supervises the Fund's daily business affairs, subject to the authority of the
Trustees. As payment for its services, Keystone is entitled to receive from
KEYSTONE STRATEGIC INCOME FUND a fee, calculated on an annual basis, equal to
2.0% of gross dividend and interest income of the Fund plus 0.50% of the first
$100,000,000 of the aggregate net asset value of the shares of the Fund, plus
0.45% of the next $100,000,000, plus 0.40% of the next $100,000,000, plus 0.35%
of the next $100,000,000, plus 0.30% of the next $100,000,000, plus 0.25% of
amounts over $500,000,000, computed as of the close of business each business
day and paid monthly.
12
<PAGE>
The total annualized operating expenses of each Fund for the fiscal
period ended April 30, 1997, expressed as a percentage of average net assets on
an annual basis, are set forth in the section entitled "Financial Highlights".
Such expenses reflect all voluntary expense reimbursements which may be revised
or terminated at any time.
PORTFOLIO MANAGERS
Rollin C. Williams, a Vice President of FUNB, has been the Portfolio
Manager of EVERGREEN U.S. GOVERNMENT FUND since its inception in 1992. Mr.
Williams, who has over 28 years investment management experience, was Head of
Fixed Income Investments at Dominion Trust Company from 1988 until its
acquisition by First Union.
The Portfolio Manager of KEYSTONE STRATEGIC INCOME FUND is Prescott B.
Crocker. Mr. Crocker is a Senior Vice President, Senior Portfolio Manager and
Head of the High Yield Bond Team at Keystone. Mr. Crocker joined Keystone in
1997 and initially served as the manager of the domestic high yield bond portion
of the Fund's portfolio. From 1993 until he joined Keystone, Mr. Crocker held
various positions at Boston Security Counsellors, including President and Chief
Investment Officer, and was Managing Director and Portfolio Manager at Northstar
Investment Management. Mr. Crocker has 25 years of experience in fixed income
investment management.
ADMINISTRATOR
Evergreen Keystone Investment Services, Inc. ("EKIS") serves as
administrator to EVERGREEN U.S. GOVERNMENT FUND, subject to the supervision and
control of the Trustees of the Evergreen Investment Trust. As administrator EKIS
provides facilities, equipment and personnel to the EVERGREEN U.S. GOVERNMENT
FUND and is entitled to receive an administration fee from the Fund based on the
aggregate average daily net assets of all the mutual funds for which CMG,
Evergreen Asset or Keystone serve as investment adviser, calculated in
accordance with the following schedule:
<TABLE>
<CAPTION>
Administration Fee
<S> <C>
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% on assets in excess of $30 billion
</TABLE>
EKIS also provides facilities, equipment and personnel to KEYSTONE
STRATEGIC INCOME FUND on behalf of the Fund's investment adviser.
SUB-ADMINISTRATOR
BISYS Fund Services, Inc. ("BISYS"), an affiliate of Evergreen Keystone
Distributor, Inc. ("EKD"), distributor for the Evergreen Keystone Funds, serves
as sub-administrator to the Funds and is entitled to receive a fee based on the
aggregate average daily net assets of all the mutual funds for which CMG,
Evergreen Asset or Keystone serve as investment adviser, calculated in
accordance with the following schedule:
<TABLE>
<CAPTION>
Sub-Administration Fee
<S> <C>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
</TABLE>
The total assets of the mutual funds for which FUNB affiliates serve as
investment advisers were approximately $30.5 billion as of June 30, 1997.
13
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
Class Y shares are offered at net asset value without a front-end sales
charge or a contingent deferred sales load. Class Y shares are only offered to
(i) persons who at or prior to December 31, 1994, owned shares in a mutual fund
advised by Evergreen Asset, (ii) certain institutional investors and (iii)
investment advisory clients of CMG, Evergreen Asset, Keystone or their
affiliates.
Eligible investors may purchase Class Y shares of any of the Funds
through broker-dealers, banks or other financial intermediaries, or directly
through EKD. In addition, you may purchase Class Y shares of any of the Funds by
mailing to that Fund, c/o Evergreen Keystone Service Company ("EKSC"), P.O. Box
2121, Boston, Massachusetts 02106-2121, a completed Application and a check
payable to the Fund. You may also telephone 1-800-343-2898 to obtain the number
of an account to which you can wire or electronically transfer funds and then
send in a completed Application. The minimum initial investment is $1,000, which
may be waived in certain situations. Subsequent investments in any amount may be
made by check, by wiring federal funds, by direct deposit or by an electronic
funds transfer.
There is no minimum amount for subsequent investments. Investments of $25
or more are allowed under the Systematic Investment Plan. See the Application
for more information. Only Class Y shares are offered through this Prospectus
(see "General Information" -- "Other Classes of Shares").
How the Funds Value their Shares. The net asset value of each Class of shares of
a Fund is calculated by dividing the value of the amount of the Fund's net
assets attributable to that Class by the number of outstanding shares of that
Class. Shares are valued each day the New York Stock Exchange (the "Exchange")
is open as of the close of regular trading (currently 4:00 p.m. Eastern time).
The securities in a Fund are valued at their current market value determined on
the basis of market quotations or, if such quotations are not readily available,
such other methods as a Fund's Trustees believe would accurately reflect fair
value. Non-dollar denominated securities will be valued as of the close of the
Exchange at the closing price of such securities in their principal trading
markets.
Additional Purchase Information. As a condition of this offering, if a purchase
is canceled due to nonpayment or because an investor's check does not clear, the
investor will be responsible for any loss a Fund or the Fund's investment
adviser incurs. If such investor is an existing shareholder, a Fund may redeem
shares from an investor's account to reimburse the Fund or its investment
adviser for any loss. In addition, such investors may be prohibited or
restricted from making further purchases in any of the Evergreen Keystone Funds.
The Funds will not accept third party checks other than those payable directly
to a shareholder whose account has been in existence at least thirty days.
HOW TO REDEEM SHARES
You may "redeem" (i.e., sell) your Class Y shares in a Fund to the Fund
for cash, (at the net redemption value) on any day the Exchange is open, either
directly by writing to the Fund, c/o EKSC, or through your financial
intermediary. The amount you will receive is the net asset value adjusted for
fractions of a cent next calculated after the Fund receives your request in
proper form. Proceeds generally will be sent to you within seven days. However,
for shares recently purchased by check, a Fund will not send proceeds until it
is reasonably satisfied that the check has been collected (which may take up to
15 days). Once a redemption request has been telephoned or mailed, it is
irrevocable and may not be modified or canceled.
Redeeming Shares Through Your Financial Intermediary. A Fund must receive
instructions from your financial intermediary before 4:00 p.m. (Eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to a Fund and may charge
you for this service. Certain financial intermediaries may require that you give
instructions earlier than 4:00 p.m. (Eastern time).
Redeeming Shares Directly by Mail or Telephone. Send a signed letter of
instruction or stock power form to the Fund, c/o EKSC; the registrar, transfer
agent and dividend-disbursing agent for each Fund. Stock power forms are
available from your financial intermediary, EKSC, and many commercial banks.
Additional documentation is required for the sale of shares by corporations,
financial intermediaries, fiduciaries and surviving joint owners. Signature
guarantees are required for all redemption requests for shares with a value of
more than $50,000. Currently, the requirement for a signature guarantee has been
waived on redemptions of $50,000 or less when the
14
<PAGE>
account address of record has been the same for a minimum period of 30 days.
Each Fund and EKSC reserve the right to withdraw this waiver at any time. A
signature guarantee must be provided by a bank or trust company (not a Notary
Public), a member firm of a domestic stock exchange or by other financial
institutions whose guarantees are acceptable under the Securities Exchange Act
of 1934 and EKSC's policies.
Shareholders may withdraw amounts of $1,000 or more (up to $50,000) from
their accounts by calling the telephone number on the front page of this
Prospectus between the hours of 8:00 a.m. and 5:30 p.m.(Eastern time) each
business day (i.e., any weekday exclusive of days on which the Exchange or EKSCs
offices are closed). The Exchange is closed on New Years Day, Martin Luther King
Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Redemption requests received after 4:00 p.m.
(Eastern time) will be processed using the net asset value determined on the
next business day. Such redemption requests must include the shareholder's
account name, as registered with a Fund, and the account number. During periods
of drastic economic or market changes, shareholders may experience difficulty in
effecting telephone redemptions. If you cannot reach the Fund by telephone, you
should follow the procedures for redeeming by mail or through a broker-dealer as
set forth herein. The telephone redemption service is not made available to
shareholders automatically. Shareholders wishing to use the telephone redemption
service must complete the appropriate sections on the Application and choose how
the redemption proceeds are to be paid. Redemption proceeds will either (i) be
mailed by check to the shareholder at the address in which the account is
registered or (ii) be wired to an account with the same registration as the
shareholder's account in a Fund at a designated commercial bank.
In order to insure that instructions received by EKSC are genuine when
you initiate a telephone transaction, you will be asked to verify certain
criteria specific to your account. At the conclusion of the transaction, you
will be given a transaction number confirming your request, and written
confirmation of your transaction will be mailed the next business day. Your
telephone instructions will be recorded. Redemptions by telephone are allowed
only if the address and bank account of record have been the same for a minimum
period of 30 days. Each Fund reserves the right at any time to terminate,
suspend, or change the terms of any redemption method described in this
Prospectus, except redemption by mail, and to impose fees.
Except as otherwise noted, the Funds, EKSC, and EKD will not assume
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing, over the Evergreen Keystone Express Line, or by
telephone. EKSC will employ reasonable procedures to confirm that instructions
received over the Evergreen Keystone Express Line or by telephone are genuine.
The Funds, EKSC, and EKD will not be liable when following instructions received
over the Evergreen Keystone Express Line or by telephone that EKSC reasonably
believes are genuine.
Evergreen Keystone Express Line. The Evergreen Keystone Express Line offers you
specific fund account information and price and yield quotations as well as the
ability to do account transactions, including investments, exchanges and
redemptions. You may access the Evergreen Keystone Express Line by dialing toll
free 1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a
week.
General. The sale of shares is a taxable transaction for federal income tax
purposes. The Funds may temporarily suspend the right to redeem their shares
when (1) the Exchange is closed, other than customary weekend and holiday
closings; (2) trading on the Exchange is restricted; (3) an emergency exists and
the Funds cannot dispose of their investments or fairly determine their value;
or (4) the Securities and Exchange Commission ("SEC") so orders. The Funds
reserve the right to close an account that through redemption has fallen below
$1,000 and has remained so for thirty days. Shareholders will receive sixty
days' written notice to increase the account value to at least $1,000 before the
account is closed. The Funds have elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which each Fund is obligated to redeem shares solely in
cash, up to the lesser of $250,000 or 1% of a Fund's total net assets, during
any ninety day period for any one shareholder.
15
<PAGE>
EXCHANGE PRIVILEGE
How to Exchange Shares. You may exchange some or all of your Class Y shares for
shares of the same Class in the other Evergreen Keystone funds through your
financial intermediary, by calling or writing to EKSC or by using the Evergreen
Keystone Express Line as described above. Once an exchange request has been
telephoned or mailed, it is irrevocable and may not be modified or canceled.
Exchanges will be made on the basis of the relative net asset values of the
shares exchanged next determined after an exchange request is received. An
exchange which represents an initial investment in another Evergreen Keystone
fund is subject to the minimum investment and suitability requirements of each
Fund.
Each of the Evergreen Keystone funds has different investment objectives
and policies. For complete information, a prospectus of the fund into which an
exchange will be made should be read prior to the exchange. An exchange order
must comply with the requirement for a redemption or repurchase order and must
specify the dollar value or number of shares to be exchanged. An exchange is
treated for federal income tax purposes as a redemption and purchase of shares
and may result in the realization of a capital gain or loss. Shareholders are
limited to five exchanges per calendar year, with a maximum of three per
calendar quarter. This exchange privilege may be modified or discontinued at any
time by the Fund upon sixty days' notice to shareholders and is only available
in states in which shares of the fund being acquired may lawfully be sold.
Exchanges Through Your Financial Intermediary. A Fund must receive exchange
instructions from your financial intermediary before 4:00 p.m. (Eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to a Fund and may charge
you for this service.
Exchanges By Telephone And Mail. Exchange requests received by a Fund after 4:00
p.m. (Eastern time) will be processed using the net asset value determined at
the close of the next business day. During periods of drastic economic or market
changes, shareholders may experience difficulty in effecting telephone
exchanges. You should follow the procedures outlined below for exchanges by mail
if you are unable to reach EKSC by telephone. If you wish to use the telephone
exchange service you should indicate this on the Application. As noted above,
each Fund will employ reasonable procedures to confirm that instructions for the
redemption or exchange of shares communicated by telephone are genuine. A
telephone exchange may be refused by a Fund or EKSC if it is believed advisable
to do so. Procedures for exchanging Fund shares by telephone may be modified or
terminated at any time. Written requests for exchanges should follow the same
procedures outlined for written redemption requests in the section entitled "How
to Redeem Shares"; however, no signature guarantee is required.
SHAREHOLDER SERVICES
The Funds offer the following shareholder services. For more information
about these services or your account, contact your financial intermediary, EKSC
or call the toll-free number on the front page of this Prospectus. Some services
are described in more detail in the Application.
Systematic Investment Plan. Under a Systematic Investment Plan, you may invest
as little as $25 per month to purchase shares of a Fund with no minimum initial
investment required.
Telephone Investment Plan. You may make investments into an existing account
electronically in amounts of not less than $100 or more than $10,000 per
investment. Telephone investment requests received by 4:00 p.m. (Eastern time)
will be credited to a shareholder's account the day the request is received.
Shares purchased under the Systematic Investment Plan or Telephone Investment
Plan may not be redeemed for ten days from the date of investment.
Systematic Withdrawal Plan. When an account of $10,000 or more is opened or when
an existing account reaches that size, you may participate in the Systematic
Withdrawal Plan by filling out the appropriate part of the Application. Under
this Plan, you may receive (or designate a third party to receive) a monthly or
quarterly fixed-withdrawal payment in a stated amount of at least $75 and may be
as much as 1.0% per month or 3.0% per quarter of the total net asset value of
the Fund shares in your account when the Plan was opened. Fund shares will be
redeemed as necessary to meet withdrawal payments. All participants must elect
to have their dividends and capital gain distributions reinvested automatically.
Automatic Reinvestment Plan. For the convenience of investors, all dividends and
distributions are automatically reinvested in full and fractional shares of a
Fund at the net asset value per share at the close of business on the record
date, unless otherwise requested by a shareholder in writing. If the transfer
agent does not receive a written
16
<PAGE>
request for subsequent dividends and/or distributions to be paid in cash at
least three full business days prior to a given record date, the dividends
and/or distributions to be paid to a shareholder will be reinvested.
Dollar Cost Averaging. Through dollar cost averaging you can invest a fixed
dollar amount each month or each quarter in any Evergreen Keystone fund. This
results in more shares being purchased when the selected Fund's net asset value
is relatively low and fewer shares being purchased when the Fund's net asset
value is relatively high and may result in a lower average cost per share than a
less systematic investment approach.
Prior to participating in dollar cost averaging, you must establish an
account in an Evergreen Keystone fund. You should designate on the Application
(i) the dollar amount of each monthly or quarterly investment you wish to make,
and (ii) the Fund in which the investment is to be made. Thereafter, on the
first day of the designated month, an amount equal to the specified monthly or
quarterly investment will automatically be redeemed from your initial account
and invested in shares of the designated fund.
Two Dimensional Investing. You may elect to have income and capital gains
distributions from any Class Y Evergreen Keystone fund shares you own
automatically invested to purchase the same class of shares of any other
Evergreen Keystone fund. You may select this service on your Application and
indicate the Evergreen Keystone fund(s) into which distributions are to be
invested.
Tax Sheltered Retirement Plans. The Funds have various retirement plans
available to eligible investors, including Individual Retirement Accounts
(IRAs); Rollover IRAs; Simplified Employee Pension Plans (SEPs); Salary
Incentive Match Plan for Employees (SIMPLEs); Tax Sheltered Annuity Plans;
403(b)(7) Plans; 401(k) Plans; Keogh Plans; Profit-Sharing Plans; Pension and
Target Benefit and Money Purchase Plans. For details, including fees and
application forms, call toll free 1-800-247-4075 or write to EKSC.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Funds. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser, transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. Keystone
and CMG are subject to and in compliance with the aforementioned laws and
regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in CMG or Keystone being prevented from
continuing to perform the services required under the investment advisory
contract or from acting as agent in connection with the purchase of shares of a
Fund by its customers. If CMG or Keystone were prevented from continuing to
provide the services called for under the investment advisory agreement, it is
expected that the Trustees would identify, and call upon each Fund's
shareholders to approve, a new investment adviser. If this were to occur, it is
not anticipated that the shareholders of any Fund would suffer any adverse
financial consequences.
OTHER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
For each Fund, net income dividends, if any, are declared daily and paid
monthly. Distributions of any net realized capital gains of the Funds will be
made annually or more frequently. Dividends and distributions generally are
taxable in the year in which they are paid, except any dividends paid in January
that were declared in the previous calendar quarter will be treated as paid in
December of the previous year. Income dividends and capital gain distributions
are automatically reinvested in additional shares of the Fund making the
distribution at the net asset value per share at the close of business on the
record date, unless the shareholder has made a written request for payment in
cash.
Each Fund has qualified and intends to continue to qualify to be treated
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). While so qualified, it is expected
17
<PAGE>
that each Fund will not be required to pay any Federal income taxes on that
portion of its investment company taxable income and any net realized capital
gains it distributes to shareholders. The Code imposes a 4% nondeductible excise
tax on regulated investment companies, such as the Funds, to the extent they do
not meet certain distribution requirements by the end of each calendar year.
Each Fund anticipates meeting such distribution requirements. Most shareholders
of the Funds normally will have to pay Federal income taxes and any state or
local taxes on the dividends and distributions they receive from a Fund whether
such dividends and distributions are made in cash or in additional shares.
Questions on how any distributions will be taxed to the investor should be
directed to the investor's own tax adviser.
Following the end of each calendar year, every shareholder of the Funds
will be sent applicable tax information and information regarding the dividends
and capital gain distributions made during the calendar year.
A Fund may be subject to foreign withholding taxes which would reduce the
yield on its investments. Tax treaties between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of a Fund who are
subject to United States Federal income tax may be entitled, subject to certain
rules and limitations, to claim a Federal income tax credit or deduction for
foreign income taxes paid by a Fund. See the Statement of Additional Information
for additional details. A Fund's transactions in options, futures and forward
contracts may be subject to special tax rules. These rules can affect the
amount, timing and characteristics of distributions to shareholders.
Each Fund is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gain distributions, if any, and
redemptions) paid to certain shareholders. In order to avoid this backup
withholding requirement, you must certify on the Application, or on a separate
form supplied by State Street, that your social security or taxpayer
identification number is correct and that you are not currently subject to
backup withholding or are exempt from backup withholding.
The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. As the foregoing
discussion is for general information only, you should also review the
discussion of "Additional Tax Information" contained in the Statement of
Additional Information. In addition, you should consult your own tax adviser as
to the tax consequences of investments in the Funds, including the application
of state and local taxes which may be different from Federal income tax
consequences described above.
GENERAL INFORMATION
Portfolio Transactions. Consistent with the Rules of Conduct of the National
Association of Securities Dealers, Inc., and subject to seeking best price and
execution, a Fund may consider sales of its shares as a factor in the selection
of dealers to enter into portfolio transactions with the Fund.
Organization. EVERGREEN U.S. GOVERNMENT FUND is a separate investment series of
Evergreen Investment Trust (formerly First Union Funds), which is a
Massachusetts business trust organized in 1984. KEYSTONE STRATEGIC INCOME FUND
is a Massachusetts business trust organized in 1986. The Funds do not intend to
hold annual shareholder meetings; shareholder meetings will be held only when
required by applicable law. Shareholders have available certain procedures for
the removal of Trustees.
A shareholder in each Class of a Fund will be entitled to his or her
share of all dividends and distributions from a Fund's assets, based upon the
relative value of such shares to those of other Classes of the Fund, and, upon
redeeming shares, will receive the then current net asset value of the Class of
shares of the Fund represented by the redeemed shares less any applicable
contingent deferred sales charge. Each Trust named above is empowered to
establish, without shareholder approval, additional investment series, which may
have different investment objectives, and additional Classes of shares for any
existing or future series. If an additional series or Class were established in
a Fund, each share of the series or Class would normally be entitled to one vote
for all purposes. Generally, shares of each series and Class would vote together
as a single Class on matters, such as the election of Trustees, that affect each
series and Class in substantially the same manner. Class A, Class B, Class C and
Class Y shares have identical voting, dividend, liquidation and other rights,
except that each Class bears, to the extent applicable, its own distribution and
transfer agency expenses as well as any other expenses applicable only to a
specific Class. Each Class of shares votes separately with respect to Rule 12b-1
18
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distribution plans and other matters for which separate Class voting is
appropriate under applicable law. Shares are entitled to dividends as determined
by the Trustees and, in liquidation of a Fund, are entitled to receive the net
assets of the Fund.
Custodian. State Street Bank and Trust Company, P.O. Box 9021, Boston,
Massachusetts 02205-9827 acts as each Fund's custodian.
Registrar, Transfer Agent and Dividend-Disbursing Agent. Evergreen Keystone
Service Company, P.O. Box 2121, Boston, Massachusetts 02106-2121 serves as each
Fund's registrar, transfer agent and dividend-disbursing agent.
Principal Underwriter. EKD, an affiliate of BISYS, is located at 125 W. 55th
Street, New York, New York 10019, and is the principal underwriter of the Funds.
BISYS also acts as sub-administrator to the Funds and provides personnel to
serve as officers of the Funds.
Other Classes of Shares. Each Fund currently offers four classes of shares,
Class A, Class B, Class C and Class Y, and may in the future offer additional
classes. Class Y shares are the only class of shares offered by this Prospectus
and are only available to (i) persons who at or prior to December 31, 1994,
owned shares in a mutual fund advised by Evergreen Asset, (ii) certain
institutional investors and (iii) investment advisory clients of CMG, Evergreen
Asset, Keystone or their affiliates. The dividends payable with respect to Class
A, Class B and Class C shares will be less than those payable with respect to
Class Y shares due to the distribution and shareholder servicing-related
expenses borne by Class A, Class B and Class C shares and the fact that such
expenses are not borne by Class Y shares.
Performance Information. From time to time, the Funds may quote their "total
return" or "yield" for a specified period in advertisements, reports or other
communications to shareholders. Total return and yield are computed separately
for Class A, Class B, Class C and Class Y shares. A Fund's total return for each
such period is computed by finding, through the use of a formula prescribed by
the SEC, the average annual compounded rate of return over the period that would
equate an assumed initial amount invested to the value of the investment at the
end of the period. For purposes of computing total return, dividends and capital
gains distributions paid on shares of a Fund are assumed to have been reinvested
when paid and the maximum sales charges applicable to purchases of a Fund's
shares are assumed to have been paid. Yield is a way of showing the rate of
income the Fund earns on its investments as a percentage of the Fund's share
price. The Fund's yield is calculated according to accounting methods that are
standardized by the SEC for all stock and bond funds. Because yield accounting
methods differ from the method used for other accounting purposes, the Fund's
yield may not equal its distribution rate, the income paid to your account or
the net investment income reported in the Fund's financial statements. To
calculate yield, the Fund takes the interest and dividend income it earned from
its portfolio of investments (as defined by the SEC formula) for a 30-day period
(net of expenses), divides it by the average number of shares entitled to
receive dividends, and expresses the result as an annualized percentage rate
based on the Fund's share price at the end of the 30-day period. This yield does
not reflect gains or losses from selling securities.
Performance data for each Class of shares will be included in any
advertisement or sales literature using performance data of a Fund. These
advertisements may quote performance rankings or ratings of a Fund by financial
publications or independent organizations such as Lipper Analytical Services,
Inc. and Morningstar, Inc. or compare a Fund's performance to various indices. A
Fund may also advertise in items of sales literature an "actual distribution
rate" which is computed by dividing the total ordinary income distributed (which
may include the excess of short-term capital gains over losses) to shareholders
for the latest twelve month period by the maximum public offering price per
share on the last day of the period. Investors should be aware that past
performance may not be indicative of future results.
In marketing a Fund's shares, information may be provided that is
designed to help individuals understand their investment goals and explore
various financial strategies. Such information may include publications
describing general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting; a questionnaire designed to
help create a personal financial profile; and an action plan offering investment
alternatives. The information provided to investors may also include discussions
of other Evergreen Keystone funds, products, and services, which may include:
retirement investing; brokerage products and services; the effects of periodic
investment plans and dollar cost averaging; saving for college; and charitable
giving. In addition, the information provided to investors may quote financial
or business publications and periodicals, including model portfolios or
allocations, as they relate to fund management, investment philosophy, and
investment techniques.
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The materials may also reprint, and use as advertising and sales literature,
articles from EVERGREEN KEYSTONE EVENTS, a quarterly magazine provided free of
charge to Evergreen Keystone fund shareholders.
Liability Under Massachusetts Law. Under Massachusetts law, Trustees and
shareholders of a business trust may, in certain circumstances, be held
personally liable for its obligations. The Declaration of Trust under which each
Fund operates provide that no Trustee or shareholder will be personally liable
for the obligations of the Trust and that every written contract made by the
Trust contain a provision to that effect. If any Trustee or shareholder were
required to pay any liability of the Trust, that person would be entitled to
reimbursement from the general assets of the Trust.
Additional Information. This Prospectus and the Statement of Additional
Information, which has been incorporated by reference herein, do not contain all
the information set forth in the Registration Statements filed by the Trusts
with the SEC under the Securities Act of 1933, as amended. Copies of the
Registration Statements may be obtained at a reasonable charge from the SEC or
may be examined, without charge, at the offices of the SEC in Washington, D.C.
20
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INVESTMENT ADVISERS
Capital Management Group of First Union National Bank, 210 South College
Street, Charlotte, North Carolina, 28228
EVERGREEN U.S. GOVERNMENT FUND
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116-5034
KEYSTONE STRATEGIC INCOME FUND
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Keystone Service Company, P.O. Box 2121, Boston, Massachusetts
02106-2121
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
DISTRIBUTOR
Evergreen Keystone Distributor, Inc., 125 W. 55th Street, New York, New York
10019
541292
<PAGE>
KEYSTONE STRATEGIC INCOME FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
EVERGREEN KEYSTONE LONG TERM BOND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1997
Evergreen U.S. Government Fund ("U.S. Government")
Keystone Strategic Income Fund ("Strategic Income")
This Statement of Additional Information pertains to all classes of
shares of the Funds listed above. It is not a prospectus and should be read in
conjunction with the Prospectus dated September 1, 1997 for the Fund in which
you are making or contemplating an investment. The Evergreen Keystone Long Term
Bond Funds are offered through two separate Prospectuses: one offering Class A,
Class B and Class C shares of U.S. Government and Strategic Income, and a
separate prospectus offering Class Y shares of each Fund.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Investment Objectives and Policies .......................................2
Investment Restrictions..................................................10
Certain Risk Considerations..............................................14
Management...............................................................14
Trustees ................................................................15
Investment Advisers......................................................22
Distribution Plans and Agreements........................................25
Allocation of Brokerage..................................................28
Additional Tax Information...............................................29
Net Asset Value..........................................................31
Purchase of Shares.......................................................32
General Information about the Funds......................................41
Performance Information..................................................43
General ................................................................45
Financial Statements.....................................................46
Appendix "A".............................................................47
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INVESTMENT OBJECTIVES AND POLICIES
(See also "Description of the Funds Investment Objectives and Policies"
in the Funds' Prospectus)
- --------------------------------------------------------------------------------
The investment objective of each Fund and a description of the
securities in which each Fund may invest is set forth under "Description of the
Funds- Investment Objectives and Policies" in the relevant Prospectus. The
investment objectives of each Fund are fundamental and cannot be changed without
the approval of shareholders. The following expands the discussion in the
Prospectus regarding certain investments of each Fund.
Types of Investments
U.S. Government Obligations (Both Funds)
The types of U.S. Government obligations in which the Funds may invest
generally include obligations issued or guaranteed by U.S. Government agencies
or instrumentalities.
These securities are backed by:
(1) the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities; or
(2) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive
financial support from the U.S.
Government are:
(i) Farm Credit System, including the National Bank for Cooperatives,
Farm Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association;
(vi) Government National Mortgage Association; and
(vii) Student Loan Marketing Association
GNMA Securities. The Funds may invest in securities issued by the Government
National Mortgage Association ("GNMA"), a wholly-owned U.S. Government
corporation, which guarantees the timely payment of principal and interest, but
not premiums paid to purchase these instruments. The market value and interest
yield of these instruments can vary due to market interest rate fluctuations and
early prepayments of underlying mortgages. These securities represent ownership
in a pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary
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widely, it is not possible to accurately predict the average maturity of a
particular GNMA pool. The scheduled monthly interest and principal payments
relating to mortgages in the pool will be "passed through" to investors. GNMA
securities differ from conventional bonds in that principal is paid back to the
certificate holders over the life of the loan rather than at maturity. As a
result, there will be monthly scheduled payments of principal and interest. In
addition, there may be unscheduled principal payments representing prepayments
on the underlying mortgages. Although GNMA certificates may offer yields higher
than those available from other types of U.S. Government securities, GNMA
certificates may be less effective than other types of securities as a means of
"locking in" attractive long-term rates because of the prepayment feature. For
instance, when interest rates decline, the value of a GNMA certificate likely
will not rise as much as comparable debt securities due to the prepayment
feature. In addition, these prepayments can cause the price of a GNMA
certificate originally purchased at a premium to decline in price compared to
its par value, which may result in a loss.
Mortgage-Backed or Asset-Backed Securities. The Funds may invest in
mortgage-backed securities and asset-backed securities. Two principal types of
mortgage-backed securities are collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs"). CMOs are securities
collateralized by mortgages, mortgage pass-throughs, mortgage pay-through bonds
(bonds representing an interest in a pool of mortgages where the cash flow
generated from the mortgage collateral pool is dedicated to bond repayment), and
mortgage-backed bonds (general obligations of the issuers payable out of the
issuers' general funds and additionally secured by a first lien on a pool of
single family detached properties). Many CMOs are issued with a number of
classes or series which have different maturities and are retired in sequence.
Investors purchasing CMOs in the shortest maturities receive or are credited
with their pro rata portion of the scheduled payments of interest and principal
on the underlying mortgages plus all unscheduled prepayments of principal up to
a predetermined portion of the total CMO obligation. Until that portion of such
CMO obligation is repaid, investors in the longer maturities receive interest
only. Accordingly, the CMOs in the longer maturity series are less likely than
other mortgage pass-throughs to be prepaid prior to their stated maturity.
Although some of the mortgages underlying CMOs may be supported by various types
of insurance, and some CMOs may be backed by GNMA certificates or other mortgage
pass-throughs issued or guaranteed by U.S. Government agencies or
instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities.
In addition to mortgage-backed securities, the Funds may invest in
securities secured by other assets including company receivables, truck and auto
loans, leases, and credit card receivables. These issues may be traded
over-the-counter and typically have a short-intermediate maturity structure
depending on the pay down characteristics of the underlying financial assets
which are passed through to the security holder.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by automobile receivables permit the servicers of
such receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
rated asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for
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the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, the Adviser (as herein after
defined) considers the financial strength of the guarantor or other provider of
credit support, the type and extent of credit enhancement provided as well as
the documentation and structure of the issue itself and the credit support.
Restricted and Illiquid Securities (Both Funds)
The ability of the Board of Trustees of either Fund to determine the
liquidity of certain restricted securities is permitted under a Securities and
Exchange Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive, safe-harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws. The
Rule provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for sale
under the Rule. The Funds believe that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities (eligible for
resale under the Rule) for determination by the Trustees. The Trustees consider
the following criteria in determining the liquidity of certain restricted
securities:
(i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace trades.
Variable or Floating Rate Instruments (Both Funds)
Certain of the investments may include variable or floating rate
instruments which may involve a demand feature and may include variable amount
master demand notes which may or may not be backed by bank letters of credit.
Variable or floating rate instruments bear interest at a rate which varies with
changes in market rates. The holder of an instrument with a demand feature may
tender the instrument back to the issuer at par prior to maturity. A variable
amount master demand note is issued pursuant to a written agreement between the
issuer and the holder, its amount may be increased by the holder or decreased by
the holder or issuer, it is payable on demand, and the rate of interest varies
based upon an agreed formula. The quality of the underlying credit must, in the
opinion of each Fund's Adviser, be equivalent to the long-term bond or
commercial paper ratings applicable to permitted investments for each Fund. The
Adviser will monitor, on an ongoing basis, the earning power, cash flow, and
liquidity ratios of the issuers of such instruments and will similarly monitor
the ability of an issuer of a demand instrument to pay principal and interest on
demand.
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When-Issued and Delayed Delivery Securities (Both Funds)
The Funds may enter into securities transactions on a when-issued basis.
These transactions involve the purchase of debt obligations on a when-issued
basis, in which case delivery and payment normally take place within a month or
more after the date of commitment to purchase. The Funds will only make
commitments to purchase obligations on a when-issued basis with the intention of
actually acquiring the securities, but may sell them before the settlement date.
The when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case
there could be an unrealized loss at the time of delivery.
Segregated accounts will be established with the custodian, and the
Funds will maintain liquid assets in an amount at least equal in value to a
Fund's commitments to purchase when-issued securities. If the value of these
assets declines, a Fund will place additional liquid assets in the account on a
daily basis so that the value of the assets in the account is equal to the
amount of such commitments. U.S. Government does not intend to engage in
when-issued and delayed delivery transactions to an extent that would cause
segregation of more than 20% of the total value of its assets. Strategic Income
does not intend to invest more than 5% of its assets in when-issued or delayed
delivery transactions.
Lending of Portfolio Securities (Both Funds)
The Funds may lend securities pursuant to agreements requiring that the
loans be continuously secured by cash, securities of the U.S. Government or its
agencies, or any combination of cash and such securities, as collateral equal at
all times to 100% of the market value of the securities lent. The collateral
received when a Fund lends portfolio securities must be valued daily and, should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the lending Fund. During the time portfolio securities
are on loan, the borrower pays the Fund any dividends or interest paid on such
securities. Loans are subject to termination at the option of the Fund or the
borrower. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or equivalent collateral to the borrower or placing broker. A Fund
does not have the right to vote securities on loan, but would terminate the loan
and regain the right to vote if that were considered important with respect to
the investment. Any loan may be terminated by either party upon reasonable
notice to the other party. There may be risks of delay in receiving additional
collateral or risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans are made only to borrowers deemed by the Adviser to be of good
standing and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risk.
Such loans will not be made if, as a result, the aggregate amount of all
outstanding securities loans for U.S. Government exceeds one-third of the value
of a Fund's total assets taken at fair market value. Loans of securities by
Strategic Income are limited to 15% of its total assets.
Reverse Repurchase Agreements (Both Funds)
As described herein, the Funds may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, a Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated
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date in the future the Fund will repurchase the portfolio instrument by
remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Options and Futures Transactions (Both Funds)
The Funds may purchase put and call options on financial futures
contracts. With regard to U.S. Government, such options must be listed. The
Funds may buy and sell financial futures contracts and options on financial
futures contracts and may buy and sell put and call options. With regard to U.S.
Government, such options must be on U.S. Government securities. Unlike entering
directly into a futures contract, which requires the purchaser to buy a
financial instrument on a set date at an undetermined price, the purchase of a
put option on a futures contract entitles (but does not obligate) its purchaser
to decide on or before a future date whether to assume a short position at the
specified price.
A Fund may purchase put and call options on futures to protect portfolio
securities against decreases in value resulting from an anticipated increase in
market interest rates. Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures contracts will also
decrease in value and the put option will increase in value. In such an event, a
Fund will normally close out its option by selling an identical put option. If
the hedge is successful, the proceeds received by the Fund upon the sale of the
put option plus the realized decrease in value of the hedged securities.
Alternately, a Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an option,
the option will expire on the date provided in the option contract, and the
premium paid for the contract will be lost.
Purchasing Options (Both Funds)
The Funds may purchase both put and call options on their portfolio
securities. These options will be used as a hedge to attempt to protect
securities which a Fund holds or will be purchasing against decreases or
increases in value. A Fund may purchase call and put options for the purpose of
offsetting previously written call and put options of the same series. If the
Fund is unable to effect a closing purchase transaction with respect to covered
options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised.
The Funds intend to purchase put and call options on currency and other
financial futures contracts for hedging purposes. A put option purchased by a
Fund would give it the right to assume a position as the seller of a futures
contract. A call option purchased by a Fund would give it the right to assume a
position as the purchaser of a futures contract. The purchase of an option on a
futures contract requires a Fund to pay a premium. In exchange for the premium,
a Fund becomes entitled to exercise the benefits, if any, provided by the
futures contract, but is not required to take any action
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under the contract. If the option cannot be exercised profitably before it
expires, a Fund's loss will be limited to the amount of the premium and any
transaction costs.
U.S. Government currently does not intend to invest more than 5% of its
net assets in options transactions. Strategic Income will not purchase a put or
call option if, as a result of such purchase, more than 10% of its total assets
would be invested in premiums for such options.
U.S. Government may not purchase or sell futures contracts or related
options if immediately thereafter the sum of the amount of margin deposits on
the Fund's existing futures positions and premiums paid for related options
would exceed 5% of the market value of the Fund's total assets. When the Fund
purchases futures contracts, an amount of cash and cash equivalents, equal to
the underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the purchase of such futures contracts is unleveraged.
Purchasing Call Options on Financial Futures Contracts
An additional way in which the Funds may hedge against decreases in
market interest rates is to buy a listed call option on a financial futures
contract for U.S. Government securities. When a Fund purchases a call option on
a futures contract, it is purchasing the right (not the obligation) to assume a
long futures position (buy a futures contract) at a fixed price at any time
during the life of the option. As market interest rates fall, the value of the
underlying futures contract will normally increase, resulting in an increase in
value of a Fund's option position. When the market price of the underlying
futures contract increases above the strike price plus premium paid, a Fund
could exercise its option and buy the futures contact below market price.
Prior to the exercise or expiration of the call option, the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium originally
paid, the Fund has completed a successful hedge.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, a Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve the
borrowing of funds by a Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, a Fund
will mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
Each Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss
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on those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, each Fund will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
Purchasing and Writing Put and Call Options on U.S. Government Securities
U.S. Government may purchase put and call options on U.S. Government
securities to protect against price movements in particular securities. A put
option gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of the
option. A call option gives the Fund, in return for a premium, the right to buy
the underlying security from the seller.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or writers of
the options since options on the portfolio securities held by the Fund are not
traded on an exchange. The Fund purchases and writes options only with
investment dealers and other financial institutions (such as commercial banks or
savings and loan associations) deemed creditworthy by the Adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not.
Section 4(2) Commercial Paper (Both Funds)
The Funds may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Funds, who agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the purchaser must be
in an exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Funds through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Funds believe that Section 4(2) commercial
paper and possibly certain other restricted securities which meet the criteria
for liquidity established by the Trustees are quite liquid. The Funds intend,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by each Fund's Adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Funds do not intend to subject such
paper to the limitation applicable to restricted securities.
Repurchase Agreements (Both Funds)
Certain of the investments of the Funds may include repurchase
agreements which are agreements by which a person (e.g., a Fund) obtains a
security and simultaneously commits to return the security to the seller (a
member bank of the Federal Reserve System or recognized securities dealer) at an
agreed upon price (including principal and interest) on an agreed upon date
within a number of days (usually not more than seven) from the date of purchase.
The resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the underlying
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price, which obligation is in effect secured by the value of the
underlying security.
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A Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Foreign Securities (Strategic Income)
Strategic Income may invest in foreign securities or U.S. securities
traded in foreign markets. Permissible investments may consist of obligations of
foreign branches of U.S. banks and of foreign banks, including European
certificates of deposit, European time deposits, Canadian time deposits and
Yankee certificates of deposit, and investments in Canadian commercial paper,
foreign securities and Europaper. These instruments may subject the Fund to
investment risks that differ in some respects from those related to investments
in obligations of U.S. domestic issuers. Such risks include future adverse
political and economic developments, the possible imposition of withholding
taxes on interest or other income, possible seizure, nationalization, or
expropriation of foreign deposits, the possible establishment of exchange
controls or taxation at the source, greater fluctuations in value due to changes
in exchange rates, or the adoption of other foreign governmental restrictions
which might adversely affect the payment of principal and interest on such
obligations. Such investments may also entail higher custodial fees and sales
commissions than domestic investments. Foreign issuers of securities or
obligations are often subject to accounting treatment and engage in business
practices different from those respecting domestic issuers of similar securities
or obligations. Foreign branches of U.S. banks and foreign banks may be subject
to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks.
Foreign Currency Transactions (Strategic Income)
As one way of managing exchange rate risk, Strategic Income may enter
into forward currency exchange contracts (agreements to purchase or sell
currencies at a specified price and date). The exchange rate for the transaction
(the amount of currency the Fund will deliver and receive when the contract is
completed) is fixed when the Fund enters into the contract. The Fund usually
will enter into these contracts to stabilize the U.S. dollar value of a security
it has agreed to buy or sell. The Fund 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 the Adviser's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strengths of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between foreign
currencies and the U.S. dollar. Changes in foreign currency exchange rates also
may affect the value of dividends and interest earned, gains and losses realized
on the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund. The Fund may also purchase and sell
options related to foreign currencies in connection with hedging strategies.
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Other Investments (Both Funds)
The Funds are not prohibited from investing in obligations of banks
which are clients of the Distributor (as herein after defined). However, the
purchase of shares of the Funds by such banks or by their customers will not be
a consideration in determining which bank obligations the Funds will purchase.
The Funds will not purchase obligations of its Adviser or its affiliates.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS OF EVERGREEN U.S. GOVERNMENT FUND
Except as noted, the investment restrictions set forth below are
fundamental and may not be changed with respect to the Fund without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
Where an asterisk (*) appears, the relevant policy is non-fundamental and may be
changed by the Fund's Adviser without shareholder approval, subject to review
and approval by the Trustees. As used in this Statement of Additional
Information and in the Prospectus, "a majority of the outstanding voting
securities of the Fund" means the lesser of (1) the holders of more than 50% of
the outstanding shares of beneficial interest of the Fund or (2) 67% of the
shares present if more than 50% of the shares are present at a meeting in person
or by proxy.
(1) Concentration of Assets in Any One Issuer
With respect to 75% of the value of its assets, the Fund will not
purchase securities of any one issuer (other than cash, cash items or securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities)
if as a result more than 5% of the value of its total assets would be invested
in the securities of the issuer. The Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer.
(2) Purchase of Securities on Margin
The Fund will not purchase securities on margin, except that it may
obtain such short-term credits as may be necessary for the clearance of
transactions. A deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or related options transactions is
not considered the purchase of a security on margin.
(3) Unseasoned Issuers*
The Fund may not invest more than 5% of its total assets in securities
of unseasoned issuers that have been in continuous operation for less than three
years, including operating periods of their predecessors.
(4) Underwriting
The Fund will not underwrite any issue of securities except as it may be
deemed an underwriter under the Securities Act of 1933 in connection with the
sale of securities in accordance with their investment objectives, policies and
limitations.
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(5) Concentration in Any One Industry
The Fund will not invest more than 25% of the value of its total assets
in any one industry except the Fund may invest more than 25% of its total assets
in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
(6) Ownership by Trustees/Officers*
The Fund may not purchase or retain the securities of any issuer if (i)
one or more officers or Trustees of the Fund or its investment adviser
individually owns or would own, directly or beneficially, more than 1/2 of 1% of
the securities of such issuer, and (ii) in the aggregate, such persons own or
would own, directly or beneficially, more than 5% of such securities.
(7) Short Sales
The Fund will not sell any securities short.
(8) Lending of Funds and Securities
The Fund will not lend any of its assets except portfolio securities in
accordance with its investment objectives, policies and limitations.
(9) Commodities
The Fund will not purchase or sell commodities or commodity contracts;
however, the Fund may enter into futures contracts on financial instruments or
currency and sell or buy options on such contracts. Subject to its permitted
investments, the Fund may invest in companies which invest in commodities and
commodities contracts.
(10) Real Estate
The Fund may not buy or sell real estate although the Fund may invest in
securities of companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate. However, subject to its permitted investments, the Fund may invest in
companies which invest in real estate.
(11) Borrowing, Senior Securities, Reverse Repurchase Agreements
The Fund will not issue senior securities. However, the Fund may borrow
money directly or through reverse repurchase agreements as a temporary measure
for extraordinary or emergency purposes in an amount up to one-third of the
value of its total assets, including the amounts borrowed. The Fund will not
purchase any securities while borrowings in excess of 5% of the value of its
total assets are outstanding.
(12) Pledging Assets
The Fund will not mortgage, pledge or hypothecate any assets except to
secure permitted borrowings. Margin deposits for the purchase and sale of
financial futures contracts and related options and segregation or collateral
arrangements made in connection with options activities are not deemed to be a
pledge.
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(13) Investing in Securities of Other Investment Companies*
The Fund will purchase securities of investment companies only in
open-market transactions involving customary broker's commissions. The Fund will
only make such purchases to the extent permitted by the Investment Company Act
of 1940 and the rules and regulations thereunder. However, these limitations are
not applicable if the securities are acquired in a merger, consolidation or
acquisition of assets. It should be noted that investment companies incur
certain expenses such as management fees and therefore any investment by the
Fund in shares of another investment company would be subject to such duplicate
expenses.
It is the position of the SEC's Staff that certain nongovernmental
issuers of CMOs and REMICs constitute investment companies pursuant to the
Investment Company Act of 1940, as amended (the "1940 Act") and either (a)
investments in such instruments are subject to the limitations set forth above
or (b) the issuers of such instruments have received orders from the SEC
exempting such instruments from the definition of investment company.
(14) Restricted Securities*
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933 (except for
certain restricted securities which meet criteria for liquidity established by
the Trustees). This restriction is not applicable to commercial paper issued
under Section 4(2)of the Securities Act of 1933.
(15) Illiquid Securities*
The Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement in more
than seven days after notice and certain securities determined by the Trustees
not to be liquid.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund did not borrow money, sell securities short, invest in reverse
repurchase agreements in excess of 5% of the value of their net assets, or
invest more than 5% of its net assets in the securities of other investment
companies in the last fiscal year, and has no present intent to do so during the
coming year.
For purposes of their policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings and loan association, having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment, to be
"cash items".
INVESTMENT RESTRICTIONS OF KEYSTONE STRATEGIC INCOME FUND
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares (as defined in the 1940 Act, as amended, (the "1940 Act")).
Unless otherwise stated, all references to the assets of the Fund are in terms
of current market value.
The Fund may not do the following:
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(1) purchase any security (other than U.S. Government securities) of any
issuer if as a result more than 5% of its total assets would be invested in
securities of the issuer, except that up to 25% of its total assets may be
invested without regard to this limit;
(2) purchase securities on margin except that it may obtain such short
term credit as may be necessary for the clearance of purchases and sales of
securities;
(3) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or of securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short, and unless not more than 10% of
its net assets are held as collateral for such sales at any one time;
(4) borrow money or enter into reverse repurchase agreements, except
that the Fund may (a) enter into reverse repurchase agreements or (b) borrow
money from banks for temporary or emergency purposes in aggregate amounts up to
one-third of the value of the Fund's net assets; provided that while borrowings
from banks exceed 5% of the Fund's net assets, any such borrowings will be
repaid before additional investments are made;
(5) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis or collateral
arrangement with respect to the writing of options on securities are not deemed
to be a pledge of assets;
(6) issue senior securities; the purchase or sale of securities on a
"when issued" basis or collateral arrangement with respect to the writing of
options on securities are not deemed to be the issuance of a senior security;
(7) make loans, except that the Fund may make, purchase or hold debt
securities and other debt investments, including loans, consistent with its
investment objective, lend portfolio securities valued at not more than 15% of
its total assets to broker-dealers, and enter into repurchase agreements;
(8) purchase any security (other than U.S. Government securities) of any
issuer if as a result more than 25% of its total assets would be invested in a
single industry; except that (a) there is no restriction with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (b) wholly owned finance companies will be considered to be
in the industries of their parents if their activities are primarily related to
financing the activities of the parents; (c) the industry classification of
utilities will be determined according to their services (for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry); and (d) the industry classification of medically related industries
will be determined according to their services (for example, management,
hospital supply, medical equipment and pharmaceuticals will each be considered a
separate industry);
(9) invest more than 5% of its total assets in securities of any company
having a record, together with its predecessors, of less than three years of
continuous operation;
(10) purchase securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction;
(11) purchase or sell commodities or commodity contracts or real estate,
except that the Fund may purchase and sell securities secured by real estate and
securities of companies which invest in real estate and may engage in currency
or other financial futures contracts and related options transactions; and
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(12) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
The Fund intends to follow the policies of the SEC as they are adopted
from time to time with respect to illiquid securities, including at this time,
(1) treating as illiquid, securities that may not be sold or disposed of in the
ordinary course of business within seven days at approximately the value at
which the Fund has valued the investment on its books and (2) limiting its
holdings of such securities to 15% of its net assets.
Portfolio securities of the Fund may not be purchased from or sold or
loaned to the Adviser or any affiliate thereof or any of their Directors,
officers or employees.
Except with respect to borrowing money, if a percentage limit is
satisfied at the time of investment, a later increase or decrease resulting from
a change in asset value is not a violation of the limit.
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CERTAIN RISK CONSIDERATIONS
- --------------------------------------------------------------------------------
There can be no assurance that a Fund will achieve its investment
objectives and an investment in the Fund involves certain risks which are
described under "Description of the Funds - Investment Objectives and Policies"
in the Funds' Prospectus.
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MANAGEMENT
- --------------------------------------------------------------------------------
The Evergreen Keystone Funds consist of seventy-three mutual funds. Each
mutual fund is, or is a series of, a registered, open-end management company.
The Trustees and executive officers of each mutual fund, their ages,
addresses and principal occupations during the past five years are set forth
below:
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TRUSTEES
- --------------------------------------------------------------------------------
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of the
Evergreen Keystone 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.
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MICHAEL S. SCOFIELD (53), 212 S. Tryon Street Suite 980, Charlotte, NC-Trustee.
Attorney, Law Offices of Michael S. Scofield since 1969.
Messrs. Howell, Salton and Scofield are Trustees of all Evergreen Keystone
Mutual Funds.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC -Trustee. Sales
Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
THOMAS L. McVERRY (58), 4419 Parkview Drive, Charlotte, NC-Trustee. Director of
Carolina Cooperative Federal Credit Union since 1990 and Rexham Corporation from
1988 to 1990; Vice President of Rexham Industries, Inc. (diversified
manufacturer) from 1989 to 1990; Vice President-Finance and Resources, Rexham
Corporation from 1979 to 1990.
WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NCTrustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990.
Messrs. McDonnell, McVerry and Pettit are Trustees of all Evergreen Keystone
Mutual Funds, except those established within the Evergreen Variable Trust.
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL- Trustee. Real
estate developer and construction consultant since 1980; President of Centrum
Equities since 1987 and Centrum Properties, Inc. since 1980.
FOSTER BAM (70), Greenwich Plaza, Greenwich, CT- Trustee. Partner in the law
firm of Cummings and Lockwood since 1968.
Messrs. Ashkin and Bam are Trustees of all Evergreen Keystone Mutual Funds,
except those established within the Evergreen Variable Trust and Evergreen
Investment Trust.
FREDERICK AMLING (69) Trustee. Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member, Board of
Advisers, Credito Emilano (banking); and former Economics and Financial
Consultant, Riggs National Bank.
CHARLES A. AUSTIN III (61) Trustee. Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation (investment
advice); and former Director, Executive Vice President and Treasurer, State
Street Research & Management Company (investment advice).
GEORGE S. BISSELL* (67) Chairman of the Keystone group of mutual funds, and
Trustee. Chairman of the Board and Trustee of Anatolia College; Trustee of
University Hospital (and Chairman of its Investment Committee); former Director
and Chairman of the Board of Hartwell Keystone; and former Chairman of the Board
and Chief Executive Officer of Keystone Investments, Inc..
EDWIN D. CAMPBELL (69) Trustee. Director and former Executive Vice President,
National Alliance of Business; former Vice President, Educational Testing
Services; former Dean, School of Business, Adelphi University; and former
Executive Director, Coalition of Essential Schools, Brown University.
CHARLES F. CHAPIN (67) Trustee. Former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, NC).
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K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and Executive Vice
President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund, and
The Phoenix Big Edge Series Fund; and former President, Morehouse College.
F. RAY KEYSER, JR. (69) Trustee and Advisor to the Boards of Trustees of the
Evergreen group of mutual funds. Counsel, Keyser, Crowley & Meub, P.C.; Member,
Governor's (VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and Hitchcock Clinic;
Director, Vermont Yankee Nuclear Power Corporation, Vermont Electric Power
Company, Inc., Grand Trunk Corporation, Central Vermont Railway, Inc., S.K.I.
Ltd., Sherburne Corporation, Union Mutual Fire Insurance Company, New England
Guaranty Insurance Company, Inc., and the Investment Company Institute; former
Governor of Vermont.
DAVID M. RICHARDSON (55) Trustee. Executive Vice President, DHR International,
Inc. (executive recruitment); former Senior Vice President, Boyden International
Inc. (executive recruitment); and Director, Commerce and Industry Association of
New Jersey, 411 International, Inc., and J&M Cumming Paper Co.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of the
Evergreen group of mutual funds. Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Trust Company of Connecticut, Hartford
Hospital, Old State House Association, and Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-
Oxford School and Greater Hartford YMCA; former Director, Executive Vice
President, and Vice Chairman of The Travelers Corporation.
ANDREW J. SIMONS (57) Trustee. Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; former President, Nassau County Bar Association;
former Associate Dean and Professor of Law, St. John's University School of Law.
Messrs. Amling, Austin, Bissell, Campbell, Chapin, Gifford, Keith, Keyser,
Richardson, Shima and Simons are Trustees or Directors of the thirty-one funds
in the Keystone group of mutual funds. Their addresses are 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
ROBERT J. JEFFRIES (74), 2118 New Bedford Drive, Sun City Center, Fl Trustee
Emeritus. Corporate consultant since 1967.
Mr. Jeffries has been serving as a Trustee Emeritus of eleven Evergreen Keystone
Mutual Funds since January 1, 1996 (excluded are Evergreen Variable Trust,
Evergreen Investment Trust, as well as the Keystone group of mutual funds).
EXECUTIVE OFFICERS
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY- President and
Treasurer. Consultant to BISYS Fund Services since 1996. Senior Managing
Director, Furman Selz LLC since
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1992, Managing Director from 1984 to 1992.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH-Secretary. Senior Vice
President/Director of Administration and Regulatory Services, BISYS Fund
Services since April 1995. Vice President/Assistant General Counsel, Alliance
Capital Management from 1988 to 1995.
* Messrs. Pettit and Bissell may each be deemed to be an "interested person"
within the meaning of the Investment Company Act of 1940, as amended (the "1940
Act").
The officers of the Trusts are all officers and/or employees of The
BISYS Group, Inc. ("BISYS"), except for Mr. Pileggi, who is a consultant to
BISYS. BISYS is an affiliate of Evergreen Keystone Distributor, Inc., the
distributor of each Class of shares of each Fund.
The Funds do not pay any direct remuneration to any officer or Trustee
who is an "affiliated person" of either First Union National Bank, Evergreen
Asset Management Corp., Keystone Investment Management Company or their
affiliates. See "Investment Advisers". The Trusts pay each Trustee who is not an
"affiliated person" an annual retainer and a fee per meeting attended, plus
expenses, as follows:
NAME OF TRUST/FUND ANNUAL RETAINER MEETING FEE
Evergreen Investment Trust* 15,500 2,000
U.S. Government
Keystone Strategic Income Fund**
* The annual retainer and meeting fee paid by Evergreen Investment Trust to each
Trustee are allocated among its fourteen series based on assets.
** See Item No. 7 below.
In addition:
(1) The Chairman of the Board of the Evergreen group of mutual funds is paid an
annual retainer of $5,000, and the Chairman of the Audit Committee is paid an
annual retainer of $2,000. These retainers are allocated among all the funds in
the Evergreen group of mutual funds, based upon assets.
(2) Each member of the Audit Committee of the Evergreen group of mutual funds is
paid an annual retainer of $500.
(3) Each non-affiliated Trustee of the Evergreen group of mutual funds is paid a
fee of $500 for each special telephonic meeting in which he participates,
regardless of the number of Funds for which the meeting is called.
(4) Each non-affiliated Trustee of the Keystone group of mutual funds is paid a
fee of $300 for each special telephonic meeting in which he participates,
regardless of the number of Funds for which the meeting is called.
(5) Each non-affiliated Trustee of the Evergreen group of mutual funds is paid a
fee of $250 for each special Committee of the Board telephone conference call
meeting of one or more Funds in which
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he participates.
(6) The members of the Advisory Committee to the Boards of Trustees of the
Evergreen group of mutual funds are paid an annual retainer of $17,500 and a fee
of $2,200 for each meeting of the Boards of Directors or Trustees of the
Evergreen group of mutual funds attended.
(7) Each non-affiliated Trustee of the Keystone group of mutual funds is paid an
annual retainer of $30,000, and a fee of $1,200 for each meeting attended, which
fees are charged to the Funds as follows:
Annual Meeting
Retainer Fee
Keystone Global Opportunities Fund $ 500 $ 20
Keystone Global Resources and Development Fund $ 2,000 $ 80
Keystone Omega Fund $ 2,000 $ 80
Keystone Small Company Growth Fund II $ 500 $ 20
Keystone Strategic Income Fund $ 2,000 $ 80
Keystone Tax Free Income Fund $ 500 $ 20
Keystone Quality Bond Fund (B-1) $ 2,000 $ 80
Keystone Diversified Bond Fund (B-2) $ 2,500 $ 100
Keystone High Income Bond Fund (B-4) $ 2,500 $ 100
Keystone Balanced Fund (K-1) $ 3,000 $ 120
Keystone Strategic Growth Fund (K-2) $ 2,000 $ 80
Keystone Growth and Income Fund (S-1) $ 500 $ 20
Keystone Mid-Cap Growth Fund (S-3) $ 500 $ 20
Keystone Small Company Growth Fund (S-4) $ 3,000 $ 120
Keystone International Fund Inc. $ 500 $ 20
Keystone Precious Metals Holdings, Inc. $ 500 $ 20
Keystone Tax Free Fund $ 5,500 $ 220
(8) Each non-affiliated Trustee of the Keystone group of mutual funds is paid a
fee of $600 for attendance at each Committee meeting held on the same day as a
regular meeting.
(9) Each non-affiliated Trustee of the Keystone group of mutual funds is paid a
fee of $1,200 for attendance at each Committee meeting held on a non-meeting
day.
(10) Any individual who has been appointed as a Trustee Emeritus of one or more
funds in the Evergreen group of mutual funds is paid one-half of the annual
retainer fees that are payable to regular Trustees, and one-half of the meeting
fees for each meeting attended.
Set forth below for each of the Trustees is the aggregate compensation (and
expenses) paid to such Trustees by each Trust for the fiscal year ended April
30, 1997.
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Aggregate Compensation From Each Trust
Name of Evergreen Keystone
Trustee Investment Strategic
Trust Income
Fund
L.B.Ashkin $ 0 $ 1,240
F. Bam 0 39,100
R.J. Jeffries 0 0
J.S. Howell 27,276 1,360
G.M. 25,455 1,360
McDonnell
T.L. McVerry 26,140 1,360
W.W. Pettit 25,000 1,360
R.A. Salton 25,000 1,240
M.S. Scofield 25,000 1,240
F. Amling 0 2,960
C.A. Austin 0 2,960
G.S. Bissell 0 1,320
E.D. Campbell 0 2,720
C.F. Chapin 0 2,800
K.D. Gifford 0 2,560
L. Keith 0 2,760
F.R. Keyser 415 2,920
D.M. 0 2,880
Richardson
R.J. Shima 415 2,840
A.J. Simons 0 2,840
-----------------------
Set forth below for each Trustee receiving in excess of $60,000 for the
fiscal period May 1, 1996 through April 30, 1997 is the aggregate compensation
paid to such Trustee by the Evergreen- Keystone funds:
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<PAGE>
J.S. Howell $ 76,875
R.A. Salton 71,325
M.S. Scofield 71,325
As of July 31, 1997, the officers and Trustees of the Trusts owned as a
group less than 1% of the outstanding Class A, Class B, Class C or Class Y
shares of any of the Funds.
Set forth below is information with respect to each person, who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of
each Fund's total outstanding shares and their aggregate ownership of the Fund's
total outstanding shares as of July 31, 1997.
<TABLE>
<CAPTION>
Name of % of
Name and Address Fund/Class No. of Shares Class
- -------------------------- --------------- ---------------- ------------
<S> <C> <C> <C>
MLPF&S for the sole benefit Strategic 1,267,718 15.17%
of its customers Income/A
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Strategic 2,235,750 14.04%
of its customers Income/B
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Strategic 838,335 26.19%
of its customers Income/C
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
First Union National Bank Strategic 22,476 57.81%
Re-invest Account Income/Y
Attn: Trust Operations Fund Group
401 South Tryon St., 3rd Floor
Charlotte, NC 28288-1151
First Union National Bank Strategic 14,793 38.05%
Cash Account Income/Y
Attn: Trust Operation Fund Group
401 South Tryon St., 3rd Floor
Charlotte, NC 28288-1151
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<PAGE>
FUBS & Co. FEBO U. S. 10,132 15.71%
William F. Daly Trust and William Government/C
F. Daly Ttee
U/A/D 09/02/77 2336 NE 27 St.
Lighthouse Point, FL 33064-8355
FUBS & Co. FEBO U. S. 4,858 7.53%
Douglas H. Thompson Sr Government/C
PO Box 633
Belle Glade, Fl 33430-0633
FUBS & Co. FEBO U. S. 21,517 33.37%
Local1804 1 ILA Federal Government/C
Credit Union
5080 McLester Street
Elizabeth, NJ 07207
Wachovia Bank of Georgia U.S. 6,247,256 45.22%
Directed Ttee for First Union Corp. Government/Y
Non-Qualified Retirement Plan
U/A DTD 8/31/94 Investment Act
301 N. Main St. MC-NC 31051
Winston Salem, NC 27101-3819
First Union National Bank U.S. 3,837,774 27.78%
Trust Accounts Government/Y
Attn: Ginny Batten
11th Fl. CMG-151
301 S. Tyron St.
Charlotte, NC 28288
First Union National Bank U.S. 1,926,549 13.94%
Trust Accounts Government/Y
Attn: Ginny Batten
11th Fl. CMG-151
301 S. Tyron St.
Charlotte, NC 28288
Wachovia Bank of Georgia Ttee U.S. 1,568,894 11.36%
First Union Corp Retirement Trust Government/Y
for Non Employee Directors 10/24/94
301 N. Main St. MC-NC 31051
Winston Salem, NC 27101-3819
</TABLE>
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<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
(SEE ALSO "MANAGEMENT OF THE FUNDS" IN EACH FUND'S PROSPECTUS)
- --------------------------------------------------------------------------------
The investment adviser of U.S. Government is First Union National Bank
("FUNB" or the "Adviser") which provides investment advisory services through
its Capital Management Group.
The Directors of FUNB are Edward E. Crutchfield, Chief Executive
Officer and Chairman; Anthony P. Terracciano, President; John R. Georgius, Vice
Chairman; Marion A. Cowell, Jr., Secretary and Executive Vice President; and
Robert T. Atwood, Chief Financial Officer and Executive Vice President.
The investment adviser of Strategic Income is Keystone Investment
Management Company ("Keystone" or the "Adviser"), a Delaware corporation, with
offices at 200 Berkeley Street, Boston, Massachusetts. Keystone is an indirectly
owned subsidiary of FUNB.
The Directors of Keystone are Donald McMullen; William M. Ennis, II;
Barbara I. Colvin; Albert H. Elfner, III, Chairman, CEO and President; Edward F.
Godfrey, Senior Vice President and Chief Operating Officer; and W. Douglas Munn,
Senior Vice President, Chief Financial Officer and Treasurer.
On September 6, 1996, First Union Corporation ("First Union") and FUNB
entered into an Agreement and Plan of Acquisition and Merger (the "Merger") with
Keystone Investments, Inc. ("Keystone Investments"), the corporate parent of
Keystone, which provided, among other things, for the merger of Keystone
Investments with and into a wholly-owned subsidiary of FUNB. The Merger was
consummated on December 11, 1996. Keystone continues to provide investment
advisory services to the Keystone Family of Funds. Contemporaneously with the
Merger, Strategic Income entered into a new investment advisory agreement with
Keystone and into a principal underwriting agreement with the Distributor.
Under the Investment Advisory Agreement with each Fund, each Adviser
has agreed to furnish reports, statistical and research services and
recommendations with respect to each Fund's portfolio of investments. In
addition, each Adviser provides office facilities to the Funds and performs a
variety of administrative services. Each Fund pays the cost of all of its other
expenses and liabilities, including expenses and liabilities incurred in
connection with maintaining their registrations under the Securities Act of
1933, as amended, and the 1940 Act, printing prospectuses (for existing
shareholders) as they are updated, state qualifications, mailings, brokerage,
custodian and stock transfer charges, printing, legal and auditing expenses,
expenses of shareholder meetings and reports to shareholders. Notwithstanding
the foregoing, each Adviser will pay the costs of printing and distributing
prospectuses used for prospective shareholders.
The method of computing the investment advisory fee for each Fund is
described in such Fund's Prospectus. The advisory fees paid by each Fund for the
three most recent fiscal periods reflected in its registration statement are set
forth below:
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<PAGE>
INVESTMENT ADVISORY FEES
<TABLE>
<CAPTION>
U.S. GOVERNMENT Ten Months Year Ended Six Months Year Ended
<S> <C> <C> <C> <C>
Ended 4/30/97 6/30/96 Ended 6/30/95 12/31/94
Advisory Fee $1,258,319 $1,507,281 $575,771 $1,355,420
========= ========= ======= =========
STRATEGIC INCOME Nine Months Year Ended Year Ended Year Ended
Ended 4/30/97 7/31/96 7/31/95 7/31/94
Advisory Fee $1,017,082 $1,663,669 $1,954,412 $1,721,793
========= ========= ========= =========
</TABLE>
The Investment Advisory Agreements are terminable, without the
payment of any penalty, on sixty days' written notice, by a vote of the holders
of a majority of each Fund's outstanding shares, or by a vote of a majority of
each Trust's Trustees or by the respective Adviser. The Investment Advisory
Agreements will automatically terminate in the event of their assignments. Each
Investment Advisory Agreement provides in substance that the Adviser shall not
be liable for any action or failure to act in accordance with its duties
thereunder in the absence of willful misfeasance, bad faith or gross negligence
on the part of the Adviser or of reckless disregard of its obligations
thereunder.
The Investment Advisory Agreement with respect to U.S. Government
dated February 28, 1985, and amended from time to time thereafter, was last
approved by the Trustees of Evergreen Investment Trust on June 17, 1997.
The Investment Advisory Agreement with respect to Strategic Income
was approved by the Fund's shareholders on December 9, 1996, and became
effective on December 11, 1996.
Each Investment Advisory Agreement will continue in effect from year
to year provided that its continuance is approved annually by a vote of a
majority of the Trustees of each Trust including a majority of those Trustees
who are not parties thereto or "interested persons" (as defined in the 1940 Act)
of any such party (the "Independent Trustees"), cast in person at a meeting duly
called for the purpose of voting on such approval or a majority of the
outstanding voting shares of each Fund.
Certain other clients of each Adviser may have investment objectives
and policies similar to those of the Funds. Each Adviser may, from time to time,
make recommendations which result in the purchase or sale of a particular
security by its other clients simultaneously with a Fund. If transactions on
behalf of more than one client during the same period increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price or quantity. It is the policy of each Adviser to
allocate advisory recommendations and the placing of orders in a manner which is
deemed equitable by the Adviser to the accounts involved, including the Funds.
When two or more of the clients of the Adviser (including one or more of the
Funds) are purchasing or selling the same security on a given day from the same
broker-dealer, such transactions may be averaged as to price.
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<PAGE>
Although the investment objectives of the Funds are not the same, and
their investment decisions are made independently of each other, they may rely
upon the same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, each
Adviser attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to
permit purchase and sales transactions to be effected between each Fund and the
other registered investment companies for which FUNB, Evergreen Asset Managment
Corporation, a subsidiary of FUNB ("Evergreen Asset") or Keystone act as
investment adviser or between the Fund and any advisory clients of Evergreen
Asset, FUNB or Keystone. Each Fund may from time to time engage in such
transactions but only in accordance with these procedures and if they are
equitable to each participant and consistent with each participant's investment
objectives.
Prior to July 7, 1995, Federated Administrative Services, a
subsidiary of Federated Investors, provided legal, accounting and other
administrative personnel and support services to each of the portfolios of
Evergreen Investment Trust. The Trust paid a fee for such services at the
following annual rate: .15% on the first $250 million average daily net assets
of the Trust; .125% on the next $250 million; .10% on the next $250 million and
.075% on assets in excess of $250 million.
From July 8, 1995 to March 10, 1997 Evergreen Asset provided
administrative services to each of the portfolios of Evergreen Investment Trust
for a fee based on the average daily net assets of each fund administered by
Evergreen Asset for which Evergreen Asset or FUNB also served as investment
adviser, calculated daily and payable monthly at the following annual rates:
.050% on the first $7 billion; .035% on the next $3 billion; .030% on the next
$5 billion; .020% on the next $10 billion; .015% on the next $5 billion; and
.010% on assets in excess of $30 billion.
At present, Evergreen Keystone Investment Services ("EKIS") serves as
administrator to U.S. Government, subject to the supervision and control of the
Trustees of the Evergreen Investment Trust. As administrator, EKIS provides
facilities, equipment and personnel to U.S. Government and is entitled to
receive an administration fee from the Fund based on the average daily net
assets of all the mutual funds for which FUNB, Keystone or Evergreen Asset also
serve as investment adviser, calculated in accordance with the following
schedule: .050% of the first $7 billion; .035% on the next $3 billion; .030% on
the next $5 billion; .020% on the next $10 billion; .015% on the next $5
billion; and .010% on assets in excess of $30 billion.
Prior to January 1, 1997, Furman Selz LLC, an affiliate of Evergreen
Funds Distributor, Inc. (currently known as Evergreen Keystone Distributor,
Inc.), distributor for the Evergreen group of mutual funds (the "Distributor"),
served as sub-administrator to U.S. Government, and was entitled to receive a
fee from the Fund calculated on the average daily net assets of each Fund at a
rate based on the total assets of the mutual funds administered by Evergreen
Asset for which FUNB or Evergreen Asset also served as investment adviser,
calculated in accordance with the following schedule: .0100% of the first $7
billion; .0075% on
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<PAGE>
the next $3 billion; .0050% on the next $15 billion; and .0040% on assets in
excess of $25 billion.
At present, BISYS Fund Services, an affiliate of the Distributor,
serves as sub-administrator to each Fund and is entitled to receive a fee from
each Fund calculated daily and payable monthly at an annual rate based on the
aggregate average daily net assets of the mutual funds for which FUNB, Evergreen
Asset, Keystone or any affiliate of FUNB serves as investment adviser,
calculated in accordance with the following schedule: .0100% on the first $7
billion; .0075% on the next $3 billion; .0050% on the next $15 billion; and
.0040% on assets in excess of $25 billion. The total assets of the mutual funds
for which Evergreen Asset, FUNB or Keystone serve as investment adviser were
approximately $30.5 billion as of June 30, 1997.
For the fiscal year ended December 31, 1994, the fiscal period ended
June 30, 1995, the fiscal year ended June 30, 1996 and the fiscal period ended
April 30, 1997, U.S. Government incurred $228,590, $95,122, $159,046 and
$108,936 respectively, in administrative service costs.
For the fiscal years ended July 31, 1994, 1995, 1996 and the fiscal
period ended April 30, 1997, Strategic Income incurred $15,491, $17,770, $24,365
and $23,600, respectively, in administrative service costs.
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS AND AGREEMENTS
- --------------------------------------------------------------------------------
Reference is made to "Management of the Funds - Distribution Plans
and Agreements" in the Prospectus of each Fund for additional disclosure
regarding the Funds' distribution arrangements. Distribution fees are accrued
daily and paid monthly on the Class A, Class B and Class C shares and are
charged as class expenses, as accrued. The distribution fees attributable to the
Class B shares and Class C shares are designed to permit an investor to purchase
such shares through broker-dealers without the assessment of a front-end sales
charge, and, in the case of Class C shares, without the assessment of a
contingent deferred sales charge after the first year following the month of
purchase, while at the same time permitting the Distributor to compensate
broker-dealers in connection with the sale of such shares. In this regard, the
purpose and function of the combined contingent deferred sales charge and
distribution services fee on the Class B shares and the Class C shares are the
same as those of the front-end sales charge and distribution fee with respect to
the Class A shares in that in each case the sales charge and/or distribution fee
provide for the financing of the distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by
each Fund with respect to each of its Class A, Class B and Class C shares (each
a "Plan" and collectively, the "Plans"), the Treasurer of each Fund reports the
amounts expended under the Plans and the purposes for which such expenditures
were made to the Trustees of each Trust for their review on a quarterly basis.
Also, each Plan provides that the selection and nomination of the Independent
Trustees are committed to the discretion of such disinterested Trustees then in
office.
Each Adviser may from time to time and from its own funds or such
other resources as may be permitted by rules of the SEC make payments for
distribution services to the Distributor; the latter may in turn pay part or all
of such compensation to brokers or other
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<PAGE>
persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of each Trust or by vote
of the holders of a majority of the outstanding voting securities of that Class
and, in either case, by a majority of the Independent Trustees of the Trust who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related thereto.
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to each Fund and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class A, Class B and Class C shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B and Class C shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class A, Class B and Class C shares.
In addition to the Plans, U.S. Government has adopted a Shareholder
Services Plan whereby shareholder servicing agents may receive fees from the
Fund for providing services which include, but are not limited to, distributing
prospectuses and other information, providing shareholder assistance, and
communicating or facilitating purchases and redemptions of Class B and Class C
shares of the Fund.
In the event that a Plan or Distribution Agreement is terminated or
not continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of a Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the Independent Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. With respect to U.S.
Government, amendments to the Shareholder Services Plan require a majority vote
of the Independent Trustees but do not require a shareholders vote. Any Plan,
Shareholder Services Plan or Distribution Agreement may be terminated (i) by a
Fund without penalty at any time by a majority vote of the holders of the
outstanding voting securities of the Fund, voting separately by Class or by a
21072
26
<PAGE>
majority vote of the Independent 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.
The Funds incurred the following Distribution Plan and Shareholder
Services Plan fees:
Distribution Fees:
U.S. GOVERNMENT. For the fiscal year ended June 30, 1996 and the ten-month
period ended April 30, 1997, $53,238 and $39,780, respectively, on behalf of
Class A shares; $1,374,856 and $975,522, respectively, on behalf of Class B
shares; and $3,646 and $4,490, respectively, on behalf of Class C shares.
STRATEGIC INCOME. For the fiscal year ended July 31, 1996 and the nine-month
period ended April 30, 1997, $181,536 and $112,916, respectively, on behalf of
Class A shares; $1,399,711 and $663,982, respectively, on behalf of Class B
shares; and $390,758 and $161,499, respectively, on behalf of Class C shares.
Shareholder Services Fees:
U.S. GOVERNMENT. For the fiscal year ended June 30, 1996 and the ten-month
period ended April 30, 1997, $458,285 and $325,174, respectively, on behalf of
Class B shares and $1,215 and $1,496, respectively, on behalf of Class C
shares.
STRATEGIC INCOME. For the fiscal year ended July 31, 1996 and the
nine-month period ended April 30, 1997, $349,932 and $221,423, respectively, on
behalf of Class B shares and $97,689 and $53,852, respectively, on behalf of
Class C shares. For the period from January 13, 1997 (commencement of class
operations) to April 30, 1997, $0 on behalf of Class Y shares.
- --------------------------------------------------------------------------------
ALLOCATION OF BROKERAGE
- --------------------------------------------------------------------------------
Decisions regarding each Fund's portfolio are made by its Adviser,
subject to the supervision and control of the Trustees. Orders for the purchase
and sale of securities and other investments are placed by employees of each
Fund's Adviser. In general, the same individuals perform the same functions for
the other funds managed by each Adviser. A Fund will not effect any brokerage
transactions with any broker or dealer affiliated directly or indirectly with
the Adviser unless such transactions are fair and reasonable, under the
circumstances, to the Fund's shareholders. Circumstances that may indicate that
such transactions are fair or reasonable include the frequency of such
transactions, the selection process and the commissions payable in connection
with such transactions.
A substantial portion of the transactions in equity securities for each
Fund will occur on domestic stock exchanges. Transactions on stock exchanges
involve the payment of brokerage commissions. In transactions on stock exchanges
in the United States, these commissions are negotiated, whereas on many foreign
stock exchanges these commissions are fixed. In the case
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<PAGE>
of securities traded in the foreign and domestic over-the-counter markets, there
is generally no stated commission, but the price usually includes an undisclosed
commission or markup. Over-the-counter transactions will generally be placed
directly with a principal market maker, although the Fund may place an
over-the-counter order with a broker-dealer if a better price (including
commission) and execution are available.
It is anticipated that most purchase and sale transactions involving
fixed income securities will be with the issuer or an underwriter or with major
dealers in such securities acting as principals. Such transactions are normally
on a net basis and generally do not involve payment of brokerage commissions.
However, the cost of securities purchased from an underwriter usually includes a
commission paid by the issuer to the underwriter. Purchases or sales from
dealers will normally reflect the spread between bid and ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Fund shall be prompt execution at the most favorable
price. Each Adviser will also consider such factors as the price of the
securities and the size and difficulty of execution of the order. If these
objectives may be met with more than one firm, the Adviser will also consider
the availability of statistical and investment data and economic facts and
opinions helpful to the Fund. To the extent that receipt of these services for
which the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
The Board of Trustees of each Trust under which each Fund is governed
has determined that the Fund may consider sales of Fund shares as a factor in
the selection of brokers to execute portfolio transactions, subject to the
requirements of best execution described above. Each Fund expects that purchases
and sales of securities will usually be effected through brokerage transactions
for which commissions are payable. Purchases from underwriters will include the
underwriting commission or concession, and purchases from dealers serving as
market makers will include a dealer's mark-up or reflect a dealer's mark-down.
Where transactions are made in the over-the-counter market, each Fund will deal
with primary market makers unless more favorable prices are otherwise
obtainable. Under its Investment Advisory Agreement, each Adviser 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 that an Adviser follows such a practice, it will do so on a basis that is
fair and equitable to the Fund.
For the ten month period ended April 30, 1997, the fiscal year ended
June 30, 1996, the six-month period ended June 30, 1995 and the fiscal year
ended December 31, 1994, U.S. Government paid $6,838, $0, $10 and $180,
respectively, in commissions on brokerage transactions.
For the nine-month period ended April 30, 1997 and the fiscal years
ended July 31, 1996, 1995 and 1994, Strategic Income paid $2,864, $35,599,
$30,894, and $0, respectively, in brokerage commissions.
21072
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<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL TAX INFORMATION
(SEE ALSO "OTHER INFORMATION - DIVIDENDS,
DISTRIBUTIONS AND TAXES" IN EACH FUND'S PROSPECTUS)
- --------------------------------------------------------------------------------
Each Fund has qualified and intends to continue to qualify for and
elect the tax treatment applicable to regulated investment companies ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). (Such qualification does not involve supervision of management or
investment practices or policies by the Internal Revenue Service.) In order to
qualify as a regulated investment company, a Fund must, among other things, (i)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
securities or foreign currencies and other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in such securities; (ii) derive less than 30% of its gross income from the sale
or other disposition of securities, options, futures or forward contracts (other
than those on foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the RIC's principal
business of investing in securities (or options and futures with respect
thereto) held for less than three months; and (iii) diversify its holdings so
that, at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Fund's total assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer, to an
amount not greater than 5% of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment companies).
By so qualifying, a Fund is not subject to federal income tax if it timely
distributes its investment company taxable income and any net realized capital
gains. A 4% nondeductible excise tax will be imposed on a Fund to the extent it
does not meet certain distribution requirements by the end of each calendar
year. Each Fund anticipates meeting such distribution requirements.
Dividends paid by a Fund from investment company taxable income
generally will be taxed to the shareholders as ordinary income. Investment
company taxable income includes net investment income and net realized
short-term gains (if any). Any dividends received by a Fund from domestic
corporations will constitute a portion of the Fund's gross investment income. It
is anticipated that this portion of the dividends paid by a Fund (other than
distributions of securities profits) will qualify for the 70% dividends-received
deduction for corporations. Shareholders will be informed of the amounts of
dividends which so qualify.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders (who are not exempt from
tax) as long-term capital gain, regardless of the length of time the shares of a
Fund have been held by such shareholders. Short-term capital gains distributions
are taxable to shareholders who are not exempt from tax as ordinary income. Such
distributions are not eligible for the dividends-received deduction. Any loss
recognized upon the sale of shares of a Fund held by a shareholder for six
months or less will be treated as a long-term capital loss to the extent that
the shareholder received a long-term capital gain distribution with respect to
such shares.
Distributions will be taxable as described above to shareholders (who
are not exempt from tax), whether made in shares or in cash. Shareholders
electing to receive distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each
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<PAGE>
share so received equal to the net asset value of a share of a Fund on the
reinvestment date.
Distributions by each Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would be taxable as
ordinary income or capital gain as described above to shareholders (who are not
exempt from tax), even though, from an investment standpoint, it may constitute
a return of capital. In particular, investors should be careful to consider the
tax implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive
what is in effect a return of capital upon the distribution which will
nevertheless be taxable to shareholders subject to taxes.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gains or losses
will be treated as a capital gain or loss if the shares are capital assets in
the investor's hands and will be a long-term capital gain or loss if the shares
have been held for more than one year. Generally, any loss realized on a sale or
exchange will be disallowed to the extent shares disposed of are replaced within
a period of sixty-one days beginning thirty days before and ending thirty days
after the shares are disposed of. Any loss realized by a shareholder on the sale
of shares of the Fund held by the shareholder for six months or less will be
disallowed to the extent of any exempt interest dividends received by the
shareholder with respect to such shares, and will be treated for tax purposes as
a long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisers about the applicability of the backup withholding provisions.
If more than 50% of the value of a Fund's total assets at the end of a
fiscal year is represented by securities of foreign corporations and a Fund
elects to make foreign tax credits available to its shareholders, a shareholder
will be required to include in his gross income both cash dividends and the
amount a Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on a Fund's investments.
The shareholder will be entitled, however, to take the amount of such foreign
taxes withheld as a credit against his U.S. income tax, or to treat the foreign
tax withheld as an itemized deduction from his gross income, if that should be
to his advantage. In substance, this policy enables the shareholder to benefit
from the same foreign tax credit or deduction that he would have received if he
had been the individual owner of foreign securities and had paid foreign income
tax on the income therefrom. As in the case of individuals receiving income
directly from foreign sources, the above-described tax credit and deductions are
subject to certain limitations.
The foregoing discussion relates solely to U.S. federal income tax law
as applicable to
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U.S. persons (i.e., U.S. citizens and residents and U.S. domestic corporations,
partnerships, trusts and estates). It does not reflect the special tax
consequences to certain taxpayers (e.g., banks, insurance companies, tax exempt
organizations and foreign persons). Shareholders are encouraged to consult their
own tax advisers regarding specific questions relating to federal, state and
local tax consequences of investing in shares of a Fund. Each shareholder who is
not a U.S. person should consult his or her tax adviser regarding the U.S. and
foreign tax consequences of ownership of shares of a Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 31% (or at a lower rate under a tax treaty) on amounts treated as
income from U.S. sources under the Code.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
The following information supplements that set forth in each Fund's
Prospectus under the subheading "How to Buy Shares - How the Funds Value Their
Shares" in the Section entitled "Purchase and Redemption of Shares."
The public offering price of shares of a Fund is its net asset value
plus, in the case of Class A shares, a sales charge which will vary depending
upon the purchase alternative chosen by the investor, as more fully described in
the Prospectus. See "Purchase of Shares - Class A Shares - Front-End Sales
Charge Alternative." On each Fund business day on which a purchase or redemption
order is received by a Fund and trading in the types of securities in which a
Fund invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Declaration of
Trust and By-Laws governing each Fund as of the next close of regular trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time)
by dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any weekday,
exclusive of national holidays on which the Exchange is closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic
or foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked prices and portfolio bonds are presently valued by
a recognized pricing service when such prices are believed to reflect the fair
value of the security. Over-the-counter securities not included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one or more brokers. If accurate quotations are not available,
securities will be valued at fair value determined in good faith by the Board of
Trustees.
The respective per share net asset values of the Class A, Class B,
Class C and Class Y shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the Class B
and Class C shares may be lower than the per share net asset value of the Class
A shares (and, in turn, that of Class A shares may be lower than Class Y shares)
as a result of the greater daily expense accruals, relative to Class A and Class
Y shares, of Class B and Class C shares relating to distribution services fees
(and, with respect to U.S. Government, the Shareholder Service Plan fee) and, to
the extent applicable, transfer agency fees and the fact that Class Y shares
bear no additional distribution, shareholder service or transfer agency related
fees. While it is expected that, in the event each Class of shares of a Fund
realizes net investment income or does not realize a net operating loss
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for a period, the per share net asset values of the four Classes will tend to
converge immediately after the payment of dividends, which dividends will differ
by approximately the amount of the expense accrual differential among the
Classes, there is no assurance that this will be the case. In the event one or
more Classes of a Fund experiences a net operating loss for any fiscal period,
the net asset value per share of such Class or Classes will remain lower than
that of Classes that incurred lower expenses for the period.
To the extent that any Fund invests in non-U.S. dollar denominated
securities, the value of all assets and liabilities will be translated into
United States dollars at the mean between the buying and selling rates of the
currency in which such a security is denominated against United States dollars
last quoted by any major bank. If such quotations are not available, the rate of
exchange will be determined in accordance with policies established by the Fund.
The Trustees will monitor, on an ongoing basis, a Fund's method of valuation.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York. In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York.
Furthermore, trading takes place in various foreign markets on days
which are not business days in New York and on which the Fund's net asset value
is not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the Exchange
will not be reflected in a Fund's calculation of net asset value unless the
Trustees deem that the particular event would materially affect net asset value,
in which case an adjustment will be made. Securities transactions are accounted
for on the trade date, the date the order to buy or sell is executed. Dividend
income and other distributions are recorded on the ex-dividend date, except
certain dividends and distributions from foreign securities which are recorded
as soon as the Fund is informed after the ex-dividend date.
- -------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
The following information supplements that set forth in each Fund's
Prospectus under the heading "Purchase and Redemption of Shares - How To Buy
Shares."
General
Shares of each Fund will be offered on a continuous basis at a price
equal to their net asset value plus an initial sales charge at the time of
purchase (the "front-end sales charge alternative"), with a contingent deferred
sales charge (the deferred sales charge alternative"), or without any front-end
sales charge, but with a contingent deferred sales charge imposed only during
the first year after the month of purchase (the "level-load alternative"), as
described below. Class Y shares which, as described below, are not offered to
the general public, are offered without any front-end or contingent sales
charges. Shares of each Fund are offered on a continuous basis through (i)
investment dealers that are members of the National Association of Securities
Dealers, Inc. and have entered into selected dealer agreements with the
Distributor ("selected dealers"), (ii) depository institutions and other
financial intermediaries or their affiliates, that have entered into selected
agent agreements with the
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Distributor ("selected agents"), or (iii) the Distributor. The minimum for
initial investment is $1,000; there is no minimum for subsequent investments.
The subscriber may use the Application available from the Distributor for his or
her initial investment. Sales personnel of selected dealers and agents
distributing a Fund's shares may receive differing compensation for selling
Class A, Class B or Class C shares.
Investors may purchase shares of a Fund in the United States either
through selected dealers or agents or directly through the Distributor. A Fund
reserves the right to suspend the sale of its shares to the public in response
to conditions in the securities markets or for other reasons.
Each Fund will accept unconditional orders for its shares to be
executed at the public offering price equal to the net asset value next
determined (plus for Class A shares, the applicable sales charges), as described
below. Orders received by the Distributor prior to the close of regular trading
on the Exchange on each day the Exchange is open for trading are priced at the
net asset value computed as of the close of regular trading on the Exchange on
that day (plus for Class A shares the sales charges). In the case of orders for
purchase of shares placed through selected dealers or agents, the applicable
public offering price will be the net asset value as so determined, but only if
the selected dealer or agent receives the order prior to the close of regular
trading on the Exchange and transmits it to the Distributor prior to its close
of business that same day (normally 5:00 p.m. Eastern time). The selected dealer
or agent is responsible for transmitting such orders by 5:00 p.m. If the
selected dealer or agent fails to do so, the investor's right to that day's
closing price must be settled between the investor and the selected dealer or
agent. If the selected dealer or agent receives the order after the close of
regular trading on the Exchange, the price will be based on the net asset value
determined as of the close of regular trading on the Exchange on the next day it
is open for trading.
Following the initial purchase of shares of a Fund, a shareholder may
place orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Application. Payment for shares
purchased by telephone can be made only by Electronic Funds Transfer from a bank
account maintained by the shareholder at a bank that is a member of the National
Automated Clearing House Association ("ACH"). If a shareholder's telephone
purchase request is received before 3:00 p.m. Eastern time on a Fund business
day, the order to purchase shares is automatically placed the same Fund business
day for non-money market funds, and two days following the day the order is
received for money market funds, and the applicable public offering price will
be the public offering price determined as of the close of business on such
business day. Full and fractional shares are credited to a subscriber's account
in the amount of his or her subscription. As a convenience to the subscriber,
and to avoid unnecessary expense to a Fund, stock certificates representing
shares of a Fund are not issued. This facilitates later redemption and relieves
the shareholder of the responsibility for and inconvenience of lost or stolen
certificates.
Alternative Purchase Arrangements
Each Fund issues four classes of shares: (i) Class A shares, which are
sold to investors choosing the front-end sales charge alternative; (ii) Class B
shares, which are sold to investors choosing the deferred sales charge
alternative; (iii) Class C shares, which are sold to investors choosing the
level-load sales charge alternative; and (iv) Class Y shares, which are offered
only to (a) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (b) certain investment advisory clients
of the Advisers and their affiliates, and (c) institutional investors. The four
Classes of shares each represent
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<PAGE>
an interest in the same portfolio of investments of the Fund, have the same
rights and are identical in all respects, except that (i) only Class A, Class B
and Class C shares are subject to a Rule 12b-1 distribution fee, (ii) Class B
and Class C shares of U.S. Government are subject to a Shareholder Service Plan
fee, (iii) Class A shares bear the expense of the front-end sales charge and
Class B and Class C shares bear the expense of the deferred sales charge, (iv)
Class B shares and Class C shares each bear the expense of a higher Rule 12b-1
distribution services fee and Shareholder Service Plan fee than Class A shares
and, in the case of Class B shares, higher transfer agency costs, (v) with the
exception of Class Y shares, each Class of each Fund has exclusive voting rights
with respect to provisions of the Rule 12b-1 Plan pursuant to which its
distribution services (and, to the extent applicable, Shareholder Service Plan
fee) is paid which relates to a specific Class and other matters for which
separate Class voting is appropriate under applicable law, provided that, if the
Fund submits to a simultaneous vote of Class A, Class B and Class C shareholders
an amendment to the Rule 12b-1 Plan that would materially increase the amount to
be paid thereunder with respect to the Class A shares, the Class A shareholders
and the Class B and Class C shareholders will vote separately by Class, and (vi)
only the Class B shares are subject to a conversion feature. Each Class has
different exchange privileges and certain different shareholder service options
available.
The alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the accumulated distribution services (and, to the
extent applicable, Shareholder Service Plan) fee and contingent deferred sales
charges on Class B shares prior to conversion, or the accumulated distribution
services (and, to the extent applicable, Shareholder Service Plan) fee on Class
C shares, would be less than the front-end sales charge and accumulated
distribution services fee on Class A shares purchased at the same time, and to
what extent such differential would be offset by the higher return of Class A
shares. Class B and Class C shares will normally not be suitable for the
investor who qualifies to purchase Class A shares at the lowest applicable sales
charge. For this reason, the Distributor will reject any order (except orders
for Class B shares from certain retirement plans) for more than $250,000 for
Class B shares or $500,000 for Class C shares.
Class A shares are subject to a lower distribution services fee and no
Shareholder Service Plan fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares. However, because
front-end sales charges are deducted at the time of purchase, investors
purchasing Class A shares would not have all their funds invested initially and,
therefore, would initially own fewer shares. Investors not qualifying for
reduced front-end sales charges who expect to maintain their investment for an
extended period of time might consider purchasing Class A shares because the
accumulated continuing distribution (and, to the extent applicable, Shareholder
Service Plan) charges on Class B shares or Class C shares may exceed the
front-end sales charge on Class A shares during the life of the investment.
Again, however, such investors must weigh this consideration against the fact
that, because of such front-end sales charges, not all their funds will be
invested initially.
Other investors might determine, however, that it would be more
advantageous to purchase Class B shares or Class C shares in order to have all
their funds invested initially, although remaining subject to higher continuing
distribution services (and, to the extent applicable, Shareholder Service Plan)
fees and, in the case of Class B shares, being subject to a contingent deferred
sales charge for a six-year period. For example, based on current fees and
expenses, an investor subject to the 4.75% front-end sales charge imposed on
Class A
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<PAGE>
shares of the Funds would have to hold his or her investment approximately seven
years for the Class B and Class C distribution services (and, to the extent
applicable, Shareholders Service Plan) fees, to exceed the front-end sales
charge plus the accumulated distribution services fee of Class A shares. In this
example, an investor intending to maintain his or her investment for a longer
period might consider purchasing Class A shares. This example does not take into
account the time value of money, which further reduces the impact of the Class B
and Class C distribution services (and, to the extent applicable, Shareholder
Service Plan) fees on the investment, fluctuations in net asset value or the
effect of different performance assumptions.
Those investors who prefer to have all of their funds invested
initially but may not wish to retain Fund shares for the six year period during
which Class B shares are subject to a contingent deferred sales charge may find
it more advantageous to purchase Class C shares if available through their
broker-dealers.
With respect to each Fund, the Trustees have determined that currently
no conflict of interest exists between or among the Class A, Class B, Class C
and Class Y shares. On an ongoing basis, the Trustees, pursuant to their
fiduciary duties under the 1940 Act and state laws, will seek to ensure that no
such conflict arises.
Front-End Sales Charge Alternative--Class A Shares
The public offering price of Class A shares for purchasers choosing the
front-end sales charge alternative is the net asset value plus a sales charge as
set forth in the Prospectus for each Fund.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are not subject to any sales charges.
The Fund receives the entire net asset value of its Class A shares sold to
investors. The Distributor's commission is the sales charge set forth in the
Prospectus for each Fund, less any applicable discount or commission
"re-allowed" to selected dealers and agents. The Distributor will reallow
discounts to selected dealers and agents in the amounts indicated in the table
in the Prospectus. In this regard, the Distributor may elect to reallow the
entire sales charge to selected dealers and agents for all sales with respect to
which orders are placed with the Distributor.
Set forth below is an example of the method of computing the offering
price of the Class A shares of each Fund. The example assumes a purchase of
Class A shares of a Fund aggregating less than $100,00 subject to the schedule
of sales charges set forth in the Prospectus at a price based upon the net asset
value of Class A shares of each Fund for at the end of each Fund's latest fiscal
period.
Date Net Asset Per Share Sales Offering Price
Value Charge Per Share
U.S. Government 4/30/97 $9.39 $0.47 $9.86
Strategic Income 4/30/97 $6.82 $0.34 $7.16
With respect to U.S. Government, the following commissions were paid to
and amounts were retained by Federated Securities Corp. through July 7, 1995
which until such date was the
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principal underwriter of portfolios of Evergreen Investment Trust. For the
period from July 8, 1995 through April 30, 1997, commissions were paid to and
amounts were retained by the current Distributor as noted below:
Ten Months Period From Period From
Ended 4/30/97 7/8/95 to 1/1/95 to 7/7/95
6/30/96
U.S. GOVERNMENT
Commissions $32,391 $159,666 $104,303
Received
Commissions $ 3,999 $ 16,558 $ 3,599
Retained
With respect to Strategic Income, the following commissions were paid
to and amounts were retained by Keystone Investment Distributors Company, which
prior to December 1, 1996, was the distributor for Strategic Income. Since that
date, commissions have been paid to and amounts retained by the current
Distributor as noted below:
<TABLE>
<CAPTION>
Nine Months Year Ended Year Ended Year Ended
Ended 4/30/97 7/31/96 7/31/95 7/31/94
<S> <C> <C> <C> <C>
STRATEGIC INCOME
Commissions Received $133,622 $123,058 $2,484,230 $3,623,529
Commissions Retained $ 9,140 $ 10,574 $1,345,124 -0-
</TABLE>
Investors choosing the front-end sales charge alternative may under
certain circumstances be entitled to pay reduced sales charges. The
circumstances under which such investors may pay reduced sales charges are
described below.
Combined Purchase Privilege. Certain persons may qualify for the sales
charge reductions by combining purchases of shares of one or more Evergreen
Keystone Funds (other than the money market funds) into a single "purchase," if
the resulting "purchase" totals at least $100,000. The term "purchase" refers
to: (i) a single purchase by an individual, or to concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an individual,
his or her spouse and their children under the age of 21 years purchasing shares
for his, her or their own account(s); (ii) a single purchase by a trustee or
other fiduciary purchasing shares for a single trust, estate or single fiduciary
account although more than one beneficiary is involved; or (iii) a single
purchase by an organization exempt from federal income tax under Section 501
(c)(3) or (13) of the Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Code. The term "purchase"
also includes purchases by any "company," as the term is defined in the 1940
Act, but does not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other than the
purchase of shares of a Fund or shares of other registered investment companies
at a discount. The term "purchase" does not include purchases by any
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group of individuals whose sole organizational nexus is that the participants
therein are credit card holders of a company, policy holders of an insurance
company, customers of either a bank or broker-dealer or clients of an investment
adviser. A "purchase" may also include shares, purchased at the same time
through a single selected dealer or agent, of any Evergreen Keystone Fund.
Cumulative Quantity Discount (Right of Accumulation). An investor's
purchase of additional Class A shares of a Fund may qualify for a Cumulative
Quantity Discount. The applicable sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the previous
day) of (a) all Class A shares of the Fund held by the
investor and (b) all such shares of any other Evergreen
Keystone Fund held by the investor; and
(iii) the net asset value of all shares described in paragraph; and
(iv) shares owned by another shareholder eligible to combine his
or her purchase with that of the investor into a single
"purchase" (see above).
For example, if an investor owned Class A, B or C shares of an
Evergreen Keystone Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of a Fund worth an additional
$100,000, the sales charge for the $100,000 purchase, in the case of the Funds,
would be at the 2.50% rate applicable to a single $300,000 purchase of shares of
the Fund, rather than the 3.75% rate.
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through a selected dealer or agent,
the investor or selected dealer or agent must provide the Distributor with
sufficient information to verify that each purchase qualifies for the privilege
or discount.
Letter of Intent. Class A investors may also obtain the reduced sales
charges shown in the Prospectus by means of a written Letter of Intent, which
expresses the investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares of the Fund or any other Evergreen
Keystone Fund. Each purchase of shares under a Letter of Intent will be made at
the public offering price or prices applicable at the time of such purchase to a
single transaction of the dollar amount indicated in the Letter of Intent. At
the investor's option, a Statement of Intention may include purchases of Class A
shares of the Fund or any other Evergreen Keystone Fund made not more than 90
days prior to the date that the investor signs a Statement of Intention;
however, the 13-month period during which the Letter of Intent is in effect will
begin on the date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege described
above may purchase shares of the Evergreen Keystone Funds under a single Letter
of Intent. For example, if at the time an investor signs a Letter of Intent to
invest at least $100,000 in Class A shares of the Fund, the investor and the
investor's spouse each purchase shares of the Fund worth $20,000 (for a total of
$40,000), it will only be necessary to invest a total of $60,000 during the
following 13 months in Class A shares of the Fund or any other Evergreen
Keystone Fund, to qualify for the 3.75% sales charge applicable to purchases in
any Evergreen Keystone Equity or Long-Term Bond Fund on the total amount being
invested (the sales charge applicable to an investment of $100,000).
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The Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge applicable to the
shares actually purchased if the full amount indicated is not purchased, and
such escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow. When the full
amount indicated has been purchased, the escrow will be released. To the extent
that an investor purchases more than the dollar amount indicated on the Letter
of Intent and qualifies for a further reduced sales charge, the sales charge
will be adjusted for the entire amount purchased at the end of the 13-month
period. The difference in sales charge will be used to purchase additional
shares of the Fund subject to the rate of sales charge applicable to the actual
amount of the aggregate purchases.
Investors wishing to enter into a Letter of Intent in conjunction with
their initial investment in Class A shares of a Fund should complete the
appropriate portion of the Application while current Class A shareholders
desiring to do so can obtain a form of Letter of Intent by contacting a Fund at
the address or telephone number shown on the cover of this Statement of
Additional Information.
Investments Through Employee Benefit and Savings Plans. Certain
qualified and non-qualified benefit and savings plans may make shares of the
Evergreen Keystone Funds available to their participants. Investments made by
such employee benefit plans may be exempt from any applicable front-end sales
charges if they meet the criteria set forth in the Prospectus under "Class A
Shares-Front End Sales Charge Alternative." The Advisers may provide
compensation to organizations providing administrative and record keeping
services to plans which make shares of the Evergreen Keystone Funds available to
their participants.
Reinstatement Privilege. A Class A shareholder who has caused any or
all of his or her shares of the Fund to be redeemed or repurchased may reinvest
all or any portion of the redemption or repurchase proceeds in Class A shares of
the Fund at net asset value without any sales charge, provided that such
reinvestment is made within 30 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net asset value next
determined as described above. A reinstatement pursuant to this privilege will
not cancel the redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for federal income tax purposes except that no
loss will be recognized to the extent that the proceeds are reinvested in shares
of the Fund. The reinstatement privilege may be used by the shareholder only
once, irrespective of the number of shares redeemed or repurchased, except that
the privilege may be used without limit in connection with transactions whose
sole purpose is to transfer a shareholder's interest in the Fund to his or her
individual retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written request sent to
the Fund at the address shown on the cover of this Statement of Additional
Information.
Sales at Net Asset Value. In addition to the categories of investors
set forth in the Prospectus, each Fund may sell its Class A shares at net asset
value, i.e., without any sales charge, to: (i) certain investment advisory
clients of the Advisers or their affiliates; (ii) officers and present or former
Trustees of the Trusts; present or former trustees of other investment companies
managed by the Advisers; officers, directors and present or retired full-time
employees of the Advisers, the Distributor, and their affiliates; officers,
directors and present and full-time employees of selected dealers or agents; or
the spouse, sibling, direct ancestor or
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direct descendant (collectively "relatives") of any such person; or any trust,
individual retirement account or retirement plan account for the benefit of any
such person or relative; or the estate of any such person or relative, if such
shares are purchased for investment purposes (such shares may not be resold
except to the Fund); (iii) certain employee benefit plans for employees of the
Advisers, the Distributor and their affiliates; (iv) persons participating in a
fee-based program, sponsored and maintained by a registered broker-dealer and
approved by the Distributor, pursuant to which such persons pay an asset-based
fee to such broker-dealer, or its affiliate or agent, for service in the nature
of investment advisory or administrative services. These provisions are intended
to provide additional job-related incentives to persons who serve the Funds or
work for companies associated with the Funds and selected dealers and agents of
the Funds. Since these persons are in a position to have a basic understanding
of the nature of an investment company as well as a general familiarity with the
Fund, sales to these persons, as compared to sales in the normal channels of
distribution, require substantially less sales effort. Similarly, these
provisions extend the privilege of purchasing shares at net asset value to
certain classes of institutional investors who, because of their investment
sophistication, can be expected to require significantly less than normal sales
effort on the part of the Funds and the Distributor.
Deferred Sales Charge Alternatives--Class B and Class C Shares
Investors choosing the deferred sales charge alternative purchase Class
B shares at the public offering price equal to the net asset value per share of
the Class B shares on the date of purchase without the imposition of a sales
charge at the time of purchase. The Class B shares are sold without a front-end
sales charge so that the full amount of the investor's purchase payment is
invested in the Fund initially.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used by the Distributor to defray the expenses of the
Distributor related to providing distribution-related services to the Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to selected dealers and agents for selling Class B shares. The
combination of the contingent deferred sales charge and the distribution
services fee (and, with respect to U.S. Government, the Shareholder Service Plan
fee) enables the Fund to sell the Class B shares without a sales charge being
deducted at the time of purchase. The higher distribution services fee (and,
with respect to U.S. Government, the Shareholder Service Plan fee) incurred by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within six years of purchase will be subject to a contingent deferred sales
charge at the rates set forth in the Prospectus charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal to
the lesser of the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be imposed on
increases in net asset value above the initial purchase price. In addition, no
contingent deferred sales charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The amount of the
contingent deferred sales charge, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares.
In determining the contingent deferred sales charge applicable to a
redemption, it will be assumed that the redemption is first of any Class A
shares or Class C shares in the shareholder's Fund account, second of Class B
shares held for over six years or Class B shares acquired pursuant to
reinvestment of dividends or distributions and third of Class B shares
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held longest during the six-year period.
To illustrate, assume that an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the second year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional Class B shares upon dividend reinvestment. If at such
time the investor makes his or her first redemption of 50 Class B shares, 10
Class B shares will not be subject to charge because of dividend reinvestment.
With respect to the remaining 40 Class B shares, the charge is applied only to
the original cost of $10 per share and not to the increase in net asset value of
$2 per share. Therefore, of the $600 of the shares redeemed $400 of the
redemption proceeds (40 shares x $10 original purchase price) will be charged at
a rate of 4.0% (the applicable rate in the second year after purchase for a
contingent deferred sales charge of $16).
The contingent deferred sales charge is waived on redemptions of shares
(i) following the death or disability, as defined in the Code, of a shareholder,
or (ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Conversion Feature. At the end of the period ending seven years after
the end of the calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A shares and will
no longer be subject to a higher distribution services fee (and, with respect to
U.S. Government, the Shareholder Service Plan fee) imposed on Class B shares.
Such conversion will be on the basis of the relative net asset values of the two
classes, without the imposition of any sales load, fee or other charge. The
purpose of the conversion feature is to reduce the distribution services fee
paid by holders of Class B shares that have been outstanding long enough for the
Distributor to have been compensated for the expenses associated with the sale
of such shares.
For purposes of conversion to Class A, Class B shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the sub-account) convert to Class A, an equal pro-rata portion of
the Class B shares in the sub-account will also convert to Class A.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee (and, with respect to U.S.
Government, Shareholder Service Plan fee) and transfer agency costs with respect
to Class B shares does not result in the dividends or distributions payable with
respect to other Classes of a Fund's shares being deemed "preferential
dividends" under the Code, and (ii) the conversion of Class B shares to Class A
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares to Class A shares may be suspended if such an
opinion is no longer available at the time such conversion is to occur. In that
event, no further conversions of Class B shares would occur, and shares might
continue to be subject to the higher distribution services fee (and, with
respect to U.S. Government, the Shareholder Service Plan fee) for an indefinite
period which may extend beyond the period ending seven years after the end of
the calendar month in which the shareholder's purchase order was accepted.
Level-Load Alternative--Class C Shares
Investors choosing the level-load sales charge alternative purchase
Class C shares at the
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public offering price equal to the net asset value per share of the Class C
shares on the date of purchase without the imposition of a front-end sales
charge. However, you will pay a 1.0% contingent deferred sales charge if you
redeem shares during the first year after the month of purchase. No charge is
imposed in connection with redemptions made more than one year after the month
of purchase. Class C shares are sold without a front-end sales charge so that
the Fund will receive the full amount of the investor's purchase payment and
after the first year without a contingent deferred sales charge so that the
investor will receive as proceeds upon redemption the entire net asset value of
his or her Class C shares. The Class C distribution services fee (and, with
respect to U.S. Government, Shareholder Service Plan fee) enables the Fund to
sell Class C shares without either a front-end or contingent deferred sales
charge. However, unlike Class B shares, Class C shares do not convert to any
other Class shares of the Fund. Class C shares incur higher distribution
services fees (and, with respect to U.S. Government, Shareholder Service Plan
fee) than Class A shares, and will thus have a higher expense ratio and pay
correspondingly lower dividends than Class A shares.
Class Y Shares
Class Y shares are not offered to the general public and are available
only to (i) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (ii) certain investment advisory clients
of the Advisers and their affiliates, and (iii) institutional investors. Class Y
shares do not bear any Rule 12b-1 distribution expenses and are not subject to
any front-end or contingent deferred sales charges.
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUNDS
(SEE ALSO "OTHER INFORMATION - GENERAL INFORMATION"
IN EACH FUND'S PROSPECTUS)
- --------------------------------------------------------------------------------
Capitalization and Organization
The Evergreen U.S. Government Fund is a separate series of Evergreen
Investment Trust, a Massachusetts business trust. Keystone Strategic Income Fund
is a Massachusetts business trust. On July 7, 1995, First Union Funds changed
its name to Evergreen Investment Trust. The above-named Trusts are individually
referred to in this Statement of Additional Information as the "Trust" and
collectively as the "Trusts." Each Trust is governed by a Board of Trustees.
Unless otherwise stated, references to the "Board of Trustees" or "Trustees" in
this Statement of Additional Information refer to the Trustees of all the
Trusts.
U.S. Government may issue an unlimited number of shares of beneficial
interest with a $0.0001 par value. Strategic Income may issue an unlimited
number of shares of beneficial interest with no par value. All shares of these
Funds have equal rights and privileges. Each share is entitled to one vote, to
participate equally in dividends and distributions declared by the Funds and on
liquidation to their proportionate share of the assets remaining after
satisfaction of outstanding liabilities. Shares of these Funds are fully paid,
nonassessable and fully transferable when issued and have no pre-emptive,
conversion or exchange rights. Fractional shares have proportionally the same
rights, including voting rights, as are provided for a full share.
Under each Trust's Declaration of Trust, each Trustee will continue in
office until the
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termination of the Trust or his or her earlier death, incapacity, resignation or
removal. Shareholders can remove a Trustee upon a vote of two-thirds of the
outstanding shares of beneficial interest of the Trust. Vacancies will be filled
by a majority of the remaining Trustees, subject to the 1940 Act. As a result,
normally no annual or regular meetings of shareholders will be held, unless
otherwise required by the Declaration of Trust of each Trust or the 1940 Act.
Shares have noncumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of Trustees can elect
100% of the Trustees if they choose to do so and in such event the holders of
the remaining shares so voting will not be able to elect any Trustees.
The Trustees of each Trust are authorized to reclassify and issue any
unissued shares to any number of additional series without shareholder approval.
Accordingly, in the future, for reasons such as the desire to establish one or
more additional portfolios of a Trust with different investment objectives,
policies or restrictions, additional series of shares may be created by one or
more of the Trusts. Any issuance of shares of another series or class would be
governed by the 1940 Act and the law of the Commonwealth of Massachusetts. If
shares of another series of a Trust were issued in connection with the creation
of additional investment portfolios, each share of the newly created portfolio
would normally be entitled to one vote for all purposes. Generally, shares of
all portfolios would vote as a single series on matters, such as the election of
Trustees, that affected all portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of the Investment
Advisory Agreement and changes in investment policy, shares of each portfolio
would vote separately.
In addition any Fund may, in the future, create additional classes of
shares which represent an interest in the same investment portfolio. Except for
the different distribution related and other specific costs borne by such
additional classes, they will have the same voting and other rights described
for the existing classes of each Fund.
Procedures for calling a shareholders' meeting for the removal of the
Trustees of each Trust, similar to those set forth in Section 16(c) of the 1940
Act, will be available to shareholders of each Fund. The rights of the holders
of shares of a series of a Fund may not be modified except by the vote of a
majority of the outstanding shares of such series.
Distributor
Evergreen Keystone Distributor, Inc. (formerly known as Evergreen Funds
Distributor, Inc. (the "Distributor")), 125 W. 55th Street, New York, New York
10019, serves as each Fund's principal underwriter, and as such may solicit
orders from the public to purchase shares of any Fund. The Distributor is not
obligated to sell any specific amount of shares and will purchase shares for
resale only against orders for shares. Under the Distribution Agreement between
each Fund and the Distributor, the Fund has agreed to indemnify the Distributor,
in the absence of its willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations thereunder, against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
Counsel
Sullivan & Worcester LLP, Washington, D.C. serves as counsel to the
Funds.
Independent Auditors
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KPMG Peat Marwick LLP has been selected to be the independent auditors
of the Funds.
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PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Total Return
From time to time a Fund may advertise its "total return." Computed
separately for each class, the Fund's "total return" is its average annual
compounded total return for the most recent one, five, and ten-year periods (or
the period since the Fund's inception). The Fund's total return for such a
period is computed by finding, through the use of a formula prescribed by the
SEC, the average annual compounded rate of return over the period that would
equate an assumed initial amount invested to the value of such investment at the
end of the period. For purposes of computing total return, income dividends and
capital gains distributions paid on shares of the Fund are assumed to have been
reinvested when paid, and the maximum sales charge applicable to purchases of
Fund shares is assumed to have been paid. The Fund will include performance data
for Class A, Class B, Class C and Class Y shares in any advertisement or
information including performance data of the Fund.
U.S. GOVERNMENT Ten Months One Year From inception*
Ended 4/30/97 Ended 4/30/97 to 4/30/97
Class A 0.30% 1.32% 4.30%
Class B 0.34% 0.60% 4.42%
Class C 3.65% 4.58% 6.18%
Class Y 5.52% 6.63% 4.75%
STRATEGIC INCOME Nine Months One Year Five Years From inception**
Ended 4/30/97 Ended 4/30/97 Ended 4/30/97 to 4/30/97
Class A 1.73% 4.08% 8.44% 6.87%
Class B 1.06% 3.48% ------- 7.11%
Class C 5.07% 7.49% ------- 7.44%
Class Y ------- -------- ------- --------
* Inception date: Class A - January 11, 1993; Class B - January 11, 1993; Class
C - September 2, 1994; Class Y - September 2, 1993.
** Inception date: Class A - April 14, 1987; Class B - February 1, 1993; Class C
- -February 1, 1993; Class Y -January 13, 1997.
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A Fund's total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and quality of the
securities in a Fund's portfolio and its expenses. Total return information is
useful in reviewing a Fund's performance but such information may not provide a
basis for comparison with bank deposits or other investments which pay a fixed
yield for a stated period of time. An investor's principal investment in a Fund
is not fixed and will fluctuate in response to prevailing market conditions.
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other communications to shareholders. Yield quotations are expressed
in annualized terms and may be quoted on a compounded basis. Yields are computed
by dividing the Fund's interest income (as defined in the SEC yield formula) for
a given 30-day or one month period, net of expenses, by the average number of
shares entitled to receive distributions during the period, dividing this figure
by the Fund's net asset value per share at the end of the period and annualizing
the result (assuming compounding of income) in order to arrive at an annual
percentage rate. The formula for calculating yield is as follows:
6
YIELD = [2[(a-b/cd)+ 1] -1]
Where a= Interest earned during the period
b= Expenses accrued for the period (net of reimbursements)
c= The average daily number of shares outstanding during the period that
were entitled to receive dividends
d= The maximum offering price per share on the last day of the period
Income is calculated for purposes of yield quotations in accordance
with standardized methods applicable to all stock and bond funds. Gains and
losses generally are excluded from the calculation. Income calculated for
purposes of determining a Fund's yield differs from income as determined for
other accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yields quoted for
a Fund may differ from the rates of distributions a Fund paid over the same
period, or the net investment income reported in a Fund's financial statements.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Funds'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates
the yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of the Fund's investments, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite can be expected to occur.
The yield for the thirty-day period ended April 30, 1997 for each
Class of shares offered by the Funds is set forth in the table below:
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U.S. Government Strategic Income
Class A 6.13% 7.02%
Class B 5.37% 6.66%
Class C 5.36% 6.61%
Class Y 6.38% N/A
Non-Standardized Performance
In addition to the performance information described above, a Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
- -------------------------------------------------------------------------------
GENERAL
- -------------------------------------------------------------------------------
From time to time, a Fund may quote its performance in advertising and
other types of literature as compared to the performance of a bond index. A
Fund's performance may also be compared to those of other mutual funds having
similar objectives. This comparative performance would be expressed as a ranking
prepared by Lipper Analytical Services, Inc. or similar independent services
monitoring mutual fund performance. A Fund's performance will be calculated by
assuming, to the extent applicable, reinvestment of all capital gains
distributions and income dividends paid. Any such comparisons may be useful to
investors who wish to compare a Fund's past performance with that of its
competitors. Of course, past performance cannot be a guarantee of future
results.
Additional Information
Any shareholder inquiries may be directed to the shareholder's broker
or to each Adviser at the address or telephone number shown on the front cover
of this Statement of Additional Information. This Statement of Additional
Information does not contain all the information set forth in the Registration
Statements filed by the Trusts with the SEC under the Securities Act of 1933.
Copies of the Registration Statements may be obtained at a reasonable charge
from the SEC or may be examined, without charge, at the offices of the SEC in
Washington, D.C.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Funds' financial statements for the fiscal period ended April 30,
1997, and the report thereon of KPMG Peat Marwick LLP, are incorporated by
reference herein from the Funds' Annual Report, as filed with the Commission
pursuant to Section 30(d) of the 1940 act and Rule 30d-1 thereunder.
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You may obtain a copy of the Funds' Annual Report without charge by
writing to EKSC, P.O. Box 2121, Boston, Massachusetts 02106-2121, or by calling
EKSC toll free at 1-800-343-2898.
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APPENDIX "A"
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Service. A Standard & Poor's corporate or
municipal bond rating is a current assessment of the credit worthiness of an
obligor with respect to a specific obligation. This assessment of credit
worthiness may take into consideration obligors such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or their arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay interest and
repay any principal.
AA - Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest and repay principal is very strong and in the majority
of instances they differ from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate and municipal issues. The ratings
measure the credit worthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service. A brief description of the applicable
Moody's rating symbols and
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their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. NOTE:
Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible risk
factors; AA -- high credit quality, with strong protection factors and modest
risk, which may vary very slightly from time to time because of economic
conditions; A--average credit quality with adequate protection factors, but with
greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating
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categories.
Fitch Investors Service L.P.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high credit quality, with very strong ability to pay interest and repay
principal; A -- high credit quality, considered strong as regards principal and
interest protection, but may be more vulnerable to adverse changes in economic
conditions and circumstances. The indicators "+" and "-" to the AA, A and BBB
categories indicate the relative position of credit within those rating
categories.
COMMERCIAL PAPER RATINGS
Moody's Investors Service: Commercial paper rated "Prime" carries the
smallest degree of investment risk. The modifiers 1, 2, and 3 are used to denote
relative strength within this highest classification.
Standard & Poor's Ratings Service: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service L.P.: F-1+ -- denotes exceptionally strong
credit quality given to issues regarded as having strongest degree of assurance
for timely payment; F-1 -- very strong, with only slightly less degree of
assurance for timely payment than F-1+; F-2 -- good credit quality, carrying a
satisfactory degree of assurance for timely payment.
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KEYSTONE STRATEGIC INCOME FUND
Part C
Other Information
Item 24. Financial Statements and Exhibits
Item 24 (a). Financial Statements
The following financial statements are incorporated by reference to the
Registrant's Annual Report dated April 30, 1997.
Schedule of Investments April 30, 1997
Financial Highlights
Class A Shares For the period August 1, 1996 through
April 30, 1997, each of the years in the
nine-year period ended July 31, 1996, and
for the period from February 13, 1987
(Commencement of Operations) to
July 31, 1987
Class B Shares For the period August 1, 1996 through
April 30, 1997, each of the years in the
three-year period ended July 31, 1996, and
for the period from February 1, 1993
(Date of Initial Public Offering) to
July 31, 1993.
Class C Shares For the period August 1, 1996 through
April 30, 1997, each of the years in the
three-year period ended July 31, 1996, and
for the period from February 1, 1993
(Date of Initial Public Offering) to
July 31, 1993.
Class Y Shares For the period January 13, 1997
(Commencement of Class Operations) to
April 30, 1997.
Statement of Assets and April 30, 1997
Liabilities
Statement of Operations For the period August 1, 1996 through
April 30, 1997 and for the year ended
July 31, 1996.
Statements of Changes in For the period August 1, 1996 through
Net Assets April 30, 1997 and for each of the years
in the two-year period ended
July 31, 1996.
Notes to Financial Statements
Independent Auditors' Report May 30, 1997
<PAGE>
(24)(b) Exhibits
(1) Registrant's Declaration of Trust, as supplemented (the "Declaration of
Trust") (1)
(2) Registrant's By-Laws, as amended (1)
(3) Not applicable.
(4)(a) The Declaration of Trust, Articles III, V, VI, and VIII (1)
(b) Registrant's By-Laws, as amended, Article 2., Section 2.5 (1)
(5) Investment Advisory and Management Agreement between Registrant and
Keystone Investment Management Company ("Keystone")(the "Advisory
Agreement") (2)
(6)(a) Principal Underwriting Agreements for Registrant's Class A, B and C
shares between Registrant and Evergreen Keystone Distributor, Inc.
("EKD") (the "Principal Underwriting Agreements") (2)
(b) Principal Underwriting Agreements for Registrant's Class Y shares
between Registrant and EKD (the "Class Y Principal Underwriting
Agreement") (2)
(c) Form of Dealer Agreements for Class A, B and C shares used by EKD
(the "Dealer Agreements") (2)
(7) Not applicable.
(8) Custodian, Fund Accounting and Recordkeeping Agreements, as amended,
between Registrant and State Street Bank & Trust Company (1)
(9)(a) Form of Marketing Services Agreement between EKD and Evergreen
Keystone Investment Services, Inc. ("EKIS") (the "Marketing Services
Agreement") (4)
(b) Principal Underwriting Agreements for Registrant's Class A, B and C
shares between Registrant and Evergreen Keystone Investment Services,
Inc. ("EKIS") (the "Continuation Agreements") (2)
(c) Form of Sub-Administrator Agreement between Keystone and BISYS Fund
Services Limited Partnership DBA as BISYS Fund Services ("BISYS") (the
"Sub-Administrator Agreement") (4)
(10) Opinion and consent of counsel (4)
(11) Consent of Independent Auditors (4)
(12) Not applicable.
(13)(a) Subscription Agreements (5)
(b) Copies of the release of one Subscription Agreement and a new
Subscription Agreement (6)
(14) Model plans used in the establishment of retirement plans in connection
with which Registrant offers its securities (the "Model Retirement
Plans") (7)
(15) Registrant's Class A, B and C Distribution Plans adopted pursuant to
Rule 12b-1(1)
(16) Schedules for the computation of total return and current yield
quotations (4)
(17) Financial data schedules (4)
(18) Registrant's Multiple Class Plan adopted pursuant to Rule 18f-3 (8)
(19) Powers of Attorney (2)
- ---------------------
(1) Filed with Post-Effective Amendment No. 17 ("Post-Effective Amendment No.
17") to Registration Statement No. 33-11050/811-4947 (the "Registration
Statement") and incorporated by reference herein.
(2) Filed with Registrant's Prospectus/Proxy Statement on Form N-14 ("Proxy
Statement") dated April 14, 1997 and incorporated by reference herein.
(3) Filed with Post-Effective Amendment No. 10 to the Registration Statement
("Post-Effective Amendment No. 10") as part of Exhibit 24(b)(6)(b) and is
incorporated by reference herein.
(4) Filed herewith.
(5) Filed with the Registration Statement and incorporated by reference
herein.
(6) Filed with Pre-Effective Amendment No. 2 to the Registration Statement
("Pre-Effective Amendment No. 2") and incorporated by reference herein.
(7) Filed with Post-Effective Amendment No. 66 to Registration Statement No.
2-10527/811-96 as Exhibit 24(b)(14) and incorporated by reference herein.
(8) Filed with Post-Effective Amendment No. 16 to the Registration Statement
("Post-Effective Amendment No 16") and incorporated by reference herein.
Item 25. Persons Controlled by or Under Common Control With Registrant
Not applicable.
Item 26. Number of Holders of Securities
Number of Record
Title of Class Holders as of July 31, 1997
-------------- ---------------------------
Shares of Beneficial Interest,
(.0001 par value):
Class A 3,452
Class B 5,829
Class C 1,035
Class Y 4
Item 27. Indemnification
Provisions for the indemnification of Registrant's Trustees and
officers are contained in Article VIII the Declaration of Trust, a copy
of which was filed with Post-Effective Amendment No. 17 and
incorporated by reference herein.
Provisions for the indemnification of EKD, the Registrant's Principal
Underwriter, are contained in Section 10 of the Class A and C Principal
Underwriting Agreements, copies of the form of which were filed with
the Proxy Statement and incorporated by reference herein.
Provisions for the indemnification of EKD are contained in Section 9 of
the Class B-2 Principal Underwriting Agreement, a copy of the form of
which was filed with the Proxy Statement and incorporated by reference
herein.
Provisions for the indemnification of EKIS are contained in Section 5
of the Class A and C Continuation Agreement, a copy of which was filed
with the Proxy Statement and incorporated by reference herein.
Provisions for the indemnification of EKIS are contained in Section 9
of the Class B Continuation Agreements, copies of which were filed with
the Proxy Statement and incorporated by reference herein.
Provisions for the indemnification of Keystone, Registrant's investment
adviser, are contained in Section 6 of the Advisory Agreement, a copy
of which was filed with the Proxy Statement and incorporated by
reference herein.
Item 28. Businesses and Other Connections of Investment Advisers
The following table lists the names of the various officers and
directors of Keystone, Registrant's investment adviser, and their
respective positions. For each named individual, the table lists, for
at least the past two fiscal years, (i) any other organizations
(excluding investment advisory clients) with which the officer and/or
director has had or has substantial involvement; and (ii) positions
held with such organizations.
<PAGE>
LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY
<TABLE>
<CAPTION>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
<S> <C> <C>
Albert H. Chairman of Senior Vice President
Elfner, III the Board, First Union Keystone, Inc.
Chief Executive Keystone Asset Corporation
Officer President and Director:
Keystone Trust Company
Director or Trustee:
Evergreen Keystone Investment Services, Inc
Evergreen Keystone Service Company
Boston Children's Services Associates
Middlesex School
Middlebury College
Formerly:
Chairman of the Board,
Chief Executive Officer,
President and Director:
Keystone Management, Inc.
Keystone Software, Inc.
Keystone Capital Corporation
Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Fiduciary Investment Company, Inc.
Formerly Chairman of the Board and Director:
Keystone Fixed Income Advisers, Inc.
Keystone Institutional Company, Inc.
Herbert L. Senior Vice None
Bishop, Jr. President
Donald C. Dates Senior Vice None
President
Gilman Gunn Senior Vice None
President,
Chief Investment
Officer
Edward F. Senior Vice Formerly Senior Vice President,
Godfrey President, Chief Financial Officer and Treasurer:
Chief Operating First Union Keystone, Inc.
Officer Evergreen Keystone Investment Services, Inc.
Formerly:
Treasurer:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Treasurer and Director:
Hartwell Keystone Advisers, Inc.
Rosemary D. Senior Vice Senior Vice President:
Van Antwerp President, Evergreen Keystone Service Company
Secretary Senior Vice President and Secretary:
Evergreen Keystone Investment Services, Inc.
Formerly:
Senior Vice President, General Counsel and Secretary:
Keystone Investments, Inc.
Senior Vice President and General Counsel:
Keystone Institutional Company, Inc.
Senior Vice President, General Counsel and Director:
Fiduciary Investment Company, Inc.
Senior Vice President, General Counsel, Director and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Senior Vice President and Secretary:
Hartwell Keystone Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income Advisers, Inc.
J. Kevin Kenely Vice President Vice President:
Evergreen Keystone Investment Services, Inc.
Formerly:
Controller
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Vice President:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Keystone Investments, Inc.
John D. Rogol Vice President Vice President and
Controller:
Evergreen Keystone Investment Services, Inc.
Treasurer and Vice President:
Evergreen Keystone Service Company
Controller:
Keystone Asset Corporation
Formerly:
Controller:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Formerly Vice President and Controller:
Keystone Investments, Inc.
Christopher P. Senior Vice None
Conkey President, Chief
Investment Officer
J. Gary Craven Senior Vice None
President
Richard Cryan Senior Vice None
President
Maureen E. Senior Vice None
Cullinane President
Betsy Hutchings Senior Vice None
President
Walter T. Senior Vice None
McCormick President
James F. Angelos* Vice President, Vice President, Lieber & Co.
Chief Compliance
Officer
John Addeo Vice President None
Andrew Baldassarre Vice President None
David Benhaim Vice President None
Donald Bisson Vice President None
Francis X. Claro Vice President None
Kristine R. Vice President None
Cloyes
Patrick T. Bannigan Vice President Vice President, Lieber & Co.
Liu-Er Chen Vice President None
George E. Dlugos Vice President None
Antonio T. Docal Vice President None
Dana E. Erikson Vice President None
Gordon M. Forrester Vice President None
Thomas L. Holman Vice President None
George J. Kimball Vice President None
JoAnn L. Lyndon Vice President None
Craig Lewis Vice President None
John C. Vice President None
Madden, Jr.
Eleanor H. Marsh Vice President None
James D. Medvedeff Vice President None
Stanley M. Niksa Vice President None
Jonathan A. Noonan Vice President None
Robert E. O'Brien Vice President None
Margery C. Parker Vice President None
William H. Parsons Vice President None
Joyce W. Petkovich Vice President None
Gary E. Pzegeo Vice President None
Harlen R. Sanderling Vice President None
Thomas W. Trickett Vice President None
Kathy K. Wang* Vice President None
Judith A. Warners Vice President None
Peter Willis Vice President None
Walter Zagrobski Vice President None
</TABLE>
<PAGE>
Item 29. Principal Underwriters
Evergreen Keystone Distributor, Inc.
The Director and principal executive officers are:
Director Michael C. Petrycki
Officers Robert A. Hering President
Michael C. Petrycki Vice President
Lawrence Wagner VP, Chief Financial Officer
Steven D. Blecher VP, Treasurer, Secretary
Elizabeth Q. Solazzo Assistant Secretary
Evergreen Keystone Distributor, Inc. acts as Distributor for the
following registered investment companies or separate series thereof:
Evergreen Trust
Evergreen Fund
Evergreen Aggressive Growth Fund
Evergreen Equity Trust:
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
The Evergreen Limited Market Fund, Inc.
Evergreen Growth and Income Fund
The Evergreen Total Return Fund
The Evergreen American Retirement Trust:
The Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
The Evergreen Foundation Trust:
Evergreen Foundation Fund
Evergreen Tax Strategic Foundation Fund
The Evergreen Municipal Trust:
Evergreen Short-Intermediate Municipal Fund
Evergreen Florida High Income Municipal Bond Fund
Evergreen Tax Exempt Money Market Fund
Evergreen Institutional Tax Exempt Money Market Fund
Evergreen Money Market Trust
Evergreen Money Market Fund
Evergreen Institutional Money Market Fund
Evergreen Institutional Treasury Money Market Fund
Evergreen Investment Trust
Evergreen Emerging Markets Growth Fund
Evergreen International Equity Fund
Evergreen Balanced Fund
Evergreen Value Fund
Evergreen Utility Fund
Evergreen Short-Intermediate Bond Fund (formerly Evergreen Fixed Income)
Evergreen U.S. Government Fund
Evergreen Florida Municipal Bond Fund
Evergreen Georgia Municipal Bond Fund
Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund
Evergreen Virginia Municipal Bond Fund
Evergreen High Grade Tax Free Fund
Evergreen Treasury Money Market Fund
Evergreen Latin America Fund
The Evergreen Lexicon Fund:
Evergreen Intermediate-Term Government Securities Fund
Evergreen Intermediate-Term Bond Fund
Evergreen Tax Free Trust:
Evergreen Pennsylvania Tax Free Money Market Fund
Evergreen New Jersey Tax Free Income Fund
Evergreen Variable Trust:
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
Evergreen VA Global Leaders Fund
Evergreen VA Strategic Income Fund
Evergreen VA Aggressive Growth Fund
Keystone Quality Bond Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Strategic Growth Fund (K-2)
Keystone Growth and Income Fund (S-1)
Keystone Small Company Growth Fund (S-4)
Keystone Capital Preservation and Income Fund
Keystone Fund for Total Return
Keystone Global Opportunities Fund
Keystone Global Resources and Development Fund
Keystone Institutional Adjustable Rate Fund
Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
Keystone Intermediate Term Bond Fund
Keystone International Fund Inc.
Keystone Omega Fund
Keystone Precious Metals Holdings, Inc.
Keystone Small Company Growth Fund II
Keystone State Tax Free Fund
Keystone New York Tax Free Fund
Keystone Pennsylvania Tax Free Fund
Keystone Massachusetts Tax Free Fund
Keystone Florida Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Missouri Tax Free Fund
Keystone California Tax Free Fund
Keystone Strategic Income Fund
Keystone Tax Free Fund
Keystone Tax Free Income Fund
Item 29(c). - Not applicable
Item 30. Location of Accounts and Records
First Union Keystone, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
State Street Bank & Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Iron Mountain
3431 Sharp Slot Road
Swansea, Massachusetts 02277
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
Upon request and without charge, Registrant hereby undertakes to
furnish a copy of its latest annual report to shareholders to each
person to whom a copy of Registrant's prospectus is delivered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Amendment to its Registration Statement
pursuant to rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Boston, and The
Commonwealth of Massachusetts, on the 14th day of August, 1997.
KEYSTONE STRATEGIC INCOME FUND
By:/s/ John J. Pileggi
------------------------------
John J. Pileggi
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's registration statement has been signed below by the following
persons in the capacities indicated on the 14th day of August, 1997.
<TABLE>
<S> <C> <C>
/s/ George S. Bissell /s/ Charles F. Chapin
- ------------------------ ------------------------- -------------------------
George S. Bissell Charles F. Chapin* William Walt Pettit
Chairman of the Board of Trustees Trustee Trustee
and Chief Executive Officer
/s/ John J. Pileggi /s/ K. Dun Gifford /s/ David M. Richardson
- ------------------------- ------------------------- -------------------------
John J. Pileggi K. Dun Gifford* David M. Richardson*
President and Treasurer (Principal Trustee Trustee
Financial and Accounting Officer)
/s/ Frederick Amling
- ------------------------- ------------------------- -------------------------
Frederick Amling* James S. Howell Russell A. Salton, III MD
Trustee Trustee Trustee
/s/ Leroy Keith, Jr.
- ------------------------- ------------------------- -------------------------
Laurence B. Ashkin Leroy Keith, Jr.* Michael S. Scofield
Trustee Trustee Trustee
/s/ Charles A. Austin, III /s/ F. Ray Keyser, Jr. /s/ Richard J. Shima
- ------------------------- ------------------------- -------------------------
Charles A. Austin, III* F. Ray Keyser, Jr.* Richard J. Shima*
Trustee Trustee Trustee
/s/ Andrew J. Simons
- ------------------------- ------------------------- -------------------------
Foster Bam Gerald M. McDonnell Andrew J. Simons*
Trustee Trustee Trustee
/s/ Edwin D. Campbell
- ------------------------- -------------------------
Edwin D. Campbell* Thomas L. McVerry
Trustee Trustee
</TABLE>
*By:/s/ Rosemary D. Van Antwerp
- -------------------------------
Rosemary D. Van Antwerp**
Attorney-in-Fact
** Rosemary D. Van Antwerp, by signing her 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 attached hereto as Exhibit 24(b)(19).
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- -------
1 Declaration of Trust, as supplemented(1)
2 By-Laws, as amended(1)
5 Advisory Agreement(2)
6 (a) Principal Underwriting Agreements(2)
(b) Class Y Principal Underwriting Agreement(2)
(c) Dealer Agreements(3)
8 Custodian, Fund Accounting and
Recordkeeping Agreements, as amended(1)
9 (a) Marketing Services Agreement
(b) Continuation Agreements
(c) Sub-Administrator Agreements
10 Opinion and Consent of Counsel(8)
11 Consent of Independent Auditors(8)
13 (a) Subscription Agreements(4)
(b) Additional Subscription Agreements(5)
14 Model Retirement Plans(6)
15 Class A, B and C Distribution Plans(1)
16 Total Return and Current Yield Schedules(8)
17 Financial Data Schedules (filed as Exhibit 27)(8)
18 Multiple Class Plan(7)
----------------------------------
(1)Incorporated herein by reference to Post-Effective Amendment No. 17 to
the Regisration Statement.
(2)Filed with the Proxy Statement and incorporated by reference herein.
(3)Incorporated herein by reference to Post-Effective Amendment No. 10 to
the Registration Statement.
(4)Incorporated herein by reference to the Registration Statement.
(5)Incorporated herein by reference to Pre-Effective Amendment No. 2 to
the Registration Statement.
(6)Incorporated herein by reference to Post-Effective Amendment No. 66 to
Registration Statement No. 2-10527/811-96.
(7) Incorporated herein by reference to Post-Effective Amendment No. 16 to
the Registration Statement.
(8) Filed herewith.
MARKETING SERVICES AGREEMENT
AGREEMENT made this __th day of December 1996 by and between Evergreen
Keystone Distributor, Inc., a Delaware corporation (the "Principal
Underwriter"), and Evergreen Keystone Investment Services, Inc. ("Marketing
Services Agent").
WHEREAS, the Keystone ________ Fund (the "Fund"), has adopted one or
more Plans of Distribution (each a "Plan", or collectively the "Plans") with
respect to certain Classes of shares of the Fund and to the extent applicable
certain Classes of shares of its separate investment series (the "Shares"),
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"1940 Act") which Plans authorize the Fund to enter into agreements regarding
the distribution of such Shares set forth on Exhibit A; and
WHEREAS, the Fund has entered into a principal underwriting agreement
with the Principal Underwriter pursuant to which the Principal Underwriter has
agreed to facilitate the distribution of the Shares; and
WHEREAS, the Fund has authorized the Principal Underwriter under the
terms of the principal underwriting agreement to enter into a marketing services
agreement with the Marketing Services Agent pursuant to which the Principal
Underwriter has agreed to facilitate the distribution of the Shares;
NOW, THEREFORE, in consideration of the agreements hereinafter
contained, it is agreed as follows:
1. Services as Marketing Services Agent.
1.1. The Marketing Services Agent shall assist the Principal
Underwriter in promoting Shares of the Fund and will undertake such advertising
and marketing services as it believes reasonable in connection therewith. In the
event that the Fund establishes additional investment series with respect to
which it has retained the Principal Underwriter to act as principal underwriter
for one or more Classes hereunder, the Principal Underwriter shall promptly
notify the Marketing Services Agent in writing. If the Marketing Services Agent
is willing to render such services it shall notify the Principal Underwriter in
writing whereupon the applicable Class or Classes of shares of such investment
series shall become "Shares" hereunder.
1.2. All activities by the Marketing Services Agent and its agents and
employees as the Marketing Services Agent shall comply with all applicable laws,
rules and regulations, including, without limitation, all rules and regulations
made or adopted pursuant to the 1940 Act by the Securities and Exchange
Commission (the "Commission") or any securities association registered under the
Securities Exchange Act of 1934, as amended (the "1934 Act").
1.3. In assisting the Principal Underwriter in promoting shares of the
Fund and undertaking any advertising and marketing services on behalf of the
Fund, the Marketing Services Agent shall use its best efforts in all respects
duly to conform with the requirements of all Federal and state laws
1
<PAGE>
relating to the sale of such securities. Neither the Marketing Services Agent,
Principal Underwriter, any selected dealer or any other person is authorized by
the Fund to give any information or to make any representations, other than
those contained in the Fund's registration statement (the "Registration
Statement") or related prospectus and statement of additional information
("Prospectus" and "Statement of Additional Information") and any sales
literature specifically approved by the Fund.
2. Duties of the Principal Underwriter.
2.1. The Principal Underwriter shall furnish from time to time, for use
in connection with the sale of Shares such information with respect to the
Shares as the Marketing Services Agent may reasonably request; and the Principal
Underwriter warrants that any such information shall be true and correct.
3. Representations of the Principal Underwriter.
3.1. The Principal Underwriter represents to the Marketing Services
Agent that it is a broker-dealer registered with the ^ Commission, is a member
of the National Association of Securities Dealers, Inc. ("NASD") and that the
Fund is registered under the 1940 Act and that the Shares have been registered
under the Securities Act of 1933, as amended (the "Securities Act").
3.2 That the principal underwriting agreement between the Fund and the
Principal Underwriter has been duly approved and continues in full force and
effect.
4. Indemnification.
4.1. The Marketing Services Agent agrees to indemnify and hold harmless
the Principal Underwriter and each of its directors, officers, employees, agents
and each person, if any, who controls the Principal Underwriter within the
meaning of the Securities Act ^ against any losses, claims, damages or
liabilities to which the Principal Underwriter ^ may become subject, insofar as
such losses, claims, damages, ^ liabilities, or expense (or actions in respect
thereof) (i) arise out of or are based upon the actions of the Marketing
Services Agent or (ii) result from a breach of a material provision of this
Agreement by the Marketing Services Agent. The Marketing Services Agent will
reimburse any legal or other expenses reasonably incurred by the Principal
Underwriter or any such ^ controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Marketing Services Agent will not be liable for indemnification
hereunder to the extent that any such loss, claim, damage or liability arises
out of or is based upon the gross negligence or willful misconduct of the
Principal Underwriter, its respective directors, officers, employees, agents or
any controlling person herein defined in performing their obligations under this
Agreement.
(b) The Principal Underwriter agrees to indemnify and hold harmless the
Marketing Services Agent, and each of its directors, officers, employees, agents
and each person, if any, who controls the Marketing Services Agent within the
meaning of the 1933 Act against any losses, claims, damages or liabilities to
which the Marketing Services Agent, or any such director, officer, employee,
agent or
2
<PAGE>
controlling person may become subject, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) (i) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement ^ or sales literature of the Fund
prepared or approved in writing by the Principal Underwriter or arise out of, or
are based upon, the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or (ii) result from a breach by it of a material provision of
this Agreement. The Principal Underwriter will reimburse any legal or other
expenses reasonably incurred by the Marketing Services Agent, or any such
director, officer, employee, agent, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Principal Underwriter will not be liable for
indemnification hereunder to the extent that any such loss, claim, damage or
liability arises out of, or is based upon, the gross negligence or willful
misconduct of the Marketing Services Agent, or its respective directors,
officers, employees, agents or any controlling person herein defined in the
performance of their obligations under this Agreement.
(c) Promptly after receipt by an indemnified party hereunder of notice
of the commencement of an action, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability that it may
have to any indemnified party otherwise than under this Section 4. In case any
such action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish to, assume
the defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 4 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
5. Amendments to Registration Statement and Other Material Events.
5.1. The Principal Underwriter agrees to advise the Marketing Services
Agent as soon as reasonably practical by a notice in writing delivered to the
Marketing Services Agent: (a) of any request or action taken by the Commission
which is material to the Marketing Services Agent's obligations or rights
hereunder or (b) any material fact of which the Principal Underwriter becomes
aware which affects the Marketing Services Agent's obligations or rights
hereunder.
For purposes of this section, informal requests by or acts of the Staff
of the Commission shall not be deemed actions of or requests by the Commission.
6. Compensation of Marketing Services Agent.
6.1. (a) As promptly as possible after the first Business Day (as
defined in the Prospectus) of each month this Agreement is in effect, the
Principal Underwriter shall compensate the Marketing Services Agent for its
services rendered during the previous month (but not prior to the commencement
date of this Agreement); by making payment to the Marketing Services Agent in
the
3
<PAGE>
amounts set forth on Exhibit A annexed hereto with respect to each Class of
Shares of the Fund or, if applicable, each of its separate investment series to
which this Agreement relates. In connection therewith the Principal Underwriter
hereby agrees that it is obligated under this Agreement to comply with Paragraph
7 of the principal underwriting agreement. The compensation by the Principal
Underwriter of the Marketing Services Agent is authorized pursuant to the Plan
or Plans adopted by the Fund pursuant to Rule 12b-l under the 1940 Act.
(b) Under this Agreement, the Marketing Services Agent shall: (i) incur
the expense of obtaining such support services, telephone facilities and
shareholder services as may reasonably be required in connection with its duties
hereunder; (ii) formulate and implement marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising; (iii) prepare, print and
distribute sales literature; (iv) prepare, print and distribute Prospectuses of
the Series and reports for recipients other than existing shareholders of the
Series; and (v) provide to the Fund such information, analyses and opinions with
respect to marketing and promotional activities as the Fund may, from time to
time, reasonably request.
(c) The Marketing Services Agent shall prepare and deliver reports to
the Principal Underwriter on a regular, at least monthly, basis, showing the
distribution expenditures incurred by the Principal Underwriter in connection
with its services rendered pursuant to this Agreement and the Plan and the
purposes therefor, as well as any supplemental reports to the Fund's Board, from
time to time, as the Principal Underwriter may reasonably request.
7. Confidentiality, Non-Exclusive Agency.
7.1. The Marketing Services Agent agrees on behalf of itself and its
employees to treat confidentially and as proprietary information of the
Principal Underwriter all records and other information relative to the or, if
applicable, each of its separate investment series, and its prior, present or
potential shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and in connection with
the financing described in Paragraph 7 (f) to obtain approval in writing by the
Principal Underwriter, which approval shall not be unreasonably withheld and may
not be withheld where the Marketing Services Agent may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities.
7.2. Nothing contained in this Agreement shall prevent the Marketing
Services Agent, or any affiliated person of the Marketing Services Agent, from
performing services similar to those to be performed hereunder for any other
person, firm, or corporation or for its or their own accounts or for the
accounts of others.
8. Term.
8.1. This Agreement shall continue until December __, 1998 and
thereafter for successive annual periods, provided such continuance is
specifically approved with respect to the Fund or, if applicable, each of its
separate investment series at least annually by vote cast in person at a meeting
4
<PAGE>
called for the purpose of voting on such approval by (i) a vote of the majority
of the members of the Fund's Board and (ii) a vote of a majority of the members
who are not " interested persons" of the Fund, as that term is defined in the ^
1940 Act or who do not have any direct or indirect financial interest in the
Fund's Distribution Plan or any related agreements, voting separately. This
Agreement is terminable at any time, with respect to the Fund or, if applicable,
each of its separate investment series, without penalty, (a) on not less than 60
days' written notice by vote of a majority of the Independent Trustees, or by
vote of the holders of a majority of the outstanding voting securities of the
Fund or, if applicable, each of its separate investment series, or (b) upon not
less than 60 days' written notice by the Marketing Services Agent. This
Agreement may remain in effect with respect to a separate investment series even
if it has been terminated in accordance with this paragraph with respect to one
or more other separate investment series of the Fund. This Agreement will also
terminate automatically in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities",
"interested persons", and "assignment" shall have the same meaning as such terms
have in the 1940 Act.)
9. Miscellaneous.
9.1. This Agreement shall be governed by the laws of the State
of New York.
9.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their constructions or effect.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the __th day of December,
1996.
EVERGREEN KEYSTONE DISTRIBUTOR, INC. EVERGREEN KEYSTONE INVESTMENT
SERVICES, INC.
By: _____________________________ By:____________________________
Title: Title:
5
<PAGE>
EXHIBIT A
To Marketing Services Agreement between Evergreen Funds Distributor, Inc.
and KEYSTONE INVESTMENT DISTRIBUTORS COMPANY
SERIES AND CLASSES COVERED BY THIS AGREEMENT:
[KEYSTONE][EVERGREEN] _________ FUND
CLASS B[-2] SHARES
Marketing Services Fees
The Principal Underwriter agrees to pay the Marketing Servicing Agent a fee
at the rate of up to .75 of 1% of average daily net assets of the shares of each
Class set forth above, provided however that the payment of such fee shall: (i)
be subject and subordinate to the obligation of the Fund to make payments to the
Principal Underwriter pursuant to the provisions of the Distribution Agreement
dated ___________, 1996 between the Fund and its Principal Underwriter,
Evergreen Keystone Funds Distributor Inc.; (ii) be subject and subordinate to
the obligation of the Fund to make payments to any entity with respect to shares
sold prior to December 1, 1996; and (ii) not result in an aggregate fee being
paid to the Marketing Service Agent and Principal Underwriter that would exceed
.75 of 1% of the Fund's average daily net assets on an annual basis or otherwise
exceed the limit imposed on asset based and deferred sales charges under
subsection (d) of Section 26 of Article III of the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
IN WITNESS WHEREOF, the parties hereto have caused this Exhibit A to
the Distribution Agreement between the parties dated December __, 1996 to be
executed by their officers designated below as of the __th day of December,
1996.
EVERGREEN KEYSTONE DISTRIBUTOR, INC. EVERGREEN KEYSTONE INVESTMENT
SERVICES, INC.
By: _____________________________ By:____________________________
Title: Title:
6
<PAGE>
FORM OF SUB-ADMINISTRATOR AGREEMENT
This Sub-Administrator Agreement is made as of this 1st day of
January, 1997 between Keystone Investment Management Company, a Delaware
corporation (herein called "KIMCO"), and BISYS Fund Service Limited Partnership
DBA as BISYS Fund Services, an Ohio Limited Partnership Corporation (herein
called "BISYS").
WHEREAS, KIMCO has been appointed as investment adviser to
certain open-end management investment companies, or to one or more separate
investment series thereof, listed on Schedule A, as the same may be amended from
time to time to reflect additions or deletions of such companies or series,
which are registered under the Investment Company Act of 1940 (the "Funds");
WHEREAS, in its capacity as investment adviser to the Funds,
KIMCO has the obligation to provide, or engage others to provide, certain
administrative services to the Funds; and
WHEREAS, KIMCO desires to retain BISYS as Sub-Administrator to
the Funds for the purpose of providing the Funds with personnel to act as
officers of the Funds and to provide certain administrative services in addition
to those provided by KIMCO ("Sub-Administrative Services"), and BISYS is willing
to render such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants set forth herein, the parties hereto agree as follows:
1. Appointment of Sub-Administrator. KIMCO hereby appoints BISYS as
Sub-Administrator for the Funds on the terms and conditions set forth in this
Agreement and BISYS hereby accepts such appointment and agrees to perform the
services and duties set forth in Section 2 of this Agreement in consideration of
the compensation provided for in Section 4 hereof.
2. Services and Duties. As Sub-Administrator, and subject to the supervision and
control of KIMCO and the Trustees or Directors of the Funds, BISYS will
hereafter provide facilities, equipment and personnel to carry out the following
Sub-Administrative services to assist in the operation of the business and
affairs of the Funds:
(a) provide individuals reasonably acceptable to the Funds for
nomination, appointment or election as officers of the Funds and who
will be responsible for the management of certain of each Fund's
affairs as determined from time to time by the Trustees or Directors of
the Funds;
(b) review filings with the Securities and Exchange Commission and
state securities authorities that have been prepared on behalf of the
Funds by the administrator and take such actions as may be reasonably
requested by the administrator to effect such filings;
(c) verify, authorize and transmit to the custodian, transfer agent and
dividend disbursing agent of each Fund all necessary instructions for
the disbursement of cash, issuance of
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
1
<PAGE>
shares, tender and receipt of portfolio securities, payment of expenses
and payment of dividends; and
(d) advise the Trustees or Directors of the Funds on matters
concerning the Funds and their affairs.
BISYS may, in addition, agree in writing to perform additional
Sub-Administrative Services for the Funds. Sub-Administrative Services shall not
include investment advisory services or any duties, functions, or services to be
performed for the Funds by their distributor, custodian or transfer agent
pursuant to their agreements with the Funds.
3. Expenses. BISYS shall be responsible for expenses incurred in providing
office space, equipment and personnel as may be necessary or convenient to
provide the Sub-Administrative Services to the Funds. KIMCO and/or the Funds
shall be responsible for all other expenses incurred by BISYS on behalf of the
Funds pursuant to this Agreement at the direction of KIMCO, including without
limitation postage and courier expenses, printing expenses, registration fees,
filing fees, fees of outside counsel and independent auditors, insurance
premiums, fees payable to Trustees or Directors who are not Furman Selz
employees, and trade association dues.
4. Compensation. For the Sub-Administrative Services provided, KIMCO hereby
agrees to pay and BISYS hereby agrees to accept as full compensation for
its services rendered hereunder a sub-administrative fee,calculated daily and
payable monthly at an annual rate based on the aggregate average daily net
assets of the Funds, or separate series thereof, set forth on Schedule A and
determined in accordance with the table below.
Aggregate Daily Net Assets of Funds For
Which KIMCO, Evergreen Asset Management
Sub-Administrative Corp., First Union National Bank of North
Fee as a % of Carolina or any Affiliates Thereof Serve as
Average Annual Investment Adviser or Administrator And For
Daily Net Assets Which BISYS Serves as Sub-Administrator
.0100% on the first $7 billion
.0075% on the next $3 billion
.0050% on the next $15 billion
.0040% on assets in excess of $25 billion
5. Indemnification and Limitation of Liability of BISYS. The duties of BISYS
shall be limited to those expressly set forth herein or later agreed to in
writing by Furman Selz, and no implied duties are assumed by or may be asserted
against BISYS hereunder. BISYS shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any act or omission in carrying
out its duties hereunder, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder, except as may otherwise be
provided under provisions of applicable law which cannot be waived or
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
2
<PAGE>
modified hereby. (As used in this Section, the term "BISYS" shall include
partners, officers, employees and other agents of BISYS as well as Furman Selz
itself)
So long as BISYS Selz acts in good faith and with due diligence and
without negligence, KIMCO shall indemnify BISYS and hold it harmless from any
and all actions, suits and claims, and from any and all losses, damages, costs,
charges, reasonable counsel fees and disbursements, payments, expenses and
liabilities (including reasonable investigation expenses) arising directly or
indirectly out of BISYS' actions taken or nonactions with respect to the
performance of services hereunder. The indemnity and defense provisions set
forth herein shall survive the termination of this Agreement for a period of
three years.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited. In order
that the indemnification provision contained herein shall apply, however, it is
understood that if in any case KIMCO may be asked to indemnify or hold Furman
Selz harmless, KIMCO shall be fully and promptly advised of all pertinent facts
concerning the situation in question, and it is further understood that Furman
Selz will use all reasonable care to identify and notify KIMCO promptly
concerning any situation which presents or appears likely to present the
probability of such a claim for indemnification against KIMCO.
KIMCO shall be entitled to participate at its own expense or, if it so
elects, to assume the defense of any suit brought to enforce any claims subject
to this indemnity provision. If KIMCO elects to assume the defense of any such
claim, the defense shall be conducted by counsel chosen by KIMCO and
satisfactory to BISYS, whose approval shall not be unreasonably withheld. In the
event that KIMCO elects to assume the defense of any suit and retain counsel,
BISYS shall bear the fees and expenses of any additional counsel retained by it.
If KIMCO does not elect to assume the defense of a suit, it will reimburse
Furman Selz for the reasonable fees and expenses of any counsel retained by
BISYS.
BISYS may apply to KIMCO at any time for instructions and may consult
counsel for KIMCO or its own counsel and with accountants and other experts with
respect to any matter arising in connection with BISYS' duties, and BISYS shall
not be liable or accountable for any action taken or omitted by it in good faith
in accordance with such instruction or with the opinion of such counsel,
accountants or other experts.
Any person, even though also an officer, director, partner, employee or
agent of BISYSs, who may be or become an officer, trustee, employee or agent of
the Funds, shall be deemed, when rendering services to a Fund or acting on any
business of a Fund (other than services or business in connection with the
duties of BISYS hereunder) to be rendering such services to or acting solely for
the Fund and not as an officer, director, partner, employee or agent or one
under the control or direction of BISYS even though paid by BISYS.
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
3
<PAGE>
6. Duration and Termination.
(a) The initial term of this Agreement (the "Initial Term") shall
commence on the date this Agreement is executed by both parties, shall continue
until April 30, 1998, and shall continue in effect for a Fund from year to year
thereafter, provided it is approved, at least annually, by a vote of a majority
of Directors/Trustees of the Funds, including a majority of the disinterested
Directors/Trustees. Notwithstanding the foregoing, this Agreement shall only
become effective if (i) Keystone Investments, the parent of KIMCO, has
previously been acquired by First Union National Bank of North Carolina, and
(ii) the Funds have appointed Evergreen Funds Distributor, Inc. as their
Principal Underwriter. In the event of any breach of this Agreement by either
party, the non-breaching party shall notify the breaching party in writing of
such breach and upon receipt of such notice, the breaching party shall have 45
days to remedy the breach except in the case of a breach resulting from fraud or
other acts which materially and adversely affects the operations or financial
position of the Funds. In the event any material breach is not remedied within
such time period, the nonbreaching party may immediately terminate this
Agreement.
Notwithstanding the foregoing, after such termination for so long as
BISYS, with the written consent of KIMCO, in fact continues to perform any
one or more of the services contemplated by this Agreement or any schedule or
exhibit hereto, the provisions of this Agreement, including without limitation
the provisions dealing with indemnification, shall continue in full force and
effect. Compensation due BISYS and unpaid by KIMCO upon such termination
shall be immediately due and payable upon and notwithstanding such termination.
Furman Selz shall be entitled to collect from KIMCO, in addition to the
compensation described herein, all costs reasonably incurred in connection with
Furman Selz's activities in effecting such termination, including without
limitation, the delivery to the Funds and/or their designees of each Fund's
property, records, instruments and documents, or any copies thereof. To the
extent that Furman Selz may retain in its possession copies of any Fund
documents or records subsequent to such termination which copies had not been
requested by or on behalf of a Fund in connection with the termination process
described above, BISYS will provide such Fund with reasonable access to
such copies; provided, however, that, in exchange therefor, KIMCO shall
reimburse BISYS for all costs reasonably incurred in connection therewith.
(b) Subject to (c) below, this Agreement may be terminated at any time,
without payment of any penalty, on sixty (60) day's prior written notice by
KIMCO, or by BISYS and, with respect to one or more of the Funds a vote of
a majority of such Fund's or Funds' Directors/Trustees.
(c) If, during the first six months this Agreement is in effect it is
terminated for a Fund or Funds in accordance with (b) above, for any reason
other than a material breach of this Agreement, the merger of a Fund or Funds
for which KIMCO, Evergreen Asset Management Corp., First Union National Bank of
North Carolina or any affiliates thereof act as investment adviser, or any other
event that leads to the termination of the existence of a Fund or Funds, and
BISYS is replaced as sub-administrator, then KIMCO shall make a one-time
cash payment to BISYS equal to the unpaid balance due BISYS for the
first six-months this Agreement in effect, assuming for
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
4
<PAGE>
purposes of calculation of the payment that the asset level of each Fund on the
date BISYS is replaced will remain constant for the balance of such term. Once
this Agreement has been in effect for more than six months from the commencement
date, this paragraph (c) shall be null, void and of no further effect.
7. Amendment. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought.
8. Notices. Notices of any kind to be given to KIMCO hereunder by BISYS shall be
in writing and shall be duly given if delivered to KIMCO at the following
address: Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116 ATT: General Counsel. Notices of any kind to be given to
Furman Selz hereunder by EAMC or the Funds shall be in writing and shall be duly
given if delivered to BISYS at 3435 Stelzer Road, Columbus, Ohio 43219
Attention: George O. Martinez, Senior Vice President.
9. Limitation of Liability. BISYS is hereby expressly put on notice of the
limitations of liability as set forth in the Declarations of Trust of the Funds
that are Massachusetts business trusts or series thereof and agrees that the
obligations pursuant to this Agreement of a particular Fund be limited solely to
the assets of that particular Fund, and BISYS shall not seek satisfaction of any
such obligation from the assets of any other Fund, the shareholders of any Fund,
the Trustees, officers, employees or agents of any Fund, or any of them.
10. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. Subject to the provisions of Section 5 hereof, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and shall be governed by New York law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or regulation
promulgated by the Securities and Exchange Commission thereunder.
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
KEYSTONE INVESTMENT MANAGEMENT COMPANY
By______________________________________
its:____________________________________
Attest:________________________
BISYS FUND SERVICES, INC.
By______________________________________
its_____________________________________
Attest:________________________
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
6
<PAGE>
SCHEDULE A
SUB-ADMINISTRATOR AGREEMENT
Keystone America Hartwell Emerging Growth Fund ("Emerging Growth")
Keystone Balanced Fund II ("Balanced Fund")
Keystone Capital Preservation and
Income Fund ("Capital Preservation and Income")
Keystone Emerging Markets Fund ("Emerging Markets")
Keystone Fund For Total Return ("Total Return")
Keystone Fund of the Americas ("Fund of the Americas")
Keystone Global Opportunities Fund ("GlobalOpportunities")
Keystone Global Resources and Development Fund ("GlobalResources")
Keystone Government Securities Fund ("Government Securities")
Keystone Intermediate Term Bond Fund ("Intermediate Term")
Keystone Liquid Trust("Liquid Trust") Keystone Omega Fund ("Omega")
Keystone Small Company Growth Fund II ("Small Company Growth")
Keystone State Tax Free Fund ("State Tax Free")
- Florida Tax Free Fund ("Florida Tax Free")
- Massachusetts Tax Free Fund ("Massachusetts Tax Free")
- Pennsylvania Tax Free Fund ("Pennsylvania Tax Free")
- New York Insured Tax Free Fund ("New York Insured")
Keystone State Tax Free Fund-Series II ("State Tax Free II")
- California Insured Tax Free Fund ("California Insured")
- Missouri Tax Free Fund ("Missouri Tax Free")
Keystone Strategic Income Fund ("Strategic Income")
Keystone Tax Free Income Fund ("Tax Free Income")
Keystone Quality Bond Fund (B-1) ("B-1") Keystone
Diversified Bond Fund (B-2) ("B-2")
Keystone High Income Bond Fund (B-4) ("B-4")
Keystone Balanced Fund (K-1) ("K-1")
Keystone Strategic Growth Fund (K-2)("K-2")
Keystone Growth and Income Fund (S-1) ("S-1")
Keystone Mid-Cap Growth Fund (S-3) ("S-3")
Keystone Small Company Growth Fund (S-4) ("S-4")
Keystone Institutional Adjustable Rate Fund ("Adjustable Rate")
Keystone Institutional Trust ("Institutional")
Keystone International Fund Inc. ("International")
Keystone Precious Metals Holdings, Inc. ("Precious Metals")
Keystone Tax Free Fund ("Tax Free")
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
August 14, 1997
Keystone Strategic Income Fund
200 Berkeley Street
Boston, Massachusetts 02116-5034
Gentlemen:
I am Senior Counsel to Keystone Investment Management Company,
investment adviser to Keystone Strategic Income Fund (the "Fund"). You have
asked for my opinion with respect to the proposed issuance of 9,228,859
additional shares of the Fund.
To my knowledge, a Prospectus is being filed with the Securities and
Exchange Commission (the "Commission") as part of Post-Effective Amendment No.
20 to the Fund's Registration Statement, which covers the public offering and
sale of the Fund shares currently registered with the Commission.
In my opinion, such additional shares, if issued and sold in accordance
with the Fund's Declaration of Trust (the "Declaration of Trust") and offering
Prospectus, will be legally issued, fully paid, and nonassessable by the Fund,
entitling the holders thereof to the rights set forth in the Declaration of
Trust and subject to the limitations set forth therein.
My opinion is based upon my examination of the Fund's Declaration of
Trust and By-Laws; a review of the minutes of the Fund's Board of Trustees
authorizing the issuance of such additional shares; and the Fund's Prospectus.
In my examination of such documents, I have assumed the genuineness of all
signatures and the conformity of copies to originals.
I hereby consent to the use of this opinion in connection with
Post-Effective Amendment No. 20 to the Fund's Registration Statement, which
covers the registration of such additional shares.
Very truly yours,
/s/ Rosemary D. Van Antwerp
Rosemary D. Van Antwerp
Senior Counsel
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Keystone Strategic Income Fund
Evergreen U.S. Government Fund
We consent to the use of our report dated May 30, 1997 incorporated by
reference herein and to the references to our firm under the captions "Financial
Highlights" in the Prospectuses.
/S/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
August 14, 1997
KEYSTONE STRATEGIC INCOME FUND - CLASS A
PRICING DATE 04/30/97
.........
30 DAY YTM 7.01563%
.........
<TABLE>
<CAPTION>
......................................................................................
PRICE ST VARIABLE PIK INCOME LONG TERM MORTAGE GAIN/ TOTAL DIV
DATE INCOME INCOME INCOME LOSS INCOME FACTOR
......................................................................................
<S> <C> <C> <C> <C> <C> <C>
1 04/01/97 232.99 44,415.85 44,648.84 30.74655460
2 04/02/97 586.49 44,454.22 45,040.71 30.67991679
3 04/03/97 558.84 44,519.74 45,078.58 30.73142937
4 04/04/97 440.75 44,552.66 44,993.41 30.72817918
5 04/05/97 440.75 44,552.66 44,993.41 30.72817918
6 04/06/97 440.75 44,552.66 44,993.41 30.72817918
7 04/07/97 449.22 44,427.77 44,876.99 30.75611903
8 04/08/97 413.36 44,417.84 44,831.20 30.38630107
9 04/09/97 437.40 44,325.65 44,763.05 30.43987322
10 04/10/97 276.46 44,343.33 44,619.79 30.45117866
11 04/11/97 99.79 44,472.03 44,571.82 30.43531587
12 04/12/97 99.79 44,472.03 44,571.82 30.43531587
13 04/13/97 99.79 44,472.03 44,571.82 30.43531587
14 04/14/97 14.87 44,620.06 44,634.93 30.40593867
15 04/15/97 60.27 44,316.06 44,376.33 30.44205960
16 04/16/97 1,037.52 43,395.97 44,433.49 30.44714551
17 04/17/97 781.17 43,504.21 44,285.38 30.46253114
18 04/18/97 201.01 44,459.52 44,660.53 30.48833555
19 04/19/97 201.01 44,459.52 44,660.53 30.48833555
20 04/20/97 201.01 44,459.52 44,660.53 30.48833555
21 04/21/97 185.53 44,449.93 44,635.46 30.48835133
22 04/22/97 155.10 44,449.93 44,605.03 30.52399211
23 04/23/97 489.05 43,770.37 44,259.42 30.51177995
24 04/24/97 498.91 43,779.11 44,278.02 30.43365119
25 04/25/97 458.89 48,783.57 49,242.46 30.47881379
26 04/26/97 458.89 48,783.57 49,242.46 30.47881379
27 04/27/97 458.89 48,783.57 49,242.46 30.47881379
28 04/28/97 209.04 43,783.57 43,992.61 30.49608105
29 04/29/97 178.95 43,790.15 43,969.10 30.46885871
30 04/30/97 328.87 42,928.64 2,855.36 46,112.87 30.46104240
10,495.37 0.00 1,340,495.74 0.00 2,855.36 1,353,846.47 915.724737570
</TABLE>
TOTAL INCOME FOR PERIOD 413,248.65
TOTAL EXPENSES FOR PERIOD 54,976.41
AVERAGE SHARES OUTSTANDING 8,683,087.64
LAST PRICE DURING PERIOD 7.16
<TABLE>
<CAPTION>
.............................................................................................
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
.............................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
1 13,727.98 1,978.15 8,852,998.901 7.10 13,727.98 1,978.15 8,852,998.901
2 13,818.45 1,978.15 8,822,989.541 7.10 27,546.43 3,956.30 17,675,988.442
3 13,853.29 1,978.15 8,829,742.128 7.10 41,399.72 5,934.45 26,505,730.570
4 13,825.66 1,930.95 8,820,157.183 7.09 55,225.38 7,865.40 35,325,887.753
5 13,825.66 1,930.95 8,820,157.183 7.09 69,051.04 9,796.35 44,146,044.936
6 13,825.66 1,930.95 8,820,157.183 7.09 82,876.70 11,727.30 52,966,202.119
7 13,802.42 4,682.51 8,826,831.135 7.10 96,679.12 16,409.81 61,793,033.254
8 13,622.54 2,097.75 8,666,988.968 7.10 110,301.66 18,507.56 70,460,022.222
9 13,625.82 2,087.64 8,663,068.047 7.10 123,927.48 20,595.20 79,123,090.269
10 13,587.25 2,087.00 8,663,103.249 7.10 137,514.73 22,682.20 87,786,193.518
11 13,565.57 1,900.20 8,659,617.441 7.08 151,080.30 24,582.40 96,445,810.959
12 13,565.57 1,900.20 8,659,617.441 7.08 164,645.87 26,482.61 105,105,428.400
13 13,565.57 1,900.20 8,659,617.441 7.08 178,211.44 28,382.81 113,765,045.841
14 13,571.67 2,630.48 8,643,431.268 7.08 191,783.11 31,013.21 122,408,477.109
15 13,509.07 2,080.48 8,639,053.203 7.11 205,292.18 33,093.71 131,047,530.312
16 13,528.73 2,088.60 8,632,102.541 7.11 218,820.91 35,182.31 139,679,632.853
17 13,490.45 2,041.64 8,626,008.210 7.12 232,311.36 37,224.01 148,305,641.063
18 13,616.25 1,901.39 8,626,305.335 7.14 245,927.61 39,125.31 156,931,946.398
19 13,616.25 1,901.39 8,626,305.335 7.14 259,543.86 41,026.71 165,558,251.733
20 13,616.25 1,901.39 8,626,305.335 7.14 273,160.11 42,928.11 174,184,557.068
21 13,608.62 2,645.56 8,625,519.940 7.14 286,768.73 45,573.71 182,810,077.008
22 13,615.24 2,099.90 8,631,244.809 7.15 300,383.97 47,673.61 191,441,321.817
23 13,504.34 2,094.98 8,615,044.204 7.15 313,888.31 49,768.62 200,056,366.021
24 13,475.42 526.15 8,608,125.470 7.11 327,363.73 50,294.72 208,664,491.491
25 15,008.52 327.15 8,643,027.840 7.11 342,372.25 50,621.92 217,307,519.331
26 15,008.52 327.15 8,643,027.840 7.11 357,380.77 50,949.02 225,950,547.171
27 15,008.52 327.15 8,643,027.840 7.11 372,389.29 51,276.22 234,593,575.011
28 13,416.02 1,080.03 8,648,892.030 7.10 385,805.31 52,356.22 243,242,467.041
29 13,396.88 522.32 8,631,586.959 7.14 399,202.19 52,878.52 251,874,054.000
30 14,046.46 2,097.84 8,618,575.133 7.16 413,248.65 54,976.42 260,492,629.133
413,248.65 54,976.41 8,683,087.638
</TABLE>
KEYSTONE STRATEGIC INCOME FUND - CLASS B
PRICING DATE 04/30/97
........
30 DAY YTM 6.66096%
.........
<TABLE>
<CAPTION>
............................................................................................
PRICE ST VARIABLE PIK LONG TERM MORTAGE GAIN/LOSS TOTAL DIV
DATE INCOME INCOME INCOME INCOME INCOME FACTOR
.............................................................................................
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 04/01/97 232.99 0.00 44,415.85 0.00 0.00 44,648.84 56.46872940
2 04/02/97 586.49 0.00 44,454.22 0.00 0.00 45,040.71 56.52046479
3 04/03/97 558.84 0.00 44,519.74 0.00 0.00 45,078.58 56.54744831
4 04/04/97 440.75 0.00 44,552.66 0.00 0.00 44,993.41 56.54208471
5 04/05/97 440.75 0.00 44,552.66 0.00 0.00 44,993.41 56.54208471
6 04/06/97 440.75 0.00 44,552.66 0.00 0.00 44,993.41 56.54208471
7 04/07/97 449.22 0.00 44,427.77 0.00 0.00 44,876.99 56.54529136
8 04/08/97 413.36 0.00 44,417.84 0.00 0.00 44,831.20 56.86062126
9 04/09/97 437.40 0.00 44,325.65 0.00 0.00 44,763.05 56.86523987
10 04/10/97 276.46 0.00 44,343.33 0.00 0.00 44,619.79 56.88377504
11 04/11/97 99.79 0.00 44,472.03 0.00 0.00 44,571.82 56.90677089
12 04/12/97 99.79 0.00 44,472.03 0.00 0.00 44,571.82 56.90677089
13 04/13/97 99.79 0.00 44,472.03 0.00 0.00 44,571.82 56.90677089
14 04/14/97 14.87 0.00 44,620.06 0.00 0.00 44,634.93 56.93445449
15 04/15/97 60.27 0.00 44,316.06 0.00 0.00 44,376.33 56.94344964
16 04/16/91 1,037.52 0.00 43,395.97 0.00 0.00 44,433.49 56.94488198
17 04/17/97 781.17 0.00 43,504.21 0.00 0.00 44,285.38 56.92923255
18 04/18/97 201.01 0.00 44,459.52 0.00 0.00 44,660.53 56.89738174
19 04/19/97 201.01 0.00 44,459.52 0.00 0.00 44,660.53 56.89738174
20 04/20/97 201.01 0.00 44,459.52 0.00 0.00 44,660.53 56.89738174
21 04/21/97 185.53 0.00 44,449.93 0.00 0.00 44,635.46 56.90258247
22 04/22/97 155.10 0.00 44,449.93 0.00 0.00 44,605.03 56.89244497
23 04/23/97 489.05 0.00 43,770.37 0.00 0.00 44,259.42 56.93197350
24 04/24/97 498.91 0.00 43,779.11 0.00 0.00 44,278.02 56.91620477
25 04/25/97 458.89 0.00 48,783.57 0.00 0.00 49,242.46 56.88624065
26 04/26/97 458.89 0.00 48,783.57 0.00 0.00 49,242.46 56.88624065
27 04/27/97 458.89 0.00 48,783.57 0.00 0.00 49,242.46 56.88624065
28 04/28/97 209.04 0.00 43,783.57 0.00 0.00 43,992.61 56.88057659
29 04/29/97 178.95 0.00 43,790.15 0.00 0.00 43,969.10 56.89943459
30 04/30/97 328.87 0.00 42,928.64 0.00 2,855.36 46,112.87 56.90055200
10,495.37 0.00 1,340,495.74 0.00 2,855.36 1,353,846.47 1704.464791550
</TABLE>
TOTAL INCOME FOR PERIOD 769,196.79
TOTAL EXPENSES FOR PERIOD 170,151.02
AVERAGE SHARES OUTSTANDING 16,089,502.26
LAST PRICE DURING PERIOD 6.80
<TABLE>
<CAPTION>
.....................................................................................................
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
.....................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
1 25,212.63 7,788.08 16,183,948.921 6.80 25,212.63 7,788.08 16,183,948.921
2 25,457.22 6,135.73 16,179,325.914 6.79 50,669.85 13,923.81 32,363,274.835
3 25,490.79 4,186.57 16,172,639.364 6.79 76,160.64 18,110.38 48,535,914.199
4 25,440.21 5,809.88 16,155,670.625 6.78 101,600.85 23,920.26 64,691,584.824
5 25,440.21 5,809.88 16,155,670.625 6.78 127,041.06 29,730.14 80,847,255.449
6 25,440.21 5,809.88 16,155,670.625 6.78 152,481.27 35,540.02 97,002,926.074
7 25,375.82 10,859.21 16,155,119.647 6.79 177,857.09 46,399.23 113,158,045.721
8 25,491.30 6,166.23 16,145,499.788 6.79 203,348.39 52,565.46 129,303,545.509
9 25,454.62 6,154.00 16,111,433.742 6.79 228,803.01 58,719.46 145,414,979.251
10 25,381.42 6,146.31 16,111,090.545 6.79 254,184.43 64,865.77 161,526,069.796
11 25,364.38 5,799.05 16,119,846.314 6.77 279,548.81 70,664.82 177,645,916.110
12 25,364.38 5,799.05 16,119,846.314 6.77 304,913.19 76,463.86 193,765,762.424
13 25,364.38 5,799.05 16,119,846.314 6.77 330,277.57 82,262.91 209,885,608.738
14 25,412.65 7,167.59 16,114,088.812 6.77 355,690.22 89,430.50 225,999,697.550
15 25,269.41 6,134.98 16,089,720.329 6.80 380,959.63 95,565.48 242,089,417.879
16 25,302.60 6,152.92 16,074,819.492 6.80 406,262.23 101,718.40 258,164,237.371
17 25,211.33 6,060.80 16,051,380.596 6.81 431,473.56 107,779.20 274,215,617.967
18 25,410.67 5,795.17 16,029,718.484 6.82 456,884.23 113,574.37 290,245,336.451
19 25,410.67 5,795.17 16,029,718.484 6.82 482,294.90 119,369.53 306,275,054.935
20 25,410.67 5,795.17 16,029,718.484 6.82 507,705.57 125,164.70 322,304,773.419
21 25,398.73 7,185.46 16,030,725.835 6.83 533,104.30 132,350.16 338,335,499.254
22 25,376.89 6,163.97 16,020,092.084 6.84 558,481.19 138,514.13 354,355,591.338
23 25,197.76 6,159.52 16,007,860.739 6.84 583,678.95 144,673.65 370,363,452.077
24 25,201.37 3,232.22 16,031,988.287 6.80 608,880.32 147,905.87 386,395,440.364
25 28,012.19 2,866.80 16,055,108.394 6.80 636,892.51 150,772.67 402,450,548.758
26 28,012.19 2,866.80 16,055,108.394 6.80 664,904.70 153,639.47 418,505,657.152
27 28,012.19 2,866.80 16,055,108.394 6.80 692,916.89 156,506.27 434,560,765.546
28 25,023.25 4,257.20 16,055,999.875 6.80 717,940.14 160,763.47 450,616,765.421
29 25,018.17 3,216.77 16,043,859.284 6.83 742,958.31 163,980.24 466,660,624.705
30 26,238.48 6,170.78 16,024,443.008 6.80 769,196.79 170,151.02 482,685,067.713
769,196.79 170,151.02 16,089,502.257
</TABLE>
KEYSTONE STRATEGIC INCOME FUND - CLASS C
PRICING DATE 04/30/97
..........
30 DAY YTM 6.61081%
..........
<TABLE>
<CAPTION>
..........................................................................................
PRICE ST FIXED PIK INCOME LONG TERM MORTAGE GAIN/LOSS TOTAL DIV
DATE INCOME INCOME INCOME INCOME FACTOR
..........................................................................................
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 04/01/97 232.99 0.00 44,415.85 0.00 0.000 44,648.84 12.78471260
2 04/02/97 586.49 0.00 44,454.22 0.00 0.000 45,040.71 12.79961492
3 04/03/97 558.84 0.00 44,519.74 0.00 0.000 45,078.58 12.72111883
4 04/04/97 440.75 0.00 44,552.66 0.00 0.000 44,993.41 12.72973261
5 04/05/97 440.75 0.00 44,552.66 0.00 0.000 44,993.41 12.72973261
6 04/06/97 440.75 0.00 44,552.66 0.00 0.000 44,993.41 12.72973261
7 04/07/97 449.22 0.00 44,427.77 0.00 0.000 44,876.99 12.69858612
8 04/08/97 413.36 0.00 44,417.84 0.00 0.000 44,831.20 12.75307416
9 04/09/97 437.40 0.00 44,325.65 0.00 0.000 44,763.05 12.69488339
10 04/10/97 276.46 0.00 44,343.33 0.00 0.000 44,619.79 12.66504278
11 04/11/97 99.79 0.00 44,472.03 0.00 0.000 44,571.82 12.65790972
12 04/12/97 99.79 0.00 44,472.03 0.00 0.000 44,571.82 12.65790972
13 04/13/97 99.79 0.00 44,472.03 0.00 0.000 44,571.82 12.65790972
14 04/14/97 14.87 0.00 44,620.06 0.00 0.000 44,634.93 12.65960332
15 04/15/97 60.27 0.00 44,316.06 0.00 0.000 44,376.33 12.61448724
16 04/16/97 1,037.52 0.00 43,395.97 0.00 0.000 44,433.49 12.60796898
17 04/17/97 781.17 0.00 43,504.21 0.00 0.000 44,285.38 12.60823278
18 04/18/97 201.01 0.00 44,459.52 0.00 0.000 44,660.53 12.61427919
19 04/19/97 201.01 0.00 44,459.52 0.00 0.000 44,660.53 12.61427919
20 04/20/97 201.01 0.00 44,459.52 0.00 0.000 44,660.53 12.61427919
21 04/21/97 185.53 0.00 44,449.93 0.00 0.000 44,635.46 12.60906267
22 04/22/97 155.10 0.00 44,449.93 0.00 0.000 44,605.03 12.58355939
23 04/23/97 489.05 0.00 43,770.37 0.00 0.000 44,259.42 12.55624301
24 04/24/97 498.91 0.00 43,779.11 0.00 0.000 44,278.02 12.65014051
25 04/25/97 458.89 0.00 48,783.57 0.00 0.000 49,242.46 12.63494202
26 04/26/97 458.89 0.00 48,783.57 0.00 0.000 49,242.46 12.63494202
27 04/27/97 458.89 0.00 48,783.57 0.00 0.000 49,242.46 12.63494202
28 04/28/97 209.04 0.00 43,783.57 0.00 0.000 43,992.61 12.62333883
29 04/29/97 178.95 0.00 43,790.15 0.00 0.000 43,969.10 12.63170316
30 04/30/97 328.87 0.00 42,928.64 0.00 2,855.360 46,112.87 12.63840200
10,495.37 0.00 1,340,495.74 0.00 2,855.36 1,353,846.47 379.810365310
</TABLE>
TOTAL INCOME FOR PERIOD 171,400.99
TOTAL EXPENSES FOR PERIOD 37,959.14
AVERAGE SHARES OUTSTANDING 3,589,763.86
LAST PRICE DURING PERIOD 6.84
<TABLE>
<CAPTION>
................................................................................................
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
1 5,708.23 1,765.77 3,668,560.683 6.790 5,708.23 1,765.77 3,668,560.683
2 5,765.04 1,394.50 3,668,410.180 6.780 11,473.27 3,160.27 7,336,970.863
3 5,734.50 948.89 3,642,664.837 6.780 17,207.77 4,109.16 10,979,635.700
4 5,727.54 1,307.49 3,641,673.432 6.770 22,935.31 5,416.65 14,621,309.132
5 5,727.54 1,307.49 3,641,673.432 6.770 28,662.85 6,724.15 18,262,982.564
6 5,727.54 1,307.49 3,641,673.432 6.770 34,390.39 8,031.64 21,904,655.996
7 5,698.74 2,440.39 3,632,431.701 6.780 40,089.13 10,472.03 25,537,087.697
8 5,717.36 1,383.86 3,625,629.025 6.780 45,806.49 11,855.89 29,162,716.722
9 5,682.62 1,376.97 3,601,178.357 6.780 51,489.11 13,232.86 32,763,895.079
10 5,651.12 1,370.25 3,591,461.587 6.780 57,140.23 14,603.11 36,355,356.666
11 5,641.86 1,290.54 3,589,934.637 6.760 62,782.09 15,893.65 39,945,291.303
12 5,641.86 1,290.54 3,589,934.637 6.760 68,423.95 17,184.18 43,535,225.940
13 5,641.86 1,290.54 3,589,934.637 6.760 74,065.81 18,474.72 47,125,160.577
14 5,650.61 1,593.97 3,587,386.206 6.760 79,716.42 20,068.69 50,712,546.783
15 5,597.85 1,361.53 3,568,626.491 6.790 85,314.27 21,430.22 54,281,173.274
16 5,602.16 1,362.66 3,563,380.631 6.790 90,916.43 22,792.88 57,844,553.905
17 5,583.60 1,342.10 3,559,236.883 6.800 96,500.03 24,134.98 61,403,790.788
18 5,633.60 1,284.11 3,558,125.834 6.820 102,133.63 25,419.09 64,961,916.622
19 5,633.60 1,284.11 3,558,125.834 6.820 107,767.23 26,703.20 68,520,042.456
20 5,633.60 1,284.11 3,558,125.834 6.820 113,400.83 27,987.31 72,078,168.290
21 5,628.11 1,592.57 3,556,547.966 6.820 119,028.94 29,579.88 75,634,716.256
22 5,612.90 1,364.58 3,547,635.441 6.830 124,641.84 30,944.46 79,182,351.697
23 5,557.32 1,360.36 3,534,778.772 6.830 130,199.16 32,304.82 82,717,130.469
24 5,601.23 713.25 3,567,562.224 6.790 135,800.39 33,018.07 86,284,692.693
25 6,221.76 637.19 3,570,331.282 6.790 142,022.15 33,655.26 89,855,023.975
26 6,221.76 637.19 3,570,331.282 6.790 148,243.91 34,292.44 93,425,355.257
27 6,221.76 637.19 3,570,331.282 6.790 154,465.67 34,929.63 96,995,686.539
28 5,553.34 945.33 3,567,585.801 6.790 160,019.01 35,874.96 100,563,272.340
29 5,554.05 713.90 3,566,068.310 6.820 165,573.06 36,588.86 104,129,340.650
30 5,827.93 1,370.28 3,563,575.165 6.840 171,400.99 37,959.14 107,692,915.815
171,400.99 37,959.14 3,589,763.861
</TABLE>
KEYSTONE STRATEGIC INCOME FUND - CLASS Y
PRICING DATE 04/30/97
.........
30 DAY YTM 0.00000%
.........
<TABLE>
<CAPTION>
...........................................................................................
PRICE ST FIXED ZERO COUPON LONG TERM TOTAL DIV
DATE INCOME AND DIV INC INCOME INCOME FACTOR
...........................................................................................
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 04/01/97 232.99 0.00 44,415.85 0.00 0.00.00 44,648.84 0.00000337
2 04/02/97 586.49 0.00 44,454.22 0.00 0.00.00 45,040.71 0.00000349
3 04/03/97 558.84 0.00 44,519.74 0.00 0.00.00 45,078.58 0.00000349
4 04/04/97 440.75 0.00 44,552.66 0.00 0.00.00 44,993.41 0.00000349
5 04/05/97 440.75 0.00 44,552.66 0.00 0.00.00 44,993.41 0.00000349
6 04/06/97 440.75 0.00 44,552.66 0.00 0.00.00 44,993.41 0.00000349
7 04/07/97 449.22 0.00 44,427.77 0.00 0.00.00 44,876.99 0.00000349
8 04/08/97 413.36 0.00 44,417.84 0.00 0.00.00 44,831.20 0.00000351
9 04/09/97 437.40 0.00 44,325.65 0.00 0.00.00 44,763.05 0.00000352
10 04/10/97 276.46 0.00 44,343.33 0.00 0.00.00 44,619.79 0.00000352
11 04/11/97 99.79 0.00 44,472.03 0.00 0.00.00 44,571.82 0.00000352
12 04/12/97 99.79 0.00 44,472.03 0.00 0.00.00 44,571.82 0.00000352
13 04/13/97 99.79 0.00 44,472.03 0.00 0.00.00 44,571.82 0.00000352
14 04/14/97 14.87 0.00 44,620.06 0.00 0.00.00 44,634.93 0.00000352
15 04/15/97 60.27 0.00 44,316.06 0.00 0.00.00 44,376.33 0.00000353
16 04/16/97 1,037.52 0.00 43,395.97 0.00 0.00.00 44,433.49 0.00000353
17 04/17/97 781.17 0.00 43,504.21 0.00 0.00.00 44,285.38 0.00000353
18 04/18/97 201.01 0.00 44,459.52 0.00 0.00.00 44,660.53 0.00000353
19 04/19/97 201.01 0.00 44,459.52 0.00 0.00.00 44,660.53 0.00000353
20 04/20/97 201.01 0.00 44,459.52 0.00 0.00.00 44,660.53 0.00000353
21 04/21/97 185.53 0.00 44,449.93 0.00 0.00.00 44,635.46 0.00000353
22 04/22/97 155.10 0.00 44,449.93 0.00 0.00.00 44,605.03 0.00000353
23 04/23/97 489.05 0.00 43,770.37 0.00 0.00.00 44,259.42 0.00000354
24 04/24/97 498.91 0.00 43,779.11 0.00 0.00.00 44,278.02 0.00000353
25 04/25/97 458.89 0.00 48,783.57 0.00 0.00.00 49,242.46 0.00000354
26 04/26/97 458.89 0.00 48,783.57 0.00 0.00.00 49,242.46 0.00000354
27 04/27/97 458.89 0.00 48,783.57 0.00 0.00.00 49,242.46 0.00000354
28 04/28/97 209.04 0.00 43,783.57 0.00 0.00.00 43,992.61 0.00000354
29 04/29/97 178.95 0.00 43,790.15 0.00 0.00.00 43,969.10 0.00000354
30 04/30/97 328.87 0.00 42,928.64 0.00 0.### 46,112.87 0.00000347
10,495.37 0.00 1,340,495.74 0.00 0.### 1,353,846.47 0.000105420
</TABLE>
TOTAL INCOME FOR PERIOD 0.00
TOTAL EXPENSES FOR PERIOD 0.00
AVERAGE SHARES OUTSTANDING 1.02
LAST PRICE DURING PERIOD 6.66
<TABLE>
<CAPTION>
................................................................................
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
1 0.00 0.00 1.007 6.94 0.00 0.00 1.007
2 0.00 0.00 1.021 6.64 0.00 0.00 2.028
3 0.00 0.00 1.021 6.64 0.00 0.00 3.049
4 0.00 0.00 1.021 6.62 0.00 0.00 4.070
5 0.00 0.00 1.021 6.62 0.00 0.00 5.091
6 0.00 0.00 1.021 6.62 0.00 0.00 6.112
7 0.00 0.00 1.021 6.63 0.00 0.00 7.133
8 0.00 0.00 1.021 6.63 0.00 0.00 8.154
9 0.00 0.00 1.021 6.63 0.00 0.00 9.175
10 0.00 0.00 1.021 6.63 0.00 0.00 10.196
11 0.00 0.00 1.021 6.61 0.00 0.00 11.217
12 0.00 0.00 1.021 6.61 0.00 0.00 12.238
13 0.00 0.00 1.021 6.61 0.00 0.00 13.259
14 0.00 0.00 1.021 6.61 0.00 0.00 14.280
15 0.00 0.00 1.021 6.63 0.00 0.00 15.301
16 0.00 0.00 1.021 6.63 0.00 0.00 16.322
17 0.00 0.00 1.021 6.64 0.00 0.00 17.343
18 0.00 0.00 1.021 6.65 0.00 0.00 18.364
19 0.00 0.00 1.021 6.65 0.00 0.00 19.385
20 0.00 0.00 1.021 6.65 0.00 0.00 20.406
21 0.00 0.00 1.021 6.65 0.00 0.00 21.427
22 0.00 0.00 1.021 6.66 0.00 0.00 22.448
23 0.00 0.00 1.021 6.66 0.00 0.00 23.469
24 0.00 0.00 1.021 6.61 0.00 0.00 24.490
25 0.00 0.00 1.029 6.60 0.00 0.00 25.519
26 0.00 0.00 1.029 6.60 0.00 0.00 26.548
27 0.00 0.00 1.029 6.60 0.00 0.00 27.577
28 0.00 0.00 1.029 6.60 0.00 0.00 28.606
29 0.00 0.00 1.029 6.64 0.00 0.00 29.635
30 0.00 0.00 1.021 6.66 0.00 0.00 30.656
0.00 0.00 1.022
</TABLE>
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
$952.50
A NAV A A
TIME ACCOUNT A AVERAGE A/C VALUE A AVERAGE
YEARS PERIOD VALUE CLASS ANNNUAL W/LOAD CLASS ANNNUAL
<S> <C> <C> <C> <C> <C> <C> <C>
30-Apr-97 BLANK 2,047.33 0.00% 952.5 -4.75% -4.75%
31-Mar-97 1 MO 2,018.91 1.41% 1.41% 965.93 -3.41% -3.41%
31-Jan-97 QTR 2,057.60 -0.50% -0.50% 947.75 -5.23% -5.23%
31-Dec-96 YTD 2,061.93 -0.71% -0.71% 945.76 -5.42% -5.42%
30-Apr-96 1 1,873.57 9.27% 9.27% 1,040.84 4.08% 4.08%
30-Apr-94 3 1,765.20 15.98% 5.07% 1,104.74 10.47% 3.38%
30-Apr-92 5 1,300.48 57.43% 9.50% 1,499.52 49.95% 8.44%
30-Apr-87 10 1,001.00 104.53% 7.42% 1,948.14 94.81% 6.90%
14-Apr-87 INCEPT. 1,000.00 104.73% 7.39% 1,950.09 95.01% 6.87%
INCEPTION FACTOR: 10.0548
</TABLE>
<TABLE>
<CAPTION>
$1,000
B B NAV LEVEL VALUE OF VALUE OF B
TIME ACCOUNT B AVERAGE LOAD CLASS B CLASS B INIT B AVERAGE
YEARS PERIOD VALUE CLASS ANNNUAL COMP INVESTMENT INVESTMENT CUMULATIVE ANNUAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-Apr-97 BLANK 1,357.86 0.00% 50 1,000.00 1,000.00 0.00%
31-Mar-97 1 MO 1,339.87 1.34% 1.34% 50 1,013.43 1,007.35 -3.66% -3.66%
31-Jan-97 QTR 1,367.01 -0.67% -0.67% 48.789 993.31 975.78 -5.55% -5.55%
31-Dec-96 YTD 1,370.67 -0.93% -0.93% 48.376 990.66 967.51 -5.77% -5.77%
30-Apr-96 1 1,251.77 8.48% 8.48% 50 1,084.76 1,010.32 3.48% 3.48%
30-Apr-94 3 1,196.69 13.47% 4.30% 26.933 1,134.68 897.77 10.77% 3.47%
30-Apr-92 5 0 0 0% 0 0 0 0 0%
30-Apr-87 10 0 0 0% 0 0 0 0%
1-Feb-93 INCEPT. 1,000.00 35.79% 7.47% 19.378 1,357.86 968.88 33.85% 7.11%
INCEPTION FACTOR: 4.2466
</TABLE>
<TABLE>
<CAPTION>
$1,000
C C NAV LEVEL VALUE OF VALUE OF C
ACCOUNT C AVERAGE LOAD CLASS C CLASS C INIT C AVERAGE
YEARS VALUE CLASS ANNNUAL COMP INVESTMENT INVESTMENT CUMULATIVE ANNUAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-Apr-97 BLANK 1,356.35 0.00% 10 1,000.00 1,000.00 0.00%
31-Mar-97 1 MO 1,338.36 1.34% 1.34% 10 1,013.45 1,007.36 0.34% 0.34%
31-Jan-97 QTR 1,365.50 -0.67% -0.67% 9.76 993.3 975.75 -1.65% -1.65%
31-Dec-96 YTD 1,369.16 -0.94% -0.94% 9.67 990.65 967.47 -1.90% -1.90%
30-Apr-96 1 1,250.24 8.49% 8.49% 10 1,084.88 1,010.34 7.49% 7.49%
30-Apr-94 3 1,196.79 13.33% 4.26% 1,133.33 896.46 13.33% 4.26%
30-Apr-92 5 0 0 0% 0 0 0 0%
30-Apr-87 10 0 0 0% 0 0 0 0%
1-Feb-93 INCEPT. 1,000.00 35.64% 7.44% 0 1,356.35 967.47 35.64% 7.44%
INCEPTION FACTOR: 4.2466
</TABLE>
<TABLE>
<CAPTION>
Y
ACCOUNT Y AVERAGE
YEARS VALUE CLASS ANNNUAL
<S> <C> <C> <C> <C>
30-Apr-97 BLANK 971.3 0.00%
31-Mar-97 1 MO 966.18 0.53% 0.53%
31-Jan-97 QTR 995.04 -2.39% -2.39%
31-Dec-96 YTD 0 0 0%
30-Apr-96 1 0 0 0%
30-Apr-94 3 0 0 0%
30-Apr-92 5 0 0 0%
30-Apr-87 10 0 0 0%
13-Jan-97 INCEPT 1,000.00 -2.87% -9.40%
INCEPTION FACTOR: 0.2949
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> KEYSTONE STRATEGIC INCOME FUND CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 192,568,506
<INVESTMENTS-AT-VALUE> 186,554,866
<RECEIVABLES> 8,965,284
<ASSETS-OTHER> 129,756
<OTHER-ITEMS-ASSETS> 45,670
<TOTAL-ASSETS> 195,695,576
<PAYABLE-FOR-SECURITIES> 1,118,125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,467,100
<TOTAL-LIABILITIES> 2,585,225
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 99,692,701
<SHARES-COMMON-STOCK> 8,613,751
<SHARES-COMMON-PRIOR> 10,060,162
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (475,688)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (39,103,173)
<ACCUM-APPREC-OR-DEPREC> (1,388,765)
<NET-ASSETS> 58,725,075
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,110,854
<OTHER-INCOME> 7,043
<EXPENSES-NET> (607,267)
<NET-INVESTMENT-INCOME> 3,510,630
<REALIZED-GAINS-CURRENT> 1,659,103
<APPREC-INCREASE-CURRENT> (863,411)
<NET-CHANGE-FROM-OPS> 4,306,322
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,741,251)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 722,925
<NUMBER-OF-SHARES-REDEEMED> (2,450,268)
<SHARES-REINVESTED> 280,932
<NET-CHANGE-IN-ASSETS> (9,393,297)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (665,398)
<OVERDIST-NET-GAINS-PRIOR> (40,580,597)
<GROSS-ADVISORY-FEES> (309,393)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (607,267)
<AVERAGE-NET-ASSETS> 64,437,064
<PER-SHARE-NAV-BEGIN> 6.77
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> 0.09
<PER-SHARE-DIVIDEND> (0.41)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 6.82
<EXPENSE-RATIO> 1.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 102
<NAME> KEYSTONE STRATEGIC INCOME FUND CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 192,568,506
<INVESTMENTS-AT-VALUE> 186,554,866
<RECEIVABLES> 8,965,284
<ASSETS-OTHER> 129,756
<OTHER-ITEMS-ASSETS> 45,670
<TOTAL-ASSETS> 195,695,576
<PAYABLE-FOR-SECURITIES> 1,118,125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,467,100
<TOTAL-LIABILITIES> 2,585,225
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 132,668,762
<SHARES-COMMON-STOCK> 16,071,930
<SHARES-COMMON-PRIOR> 18,132,004
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (28,058)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (19,186,516)
<ACCUM-APPREC-OR-DEPREC> (3,372,557)
<NET-ASSETS> 110,081,631
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,563,921
<OTHER-INCOME> 13,217
<EXPENSES-NET> (1,794,701)
<NET-INVESTMENT-INCOME> 5,782,437
<REALIZED-GAINS-CURRENT> 3,074,228
<APPREC-INCREASE-CURRENT> (1,559,434)
<NET-CHANGE-FROM-OPS> 7,297,231
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,238,801)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,590,485
<NUMBER-OF-SHARES-REDEEMED> (5,099,176)
<SHARES-REINVESTED> 448,617
<NET-CHANGE-IN-ASSETS> (13,307,058)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (345,120)
<OVERDIST-NET-GAINS-PRIOR> (21,926,446)
<GROSS-ADVISORY-FEES> (569,310)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,794,701)
<AVERAGE-NET-ASSETS> 118,566,303
<PER-SHARE-NAV-BEGIN> 6.81
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 0.07
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.22
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 103
<NAME> KEYSTONE STRATEGIC INCOME FUND CLASS C
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 192,568,506
<INVESTMENTS-AT-VALUE> 186,554,866
<RECEIVABLES> 8,965,284
<ASSETS-OTHER> 129,756
<OTHER-ITEMS-ASSETS> 45,670
<TOTAL-ASSETS> 195,695,576
<PAYABLE-FOR-SECURITIES> 1,118,125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,467,100
<TOTAL-LIABILITIES> 2,585,225
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,210,864
<SHARES-COMMON-STOCK> 3,552,632
<SHARES-COMMON-PRIOR> 4,680,973
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (72,652)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (6,546,089)
<ACCUM-APPREC-OR-DEPREC> (1,288,485)
<NET-ASSETS> 24,303,638
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,840,815
<OTHER-INCOME> 3,215
<EXPENSES-NET> (436,932)
<NET-INVESTMENT-INCOME> 1,407,098
<REALIZED-GAINS-CURRENT> 728,946
<APPREC-INCREASE-CURRENT> (275,710)
<NET-CHANGE-FROM-OPS> 1,860,334
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,508,377)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 413,449
<NUMBER-OF-SHARES-REDEEMED> (1,679,415)
<SHARES-REINVESTED> 137,625
<NET-CHANGE-IN-ASSETS> (7,512,063)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (159,478)
<OVERDIST-NET-GAINS-PRIOR> (7,193,730)
<GROSS-ADVISORY-FEES> (138,379)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (436,932)
<AVERAGE-NET-ASSETS> 28,836,828
<PER-SHARE-NAV-BEGIN> 6.80
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> 0.08
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.84
<EXPENSE-RATIO> 2.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 104
<NAME> KEYSTONE STRATEGIC INCOME FUND CLASS Y
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 192,568,506
<INVESTMENTS-AT-VALUE> 186,554,866
<RECEIVABLES> 8,965,284
<ASSETS-OTHER> 129,756
<OTHER-ITEMS-ASSETS> 45,670
<TOTAL-ASSETS> 195,695,576
<PAYABLE-FOR-SECURITIES> 1,118,125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,467,100
<TOTAL-LIABILITIES> 2,585,225
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7
<SHARES-COMMON-STOCK> 1
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 7
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 7.03
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (0.20)
<PER-SHARE-DIVIDEND> (0.18)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.65
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
