1933 Act Registration No. 333-39871
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N- 14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
EVERGREEN FIXED INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ________ pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on ________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on ________ pursuant to paragraph (a)(2) of Rule 485
Pursuant to Rule 414 under the Securities Act of 1933, by this
amendment to Registration Statement No. 333-39871 on Form N- 14 of Evergreen
Strategic Income Fund, a Massachusetts business trust, the Registrant hereby
adopts the Registration Statement of
<PAGE>
such trust under
the Securities Act of 1933.
<PAGE>
EVERGREEN FIXED INCOME TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary; Comparison
of Investment Objectives and
Policies; Risks
4. Information About the Summary; Reasons for the
Transaction
Reorganization; Comparative
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
7. Voting Information Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of Evergreen
Strategic Income Fund dated
September 1, 1997, as amended
13. Additional Information Statement of Additional
about the Company Being Information of Blanchard Funds
Acquired - Blanchard Flexible Income
Fund dated November
30, 1997
14. Financial Statements Financial Statements dated
April 30, 1997 of Evergreen
Strategic Income Fund;
Financial Statements of
Blanchard Flexible Income Fund
dated September 30, 1997; Pro
Forma Financial Statements
Item of Part C of Form N-14
Incorporated by Reference to
15. Indemnification Part A Caption - "Comparative
Information on Shareholders'
Rights - Liability and
Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
<PAGE>
17. Undertakings
Item 17. Undertakings
<PAGE>
BLANCHARD FUNDS
BLANCHARD FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January 5, 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of Blanchard Flexible Income Fund (the "Fund") to
inform you of a Special Shareholders' meeting to be held on February 20, 1998.
Before that meeting I would like your vote on the important issues affecting
your Fund as described in the attached Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes three proposals. The first proposal
requests that shareholders consider and act upon an Agreement and Plan of
Reorganization whereby all of the assets of the Fund would be acquired by
Evergreen Strategic Income Fund in exchange for Class A shares of Evergreen
Strategic Income Fund and the assumption by Evergreen Strategic Income Fund of
certain liabilities of the Fund. You will receive shares of Evergreen Strategic
Income Fund having an aggregate net asset value equal to the aggregate net asset
value of your Fund shares. Details about Evergreen Strategic Income Fund's
investment objective, portfolio management team, performance, etc. are contained
in the attached Prospectus/Proxy Statement. The transaction is a non-taxable
event for shareholders.
The second proposal requests shareholder consideration of an Interim Investment
Advisory Agreement between the Fund and Virtus
Capital Management, Inc.
The third and final proposal requests shareholder consideration of an Interim
Sub-Advisory Agreement between Virtus Capital
Management, Inc. and OFFITBANK.
Information relating to the Interim Investment Advisory Agreement and the
Interim Sub-Advisory Agreement is contained in the attached Prospectus/Proxy
Statement.
The Board of Trustees has approved the proposals and recommends that you vote
FOR these proposals.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposals presented and sign and return your proxy card in the enclosed
postage-paid envelope
<PAGE>
today.
If we do not receive your completed proxy card after several weeks, you may be
contacted by our proxy solicitor, Shareholder Communications Corporation, who
will remind you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
Blanchard Funds
<PAGE>
BLANCHARD FUNDS
BLANCHARD FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of Blanchard Flexible Income Fund, a series of Blanchard Funds
("Flexible Income"), will be held at the offices of the Evergreen Funds, 200
Berkeley Street, 26th Floor, Boston, Massachusetts 02116, on February 20, 1998
at 2:00 p.m. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of November 26, 1997, providing for the acquisition of all
of the assets of Flexible Income by Evergreen Strategic Income Fund, a series of
Evergreen Fixed Income Trust, ("Evergreen Strategic Income") in exchange for
shares of Evergreen Strategic Income and the assumption by Evergreen Strategic
Income of certain identified liabilities of Flexible Income. The Plan also
provides for distribution of such shares of Evergreen Strategic Income to
shareholders of Flexible Income in liquidation and subsequent termination of
Flexible Income. A vote in favor of the Plan is a vote in favor of the
liquidation and dissolution of Flexible Income.
2. To consider and act upon the Interim Management
Contract between Flexible Income and Virtus Capital Management,
Inc.
3. To consider and act upon the Interim Sub-Advisory Agreement between
Virtus Capital Management, Inc. and OFFITBANK.
4. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of Blanchard Funds on behalf of Flexible Income have fixed
the close of business on December 26, 1997 as the record date for the
determination of shareholders of Flexible Income entitled to notice of and to
vote at the Meeting or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION
<PAGE>
TO THE ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER
SOLICITATION.
By Order of the Board of Trustees
John W. McGonigle
Secretary
January 5, 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr. John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JANUARY 5, 1998
Acquisition of Assets of
BLANCHARD FLEXIBLE INCOME FUND
a series of
Blanchard Funds
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
EVERGREEN STRATEGIC INCOME FUND
a series of
Evergreen Fixed Income Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
Blanchard Flexible Income Fund ("Flexible Income") in connection with a proposed
Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Flexible Income for consideration at a Special Meeting of
Shareholders to be held on February 20, 1998 at 2:00 p.m. at the offices of the
Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts 02116, and any
adjournments thereof (the "Meeting"). The Plan provides for all of the assets of
Flexible Income to be acquired by Evergreen Strategic Income Fund ("Evergreen
Strategic Income") in exchange for shares of Evergreen Strategic Income and the
assumption by Evergreen Strategic Income of certain identified liabilities of
Flexible Income (hereinafter referred to as the "Reorganization"). Evergreen
Strategic Income and Flexible Income are sometimes hereinafter referred to
individually as the "Fund" and collectively as the "Funds." Following the
Reorganization, shares of Evergreen Strategic Income will be distributed to
shareholders of Flexible Income in liquidation of Flexible Income and such Fund
will be terminated. Holders of shares of Flexible Income will receive Class A
shares of Evergreen Strategic Income having the same Rule 12b-1
distribution-related fees as the shares of Flexible Income held by such holders
prior to the Reorganization. No initial sales charge will be imposed in
connection with Class A shares of Evergreen Strategic Income received by holders
of shares of Flexible Income. As a result of the proposed Reorganization,
shareholders of Flexible Income will receive that number of full and fractional
shares of Evergreen Strategic Income having an aggregate net asset value equal
to the aggregate net asset value of such shareholder's shares of Flexible
Income. The Reorganization is being structured as a tax-free reorganization for
federal income tax purposes.
Evergreen Strategic Income is a separate series of Evergreen Fixed
Income Trust, an open-end management investment company
<PAGE>
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). Evergreen Strategic Income seeks high current income from interest on
debt securities and, secondarily, considers potential for growth of capital in
selecting securities. Such investment objective is substantially identical to
that of Flexible Income.
Shareholders of Flexible Income are also being asked to approve the
Interim Management Contract with Virtus Capital Management, Inc., a subsidiary
of First Union Corporation ("Virtus") (the "Interim Advisory Agreement"), with
the same terms and fees as the previous advisory agreement between Flexible
Income and Virtus and the Interim Sub-Advisory Agreement between Virtus and
OFFITBANK with the same terms and fees as the previous sub-advisory agreement
between Virtus and OFFITBANK. The Interim Advisory Agreement and Interim
Sub-Advisory Agreement will be in effect for the period of time between November
28, 1997, the date on which the merger of Signet Banking Corporation with and
into a wholly-owned subsidiary of First Union Corporation was consummated, and
the date of the Reorganization (scheduled for on or about February 27, 1998).
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen Strategic Income
that shareholders of Flexible Income should know before voting on the
Reorganization. Certain relevant documents listed below, which have been filed
with the Securities and Exchange Commission ("SEC"), are incorporated in whole
or in part by reference. A Statement of Additional Information dated January 5,
1998, relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Evergreen Strategic Income dated April 30,
1997 and Flexible Income dated September 30, 1997, has been filed with the SEC
and is incorporated by reference in its entirety into this Prospectus/Proxy
Statement. A copy of such Statement of Additional Information is available upon
request and without charge by writing to Evergreen Strategic Income at 200
Berkeley Street, Boston, Massachusetts 02116, or by calling toll-free
1-800-343-2898.
The Prospectus of Evergreen Strategic Income relating to Class A, Class
B and Class C shares dated September 1, 1997, as amended, and its Annual Report
for the period ended April 30, 1997 are incorporated herein by reference in
their entirety, insofar as they relate to Evergreen Strategic Income only, and
not to any other fund described therein. Shareholders of Flexible Income will
receive, with this Prospectus/Proxy Statement, copies of the Prospectus of
Evergreen Strategic Income. Additional information about Evergreen Strategic
Income is contained in its Statement of Additional Information of the same date
which has been filed with the SEC and which is available upon request and
without charge by writing to or calling Evergreen Strategic
<PAGE>
Income at the address or telephone number listed in the preceding paragraph.
The Prospectus of Flexible Income dated November 30, 1997, insofar as
it relates to Flexible Income only, and not to any other funds described
therein, is incorporated herein in its entirety by reference. Copies of the
Prospectus and related Statement of Additional Information dated the same date,
are available upon request without charge by writing to Flexible Income at the
address listed on the cover page of this Prospectus/Proxy Statement or by
calling toll-free 1-800-829- 3863.
Included as Exhibits A, B and C to this Prospectus/Proxy Statement are
a copy of the Plan, the Interim Advisory Agreement and the Interim Sub- Advisory
Agreement, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk, including
possible
loss of capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES..............................................6
SUMMARY ....................................................................8
Proposed Plan of Reorganization.....................................9
Tax Consequences...................................................10
Investment Objectives and Policies
of the Funds................................................................11
Comparative Performance Information
for each Fund...............................................................11
Management of the Funds............................................12
Investment Advisers and Sub-Adviser................................12
Administrator.....................................................14
Portfolio Management...............................................14
Distribution of Shares.............................................14
Purchase and Redemption Procedures.............................. 16
Exchange Privileges................................................16
Dividend Policy....................................................16
Risks ..........................................................17
REASONS FOR THE REORGANIZATION..............................................19
Agreement and Plan of Reorganization............................ 22
Federal Income Tax Consequences....................................24
Pro-forma Capitalization...........................................25
Shareholder Information............................................26
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES............................27
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS.............................30
Forms of Organization..............................................30
Capitalization.....................................................30
Shareholder Liability..............................................31
Shareholder Meetings and Voting Rights.............................32
Liquidation or Dissolution...................................... 33
Liability and Indemnification of Trustees..........................33
INFORMATION REGARDING THE INTERIM ADVISORY
AGREEMENT...................................................................34
Introduction.......................................................34
Comparison of the Interim Advisory
Agreement and the Previous Advisory
Agreement...................................................................35
Information about Flexible Income's Investment
Adviser.......................................................36
INFORMATION REGARDING THE INTERIM SUB-
ADVISORY AGREEMENT..........................................................37
Introduction.......................................................37
<PAGE>
Comparison of the Interim Sub-Advisory
Agreement
and the Previous Sub-
Advisory Agreement..........................................................38
ADDITIONAL INFORMATION................................................... 40
VOTING INFORMATION CONCERNING THE MEETING................................ 41
FINANCIAL STATEMENTS AND EXPERTS............................................43
LEGAL MATTERS............................................................ 44
OTHER BUSINESS...........................................................44
APPENDIX A..................................................................45
APPENDIX B..................................................................47
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class A shares of Evergreen Strategic Income set forth
in the following tables and in the examples are based on the expenses of
Evergreen Strategic Income for the fiscal year ended April 30, 1997. The amounts
for shares of Flexible Income set forth in the following tables and in the
examples are based on the expenses for Flexible Income for the fiscal year ended
September 30, 1997. The pro forma amounts for Class A shares of Evergreen
Strategic Income are based on what the combined expenses would have been for
Evergreen Strategic Income for the fiscal year ending April 30, 1997. All
amounts are adjusted for voluntary expense waivers.
The following tables show for Evergreen Strategic Income, Flexible
Income and Evergreen Strategic Income pro forma, assuming consummation of the
Reorganization, the shareholder transaction expenses and annual fund operating
expenses associated with an investment in the Class A shares of Evergreen
Strategic Income and shares of Flexible Income, as applicable.
<TABLE>
<CAPTION>
Comparison of Class A Shares
of Evergreen Strategic Income With
Shares of Flexible Income
Evergreen
Evergreen Strategic
Strategic Flexible Income Pro
Income Income Forma
--------- -------- --------
<S> <C> <C> <C>
Shareholder
Transaction Class A Shares Class A
Expenses ------- ------ -------
Maximum Sales Load 4.75% None 4.75%
Imposed on Purchases
(as a percentage of
offering price)
Maximum Sales Load None None None
Imposed on
Reinvested Dividends
(as a percentage of
offering price)
<PAGE>
Contingent Deferred None None None
Sales Charge (as a
percentage of
original purchase
price or redemption
proceeds, whichever
is lower)
Exchange Fee None None None
Annual Fund
Operating Expenses
(as a percentage of
average daily net
assets)
Management Fee 0.64% 0.59%
0.75%
12b-1 Fees (1) 0.23% 0.25%
0.25%
Other Expenses 0.41% 0.41%
------ 0.42% -----
------
Annual Fund 1.42% 1.25%
Operating Expenses 1.28% (2) ------ ------
------ ------ ------
------
</TABLE>
- ---------------
(1) Class A shares of Evergreen Strategic Income can pay up to 0.75% of average
daily net assets as a 12b-1 fee. For the foreseeable future, the Class A
12b-1 fees will be limited to 0.25% of average daily net assets.
(2) Reflects voluntary expense waivers by Evergreen Strategic Income's
investment adviser. Absent such waivers, total operating expenses would
have been 1.28% (rounded to two decimal places).
<PAGE>
Examples. The following tables show for Evergreen Strategic Income and
Flexible Income, and for Evergreen Strategic Income pro forma, assuming
consummation of the Reorganization, examples of the cumulative effect of
shareholder transaction expenses and annual fund operating expenses indicated
above on a $1,000 investment in each class of shares for the periods specified,
assuming (i) a 5% annual return, and (ii) redemption at the end of such period.
In the case of Evergreen Strategic Income pro forma, the example does not
reflect the imposition of the maximum 4.75% maximum sales load on purchases
since Flexible Income shareholders who receive Class A shares of Evergreen
Strategic Income in the Reorganization or who purchase additional Class A shares
subsequent to the Reorganization will not incur any sales load.
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Evergreen $60 $86 $114 $195
Strategic Income
Class A
Flexible Income $14 $45 $78 $170
Evergreen $13 $40 $69 $151
Strategic Income
Pro Forma
Class A
</TABLE>
The purpose of the foregoing examples is to assist Flexible Income
shareholders in understanding the various costs and expenses that an investor in
Evergreen Strategic Income as a result of the Reorganization would bear directly
and indirectly, as compared with the various direct and indirect expenses
currently borne by a shareholder in Flexible Income. These examples should not
be considered a representation of past or future expenses or annual return.
Actual expenses may be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement
and, to the extent not inconsistent with such additional information, the
Prospectus of Evergreen Strategic Income dated September 1, 1997, as amended,
and the Prospectus of Flexible Income dated November 30, 1997 (which are
incorporated herein by reference),
<PAGE>
the Plan, the Interim Advisory Agreement and the Interim Sub- Advisory
Agreement, forms of which are attached to this Prospectus/Proxy Statement as
Exhibits A, B and C, respectively.
Proposed Plan of Reorganization
The Plan provides for the transfer of all of the assets of Flexible
Income in exchange for shares of Evergreen Strategic Income and the assumption
by Evergreen Strategic Income of certain identified liabilities of Flexible
Income. The identified liabilities consist only of those liabilities reflected
on the Fund's statement of assets and liabilities determined immediately
preceding the Reorganization. The Plan also calls for the distribution of shares
of Evergreen Strategic Income to Flexible Income shareholders in liquidation of
Flexible Income as part of the Reorganization. As a result of the
Reorganization, the shareholders of Flexible Income will become the owners of
that number of full and fractional Class A shares of Evergreen Strategic Income
having an aggregate net asset value equal to the aggregate net asset value of
the shareholders' shares of Flexible Income as of the close of business
immediately prior to the date that Flexible Income's assets are exchanged for
shares of Evergreen Strategic Income. See "Reasons for the Reorganization -
Agreement and Plan of Reorganization."
The Trustees of Blanchard Funds, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of Flexible Income, and that the interests of the
shareholders of Flexible Income will not be diluted as a result of the
transactions contemplated by the Reorganization. Accordingly, the Trustees have
submitted the Plan for the approval of Flexible Income's shareholders.
THE BOARD OF TRUSTEES OF BLANCHARD FUNDS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF FLEXIBLE INCOME
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Fixed Income Trust have also
approved the Plan, and accordingly, Evergreen Strategic Income's
participation in the Reorganization.
Approval of the Reorganization on the part of Flexible Income will
require the affirmative vote of a majority of Flexible Income's shares voted and
entitled to vote, with all classes voting together as a single class at a
Meeting at which a quorum of the Fund's shares is present. A majority of the
outstanding shares entitled to vote, represented in person or by proxy, is
required to constitute a quorum at the Meeting. See "Voting Information
Concerning the Meeting."
<PAGE>
The merger (the "Merger") of Signet Banking Corporation ("Signet") with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
has been consummated and, as a result, by law the Merger terminated the
investment advisory agreement between Virtus and Flexible Income and the
sub-advisory agreement between Virtus and OFFITBANK. Prior to consummation of
the Merger, Flexible Income received an order from the SEC which permitted the
implementation, without formal shareholder approval, of a new investment
advisory agreement between the Fund and Virtus and a new sub-advisory agreement
between Virtus and OFFITBANK for a period of not more than 120 days beginning on
the date of the closing of the Merger and continuing through the date the
Interim Advisory Agreement and Interim Sub-Advisory Agreement are approved by
the Fund's shareholders (but in no event later than April 30, 1998). The Interim
Advisory Agreement and the Interim Sub-Advisory Agreement have the same terms
and fees as the previous investment advisory agreement between Flexible Income
and Virtus and the previous sub-advisory agreement between Virtus and OFFITBANK,
respectively. The Reorganization is scheduled to take place on or about February
27, 1998.
Approval of the Interim Advisory Agreement and Interim Sub- Advisory
Agreement requires the affirmative vote of (i) 67% or more of the shares of
Flexible Income present in person or by proxy at the Meeting, if holders of more
than 50% of the shares of Flexible Income outstanding on the record date are
present, in person or by proxy, or (ii) more than 50% of the outstanding shares
of Flexible Income, whichever is less. See "Voting Information Concerning the
Meeting."
If the shareholders of Flexible Income do not vote to approve the
Reorganization, the Trustees will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Flexible Income
will have received an opinion of Sullivan & Worcester LLP that the
Reorganization has been structured so that no gain or loss will be recognized by
the Fund or its shareholders for federal income tax purposes as a result of the
receipt of shares of Evergreen Strategic Income in the Reorganization. The
holding period and aggregate tax basis of shares of Evergreen Strategic Income
that are received by Flexible Income's shareholders will be the same as the
holding period and aggregate tax basis of shares of the Fund previously held by
such shareholders, provided that shares of the Fund are held as capital assets.
In addition, the holding period and tax basis of the assets of Flexible Income
in the hands of Evergreen Strategic Income as a result of the Reorganization
will be the same as in the hands of the Fund immediately prior to the
Reorganization, and no gain or loss will be recognized by Evergreen Strategic
Income upon the receipt of the assets of the
<PAGE>
Fund in exchange for shares of Evergreen Strategic Income and the assumption by
Evergreen Strategic Income of certain identified liabilities.
Investment Objectives and Policies of the Funds
The investment objectives and policies of Evergreen Strategic Income
and Flexible Income are substantially identical.
The investment objective of Evergreen Strategic Income is to seek high
current income from interest on debt securities and, secondarily, to consider
potential for growth of capital in selecting securities. Evergreen Strategic
Income allocates 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. The Fund may also invest in
preferred stocks, common stocks and other equity securities, including
convertible securities and warrants, and money market securities.
The investment objective of Flexible Income is to provide high current
income while seeking opportunities for capital appreciation. In seeking its
investment objective, Flexible Income also takes into consideration preservation
of capital. The Fund invests in U.S. government securities, investment grade and
high yield, high risk securities of domestic and foreign issuers. The Fund may
also invest a portion of its assets in money market securities. See "Comparison
of Investment Objectives and Policies" below.
Comparative Performance Information for each Fund
Discussions of the manner of calculation of total return are contained
in the respective Prospectus and Statement of Additional Information of the
Funds. The total return of Evergreen Strategic Income and Flexible Income for
the one and five year periods ended September 30, 1997, and for both Funds for
the periods from inception through September 30, 1997 are set forth in the table
below. The calculations of total return assume the reinvestment of all dividends
and capital gains distributions on the reinvestment date and the deduction of
all recurring expenses (including sales charges) that were charged to
shareholders' accounts.
<TABLE>
<CAPTION>
Average Annual Total Return
1 Year
Ended 5 Years From
September Ended Inception To
30, September September Inception
1997 30, 1997 30, 1997 Date
------- ------- --------- ---------
<PAGE>
<S> <C> <C> <C> <C>
Evergreen
Strategic 6.41% 7.36% 8.33% 2/13/87
Income
Class A
shares
Flexible 9.53% N/A 7.25%(1) 11/2/92
Income
</TABLE>
- --------------
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the average
annual total return during the period would have been lower.
Important information about Evergreen Strategic Income is also
contained in management's discussion of Evergreen Strategic Income's
performance, attached hereto as Exhibit D. This information also appears in
Evergreen Strategic Income's most recent Annual Report.
Management of the Funds
The overall management of Evergreen Strategic Income and of Flexible
Income is the responsibility of, and is supervised by, the Board of Trustees of
Evergreen Fixed Income Trust and Blanchard Funds, respectively.
Investment Advisers and Sub-Adviser
Keystone Investment Management Company ("Keystone") serves as
investment adviser to Evergreen Strategic Income. Keystone has served as
investment adviser to the Keystone family of mutual funds since 1932. Keystone
is an indirect wholly-owned subsidiary of First Union National Bank ("FUNB").
FUNB is a subsidiary of First Union, the sixth largest bank holding company in
the United States based on total assets as of September 30, 1997. The Capital
Management Group of FUNB, Evergreen Asset Management Corp. and Keystone manage
the Evergreen Keystone family of mutual funds with assets of approximately $40
billion as of November 30, 1997. For further information regarding Keystone,
FUNB and First Union, see "Management of the Funds -Investment Advisers" in the
Prospectus of Evergreen Strategic Income.
Keystone manages investments, provides various administrative services
and supervises the daily business affairs of Evergreen Strategic Income subject
to the authority of the Fund's Board of Trustees. The Fund pays Keystone a fee
for its services at the annual rate set forth below:
<PAGE>
Average Aggregate Net
Asset Value of the
Management Fee Income Shares of the Fund
- ------------------------- -------------------------- ---------------------
2.0% of Gross
Dividend and
Interest
Income plus
0.50% of the first $100,000,000 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.
Virtus serves as the investment adviser for Flexible Income. As
investment adviser, Virtus is responsible for providing or procuring for the
Fund all management and administrative services. In carrying out its
obligations, Virtus provides or arranges for investment research and supervision
of the Fund's investments; selects and evaluates the performance of the Fund's
sub-adviser (OFFITBANK); and conducts or arranges for a continuous program of
appropriate sale or other disposition of the Fund's assets, subject at all times
to the direction of the Board of Trustees. Virtus compensates OFFITBANK from the
advisory fee received from Flexible Income. See "Information Regarding the
Interim Sub-Advisory Agreement." For its services as investment adviser, Virtus
receives a fee at an annual rate of 0.75% of the Fund's average daily net
assets.
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Administrator
Federated Administrative Services ("FAS") provides Flexible Income with
certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to receive a fee for such services at the
following annual rates: 0.15% on the first $250 million of average daily net
assets of combined assets of the funds in the Blanchard/Virtus mutual fund
family, 0.125% on the next $250 million of such assets, 0.10% on the next $250
million of such assets, and 0.075% on assets in excess of $750 million.
Portfolio Management
<PAGE>
The portfolio manager of Evergreen Strategic Income 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 Securities Counselors, 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.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of Evergreen Strategic Income's shares. EDI
distributes the Fund's shares directly or through broker-dealers, banks
(including FUNB), or other financial intermediaries. Evergreen Strategic Income
offers four classes of shares: Class A, Class B, Class C and Class Y. Each class
has separate distribution arrangements. (See "Distribution-Related Expenses"
below.) No class bears the distribution expenses relating to the shares of any
other class.
In the proposed Reorganization, shareholders of Flexible Income will
receive Class A shares of Evergreen Strategic Income. Class A shares of
Evergreen Strategic Income have substantially similar arrangements with respect
to the imposition of Rule 12b-1 distribution and service fees as the shares of
Flexible Income. Because the Reorganization will be effected at net asset value
without the imposition of a sales charge, Evergreen Strategic Income shares
acquired by shareholders of Flexible Income pursuant to the proposed
Reorganization would not be subject to any initial sales charge or contingent
deferred sales charge as a result of the Reorganization.
The following is a summary description of charges and fees for the
Class A shares of Evergreen Strategic Income which will be received by Flexible
Income shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
the respective Evergreen Strategic Income Prospectus and the Flexible Income
Prospectus and in each Fund's respective Statement of Additional Information.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees. For a description of the initial sales charges
applicable to purchases of Class A shares, see "Purchase and Redemption of
Shares - How to Buy Shares" in the Prospectus for Evergreen Strategic Income.
Holders of shares of Flexible Income who receive Class A shares of Evergreen
<PAGE>
Strategic Income in the Reorganization will be able to purchase additional Class
A shares of Evergreen Strategic Income and of any other Evergreen fund at net
asset value. No initial sales charge will be imposed.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectus and Statement of Additional Information.
Distribution-Related Expenses. Evergreen Strategic Income has adopted a
Rule 12b-1 plan with respect to its Class A shares under which the Class may pay
for distribution-related expenses at an annual rate which may not exceed 0.75%
of average daily net assets attributable to the Class. Payments with respect to
Class A shares are currently limited to 0.25% of average daily net assets
attributable to the Class, which amount may be increased to the full plan rate
for the Fund by the Trustees without shareholder approval.
Flexible Income has adopted a Rule 12b-1 plan with respect to its
shares under which such shares may pay for distribution- related expenses at an
annual rate of 0.25% of average daily net assets.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectus and Statement of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related fees is provided above. Investments in the Funds are not
insured. The minimum initial purchase requirement for Evergreen Strategic Income
is $1,000 and the minimum investment for Flexible Income is $3,000 ($2,000 for
qualified pension plans). Flexible Income has a minimum investment requirement
of $200 for subsequent investments. There is no minimum for subsequent purchases
of shares of Evergreen Strategic Income. Each Fund provides for telephone, mail
or wire redemption of shares at net asset value as next determined after receipt
of a redemption request on each day the New York Stock Exchange ("NYSE") is open
for trading. Additional information concerning purchases and redemptions of
shares, including how each Fund's net asset value is determined, is contained in
the respective Prospectus for each Fund. Each Fund may involuntarily redeem
shareholders' accounts that have less than $1,000 of invested funds. All funds
invested in each Fund are invested in full and fractional shares. The Funds
reserve the right to reject any purchase order.
Exchange Privileges
<PAGE>
Flexible Income currently permits shareholders to exchange such shares
for shares of another fund in the Blanchard Group of Funds or for Investment
shares of other funds managed by Virtus. In addition, such shares may be
exchanged for shares of Federated Emerging Market Fund. Holders of shares of a
class of Evergreen Strategic Income generally may exchange their shares for
shares of the same class of any other Evergreen fund. Flexible Income
shareholders will be receiving Class A shares of Evergreen Strategic Income in
the Reorganization and, accordingly, with respect to shares of Evergreen
Strategic Income received by Flexible Income shareholders in the Reorganization,
the exchange privilege is limited to the Class A shares of other Evergreen
funds. No sales charge is imposed on an exchange. An exchange which represents
an initial investment in another Evergreen fund must amount to at least $1,000.
The current exchange privileges, and the requirements and limitations attendant
thereto, are described in each Fund's respective Prospectus and Statement of
Additional Information.
Dividend Policy
Each Fund declares dividends from its net investment income daily and
distributes such dividends monthly. Distributions of any net realized gains of a
Fund will be made at least annually. Shareholders begin to earn dividends on the
first business day after shares are purchased unless shares were not paid for,
in which case dividends are not earned until the next business day after payment
is received. Dividends and distributions are reinvested in additional shares of
the same class of the respective Fund, or paid in cash, as a shareholder has
elected. See the respective Prospectus of each Fund for further information
concerning dividends and distributions.
After the Reorganization, shareholders of Flexible Income who have
elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from Evergreen Strategic Income
reinvested in shares of Evergreen Strategic Income. Shareholders of Flexible
Income who have elected to receive dividends and/or distributions in cash will
receive dividends and/or distributions from Evergreen Strategic Income in cash
after the Reorganization, although they may, after the Reorganization, elect to
have such dividends and/or distributions reinvested in additional shares of
Evergreen Strategic Income.
Each of Evergreen Strategic Income and Flexible Income has qualified
and intends to continue to qualify to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"). While
so qualified, so long as each Fund distributes all of its net investment company
taxable income and any net realized gains to shareholders, it is expected that a
Fund will not be required to pay any federal income taxes on the amounts so
distributed. A 4% nondeductible excise tax
<PAGE>
will be imposed on amounts not distributed if a Fund does not meet certain
distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements.
Risks
Since the investment objectives and policies of each Fund are
substantially comparable, the risks involved in investing in each Fund's shares
are similar. For a discussion of each Fund's objectives and policies, see
"Comparison of Investment Objectives and Policies." There is no assurance that
investment performances will be positive and that the Funds will meet their
investment objectives. In addition, both Funds may employ for hedging purposes
the strategy of engaging in options and futures transactions. The risks involved
in these strategies are described in the "Investment Practices and Restrictions
- - Risk Characteristics of Options and Futures" section in Evergreen Strategic
Income's Prospectus.
Evergreen Strategic Income invests principally in domestic high yield
bonds and foreign government and corporate debt securities. High yield bonds are
rated Ba or lower by Moody's Investors Service ("Moody's") and BB or lower by
Standard & Poor's Ratings Group ("S&P") and are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. The lower ratings reflect a greater possibility that real or
perceived adverse changes in the financial condition of the issuer or in general
economic conditions or an unanticipated rise in interest rates may impair the
ability of the issuer to make payments of principal and interest or to meet
specific projected business forecasts or obtain additional financing. The values
of high yield bonds fluctuate in response to changes in interest rates, and the
secondary market for such securities may be less liquid at certain times than
the secondary market for higher quality debt securities, thereby affecting the
market price of the security, the Fund's ability to dispose of a particular
security and to obtain accurate market quotations for purposes of valuing its
assets. Flexible Income's investments in high yield bonds are limited to no more
than 35% of the Fund's assets.
Each of Evergreen Strategic Income and Flexible Income may purchase
zero coupon and payment-in-kind bonds. Such investments may experience greater
fluctuations in value due to changes in interest rates than debt obligations
that pay interest currently. Each Fund is also required by tax laws to accrue
interest income on such investments (even though they do not pay interest
currently) and to distribute such amounts at least annually to shareholders.
Thus each Fund could be required at times to liquidate investments in order to
fulfill its distribution requirements and may not be able to purchase additional
income
<PAGE>
producing securities with cash used to make such distributions, and its current
income ultimately may be reduced as a result.
Both Evergreen Strategic Income and Flexible Income may invest in
foreign securities. Flexible Income may invest up to 25% of its assets in
securities of issuers located in emerging or developing markets countries.
Evergreen Strategic Income has no limit on the percentage of its assets which
may be invested in issuers located in emerging or developing market countries.
Evergreen Strategic Income may invest in debt securities issued or guaranteed by
foreign corporations, certain supranational entities, 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. Investment in foreign securities
generally entails more risk than investment in domestic issuers for the
following reasons: publicly available information on issuers and securities may
be scarce; many foreign countries do not follow the same accounting, auditing
and financial reporting standards as are used in the U.S.; market trading
volumes may be smaller, resulting in less liquidity and more price volatility
compared to U.S. securities; securities markets and trading may be less
regulated; and the possibility of expropriation, confiscatory taxation,
nationalization, establishment of price controls, political or social
instability exists. Investing in securities of issuers in emerging markets
countries involves exposure to economic systems that are generally less stable
than those of developed countries. Investing in companies in emerging markets
countries may involve exposure to national policies that may restrict investment
by foreigners and undeveloped legal systems governing private and foreign
investments and private property. The typically small size of the markets for
securities issued by companies in emerging markets countries and the possibility
of a low or nonexistent volume of trading in those securities may also result in
a lack of liquidity and in price volatility of those securities.
REASONS FOR THE REORGANIZATION
On July 18, 1997, First Union entered into an Agreement and Plan of
Merger with Signet, which provided, among other things, for the Merger of Signet
with and into a wholly-owned subsidiary of First Union. The Merger was
consummated on November 28, 1997. As a result of the Merger it is expected that
FUNB and its affiliates will succeed to the investment advisory and
administrative functions currently performed for Flexible Income by various
units of Signet and various unaffiliated parties. It is also expected that
Signet will no longer, upon completion of the Reorganization and similar
reorganizations of other funds in the Signet mutual fund family, provide
investment advisory or administrative services to investment companies.
<PAGE>
At a meeting held on September 16, 1997, the Board of Trustees of
Blanchard Funds considered and approved the Reorganization as in the best
interests of shareholders of Flexible Income and determined that the interests
of existing shareholders of Flexible Income will not be diluted as a result of
the transactions contemplated by the Reorganization. In addition, the Trustees
approved the Interim Advisory Agreement and Interim Sub-Advisory Agreement with
respect to Flexible Income.
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise Blanchard Funds. The Merger caused,
as a matter of law, termination of the investment advisory agreement between
each series of Blanchard Funds and Virtus and the sub-advisory agreement between
Virtus and OFFITBANK with respect to the Fund. Blanchard Funds have received an
order from the SEC which permits Virtus and OFFITBANK to continue to act as
Flexible Income's investment adviser and sub-adviser, respectively, without
shareholder approval, for a period of not more than 120 days from the date the
Merger was consummated (November 28, 1997) to the date of shareholder approval
of a new investment advisory agreement and sub-advisory agreement. Accordingly,
the Trustees considered the recommendations of Signet in approving the proposed
Reorganization.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Evergreen Strategic Income and Flexible Income. Specifically, Evergreen
Strategic Income and Flexible Income have substantially identical investment
objectives and policies and comparable risk profiles. See "Comparison of
Investment Objectives and Policies" below. At the same time, the Board of
Trustees evaluated the potential economies of scale associated with larger
mutual funds and concluded that operational efficiencies may be achieved upon
the combination of Flexible Income with an Evergreen fund with a greater level
of assets. As of September 30, 1997, Evergreen Strategic Income's net assets
were approximately $210 million and Flexible Income's net assets were
approximately $155 million.
In addition, assuming that an alternative to the Reorganization would
be to propose that Flexible Income continue its existence and be separately
managed by Keystone or one of its affiliates, Flexible Income would be offered
through common distribution channels with the substantially similar Evergreen
Strategic Income. Flexible Income would also have to bear the cost of
maintaining its separate existence. Signet and Keystone believe that the
prospect of dividing the resources of the Evergreen mutual fund organization
between two substantially identical funds could result in each Fund being
disadvantaged due to an inability to achieve optimum size, performance levels
and
<PAGE>
the greatest possible economies of scale. Accordingly, for the reasons noted
above and recognizing that there can be no assurance that any economies of scale
or other benefits will be realized, Signet and Keystone believe that the
proposed Reorganization would be in the best interests of each Fund and its
shareholders.
The Board of Trustees of Blanchard Funds met and considered the
recommendation of Signet and Keystone and, in addition, considered among other
things, (i) the terms and conditions of the Reorganization; (ii) whether the
Reorganization would result in the dilution of shareholders' interests; (iii)
expense ratios, fees and expenses of Evergreen Strategic Income and Flexible
Income; (iv) the comparative performance records of each of the Funds; (v)
compatibility of their investment objectives and policies; (vi) the investment
experience, expertise and resources of Keystone; (vii) the service and
distribution resources available to the Evergreen funds and the broad array of
investment alternatives available to shareholders of the Evergreen funds; (viii)
the personnel and financial resources of First Union and its affiliates; (ix)
the fact that FUNB will bear the expenses incurred by Flexible Income in
connection with the Reorganization; (x) the fact that Evergreen Strategic Income
will assume certain identified liabilities of Flexible Income; and (xi) the
expected federal income tax consequences of the Reorganization.
The Trustees also considered the benefits to be derived by shareholders
of Flexible Income from the sale of its assets to Evergreen Strategic Income. In
this regard, the Trustees considered the potential benefits of being associated
with a larger entity and the economies of scale that could be realized by the
participation in such an entity by shareholders of Flexible Income.
In addition, the Trustees considered that there are alternatives
available to shareholders of Flexible Income, including the ability to redeem
their shares, as well as the option to vote against the Reorganization.
During their consideration of the Reorganization the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Fixed Income Trust also concluded at a
meeting on September 17, 1997 that the proposed Reorganization would be in the
best interests of shareholders of Evergreen Strategic Income and that the
interests of the shareholders of Evergreen Strategic Income would not be diluted
as a result of the transactions contemplated by the Reorganization.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF FLEXIBLE INCOME APPROVE
<PAGE>
THE PROPOSED REORGANIZATION.
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the
Plan (Exhibit A hereto).
The Plan provides that Evergreen Strategic Income will acquire all of
the assets of Flexible Income in exchange for shares of Evergreen Strategic
Income and the assumption by Evergreen Strategic Income of certain identified
liabilities of Flexible Income on or about February 27, 1998 or such other date
as may be agreed upon by the parties (the "Closing Date"). Prior to the Closing
Date, Flexible Income will endeavor to discharge all of its known liabilities
and obligations. Evergreen Strategic Income will not assume any liabilities or
obligations of Flexible Income other than those reflected in an unaudited
statement of assets and liabilities of Flexible Income prepared as of the close
of regular trading on the NYSE, currently 4:00 p.m. Eastern time, on the
business day immediately prior to the Closing Date. The number of full and
fractional shares of each class of Evergreen Strategic Income to be received by
the shareholders of Flexible Income will be determined by multiplying the
respective outstanding class of shares of Flexible Income by a factor which
shall be computed by dividing the net asset value per share of the respective
class of shares of Flexible Income by the net asset value per share of the
respective class of shares of Evergreen Strategic Income. Such computations will
take place as of the close of regular trading on the NYSE on the business day
immediately prior to the Closing Date. The net asset value per share of each
class will be determined by dividing assets, less liabilities, in each case
attributable to the respective class, by the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for Evergreen
Strategic Income, will compute the value of each Fund's respective portfolio
securities. The method of valuation employed will be consistent with the
procedures set forth in the Prospectus and Statement of Additional Information
of Evergreen Strategic Income, Rule 22c-1 under the 1940 Act, and with the
interpretations of such Rule by the SEC's Division of Investment Management.
At or prior to the Closing Date, Flexible Income will have declared a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
the Fund's shareholders (in shares of the Fund, or in cash, as the shareholder
has previously elected) all of the Fund's net investment company taxable income
for the taxable period ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all
<PAGE>
taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
As soon after the Closing Date as conveniently practicable, Flexible
Income will liquidate and distribute pro rata to shareholders of record as of
the close of business on the Closing Date the full and fractional shares of
Evergreen Strategic Income received by Flexible Income. Such liquidation and
distribution will be accomplished by the establishment of accounts in the names
of the Fund's shareholders on the share records of Evergreen Strategic Income's
transfer agent. Each account will represent the respective pro rata number of
full and fractional shares of Evergreen Strategic Income due to the Fund's
shareholders. All issued and outstanding shares of Flexible Income, including
those represented by certificates, will be canceled. The shares of Evergreen
Strategic Income to be issued will have no preemptive or conversion rights.
After such distributions and the winding up of its affairs, Flexible Income will
be terminated. In connection with such termination, Blanchard Funds will file
with the SEC an application for termination as a registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Flexible Income's shareholders,
accuracy of various representations and warranties and receipt of opinions of
counsel, including opinions with respect to those matters referred to in
"Federal Income Tax Consequences" below. Notwithstanding approval of Flexible
Income's shareholders, the Plan may be terminated (a) by the mutual agreement of
Flexible Income and Evergreen Strategic Income; or (b) at or prior to the
Closing Date by either party (i) because of a breach by the other party of any
representation, warranty, or agreement contained therein to be performed at or
prior to the Closing Date if not cured within 30 days, or (ii) because a
condition to the obligation of the terminating party has not been met and it
reasonably appears that it cannot be met.
The expenses of Flexible Income in connection with the Reorganization
(including the cost of any proxy soliciting agent) will be borne by FUNB whether
or not the Reorganization is consummated. No portion of such expenses will be
borne directly or indirectly by Flexible Income or its shareholders. There are
not any liabilities or any expected reimbursements in connection with the 12b-1
Plan of Flexible Income. As a result, no 12b-1 liabilities will be assumed by
Evergreen Strategic Income following the Reorganization.
If the Reorganization is not approved by shareholders of Flexible
Income, the Board of Trustees of Blanchard Funds will consider other possible
courses of action in the best interests of shareholders.
Federal Income Tax Consequences
<PAGE>
The Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Flexible Income will receive an
opinion of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued thereunder,
current administrative rules, pronouncements and court decisions, for federal
income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of Flexible Income solely in
exchange for shares of Evergreen Strategic Income and the assumption by
Evergreen Strategic Income of certain identified liabilities, followed by the
distribution of Evergreen Strategic Income's shares by Flexible Income in
dissolution and liquidation of Flexible Income, will constitute a
"reorganization" within the meaning of section 368(a)(1)(C) of the Code, and
Evergreen Strategic Income and Flexible Income will each be a "party to a
reorganization" within the meaning of section 368(b) of the Code;
(2) No gain or loss will be recognized by Flexible Income on the
transfer of all of its assets to Evergreen Strategic Income solely in exchange
for Evergreen Strategic Income's shares and the assumption by Evergreen
Strategic Income of certain identified liabilities of Flexible Income or upon
the distribution of Evergreen Strategic Income's shares to Flexible Income's
shareholders in exchange for their shares of Flexible Income;
(3) The tax basis of the assets transferred will be the same to
Evergreen Strategic Income as the tax basis of such assets to Flexible Income
immediately prior to the Reorganization, and the holding period of such assets
in the hands of Evergreen Strategic Income will include the period during which
the assets were held by Flexible Income;
(4) No gain or loss will be recognized by Evergreen Strategic Income
upon the receipt of the assets from Flexible Income solely in exchange for the
shares of Evergreen Strategic Income and the assumption by Evergreen Strategic
Income of certain identified liabilities of Flexible Income;
(5) No gain or loss will be recognized by Flexible Income's
shareholders upon the issuance of the shares of Evergreen Strategic Income to
them, provided they receive solely such shares (including fractional shares) in
exchange for their shares of Flexible Income; and
(6) The aggregate tax basis of the shares of Evergreen Strategic
Income, including any fractional shares, received by each of the shareholders of
Flexible Income pursuant to the Reorganization will be the same as the aggregate
tax basis of the
<PAGE>
shares of Flexible Income held by such shareholder immediately prior to the
Reorganization, and the holding period of the shares of Evergreen Strategic
Income, including fractional shares, received by each such shareholder will
include the period during which the shares of Flexible Income exchanged therefor
were held by such shareholder (provided that the shares of Flexible Income were
held as a capital asset on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Flexible Income would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Fund shares and the fair market value of Evergreen Strategic
Income shares he or she received. Shareholders of Flexible Income should consult
their tax advisers regarding the effect, if any, of the proposed Reorganization
in light of their individual circumstances. It is not anticipated that the
securities of the combined portfolio will be sold in significant amounts in
order to comply with the policies and investment practices of Evergreen
Strategic Income. Since the foregoing discussion relates only to the federal
income tax consequences of the Reorganization, shareholders of Flexible Income
should also consult their tax advisers as to the state and local tax
consequences, if any, of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen
Strategic Income and Flexible Income as of September 30, 1997 and the
capitalization of Evergreen Strategic Income on a pro forma basis as of that
date, giving effect to the proposed acquisition of assets at net asset value.
The pro forma data reflects an exchange ratio of approximately 0.69748 Class A
shares of Evergreen Strategic Income issued for each share of Flexible Income.
<TABLE>
<CAPTION>
Capitalization of Flexible Income,
Evergreen Strategic Income and Evergreen
Strategic Income (Pro Forma)
Evergreen
Strategic
Evergreen Income (After
Flexible Strategic Reorgani-
Income Income zation)
--------- -------- ------------
<S> <C> <C> <C>
Net Assets
Class A........................ $155,222,701 $66,261,382 $221,484,083
Class B........................ N/A $119,823,388 $119,823,388
<PAGE>
Evergreen
Strategic
Evergreen Income (After
Flexible Strategic Reorgani-
Income Income zation)
--------- -------- ------------
Class C........................ N/A $23,268,862 $23,268,862
Class Y........................ N/A $393,674 $393,674
------------ ------------ -------------
Total Net
Assets....................... $155,222,701 $209,747,306 $364,970,007
Net Asset Value Per
Share
Class A........................ $4.98 $7.14 $7.14
Class B........................ N/A $7.17 $7.17
Class C........................ N/A $7.16 $7.16
Class Y........................ N/A $6.96 $6.96
Shares Outstanding
Class A........................ 9,280,358 31,008,874
31,152,932
Class B........................ N/A 16,704,455
16,704,455
Class C........................ N/A 3,247,842
3,247,842
Class Y........................ N/A 56,530 56,530
----------- ---------- -----------
All Classes.................... 31,152,932 29,289,185 51,017,701
</TABLE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
Shareholder Information
As of December 26, 1997 (the "Record Date"), there were shares of
beneficial interest of Flexible Income outstanding.
As of November 30, 1997, the officers and Trustees of Blanchard Funds
beneficially owned as a group less than 1% of the outstanding shares of Flexible
Income. To Flexible Income's knowledge, no person owned beneficially or of
record more than 5% of Flexible Income's total outstanding shares as of November
30, 1997.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
<PAGE>
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectus and Statement of Additional
Information of the Funds. The investment objectives, policies and restrictions
of Evergreen Strategic Income can be found in the Prospectus of Evergreen
Strategic Income under the caption "Investment Objectives and Policies."
Evergreen Strategic Income's Prospectus also offers additional funds advised by
Keystone or its affiliates. These additional funds are not involved in the
Reorganization, their investment objectives and policies are not discussed in
this Prospectus/Proxy Statement and their shares are not offered hereby. The
investment objective, policies and restrictions of Flexible Income can be found
in the Prospectus of the Fund under the caption "The Funds' Investment
Objectives and Policies." Unlike the investment objective of Flexible Income,
which is fundamental, the investment objective of Evergreen Strategic Income is
non-fundamental and can be changed by the Board of Trustees without shareholder
approval.
The investment objective of Evergreen Strategic Income is to seek high
current income from interest on debt securities and, secondarily, to consider
growth of capital in selecting securities. Evergreen Strategic Income seeks to
achieve its objectives by allocating its assets principally between eligible
domestic high yield, high risk bonds and debt securities of foreign governments
and foreign corporations. In addition, Evergreen Strategic Income 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 the investment adviser's assessment
of global opportunities for high income. Under normal circumstances, the Fund
will invest principally in domestic high yield bonds and foreign government and
corporate debt securities. 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.
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
<PAGE>
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.
The investment objective of Flexible Income is to provide high current
income while seeking opportunities for capital appreciation. The Fund intends to
invest in the following fixed income securities markets:
U.S. Government Securities. This consists of debt
obligations of the U.S. government and its agencies and
instrumentalities and related options, futures contracts and
repurchase agreements.
Investment Grade Fixed Income Securities. This consists of
investment grade fixed income securities, including mortgage
related and asset backed securities.
High Yield Securities. This consists of higher yielding
(and, therefore, higher risk), lower rated U.S. corporation
fixed income securities.
International Fixed Income Securities. This consists of obligations of
foreign governments, their agencies and instrumentalities and other
fixed income securities denominated in foreign currencies or composite
currencies including: debt obligations issued or guaranteed by foreign
national, provincial, state, municipal or other governments with taxing
authority or by their agencies or instrumentalities; debt obligations
of supranational entities; debt obligations of the U.S. government
issued in non-dollar securities; and debt obligations and other fixed
income securities of foreign and U.S. corporate issuers (non-dollar
denominated). The Fund is not limited to purchasing debt securities
rated at the time of purchase by Moody's , S&P or any other nationally
recognized statistical ratings organizations.
The Fund may invest in any country where its investment adviser sees
potential for high income. It presently expects to invest primarily in
non-dollar denominated securities of issuers in the industrialized Western
European countries; in Canada, Japan, Australia and New Zealand; and in Latin
America. The Fund may also invest up to 25% of its assets in the fixed income
securities of issuers in emerging markets countries. It is the policy of the
Fund not to invest more than 10% of its assets in
<PAGE>
any one emerging market country, except that the Fund may invest up to 15% of
its assets in fixed income securities of issuers in Mexico.
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.
Evergreen Strategic Income may invest in equity securities. Evergreen
Strategic Income's equity investments may include preferred stocks, common
stocks and other equity securities, including convertible securities and
warrants, which may be used to create other permissible investments which are
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.
Flexible Income does not invest in equity securities.
Evergreen Strategic Income may not invest more than 5% of its assets in
securities of any one issuer or purchase more than 10% of the outstanding voting
securities of any one issuer. As a diversified portfolio under the 1940 Act, the
same restrictions apply to 75% of the assets of Evergreen Strategic Income.
However, since Flexible Income is a non-diversified portfolio for purposes of
the 1940 Act, these 5% restrictions apply to 50% of the assets of Flexible
Income. The remaining 50% of the assets of Flexible Income may be invested up to
25% in the securities of a single issuer. Nondiversification may increase
investment risks.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectus and Statement of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectus and Statement of Additional Information of each
Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Fixed Income Trust and Blanchard Funds are open-end
management investment companies registered with the SEC under the 1940 Act,
which continuously offer shares to the public. Evergreen Fixed Income Trust is
organized as a Delaware business trust and Blanchard Funds is organized as a
Massachusetts business trust. Each Trust is governed by a Declaration of Trust,
By-Laws and a Board of Trustees. Each Trust is also governed by applicable
Delaware, Massachusetts and federal law. Evergreen Strategic Income is a series
of Evergreen Fixed Income Trust and Flexible Income is a series of Blanchard
Funds.
<PAGE>
As set forth in the Supplement to Evergreen Strategic Income's
Prospectus, effective December 22, 1997, Evergreen Strategic Income Fund, a
Massachusetts business trust, was reorganized (the "Delaware Reorganization")
into a corresponding series (Evergreen Strategic Income) of Evergreen Fixed
Income Trust. In connection with the Delaware Reorganization, the Fund's
investment objectives were reclassified from "fundamental" to "non-fundamental"
and therefore may be changed without shareholder approval; the Fund adopted
certain standardized investment restrictions; and eliminated or reclassified
from fundamental to non-fundamental certain of the Fund's other fundamental
investment restrictions.
Capitalization
The beneficial interests in Evergreen Strategic Income are represented
by an unlimited number of transferable shares of beneficial interest, $.001 par
value per share. The beneficial interests in Flexible Income are represented by
an unlimited number of transferable shares of beneficial interest without par
value. The respective Declaration of Trust under which each Fund has been
established permits the Trustees to allocate shares into an unlimited number of
series, and classes thereof, with rights determined by the Trustees, all without
shareholder approval. Fractional shares may be issued. Each Fund's shares
represent equal proportionate interests in the assets belonging to the Funds.
Shareholders of each Fund are entitled to receive dividends and other amounts as
determined by the Trustees. Shareholders of each Fund vote separately, by class,
as to matters, such as approval of or amendments to Rule 12b-1 distribution
plans, that affect only their particular class and by series as to matters, such
as approval of or amendments to investment advisory agreements or proposed
reorganizations, that affect only their particular series.
Shareholder Liability
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the Declaration of Trust under which Flexible Income
was established disclaims shareholder liability for acts or obligations of the
series and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Declaration of Trust provides for indemnification out of the series property
for all losses and expenses of any shareholder held personally liable for the
obligations of the series. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered remote since it is
limited to circumstances in which a disclaimer is inoperative and the series or
the trust itself would be unable to meet its obligations.
<PAGE>
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Fixed Income Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of a Delaware trust to liability. To guard
against this risk, the Declaration of Trust of Evergreen Fixed Income Trust (a)
provides that any written obligation of the Trust may contain a statement that
such obligation may only be enforced against the assets of the Trust or the
particular series in question and the obligation is not binding upon the
shareholders of the Trust; however, the omission of such a disclaimer will not
operate to create personal liability for any shareholder; and (b) provides for
indemnification out of Trust property of any shareholder held personally liable
for the obligations of the Trust. Accordingly, the risk of a shareholder of
Evergreen Fixed Income Trust incurring financial loss beyond that shareholder's
investment because of shareholder liability is limited to circumstances in
which: (i) the court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) the Trust itself would be
unable to meet its obligations. In light of Delaware law, the nature of the
Trust's business, and the nature of its assets, the risk of personal liability
to a shareholder of Evergreen Fixed Income Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Fixed Income Trust on behalf of Evergreen Strategic
Income nor Blanchard Funds on behalf of Flexible Income is required to hold
annual meetings of shareholders. However, a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee must be called when
requested in writing by the holders of at least 10% of the outstanding shares of
Evergreen Fixed Income Trust or Blanchard Funds. In addition, each is required
to call a meeting of shareholders for the purpose of electing Trustees if, at
any time, less than a majority of the Trustees then holding office were elected
by shareholders. Each Trust currently does not intend to hold regular
shareholder meetings. Each Trust does not permit cumulative voting. Except when
a larger quorum is required by applicable law, a majority of the outstanding
shares entitled to vote of each Fund constitutes a quorum for consideration of
such matter. For Evergreen Strategic Income and Flexible Income, a majority of
the votes cast and entitled to vote is sufficient to act on a matter (unless
otherwise specifically required by the applicable governing documents or other
law, including the 1940 Act).
<PAGE>
Under the Declaration of Trust of Evergreen Fixed Income Trust, each
share of Evergreen Strategic Income is entitled to one vote for each dollar of
net asset value applicable to each share. Under the voting provisions governing
Flexible Income, each share is entitled to one vote. Over time, the net asset
values of the mutual funds which are each a series of Blanchard Funds have
changed in relation to one another and are expected to continue to do so in the
future. Because of the divergence in net asset values, a given dollar investment
in a fund which is a series of Blanchard Funds and which has a lower net asset
value will purchase more shares and, under the current voting provisions of
Blanchard Funds, have more votes, than the same investment in a series with a
higher net asset value. Under the Declaration of Trust of Evergreen Fixed Income
Trust, voting power is related to the dollar value of a shareholder's investment
rather than to the number of shares held.
Liquidation or Dissolution
In the event of the liquidation of Evergreen Strategic Income and
Flexible Income, the shareholders are entitled to receive, when, and as declared
by the Trustees, the excess of the assets belonging to such Fund or attributable
to the class over the liabilities belonging to the Fund or attributable to the
class. In either case, the assets so distributable to shareholders of the Fund
will be distributed among the shareholders in proportion to the number of shares
of a class of the Fund held by them and recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declaration of Trust of Blanchard Funds provides that no Trustee
shall be liable for errors of judgment or mistakes of fact or law. No Trustee
shall be subject to liability unless such Trustee is found to have acted in bad
faith, with willful misfeasance, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
The Declaration of Trust of Blanchard Funds provides that a present or
former Trustee or officer is entitled to indemnification against liabilities and
expenses with respect to claims related to his or her position with the Trust,
provided that no indemnification shall be provided to a Trustee or officer
against any liability to the Trust or any series thereof or the shareholders of
any series by reasons of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen Fixed Income Trust, a
Trustee is liable to the Trust and its shareholders only for such Trustee's own
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the
<PAGE>
conduct of the office of Trustee or the discharge of such Trustee's functions.
As provided in the Declaration of Trust, each Trustee of the Trust is entitled
to be indemnified against all liabilities against him or her, including the
costs of litigation, unless it is determined that the Trustee (i) did not act in
good faith in the reasonable belief that such Trustee's action was in or not
opposed to the best interests of the Trust; (ii) had acted with willful
misfeasance, bad faith, gross negligence or reckless disregard of such Trustee's
duties; and (iii) in a criminal proceeding, had reasonable cause to believe that
such Trustee's conduct was unlawful (collectively, "disabling conduct"). A
determination that the Trustee did not engage in disabling conduct and is,
therefore, entitled to indemnification may be based upon the outcome of a court
action or administrative proceeding or by (a) a vote of a majority of those
Trustees who are neither "interested persons" within the meaning of the 1940 Act
nor parties to the proceeding or (b) an independent legal counsel in a written
opinion. The Trust may also advance money for such litigation expenses provided
that the Trustee undertakes to repay the Trust if his or her conduct is later
determined to preclude indemnification and certain other conditions are met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware and Massachusetts law
and is not a complete description of those documents or law. Shareholders should
refer to the provisions of such Declarations of Trust, By-Laws, Delaware and
Massachusetts
law directly for more complete information.
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of Blanchard Funds recommends that shareholders of
Flexible Income approve the Interim Advisory Agreement. The Merger became
effective on November 28, 1997. Pursuant to an order received from the SEC all
fees payable under the Interim Advisory Agreement will be placed in escrow and
paid to Virtus if shareholders approve the contract within 120 days of its
effective date. The Interim Advisory Agreement will remain in effect until the
earlier of the Closing Date for the Reorganization or two years from its
effective date. The terms of the Interim Advisory Agreement are essentially the
same as the Previous Advisory Agreement (as defined below). The only difference
between the Previous Advisory Agreement and the Interim Advisory Agreement, if
approved by shareholders, is the length of time each Agreement is in effect. A
description of the Interim Advisory Agreement pursuant to which Virtus continues
as investment adviser to Flexible Income, as well as the services to be provided
by Virtus pursuant thereto, is set forth below under "Advisory Services."
<PAGE>
The description of the Interim Advisory Agreement in this Prospectus/Proxy
Statement is qualified in its entirety by reference to the Interim Advisory
Agreement, attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management, is an indirect wholly-owned subsidiary of
First Union. Virtus' address is 707 East Main Street, Suite 1300, Richmond,
Virginia 23219. Virtus has served as investment adviser pursuant to an
Investment Advisory Contract dated July 12, 1995. As used herein, the Investment
Advisory Agreement for Flexible Income is referred to as the "Previous Advisory
Agreement." At a meeting of the Board of Trustees of Blanchard Funds held on
September 16, 1997, the Trustees, including a majority of the Independent
Trustees, approved the Interim Advisory Agreement for Flexible Income.
The Trustees have authorized Blanchard Funds, on behalf of Flexible
Income, to enter into the Interim Advisory Agreement with Virtus. Such Agreement
became effective on November 28, 1997. If the Interim Advisory Agreement for
Flexible Income is not approved by shareholders, the Trustees will consider
appropriate actions to be taken with respect to Flexible Income's investment
advisory arrangements at that time. The Previous Advisory Agreement was last
approved by the Trustees, including a majority of the Independent Trustees, on
May 11, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus is responsible for
managing the Fund and overseeing the investment of its assets, subject at all
times to the supervision of the Board of Trustees. Virtus selects, monitors and
evaluates the Fund's sub- adviser. Virtus periodically reviews the sub-adviser's
performance record and will make a change, if necessary, subject to approval of
the Board of Trustees and shareholders.
FAS currently acts as administrator of Flexible Income. FAS will
continue during the term of the Interim Advisory Agreement as Flexible Income's
administrator for the same compensation as currently received . An affiliate of
FAS currently performs transfer agency services for Flexible Income's
shareholders . Commencing February 9, 1998 Evergreen Service Company will
provide such transfer agency services for the same fees as Flexible Income's
current transfer agent. See "Summary -Administrator."
<PAGE>
Fees and Expenses. The investment advisory fees and expense
limitations for Flexible Income under the Previous Advisory
Agreement and the Interim Advisory Agreement are identical. See
"Summary - Investment Advisers and Sub-Adviser."
Expense Reimbursement. Virtus may, if it deems appropriate, assume
expenses of the Fund or a class to the extent that the Fund's or classes'
expenses exceed such lower expense limitation as Virtus may, by notice to the
Fund, voluntarily declare to be effective.
The Interim Advisory Agreement contains an identical provision.
Payment of Expenses and Transaction Charges. Under the Previous
Advisory Agreement, Blanchard Funds was required to pay or cause to be paid on
behalf of the Fund, all of the Fund's expenses and the Fund's allocable share of
Blanchard Funds' expenses.
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to Blanchard Funds or to the Fund or to any shareholder
for any act or omission in the course of or connected in any way with rendering
services or for any losses that may be sustained in the purchase, holding or
sale of any security.
The Interim Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Advisory Agreement provides that
it may be terminated without penalty by vote of a majority of the outstanding
voting securities of Flexible Income (as defined in the 1940 Act) or by a vote
of the Trustees of Blanchard Funds on 60 days' written notice to Virtus or by
Virtus on 60 days' written notice to Blanchard Funds. Also, the Interim Advisory
Agreement will automatically terminate in the event of its assignment (as
defined in the 1940 Act). The Previous Advisory Agreement contained identical
provisions as to termination and assignment.
Information about Flexible Income's Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, other funds of The Virtus Funds, the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus
<PAGE>
is set forth in Appendix A to this Prospectus/Proxy
Statement.
For the fiscal year ended September 30, 1997 and the period from May 1,
1996 to September 30, 1996, Virtus received from Flexible Income management fees
of $1,273,719 and $610,104, respectively, of which $0 and $8,181, respectively,
were voluntarily waived. For the fiscal year ended April 30, 1996, the Fund's
investment management fee paid to Virtus and the prior manager was $1,795,137.
Signet acts as custodian for Flexible Income and received $68,539 for the fiscal
year ended September 30, 1997. Commencing on or about January 20, 1998 FUNB will
act as Flexible Income's custodian during the term of the Interim Advisory
Agreement.
The Board of Trustees considered the Interim Advisory Agreement as part
of its overall approval of the Plan. The Board of Trustees considered, among
other things, the factors set forth above in "Reasons for the Reorganization."
The Board of Trustees also considered the fact that there were no material
differences between the terms of the Interim Advisory Agreement and the terms of
the Previous Advisory Agreement.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF FLEXIBLE INCOME
APPROVE THE INTERIM ADVISORY AGREEMENT.
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of Blanchard Funds recommends that shareholders of
Flexible Income approve the Interim Sub-Advisory Agreement. Such Agreement
became effective on November 28, 1997. Pursuant to an order from the SEC, all
fees payable under the Interim Sub-Advisory Agreement will be placed in escrow
and paid to OFFITBANK if shareholders approve the contract within 120 days of
its effective date. The Interim Sub-Advisory Agreement will remain in effect
until the earlier of the Closing Date for the Reorganization or two years from
its effective date. The terms of the Interim Sub-Advisory Agreement are
essentially the same as the Previous Sub-Advisory Agreement (as defined below).
The only difference between the Previous Sub-Advisory Agreement and the Interim
Sub-Advisory Agreement, if approved by shareholders, is the length of time the
Agreement is in effect. A description of the Interim Sub-Advisory Agreement
pursuant to which OFFITBANK continues as the investment sub- adviser to Flexible
Income, as well as the services to be provided by OFFITBANK pursuant thereto, is
set forth below under "Sub-Advisory Services." The description of the Interim
Sub- Advisory Agreement in this Prospectus/Proxy Statement is
<PAGE>
qualified in its entirety by reference to the Interim Sub- Advisory Agreement,
attached hereto as Exhibit C.
OFFITBANK, 520 Madison Avenue, New York, New York 10022, has served as
investment adviser to Flexible Income pursuant to a Sub-Advisory Agreement,
dated July 12, 1995. OFFITBANK, a New York State chartered trust bank, is the
continuation of the business of Offit Associates, Inc., a registered investment
adviser founded in December, 1982. The firm converted to a trust bank in July,
1990. The core business of OFFITBANK is portfolio management for institutions,
non-profit organizations and wealthy family groups. OFFITBANK specializes in
fixed income management and offers its clients a complete range of fixed income
investments in capital markets throughout the world. As of July 31, 1997,
OFFITBANK had in excess of $8 billion in assets under management. Jack D. Burks,
Managing Director of OFFITBANK, has over 10 years of experience in Fixed Income
Portfolio Management and is responsible for the day-to-day management of the
Fund's portfolio. See "Summary - Investment Advisers and Sub-Adviser." As used
herein, the Sub-Advisory Agreement for Flexible Income is referred to as the
"Previous Sub-Advisory Agreement." At a meeting of the Board of Trustees of
Blanchard Funds held on September 16, 1997, the Trustees, including a majority
of the Independent Trustees, approved the Interim Sub-Advisory Agreement for
Flexible Income.
The Trustees have authorized Blanchard Funds, on behalf of Flexible
Income, to enter into the Interim Sub-Advisory Agreement with Virtus and
OFFITBANK. Such Agreement became effective on November 28, 1997. If the Interim
Sub-Advisory Agreement for Flexible Income is not approved by shareholders, the
Trustees will consider appropriate actions to be taken with respect to Flexible
Income's investment sub-advisory arrangements at that time. The Previous
Sub-Advisory Agreement was last approved by the Trustees, including a majority
of the Independent Trustees, on May 11, 1997.
Comparison of the Interim Sub-Advisory Agreement and the Previous
Sub-Advisory Agreement
Sub-Advisory Services. The management and advisory services to be
provided by OFFITBANK under the Interim Sub-Advisory Agreement are identical to
those currently provided by OFFITBANK under the Previous Sub-Advisory Agreement.
Under the Previous Sub-Advisory Agreement, OFFITBANK supervised the investment
and reinvestment of the cash, securities or other properties comprising the
Fund's portfolio, subject at all times to the direction of Virtus and the
policies and control of Blanchard Funds' Board of Trustees.
Fees and Expenses. The investment sub-advisory fees under the Previous
Sub-Advisory Agreement and the Interim Sub-Advisory Agreement are identical. As
compensation for its sub-advisory
<PAGE>
services under the Previous Sub-Advisory Agreement OFFITBANK was paid by Virtus
a monthly fee at the annual rate of 0.30% of the first $25 million of the Fund's
average daily net assets; plus 0.25% of the Fund's average daily net assets in
excess of $25 million but less than $50 million; plus 0.20% of the Fund's
average daily net assets in excess of $50 million.
The fee paid to OFFITBANK by Virtus for the fiscal year ended September
30, 1997 was $377,158. The fee paid to OFFITBANK by Virtus for the period from
May 1, 1996 through September 30, 1996 was $178,414. The fee paid to OFFITBANK
by the prior manager and by Virtus for the fiscal year ended April 30, 1996 was
$516,503.
The names and addresses of the principal executive officers and
directors of OFFITBANK are set forth in Appendix B to this Prospectus/Proxy
Statement.
Limitation of Liability. The Previous Sub-Advisory Agreement provided
that in the absence of willful misfeasance, bad faith or gross negligence on the
part of OFFITBANK or reckless disregard by OFFITBANK of its duties under the
Agreement, OFFITBANK shall not be liable to Virtus, Blanchard Funds or to any
shareholder of Blanchard Funds for any act or omission in the course of, or
connected with, rendering services thereunder or for any losses that may be
sustained in the purchase, holding or sale of any security. The Interim Sub-
Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Sub-Advisory Agreement provides
that it may be terminated without penalty by vote of a majority of the
outstanding voting securities of Flexible Income (as defined in the 1940 Act) or
by a vote of a majority of Blanchard Funds' entire Board of Trustees on 60 days'
written notice to OFFITBANK or by Virtus or OFFITBANK on 60 days' written notice
to the other party to the Agreement. Also, the Interim Sub-Advisory Agreement
will automatically terminate in the event of its assignment (as defined in the
1940 Act). The Previous Sub-Advisory Agreement contained identical provisions as
to termination and assignment.
The Board of Trustees considered the Interim Sub-Advisory Agreement as
part of its overall approval of the Plan. The Board of Trustees considered,
among other things, the factors set forth above in "Reasons for the
Reorganization." The Board of Trustees also considered the fact that there were
no material differences between the terms of the Interim Sub-Advisory Agreement
and the terms of the Previous Sub-Advisory Agreement.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF FLEXIBLE INCOME
APPROVE THE INTERIM SUB-ADVISORY AGREEMENT.
<PAGE>
ADDITIONAL INFORMATION
Evergreen Strategic Income. Information concerning the operation and
management of Evergreen Strategic Income is incorporated herein by reference
from the Prospectus dated September 1, 1997, as amended, a copy of which is
enclosed, and Statement of Additional Information dated September 1, 1997, as
amended. A copy of such Statement of Additional Information is available upon
request and without charge by writing to Evergreen Strategic Income at the
address listed on the cover page of this Prospectus/Proxy Statement or by
calling toll-free 1-800-343-2898.
Flexible Income. Information about the Fund is included in its current
Prospectus dated November 30, 1997 and in the Statement of Additional
Information of the same date, that have been filed with the SEC, all of which
are incorporated herein by reference. Copies of the Prospectus and Statement of
Additional Information are available upon request and without charge by writing
to Flexible Income at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-829-3863.
Evergreen Strategic Income and Flexible Income are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information, including
proxy material and charter documents, with the SEC. These items can be inspected
and copies obtained at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices located at Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661- 2511 and Seven World Trade Center, Suite 1300, New York, New
York 10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of Blanchard Funds to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116, and at any adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the meeting and a proxy card, is first being mailed to
shareholders of Flexible Income on or about January 5, 1998. Only shareholders
of record as of the close of business on the Record Date will be entitled to
notice of, and to vote at, the Meeting or any adjournment thereof. The holders
of a majority of the outstanding shares entitled to vote, at the close of
business on the Record Date, present in person or represented by proxy, will
constitute a quorum for the Meeting. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting, the proxies named
therein
<PAGE>
will vote the shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Reorganization, FOR the Interim Advisory Agreement, FOR the Interim Sub-Advisory
Agreement and FOR any other matters deemed appropriate. Proxies that reflect
abstentions and "broker non-votes" (i.e., shares held by brokers or nominees as
to which (i) instructions have not been received from the beneficial owners or
the persons entitled to vote or (ii) the broker or nominee does not have
discretionary voting power on a particular matter) will be counted as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum, but will not be counted as shares voted and will have no effect on
the vote regarding the Plan. However, such "broker non-votes" will have the
effect of being counted as votes against the Interim Advisory Agreement and the
Interim Sub- Advisory Agreement which must be approved by a percentage of the
shares present at the Meeting or a majority of the outstanding voting
securities. A proxy may be revoked at any time on or before the Meeting by
written notice to the Secretary of Blanchard Funds, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. Unless revoked, all valid proxies will be
voted in accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby, FOR approval of the Interim Advisory Agreement and FOR approval of the
Interim Sub-Advisory Agreement.
Approval of the Plan will require the affirmative vote of a majority of
the shares voted and entitled to vote at the Meeting at which a quorum of the
Fund's shares is present. Approval of the Interim Advisory Agreement and Interim
Sub-Advisory Agreement will require the affirmative vote of (i) 67% or more of
the outstanding voting securities if holders of more than 50% of the outstanding
voting securities are present, in person or by proxy, at the Meeting, or (ii)
more than 50% of the outstanding voting securities, whichever is less. Each full
share outstanding is entitled to one vote and each fractional share outstanding
is entitled to a proportionate share of one vote.
Proxy solicitations will be made primarily by mail, but proxy
solicitations may also be made by telephone, telegraph or personal solicitations
conducted by officers and employees of Keystone or Signet, their affiliates or
other representatives of Flexible Income (who will not be paid for their
soliciting activities). Shareholders Communications Corporation has been engaged
by Flexible Income to assist in soliciting proxies.
If you wish to participate in the Meeting, you may submit the proxy
card included with this Prospectus/Proxy Statement or attend in person. Any
proxy given by you is revocable.
<PAGE>
In the event that sufficient votes to approve the Reorganization are
not received by February 20, 1998, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of Blanchard
Funds to demand payment for, or an appraisal of, his or her shares. However,
shareholders should be aware that the Reorganization as proposed is not expected
to result in recognition of gain or loss to shareholders for federal income tax
purposes and that, if the Reorganization is consummated, shareholders will be
free to redeem the shares of Evergreen Strategic Income which they receive in
the transaction at their then-current net asset value. Shares of Flexible Income
may be redeemed at any time prior to the consummation of the Reorganization.
Shareholders of Flexible Income may wish to consult their tax advisers as to any
differing consequences of redeeming Fund shares prior to the Reorganization or
exchanging such shares in the Reorganization.
Flexible Income does not hold annual shareholder meetings. If the
Reorganization is not approved, shareholders wishing to submit proposals for
consideration for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of Blanchard Funds
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
The votes of the shareholders of Evergreen Strategic Income are not
being solicited by this Prospectus/Proxy Statement and are not required to carry
out the Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Flexible Income whether other persons are beneficial owners of
shares for which proxies are being solicited and, if so, the number of copies of
this Prospectus/Proxy Statement needed to supply copies to the beneficial owners
of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
<PAGE>
The financial statements of Evergreen Strategic Income as of April 30,
1997, and the financial statements and financial highlights for the periods
indicated therein, have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements and financial highlights of Flexible Income
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of the Blanchard Funds for the year ended September 30, 1997 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Strategic Income will be passed upon by Sullivan & Worcester LLP, Washington,
D.C.
OTHER BUSINESS
The Trustees of Blanchard Funds do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
THE TRUSTEES OF BLANCHARD FUNDS RECOMMEND APPROVAL OF THE PLAN, THE
INTERIM ADVISORY AGREEMENT AND THE INTERIM SUB-ADVISORY AGREEMENT, AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF
APPROVAL OF THE PLAN, THE INTERIM ADVISORY AGREEMENT AND THE INTERIM
SUB-ADVISORY AGREEMENT.
January 5, 1998
<PAGE>
APPENDIX A
The names and addresses of the principal executive officers
and directors of Virtus Capital Management, Inc. are as follows:
OFFICERS:
Name Address
- ---- -------
David C. First Union National Bank
Francis, Chief Investment 201 South College Street
Officer Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Virtus Capital Management, Inc.
Clemons Rosson, Vice 707 East Main Street
President, Assistant Suite 1300
Secretary Richmond, Virginia 23219
First Union National Bank
L. 201 South College
Robert Cheshire, Vice Street
President Charlotte, North
Carolina 28288-1195
John E. Gray, Vice First Union National Bank
President 201
South College Street
Charlotte, North Carolina 28288-
1195
Dillon S. Harris, Jr., Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
J. Kellie Allen, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
<PAGE>
DIRECTORS:
Name Address
- ---- -------
First Union National Bank
David C. 201 South College
Francis Street
Charlotte, North
Carolina 28288-1195
Donald A. McMullen First Union National Bank
201 South College
Street
Charlotte, North
Carolina 28288-1195
William M. Ennis First Union National Bank
201
South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
<PAGE>
APPENDIX B
The names and addresses of the principal executive officers and
directors of OFFITBANK are as follows:
OFFICERS AND DIRECTORS:
Name Address
- ---- -------
Leslie F.B. Ashburner, OFFITBANK
Managing Director 520 Madison Avenue
New York, New York 10022
Albert C. Bellas, Managing OFFITBANK
Director 520 Madison Avenue
New York, New York 10022
Jack D. Burks, Managing OFFITBANK
Director 520 Madison Avenue
New York, New York 10022
Carolyn N. Dolan, Managing OFFITBANK
Director 520 Madison Avenue
New York, New York 10022
John H. Haldeman, Jr., OFFITBANK
Managing Director 520 Madison Avenue
New York, New York 10022
Richard M. Johnston, Managing OFFITBANK
Director 520 Madison Avenue
New York, New York 10022
Wallace Mathai-Davis, Chief OFFITBANK
Financial Officer, Secretary, 520 Madison Avenue
Managing Director New York, New York 10022
Morris W. Offit, Chairman, OFFITBANK
Chief Executive Officer, 520 Madison Avenue
Managing Director New York, New York 10022
Stephen T. Shapiro, Managing OFFITBANK
Director 520 Madison Avenue
New York, New York 10022
Stephen B. Wells, Managing OFFITBANK
Director 520 Madison Avenue
New York, New York 10022
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 26th day of November, 1997, by and between the Evergreen Fixed Income
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its
Evergreen Strategic Income Fund series (the "Acquiring Fund"), and Blanchard
Funds, a Massachusetts business trust, with its principal place of business at
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, with respect to
its Blanchard Flexible Income Fund series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Blanchard Funds have determined that the
Selling Fund should exchange all of its assets and certain identified
liabilities for Acquiring Fund Shares and that the interests of the existing
shareholders of the Selling Fund will not be diluted as a result of the
transactions contemplated herein;
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a statement of the Acquiring Fund's
investment objectives, policies, and restrictions and a list of the securities,
if any, on the Selling Fund's list referred to in the second sentence of this
paragraph that do not conform to the Acquiring Fund's investment objectives,
policies, and restrictions. The Selling Fund will, within a reasonable time
prior to the Closing Date, furnish the
<PAGE>
Acquiring Fund with a list of its portfolio securities and other investments. In
the event that the Selling Fund holds any investments that the Acquiring Fund
may not hold, the Selling Fund, if requested by the Acquiring Fund, will dispose
of such securities prior to the Closing Date. In addition, if it is determined
that the Selling Fund and the Acquiring Fund portfolios, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Selling Fund if requested
by the Acquiring Fund will dispose of a sufficient amount of such investments as
may be necessary to avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, nothing herein shall require the Selling Fund to
dispose of any investments or securities if, in the reasonable judgment of the
Selling Fund, such disposition would adversely affect the tax-free nature of the
Reorganization or would violate the Selling Fund's fiduciary duty to its
shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately prior
to the Reorganization the Aggregate NASD Cap of the Selling Fund immediately
prior to the Reorganization, in each case calculated in accordance with such
Rule 2830.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will
<PAGE>
thereupon proceed to dissolve as set forth in paragraph 1.8 below. Such
liquidation and distribution will be accomplished by the transfer of the
Acquiring Fund Shares then credited to the account of the Selling Fund on the
books of the Acquiring Fund to open accounts on the share records of the
Acquiring Fund in the names of the Selling Fund Shareholders and representing
the respective pro rata number of the Acquiring Fund Shares due such
shareholders. All issued and outstanding shares of the Selling Fund will
simultaneously be canceled on the books of the Selling Fund. The Acquiring Fund
shall not issue certificates representing the Acquiring Fund Shares in
connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
<PAGE>
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of shares of
the Selling Fund will receive Class A shares of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. Signet Trust Company, as custodian for the
Selling Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Selling Fund's portfolio securities,
cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Closing Date; and (b) all necessary taxes including all
applicable federal and state stock transfer stamps, if any, shall have been
paid, or provision for payment shall have been made, in conjunction with the
delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading
<PAGE>
thereon shall be restricted; or (b) trading or the reporting of trading on said
Exchange or elsewhere shall be disrupted so that accurate appraisal of the value
of the net assets of the Acquiring Fund or the Selling Fund is impracticable,
the Valuation Date shall be postponed until the first business day after the day
when trading shall have been fully resumed and reporting shall have been
restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Blanchard Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectus and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material
<PAGE>
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Blanchard Funds' Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected on the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The financial statements of the Selling Fund at September
30, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since September 30, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
<PAGE>
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents
<PAGE>
that may be necessary in connection with the transactions contemplated hereby
shall be accurate and complete in all material respects and shall comply in all
material respects with federal securities and other laws and regulations
thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2.1 REPRESENTATIONS OF THE ACQUIRING FUND. The
Acquiring Fund represents and warrants to the Selling Fund as
follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the
<PAGE>
conduct of its business or the ability of the Acquiring Fund to carry out the
transactions contemplated by this Agreement. The Acquiring Fund knows of no
facts that might form the basis for the institution of such proceedings and is
not a party to or subject to the provisions of any order, decree, or judgment of
any court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions contemplated herein.
(f) The financial statements of the Acquiring Fund at April
30, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly reflect the financial condition of the Acquiring
Fund as of such date, and there are no known contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
(g) Since April 30, 1997, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a
<PAGE>
valid and binding obligation of the Acquiring Fund enforceable in accordance
with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
(n) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Evergreen
Strategic Income Fund (the "Predecessor Fund"), a Massachusetts business trust,
as of the date hereof. The Acquiring Fund shall deliver to the Selling Fund a
certificate of the Predecessor Fund of even date making the representations set
forth in Section 4.2.1 with respect to the Predecessor Fund to the extent
applicable to the Predecessor Fund as of the date hereof.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
<PAGE>
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. Blanchard Funds will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by KPMG Peat
Marwick LLP and certified by Blanchard Funds' President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
<PAGE>
5.8 CAPITAL LOSS CARRYFORWARDS. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause KPMG Peat Marwick LLP to issue a letter addressed to
the Acquiring Fund and the Selling Fund, in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
<PAGE>
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which the Acquiring Fund is
a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
<PAGE>
exhibits to the Registration Statement which are not described or
filed as required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus and Proxy Statement and related matters
were discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus and Proxy Statement (except to the extent indicated
in paragraph (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the Acquiring Fund's
officers and other representatives of the Acquiring Fund), no facts have come to
their attention that lead them to believe that the Prospectus and Proxy
Statement as of its date, as of the date of the Selling Fund Shareholders'
meeting, and as of the Closing Date, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein regarding
the Acquiring Fund or necessary, in the light of the circumstances under which
they were made, to make the statements therein regarding the Acquiring Fund not
misleading. Such opinion may state that such counsel does not express any
opinion or belief as to the financial statements or any financial or statistical
data, or as to the information relating to the Selling Fund, contained in the
Prospectus and Proxy Statement or the Registration Statement, and that such
opinion is solely for the benefit of Blanchard Funds and the Selling Fund. Such
opinion shall contain such other assumptions and limitations as shall be in the
opinion of Sullivan & Worcester LLP appropriate to render the opinions expressed
therein.
In this paragraph 6.2, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
<PAGE>
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Blanchard Funds'
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Blanchard Funds.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the
Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or
<PAGE>
affecting creditors' rights generally and to general equity
principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Blanchard Funds' Declaration of Trust or By-laws, or any provision
of any material agreement, indenture, instrument, contract, lease or other
undertaking (in each case known to such counsel) to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
Regarding the Interim Advisory Agreement," the Interim Sub- Advisory Agreement
and the Previous Sub-Advisory Agreement, as set forth under the caption
"Information Regarding the Interim Sub-Advisory Agreement" and the description
of voting requirements applicable to approval of the Interim Advisory Agreement
and Interim Sub-Advisory Agreement, as set forth under the caption "Voting
Information Concerning the Meeting," insofar as the latter constitutes a summary
of applicable voting requirements under the Investment Company Act of 1940, as
amended, are, in each case, accurate and fairly present the information required
to be shown by the applicable requirements of Form N-14.
(g) Such counsel does not know of any legal or governmental
proceedings, insofar as they relate to the Selling Fund existing on or before
the date of mailing of the Prospectus and Proxy Statement and the Closing Date,
required to be described in the Prospectus and Proxy Statement or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and
<PAGE>
the Selling Fund is neither a party to nor subject to the provisions of any
order, decree or judgment of any court or governmental body, which materially
and adversely affects its business other than as previously disclosed in the
Prospectus and Proxy Statement.
7.3.2 The Acquiring Fund shall have received on the Closing
Date an opinion of C. Grant Anderson, Esq., Assistant Secretary of Blanchard
Funds, in form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof has been
paid, and assuming that such shares were issued in accordance with the terms of
the Selling Fund's registration statement, or any amendment thereto, in effect
at the time of such issuance, all issued and outstanding shares of the Selling
Fund are legally issued and fully paid and non-assessable (except that, under
Massachusetts law, Selling Fund Shareholders could under certain circumstances
be held personally liable for obligations of the Selling Fund).
Mr. Anderson shall also state that he has reviewed and is familiar with
the contents of the Prospectus and Proxy Statement and, although he is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and Proxy
Statement, on the basis of the foregoing, no facts have come to his attention
that lead him to believe that the Prospectus and Proxy Statement as of its date,
as of the date of the Selling Fund Shareholders' meeting, and as of the Closing
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding the Selling Fund or
necessary, in the light of the circumstances under which they were made, to make
the statements therein regarding the Selling Fund not misleading. Such opinion
may state that he does not express any opinion or belief as to the financial
statements or any financial or statistical data, or as to the information
relating to the Acquiring Fund, contained in the Prospectus and Proxy Statement
or Registration Statement.
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Massachusetts law, that as Dickstein Shapiro Morin &
Oshinsky LLP and C. Grant Anderson are not admitted to the bar of Massachusetts,
such opinions are based either upon the review of published statutes, cases and
rules and regulations of the Commonwealth of Massachusetts or upon an opinion of
Massachusetts counsel.
<PAGE>
In this paragraph 7.3, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
7.4 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Blanchard Funds'
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
<PAGE>
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's net investment
company taxable income for all taxable periods ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on or prior to the
Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(C) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the
<PAGE>
Selling Fund shares held by such shareholder immediately prior to the
Reorganization, and the holding period of the Acquiring Fund Shares to be
received by each Selling Fund Shareholder will include the period during which
the Selling Fund shares exchanged therefor were held by such shareholder
(provided the Selling Fund shares were held as capital assets on the date of the
Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of appropriate
officials of the Blanchard Funds responsible for financial and accounting
matters, nothing came to their attention that caused them to believe that such
unaudited pro forma financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included
<PAGE>
in the Registration Statement and Prospectus and Proxy Statement were prepared
based on the valuation of the Selling Fund's assets in accordance with the
Trust's Declaration of Trust and the Acquiring Fund's then current prospectus
and statement of additional information pursuant to procedures customarily
utilized by the Acquiring Fund in valuing its own assets;
(e) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration Statement
and Prospectus and Proxy Statement, and inquiries of appropriate officials of
the Acquiring Fund responsible for financial and accounting matters, nothing
came to their attention that caused them to believe that such unaudited pro
forma financial statements do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing
<PAGE>
standards), the Capitalization Table appearing in the Registration Statement and
Prospectus and Proxy Statement has been obtained from and is consistent with the
accounting records of the Acquiring Fund; and
(d) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
<PAGE>
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Blanchard Funds, the respective
Trustees or officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of
<PAGE>
this Agreement, in the case of the Selling Fund, shall be governed and construed
in accordance with the laws of the Commonwealth of Massachusetts, without giving
effect to the conflicts of laws provisions thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
and the Acquiring Fund hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents, or employees of Blanchard Funds or the
Trust personally, but shall bind only the trust property of the Selling Fund and
the Acquiring Fund, as provided in the Declarations of Trust of Blanchard Funds
and the Trust. The execution and delivery of this Agreement have been authorized
by the Trustees of Blanchard Funds on behalf of the Selling Fund and the Trust
on behalf of the Acquiring Fund and signed by authorized officers of Blanchard
Funds and the Trust, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officers shall be deemed to
have been made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property of the Selling Fund and
the Acquiring Fund as provided in the Declarations of Trust of Blanchard Funds
and the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
EVERGREEN FIXED INCOME TRUST ON
BEHALF OF EVERGREEN STRATEGIC
INCOME FUND
By:
Name:
Title:
BLANCHARD FUNDS
ON BEHALF OF BLANCHARD FLEXIBLE
INCOME FUND
By:
Name:
Title:
<PAGE>
EXHIBIT B
BLANCHARD FUNDS
INTERIM MANAGEMENT CONTRACT
This Contract is made this 28th day of November, 1997 between Virtus
Capital Management, Inc., a Maryland corporation having its principal place of
business in Richmond, Virginia (the "Manager"), and Blanchard Funds, a
Massachusetts business trust having its principal place of business in
Pittsburgh,
Pennsylvania (the "Trust").
WHEREAS the Trust is an open-end management investment company as that
term is defined in the Investment Company Act of 1940, as amended, and
is registered as such with the Securities and Exchange Commission; and
WHEREAS Manager is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The Trust hereby appoints Manager as manager for each of the
portfolios ("Funds") of the Trust which executes an exhibit to this Contract,
and Manager accepts the appointments. Subject to the direction of the Trustees
of the Trust, Manager shall provide or procure on behalf of each of the Funds
all management and administrative services. In carrying out its obligations
under this paragraph, the Manager shall: (i) provide or arrange for investment
research and supervision of the investments of the Funds; (ii) select and
evaluate the performance of each Fund's Portfolio Sub-Adviser; (iii) select and
evaluate the performance of the Administrator; and (iv) conduct or arrange for a
continuous program of appropriate sale or other disposition and reinvestment of
each Fund's assets.
2. Manager, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's investment objective and policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statements and exhibits as may be
on file with the Securities and Exchange Commission.
3. Each Fund shall pay or cause to be paid all of its own expenses and
its allocable share of Trust expenses, including, without limitation, the
expenses of organizing the Trust and continuing its existence; fees and expenses
of Trustees and officers of the Trust; fees for management services and
administrative personnel and services; expenses incurred in the distribution of
its shares ("Shares"), including expenses of
<PAGE>
administrative support services; fees and expenses of preparing and printing its
Registration Statements under the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, and any amendments thereto; expenses of
registering and qualifying the Trust, the Funds, and Shares of the Funds under
federal and state laws and regulations; expenses of preparing, printing, and
distributing prospectuses (and any amendments thereto) to shareholders; interest
expense, taxes, fees, and commissions of every kind; expenses of issue
(including cost of Share certificates), purchase, repurchase, and redemption of
Shares, including expenses attributable to a program of periodic issue; charges
and expenses of custodians, transfer agents, dividend disbursing agents,
shareholder servicing agents, and registrars; printing and mailing costs,
auditing, accounting, and legal expenses; reports to shareholders and
governmental officers and commissions; expenses of meetings of Trustees and
shareholders and proxy solicitations therefor; insurance expenses; association
membership dues and such nonrecurring items as may arise, including all losses
and liabilities incurred in administering the Trust and the Funds. Each Fund
will also pay its allocable share of such extraordinary expenses as may arise
including expenses incurred in connection with litigation, proceedings, and
claims and the legal obligations of the Trust to indemnify its officers and
Trustees and agents with respect thereto.
4. Each of the Funds shall pay to Manager, for all services rendered to
each Fund by Manager hereunder, the fees set forth in the exhibits attached
hereto.
5. If, for any fiscal year, the total of all ordinary business expenses
of the Fund, including all investment advisory fees but excluding distribution
fees, taxes, interest and extraordinary expenses and certain other excludable
expenses, would exceed the most restrictive expense limits imposed by any
statute or regulatory authority of any jurisdiction in which Shares of the Fund
are offered for sale Manager shall reduce its management fee in order to reduce
such excess expenses, but will not be required to reimburse the Fund for any
ordinary business expenses which exceed the amount of its management fee for
such fiscal year. The amount of any such reduction is to be borne by the Manager
and shall be deducted from the monthly management fee otherwise payable to the
Manager during such fiscal year. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the current fiscal year which shall
have elapsed prior to the date hereof and shall include the portion of the then
current fiscal year which shall have elapsed at the date of termination of this
Agreement.
6. The net asset value of each Fund's Shares as used herein will be
calculated to the nearest 1/10th of one cent.
7. The Manager may from time to time and for such periods as it deems
appropriate reduce its compensation (and, if
<PAGE>
appropriate, assume expenses of one or more of the Funds) to the extent that any
Fund's expenses exceed such lower expense limitation as the Manager may, by
notice to the Fund, voluntarily declare to be effective.
8. This Contract shall begin for each Fund as of the date of execution
of the applicable exhibit and shall continue in effect with respect to each Fund
presently set forth on an exhibit (and any subsequent Funds added pursuant to an
exhibit during the initial term of this Contract) until the earlier of the
Closing Date defined in the Agreement and Plan of Reorganization dated as of
November 26, 1997 with respect to each Fund or for two years from the date of
this Contract set forth above and thereafter for successive periods of one year,
subject to the provisions for termination and all of the other terms and
conditions hereof if: (a) such continuation shall be specifically approved at
least annually by the vote of a majority of the Trustees of the Trust, including
a majority of the Trustees who are not parties to this Contract or interested
persons of any such party cast in person at a meeting called for that purpose;
and (b) Manager shall not have notified a Fund in writing at least sixty (60)
days prior to the anniversary date of this Contract in any year thereafter that
it does not desire such continuation with respect to that Fund. If a Fund is
added after the first approval by the Trustees as described above, this Contract
will be effective as to that Fund upon execution of the applicable exhibit and
will continue in effect until the next annual approval of the Contract by the
Trustees and thereafter for successive periods of one year, subject to approval
as described above.
9. Notwithstanding any provision in this Contract, it may be terminated
at any time with respect to any Fund, without the payment of any penalty, by the
Trustees of the Trust or by a vote of the shareholders of that Fund on sixty
(60) days' written notice to Manager.
10. This Contract may not be assigned by Manager and shall
automatically terminate in the event of any assignment. Manager may employ or
contract with such other person, persons, corporation, or corporations at its
own cost and expense as it shall determine in order to assist it in carrying out
this Contract.
11. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the obligations or duties under this Contract on the
part of Manager, Manager shall not be liable to the Trust or to any of the Funds
or to any shareholder for any act or omission in the course of or connected in
any way with rendering services or for any losses that may be sustained in the
purchase, holding, or sale of any security.
<PAGE>
12. This Contract may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by the vote of a
majority of the Trustees of the Trust, including a majority of the Trustees who
are not parties to this Contract or interested persons of any such party to this
Contract (other than as Trustees of the Trust) cast in person at a meeting
called for that purpose, and where required by Section 15(a)(2) of the Act, on
behalf of a Fund by a majority of the outstanding voting securities of such Fund
as defined in Section 2(a)(42) of the Act.
13. The Manager acknowledges that all sales literature for investment
companies (such as the Trust) is subject to strict regulatory oversight. The
Manager agrees to submit any proposed sales literature for the Trust (or any
Fund) or for itself or its affiliates which mentions the Trust (or any Fund) to
the Trust's distributor for review and filing with the appropriate regulatory
authorities prior to the public release of any such sales literature, provided,
however, that nothing herein shall be construed so as to create any obligation
or duty on the part of the Manager to produce sales literature for the Trust (or
any Fund). The Trust agrees to cause its distributor to promptly review all such
sales literature to ensure compliance with relevant requirements, to promptly
advise Manager of any deficiencies contained in such sales literature, to
promptly file complying sales literature with the relevant authorities, and to
cause such sales literature to be distributed to prospective investors in the
Trust.
14. A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees, or any of the officers,
employees, agents or shareholders of the Trust individually but are binding only
upon the assets and property of the Trust. Notice is also hereby given that the
obligations pursuant to this instrument of a particular Fund and of the Trust
with respect to that particular Fund shall be limited solely to the assets of
that particular Fund.
15. This Contract shall be construed in accordance with and governed by
the laws of the Commonwealth of Pennsylvania.
16. This Contract will become binding on the parties hereto upon their
execution of the attached exhibits to this Contract.
<PAGE>
EXHIBIT A
to the
Management Contract
Blanchard Global Growth Fund
Blanchard Flexible Income Fund
Blanchard Short-Term Flexible Income Fund
Blanchard Flexible Tax-Free Bond Fund
Blanchard Growth & Income Fund
For all services rendered by Manager hereunder, the above-named Funds
of the Trust shall pay to Manager and Manager agrees to accept as full
compensation for all services rendered hereunder, an annual management fee equal
to the following percentage ("the applicable percentage") of the average daily
net assets of each Fund:
Name of Fund Percentage of Net Assets
Blanchard Global Growth Fund 1% of the first $150 million
of average daily net
assets, .875% of the
Fund's average daily
net assets in excess
of $150 million but
not exceeding $300
million and .75% of
the Fund's average
daily net assets in
excess of $300
million.
Blanchard Flexible Income Fund .75%
Blanchard Growth & Income Fund 1.10% of the Fund's average
daily net assets, .40% of
which, which would otherwise
be received by Manager and
paid to the Chase Manhattan
Bank, N.A. ("Chase") for
portfolio advisory services,
shall be paid to Chase
directly by the Fund under a
separate investment advisory
agreement between Chase and
the Fund.
Blanchard Short-Term .75%
Flexible Income Fund
Blanchard Flexible Tax-Free .75%
Bond Fund
<PAGE>
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.
The advisory fee so accrued shall be paid to Manager daily except for
the Blanchard Growth & Income Fund which shall be paid to Manager monthly.
Witness the execution hereof this 28th day of November, 1997.
Attest: Virtus Capital Management, Inc.
________________________ By: ___________________________
Secretary Executive Vice President
Attest: Blanchard Funds
________________________ By: ____________________________
Assistant Secretary Vice President
<PAGE>
EXHIBIT C
INTERIM SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this 28th day of November, 1997 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the "Manager"), and
OFFITBANK, a New York banking corporation (the "Sub-Adviser" or "OFFITBANK")
with respect to the following recital of fact:
R E C I T A L
WHEREAS, Blanchard Funds (the "Trust") is registered as an open-end,
non-diversified, management investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"), and the rules and regulations promulgated
thereunder; and
WHEREAS, the Sub-Adviser is a New York banking corporation
and engages in the business of acting as an investment adviser;
and
WHEREAS, the Trust is authorized to issue shares of beneficial interest
in separate series, with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Trust offers shares in one series called the Blanchard
Flexible Income Fund (such series, being referred to as the "Fund"); and
WHEREAS, the Trust and the Manager have entered into an agreement of
even date herewith to provide for management services for the Fund on the terms
and conditions set forth therein (the "Interim Management Agreement"); and
WHEREAS, OFFITBANK proposes to render investment advisory services to
the Manager in connection with the Manager's responsibilities to the Fund's
portfolio on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Investment Management. OFFITBANK shall act as a Sub- Adviser for the
Fund and shall, in such capacity, supervise the investment and reinvestment of
the cash, securities or other properties comprising the Fund's portfolio,
subject at all times to the direction of the Manager and the policies and
control of the Trust's Board of Trustees. OFFITBANK shall give the Fund the
benefit of its best judgment, efforts and facilities in rendering its services
as Sub-Adviser.
<PAGE>
2. Investment Analysis and Implementation. In carrying
out its obligation under paragraph 1 hereof, the Sub-Adviser
shall:
(a) use the same skill and care in providing such service as
it uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) obtain and evaluate pertinent information about
significant developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally
or the Fund's portfolio and whether concerning the individual issuers
whose securities are included in the Fund's portfolio or the activities
in which the issuers engage, or with respect to securities which the
Sub-Adviser considers desirable for inclusion in the Fund's portfolio;
(c) determine which issuers and securities shall be
represented in the Fund's portfolio and regularly report thereon to the
Trust's Board of Trustees;
(d) formulate and implement continuing programs for the
purchases and sales of the securities of such issuers and regularly
report thereon to the Trust's Board of Trustees;
(e) be authorized to give instructions to the custodian and/or
sub-custodian of the Fund appointed by the Trust's Board of Trustees,
as to deliveries of securities, transfers of currencies and payments of
cash for the account of the Fund, in relation to the matters
contemplated by this Agreement; and
(f) take, on behalf of the Fund, all actions which appear to
the Trust and the Manager necessary to carry into effect such purchase
and sale programs and supervisory functions as aforesaid, including the
placing of orders for the purchase and sale of securities for the Fund
and the prompt reporting to the Manager of such purchases and sales.
3. Broker-Dealer Relationships. The Sub-Adviser is responsible for
decisions to buy and sell securities for the Fund's portfolio, broker-dealer
selection, and negotiation of brokerage commission rates. The Sub-Adviser's
primary consideration in effecting a security transaction will be execution at
the most favorable price. In selecting a broker-dealer to execute each
particular transaction, the Sub-Adviser will take the following into
consideration: the best net price available, the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Fund on a continuing
<PAGE>
basis. Accordingly, the price to the Fund in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies as the Board of Trustees may determine, the
Sub-Adviser shall not be deemed to have acted unlawfully or to have breached any
duty created by this Agreement or otherwise solely by reason of its having
caused the Fund to pay a broker or dealer for effecting a portfolio investment
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction, if the Sub-Adviser determines in
good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction or the Sub-Adviser's
overall responsibilities with respect to the Fund and to its other clients as to
which it exercises investment discretion. Subject to such policies as the Board
of Trustees may determine, the Sub-Adviser will purchase and sell foreign
currency contracts and other securities for the Fund. The Sub-Adviser is further
authorized to allocate the orders placed by it on behalf of the Fund to any
affiliated broker-dealer of the Fund or to such brokers and dealers who also
provide research or statistical material, or other services to the Fund, the
Manager or the Sub-Adviser. Such allocation shall be in such amounts and
proportions as the Sub-Adviser shall determine and the Sub-Adviser will report
on said allocations regularly to the Board of Trustees of the Trust indicating
the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by
the Sub-Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Adviser on behalf of the Fund pursuant thereto, shall at
all times be subject to any directives of the Board of Trustees of the Trust.
The Manager shall provide the Sub-Adviser with written notice of all such
directives, so long as this Agreement remains in effect.
5. Compliance with Applicable Requirements. In carrying
out its obligations under this Agreement, the Sub-Adviser shall
at all times conform to:
(a) all applicable provisions of the 1940 Act;
(b) the provisions of the Registration Statement of
the Trust under the Securities Act of 1933 and the 1940 Act;
and
(c) any other applicable provisions of state and
federal law.
6. Expenses. The Sub-Adviser shall maintain, at its
expense and without cost to the Manager or the Fund, a trading
<PAGE>
function in order to carry out its obligations under subparagraph (f) of
paragraph 2 hereof to place orders for the purchase and sale of portfolio
securities for the Fund.
7. Delegation of Responsibilities. Upon request of the Manager and with
the approval of the Trust's Board of Trustees, the Sub-Adviser may perform
services on behalf of the Fund which are not required by this Agreement. Such
services will be performed on behalf of the Fund and the Sub-Adviser's cost in
rendering such services may be billed monthly to the Manager, subject to
examination by the Manager's independent accountants. Payment or assumption by
the Sub-Adviser of any Fund expense that the Sub-Adviser is not required to pay
or assume under this Agreement shall not relieve the Manager or the Sub-Adviser
of any of their obligations to the Fund or obligate the Sub-Adviser to pay or
assume any similar Fund expense on any subsequent occasions.
8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Sub- Adviser a monthly fee at the
annual rate of .30% of the Fund's first $25 million of average daily net assets;
plus .25% of the Fund's average daily net assets in excess of $25 million but
less than $50 million; plus .20% of the Fund's average daily net assets in
excess of $50 million. Compensation under this Agreement shall be calculated and
accrued daily and the amounts of the daily accruals shall be paid monthly. The
compensation paid to the Sub-Adviser will not be reduced by the amount of
brokerage commissions received by the Sub-Adviser or its affiliated
broker-dealer pursuant to Section 17(e)(2) of the 1940 Act. If this Agreement
becomes effective subsequent to the first day of a month or shall terminate
before the last day of a month, compensation for that part of the month this
Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fees as set forth above. Payment of the Sub- Adviser's
compensation for the preceding month shall be made as promptly as possible after
the end of each month.
9. Exclusivity. OFFITBANK agrees that it will not render advisory or
sub-advisory services to any other similar publicly offered no-load or low-load
open-end investment company registered with the Securities and Exchange
Commission while this Agreement is in effect. In the event of the termination of
this Agreement by the Sub-Adviser such exclusivity shall continue for a period
of [ ] months from the effective date of such termination. For the purposes of
this Agreement, low-load shall be defined as a sales charge of 3% or less. The
Sub-Adviser, however, shall be free to render investment advisory or other
services to others (including unit trusts and registered investment companies
other than no load or low load investment companies) and to engage in other
activities, so long as its services under this Agreement are not impaired
thereby.
<PAGE>
10. Term. This Agreement shall become effective at the close of
business on the date hereof and shall remain in force and effect until the
earlier of the Closing Date defined in the Agreement and Plan of Reorganization
dated November 26, 1997 with respect to the Fund or for an initial term of two
years, and shall remain in effect thereafter if approved in the manner set forth
in Section 10 hereof.
11. Renewal. Following the expiration of its initial two year term,
this Agreement shall continue in force and effect from year to year, provided
that such continuance is specifically approved at least annually:
(a) (i) by the Trust's Board of Trustees or (ii) by the vote
of a majority of the Fund's outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act), and
(b) by the affirmative vote of a majority of the Trustees who
are not parties to this agreement or interested persons of a party to
this Agreement (other than as a Trustee of the Trust), by votes cast in
person at a meeting specifically called for such purpose.
12. Termination. This Agreement may be terminated at any time, without
the payment of any penalty, by vote of the Trust's Board of Trustees or by vote
of a majority of the Fund's outstanding voting securities (as defined in Section
2(a)(42) of the 1940 Act), or by the Manager or the Sub-Adviser, on sixty (60)
days' written notice to the other party. This Agreement shall automatically
terminate: (a) in the event of its assignment, the term "assignment" having the
meaning defined in Section 2(a)(4) of the 1940 Act, or (b) in the event that the
Interim Management Agreement between the Fund and the Manager shall terminate.
13. Liability of the Sub-Adviser. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the Sub-Adviser or its
officers, directors or employees, or reckless disregard by the Sub-Adviser of
its duties under this Agreement, the Sub-Adviser shall not be liable to the
Manager, the Trust or to any shareholder of the Trust for any act or omission in
the course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security.
14. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the Manager
for this purpose shall be 707 East Main Street, Suite 1300, Richmond, Virginia
23219, that of the Trust for this purpose shall be
<PAGE>
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, and the address
of the Sub-Adviser for this purpose shall be 520 Madison Avenue, New York, New
York 10022.
15. Questions of Interpretation. Any questions of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretations thereof, if any, by the
United States Courts or in the absence of any controlling decision of any such
courts, by rules, regulations or orders of the Securities and Exchange
Commission issued pursuant to said Act. In addition, where the effect of a
requirement of the 1940 Act reflected in a provision of this Agreement is
revised by rule, regulation or order of the Securities and Exchange Commission,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
Attest: OFFITBANK
By
Title: Managing Director Title: Managing Director
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
By
Title: Senior Vice President Title: Senior Vice President
<PAGE>
EXHIBIT D
(Keystone Strategic Income Fund logo appears here)
KEYSTONE
STRATEGIC INCOME FUND
FUND AT A GLANCE
As of April 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 4.08 % 3.48 % 7.49 % N/A
One year w/o sales
charge 9.27 8.48 8.49 N/A
SEC 30-day yield
w/sales charge1 7.02 6.66 6.61 N/A
Twelve month dividends
per share $0.54 $0.49 $0.49 $0.18 3
<CAPTION>
AVERAGE
ANNUAL RETURNS* CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years 3.38 % 3.47 % 4.26 % N/A
Five years 8.44 N/A N/A N/A
Ten years 6.90 N/A N/A N/A
Life of class2 6.87 7.11 7.44 N/A
<CAPTION>
CUMULATIVE RETURNS* CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Nine months w/o sales
charge 6.80 % 6.06 % 6.07 % N/A
Three years 10.47 10.77 13.33 N/A
Five years 49.95 N/A N/A N/A
Ten years 94.81 N/A N/A N/A
Life of class2 95.01 33.85 35.64 -2.87 %
*ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES
CHARGE
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C> <C> <C> <C>
Total net assets $193.1 million
Average credit
quality BBB
Average maturity 6.5 years
Average duration 4.93 years
1SEC YIELD IS BASED ON THE FUND'S NET INVESTMENT INCOME
OVER A 30-DAY PERIOD AND IS CALCULATED IN ACCORDANCE
WITH SECURITIES AND EXCHANGE COMMISSION GUIDELINES.
2CLASS A SHARES COMMENCED INVESTMENT OPERATIONS ON
4/14/87. CLASS B AND C SHARES WERE INTRODUCED ON
2/1/93. CLASS Y SHARES WERE INTRODUCED ON 1/13/97.
3DIVIDENDS FOR CLASS Y ARE FOR THE PERIOD JANUARY 13,
1997 TO APRIL 30, 1997.
</TABLE>
PORTFOLIO QUALITY (AS A PERCENTAGE OF NET ASSETS)
(Pie chart appears here with the following information:)
AAA 34.2%
AA 2.0%
BBB 5.5%
Other 58.3%
OBJECTIVES
High current income from interest on debt securities. Secondarily, the Fund
considers potential for growth of capital in selecting securities.
STRATEGY
The Fund seeks to meet its objectives by investing in three fixed-income asset
classes: U.S. government and agency securities; high yield corporate bonds
issued in the United States; and foreign bonds. The U.S. investments include a
range of issues spanning virtually the entire quality spectrum, from the
highest-quality government and agency obligations to high yielding bonds rated
below investment-grade. The foreign portion consists primarily of high-quality
securities issued by sovereign governments. Investing in foreign securities
generally involves more risk than investing in a portfolio consisting solely of
securities of domestic issuers. Fluctuations in foreign exchange rates pose an
additional level of risk. Keystone Strategic Income Fund manages investment and
currency risk by conducting extensive research of the countries and companies
whose securities it buys and by hedging the foreign currency exposure, if
needed.
PORTFOLIO MANAGEMENT TEAM
(Photo of Prescott Crocker appears here)
Senior Vice President and Head of the High Yield Bond Team,
Prescott Crocker is portfolio manager of Keystone Strategic
Income Fund. A Chartered Financial Analyst, Mr. Crocker has 25
years of senior-level investment experience. He is a graduate
of Harvard College and holds an M.B.A. in international
finance from Harvard Business School.
2
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
MANAGEMENT REPORT
June 1997
Dear Shareholders:
We are pleased to report to you on the activities of Keystone Strategic Income
Fund for the fiscal period which ended April 30, 1997. You may recall you
recently received a semi-annual report for the period ending January 31, 1997.
We have changed your Fund's fiscal year, however, to end on April 30, 1997. This
is part of an effort by Evergreen Keystone Funds to streamline fund
administration. Funds with similar investment objectives are being placed on the
same fiscal year cycle. The next report you will receive will be a semi-annual
report for the period ending October 31, 1997. You should expect to receive it
in December.
PERFORMANCE
Your Fund generated strong total returns for the nine-month period ending April
30, 1997. The overall performance reflected the favorable investment climates in
each of the Fund's three asset classes. The high yield sector had the strongest
performance during the period and helped to boost the overall total return. The
results of U.S. government securities were generally lackluster, but stayed
positive despite fluctuating interest rates. However, the Fund's European
holdings denominated in non-U.S. currencies underperformed, due to the strength
of the U.S. dollar. We have modified our hedging strategy to protect the
portfolio more effectively. At this writing, 100% of the Fund's European
holdings denominated in non-U.S. dollars is hedged.
UNPREDICTABLE MARKET
The investment environment was generally favorable during the period, with the
economy growing moderately and many corporations reporting better-than-expected
earnings growth. Consumer confidence was high, as was evidenced by strong retail
sales and demand for stocks and high-yield bonds. Conversely, these positive
fundamentals spurred fears of inflation and higher interest rates, resulting in
pockets of significant turbulence during the period. The inflation concerns
subsided when the Federal Reserve raised interest rates at the end of March.
STRATEGY
We have made some material adjustments to the Fund, primarily seeking to
increase the portfolio's total return. We increased the weighting in the high
yield area, as we believed this sector was fundamentally strong, attractively
valued, and consistently in high demand during the period.
At the close of the period, the Fund had 33% of net assets in high yield bonds,
versus 25% at the time of our last semiannual report dated January 31, 1997. The
economic uncertainties in Europe combined with the strength of the U.S. dollar
motivated us to reduce significantly our foreign currency exposure. We did this
by reducing our European holdings and by hedging the remaining positions. In
expectation of lower interest rates in the later part of 1997, we increased our
positions in U.S. government and agency issues to represent 33.7% of the
portfolio. Our overall optimism notwithstanding, we positioned the Fund's
duration-- or sensitivity to interest rates-- conservatively, to help preserve
the value of the portfolio during periods of volatility, which we believed would
recur. Although the Fund's duration is generally in the range of 4-6 years, we
adjusted it downward at fiscal year-end
PORTFOLIO ALLOCATIONS APRIL 30, 1997
(AS A PERCENTAGE OF NET ASSETS)
(Pie chart appears here with the following information:)
Corporate debt 33.3%
Foreign bonds 26.3%
Mortgage-backed 21.2%
U.S. Treasury 11.3%
Other assets and
liabilities (net) 4.6%
Short-term
investments 3.3%
to 4.9 years to guard against potential interest-rate volatility in the
short-term.
OUTLOOK
We are confident that we could see substantially better markets in the following
months after a potential period of interest rate fluctuations in the short run.
The economy responded favorably to the interest rate hike in March and we think
that economic growth will continue to moderate.
We are bullish on the high yield sector, given the continuing apparent good
health of U.S. corporations and the strong demand from investors seeking higher
yields.
With regard to the Fund's foreign holdings, we think the U.S. dollar may
continue to be strong. Economic uncertainty surrounds the forming of the
European Monetary Union (EMU) in 1999, as indicated by the turbulence in the
markets following the Socialist victory in the French elections. This
uncertainty may continue to pressure European currencies, but provide investment
opportunities for the Fund in Italian, Spanish, and Swedish bonds as the
outlying markets continue to converge on the stronger core German market.
Emerging market bonds have been very attractive relative to U.S. treasuries and
we believe this will continue. These trends reflect the growing confidence of
investors in the viability and creditworthiness of developing economies.
Thank you for your support of Keystone Strategic Income Fund.
Sincerely,
(Signature of Albert H. Elfner, III appears here)
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
(Signature of Prescott Crocker appears here)
PRESCOTT CROCKER
SENIOR VICE PRESIDENT
Keystone Investment Management Company
3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
BLANCHARD FLEXIBLE INCOME FUND
a Series of
BLANCHARD FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
EVERGREEN STRATEGIC INCOME FUND
a Series of
EVERGREEN FIXED INCOME TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Blanchard Flexible Income
Fund ("Flexible Income"), a series of Blanchard Funds, to Evergreen Strategic
Income Fund ("Evergreen Strategic Income"), in exchange for Class A shares of
beneficial interest, $.001 par value per share, of Evergreen Strategic Income,
consists of this cover page and the following described documents, each of which
is attached hereto and incorporated by reference herein:
(1) The Statement of Additional Information of Evergreen Strategic
Income dated September 1, 1997 as amended;
(2) The Statement of Additional Information of Flexible Income
dated November 30, 1997;
(3) Annual Report of Flexible Income for the year ended
September 30, 1997;
(4) Annual Report of Evergreen Strategic Income for the period
ended April 30, 1997; and
(5) Pro-Forma Combining Financial Statements (unaudited) dated
April 30, 1997.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Strategic Income and
<PAGE>
Flexible Income dated January 5, 1998. A copy of the Prospectus/Proxy Statement
may be obtained without charge by calling or writing to Evergreen Strategic
Income or Flexible Income at the telephone numbers or addresses set forth above.
The date of this Statement of Additional Information is January 5,
1998.
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
21072
<PAGE>
- --------------------------------------------------------------------------------
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
21072
2
<PAGE>
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
21072
3
<PAGE>
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.
21072
4
<PAGE>
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
21072
5
<PAGE>
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
21072
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<PAGE>
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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<PAGE>
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
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<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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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.
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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
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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.
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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.
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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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SUPPLEMENT TO THE STATEMENTS
OF ADDITIONAL INFORMATION OF
Evergreen Aggressive Growth Fund, Evergreen American Retirement Fund,
Evergreen Emerging Markets Growth Fund,
Evergreen Florida High Income Municipal Bond Fund, Evergreen Foundation Fund,
Evergreen Fund, Evergreen Georgia Municipal Bond Fund,
Evergreen Global Leaders Fund, Evergreen Growth and Income Fund,
Evergreen High Grade Tax Free Fund, Evergreen Income and Growth Fund,
Evergreen Intermediate Term Government Securities Fund,
Evergreen International Equity Fund,
Evergreen Institutional Money Market Fund,
Evergreen Institutional Tax Exempt Money Market Fund,
Evergreen Institutional Treasury Money Market Fund,
Evergreen Latin America Fund,
Evergreen Micro Cap Fund, Inc.,
Evergreen Money Market Fund,
Evergreen New Jersey Tax Free Income Fund,
Evergreen North Carolina Municipal Bond Fund,
Evergreen Pennsylvania Tax Free Money Market Fund,
Evergreen Short-Intermediate Bond Fund,
Evergreen Short-Intermediate Municipal Fund,
Evergreen Small Cap Equity Income Fund,
Evergreen South Carolina Municipal Bond Fund,
Evergreen Tax Exempt Money Market Fund,
Evergreen Tax Strategic Foundation Fund,
Evergreen Treasury Money Market Fund,
Evergreen U.S. Government Fund, Evergreen Utility Fund,
Evergreen Value Fund, Evergreen Virginia Municipal Bond Fund,
Evergreen Capital Preservation and Income Fund,
Evergreen Fund for Total Return, Evergreen Global Opportunities Fund,
Evergreen Natural Resources Fund,
Evergreen Omega Fund, Evergreen Strategic Income Fund,
Evergreen California Tax Free Fund,
Evergreen Massachusetts Tax Free Fund,
Evergreen Missouri Tax Free Fund, Evergreen New York Tax Free Fund,
Evergreen Pennsylvania Tax Free Fund, Keystone Balanced Fund (K-1),
Keystone Diversified Bond Fund (B-2),
Keystone High Income Bond Fund (B-4),
Keystone Small Company Growth Fund (S-4), Keystone Strategic Growth Fund (K-2),
Keystone Growth and Income Fund (S-1),
Evergreen Select Adjustable Rate Fund,
Evergreen Select Small Cap Growth Fund, Keystone International Fund,
Keystone Precious Metals Holdings, and Keystone Tax Free Fund
(each a "Fund" and, collectively, the "Funds")
The Statements of Additional Information of each of the Funds are hereby
supplemented as follows:
Standardized Fundamental Investment Restrictions
Each of the above Funds except Keystone Balanced Fund (K-1), Keystone
Diversified Bond Fund (B-2), Keystone Small Company Growth Fund (S-4), and
Keystone Tax Free Fund has adopted the following standardized fundamental
investment restrictions. These restrictions may be changed only by a vote of
Fund shareholders.
1. Diversification of Investments
The Fund may not make any investment inconsistent with the Fund's
classification as a diversified [non-diversified] investment company under the
Investment Company Act of 1940.
2. Concentration of a Fund's Assets in a Particular Industry. ([All Funds
other than those listed below.)
The Fund may not concentrate its investments in the securities of issuers
primarily engaged in any particular industry (other than securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities [or in
the case of Money Market Funds domestic bank money instruments]).
For Evergreen Utility Fund
The Fund will concentrate its investments in the utilities industry.
For Keystone Precious Metals Holdings, Inc.
The Fund will concentrate its investments in industries related to the
mining, processing or dealing in gold or other precious metals and minerals.
3. Issuance of Senior Securities
Except as permitted under the Investment Company Act of 1940, the Fund may
not issue senior securities.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by applicable
law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar as
the Fund may be deemed an underwriter in connection with the disposition of its
portfolio securities.
6. Investment in Real Estate
The Fund may not purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in (a) securities directly or
indirectly secured by real estate, or (b) securities issued by companies that
invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on commodities
except to the extent that the Fund may engage in financial futures contracts and
related options and currency contracts and related options and may otherwise do
so in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may lend
its portfolio securities in accordance with applicable law. The acquisition of
investment instruments shall not be deemed to be the making of a loan.
9. Investment in Federally Tax Exempt Securities
The following Funds have also adopted a standardized fundamental investment
restriction in regard to investments in federally tax-exempt securities:
<TABLE>
<CAPTION>
<S> <C>
Evergreen Tax Exempt Money Market Fund Evergreen Institutional Tax Exempt Money Market Fund
Evergreen Pennsylvania Tax Free Money Market Fund Evergreen Short-Intermediate Municipal Fund
Evergreen Tax Strategic Foundation Fund Evergreen High Grade Tax Free Fund
Evergreen Georgia Municipal Bond Fund Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund Evergreen Virginia Municipal Bond Fund
Evergreen New Jersey Tax Free Income Fund Evergreen Massachusetts Tax Free Fund
Evergreen New York Tax Free Fund Evergreen Pennsylvania Tax Free Fund
Evergreen California Tax Free Fund Evergreen Missouri Tax Free Fund
</TABLE>
The Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for Funds with the words tax exempt, tax free or municipal in their names.
Elimination of Certain Non-Fundamental Investment Restrictions
The nonfundamental investment restrictions described below have been
eliminated by each Fund listed under such restriction:
1. Prohibition on Investment in Unseasoned Issuers
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, American
Retirement Fund, Money Market Fund, Tax Exempt Money Market Fund, Short-
Intermediate Municipal Fund, Growth and Income Fund (S-1), Omega Fund, Precious
Metals Holdings, Inc., Strategic Growth Fund (K-2), High Income Bond Fund (B-4),
Capital Preservation and Income Fund, Select Adjustable Rate Fund, Strategic
Income Fund, Fund for Total Return, Global Opportunities Fund, International
Fund Inc.
2. Prohibition on Investment in Companies for the Purpose of Exercising
Control or Management
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, Value Fund,
Intermediate Term Government Securities Fund , Foundation Fund, American
Retirement Fund, Emerging Markets Growth Fund, International Equity Fund, Global
Leaders Fund, Money Market Fund, Tax Exempt Money Market Fund, Pennsylvania Tax
Free Money Market Fund, Florida High Income Municipal Bond Fund,
Short-Intermediate Municipal Fund, Growth and Income Fund (S-1), Precious Metals
Holdings, Inc., Strategic Growth Fund (K-2), High Income Bond Fund (B-4), Fund
for Total Return, Global Opportunities Fund, International Fund Inc.
3. Prohibition on Investment in Companies in which Trustees or Officers of
the Funds Also Hold Shares Above Certain Percentage Levels
Evergreen Fund, MicroCap Fund, Inc., Percentage Growth and Income Fund,
Income and Growth Fund, Intermediate Term Government Securities Fund, Foundation
Fund, American Retirement Fund, Money Market Fund, Tax Exempt Money Market Fund,
Treasury Money Market Fund, Short-Intermediate Municipal Fund, Precious Metals
Holdings, Inc.
4. Prohibition on Investment of More Than 5% of a Fund's Net Assets in
Warrants, With No More Than 2% of Net Assets Being Invested in Warrants That Are
Listed on Neither the New York nor American Stock Exchanges Evergreen Fund,
MicroCap Fund, Inc., Growth and Income Fund, Income and Growth Fund, Foundation
Fund, American Retirement Fund, Tax Exempt Money Market Fund, Short-Intermediate
Municipal Fund
5. Prohibition on Investment in Oil, Gas or Other Mineral Exploration or
Development Programs
Evergreen Fund, MicroCap Fund, Inc., Aggressive Growth Fund, Growth and
Income Fund, Small Cap Equity Fund, Income and Growth Fund, Value Fund,
Intermediate Term Government Securities Fund, Foundation Fund, American
Retirement Fund, Money Market Fund, Tax Exempt Money Market Fund, Pennsylvania
Tax Free Money Market Fund, Florida High Income Municipal Bond Fund,
Short-Intermediate Municipal Fund, High Grade Tax Free Fund, Precious Metals
Holdings, Inc.
6. Prohibition on Joint Trading Accounts Evergreen Fund, MicroCap Fund,
Inc., Growth and Income Fund, Income and Growth Fund, Foundation Fund, American
Retirement Fund, Florida High Income Municipal Bond Fund
7. Prohibition on Investment in Other Investment Companies. [Note: The
Funds may invest in such companies to the extent permitted by the Investment
Company Act of 1940 and the rules thereunder.]
Growth and Income Fund, Utility Fund, Small Cap Equity Income Fund, Income
and Growth Fund, Value Fund, Short-Intermediate Bond Fund, Intermediate Term
Government Securities Fund, Foundation Fund, Tax Strategic Foundation Fund,
American Retirement Fund, New Jersey Tax Free Income Fund, High Grade Tax Free
Fund, Growth and Income Fund (S-1), Omega Fund, Precious Metals Holdings, Inc.
Strategic Growth Fund (K-2), High Income Bond Fund (B-4), Select Adjustable Rate
Fund, Strategic Income Fund, Fund for Total Return, Global Opportunities Fund,
International Fund, Inc., Massachusetts Tax Free Fund, New York Tax Free Fund,
Pennsylvania Tax Free Fund, California Tax Free Fund and Missouri Tax Free Fund.
Reclassification of All Other Fundamental Investment Restrictions
All investment restrictions other than those described above as having been
standardized or eliminated have been reclassified from fundamental to
nonfundamental and, as, such, may be changed by the Funds' Boards of Trustees at
any time without a shareholder vote.
Trustees
The Trustees and executive officers of each Trust, their ages, and their
principal occupations during the last five years are shown below:
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of the
Evergreen Group of Mutual Funds and Trustee. Retired Vice President of Lance
Inc. (food manufacturing); Chairman of the Distribution Comm. Foundation for the
Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park, Charlotte,
NC- Trustee. Medical Director, U.S. Healthcare of Charlotte, North Carolina
since 1996; President, Primary Physician Care from 1990 to 1996.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street, Suite 980, Charlotte,
NC-Trustee. Attorney, Law Offices of Michael S. Scofield since 1969.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC - Trustee. Sales
Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
THOMAS L. McVERRY (58), 4419 Parkview Drive, Charlotte, NC - Trustee.
Director of Carolina Cooperative Federal Credit Union since 1990 and Rexham
Corporation from 1988 to 1990; Vice President of Rexham Industries, Inc.
(diversified manufacturer) from 1989 to 1990; Vice President - Finance and
Resources, Rexham Corporation from 1979 to 1990.
WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC - Trustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990.
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL - Trustee.
Real estate developer and construction consultant since 1980; President of
Centrum Equities since 1987 and Centrum Properties, Inc. since 1980.
CHARLES A. AUSTIN III (61), Trustee. Investment counselor to Appleton
Partners, Inc.; former Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment advice).
K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and Executive
Vice President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund, and
The Phoenix Big Edge Series Fund; and former President, Morehouse College.
DAVID M. RICHARDSON (55) Trustee. Executive Vice President, DMR
International, Inc. (executive recruitment); former Senior Vice President,
Boyden International Inc. (executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of the
Evergreen Group of Mutual Funds. Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Trust Company of Connecticut, Hartford
Hospital, Old State House Association, and Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford YMCA; former Director; Executive Vice
President, and Vice Chairman of The Travelers Corporation.
Executive Officers
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY - President
and Treasurer. Consultant to BISYS Fund Services since 1996. Senior Managing
Director, Furman Selz LLC since 1992, Managing Director from 1984 to 1992.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH - Secretary.
Senior Vice President/Director of Administration and Regulatory Services, BISYS
Fund Services since April 1995. Vice President/Assistant General Counsel,
Alliance Capital Management from 1988 to 1995.
The officers of the Trusts are officers and/or employees of The BISYS
Group, Inc. ("BISYS Group"), except for Mr. Pileggi, who is a consultant to The
BISYS Group. The BISYS Group is an affiliate of Evergreen Distributor, Inc.
("EDI"), the distributor of each class of shares of each Fund.
No officer or Trustee of the Trusts owned more than 1.0% of any Class of
shares of any of the Funds as of November 30, 1997.
Distribution Plans
The following is added to the disclosure under the caption "Distribution
Plan"
Class A and B shares are made available to employer-sponsored retirement or
savings plans ("Plans") without a sales charge if:
(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch and,
on the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the Plan has $3 million or more in assets invested in broker/dealer
funds not advised or managed by Merrill Lynch Asset Management, L.P. ("MLAM")
that are made available pursuant to a Services Agreement between Merrill Lynch
and the Fund's principal underwriter or distributor and in Funds advised or
managed by MLAM (collectively, the "Applicable Investments"); or
(ii) the Plan is record kept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has $3 million or more
in assets, excluding money market funds, invested in Applicable Investments; or
(iii) the Plan has 500 or more eligible employees, as determined by the
Merrill Lynch plan conversion manager, on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares convert to Class A shares once the Plan has reached $5 million
invested in Applicable Investments. The Plan will receive a Plan level share
conversion.
The following is added to the Statement of Additional Information of each
of Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone Small Company Growth Fund (S-4), Keystone
Strategic Growth Fund (K-2), Keystone Growth and Income Fund (S-1) and Keystone
Tax Free Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Distribution Plans and Agreements
Distribution fees are accrued daily and paid monthly on Class A, Class B
and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B shares and Class C shares are
designed to permit an investor to purchase such shares through broker-dealers
without the assessment of a front-end sales charge, and, in the case of Class C
shares, without the assessment of a contingent deferred sales charge after the
first year following the month of purchase, while at the same time permitting
the Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares and
the Class C shares are the same as those of the front-end sales charge and
distribution fee with respect to the Class A shares in that in each case the
sales charge and/or distribution fee provide for the financing of the
distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each Fund
with respect to each of its Class A, Class B and Class C shares (each a "Plan"
and collectively, the "Plans"), the Treasurer of each Fund reports the amounts
expended under the Plans and the purposes for which such expenditures were made
to the Trustees of the Trust for their review on a quarterly basis. Also, each
Plan provides that the selection and nomination of the disinterested Trustees
are committed to the discretion of such disinterested Trustees then in office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for successive
twelve-month periods provided, however, that such continuance is specifically
approved at least annually by the Trustees of the Trust or by vote of the
holders of a majority of the outstanding voting securities of that Class and, in
either case, by a majority of the Independent Trustees of the Trust who have no
direct or indirect financial interest in the operation of the Plan or any
agreement related thereto.
The Plans permit the payment of fees to brokers and others for distribution
and shareholder-related administrative services and to broker-dealers,
depository institutions, financial intermediaries and administrators for
administrative services as to Class A, Class B and Class C shares. The Plans are
designed to (i) stimulate brokers to provide distribution and administrative
support services to each Fund and holders of Class A, Class B and Class C shares
and (ii) stimulate administrators to render administrative support services to
the Fund and holders of Class A, Class B and Class C shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to
providing office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding Class A, Class B and
Class C shares; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A, Class B and Class C shares.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (i) by a Fund without penalty
at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
disinterested Trustees, or (ii) by the Distributor. To terminate any
Distribution Agreement, any party must give the other parties 60 days' written
notice; to terminate a Plan only, the Fund need give no notice to the
Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
HOW THE FUNDS OFFER SHARES TO THE PUBLIC
You may buy shares of a Fund through the Funds' distributor, broker-dealers
that have entered into special agreements with the Funds' distributor or certain
other financial institutions. Each Fund offers four classes of shares that
differ primarily with respect to sales charges and distribution fees. Depending
upon the class of shares, you will pay an initial sales charge when you buy a
Fund's shares, a contingent deferred sales charge (a "CDSC") when you redeem a
Fund's shares or no sales charges at all.
Purchase Alternatives
Class A Shares
With certain exceptions, when you purchase Class A shares you will pay a
maximum sales charge of 4.75%. (The prospectus contains a complete table of
applicable sales charges and a discussion of sales charge reductions or waivers
that may apply to purchases.) If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, the Funds will charge a CDSC
of 1.00% if you redeem during the month of your purchase and the 12-month period
following the month of your purchase. See "Calculation of Contingent Deferred
Sales Charge" below.
Class B Shares
The Funds offer Class B shares at net asset value (without a front-end
load). With certain exceptions, however, the Funds will charge a CDSC of 1.00%
on shares you redeem within 72 months after the month of your purchase. The
Funds will charge CDSCs at the following rate:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase....................................5.00%
Second twelve-month period following the month of purchase................4.00%
Third twelve-month period following the month of purchase.................3.00%
Fourth twelve-month period following the month of purchase................3.00%
Fifth twelve-month period following the month of purchase.................2.00%
Sixth twelve-month period following the month of purchase.................1.00%
Thereafter................................................................0.00%
Class B shares that have been outstanding for seven years after the month
of purchase will automatically convert to Class A shares without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificate to ESC.
Class C Shares
Class C shares are available only through broker-dealers who have entered
into special distribution agreements with the Underwriter. The Funds offer Class
C shares at net asset value (without an initial sales charge). With certain
exceptions, however, the Funds will charge a CDSC of 1.00% on shares you redeem
within 12-months after the month of your purchase. See "Contingent Deferred
Sales Charge" below.
Class Y Shares
No CDSC is imposed on the redemption of Class Y shares. Class Y shares are
not offered to the general public and are available only to (1) persons who at
or prior to December 31, 1994 owned shares in a mutual fund advised by Evergreen
Asset Management Corp. ("Evergreen Asset"), (2) certain institutional investors
and (3) investment advisory clients of the Capital Management Group of First
Union National Bank ("FUNB"), Evergreen Asset, Keystone Investment Management
Company, or their affiliates. Class Y shares are offered at net asset value
without a front-end or back-end sales charge and do not bear any Rule 12b-1
distribution expenses.
Contingent Deferred Sales Charge
The Funds charge a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plan"). If imposed, the Funds
deduct the CDSC from the redemption proceeds you would otherwise receive. The
CDSC is a percentage of the lesser of (1) the net asset value of the shares at
the time of redemption or (2) the shareholder's original net cost for such
shares. Upon request for redemption, to keep the CDSC a shareholder must pay as
low as possible, a Fund will first seek to redeem shares not subject to the CDSC
and/or shares held the longest, in that order. The CDSC on any redemption is, to
the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the Principal Underwriter or its predecessor.
SALES CHARGE WAIVERS OR REDUCTIONS
Reducing Class a Front-end Loads
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
Combined Purchases
You can reduce your sales charge by combining purchases of Class A shares
of multiple Evergreen funds. For example, if you invested $75,000 in each of two
different Evergreen funds, you would pay a sales charge based on a $150,000
purchase (i.e., 3.75% of the offering price, rather than 4.75%).
Rights of Accumulation
You can reduce your sales charge by adding the value of Class A shares of
Evergreen funds you already own to the amount of your next Class A investment.
For example, if you hold Class A shares valued at $99,999 and purchase an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75%, rather than 4.75%.
Letter of Intent
You can, by completing the "Letter of Intent" section of the application,
purchase Class A shares over a 13-month period and receive the same sales charge
as if you had invested all the money at once. All purchases of Class A shares of
an Evergreen fund during the period will qualify as Letter of Intent purchases.
Shares That Are Not Subject to a Sales Charge or CDSC
Waiver of Sales Charges
The Funds may sell their shares at net asset value without an initial sales
charge to:
1. purchases of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax sheltered annuity or
TSA plan sponsored by an organization having 100 or more eligible employees (a
"Qualifying Plan") or a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust departments and
registered investment advisers;
4. investment advisers, consultants or financial planners who place trades
for their own accounts or the accounts of their clients and who charge such
clients a management, consulting, advisory or other fee;
5. clients of investment advisers or financial planners who place trades
for their own accounts if the accounts are linked to master account of such
investment advisers or financial planners on the books of the broker-dealer
through whom shares are purchased;
6. institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with a Fund by the broker-dealer;
7. employees of FUNB, its affiliates, Evergreen Distributor, Inc., any
broker-dealer with whom Evergreen Distributor, Inc., has entered into an
agreement to sell shares of the Funds, and members of the immediate families of
such employees;
8. certain Directors, Trustees, officers and employees of the Evergreen
Funds, the Distributor or their affiliates and to the immediate families of such
persons; or
9. a bank or trust company in a single account in the name of such bank or
trust company as trustee if the initial investment in or any Evergreen fund made
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1% of the amount invested.
With respect to items 8 and 9 above, each Fund will only sell shares to
these parties upon the purchasers written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. The Funds will not charge any
CDSC on redemptions by such purchasers.
Waiver of CDSCs
The Funds do not impose a CDSC when the shares you are redeeming
represent:
1. an increase in the share value above the net cost of such shares;
2. certain shares for which the Fund did not pay a commission on issuance,
including shares acquired through reinvestment of dividend income and capital
gains distributions;
3. shares that are in the accounts of a shareholder who has died or become
disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit plan
qualified under the Employee Retirement Income Security Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder who is a
least 59 1/2 years old;
6. shares in an account that we have closed because the account has an
aggregate net asset value of less than $1,000;
7. an automatic withdrawals under an Systematic Income Plan of up to 1.0%
per month of your initial account balance;
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawals made by a retirement plan participant;
10. a withdrawal consisting of returns of excess contributions or excess
deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan that
purchased Class C shares (this waiver is not available in the event a Qualifying
Plan, as a whole, redeems substantially all of its assets).
EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of any
other Evergreen fund, as described under the section entitled "Exchanges" in a
Fund's prospectus. Before you make an exchange, you should read the prospectus
of the Evergreen fund into which you want to exchange. The Trust's Board of
Trustees reserves the right to discontinue, alter or limit the exchange
privilege at any time.
HOW THE FUNDS VALUE SHARES
How and When a Fund Calculates its Net Asset Value per Share ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as
described in the Prospectus. A Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of each Fund is calculated by dividing the value of a Fund's net
assets attributable to that class by all of the shares issued for that class.
How a Fund Values the Securities it Owns
Current values for a Fund's portfolio securities are determined as follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or on the NMS prior to
the time of the valuation, provided that a sale has occurred.
(2) Securities traded in the over-the-counter market, other than on NMS,
are valued at the mean of the bid and asked prices at the time of valuation.
(3) Short-term investments maturing in more than sixty days for which
market quotations are readily available, are valued at current market value.
(4) Short-term investments maturing in sixty days or less (including all
master demand notes) are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market.
(5) short-term investments maturing in more than sixty days when purchased
that are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest, approximates
market.
(6) Securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS if, in
the Fund's opinion, the last sales price does not reflect a current market value
or if no sale occurred; and other assets are valued at prices deemed in good
faith to be fair under procedures established by the Board of Trustees.
SHAREHOLDER SERVICES
As described in the prospectus, a shareholder may elect to receive their
dividends and capital grains distributions in cash instead of shares. However,
ESC will automatically convert a shareholder's distribution option so that the
shareholder reinvests all dividends and distributions in additional shares when
it learns that the postal or other delivery service is unable to deliver checks
or transaction confirmations to the shareholder's address of record. The Funds
will hold the returned distribution or redemption proceeds in a
non-interest-bearing account in the shareholder's name until the shareholder
updates their address. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
December 22, 1997
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated November 30, 1997 (the "Prospectus"), pursuant to which
the Blanchard Flexible Income Fund (the "FUND") is offered.
Please retain this document for future reference.
To obtain the Prospectus please call the FUND at 1-800-829-3863.
TABLE OF CONTENTS Page
General Information and History 2
Investment Objective and Policies 2
Investment Restrictions 15
Portfolio Transactions 16
Computation of Net Asset Value 17
Performance Information 18
Additional Purchase and Redemption Information 20
Tax Matters 20
Blanchard Funds Management 25
Management Services 29
The Sub-Advisory Agreement 30
Custodian 31
Administrative Services 31
Purchasing Shares 32
Distribution Plan 32
Description of the FUND 32
Shareholder Reports 33
Manager
Virtus Capital Management, Inc.
Sub-Adviser
OFFITBANK
Distributor
Federated Securities Corp.
Custodian
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP
Dated: November 30, 1997
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND's investment objective is to provide high current income while seeking
opportunities for capital appreciation. There is no assurance that the FUND will
achieve its investment objective. This objective is a fundamental policy and may
not be changed except by a majority vote of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies" and "Certain Investment Strategies and Policies."
The FUND intends to invest in the following fixed income securities
markets:
U.S. Government Securities. This consists of debt obligations
of the U.S. Government and its agencies and instrumentalities
and related options, futures and repurchase agreements.
Investment Grade Fixed Income Securities. This consists of
investment grade fixed income securities, including mortgage
related and asset backed securities.
High Yield Securities. This consists of higher yielding (and,
therefore, higher risk), lower rated U.S. corporate fixed
income securities.
International Fixed Income Securities. This consists of
obligations of foreign governments, their agencies and
instrumentalities and other fixed income securities
denominated in foreign currencies or composite currencies.
OFFITBANK, the FUND's portfolio adviser, believes that the ability to
invest the FUND's assets among these markets, as opposed to investing in any
one, may enable the FUND to enhance current income and increase opportunities
for capital appreciation while taking risk to principal into consideration. The
Fund may invest up to 35% of its assets in lower quality fixed income
securities. There is no limit on the percentage of FUND assets invested in any
of the fixed income markets except for High Yield Securities which is limited to
35%, and further limited to the extent of any lower quality fixed income
securities held in the International Fixed Income Securities portfolio. See
"Risk Factors - Lower Rated Fixed Income Securities" in the FUND's Prospectus.
At least 65% of the FUND's total assets generally will be invested in
income-producing securities; however, the FUND expects that substantially all of
its total assets will be invested in income-producing securities, together with
certain futures, options and foreign currency contracts and other investments
described below.
The investment objective of providing high current income while seeking
opportunities for capital appreciation is a fundamental policy and may not be
changed without the authorization of the holders of a majority of the
outstanding shares of the FUND, as defined in the Investment Company Act of
1940, as amended (the "1940 Act"). The other investment policies may be changed
with the approval of the FUND's Board of Trustees, except as set forth under
"Investment Restrictions" in this Statement of Additional Information.
U.S. Government Securities
FUND assets invested in this market will be invested exclusively in
U.S. Government Securities and in options, futures contracts and repurchase
transactions with respect to such securities. As used in this Prospectus, the
term "U.S. Government Securities" refers to debt securities denominated in U.S.
dollars issued or guaranteed by the U.S. government, by various of its agencies,
or by various instrumentalities established or sponsored by the U.S. government.
Certain of these obligations including U.S. Treasury bills, notes and bonds,
mortgage participation certificates guaranteed by the Government National
Mortgage Association ("GNMA"), and Federal Housing Administration debentures,
are supported by the full faith and credit of the United States. Other U.S.
Government Securities issued or guaranteed by federal agencies or government
sponsored enterprises are not supported by the full faith and credit of the
United States. These securities include obligations supported by the right of
the issuer to
<PAGE>
borrow from the U.S. Treasury, such as obligations of Federal Home Loan Banks,
and obligations supported only by the credit of the instrumentality, such as
Federal National Mortgage Association Bonds. When purchasing securities in the
U.S. Government market, OFFITBANK may take full advantage of the entire range of
maturities of U.S. Government Securities and may adjust the average maturity of
the investments held in the portfolio from time to time, depending on its
assessment of relative yields of securities of different maturities and its
expectations of future changes in interest rates. To the extent that the FUND
invests in the mortgage market, OFFITBANK usually will evaluate, among other
things, relevant economic, environmental and security-specific variables such as
housing starts, coupon and age trends. To determine relative value among markets
OFFITBANK may use tools such as yield/duration curves, break-even prepayment
rate analysis and holding-period-return scenario testing.
The FUND may seek to increase its current income by writing covered
call or put options with respect to some or all of the U.S. Government
Securities held in its portfolio. In addition, the FUND may at times, through
the writing and purchase of options on U.S. Government Securities, and the
purchase and sale of futures contracts and related options with respect to U.S.
Government Securities, seek to reduce fluctuations in net asset value by hedging
against a decline in the value of U.S. Government Securities owned by the FUND
or an increase in the price of such Securities which the FUND plans to purchase,
although it is not the general practice to do so. Significant option writing
opportunities generally exist only with respect to longer term U.S. Government
Securities. Options on U.S. Government Securities and futures and related
options are not considered U.S. Government Securities; accordingly, they have a
different set of risks and features. These practices and related risks are
described in "Certain Investment Strategies and Policies" in the FUND's
Prospectus and in "Investment Objective and Policies" in this Statement of
Additional Information.
Description of Certain U.S. Government Mortgage-Related Securities
GNMA Certificates
Government National Mortgage Association. The Government National
Mortgage Association is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities backed
by pools of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the FUND purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the FUND will be
reinvested in additional GNMA Certificates or in other permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a pool
of mortgages insured by the Federal Housing Administration ("FHA") or the
Farmers Home Administration or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it
is not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.
<PAGE>
Yield Characteristics of GNMA Certificates. The coupon rate of interest
of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the Certificates, but only by the amount of
the fees paid to GNMA and the GNMA Certificate issuer. For the most common type
of mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather
than at par.
2. After issuance, Certificates usually trade in the secondary
market at a premium or discount.
3. Interest is paid monthly rather than semi-annually as is the
case for traditional bonds. Monthly compounding has the effect
of raising the effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the
Certificate. If mortgagors prepay their mortgages, the
principal returned to Certificate holders may be reinvested at
higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FNMA Securities
The Federal National Mortgage Association ("FNMA") was established in
1938 to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States.
FHLMC Securities
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in
1970 to promote development of a nationwide secondary market in conventional
residential mortgages. The FHLMC issues two types of mortgage pass-through
securities ("FHLMC Certificates"): mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semiannually and return principal once a year in guaranteed minimum
payments. The expected average life of these securities is approximately ten
years. The FHLMC guarantee is not backed by the full faith and credit of the
United States.
<PAGE>
Special Considerations
U.S. Government Securities are considered among the most creditworthy
of fixed income investments. Because of this added safety, the yields available
from U.S. Government Securities are generally lower than the yields available
from corporate debt securities. The values of U.S. Government Securities (like
those of fixed income securities generally) will change as interest rates
fluctuate. During periods of falling U.S. interest rates, the values of
outstanding long term U.S. Government Securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations will generally be greater for
securities with longer maturities and the FUND expects that its portfolio of
U.S. Government Securities will be weighted towards the longer maturities at
least to the extent that it has written call options thereon. Although changes
in the value of U.S. Government securities will not affect investment income
from those securities, they will affect the FUND's net asset value.
Investment Grade Fixed Income Securities
The FUND may invest in other investment grade U.S. fixed income
securities. Such investments may include mortgage related securities that are
not U.S. Government Securities, asset backed securities and fixed income
securities rated Baa or higher by Moody's Investors Service, Inc. ("Moody's") or
BBB by Standard & Poor's Ratings Group ("Standard & Poor's"). Fixed income
securities rated Baa by Moody's or BBB by Standard & Poor's are considered
investment grade obligations which lack outstanding investment characteristics
and may have speculative characteristics as well. See Appendix A in the FUND's
Prospectus for the rating securities descriptions of these rating categories.
Mortgage Related Securities
Mortgage-related securities issued by financial institutions (or
separate trusts or affiliates of such institutions), even where backed by U.S.
Government securities, are not considered U.S. Government Securities.
The mortgage pass-through market is marked by high liquidity and credit
quality. The primary risk that exists for mortgage pass-through securities is
interest rate risk. Changes in market yields will affect the value of these
securities as the price of fixed income securities generally increases when
interest rates decline and decreases when interest rates rise. Prices of longer
term securities generally increase or decrease more sharply than those of
shorter term securities in response to interest rate changes. In addition,
prepayment of principal on mortgage pass-through securities may make it
difficult to lock in interest rates for a fixed period of time. To the extent
that mortgage securities are purchased at prices that differ from par, these
prepayments (which are received at par) may make up a significant portion of the
pass-through total return. Generally, mortgage securities yield more than
treasury securities of the same average life.
Collateralized Mortgage Obligations
Collateralized mortgage obligations are debt obligations issued
generally by finance subsidiaries or trusts which are secured by mortgage-backed
certificates, including GNMA Certificates, FHLMC Certificates and FNMA
Certificates, together with certain funds and other collateral. Scheduled
distributions on the mortgage-backed certificates pledged to secure the
collateralized mortgage obligations, together with certain funds and other
collateral and reinvestment income thereon at an assumed reinvestment rate, will
be sufficient to make timely payments of interest on the obligations and to
retire the obligations not later than their stated maturity. Since the rate of
payment of principal of any collateralized mortgage obligation will depend on
the rate of payment (including prepayments) of the principal of the mortgage
loans underlying the mortgage-backed certificates, the actual maturity of the
obligation could occur significantly earlier than its stated maturity.
Collateralized mortgage obligations may be subject to redemption under certain
circumstances. The rate of interest borne by collateralized mortgage obligations
may be either fixed or floating. In addition, certain collateralized mortgage
obligations do not bear interest and are sold at a substantial discount (i.e., a
price less than the principal amount). Purchases of collateralized mortgage
obligations at a substantial discount involves a risk that the anticipated yield
on the purchase may not be realized if the underlying mortgage loans prepay at a
slower than anticipated rate, since the yield depends significantly on the rate
of prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of loss
of principal in the event of unanticipated prepayments of the mortgage loans
underlying the mortgage-backed certificates since the premium may not have been
fully amortized at the time the obligation is repaid. The market value of
collateralized mortgage obligations purchased at a substantial premium or
discount is extremely volatile and the effects of prepayments on the underlying
mortgage loans may increase such volatility.
<PAGE>
Although payment of the principal of and interest on the
mortgage-backed certificates pledged to secure collateralized mortgage
obligations may be guaranteed by GNMA, FHLMC or FNMA, the collateralized
mortgage obligations represent obligations solely of their issuers and are not
insured or guaranteed by GNMA, FHLMC, FNMA or any other governmental agency or
instrumentality, or by any other person or entity. The issuers of collateralized
mortgage obligations typically have no significant assets other than those
pledged as collateral for the obligations.
Asset Backed Securities
In general, asset-backed securities in which the FUND may invest are
issued as debt securities by special purpose corporations. These securities
represent an undivided ownership interest in a pool of installment sales
contracts and installment loans collateralized by, among other things, credit
card receivables and automobiles. The FUND will invest in, to the extent
available, (i) loan pass-through certificates or participations representing an
undivided ownership interest in pools of installment sales contracts and
installment loans (the "Participations") and (ii) debt obligations issued by
special purpose corporations which hold subordinated equity interests in such
installment sales contracts and installment loans. The FUND anticipates that a
substantial portion of the asset backed securities in which it invests will
consist of the debt obligations of such special purpose corporations.
Asset-backed securities, in general, are of a shorter maturity (usually
five years) than most conventional mortgage-backed securities and historically
have been less likely to experience substantial prepayments. Furthermore, the
effect of prepayments on securities that have shorter maturities, such as
asset-backed securities, is much smaller than the effect of prepayments on
securities having longer maturities, such as mortgage-backed securities. The
yield characteristics of asset-backed securities differ from more traditional
debt securities in that interest and principal payments are paid more
frequently, usually monthly, and principal may be prepaid at any time. As a
result, if the FUND purchases an asset-backed security at a discount, similar to
conventional mortgage-backed securities, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of reducing yield to maturity.
Conversely, if the FUND purchases an asset-backed security at a premium, faster
than expected prepayments will reduce, while slower than expected prepayments
will increase, yield to maturity. Prepayments may result from a number of
factors, including trade-ins and liquidations due to default, as well as the
receipt of proceeds from physical damage, credit, life and disability insurance
policies. The rate of prepayments on asset-backed securities may also be
influenced by a variety of economic and social factors, including general
measures of consumer confidence; accordingly, from time to time, substantial
amounts of prepayments may be available for reinvestment by the FUND and will be
subject to the prevailing interest rates at the time of prepayment.
Asset-backed securities often contain elements of credit support to
lessen the effect of the potential failure by obligors to make timely payments
on underlying assets. Credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying asset. Liquidity protection ensures that the pass
through of payments due on the installment sales contracts and installment loans
which comprise the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties; through
various means of structuring the transaction, or through a combination of such
approaches. The FUND will not pay any additional fees for such credit support.
However, the existence of credit support may increase the market price of the
security.
As with Mortgage-Related Securities, Asset-Backed Securities are often
backed by a pool of assets representing the obligations of a number of different
parties and use similar credit enhancement techniques.
Asset-Backed Securities do not have the benefit of the same security
interest in the related collateral as do Mortgage-Related Securities. 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 automobile receivables permit
the servicers 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
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
perfected 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.
<PAGE>
High Yield Securities
The FUND may invest up to (but not including) 35% (further limited to
the extent of any lower quality fixed income securities held in the
International Fixed Income Securities portfolio) of its assets in higher
yielding (and, therefore, higher risk), lower rated U.S. corporate fixed income
securities, including debt securities, (commonly referred to as "junk bonds")
convertible securities and preferred stocks and unrated corporate fixed income
securities. Investments in high-yield securities entail greater risks than those
involved in higher-rated securities.
Convertible securities are bonds, debentures, notes, preferred stock or
other securities which may be converted or exchanged by the holder into shares
of the underlying common stock at a stated exchange ratio. A convertible
security may also be subject to redemption by the issuer but only after a date
and under certain circumstances (including a specified price) established on
issue. Adjustable rate preferred stocks are preferred stocks which adjust their
dividend rates quarterly based on specified relationships to certain indexes of
U.S. Treasury Securities. The FUND may continue to hold securities obtained as a
result of the conversion of convertible securities held by the FUND when
OFFITBANK believes retaining such securities is consistent with the FUND's
investment objective.
Differing yields on fixed income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB or
lower by Standard & Poor's. The FUND may invest in any security which is rated
by Moody's or by Standard & Poor's, or in any unrated security which OFFITBANK
determines is of suitable quality. Securities in the rating categories below Baa
as determined by Moody's and BBB as determined by Standard & Poor's are
considered to be of poor standing and predominantly speculative. The rating
services descriptions of these rating categories, including the speculative
characteristics of the lower categories, are set forth in Appendix A in the
FUND's Prospectus.
Securities ratings are based largely on the issuer's historical
financial information and the rating agencies' investment analysis at the time
of rating. The medium to lower-rated securities in which the FUND may invest
tend to offer higher yields than higher-rated securities with the same
maturities because the historical financial condition of the issuers of such
securities may not be as strong as that of other issuers. The rating assigned to
any particular security, however, is not necessarily a reflection of the
issuer's current financial condition, which may be better or worse than the
rating would indicate. Although OFFITBANK will consider security ratings when
making investment decisions in the High Yield market, it will perform its own
investment analysis and will not rely principally on the ratings assigned by the
rating services. OFFITBANK's analysis generally may include, among other things,
consideration of the issuer's experience and managerial strength, changing
financial condition, borrowing requirements or debt maturity schedules, and its
responsiveness to changes in business conditions and interest rates. It also
considers relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects.
High Yield Securities - Risk Factors. High Yield Securities are subject to
certain risks that may not be present with investments in higher grade
securities. See the FUND's Prospectus for more information.
Effect of Interest Rate and Economic Changes. The prices of High Yield
Securities tend to be less sensitive to interest rate changes than higher-rated
investments, but may be more sensitive to adverse economic changes or individual
corporate developments. Periods of economic uncertainty and changes generally
result in increased volatility in the market prices and yields of High Yield
Securities and thus in the FUND's net asset value. A strong economic downturn or
a substantial period of rising interest rates could severely affect the market
for High Yield Securities. In these circumstances, highly leveraged companies
might have greater difficulty in making principal and interest payments, meeting
projected business goals, and obtaining additional financing. Thus, there could
be a higher incidence of default. This would affect the value of such securities
and thus the FUND's net asset value. Further, if the issuer of a security owned
by the FUND defaults, the FUND might incur additional expenses to seek recovery.
The High Yield Securities Market. The market for High Yield Securities has
expanded in recent years and is relatively new. This expanded market has not yet
completely weathered an economic downturn. A further economic downturn or an
increase in interest rates could have a negative effect on the High Yield
Securities market and on the market value of the High Yield Securities held by
the FUND, as well as on the ability of the issuers of such securities to repay
principal and interest on their borrowings.
<PAGE>
Credit Ratings. The credit ratings issued by credit rating services may not
fully reflect the true risks of an investment. For example, credit ratings
typically evaluate the safety of principal and interest payments, not market
value risk, of High Yield Securities. Also, credit rating agencies may fail to
change on a timely basis a credit rating to reflect changes in economic or
company conditions that affect a security's market value.
Liquidity and Valuation. Lower-rated bonds are typically traded among a smaller
number of broker-dealers than in a broad secondary market. Purchasers of High
Yield Securities tend to be institutions, rather than individuals, which is a
factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many High Yield Securities may not
be as liquid as higher-grade bonds. A less active and thinner market for High
Yield Securities than that available for higher quality securities may result in
more volatile valuations of the FUND's holding and more difficulty in executing
trades at favorable prices during unsettled market conditions.
The ability of the FUND to value or sell High Yield Securities will be
adversely affected to the extent that such securities are thinly traded or
illiquid. During such periods, there may be less reliable objective information
available and thus the responsibility of the FUND's Board of Trustees to value
High Yield Securities becomes more difficult, with judgment playing a greater
role. Further, adverse publicity about the economy or a particular issuer may
adversely affect the public's perception of the value, and thus liquidity, of a
High Yield Security, whether or not such perceptions are based on a fundamental
analysis.
Legislation. Provisions of the Revenue Reconciliation Act of 1989 limit a
corporate issuer's deduction for a portion of the original issue discount on
"high yield discount" obligations (including certain pay-in-kind securities).
This limitation could have a materially adverse impact on the market for certain
High Yield Securities. In addition, the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 requires savings associations to divest their
holdings of High Yield Securities before July 1, 1994. This requirement also
could have a materially adverse impact on the market for High Yield Securities.
From time to time, legislators and regulators have proposed other legislation
that would limit the use of high yield debt securities in leveraged buyouts,
mergers and acquisitions. It is not certain whether such proposals, which also
could adversely affect High Yield Securities, will be enacted into law.
International Fixed Income Securities
FUND assets invested in International Fixed Income Securities will be
invested in debt obligations and other fixed income securities, in each case
denominated in non-U.S. currencies or composite currencies including:
debt obligations issued or guaranteed by foreign national, provincial,
state, municipal or other governments with taxing authority or by their
agencies or instrumentalities;
debt obligations of supranational entities (described below);
debt obligations of the U.S. Government issued in non-dollar
securities; and
debt obligations and other fixed income securities of foreign and U.S.
corporate issuers (non-dollar denominated).
When investing in International Fixed Income Securities, the FUND is
not limited to purchasing debt securities rated at the time of purchase by
Moody's or Standard & Poor's. However, the FUND is limited to the extent that it
may not invest more than 35% of its assets in all lower quality fixed income
securities held by the FUND (by aggregating the value of all such securities
held in the High Yield Securities and the International Fixed Income Securities
portfolios). In making international fixed income securities investments,
OFFITBANK may consider, among other things, the relative growth and inflation
rates of different countries. OFFITBANK may also consider expected changes in
foreign currency exchange rates, including the prospects for central bank
intervention, in determining the anticipated returns of securities denominated
in foreign currencies. OFFITBANK may further evaluate, among other things,
foreign yield curves and regulatory and political factors, including the fiscal
and monetary policies of such countries.
The FUND may invest in any country where OFFITBANK sees potential for
high income. It presently expects to invest primarily in non-dollar denominated
securities of issuers in the industrialized Western European countries; in
Canada, Japan, Australia and New Zealand; and in Latin America. The FUND may
also invest up to 15% of its assets in the fixed income securities of issuers in
emerging market countries. See the FUND's Prospectus for more information.
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The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support. Obligations of
foreign governmental entities include obligations issued or guaranteed by
national, provincial, state or other governments with taxing power or by their
agencies. These obligations may or may not be supported by the full faith and
credit of a foreign government.
Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to making additional
capital contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income.
Risk Factors
See "Risk Factors - Lower Rated Fixed Income Securities" and Appendix A
in the FUND's Prospectus for more information concerning the risks of investing
in lower quality fixed income securities.
Foreign investments involve certain risks that are not present in
domestic securities. Because the FUND intends to purchase securities denominated
in foreign currencies, a change in the value of any such currency against the
U.S. dollar will result in a corresponding change in the U.S. dollar value of
the FUND's assets and the FUND's income available for distribution. In addition,
although a portion of the FUND's investment income may be received or realized
in such currencies, the Internal Revenue Code of 1986 (the "Code") requires that
the FUND compute and distribute its income in U.S. dollars. Therefore, if the
exchange rate for any such currency declines after the FUND's income has been
earned and translated into U.S. dollars but before payment, the FUND could be
required to liquidate portfolio securities to make such distributions.
Similarly, if an exchange rate depreciates between the time the FUND incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred. Under the Code,
changes in an exchange rate which occur between the time the FUND accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the FUND actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable net investment income. Similarly,
dispositions of certain debt securities (by sale, at maturity or otherwise) at a
U.S. dollar amount which is higher or lower than the FUND's original U.S. dollar
cost may result in foreign exchange gains or losses, which will increase or
decrease distributable net investment income.
The values of foreign investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Although the FUND will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S. dollars
without legal restriction at the time of investment, there is no assurance that
currency controls will not be imposed subsequently. In addition, the values of
foreign fixed income investments will fluctuate in response to changes in U.S.
and foreign interest rates.
There may be less information publicly available about a foreign issuer
than about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
In addition, with respect to certain foreign countries, there is a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments which could adversely affect
the value of investments in those countries. OFFITBANK does not expect to invest
the FUND's assets in countries where it believes such events are likely to
occur.
Income received by the FUND from sources within foreign countries may
be reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. OFFITBANK will attempt to minimize such taxes by timing of
transactions and other strategies, but there is no assurance that such efforts
will be successful. Any such taxes paid by the FUND will reduce its net income
available for distribution to shareholders.
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The FUND is a "non-diversified" investment company portfolio, which
means that the FUND is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. However, the FUND intends to
conduct its operations so as to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which
will relieve the FUND of any liability for Federal income tax to the extent its
earnings are distributed to shareholders. See "Distributions and Taxes." To so
qualify, among other requirements, the FUND will limit its investments so that,
at the close of each calendar quarter, (i) not more than 25% of the market value
of the FUND's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the FUND will not own more than 10% of the
outstanding voting securities of a single issuer. For purposes of the FUND's
requirements to maintain diversification for tax purposes, the issuer of a loan
participation will be the underlying borrower. In cases where the FUND does not
have recourse directly against the borrower, both the borrower and each agent
bank and co-lender interposed between the FUND and the borrower will be deemed
issuers of the loan participation for tax diversification purposes. The FUND's
investments in U.S. Government Securities are not subject to these limitations.
Since the FUND as a non-diversified investment company may invest in a smaller
number of individual issuers than a diversified investment company, an
investment in the FUND may, under certain circumstances, present greater risk to
an investor than an investment in a diversified company.
Futures Contracts
The FUND may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies which otherwise meet
the FUND's investment policies, to the extent permitted by the Commodity Futures
Trading Commission (the "CFTC"). U.S. futures contracts have been designed by
exchanges which have been designated "contract markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. The FUND will enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. The
FUND may also enter into futures contracts which are based on non-U.S.
Government bonds.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific,
interest rate-sensitive financial instrument (debt security) at a specified
price, date, time and place. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified foreign currency at a specified price, date, time and
place.
The FUND may not enter into futures transactions if the sum of the
amount of initial margin deposits on its existing futures contracts and premiums
paid for unexpired options would exceed 5% of the fair market value of the
FUND's total assets, after taking into account unrealized profits and unrealized
losses on commodity contracts it has entered into. The FUND will not use
leverage when it enters into long futures or options contracts and for each such
long position the FUND will deposit cash or cash equivalents, such as U.S.
Government Securities or high grade debt obligations, having a value equal to
the underlying commodity value of the contract as collateral with its custodian
in a segregated account.
No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, equal to approximately 1% to 10% of the contract amount (this
amount is subject to change by the exchange on which the contract is traded and
brokers may charge a higher amount). This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the FUND upon termination of the futures contract, assuming
all contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the FUND fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the price of the currency or securities underlying
the futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as "marking-to-market."
At any time prior to the expiration of a futures contract, the FUND may elect to
close the position by taking an opposite position, which will operate to
terminate the FUND's existing position in the contract.
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There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability of FUND
management to predict correctly movements in the price of the securities or
currencies underlying the particular transaction. These predictions and, thus,
the use of futures contracts involve skills and techniques that are different
from those involved in the management of portfolio securities.
Positions in futures contracts and options on futures contracts may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although the
FUND intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist for
the contracts at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting the FUND to substantial losses. In such event, and in the event
of adverse price movements, the FUND would be required to make daily cash
payments of variation margin.
Options on Futures Contracts
The FUND may purchase and write put and call options on interest rate
and foreign currency contracts that are traded on a U.S. exchange or board of
trade or a foreign exchange, to the extent permitted by the CFTC, and may enter
into closing transactions with respect to such options to terminate existing
positions. There is no guarantee that such closing transactions can be effected.
An option on an interest rate or foreign currency contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in an interest
rate or foreign currency contract at a specified exercise price at any time
prior to the expiration date of the option. Options on interest rate futures
contracts currently available include those with respect to U.S. Treasury Bonds,
U.S. Treasury Notes, U.S. Treasury Bills and Eurodollars. Options on foreign
currency futures currently available include those with respect to British
Pounds, Swiss Francs, Japanese Yen, Canadian Dollars and Australian Dollars.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contracts exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The potential loss related to the purchase of an
option on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the FUND.
Options on Foreign Currencies
The FUND may purchase and write options on foreign currencies to
increase its gross income in a manner similar to that in which futures contracts
on foreign currencies, or forward contracts, will be utilized.
The FUND intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the FUND is "covered" if the FUND
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its Custodian or by a designated sub-custodian) upon conversion or exchange
of other foreign currency held in its portfolio. A call option is also covered
if the FUND has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price or the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the FUND in cash, U.S. Government Securities and other high grade liquid debt
securities in a segregated account with its Custodian or with a designated
sub-custodian. As a writer of a covered put option, the FUND incurs an
obligation to buy the security underlying the option from the purchaser of the
put, at the option's exercise price at any time during the option period, at the
purchaser's election
<PAGE>
(certain listed and over-the-counter put options written by the FUND will be
exercisable by the purchaser only on a specific date). A put is "covered" if, at
all times, the FUND maintains, in a segregated account maintained on its behalf
at the FUND's custodian, cash, U.S. Government securities or other high grade
obligations in an amount equal to at least the exercise price of the option, at
all times during the option period. Similarly, a short put position could be
covered by the FUND by its purchase of a put option on the same security
(currency) as the underlying security of the written option, where the exercise
price of the purchased option is equal to or more than the exercise price of the
put written or less than the exercise price of the put written if the marked to
market difference is maintained by the FUND in cash, U.S. Government securities
or other high grade debt obligations which the FUND holds in a segregated
account maintained at its custodian.
Forward Currency Contracts
The FUND may engage in currency exchange transactions as a portfolio
management technique. The FUND will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or through entering into forward contracts to purchase or sell
currency. A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract.
If a devaluation is generally anticipated, the FUND may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. The FUND will not enter into a currency transaction if, as a
result, it will fail to qualify as a regulated investment company under the Code
for any given year.
Options on Portfolio Securities
The FUND may write only covered call option contracts. Currently, the
principal exchanges on which such options may be written are the Chicago Board
Option Exchange and the American, Philadelphia, and Pacific Stock Exchanges. In
addition, the FUND may purchase and sell options in the over-the-counter market
("OTC Options"). A call option gives the purchaser of the option the right to
buy the underlying security from the writer at the exercise price at any time
prior to the expiration of the contract, regardless of the market price of the
security during the option period. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract. The
writer forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price so long as the option remains
open and covered, except insofar as the premium represents such a profit.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that purchased over-the-counter options and the assets used
as cover for written over-the-counter options are illiquid securities. The FUND
will write OTC Options only with primary U.S. Government Securities dealers
recognized by the Board of Governors of the Federal Reserve System or member
banks of the Federal Reserve System ("primary dealers"). The FUND may also
write, to the extent available, OTC Options with non-primary dealers, such as
foreign dealers; however, unlike OTC Options written with primary dealers, any
OTC Options written with such non-primary dealers and the assets used as cover
for such options will be treated as illiquid securities. In connection with
these special arrangements, the FUND intends to establish standards for the
creditworthiness of the primary and non-primary dealers with which it may enter
into OTC Option contracts and those standards, as modified from time to time,
will be implemented and monitored by the Manager. Under these special
arrangements, the FUND will enter into contracts with primary and non-primary
dealers which provide that the FUND has the absolute right to repurchase an
option it writes at any time at a repurchase price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula contained in the contract. Although the specific details of the formula
may vary between contracts with different primary and non-primary dealers, the
formula will generally be based on a multiple of the premium received by the
FUND for writing the option, plus the amount, if any, by which the option is
"in-the-money." The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." Under such circumstances, and with
respect to OTC Options written with primary dealers only, the FUND will treat as
illiquid that amount of the "cover" assets equal to the amount by which the
formula price for the repurchase of the option is greater than the amount by
which the market value of the security subject to the option exceeds the
exercise price of the option (the amount by which the option is "in-the-money").
Although each agreement will provide that the FUND's repurchase price shall be
determined in good faith (and that it shall not exceed the maximum determined
pursuant to the formula) the formula price will not necessarily reflect the
market value of the option written, therefore, the FUND might pay more to
repurchase the OTC Option contract than the FUND would pay to close out a
similar exchange traded option.
<PAGE>
In determining the FUND's net asset value, the current market value of
any option written by the FUND is subtracted from net asset value. If the
current market value of the option exceeds the premium received by the FUND, the
excess represents an unrealized loss, and, conversely, if the premium exceeds
the current market value of the option, such excess would be unrealized gain.
Additional Risks of Options on Futures Contracts, Forward Contracts and Options
on Foreign Currencies
Unlike transactions entered into by the FUND in certain futures
contracts, certain other futures contracts, options on foreign currencies and
forward contracts are not traded on contract markets regulated by the CFTC and
forward currency contracts are not regulated by the Commission. Instead, forward
currency contracts are traded through financial institutions acting as
market-makers. Foreign currency options are traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board options Exchange, subject to regulation by the Commission. In the forward
currency market, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Moreover, a trader of forward contracts could lose amounts substantially in
excess of its initial investments, due to the collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may exist, potentially permitting the FUND to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, future contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in the FUND's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States and
the United Kingdom, (d) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (e)
lesser trading volume.
Pursuant to the sub-advisory agreement, OFFITBANK, where permitted by
law, will purchase and sell foreign exchange in the interbank dealer market for
a fee on behalf of the FUND, subject to certain procedures and reporting
requirements adopted by the Board of Trustees.
Repurchase Agreements
The FUND may enter into repurchase agreements. Under a repurchase
agreement, the FUND acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the FUND to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the FUND's money is invested. The FUND's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When the FUND enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the
<PAGE>
Investment Company Act of 1940, as amended (the "1940 Act"), collateralized by
the underlying securities. The return on the collateral may be more or less than
that from the repurchase agreement. The securities underlying a repurchase
agreement will be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including the accrued
interest earned. In evaluating whether to enter into a repurchase agreement,
OFFITBANK will carefully consider the creditworthiness of the seller. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the FUND may incur a loss.
Lending of Portfolio Securities
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM or OFFITBANK. The
borrower at all times during the loan must maintain with the FUND cash or cash
equivalent collateral or provide to the FUND an irrevocable letter of credit
equal in value at all times to at least 100% of the value of the securities
loaned. During the time portfolio securities are on loan, the borrower pays the
FUND any dividends or interest paid on such securities, and the FUND may invest
the cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or a letter of credit. Loans are subject to termination at the option
of the FUND or the borrower at any time. The FUND may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker.
Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. For this purpose, illiquid securities include (a) securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) participation interests in loans that
are not subject to puts, (c) covered call options on portfolio securities
written by the FUND over-the-counter and the cover for such options and (d)
repurchase agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
<PAGE>
The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. FUND management anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. The FUND, a non-diversified management investment company, has the
following restrictions: (a) with respect to 50% of the FUND's total
assets, the FUND may not invest more than 5% of its total assets, at
market value, in the securities of one issuer (except the securities of
the U.S. Government, its agencies and instrumentalities) and (b) with
respect to the other 50% of the FUND's total assets, the FUND may not
invest more than 25% of the market value of its total assets in a
single issuer (except the securities of the U.S. Government, its
agencies and instrumentalities). These two restrictions,
hypothetically, could give rise to the FUND having securities of as few
as twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities
of any single company; (b) more than 5% of its total assets would be
invested in the securities of companies (including predecessors) that
have been in continuous operation for less than 3 years; (c) more than
25% of its total assets would be concentrated in companies within any
one industry other than the banking industry (except that this
restriction does not apply to U.S. Government Securities); or (d) more
than 5% of net assets would be invested in warrants or rights.
(Included within that amount, but not to exceed 2% of the value of the
FUND's net assets, may be warrants which are not listed on the New York
or American Stock Exchanges.)
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the
market value of its total assets). This does not preclude the FUND from
obtaining such short-term credit as may be necessary for the clearance
of purchases and sales of its portfolio securities. The FUND will not
purchase additional securities while the amount of any borrowings is in
excess of 5% of the market value of its total assets.
4. The FUND will not make loans of money or securities except (i)
through repurchase agreements, (ii) through loan participations, and
(iii) through the lending of its portfolio securities as described in
"Lending of Portfolio Securities" in the Prospectus and in this
Statement.
5. The FUND may not invest more than 5% of its total assets in the
securities of other investment companies or purchase more than 3% of
any other investment company's voting securities, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.
6. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above. The FUND
may pledge securities having a value at the time of pledge not
exceeding 10% of the market value of the FUND's total assets.
<PAGE>
7. The FUND may not buy any securities or other property on margin
(except for such short term credits as are necessary for the clearance
of transactions) or engage in short sales.
8. The FUND may not invest in companies for the purpose of exercising
control or management.
9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing
or selling portfolio securities.
10. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers
and Trustees of the FUND and the officers and directors of VCM or
OFFITBANK, who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more
than 5% of such outstanding securities.
11. The FUND may not purchase or sell real property (including limited
partnership interests, but excluding readily marketable interests in
real estate investment trusts or readily marketable securities of
companies which invest in real estate).
12. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases.
13. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Manager subject to the supervision of VCM
and the Trustees and pursuant to authority contained in the Investment Advisory
Contract between the FUND and VCM, and the Sub-Advisory Agreement between VCM
and OFFITBANK. In selecting such brokers or dealers, OFFITBANK will consider
various relevant factors, including, but not limited to the best net price
available, the size and type of the transaction, the nature and character of the
markets for the security to be purchased or sold, the execution efficiency,
settlement capability, financial condition of the broker-dealer firm, the
broker-dealer's execution services rendered on a continuing basis and the
reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to OFFITBANK for the FUND's use, which
in the opinion of the Trustees, are reasonable and necessary to the FUND's
normal operations. Those services may include economic studies, industry
studies, security analysis or reports, sales literature and statistical services
furnished either directly to the FUND or to OFFITBANK. Such allocation shall be
in such amounts as VCM or OFFITBANK shall determine and OFFITBANK shall report
regularly to VCM who will in turn report to the Trustees on the allocation of
brokerage for such services.
The receipt of research from broker-dealers may be useful to OFFITBANK
in rendering investment management services to its other clients, and
conversely, such information provided by brokers or dealers who have executed
orders on behalf of OFFITBANK's other clients may be useful to OFFITBANK in
carrying out its obligations to the FUND. The receipt of such research may not
reduce OFFITBANK's normal independent research activities.
<PAGE>
OFFITBANK is authorized, subject to best price and execution, to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the FUND and are authorized to use Federated
Securities Corp. (the "Distributor"), and OFFITBANK or an affiliated
broker-dealer on an agency basis, to effect a substantial amount of the
portfolio transactions which are executed on the New York or American Stock
Exchanges, Regional Exchanges and Foreign Exchanges where relevant, or which are
traded in the Over-the-Counter market. Any profits resulting from portfolio
transactions earned by the Distributor as a result of FUND transactions will
accrue to the benefit of the shareholders of the Distributor who are also
shareholders of VCM. The Investment Advisory Contract does not provide for any
reduction in the advisory fee as a result of profits resulting from brokerage
commissions effected through the Distributor. In addition, the Sub-Advisory
Agreement between VCM and OFFITBANK does not provide for any reduction in the
advisory fees as a result of profits resulting from portfolio transactions
effected through OFFITBANK or an affiliated brokerage firm. For the fiscal year
ended September 30, 1997, and for the period from May 1, 1996 through September
30, 1996, the FUND paid no brokerage commissions. For the fiscal years ended
April 30, 1996, 1995 and 1994, the FUND paid no brokerage commissions.
The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid to the Distributor or to OFFITBANK or an affiliated
broker-dealer must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." The Rule and the procedures also contain review requirements
and require VCM to furnish reports to the Trustees and to maintain records in
connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of OFFITBANK. When the other clients are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts will be allocated
in accordance with a formula considered by VCM to be equitable to each, taking
into consideration such factors as size of account, concentration of holdings,
investment objectives, tax status, cash availability, purchase cost, holding
period and other pertinent factors relative to each account. In some cases this
system could have a detrimental effect on the price or volume of the security as
far as the FUND is concerned. In other cases, however, the ability of the FUND
to participate in volume transactions will produce better executions for the
FUND.
For the fiscal year ended September 30, 1997, and for the period from
May 1, 1996 through September 30, 1996, and for the fiscal years ended April 30,
1996 and 1995, the FUND's annual rates of portfolio turnover were approximately
101%, 87%, 347% and 455%, respectively.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
Time) on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determining Market Value of Securities
Market or fair values of the FUND's portfolio securities are determined
as follows:
o according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on
more than one exchange, the price on the primary market for
that security, as determined by the Adviser or sub-adviser, is
used.);
o according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded
over-the-counter;
o for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term
obligations with remaining maturities of 60 days or less at
the time of purchase, may be valued at amortized cost; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate; maturity;
type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in good
faith that another method of valuing options positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and asked prices.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from
the closing of the New York Stock Exchange. In computing the net asset value,
the FUND values foreign securities at the latest closing price on the exchange
on which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates are determined when such rates
are made available to the FUND at times prior to the close of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into U.
S. dollars at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Trustees, although the actual
calculation may be done by others.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10
year periods (or fractional portion
thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
fiscal year ended September 30, 1997, and the period from May 1, 1996 through
September 30, 1996 was 9.53% and 3.95%, respectively. For the fiscal year ended
April 30, 1996 and since inception (November 2, 1992 through September 30, 1997)
the FUND's aggregate annualized total rates of return were 8.06% and 7.25%,
respectively.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee which was in effect from November 2, 1992 to December,
1994 from the initial value invested. The FUND will, however, disclose the pro
rata share of the account opening fee and will disclose that the performance
data does not reflect such non-recurring charge and that inclusion of such
charge would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under the Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:
YIELD 2[(a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
Under this formula, interest earned on debt obligations for purposes of
"all above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
The FUND's yield for the 30-day period ended September 30, 1997, was
6.06%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, including foreign
currency gains and loss) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
Please note that the below-listed and defined "Short-Short Gain Test" has been
repealed pursuant to the Taxpayer Relief Act of 1997, effective for taxable
years beginning after the date of enactment. For purposes of the FUND, the
effective date of the repeal will be October 1, 1997. Distributions by the FUND
made during the taxable year or, under specified circumstances, within twelve
months after the close of the taxable year, will be considered distributions of
income and gains of the taxable year and can therefore satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). For purposes of this calculations,
gross income includes tax-exempt income. However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the FUND may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the FUND from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received for this purpose by the
FUND at maturity or upon the disposition of a security held for less than three
months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of the Short-Short Gain Test.
However, income attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In addition, under the rules of
Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a forward foreign
currency contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Section 1256, will generally be treated as ordinary income or
loss. At September 30, 1997, the FUND had capital loss carryovers of $12,071,274
which is available through 2002, $3,223,064 which is available through 2003, and
$1,335,786 which is available through 2004 to the extent provided by
regulations.
Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contract have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is combined with any other
gain or loss that was previously recognized upon the termination of Section 1256
contracts during that taxable year. The net amount of such gain or loss for the
entire taxable year (including gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss (except for Section 1256 forward
foreign currency contracts, which are subject to Section 988 Rules). The
Internal Revenue Service has held in several private rulings (not necessarily
applicable to the FUND) that gains arising from Section 1256 contracts will be
treated for purposes of the Short-Short Gain Test as being derived from
securities held for not less than three months if the gains arise as a result of
a constructive sale under Code Section 1256. The FUND may elect not to have this
special tax treatment apply to Section 1256 contracts that are part of a "mixed
straddle" with other investments of the FUND that are not Section 1256
contracts.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss, or any net foreign currency loss
incurred after October 31 as if they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of its taxable
year, at least 50% of the value of the FUND's assets must consist of cash and
cash items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the FUND has not
invested more than 5% of the value of the FUND's total assets in securities of
such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will he subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election"). The balance
of such income must be distributed during the next calendar year. For the
foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) unless it has
made a taxable year election, exclude foreign currency gains and losses incurred
after October 31 of any year in determining the amount of ordinary taxable
income for the current calendar year (and, instead, include such gains and
losses in determining ordinary taxable income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporations.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.
<PAGE>
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the FUND may elect to "pass through" to the FUND's shareholders the amount of
foreign taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, its pro
rata share of the foreign taxes paid by the FUND, but would be treated as having
paid its pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against Federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income its pro
rata share of such foreign taxes plus the portion of dividends received from the
FUND representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Shareholders should consult their own tax advisors concerning the
application of the foreign tax credit to them.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid by January 31 of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
<PAGE>
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the FUND's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having been paid. Such a foreign shareholder would generally be
exempt from U.S. Federal income tax on gains realized on the sale of shares of
the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. Federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
<PAGE>
BLANCHARD FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, and present
positions with Blanchard Funds, and principal occupations.
<TABLE>
<CAPTION>
<S> <C>
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman and
Birthdate: July 28, 1924 Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research;
Chairman and Director, Federated Research Corp. and
Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and
Director or Trustee of the Funds. Mr. Donahue is
the father of J. Christopher Donahue, Executive
Vice President of the Trust.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934 Trustee of the Fund; Chairman of the Board,
Children's Hospital of Pittsburgh formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000
Group, Inc.; Director, Member of Executive
Committee, University of Pittsburgh; Director or
Trustee of the Funds.
.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; President, Investment
Birthdate: June 23, 1937 Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or
Trustee in private real estate ventures in
Southwest Florida; formerly, President, Naples
Property Management, Inc. and Northgate Village
Development Corporation; Director or Trustee of the
Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director and Member of the
Birthdate: July 4, 1918 Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC
Bank Corp. and Director, Ryan Homes, Inc.; Director
or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Attorney-at-law; Director, The
Birthdate: May 18, 1922 Emerging Germany Fund, Inc.; Director or Trustee of
the Funds.
<PAGE>
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Professor of Medicine, University of
Birthdate: October 11, 1932 Pittsburgh; Medical Director, University of Pittsburgh
Medical Center - Downtown; Member, Board of Directors,
University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller Ament Henny & Kochuba
205 Ross Street Trustee of the Fund; Attorney of Counsel, Miller,
Pittsburgh, PA Ament, Henny & Kochuba; Director, Eat'N Park
Birthdate: June 18, 1924 Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Director or
Trustee of the Funds. .
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA President, Treasurer and Trustee of the Fund; Vice
Birthdate: October 22, 1930 Chairman, Treasurer, and Trustee, Federated Investors;
Vice President, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., Federated
Global Research Corp. and Passport Research, Ltd.;
Executive Vice President and Director, Federated
Securities Corp.; Trustee, Federated Shareholder Services
Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some
of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL Trustee of the Fund; Consultant; Former State
Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation;
Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
Duquesne University
Pittsburgh, PA Trustee of the Fund; President, Law Professor,
Birthdate: December 20, 1932 Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
<PAGE>
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Professor, International Politics;
Birthdate: September 14, 1925 Management Consultant; Trustee, Carnegie Endowment for
International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, and
U.S. Space Foundation; President Emeritus, University of
Pittsburgh; Founding Chairman; National Advisory Council
for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and Czech Management Center,
Prague; Director or Trustee of the Funds. .
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Public
Birthdate: June 21, 1935 Relations/Marketing/Conference Planning; Director
or Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA Executive Vice President of the Fund; President
Birthdate: April 11, 1949 and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research:; President and Director, Federated
Research Corp. and Federated Global Research Corp.;
President, Passport Research, Ltd.; Trustee,
Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated
Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some
of the Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Trustee of the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA Executive Vice President, and Secretary of the Fund;
Birthdate: October 26, 1938 Executive Vice President, Secretary, and Trustee,
Federated Investors; Trustee, Federated Advisers,
Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Shareholder Services Company;
Director, Federated Services Company; President and
Trustee, Federated Shareholder Services; Director,
Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
<PAGE>
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA Vice President of the Fund; Executive Vice
Birthdate: May 17, 1923 President and Trustee, Federated
Investors, Chairman and Director, Federated
Securities Corp.; President or Vice President of
some of the Funds; Director or Trustee of some of
the Funds.
Joeseph S. Machi
Federated Investors Tower
Pittsburgh, PA Vice President and Assistant Treasurer; Vice
Birthdate: May 22, 1962 President and Assistant Treasurer of some of the
Funds.
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for
U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds;
The Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
As of October 29, 1997, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of October 29, 1997, no
shareholder owned 5% or more of the outstanding shares of the FUND.
<PAGE>
<TABLE>
<CAPTION>
Officers and Trustees Compensation
- -------------------------------------- ------------------------------------- -------------------------------------
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION PAID TO TRUSTEES
NAME, POSITION THE TRUST* FROM THE FUND AND FUND COMPLEX**
WITH THE TRUST
- -------------------------------------- ------------------------------------- -------------------------------------
- -------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
John F. Donahue, Chairman and Trustee $0 $0 for the Fund Complex
Thomas G. Bigley, Trustee $1,011 $3,217 for the Fund Complex
John T. Conroy, Jr., Trustee $1,114 $3,538 for the Fund Complex
William J. Copeland, Trustee $1,114 $3,538 for the Fund Complex
James E. Dowd, Trustee $1,114 $3,538 for the Fund Complex
Lawrence D. Ellis, M.D., Trustee $1,011 $3,217 for the Fund Complex
Edward L. Flaherty, Jr., Trustee $1,114 $3,538 for the Fund Complex
Edward C. Gonzales, President and $0 $0 for the Fund Complex
Trustee
Peter E. Madden, Trustee $1,011 $3,217 for the Fund Complex
John E. Murray, Jr., J.D., S.J.D., $1,011 $3,217 for the Fund Complex
Trustee
Wesley W. Posvar, Trustee $1,011 $3,217 for the Fund Complex
Marjorie P. Smuts $1,011 $3,217 for the Fund Complex
Trustee
</TABLE>
* The aggregate compensation for the fiscal year ended 9/30/97 is provided for
the Trust which is comprised of five portfolios.
**The total compensation is provided for the Fund Complex, which consists of the
Blanchard Precious Metals Fund, The Virtus Funds, and the Trust. The
information is provided for Blanchard Funds and Blanchard Precious Metals
Fund, Inc. and The Virtus Funds for the fiscal year ended 9/30/97.
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a wholly-owned subsidiary of Signet Banking Corporation. Because of the
internal controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus. For the fiscal year ended September 30, 1997, and for the period
from May 1, 1996 through September 30, 1996, the FUND's investment management
fee paid to VCM was $1,273,719 and $610,104, respectively, less a voluntary
expense reimbursement of $0 and $8,181, respectively. For the fiscal year ended
April 30, 1996, the FUND's investment management fee paid to VCM and the prior
manager was $1,795,137, less voluntary expense reimbursement of $0. For the
fiscal year ended April 30, 1995, the FUND's investment management fee paid to
the prior manager was $2,723,672, less a voluntary expense reimbursement of
$43,422. For the fiscal year ended April 30, 1994, the FUND's investment
management fee paid to the prior manager was $4,285,213, less a voluntary
expense reimbursement of $1,252,529.
<PAGE>
THE SUB-ADVISORY AGREEMENT
OFFITBANK furnishes investment advisory services to the FUND pursuant
to a Sub-Advisory Agreement between VCM and OFFITBANK. Pursuant to the
Sub-Advisory Agreement, OFFITBANK supervises the investment and reinvestment of
the cash, securities or other properties comprising the FUND's portfolio,
subject at all times to the direction of VCM and the policies and control of the
Trust's Board of Trustees. OFFITBANK gives the FUND the benefit of its best
judgment, efforts and facilities in rendering its services as Sub-Adviser.
In carrying out its obligations, OFFITBANK:
(a) uses the same skill and care in providing such service as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities; (b) obtains and evaluates pertinent information about
significant developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally or the
FUND's portfolio and whether concerning the individual issuers whose securities
are included in the FUND's portfolio or the activities in which the issuers
engage, or with respect to securities which it considers desirable for inclusion
in the FUND's portfolio; (c) determines which issuers and securities shall be
represented in the FUND's portfolio and regularly reports thereon to the Trust's
Board of Trustees; (d) formulates and implements continuing programs for the
purchases and sales of the securities of such issuers and regularly reports
thereon to the Trust's Board of Trustees; (e) is authorized to give instructions
to the custodian and/or sub-custodian of the FUND appointed by the Trust's Board
of Trustees, as to deliveries of securities, transfers of currencies and
payments of cash for the account of the FUND, in relation to the matters
contemplated by this Agreement; and (f) takes, on behalf of the FUND, all
actions which appear to the Trust and VCM necessary to carry into effect such
purchase and sale programs and supervisory functions as aforesaid, including the
placing of orders for the purchase and sale of securities for the FUND and the
prompt reporting to VCM of such purchases and sales.
OFFITBANK is responsible for decisions to buy and sell securities for
the FUND's portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. OFFITBANK's primary consideration in effecting a security
transaction will be execution at the most favorable price. In selecting a
broker-dealer to execute each particular transaction, OFFITBANK will take the
following into consideration: the best net price available, the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the FUND on a continuing
basis. Accordingly, the price to the FUND in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies as the Board of Trustees may determine,
OFFITBANK shall not be deemed to have acted unlawfully or to have breached any
duty created under the Sub-Advisory Agreement or otherwise solely by reason of
its having caused the FUND to pay a broker or dealer for effecting a portfolio
investment transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if OFFITBANK
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or
OFFITBANK's overall responsibilities with respect to the FUND and to its other
clients as to which it exercises investment discretion. Subject to such policies
as the Board of Trustees may determine, OFFITBANK will purchase and sell foreign
currency and futures contracts and other securities for the FUND. OFFITBANK is
further authorized to allocate the orders placed by it on behalf of the FUND to
any affiliated broker-dealer of the FUND or to such brokers and dealers who also
provide research or statistical material, or other services to the FUND, VCM or
OFFITBANK. Such allocation is in such amounts and proportions as OFFITBANK shall
determine and OFFITBANK will report on said allocations regularly to the Board
of Trustees of the Trust indicating the brokers to whom such allocations have
been made and the basis therefor.
Any investment program undertaken by OFFITBANK pursuant to the
Sub-Advisory Agreement, as well as any other activities undertaken by OFFITBANK
on behalf of the FUND pursuant thereto, is at all times subject to any
directives of the Board of Trustees of the Trust. VCM provides OFFITBANK with
written notice of all such directives, so long as the Sub-Advisory Agreement
remains in effect.
Pursuant to the Sub-Advisory Agreement, OFFITBANK maintains, at its
expense and without cost to VCM or the FUND, a trading function in order to
carry out its obligations to place orders for the purchase and sale of portfolio
securities for the FUND.
<PAGE>
Pursuant to the Sub-Advisory Agreement, upon request of VCM and with
the approval of the Trust's Board of Trustees, OFFITBANK may perform services on
behalf of the FUND which are not required by the Sub-Advisory Agreement. Such
services will be performed on behalf of the FUND and OFFITBANK's cost in
rendering such services may be billed monthly to VCM, subject to examination by
VCM's independent accountants. Payment or assumption by OFFITBANK of any FUND
expense that OFFITBANK is not required to pay or assume under the Sub-Advisory
Agreement shall not relieve VCM or OFFITBANK of any of their obligations to the
FUND or obligate OFFITBANK to pay or assume any similar FUND expense on any
subsequent occasions.
Pursuant to the Sub-Advisory Agreement, for the services to be rendered
and the facilities furnished hereunder, VCM pays OFFITBANK a monthly fee at the
annual rate of .30% of the FUND's first $25 million of average daily net assets;
plus .25% of the FUND's average daily net assets in excess of $25 million but
less than $50 million; plus .20% of the FUND's average daily net assets in
excess of $50 million. Compensation under the Sub-Advisory Agreement is
calculated and accrued daily and the amounts of the daily accruals are paid
monthly.
The fee paid to OFFITBANK by VCM for the fiscal year ended September
30, 1997, and for the period from May 1, 1996 through September 30, 1996, was
$377,158 and $178,414, respectively. The fee paid to OFFITBANK by the prior
manager and by VCM for the fiscal year ended April 30, 1996 was $516,503. The
fees paid to OFFITBANK by the prior manager for the fiscal year ended April 30,
1995 and 1994, were $763,516 and $1,100,253. The compensation paid to OFFITBANK
will not be reduced by the amount of brokerage commissions received by OFFITBANK
or its affiliated broker-dealer pursuant to Section 17(e)(2) of the 1940 Act.
Pursuant to the Sub-Advisory Agreement, OFFITBANK agrees that it will
not render advisory or sub-advisory services to any other similar publicly
offered no-load or low-load open-end investment company registered with the SEC
while the Sub-Advisory Agreement is in effect.
The Sub-Advisory Agreement was approved by the then Trustees on March
24, 1995. The Sub-Advisory Agreement will remain in force and effect for an
initial term of two years, and shall remain in effect thereafter from year to
year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Trust's Board of Trustees or (ii) by the vote of a majority of
the FUND's outstanding voting securities (as defined in Section 2(a)(42) of the
1940 Act), and (b) by the affirmative vote of a majority of the Trustees who are
not parties to the Sub-Advisory Agreement or interested persons of a party to
the Sub-Advisory Agreement (other than as a Trustee of the Trust), by votes cast
in person at a meeting specifically called for such purpose.
The Sub-Advisory Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Trust's Board of Trustees or by vote of a
majority of the FUND's outstanding voting securities (as defined in Section 2(a)
(42) of the 1940 Act), or by VCM or OFFITBANK on sixty (60) days' written notice
to the other party. The Sub-Advisory Agreement automatically terminates: (a) in
the event of its assignment, the term "assignment" having the meaning defined in
Section 2(a)(4) of the 1940 Act, or (b) in the event that the Investment
Advisory Contract between the FUND and VCM shall terminate.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of the
Funds. Under the Custodian Agreement, Signet Trust Company holds the Funds'
portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. The custodian receives a fee at an annual rate
of .05% on the first $10 million of average net assets of each of the six
respective portfolios and .025% on average net assets in excess of $10 million.
There is a $20 fee imposed on each transaction. The custodian fee received
during any fiscal year shall be at least $1,000 per Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Fund for the
fees set forth in the prospectus. For the fiscal year ended September 30, 1997,
and for the period from May 1, 1996 through September 30, 1996, and for the
fiscal year ended April 30, 1996, Federated Administrative Services earned
$165,355, $77,731 and $190,752, respectively, in administrative services fees.
For the fiscal years ended April 30, 1995 and 1994, the administrative services
fees were included as part of the Management fee.
<PAGE>
PURCHASING SHARES
Shares of the Fund are sold at their net asset value without a sales
charge on days the New York Stock Exchange is open for business. The procedure
for purchasing Shares of the Fund is explained in the prospectus under
"Investing in Shares."
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the FUND's
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Fund; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the fiscal year ended September 30, 1997, and for the period from May 1,
1996 through September 30, 1996, the Fund accrued payments under the Plan
amounting to $424,573 and $203,367, respectively. For the fiscal year ended
April 30, 1996, the Fund accrued payments under the Plan amounting to $598,379.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objectives, and properly servicing these accounts, the FUND may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the Trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
<PAGE>
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
The financial statements for the fiscal year ended September 30, 1997,
are incorporated herein by reference from the FUND's Annual Report dated
September 30, 1997. A copy of the FUND'S Annual Report may be obtained without
charge by contacting Signet Financial Services, Inc. at 1-800-829-3863.
EVERGREEN KEYSTONE
LONG TERM
BOND FUNDS
1997 ANNUAL REPORT
(Logo of Evergreen Keystone Funds appears here)
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders................................. 1
Keystone Strategic Income Fund
Fund at a Glance.................................. 2
Management Report................................. 3
Evergreen U.S. Government Fund
Fund at a Glance.................................. 4
Management Report................................. 5
Growth of Investments.................................. 6
Financial Highlights
Keystone Strategic Income Fund.................... 7
Evergreen U.S. Government Fund.................... 10
Schedule of Investments
Keystone Strategic Income Fund.................... 12
Evergreen U.S. Government Fund.................... 17
Statements of Assets and Liabilities................... 18
Statements of Operations............................... 19
Statements of Changes in Net Assets.................... 21
Combined Notes to Financial Statements................. 23
Independent Auditors' Report........................... 30
</TABLE>
ABOUT EVERGREEN KEYSTONE
Since 1971, the Evergreen Funds have been providing investors with a proven,
value-driven approach to equity investment management. For over 60 years of
changing economic conditions, Keystone has taken pride in helping investors meet
their financial goals through a broad range of financial products and services.
Combined, Evergreen Keystone offers over 70 funds designed to meet a broad range
of objectives, including fixed-income, balanced, growth and income, and
aggressive growth. Assets under management total more than $30 billion.
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
LETTER TO SHAREHOLDERS
June 1997
(Photo of William M. Ennis appears here)
WILLIAM M. ENNIS
Dear Shareholders:
The past year has been a time when the most effective fixed income investment
strategies have been those that emphasized the coupon rates paid by the bonds.
Attempts to guess interest rate movements or foreign currency gains have tended
to be less successful. The economy has been strong-- witness the 4.7%
inflation-adjusted U.S. annualized growth rate for the fourth quarter of 1996
and the 5.6% annualized growth rate for the first quarter of 1997. Inflation has
been contained, although the strong economic growth has sparked periodic fears
of inflation and caused a great deal of short-term price fluctuations in the
bond market. In fact, over the six months that ended on April 30, 1997, yields
on the 30-year Treasury bond swung from a low of 6.35% to a high of 7.17%-- a
very abrupt swing by historical standards. As of this writing, the Federal
Reserve already has raised short-term rates by one-quarter of one percent, with
most observers expecting another increase eventually.
In this environment, U.S. corporations have tended to do well, and investors
have been well paid for holding corporate debt and focusing on income. In the
U.S., lower-rated securities-- which are less interest-rate sensitive-- tended
to do better than higher-rated securities. This meant high yield or "junk" bonds
outperformed investment grade corporate bonds and mortgage-backed securities,
which in turn outperformed U.S. Treasury Bonds. Strategies that emphasized
investments in foreign markets tended to suffer-- unless investments were hedged
back into the U.S. dollar. The strength of the U.S. dollar tended to undercut
the returns generated in currencies denominated in foreign currencies--
particularly the Japanese yen.
History has shown, however, that you can't make good investment decisions by
looking in the rear-view mirror. Should economic growth in the U.S. slow
dramatically, and interest rates peak and then start to decline, the investment
strategies that worked best during the past 12 months may not necessarily be the
best for the next 12 months. This is why a diversified portfolio-- in which the
investors balance the type of risks they take-- makes sense for many people. At
Evergreen Keystone, we also believe it is important for investors to remain in
close touch with their professional advisors for guidance on changing markets
and strategies.
I am delighted to inform you that Evergreen Keystone successfully integrated all
service functions of Evergreen and Keystone Funds in early May. This means that
you now have full exchange privileges among all Evergreen and Keystone America
funds. In addition, you will be receiving the top-flight shareholder service
that earned Evergreen Keystone the 1996 Dalbar Quality Tested Service Seal, the
highest award for mutual fund service presented by Dalbar, an independent mutual
fund survey and rating firm.
In the following pages, Evergreen Keystone investment professionals will give
you more detailed information about the investment environment and the
strategies employed in managing your funds. You will notice that this annual
report is a departure from past reports in format. It represents the effort of
Evergreen Keystone Funds to provide honest, thoughtful reports and to present
them in a format that is attractive and makes information easily accessible. We
are very interested in hearing your thoughts on this new format, and we welcome
any suggestions you may have.
Sincerely,
(Signature of William M. Ennis appears here)
WILLIAM M. ENNIS
MANAGING DIRECTOR
1
<PAGE>
(Keystone Strategic Income Fund logo appears here)
KEYSTONE
STRATEGIC INCOME FUND
FUND AT A GLANCE
As of April 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 4.08 % 3.48 % 7.49 % N/A
One year w/o sales
charge 9.27 8.48 8.49 N/A
SEC 30-day yield
w/sales charge1 7.02 6.66 6.61 N/A
Twelve month dividends
per share $0.54 $0.49 $0.49 $0.18 3
<CAPTION>
AVERAGE
ANNUAL RETURNS* CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years 3.38 % 3.47 % 4.26 % N/A
Five years 8.44 N/A N/A N/A
Ten years 6.90 N/A N/A N/A
Life of class2 6.87 7.11 7.44 N/A
<CAPTION>
CUMULATIVE RETURNS* CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Nine months w/o sales
charge 6.80 % 6.06 % 6.07 % N/A
Three years 10.47 10.77 13.33 N/A
Five years 49.95 N/A N/A N/A
Ten years 94.81 N/A N/A N/A
Life of class2 95.01 33.85 35.64 -2.87 %
*ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES
CHARGE
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C> <C> <C> <C>
Total net assets $193.1 million
Average credit
quality BBB
Average maturity 6.5 years
Average duration 4.93 years
1SEC YIELD IS BASED ON THE FUND'S NET INVESTMENT INCOME
OVER A 30-DAY PERIOD AND IS CALCULATED IN ACCORDANCE
WITH SECURITIES AND EXCHANGE COMMISSION GUIDELINES.
2CLASS A SHARES COMMENCED INVESTMENT OPERATIONS ON
4/14/87. CLASS B AND C SHARES WERE INTRODUCED ON
2/1/93. CLASS Y SHARES WERE INTRODUCED ON 1/13/97.
3DIVIDENDS FOR CLASS Y ARE FOR THE PERIOD JANUARY 13,
1997 TO APRIL 30, 1997.
</TABLE>
PORTFOLIO QUALITY (AS A PERCENTAGE OF NET ASSETS)
(Pie chart appears here with the following information:)
AAA 34.2%
AA 2.0%
BBB 5.5%
Other 58.3%
OBJECTIVES
High current income from interest on debt securities. Secondarily, the Fund
considers potential for growth of capital in selecting securities.
STRATEGY
The Fund seeks to meet its objectives by investing in three fixed-income asset
classes: U.S. government and agency securities; high yield corporate bonds
issued in the United States; and foreign bonds. The U.S. investments include a
range of issues spanning virtually the entire quality spectrum, from the
highest-quality government and agency obligations to high yielding bonds rated
below investment-grade. The foreign portion consists primarily of high-quality
securities issued by sovereign governments. Investing in foreign securities
generally involves more risk than investing in a portfolio consisting solely of
securities of domestic issuers. Fluctuations in foreign exchange rates pose an
additional level of risk. Keystone Strategic Income Fund manages investment and
currency risk by conducting extensive research of the countries and companies
whose securities it buys and by hedging the foreign currency exposure, if
needed.
PORTFOLIO MANAGEMENT TEAM
(Photo of Prescott Crocker appears here)
Senior Vice President and Head of the High Yield Bond Team,
Prescott Crocker is portfolio manager of Keystone Strategic
Income Fund. A Chartered Financial Analyst, Mr. Crocker has 25
years of senior-level investment experience. He is a graduate
of Harvard College and holds an M.B.A. in international
finance from Harvard Business School.
2
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
MANAGEMENT REPORT
June 1997
Dear Shareholders:
We are pleased to report to you on the activities of Keystone Strategic Income
Fund for the fiscal period which ended April 30, 1997. You may recall you
recently received a semi-annual report for the period ending January 31, 1997.
We have changed your Fund's fiscal year, however, to end on April 30, 1997. This
is part of an effort by Evergreen Keystone Funds to streamline fund
administration. Funds with similar investment objectives are being placed on the
same fiscal year cycle. The next report you will receive will be a semi-annual
report for the period ending October 31, 1997. You should expect to receive it
in December.
PERFORMANCE
Your Fund generated strong total returns for the nine-month period ending April
30, 1997. The overall performance reflected the favorable investment climates in
each of the Fund's three asset classes. The high yield sector had the strongest
performance during the period and helped to boost the overall total return. The
results of U.S. government securities were generally lackluster, but stayed
positive despite fluctuating interest rates. However, the Fund's European
holdings denominated in non-U.S. currencies underperformed, due to the strength
of the U.S. dollar. We have modified our hedging strategy to protect the
portfolio more effectively. At this writing, 100% of the Fund's European
holdings denominated in non-U.S. dollars is hedged.
UNPREDICTABLE MARKET
The investment environment was generally favorable during the period, with the
economy growing moderately and many corporations reporting better-than-expected
earnings growth. Consumer confidence was high, as was evidenced by strong retail
sales and demand for stocks and high-yield bonds. Conversely, these positive
fundamentals spurred fears of inflation and higher interest rates, resulting in
pockets of significant turbulence during the period. The inflation concerns
subsided when the Federal Reserve raised interest rates at the end of March.
STRATEGY
We have made some material adjustments to the Fund, primarily seeking to
increase the portfolio's total return. We increased the weighting in the high
yield area, as we believed this sector was fundamentally strong, attractively
valued, and consistently in high demand during the period.
At the close of the period, the Fund had 33% of net assets in high yield bonds,
versus 25% at the time of our last semiannual report dated January 31, 1997. The
economic uncertainties in Europe combined with the strength of the U.S. dollar
motivated us to reduce significantly our foreign currency exposure. We did this
by reducing our European holdings and by hedging the remaining positions. In
expectation of lower interest rates in the later part of 1997, we increased our
positions in U.S. government and agency issues to represent 33.7% of the
portfolio. Our overall optimism notwithstanding, we positioned the Fund's
duration-- or sensitivity to interest rates-- conservatively, to help preserve
the value of the portfolio during periods of volatility, which we believed would
recur. Although the Fund's duration is generally in the range of 4-6 years, we
adjusted it downward at fiscal year-end
PORTFOLIO ALLOCATIONS APRIL 30, 1997
(AS A PERCENTAGE OF NET ASSETS)
(Pie chart appears here with the following information:)
Corporate debt 33.3%
Foreign bonds 26.3%
Mortgage-backed 21.2%
U.S. Treasury 11.3%
Other assets and
liabilities (net) 4.6%
Short-term
investments 3.3%
to 4.9 years to guard against potential interest-rate volatility in the
short-term.
OUTLOOK
We are confident that we could see substantially better markets in the following
months after a potential period of interest rate fluctuations in the short run.
The economy responded favorably to the interest rate hike in March and we think
that economic growth will continue to moderate.
We are bullish on the high yield sector, given the continuing apparent good
health of U.S. corporations and the strong demand from investors seeking higher
yields.
With regard to the Fund's foreign holdings, we think the U.S. dollar may
continue to be strong. Economic uncertainty surrounds the forming of the
European Monetary Union (EMU) in 1999, as indicated by the turbulence in the
markets following the Socialist victory in the French elections. This
uncertainty may continue to pressure European currencies, but provide investment
opportunities for the Fund in Italian, Spanish, and Swedish bonds as the
outlying markets continue to converge on the stronger core German market.
Emerging market bonds have been very attractive relative to U.S. treasuries and
we believe this will continue. These trends reflect the growing confidence of
investors in the viability and creditworthiness of developing economies.
Thank you for your support of Keystone Strategic Income Fund.
Sincerely,
(Signature of Albert H. Elfner, III appears here)
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
(Signature of Prescott Crocker appears here)
PRESCOTT CROCKER
SENIOR VICE PRESIDENT
Keystone Investment Management Company
3
<PAGE>
EVERGREEN
U . S. GOVERNMENT FUND
(Evergreen U.S. Government Fund logo appears here)
FUND AT A GLANCE
As of April 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 1.32 % 0.60 % 4.58 % 6.63 %
One year w/o sales
charge 6.37 5.58 5.58 6.63
SEC 30-day yield1 with
sales charge 6.13 5.37 5.36 6.38
Twelve month dividends
per share $0.62 $0.55 $0.55 $0.65
AVERAGE
ANNUAL RETURNS CLASS A CLASS B CLASS C CLASS Y
Three years 5.04 % 5.10 % N/A 7.02 %
Life of class2 4.30 4.42 6.18 % 4.75
ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE
<CAPTION>
CUMULATIVE RETURNS CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Ten months w/o sales
charge 5.30 % 4.65 % 4.65 % 5.52 %
Three years 15.90 16.10 N/A 22.58
Life of class2 19.84 20.45 17.33 18.67
PORTFOLIO CHARACTERISTICS
Total net assets $287.8 million
Average credit quality AAA
Average maturity 8.65 years
Average duration 4.27 years
1SEC YIELD IS BASED ON THE FUND'S NET INVESTMENT INCOME
OVER A 30-DAY PERIOD AND IS CALCULATED IN ACCORDANCE
WITH SECURITIES AND EXCHANGE COMMISSION GUIDELINES.
2CLASS A AND B SHARES WERE INTRODUCED ON 1/11/93. CLASS C
SHARES WERE INTRODUCED ON 9/2/94. CLASS Y SHARES WERE
INTRODUCED ON 9/2/93.
</TABLE>
PORTFOLIO COMPOSITION APRIL 30, 1997
(AS A PERCENTAGE OF NET ASSETS)
(Pie chart appears here with the following information:)
Mortgage-back
securities 53.6%
U.S. Treasury
obligations 44.7%
Repurchase
Agreements 0.7%
Other assets and
liabilities 1.0%
OBJECTIVE
A high level of current income consistent with stability of principal.
STRATEGY
The Fund seeks to meet its objectives by investing in debt instruments issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The Fund
may also invest in mortgage-backed securities, which represent ownership
interests in mortgage pools of U.S. government agencies, such as Federal Home
Loan Mortgage Corporation and Government National Mortgage Association. Other
investments may include asset-backed securities, for which automobile and credit
card receivables are the most common collateral. Up to 20% of net assets may be
invested in collateralized mortgage obligations (CMOs), and other debt
securities considered appropriate. The Fund's net asset value is not insured and
is likely to fluctuate according to changes in interest rates. Experienced
professional management seeks to ensure broad diversification of issues and
maturities, helping to maximize opportunities and minimize the risks of changing
interest rates.
PORTFOLIO MANAGEMENT TEAM
(Photo of Rollin C. Williams appears here)
Rollin C. Williams, a Vice President and Senior Fixed Income
Portfolio Manager of First Union Capital Management Group, is
portfolio manager of Evergreen U.S. Government Fund. An
investment professional with more than 27 years of banking and
investment management experience, he is responsible for the
management of over $2.1 billion in fixed income portfolios.
Mr. Williams is a Chartered Financial Analyst, and holds a
B.B.A. from Milton College as well as graduate studies from
University of Nebraska, Omaha. He is a member of the
Association for Investment Management and Research and the
North Carolina Society of Financial Analysts. Before joining
First Union, Mr. Williams was the head of fixed-income
investments at Dominion Trust Company in Roanoke, Va. Mr.
Williams has been with First Union since 1993 when Dominion
was acquired by First Union National Bank.
4
<PAGE>
EVERGREEN
U . S. GOVERNMENT FUND
(Evergreen U.S. Government Fund logo appears here)
MANAGEMENT REPORT
June 1997
Dear Shareholders:
We are pleased to present the annual report for the Evergreen U.S. Government
Fund for the fiscal period which ended April 30, 1997. You may recall that you
recently received a semi-annual report for the period which ended December 31,
1996. We have changed your Fund's fiscal year, however, to end on April 30,
1997. This is part of an effort by Evergreen Keystone Funds to streamline and
increase the efficiency of fund administration. Funds with similar investment
objectives are being placed on the same fiscal year cycle. The next report you
will receive will be a semi-annual report for the period ending October 31,
1997. You should expect to receive it in December.
PERFORMANCE
Evergreen U.S. Government Fund performed very well during the period. In fact,
Class Y shares completed the period with top-quartile, 12-month performance
among the 175 funds in the U.S. Government Bond Fund Category of Lipper
Analytical Services, Inc., an independent mutual fund ranking service.
We attribute the Fund's solid performance during this period both to strong
duration management during a period when interest rates fluctuated dramatically,
and to an emphasis on mortgage-backed securities.
INVESTMENT CLIMATE
Throughout the 12-month period, U.S. economic growth remained extremely strong,
as evidenced by the inflation-adjusted annualized growth rate of 5.6% in the
first quarter of 1997. This strong growth, however, has made the financial
markets wary of any signs of inflationary pressure. After hitting a low point in
late November, 1996, interest rates began rising in anticipation of potential
Federal Reserve Board action to raise short-term rates to head off potential
inflation. In fact on March 25, the Federal Reserve Board raised the key Federal
Funds Rate by one-quarter of one percent, indicating it was concerned that
strong economic growth was "increasing the risk of inflationary imbalances."
Going forward, the financial markets continue to focus on any emerging
information that could suggest inflationary pressure and could result in further
hikes in short-term interest rates by the Federal Reserve.
STRATEGY
In response to rising interest rates and uncertainty about the Federal Reserve
Board's course of action, the duration of your Fund has been shortened from 4.78
years to 4.27 years over the 12-month period that ended April 30. Duration
adjustments were implemented in the Treasury sector by selling securities due in
2019 and buying shorter-term securities. In addition to shortening the duration,
we modestly increased the mortgage position of the Fund, primarily in the first
half of the year. A greater emphasis on mortgages serves as a more defensive
posture in times of interest rate increases, in that mortgages tend to show
greater price stability than
WHY INVEST IN U.S. GOVERNMENT SECURITIES?
1. The most diverse and actively traded sector of the securities market, U.S.
government securities offer a wide selection of investment choices and
liquidity.
2. U.S. government securities represent the highest-quality issues in the
fixed-income market.
3. If held to maturity, U.S. Treasury bills, notes and bonds are guaranteed by
the U.S. government as to the payment of principal and interest. This
guarantee applies to the individual securities only and not to the shares of
U.S. government securities mutual funds.
Treasuries when prices start to fall. Over the past 12 months, the mortgage
position of the Fund has been increased from 49.6% of net assets to 53.6% on
April 30, 1997. U.S. Treasuries accounted for 44.7% of assets on April 30, with
cash and other assets and liabilities accounting for the remaining 1.7%.
OUTLOOK
Looking forward, we believe the bond market's participants will continue to
monitor both the Federal Reserve Board's actions and any signs of inflation
appearing in emerging economic data. Historically, the Federal Reserve has
tended not to take isolated steps in moving short-term interest rates in any
direction, whether up or down. In fact, the last time the Federal Reserve moved
rates only once was back in 1987. As a result, we believe it is likely that the
March 25 increase in short-term rates will not be an isolated event, and that
interest rates will rise further in the short term. Over the longer term,
however, we think interest rates are more likely to decline.
Consistent with this outlook, we expect over the next few months that the
duration of the Fund will be aggressively extended to take advantage of
opportunities as interest rates peak and start to decline, and bond prices
consequently rise.
The overall strategy of the Evergreen U.S. Government Fund continues to be to
provide the investor with a high quality portfolio that offers attractive
income.
Thank you for your investment in the Evergreen U.S. Government Fund.
Sincerely,
(Signature of Richard K. Wagoner appears here)
RICHARD K. WAGONER
EXECUTIVE VICE PRESIDENT
CHIEF INVESTMENT OFFICER
First Union Capital Management Group
(Signature of Rollin C. Williams appears here)
ROLLIN C. WILLIAMS
VICE PRESIDENT
SENIOR FIXED INCOME PORTFOLIO MANAGER
5
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
GROWTH OF INVESTMENTS
KEYSTONE STRATEGIC INCOME FUND
(A chart appears below with the following information:)
Comparisons of a $10,000 investment in Keystone Strategic
Income Fund, Class A shares, versus a similar investment
in the Lehman Aggregate Bond Index (LABI) and the
Consumer Price Index (CPI).
Class A CPI LABI
------- ------ ------
(In Thousands)
4/87 $ 9,525 $10,000 $10,000
4/88 9,788 10,495 10,421
4/89 10,645 10,979 11,246
4/90 9,734 11,497 12,261
4/91 9,478 12,058 14,120
4/92 12,388 12,442 15,673
4/93 15,011 12,840 17,754
4/94 16,814 13,144 17,902
4/95 16,202 13,545 19,213
4/96 17,847 13,939 20,872
4/97 19,501 14,286 22,350
Average Annual Total Returns
- -------------------------------------------------
1 Year 5 Year 10 Year Life of Class
------ ------ ------- -------------
Class A 4.08% 8.44% 6.90% 6.87%
Class B 3.48% - - 7.11%
Class C 7.49% - - 7.44%
Class Y - - - -
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholder
investing in the different classes. The Lehman Aggregate Bond Index is an
unmanaged, market index. The index does not include transaction costs
associated with buying and selling securities, nor any management fees. The
Consumer Price Index, a measure of inflation, is through March 31, 1997.
EVERGREEN U.S. GOVERNMENT FUND
(A chart appears below with the following information:)
Comparisons of a $10,000 investment in Evergreen U.S.
Government Fund, Class A shares, versus a similar investment
in the Lehman Brothers Intermediate Term Government
Bond Index (LBIGBI), and the Consumer Price Index (CPI).
Class A CPI LABI
------- ------ ------
(In Thousands)
1/12/93 $ 9,525 $10,000 $10,000
4/93 9,860 10,148 10,455
4/94 9,849 10,388 10,549
4/95 10,488 10,705 11,200
4/96 11,266 11,016 12,044
4/97 11,984 11,290 12,888
Average Annual Total Returns
- --------------------------------
1 Year Life of Class
------ -------------
Class A 1.32% 4.30%
Class B 0.60% 4.42%
Class C 4.58% 6.18%
Class Y 6.63 4.75%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholder
investing in the different classes. The Lehman Brothers Intermediate
Government Bond Index is an unmanaged, market index. The index does
not include transaction costs associated with buying and selling securities,
nor any management fees. The Consumer Price Index, a measure of inflation,
is through March 31, 1997.
6
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, 1997 YEAR ENDED JULY 31,
(D) 1996 1995 1994 (B) 1993
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
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>
CLASS A SHARES (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) 0.00
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.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<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>
CLASS B SHARES
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.
<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>
CLASS C SHARES
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.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
JANUARY 13, 1997
(COMMENCEMENT
OF CLASS
OPERATIONS)
TO
APRIL 30, 1997
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD..................................................................... $7.03
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................................................... 0.00
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.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
EVERGREEN
U . S. GOVERNMENT FUND
(Evergreen U.S. Government Fund logo appears here)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<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>
CLASS A SHARES
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.
<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>
CLASS B SHARES
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.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
EVERGREEN
U . S. GOVERNMENT FUND
(Evergreen U.S. Government Fund logo appears here)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<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>
CLASS C SHARES
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.
<TABLE>
<CAPTION>
SEPTEMBER 2, 1993
TEN MONTHS YEAR SIX MONTHS YEAR (DATE OF INITIAL
ENDED ENDED ENDED ENDED PUBLIC OFFERING)
APRIL 30, JUNE 30, JUNE 30, DECEMBER 31, TO
1997 (D) 1996 1995 (C) 1994 DECEMBER 31, 1993
<S> <C> <C> <C> <C> <C>
CLASS Y SHARES
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.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
SCHEDULE OF INVESTMENTS
April 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE
<C> <S> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME-- 92.1%
<C> <S> <C>
INDUSTRIAL BONDS & NOTES-- 33.3%
AEROSPACE-- 0.3%
$ 500,000 Airplanes Pass Thru Trust,
Series 1, Class D, Bond (Subord.),
10.88%, 3/15/19................... $ 552,780
BROADCASTING-- 3.0%
775,000 Ackerly Communications,
Incorporated,
Series B, Sr. Notes,
10.75%, 10/1/03................... 813,750
1,500,000 Echostar Satellite Broadcast
Corporation,
Sr. Disc. Notes,
(Eff. Yield 10.05%) (d)
0.00%, 3/15/04.................... 1,110,000
750,000 K-III Communications Corporation,
Sr. Notes,
8.50%, 2/1/06 (e)................. 723,750
1,000,000 Paxson Communications Corporation,
Sr. Notes (Subord.),
11.63%, 10/1/02................... 1,062,500
1,000,000 SFX Broadcasting, Incorporated,
Series B, Sr. Notes (Subord.),
10.75%, 5/15/06 (e)............... 1,047,500
1,000,000 Sinclair Broadcast Group,
Incorporated,
Sr. Notes (Subord.),
10.00%, 9/30/05................... 1,017,500
5,775,000
CABLE/OTHER VIDEO DISTRIBUTION-- 5.1%
1,000,000 Adelphia Communications Corporation,
Sr. Notes,
9.88%, 3/1/07 (e)................. 945,000
500,000 Comcast Corporation,
Sr. Deb. (Subord.),
10.63%, 7/15/12................... 555,000
2,000,000 Diamond Cable Communications
Company,
Sr. Disc. Notes,
(Eff. Yield 10.07%) (d)
0.00%, 9/30/04.................... 1,640,000
500,000 Diamond Cable Communications
Company,
Sr. Disc. Notes,
(Eff. Yield 10.48%) (d)
0.00%, 2/15/07 (e)................ 291,250
250,000 Frontiervision,
Sr. Notes (Subord.),
11.00%, 10/15/06.................. 250,000
CABLE/OTHER VIDEO DISTRIBUTION-- CONTINUED
$1,000,000 Fundy Cable Limited,
Sr. Secd. 2nd Priority Notes,
11.00%, 11/15/05.................. $ 1,055,000
1,250,000 Marcus Cable Operating Company LP,
Sr. Disc. Notes,
13.50%, 8/1/04.................... 1,034,375
1,000,000 Rogers Cablesystems Limited,
Sr. Deb. (Subord.),
10.13%, 9/1/12.................... 1,022,500
650,000 Telewest Communications PLC,
Sr. Disc. Deb.,
(Eff. Yield 9.07%) (d)
0.00%, 10/1/07.................... 438,750
750,000 TCI Satellite Entertainment,
Incorporated,
Sr. Notes (Subord.),
10.88%, 2/15/07 (e)............... 714,375
250,000 TCI Satellite Entertainment,
Incorporated,
Sr. Disc. Notes,
12.25%, 2/15/07 (e)............... 131,250
2,000,000 Videotron Holdings PLC,
Sr. Disc. Notes,
(Eff. Yield 11.00%) (d)
0.00%, 8/15/05.................... 1,620,000
9,697,500
CHEMICALS-- 2.9%
750,000 Astor Corporation,
Series B, Sr. Notes (Subord.),
10.50%, 10/15/06.................. 772,500
750,000 Freedom Chemicals, Incorporated,
Sr. Notes (Subord.),
10.63%, 10/15/06.................. 778,125
1,000,000 Kaiser Aluminum and Chemical
Corporation,
Sr. Notes (Subord.),
12.75%, 2/1/03.................... 1,085,000
1,550,000 NL Industries, Incorporated,
Sr. Secd. Notes,
11.75%, 10/15/03.................. 1,666,250
675,000 Rexene Corporation,
Sr. Notes,
11.75%, 12/1/04................... 745,875
500,000 Texas Petrochemicals Corporation,
Sr. Notes (Subord.),
11.13%, 7/1/06.................... 520,000
5,567,750
</TABLE>
(CONTINUED)
12
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
SCHEDULE OF INVESTMENTS (CONTINUED)
April 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE
<C> <S> <C> <C> <C>
</TABLE>
CONSUMER-- 3.7%
$ 500,000 Consumers International, Incorporated,
Sr. Notes,
10.25%, 4/1/05 (e)................ $ 515,000
1,000,000 Exide Corporation,
Sr. Notes,
10.75%, 12/15/02.................. 1,025,000
1,000,000 Fonda Group, Incorporated,
Sr. Notes (Subord.),
9.50%, 3/1/07 (e)................. 945,000
1,025,000 International Semi-Tech Micro-
electronics, Incorporated,
Sr. Disc. Notes,
(Eff. Yield 11.98%) (d)
0.00%, 8/15/03.................... 553,500
1,250,000 McLeod, Incorporated,
Sr. Disc. Notes,
(Eff. Yield 9.84%) (d)
0.00%, 3/1/07 (e)................. 712,500
3,800,000 Revlon Worldwide Corporation,
Sr. Disc. Notes,
(Eff. Yield 10.75%) (d)
0.00%, 3/15/01 (e)................ 2,498,500
1,000,000 Tracor, Incorporated,
Sr. Notes (Subord.),
8.50%, 3/1/07 (e)................. 980,000
7,229,500
DIVERSIFIED MEDIA-- 0.9%
500,000 Cinemark USA, Incorporated,
Series B, Sr. Notes (Subord.),
9.63%, 8/1/08..................... 495,000
1,000,000 Dawson Production Services,
Incorporated,
Sr. Notes,
9.38%, 2/1/07..................... 990,000
350,000 Lifestyle Brands,
Gtd. Deb. (Surbord.),
10.00%, 10/30/97.................. 350,000
1,835,000
ENERGY-- 3.2%
1,000,000 Clark USA, Incorporated,
Series B, Sr. Notes,
10.88%, 12/1/05................... 1,012,500
775,000 Ferrellgas Partners Limited Partnership
Series B Sr. Secd. Notes,
9.38%, 6/15/06.................... 797,281
1,250,000 HS Resources, Incorporated,
Sr. Notes (Subord.),
9.25%, 11/15/06................... 1,220,313
ENERGY-- CONTINUED
$1,000,000 Nuevo Energy Company,
Sr. Notes (Subord.),
9.50%, 4/15/06.................... $ 1,020,000
1,000,000 Parker Drilling Corporation,
Series B, Sr. Notes,
9.75%, 11/15/06 (b)............... 1,027,500
500,000 Plains Resources, Incorporated,
Series B, Sr. Notes (Subord.),
10.25%, 3/15/06 (e)............... 520,000
500,000 Vintage Petroleum, Incorporated,
Sr. Notes (Subord.),
9.00%, 12/15/05................... 496,250
6,093,844
FINANCIAL-- 0.5%
1,000,000 Reliance Group Holdings,
Incorporated,
Sr. Deb. (Subord.),
9.75%, 11/15/03................... 1,027,500
FOODS/TOBACCO/BEVERAGES-- 2.0%
500,000 Chiquita Brands International,
Incorporated,
Sr. Notes,
9.63%, 1/15/04.................... 510,000
4,336,000 Iowa Select Farms,
Series A, Sr. Notes,
(Eff. Yield 16.62%) (d)
(8/2/94-$2,243,310),
0.00%, 2/15/04 (b)................ 2,879,707
500,000 Ralphs Grocery Company,
Sr. Notes (Subord.),
11.00%, 6/15/05................... 532,500
3,922,207
FOREST PRODUCTS/CONTAINERS-- 3.3%
1,000,000 Affiliated Newspaper Investments,
Incorporated,
Sr. Disc. Notes,
(Eff. Yield 9.20%) (d)
0.00%, 7/1/06..................... 855,000
1,000,000 Container Corporation of America,
Series A, Sr. Notes,
11.25%, 5/1/04.................... 1,070,000
375,000 Four M Corporation,
Sr. Notes,
12.00%, 6/1/06 (e)................ 367,500
934,000 Owens-Illinois, Incorporated,
Sr. Notes (Subord.),
10.50%, 6/15/02................... 985,370
350,000 Printpack, Incorporated,
Series B, Sr. Notes (Subord.),
10.63%, 8/15/06................... 359,188
(CONTINUED)
13
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
SCHEDULE OF INVESTMENTS (CONTINUED)
April 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<C> <S> <C>
</TABLE>
Incorporated,
Sr. Notes,
10.75%, 10/15/01.................. $ 1,095,000
500,000 Sea Containers Limited,
Sr. Deb. (Subord.),
12.50%, 12/1/04................... 548,750
1,000,000 Stone Container Corporation,
1st Mtge. Notes,
10.75%, 10/1/02................... 1,005,000
6,285,808
GAMING-- 3.8%
1,000,000 Casino America, Incorporated,
Sr. Notes,
12.50%, 8/1/03.................... 1,007,500
2,488,391 Grand Palais Casino, Incorporated,
Sr. Secd. PIK Notes,
(8/15/94-$2,488,391)
18.25%, 11/1/97 (a) (b) (c)....... 25
1,000,000 Lodgenet Entertainment Corporation,
Sr. Notes,
10.25%, 12/15/06 (e).............. 971,250
1,150,000 Magestic Star Casino LLC,
Sr. Secd. Notes,
12.75%, 5/15/03................... 1,242,000
500,000 Prime Hospitality Corporation,
Sr. Notes (Subord.),
9.75%, 4/1/07 (e)................. 507,500
500,000 Prime Hospitality Corporation,
1st Mtge. Notes,
9.25%, 1/15/06.................... 508,750
1,000,000 Showboat, Incorporated,
Sr. Notes (Subord.),
13.00%, 8/1/09.................... 1,130,000
750,000 Starcraft Corporation,
Notes (Subord.),
16.50%, 1/15/98 (a) (b) (c)....... 15,000
1,000,000 Sun International Hotels Limited,
Sr. Notes (Subord.),
9.00%, 3/15/07 (e)................ 990,000
1,000,000 Sun World International, Incorporated,
1st Mtge. Notes,
11.25%, 4/15/04 (e)............... 1,030,000
7,402,025
HOUSING-- 0.5%
1,000,000 Continental Homes Holding
Corporation,
Sr. Notes,
10.00%, 4/15/06................... 985,000
RETAIL-- 1.0%
$ 800,000 Cole National Group, Incorporated,
Sr. Notes,
11.25%, 10/1/01................... $ 872,000
1,000,000 Finlay Fine Jewelry Corporation,
Sr. Notes,
10.63%, 5/1/03.................... 1,045,000
1,917,000
TELECOMMUNICATIONS-- 2.1%
1,000,000 Dial Call Communications,
Incorporated,
Series B, Sr. Disc. Notes,
(Eff. Yield 11.24%) (d)
0.00%, 12/15/05................... 742,500
2,900,000 Nextel Communications, Incorporated,
Sr. Disc. Notes,
(Eff. Yield 10.70%) (d)
0.00%, 8/15/04.................... 2,109,750
1,000,000 Teleport Communications Group,
Sr. Disc. Notes,
(Eff. Yield 8.97%) (d)
0.00%, 7/1/07..................... 687,500
525,000 Teleport Communications Group,
Sr. Notes,
9.88%, 7/1/06..................... 547,313
4,087,063
TRANSPORTATION-- 0.2%
500,000 Eletson Holdings, Incorporated,
1st Pfd. Mtge. Notes,
9.25%, 11/15/03................... 490,000
WIRELESS COMMUNICATIONS-- 0.8%
500,000 Rogers Cantel,
Sr. Secd. Deb.,
9.38%, 6/1/08..................... 513,750
1,000,000 Vanguard Cellular Systems,
Incorporated, Sr. Unsecd. Deb.,
9.38%, 4/15/06.................... 975,000
1,488,750
TOTAL INDUSTRIAL BONDS & NOTES
(COST-- $66,359,186).............. 64,356,727
MORTGAGE-BACKED SECURITIES-- 21.2%
1,998,073 CWMBS, Incorporated,
7.84%, 11/1/26.................... 1,953,116
7,611,868 FHLMC Participation Certificate Pool
#607352,
7.68%, 4/1/22..................... 7,991,244
2,625,806 FHLMC Participation Certificate Pool
#846298,
7.19%, 8/1/22..................... 2,719,757
(CONTINUED)
14
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
SCHEDULE OF INVESTMENTS (CONTINUED)
April 30, 1997
1,171,156 FNMA Grantor Trust 95-T5, Class A,
7.00%, 3/17/35................$ 1,126,506
4,451,652 FNMA Pool #322356,
7.00%, 9/1/25................. 4,322,242
5,886,008 FNMA Pool #324193,
7.00%, 9/1/25..................... 5,714,902
9,932,529 GNMA Pool #354714,
6.50%, 12/15/23................... 9,420,407
7,943,707 GNMA Pool #780163,
6.50%, 7/15/09.................... 7,771,169
TOTAL MORTGAGE-BACKED SECURITIES
(COST $41,324,624)................ 41,019,343
FOREIGN BONDS (U. S. DOLLARS)-- 16.7%
1,500,000 Argentina Republic, Deb.,
11.38%, 1/30/17................... 1,594,500
2,500,000 Argentina Global, Deb.,
11.00%, 10/9/06................... 2,690,625
8,150,138 Brazil (Federal Republic of), Govt.
Gtd.,
8.00%, 4/15/14.................... 6,183,917
5,500,000 Comtel Brasileira, Notes,
10.75%, 9/26/04 (e)............... 5,692,500
2,500,000 Grupo Industrial Durango S.A.,
Notes,
12.00%, 7/15/01................... 2,675,000
400,000 Grupo Industrial Durango S.A.,
Notes,
12.63%, 8/1/03.................... 431,000
2,900,000 Grupo Televisa S.A., Series B,
Sr. Notes,
11.88%, 5/15/06 (e)............... 3,088,500
3,000,000 Indah Kiat International Finance Co.,
Gtd. Sr. Secd. Notes,
11.88%, 6/15/02................... 3,210,000
500,000 Intermedia Capital Partners, Sr.
Notes,
11.25%, 8/1/06 (e)................ 513,750
750,000 Ispat Mexicana S. A., Sr. Unsecd. Deb.,
10.38%, 3/15/01 (e)............... 765,500
FOREIGN BONDS (U. S. DOLLARS)-- CONTINUED
$5,000,000 Klabin Fabricadora Papel, Unsecd. Deb.,
10.00%, 12/20/01..................$ 5,025,000
425,000 TV Azteca SA DE CV, Sr. Notes,
10.50%, 2/15/07 (e)............... 418,094
TOTAL FOREIGN BONDS (U.S. DOLLARS)
(COST-- $31,699,064).............. 32,287,886
FOREIGN BONDS (NON U. S. DOLLARS)-- 9.6%
8,250,000 Canada Government, Deb.,
CD 8.75%, 12/1/05...................... 6,743,504
35,500,000 Denmark (Kingdom of), Deb.,
DK 8.00%, 5/15/03...................... 5,974,570
9,400,000 Germany (Federal Republic of), Deb.,
DM 6.88%, 5/12/05...................... 5,862,652
TOTAL FOREIGN BONDS (NON U.S.
DOLLARS)(COST-- $20,140,076)...... 18,580,726
U.S. TREASURY OBLIGATIONS-- 11.3%
5,900,000 U.S. Treasury Bills,
0.00%, 3/5/98..................... 5,622,877
7,723,000 U.S. Treasury Bonds,
7.88%, 2/15/21.................... 8,442,166
4,180,000 U.S. Treasury Bonds,
6.50%, 11/15/26................... 3,925,940
2,500,000 U.S. Treasury Notes,
6.25%, 3/31/99.................... 2,499,600
1,250,000 U.S. Treasury Notes,
6.13%, 12/31/01................... 1,228,325
TOTAL U.S. TREASURY OBLIGATIONS
(COST-- $21,584,207).............. 21,718,908
TOTAL FIXED INCOME
(COST-- $181,107,157)............. 177,963,590
(CONTINUED)
15
<PAGE>
KEYSTONE
STRATEGIC INCOME FUND
(Keystone Strategic Income Fund logo appears here)
SCHEDULE OF INVESTMENTS (CONTINUED)
April 30, 1997
COMMON STOCKS/WARRANTS-- 0.6%
104,514 Casino America, Incorporated (a).... $ 222,092
19,582 Casino America, Incorporated, wts.
(a)............................... 196
170,042 Colorado Gaming and Entertainment
Company (a)....................... 765,189
72,794 Grand Palais Casinos, Inc., Series
A, wts.(8/15/94-$727) (a) (b)..... 73
39,706 Grand Palais Casinos, Inc., Series
B, wts.(8/15/94-$397) (a) (b)..... 40
350,735 Grand Palais Casinos, Inc., Series
C, wts.(8/15/94-$3,507) (a) (b)... 351
160,136 Grand Palais Casinos, Inc., Series
D, wts.(8/15/94-$-0-) (a) (b)..... 160
87,342 Grand Palais Casinos, Inc.,
wts.(8/15/94-$57) (a) (b)......... 87
117,800 Iowa Select Farms, wts. (2/4/94-
$955,122) (a) (b)................. 117,800
4,820 Nextel Communications Incorporated,
wts. (a).......................... 48
TOTAL COMMON STOCKS/WARRANTS
(COST-- $3,034,294)............... 1,106,036
PREFERRED STOCK-- 0.6% (COST-- $2,106,055)
2,156 Ampex Corp. (a) (b) (c)............. $ 1,164,240
SHORT-TERM U.S. GOVERNMENT AGENCY OBLIGATION-- 2.2%
(COST-- $4,170,000)
PRINCIPAL
AMOUNT
$4,170,000 Federal Home Loan Bank, Disc. Notes,
5.28%, 05/01/97................... 4,170,000
REPURCHASE AGREEMENT-- 1.1% (COST-- $2,151,000)
2,151,000 Keystone Joint Repurchase Agreement
(Investments in repurchase
agreements, in a joint trading
account, dated 4/30/97, maturity
value $2,151,329) (f)
5.50%, 05/01/97................... 2,151,000
TOTAL INVESTMENTS
(COST-- $192,568,506).... 96.6% 186,554,866
OTHER ASSETS AND
LIABILITIES-- NET........ 3.4% 6,555,485
NET ASSETS................. 100.0% $193,110,351
(a) Non-income producing.
(b) All or a portion of these securities are either (1) restricted securities
(i.e., securities which may not be publicly sold without registration under
the Federal Securities Act of 1933) or (2) illiquid securities, and are
valued using market quotations where readily available. In the absence of
market quotations, the securities are valued based upon their fair value
determined under procedures approved by the Board of Trustees. The Fund may
make investments in an amount up to 15% of the value of the Fund's net
assets in such securities. The date of acquisition and cost are set forth in
parentheses after the description of each restricted security. On the date
of acquisition there were no market quotations on similar securities and the
securities were valued at acquisition cost. At April 30, 1997, the fair
value of these restricted securities was $2,998,243 (1.55% of the Fund's net
assets).
(c) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on these securities. At April 30,
1997, the fair value of these securities was $1,179,265 (0.61% of the
Fund's net assets).
(d) Effective yield (calculated at the date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
(e) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
(f) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at April 30, 1997.
LEGEND OF PORTFOLIO ABBREVIATIONS:
CWMBS-- Countrywide Mortgage Backed Securities
FHLMC-- Federal Home Loan Mortgage Corporation
FNMA-- Federal National Mortgage Association
GNMA-- Government National Mortgage Association
CD-- Canadian Dollar
DK-- Danish Krone
DM-- Deutsche Mark
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
EXCHANGE U.S. $ VALUE AT IN EXCHANGE
DATE APRIL 30, 1997 FOR U.S. $
<S> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
5/27/97 6,619,351 Canadian Dollar 4,743,320 4,747,335
7/11/97 10,089,020 Deutsche Mark 5,856,040 5,879,040
7/11/97 39,138,750 Danish Krone 5,963,119 5,981,774
</TABLE>
<TABLE>
<CAPTION>
EXCHANGE NET UNREALIZED
DATE APPRECIATION
<S> <C>
Forward Foreign Currency Exchange Contra
5/27/97 $ 4,015
7/11/97 23,000
7/11/97 18,655
$ 45,670
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
EVERGREEN
U . S. GOVERNMENT FUND
(Evergreen U.S. Government Fund logo appears here)
SCHEDULE OF INVESTMENTS
April 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
MORTGAGE-BACKED SECURITIES-- 53.6%
<C> <S> <C>
FEDERAL HOME LOAN MORTGAGE CORP.-- 11.5%
$14,790,674 6.50%, 04/01/26.................... $ 14,012,965
5,535,754 8.00%, 07/01/17-04/01/22........... 5,677,345
3,801,026 8.50%, 10/01/17-04/01/23........... 3,962,023
3,541,622 9.00%, 12/01/19-04/01/23........... 3,765,089
1,362,472 9.50%, 09/01/20.................... 1,469,057
2,106,788 10.00%, 12/01/19-08/01/21.......... 2,304,105
1,808,085 10.50%, 12/01/19................... 1,993,978
33,184,562
FEDERAL NATIONAL MORTGAGE ASSN.-- 16.8%
5,028,486 6.50%, 01/01/24.................... 4,751,919
17,902,428 7.00%, 08/01/01-08/01/25........... 17,382,130
12,138,650 7.50%, 07/01/23-07/01/25........... 12,070,370
11,886,747 8.00%, 08/01/25.................... 12,086,908
1,768,560 9.50%, 02/01/23.................... 1,902,307
48,193,634
GOVERNMENT NATIONAL MORTGAGE ASSN.-- 25.3%
15,066,683 7.00%, 12/15/22-12/15/23........... 14,600,550
10,544,426 7.50%, 02/15/22-03/15/23........... 10,478,523
20,893,894 8.00%, 04/15/23-08/15/24........... 21,288,018
11,950,122 8.50%, 12/15/21-07/15/24........... 12,397,450
5,835,610 9.00%, 01/15/20-06/15/21........... 6,131,038
6,036,338 9.50%, 01/15/19-02/15/21........... 6,502,265
1,296,372 10.00%, 12/15/18................... 1,423,172
72,821,016
TOTAL MORTGAGE-BACKED SECURITIES
(COST-- $156,369,768)............ 154,199,212
<CAPTION>
U.S. TREASURY OBLIGATIONS-- 44.7%
<C> <S> <C>
U.S. TREASURY BONDS-- 15.7%
$ 8,100,000 8.50%, 2/15/20..................... $ 9,401,062
3,650,000 8.75%, 11/15/08.................... 4,013,858
3,080,000 8.75%, 8/15/20..................... 3,666,161
14,010,000 8.88%, 8/15/17..................... 16,737,565
9,300,000 9.25%, 2/15/16..................... 11,418,652
45,237,298
U.S. TREASURY NOTES-- 29.0%
12,000,000 7.75%, 11/30/99.................... 12,378,744
9,800,000 7.75%, 1/31/00..................... 10,124,625
21,500,000 7.88%, 11/15/99.................... 22,245,770
6,850,000 8.25%, 7/15/98..................... 7,023,387
17,180,000 8.88%, 11/15/97.................... 17,453,798
13,700,000 9.25%, 8/15/98..................... 14,226,587
83,452,911
TOTAL U. S. TREASURY OBLIGATIONS
(COST-- $135,846,696)............ 128,690,209
<CAPTION>
REPURCHASE AGREEMENT (COST-- $2,039,802)-- 0.7%
<C> <S> <C>
2,039,802 Donaldson, Lufkin & Jenrette
Securities Corp., 5.40% dated
04/30/97, due 05/01/97, maturity
value $2,040,108 (Collateralized
by $1,943,000 U.S Treasury Notes,
7.50%, due 05/15/02; value,
including accrued interest
$2,081,365)...................... 2,039,802
TOTAL INVESTMENTS
(COST-- $294,256,266)... 99.0% 284,929,223
OTHER ASSETS AND
LIABILITIES-- NET....... 1.0 2,909,325
NET ASSETS................ 100.0% $287,838,548
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 1997
(Keystone Strategic logo appears here)
(Evergreen U.S. Government Fund logo appears here)
<TABLE>
<CAPTION> STRATEGIC U.S.
INCOME GOVERNMENT
FUND FUND
<S> <C> <C>
ASSETS
Investments at market value (identified cost-- $192,568,506 and $294,256,266, respectively)... $186,554,866 $284,929,223
Cash.......................................................................................... 8,446 0
Foreign currency (Cost $18,926)............................................................... 18,849 0
Receivable for investments sold............................................................... 4,615,523 0
Interest receivable........................................................................... 3,704,541 4,284,712
Receivable for Fund shares sold............................................................... 645,220 7,886
Unrealized appreciation on forward foreign currency exchange contracts........................ 45,670 0
Prepaid expenses and other assets............................................................. 102,461 50,600
Total assets.............................................................................. 195,695,576 289,272,421
LIABILITIES
Payable for investments purchased............................................................. 1,118,125 0
Payable for Fund shares redeemed.............................................................. 638,306 614,697
Distributions to shareholders................................................................. 552,765 490,615
Payable for closed forward foreign currency exchange contracts................................ 117,809 0
Distribution fee payable...................................................................... 90,789 122,335
Due to related parties........................................................................ 8,818 124,765
Accrued expenses and other liabilities........................................................ 58,613 81,461
Total liabilities......................................................................... 2,585,225 1,433,873
NET ASSETS...................................................................................... $193,110,351 $287,838,548
Net assets represented by
Paid-in capital............................................................................... $264,572,334 $314,822,329
Undistributed net investment income (accumulated distributions in excess of net investment
income)..................................................................................... (576,398) 207
Accumulated net realized loss on investments and foreign currency related transactions........ (64,835,778) (17,656,945)
Net unrealized depreciation on investments and foreign currency related transactions.......... (6,049,807) (9,327,043)
TOTAL NET ASSETS.......................................................................... $193,110,351 $287,838,548
Net assets consist of
Class A....................................................................................... $ 58,725,075 $ 17,912,899
Class B....................................................................................... 110,081,672 142,371,185
Class C....................................................................................... 24,303,597 455,150
Class Y....................................................................................... 7 127,099,314
$193,110,351 $287,838,548
SHARES OUTSTANDING
Class A....................................................................................... 8,613,751 1,907,838
Class B....................................................................................... 16,071,930 15,164,185
Class C....................................................................................... 3,552,632 48,478
Class Y....................................................................................... 1 13,537,374
NET ASSET VALUE PER SHARE
Class A....................................................................................... $ 6.82 $ 9.39
Class A-- Offering price (based on sales charge of 4.75%)..................................... $ 7.16 $ 9.86
Class B....................................................................................... $ 6.85 $ 9.39
Class C....................................................................................... $ 6.84 $ 9.39
Class Y....................................................................................... $ 6.65 $ 9.39
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
EVERGREEN KEYSTONE
STATEMENTS OF OPERATIONS
Periods Ended April 30, 1997
(Keystone Strategic logo appears here)
(Evergreen U.S. Government Fund logo appears here)
<TABLE>
<CAPTION>
FUND* FUND**
<S> <C> <C>
INVESTMENT INCOME
Interest (Net of foreign withholding taxes of $58,603 and $0, respectively).................... $13,515,590 $19,078,615
Other income................................................................................... 23,475 0
13,539,065 19,078,615
EXPENSES
Distribution Plan expenses..................................................................... 1,213,672 1,346,462
Management fee................................................................................. 1,017,082 1,258,319
Transfer agent fees............................................................................ 398,950 185,488
Custodian fees................................................................................. 119,727 95,205
Administrative services fees................................................................... 23,600 108,936
Professional fees.............................................................................. 38,029 16,553
Trustees' fees and expenses.................................................................... 27,497 5,756
Other.......................................................................................... 25,850 163,314
Total expenses............................................................................... 2,864,407 3,180,033
Less: Indirectly paid expenses................................................................. (25,507) (108 )
Net expenses................................................................................. 2,838,900 3,179,925
NET INVESTMENT INCOME.......................................................................... 10,700,165 15,898,690
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS
Realized gain (loss) on:
Investments.................................................................................. 6,552,327 (3,340,851 )
Foreign currency related transactions........................................................ (1,090,050) 0
Net realized gain (loss) on investments and foreign currency related transactions.............. 5,462,277 (3,340,851 )
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................. (2,851,665) 2,370,773
Foreign currency related transactions........................................................ 153,110 0
Net change in unrealized appreciation (depreciation) on investments and foreign currency
related transactions......................................................................... (2,698,555) 2,370,773
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY RELATED
TRANSACTIONS................................................................................. 2,763,722 (970,078 )
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................... $13,463,887 $14,928,612
</TABLE>
* Nine months ended April 30, 1997. During the period, the Strategic Income
Fund changed its fiscal year end from July 31 to April 30.
** Ten months ended April 30, 1997. During the period, the U.S. Government Fund
changed its fiscal year end from June 30 to April 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
EVERGREEN KEYSTONE
STATEMENTS OF OPERATIONS
(Keystone Strategic logo appears here)
(Evergreen U.S. Government Fund logo appears here)
<TABLE>
<CAPTION>
STRATEGIC U.S.
INCOME GOVERNMENT
FUND* FUND**
<S> <C> <C>
INVESTMENT INCOME
Interest (Net of foreign withholding taxes of $48,566 and $0, respectively).................... $23,880,913 $22,884,665
Other income................................................................................... 133,017 0
24,013,930 22,884,665
EXPENSES
Distribution Plan expenses..................................................................... 1,972,005 1,891,240
Management fee................................................................................. 1,663,669 1,507,281
Transfer agent fees............................................................................ 655,455 215,204
Custodian fees................................................................................. 173,082 138,256
Administrative services fees................................................................... 24,365 159,046
Professional fees.............................................................................. 54,863 45,212
Trustees' fees and expenses.................................................................... 30,556 7,532
Other.......................................................................................... 140,311 154,406
Total expenses............................................................................... 4,714,306 4,118,177
Less: Indirectly paid expenses................................................................. (37,066) 0
Net expenses................................................................................. 4,677,240 4,118,177
NET INVESTMENT INCOME.......................................................................... 19,336,690 18,766,488
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS
Realized loss on:
Investments.................................................................................. (2,858,545) (3,731,984 )
Foreign currency related transactions........................................................ (1,073,293) 0
Net realized loss on investments and foreign currency related transactions..................... (3,931,838) (3,731,984 )
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................. (48,177) (3,860,415 )
Foreign currency related transactions........................................................ 295,422 0
Net change in unrealized appreciation (depreciation) on investments and foreign currency
related transactions......................................................................... 247,245 (3,860,415 )
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS...... (3,684,593) (7,592,399 )
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................... $15,652,097 $11,174,089
</TABLE>
* Year ended July 31, 1996.
** Year ended June 30, 1996.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
EVERGREEN KEYSTONE
STATEMENTS OF CHANGES IN NET ASSETS
Periods Ended April 30, 1997
(Keystone Strategic logo appears here)
(Evergreen U.S. Government Fund logo appears here)
<TABLE>
<CAPTION>
STRATEGIC U.S.
INCOME GOVERNMENT
FUND* FUND**
<S> <C> <C>
OPERATIONS
Net investment income......................................................................... $ 10,700,165 $ 15,898,690
Net realized gain (loss) on investments and foreign currency related transactions............. 5,462,277 (3,340,851)
Net change in unrealized appreciation (depreciation) on investments and foreign currency
related transactions........................................................................ (2,698,555) 2,370,773
Net increase in net assets resulting from operations........................................ 13,463,887 14,928,612
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A..................................................................................... (3,484,550) (1,050,495)
Class B..................................................................................... (5,810,734) (7,610,760)
Class C..................................................................................... (1,404,882) (35,021)
Class Y..................................................................................... 0 (7,202,207)
In excess of net investment income:
Class A..................................................................................... (256,701) 0
Class B..................................................................................... (428,067) 0
Class C..................................................................................... (103,495) 0
Total distributions to shareholders......................................................... (11,488,429) (15,898,483)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold..................................................................... 25,911,778 26,211,170
Proceeds from reinvestment of distributions................................................... 6,009,396 10,717,216
Payment for shares redeemed................................................................... (64,109,043) (56,670,711)
Net decrease in net assets resulting from capital share transactions........................ (32,187,869) (19,742,325)
Total decrease in net assets.............................................................. (30,212,411) (20,712,196)
NET ASSETS
Beginning of period........................................................................... 223,322,762 308,550,744
END OF PERIOD................................................................................. $193,110,351 $287,838,548
Undistributed net investment income (accumulated distributions in excess of net investment
income)....................................................................................... $ (576,398) $ 207
</TABLE>
* Nine months ended April 30, 1997. During the period, the Strategic Income
Fund changed its fiscal year end from July 31 to April 30.
** Ten months ended April 30, 1997. During the period, the U.S. Government Fund
changed its fiscal year end from June 30 to April 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
EVERGREEN KEYSTONE
STATEMENTS OF CHANGES IN NET ASSETS
(Keystone Strategic logo appears here)
(Evergreen U.S. Government Fund logo appears here)
<TABLE>
<CAPTION>
STRATEGIC INCOME FUND U.S. GOVERNMENT FUND
YEAR ENDED SIX MONTHS ENDED
YEAR ENDED JULY 31, JUNE 30, JUNE 30,
1996 1995 1996 1995*
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income........................................ $ 19,336,690 $ 25,856,250 $ 18,766,488 $ 7,438,980
Net realized loss on investments, closed futures contracts
and foreign currency related transactions.................. (3,931,838) (38,021,996) (3,731,984) (2,084,111)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency related transactions...... 247,245 17,203,692 (3,860,415) 16,345,873
Net increase in net assets resulting from operations....... 15,652,097 5,037,946 11,174,089 21,700,742
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A.................................................... (5,945,153) (8,015,693) (1,406,673) (794,337)
Class B.................................................... (9,706,657) (12,000,626) (10,727,964) (6,054,489)
Class C.................................................... (2,690,979) (3,983,775) (28,511) (10,127)
Class Y.................................................... 0 0 (6,603,340) (580,027)
In excess of net investment income:
Class A.................................................... 0 (385,252) 0 0
Class B.................................................... 0 (576,777) 0 0
Class C.................................................... 0 (191,469) 0 0
Tax basis return of capital:
Class A.................................................... (564,217) (199,090) 0 0
Class B.................................................... (921,197) (298,065) 0 0
Class C.................................................... (255,384) (98,947) 0 0
Total distributions to shareholders........................ (20,083,587) (25,749,694) (18,766,488) (7,438,980)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.................................... 28,128,495 57,203,658 138,179,343 8,321,751
Proceeds from shares issued in acquisition of Evergreen U.S.
Government Securities Fund................................. 0 0 5,739,713 0
Proceeds from reinvestment of distributions.................. 10,567,921 13,886,209 11,871,813 3,745,065
Payment for shares redeemed.................................. (92,224,304) (96,370,777) (71,866,685) (29,247,163)
Net increase (decrease) in net assets resulting from
capital share transactions............................... (53,527,888) (25,280,910) 83,924,184 (17,180,347)
Total increase (decrease) in net assets.................. (57,959,378) (45,992,658) 76,331,785 (2,918,585)
NET ASSETS
Beginning of period.......................................... 281,282,140 327,274,798 232,218,959 235,137,544
END OF PERIOD................................................ $223,322,762 $281,282,140 $308,550,744 $232,218,959
Undistributed net investment income (accumulated distributions
in excess of net investment income).......................... $ (1,169,996) $ (1,023,303) $ 0 $ 0
</TABLE>
* The U.S. Government Fund changed its fiscal year end from December 31 to June
30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
COMBINED NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Evergreen Keystone Long Term Bond Funds consist of Keystone Strategic Income
Fund ("Strategic Income Fund") and Evergreen U.S. Government Fund ("U.S.
Government Fund") both of which are registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as diversified, open-end investment
management companies. Keystone Strategic Income Fund and Evergreen U.S.
Government Fund, a separate series of Evergreen Investment Trust, are
collectively known as the "Funds".
Keystone Investment Management Company ("Keystone") is the Investment Adviser
and Manager of the Strategic Income Fund. Keystone is a subsidiary of First
Union Keystone, Inc. First Union Keystone, Inc. is a wholly-owned subsidiary of
First Union National Bank of North Carolina which in turn is a wholly-owned
subsidiary of First Union Corporation ("First Union"). First Union is the
Investment Adviser for the U.S. Government Fund. Each Fund offers several
classes of shares. The investment objective of Strategic Income is to seek high
current income from high yield, foreign and U.S. government or agency
obligations. The investment objective of the U.S. Government Fund is to achieve
a high level of current income consistent with stability of principal from U.S.
government or agency obligations.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. VALUATION OF SECURITIES
U.S. government obligations held by the Funds are valued at the mean between the
over-the-counter bid and asked prices. Corporate bonds, other fixed income
securities, mortgage and other asset-backed securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Securities
for which valuations are not available from an independent pricing service
(including restricted securities) are valued at fair value as determined in good
faith according to procedures established by the Boards of Trustees.
Short term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value. Short term investments with
greater than 60 days to maturity are valued at market value.
B. REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held by the custodian on the Fund's behalf. The
Fund monitors the adequacy of the collateral daily and will require the seller
to provide additional collateral in the event the market value of the securities
pledged falls below the carrying value of the repurchase agreement.
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Strategic Income Fund, along with certain other funds managed by Keystone,
may transfer uninvested cash balances into a joint trading account. These
balances are invested in one or more repurchase agreements that are fully
collateralized by U.S. Treasury and/or Federal Agency obligations.
C. REVERSE REPURCHASE AGREEMENTS
The Strategic Income Fund may enter into reverse repurchase agreements with
qualified third-party broker-dealers. Interest on the value of reverse
repurchase agreements is based upon competitive market rates at the time of
issuance. At the time the Fund enters into a reverse repurchase agreement, it
will establish and maintain a segregated account with the custodian containing
liquid assets having a value not less than the repurchase price (including
accrued interest). If the counterparty to the transaction is rendered insolvent,
the ultimate realization of the securities to be repurchased by the Fund may be
delayed or limited.
D. FOREIGN CURRENCY
The books and records of the Funds are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets and liabilities at the daily rate
of exchange; purchases and sales of investments, income and expenses at the rate
of exchange prevailing on the respective dates of such transactions. Net
unrealized foreign exchange gain (loss) resulting from changes in foreign
currency exchange rates is a component of net unrealized appreciation
(depreciation) on investments and foreign currency transactions. Net realized
foreign currency gains and losses resulting from changes in exchange rates
include foreign currency gains and losses between trade date and settlement date
on investment securities transactions, foreign currency transactions and the
difference between the amounts of interest and dividends recorded on the books
of the Fund and the amount actually received. The portion of foreign currency
gains and losses related to fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date is included in realized gain
(loss) on foreign currency related transactions.
E. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, the
Funds may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
23
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
F. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Strategic Income Fund may enter into forward foreign currency exchange
contracts ("forward contracts") to settle portfolio purchases and sales of
securities denominated in a foreign currency and to hedge certain foreign
currency assets or liabilities. Forward contracts are recorded at the forward
rate and marked-to-market daily. Realized gains and losses arising from such
transactions are included in net realized gain (loss) on foreign currency
related transactions. The Fund bears the risk of an unfavorable change in the
foreign currency exchange rate underlying the forward contract and is subject to
the credit risk that the other party will not fulfill their obligations under
the contract. Forward contracts involve elements of market risk in excess of the
amount reflected in the statement of assets and liabilities.
G. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of discounts.
H. FEDERAL INCOME TAXES
The Funds have qualified and intend to qualify in the future as regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Funds are relieved of any federal income tax liability by
distributing all of their net taxable investment income and net taxable capital
gains, if any, to their shareholders. The Funds also intend to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
I. DISTRIBUTIONS
Distributions from net investment income for the Strategic Income Fund are
declared and paid monthly. Distributions from net investment income for the U.S.
Government Fund are declared daily and paid monthly. Distributions from net
realized capital gains, if any, are paid at least annually. Distributions to
shareholders are recorded at the close of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment for foreign
currency related transactions.
J. CLASS ALLOCATIONS
Class A shares are offered at a public offering price which includes a maximum
sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge that is
payable upon redemption and decreases depending on how long the shares have been
held. Class B shares purchased after January 1, 1997 will automatically convert
to Class A shares after seven years. Class B shares purchased prior to January
1, 1997 retain their existing conversion features.
Class C shares are sold subject to a contingent deferred sales charge payable on
shares redeemed within one year after the month of purchase.
Class Y shares are available without a front-end sales charge or contingent
deferred sales charge only to investment advisory clients of First Union and its
affiliates, certain institutional investors or Class Y shareholders of record of
certain other funds managed by First Union and its affiliates as of December 30,
1994.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
24
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL SHARE TRANSACTIONS
The Strategic Income Fund has an unlimited number of shares of beneficial
interest with no par value authorized. The U.S. Government Fund has an unlimited
number of shares of beneficial interest with a par value of $0.0001 authorized.
Shares of beneficial interest of the Funds are currently divided into Class A,
Class B, Class C and Class Y. Transactions in shares of the Funds were as
follows:
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
APRIL 30, 1997 JULY 31, 1996 JULY 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold................................. 722,925 $ 5,021,195 862,737 $ 5,908,665 1,476,748 $ 10,254,533
Shares issued in reinvestment of
distributions............................. 280,932 1,940,819 493,925 3,365,004 630,245 4,322,219
Shares redeemed............................. (2,450,268) (16,920,382) (3,779,494) (25,781,907) (3,933,229) (27,229,543)
Net decrease................................ (1,446,411) $ (9,958,368) (2,422,832) $(16,508,238) (1,826,236) $(12,652,791)
CLASS B
Shares sold................................. 2,590,485 $ 18,030,379 2,657,436 $ 18,284,154 4,868,980 $ 34,092,723
Shares issued in reinvestment of
distributions............................. 448,617 3,114,373 781,880 5,354,257 989,682 6,821,317
Shares redeemed............................. (5,099,176) (35,510,240) (6,840,568) (46,918,273) (6,393,919) (44,185,075)
Net decrease................................ (2,060,074) $(14,365,488) (3,401,252) $(23,279,862) (535,257) $ (3,271,035)
CLASS C
Shares sold................................. 413,449 $ 2,860,197 573,201 $ 3,935,676 1,847,558 $ 12,856,402
Shares issued in reinvestment of
distributions............................. 137,625 954,204 270,184 1,848,660 397,992 2,742,673
Shares redeemed............................. (1,679,415) (11,678,421) (2,845,554) (19,524,124) (3,594,976) (24,956,159)
Net decrease................................ (1,128,341) $ (7,864,020) (2,002,169) $(13,739,788) (1,349,426) $ (9,357,084)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 13, 1997
(COMMENCEMENT OF
CLASS OPERATIONS)
TO
APRIL 30, 1997
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT
CLASS Y
Shares sold..................................... 1 $7
Shares issued in reinvestment of
distributions................................ -- --
Shares redeemed................................ -- --
Net increase................................... 1 $7
Total net decrease resulting from Fund share
transactions................................ .(4,634,825) $(32,187,869) (7,826,253) $(53,527,888) (3,710,919) $(25,280,910)
</TABLE>
25
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND
TEN MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED
APRIL 30, 1997 JUNE 30, 1996 JUNE 30, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold.................................... 294,513 $ 2,785,151 786,564 $ 7,560,325 129,542 $ 1,230,340
Shares issued in reinvestment of
distributions................................ 60,924 575,792 78,565 755,991 38,627 363,779
Shares redeemed................................ (606,651) (5,738,805) (1,032,918) (9,892,163) (455,148) (4,253,390)
Net decrease................................... (251,214) $ (2,377,862) (167,789) $ (1,575,847) (286,979) $ (2,659,271)
CLASS B
Shares sold.................................... 776,060 $ 7,347,686 1,702,353 $ 16,401,640 361,937 $ 3,402,126
Shares issued in reinvestment of
distributions................................ 394,931 3,733,484 533,686 5,138,748 310,078 2,918,499
Shares redeemed................................ (3,621,913) (34,238,311) (4,576,583) (43,960,576) (2,281,908) (21,266,740)
Net decrease................................... (2,450,922) $(23,157,141) (2,340,544) $(22,420,188) (1,609,893) $(14,946,115)
CLASS C
Shares sold.................................... 28,184 $ 265,064 43,395 $ 420,990 21,067 $ 197,099
Shares issued in reinvestment of
distributions................................ 1,432 13,539 1,437 13,783 377 3,563
Shares redeemed................................ (50,056) (470,176) (12,168) (117,297) (14,514) (136,177)
Net increase (decrease)........................ (20,440) $ (191,573) 32,664 $ 317,476 6,930 $ 64,485
CLASS Y
Shares sold.................................... 1,675,475 $ 15,813,269 11,801,163 $113,796,388 370,297 $ 3,492,186
Shares issued in Acquisition of Evergreen U.S.
Government Securities Fund (Note 7).......... -- -- 590,505 5,739,713 -- --
Shares issued in reinvestment of
distributions................................ 676,410 6,394,401 620,463 5,963,291 48,784 459,225
Shares redeemed................................ (1,715,716) (16,223,419) (1,866,525) (17,896,649) (383,032) (3,590,857)
Net increase................................... 636,169 $ 5,984,251 11,145,606 $107,602,743 36,049 $ 360,554
Total net increase (decrease) resulting from
Fund share transactions...................... (2,086,407) $(19,742,325) 8,669,937 $ 83,924,184 (1,853,893) $(17,180,347)
</TABLE>
26
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short term securities) were as follows for the period ended April 30, 1997:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
<S> <C> <C>
Strategic Income Fund*.................................................. $175,425,523 $220,805,535
U.S. Government Fund**.................................................. 34,081,380 37,955,747
</TABLE>
* For the nine months ended April 30, 1997.
** For the ten months ended April 30, 1997.
The average daily balance of reverse repurchase agreements outstanding for the
Strategic Income Fund during the nine months ended April 30, 1997 was
approximately $4,984,000 at a weighted average interest rate of 4.98%. The
maximum amount of borrowing during the nine months ended April 30, 1997 for
Strategic Income Fund was $9,907,597 (including accrued interest). There were no
reverse repurchase agreements outstanding at April 30, 1997.
On April 30, 1997, the composition of unrealized appreciation and depreciation
of investment securities based on the aggregate cost of investments for federal
tax purposes was as follows:
<TABLE>
<CAPTION>
TAX NET UNREALIZED
COST APPRECIATION DEPRECIATION APPRECIATION (DEPRECIATION)
<S> <C> <C> <C> <C>
Strategic Income Fund.............................. $193,176,646 $2,988,581 $9,610,361 ($6,621,780)
U.S. Government Fund............................... 294,256,266 565,635 9,892,678 (9,327,043)
</TABLE>
As of April 30, 1997, the Funds had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
EXPIRATION
1999 2000 2001 2002 2003 2004 2005
<S> <C> <C> <C> <C> <C> <C> <C>
Strategic Income Fund............. $28,000 $11,547,000 $12,170,000 -- $5,288,000 $35,072,000 --
U.S. Government Fund.............. -- -- 1,978,000 $6,521,000 -- 2,973,000 $3,134,000
</TABLE>
4. DISTRIBUTION PLANS
Each Fund bears some of the costs of selling its shares under Distribution Plans
adopted for its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, each Fund pays its principal underwriter
amounts which are calculated and paid monthly.
On December 11, 1996, the Strategic Income Fund entered into a principal
underwriting agreement with Evergreen Keystone Distributor, Inc. (formerly,
Evergreen Funds Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of The
BISYS Group Inc. ("BISYS"). Prior to December 11, 1996, Evergreen Keystone
Investment Services, Inc. (formerly, Keystone Investment Distributors Company)
("EKIS"), a wholly-owned subsidiary of Keystone, served as the Strategic Income
Fund's principal underwriter. EKD also serves as the principal underwriter for
the U.S. Government Fund.
The Class A Distribution Plans of the Funds provide for expenditures, which are
currently limited to 0.25% annually of the average daily net assets of the Class
A shares, to pay expenses related to the distribution of Class A shares.
Pursuant to each Fund's Class B and Class C Distribution Plans, each Fund pays a
distribution fee which may not exceed 1.00% annually of the average daily net
assets of Class B and Class C shares, respectively. Of that amount, 0.75% is
used to pay distribution expenses and 0.25% is used to pay service fees.
During the period ended April 30, 1997, amounts paid to EKD and/or EKIS pursuant
to each Fund's Class A, Class B and Class C Distribution Plans were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Strategic Income Fund...................... $112,916 $ 885,405 $215,351
U.S. Government Fund....................... 39,780 1,300,696 5,986
</TABLE>
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of any Distribution
Plan, and subject to the discretion of the Independent Trustees, payments to
EKIS and/or EKD may continue as compensation for services which had been
provided while the Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
27
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At April 30, 1997, total unpaid distribution costs for the Strategic Income Fund
were $11,424,582 for Class B and $5,014,549 for Class C.
EKD has advised the Funds that it has retained the following amounts from
front-end sales charges resulting from the sales of Class A shares during the
period ended April 30, 1997 of $9,140 and $32,391 for the Strategic Income Fund
and the U.S. Government Fund, respectively.
Contingent deferred sales charges paid by redeeming shareholders are paid to EKD
or its predecessor.
5. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under the terms of an Investment Advisory Agreement dated December 11, 1996,
Keystone provides investment management and administrative services to the
Strategic Income Fund. In return, Keystone is paid a management fee that is
computed daily and paid monthly. The management fee is computed at an annual
rate of 2.00% of Strategic Income Fund's gross investment income plus an amount
determined by applying percentage rates starting at 0.50% and declining to 0.25%
per annum as net assets increase, to the average daily net asset value of the
Fund. First Union serves as the Investment Adviser to the U.S. Government Fund
and is paid a management fee that is computed daily and paid monthly at an
annual rate of 0.50% of the Fund's average daily net assets.
For the U.S. Government Fund, EKIS, a subsidiary of First Union, is the
administrator. Prior to March 11, 1997, Evergreen Asset Management Corp.
("Evergreen Asset"), a wholly-owned subsidiary of First Union, was the
administrator. Furman Selz LLC ("Furman Selz") was the sub-administrator through
December 31, 1996. Effective January 1, 1997, BISYS acquired Furman Selz' mutual
fund unit and accordingly BISYS became sub-administrator. The administrator and
sub-administrator for each Fund are entitled to an annual fee based on the
average daily net assets of the funds administered by EKIS for which First Union
or its investment advisory subsidiaries is also the investment advisor. The
administration fee is calculated by applying percentage rates, which start at
0.05% and decline to 0.01% per annum as net assets increase, to the average
daily net asset value of the Fund. The sub-administration fee is calculated by
applying percentage rates, which start at 0.01% and decline to .004% as net
assets increase, to the average daily net asset value of the Fund.
During the period ended April 30, 1997, the Strategic Income Fund and U.S.
Government Fund paid or accrued to EKIS $23,600 and $90,757, respectively, for
certain accounting services.
Evergreen Keystone Service Company (formerly, Keystone Investor Resource Center,
Inc.), ("EKSC") a wholly-owned subsidiary of Keystone, serves as the transfer
and dividend disbursing agent for the Strategic Income Fund. Effective May 5,
1997, EKSC also began providing transfer and dividend disbursing agent services
for the U.S. Government Fund that were formerly provided by State Street Bank
and Trust Company ("State Street"). For certain accounts, First Union had been
sub-contracted by State Street to maintain shareholder sub-account records, take
fund purchase and redemption orders and answer inquiries. For each account,
First Union is entitled a fee which in aggregate totaled $44,946 for the ten
months ended April 30, 1997.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds.
ORGANIZATIONAL EXPENSES-- U.S. Government's organizational expenses were borne
initially by a prior administrator. As a result of the change in the
administration agreement, First Union purchased the remaining unreimbursed
initial organizational expenses from the prior administrator. U.S. Government
will reimburse First Union during the five-year period following its
commencement of operations. Pursuant to these arrangements, as of and for the
ten months ended April 30, 1997, U.S. Government has paid and has a remaining
liability of $22,819 and $5,566, respectively.
6. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an expense offset arrangement with their custodian.
The assets deposited with the custodian under this expense offset arrangement
could have been invested in income-producing assets. The custody fees incurred,
credits received and net custody expenses for the Funds are as follows for the
period ended April 30, 1997:
<TABLE>
<CAPTION>
CUSTODY CREDIT NET
FEES RECEIVED FEE
<S> <C> <C> <C>
Strategic Income Fund.............................. $119,727 $25,507 $94,220
U.S. Government Fund............................... 95,205 108 95,097
</TABLE>
28
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. ACQUISITIONS
Effective at the close of business on July 7, 1995, U.S. Government Fund
acquired substantially all of the assets of Evergreen U.S. Government Securities
Fund through the issuance of 590,505 of its Class Y shares in exchange for
Evergreen U.S. Government Securities Fund's net assets valued at $5,739,713. The
aggregate net assets immediately after the acquisition was $233,475,732. The
acquired net assets, in this non-taxable transaction, consisted primarily of
portfolio securities with unrealized appreciation of $24,133.
8. DEFERRED TRUSTEES' FEES
Each Trustee of the U.S. Government Fund may defer any or all compensation
related to performance of duties as a Trustee. Each Trustee's deferred balances
are allocated to deferral accounts which are included in the accrued expenses
for the Fund. The investment performance of the deferral accounts is based on
the investment performance of certain Evergreen Keystone Funds. Any gains earned
or losses incurred in the deferral accounts are reported in the Fund's Trustees'
fees and expenses. Trustees will be paid either in one lump sum or in quarterly
installments for up to ten years, at their election, not earlier than either the
year in which the Trustee ceases to be a member of the Board of Trustees or
January 1, 2000. As of April 30, 1997, the value of the Trustees' deferral
account was $9,648 for the U.S. Government Fund.
9. FINANCING AGREEMENT
Prior to October 31, 1996, a financing agreement was in place with all of the
Evergreen Funds and State Street. Under this agreement, State Street provided an
unsecured line of credit facility, in the aggregate amount of $100 million ($50
million committed and $50 million uncommitted), to be accessed by the Evergreen
Funds for temporary or emergency purposes only and is subject to each
participating Fund's borrowing restrictions. Effective October 31, 1996, a new
financing agreement was put in place with all of the Evergreen Funds and State
Street, Societe Generale and ABN Amro Bank N.V. (collectively, the "Banks").
Under this agreement, the Banks provide an unsecured credit facility in the
aggregate amount of $225 million ($112.5 million committed and $112.5 million
uncommitted) allocated evenly between the Banks. Borrowings under this facility
bear interest at 0.75% per annum above the Federal Funds rate. A commitment fee
of 0.10% per annum will be incurred on the unused portion of the committed
facility which will be allocated to all participating funds. During the period
ended April 30, 1997, the U.S. Government Fund had no borrowings outstanding.
29
<PAGE>
EVERGREEN KEYSTONE
(Pine cone logo appears here)
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Strategic Income Fund
Evergreen Investment Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of the Evergreen Keystone Long Term Bond Funds
listed below as of April 30, 1997, and the related statements of operations,
statements of changes in net assets, and financial highlights for each of the
years or periods listed below:
KEYSTONE STRATEGIC INCOME FUND-- statements of operations for the nine
months ended April 30, 1997 and the year ended July 31, 1996, statements of
changes in net assets for the nine months ended April 30, 1997 and for each
of the years in the two-year period ended July 31, 1996, and financial
highlights for the nine months ended April 30, 1997, each of the years in
the nine-year period ended July 31, 1996 and the period from February 13,
1987 (commencement of operations) to July 31, 1987.
EVERGREEN U.S. GOVERNMENT FUND (ONE OF THE PORTFOLIOS CONSTITUTING EVERGREEN
INVESTMENT TRUST)-- statements of operations for the ten months ended April
30, 1997 and the year ended June 30, 1996, statements of changes in net
assets for the ten months ended April 30, 1997, for the year ended June 30,
1996 and for the six months ended June 30, 1995, and the financial
highlights for the ten months ended April 30, 1997, the year ended June 30,
1996, the six months ended June 30, 1995, the year ended December 31, 1994
and the period from January 11, 1993 (commencement of operations) to
December 31, 1993.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Strategic Income Fund and Evergreen U.S. Government Fund as of April
30, 1997, the results of their operations for the years or periods then ended,
and the changes in their net assets and the financial highlights for each of the
years or periods specified in the first paragraph above in conformity with
generally accepted accounting principles.
Boston, Massachusetts KPMG Peat Marwick LLP
May 30, 1997
30
<PAGE>
(Pine cone logo appears here)
(This Page Left Blank Intentionally)
<PAGE>
(Pine cone logo appears here)
(This Page Left Blank Intentionally)
<PAGE>
This report was prepared primarily for the information of fund shareholders. It
is authorized for distribution if preceded or accompanied by each fund's current
prospectus. The prospectus contains important information about each fund,
including fees and expenses. Read it carefully before you invest or send money.
For a free prospectus on other Evergreen Keystone Funds, contact your financial
adviser or call Evergreen Keystone.
NOT
FDIC May lose value
INSURED No bank guarantee
Evergreen Keystone Distributor, Inc.
Evergreen Keystone(SM) is a Service Mark of Evergreen Keystone Investment
Services, Inc. Copyright 1997.
541075
59425 6/97
<PAGE>
EVERGREEN KEYSTONE FUNDS
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
200 Berkeley Street
Boston, MA 02116-5034
Securities and Exchange Commission
Juciciary Plaza
450 Fifth Street, NW
Washington, D.C.
Attn: File Room
Re: The Keystone Strategic Income Fund
File No. 811-4947
CIK# 0000808330
CCC# azz*ud8s
The Evergreen Investment Trust (Evergreen U.S. Government Fund)
File No. 811-4154
CIK# 0000757440
CCC# 4apyfsr*
Commissioners:
Please be advised that the Annual Report for the above referenced Fund(s)
were submitted to your office on June 30, 1997, via electronic transmission
(EDGAR).
Any questions or comments about this document should be directed to the
undersigned at (617) 210-3570.
Very Truly Yours,
/s/ Doug Miller
Doug Miller
Assistant Vice President
- -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
- -------------------------------------------------------------------------------
Dear Investor:
I'm pleased to present the Annual Report to Shareholders for the Blanchard Group
of Funds. This report covers the funds' fiscal year, which is the period from
October 1, 1996 through September 30, 1997.
For greater efficiency in printing and mailing, this report now combines
information for all funds. It begins with a commentary by the portfolio manager,
and follows with a complete list of holdings and financial statements for each
fund.
A fund-by-fund summary for the period follows:
. BLANCHARD GLOBAL GROWTH FUND
The fund's diversified portfolio of U.S. and foreign stocks and bonds+ produced
a solid total return of 13.20%* through dividends totaling $0.21 per share and
capital gains totaling $2.26 per share. Assets in the fund totaled more than $62
million at the end of the period.
. BLANCHARD PRECIOUS METALS FUND, INC.
Due to extremely weak market conditions, the fund's portfolio of precious metals
investments and securities of mining companies produced a negative total return
of (15.24%).* While the fund paid dividends totaling $0.30 per share and capital
gains totaling $2.25 per share, the fund's share price fell from $8.90 to $5.37
as prices of the fund's holdings declined with the market. The fund's assets
closed the period at $67 million.
. BLANCHARD FLEXIBLE INCOME FUND
The fund's diversified portfolio of fixed income securities paid monthly
dividends totaling $0.31 per share and recorded a $0.14 per share increase in
net asset value. As a result, the fund achieved a total return of 9.53%.* The
fund's assets reached $155 million.
. BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
The fund's conservative portfolio of fixed income securities produced a total
return of 7.24%* through monthly dividends totaling $0.17 per share, and a $0.04
per share increase in net asset value. Assets in the fund totaled more than $133
million.
. BLANCHARD FLEXIBLE TAX-FREE BOND FUND
Designed for tax-sensitive investors, this fund paid federally tax-free
dividends totaling $0.25 per share.** Through this income stream and a $0.25 per
share increase in net asset value, the fund achieved a total return of 9.59%.*
Assets reached $24 million.
- -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE (CONTINUED)
- -------------------------------------------------------------------------------
Thank you for pursuing your financial goals through the Blanchard Group of
Funds. If you are not already doing so, consider reinvesting your earnings
automatically in additional shares. It's a convenient way to gain the advantage
of compounding--and increase your opportunity to participate in key financial
markets over time.
Sincerely,
/s/ Edward C. Gonzales
Edward C. Gonzales
President
November 15, 1997
+Foreign investing involves special risks including currency risk, increased
volatility of foreign securities, and differences in auditing and other
financial standards.
*Performance quoted reflects past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
**Income may be subject to the federal alternative minimum tax and state and
local taxes.
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Global Growth Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A1 omitted. See Appendix."]
The Blanchard Global Growth Fund's total return (price change plus
reinvestment of distributions) for the year ending September 30, 1997 was
13.20%. By comparison, the Morgan Stanley World Index (MSCI World) rose 24.12%,
and the Salomon Brothers World Government Bond Index (WGBI) was up 2.41% for the
same period.*
During the past year, equity markets substantially outperformed bond markets
around the globe. It appears the markets have priced in a continued period of
strong economic growth with low inflation. Equity markets in Continental Europe
performed better than the rest of the world, mainly because corporate earnings
have increased. Corporate earnings increased due to a pick up in economic
growth, and an increase in exports (due to their weaker currencies), as well as
from gains in productivity. Among the major stock markets, only
*The Morgan Stanley World Index is based on the share prices of approximately
1,600 companies listed on the stock exchanges of 22 countries. The Salomon
Brothers World Government Bond Index is comprised of 17 Government bond markets
whose eligibility is determined based on market capitalization and investment
criteria; a market's issues must total at least US$20 billion, DM30 billion,
and 2.5 trillion for three consecutive months, after which it will be added to
the SBWGBI at the end of the following quarter. These indices are unmanaged.
Actual investment cannot be made in an index.
the Japanese stock market declined during the past year. The low interest rate
environment in Japan has yet to spur economic growth, as the deregulation of the
financial industry has been slow.
The Blanchard Global Growth Fund benefited from its exposure to equities,
since equities posted higher returns than bonds. However, our allocation across
equity markets did not help performance. We were overweighted in Continental
Europe and Japan and underweighted in the United States. Our currency hedging
strategy added value, since the U.S. Dollar strengthened against most currencies
in Continental Europe and Japan. We continue to hedge a portion of our Japanese
Yen, Swiss Franc, and Dutch Guilder exposure.
During the past year, the Blanchard Global Growth Fund sold equities in favor
of fixed income securities, as the result of strong equity performance during
the past year. We also shifted a portion of the fund out of U.S. equities and
into foreign equities. Continental Europe and Japan offer more attractive
values, since the U.S. equity market has appreciated substantially in the past
few years. We believe the gloom has been overdone in Japan, and the stock market
reflects attractive long-term value.
Thank you for your continued patronage.
Sincerely,
/s/ Thomas B. Hazuka
Thomas B. Hazuka, Ph.D.
Chief Investment Officer
Mellon Capital Management Corporation
Portfolio Manager of the
Blanchard Global Growth Fund
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Precious Metals Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A2 omitted. See Appendix."]
THE YEAR IN REVIEW
One year ago, gold was trading around the $380 level and concerns were
mounting that the International Monetary Fund, or IMF, was likely to sell 5
million ounces of gold to fund capital projects in developing countries. This
and other concerns, such as the strengthening U.S. dollar, moved us to adopt a
more defensive posture in the portfolio to reflect the increasing likelihood
that the gold price would come under pressure.
This turned out to be quite an understatement, as large sales of gold by
central banks, particularly the Dutch and Australians, drove the yellow metal
sharply lower. Central bank sales are almost impossible to forecast except for
the general expectation that they do occur every year, but generally in
quantities that don't disrupt the market. This is partly because other central
banks tend to buy about half of the gold sold by their sister institutions. In
the 1990's, central bank gold sales have netted out to about 7.5 million ounces
per year when central bank buying is accounted for.
Surprisingly, the past year has not been terribly out of the ordinary. About
15 million ounces of central bank gold has been sold, with perhaps 9 million of
this not taken up by other central bank purchases. Ordinarily, one would not
expect the price of gold to swoon by as much as 19% (from $380 to $308) in
response. However, this time was different in a very significant way.
Aggressive speculative short sales of gold accompanied every announcement of a
central bank sale. Large quantities of gold have been borrowed from central
banks at a borrowing cost of 2-3% per annum and sold in the marketplace in what
turned out to be a successful effort to drive the gold price lower. These
speculators have correctly assumed that gold buyers will be timid in the face of
a growing perception that some banks are less willing to hold onto their sizable
gold holdings.
Estimates of the quantity of gold borrowed and sold short range as high as
2,000 metric tons, which is about 65 million ounces! Clearly, this swamps the
actual amount of gold sold by the banks and amply explains the sharp gold price
decline, which has in turn pushed most gold equities dramatically lower. In line
with the gold price decline, the Blanchard Precious Metals Fund declined by
15.24% in the past year.
A LOOK AHEAD
The dominant theme of increasing and long-lasting central bank gold sales
continues to weigh heavily on the bullion price as 1997 draws to a close. In
recent days, the focal point of the issue has become the potential for sales of
Swiss gold reserves starting in the year 2000. These sales could come about in
response to a change in the Swiss constitution, which would eliminate or reduce
the requirement for a gold backstop in the money supply. Complicating the issue
is the proposal to create a Solidarity Foundation for charitable purposes, which
would be funded in part by gold bullion sales, perhaps as much as 800 metric
tons (about 26 million ounces).
These proposals would both require political approval, followed by popular
approval in a national referendum. If successful, the gold would be sold
gradually over a period of five to eight years. The worst-case scenario at
present seems to be the addition of 9 million ounces of gold to the annual
supply-demand equation, which would last 5 years. Putting this into perspective,
the annual gold market is currently sized at 130 million ounces of gold, so this
is a manageable quantity. However, the larger issue is whether a significant
change in central bank attitudes toward gold is at hand. If central banks are
more willing to part with their gold in the years ahead, then gold will settle
into a lower trading range than we have become accustomed to in the past ten
years. If instead, the net supply of
central bank gold remains at less than ten million ounces per year as in the
past, then we can look forward to an explosive rally in the gold market as the
huge outstanding short position is bought back.
We lean toward the latter scenario, particularly since gold is now trading
below the cost of production for about one quarter of the global gold mining
community! New mining projects are being canceled or deferred and the supply of
newly mined gold and scrap is now falling. Nonetheless, caution is the order of
the day until we discern a more predictable upward path for the gold price.
Thank you for your continued patronage.
Sincerely,
/s/ Peter C. Cavelti
Peter C. Cavelti
Chairman and CEO
Cavelti Capital Management Ltd.
Portfolio Manager of the
Blanchard Precious Metals Fund, Inc.
Dear Shareholders,
Enclosed please find the annual report for your Blanchard Flexible Income Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A3 omitted. See Appendix."]
The past year has been one of relatively good economic growth and declining
inflation. The Federal Reserve Board (the "Fed") has continued its policy of
promoting price stability and the market has responded by pushing bonds yields
lower.
The fund has benefited from this environment as the investments in high yield
bonds* and mortgage backed securities have not only earned attractive yields,
but have also appreciated in price. The third allocation, U.S. Treasurys, has
provided the anchor to the portfolio.
Looking forward, we are increasingly concerned with the tight labor markets
and high resource utilization currently existing in the U.S. In order to relieve
these pressures, higher interest rates will probably be required. However, if
the Fed continues to be vigilant in its fight against inflation, significant
interest rate increases should not be in the offing.
*Lower rated bonds involve a higher degree of risk than investment grade bonds
in return for higher yield potential.
While the markets will undoubtedly have bouts of volatility, relative
stability may remain the norm. In this environment, the fund should continue to
benefit from its prudent blend of financial assets.
Thank you for your continued patronage.
Sincerely,
/s/ Jack D. Burks
Jack D. Burks
Managing Director of OFFITBANK
Portfolio Manager of the
Blanchard Flexible Income Fund
Dear Shareholders,
Enclosed please find the annual report for your Blanchard Short-Term Flexible
Income Fund for the fiscal year ended September 30, 1997.
["Graphic representation A4 omitted. See Appendix."]
The past year has been one of relatively good economic growth and declining
inflation. The Federal Reserve Board (the "Fed") has continued its policy of
promoting price stability and the market has responded by pushing bond yields
lower.
The fund has benefited from this environment as the investments in high yield
bonds* and mortgage backed securities have not only earned attractive yields,
but have also appreciated in price. The third allocation, U.S. Treasurys, has
provided the anchor to the portfolio.
Looking forward, we are increasingly concerned with the tight labor markets
and high resource utilization currently existing in the U.S. In order to relieve
these pressures, higher interest rates will probably be required. However, if
the Fed continues to be vigilant in its fight against inflation, significant
interest rate increases should not be in the offing.
*Lower rated bonds involve a higher degree of risk than investment grade bonds
in return for higher yield potential.
While the markets will undoubtedly have bouts of volatility, relative
stability may remain the norm. In this environment, the fund should continue to
benefit from its prudent blend of financial assets.
Thank you for your continued patronage.
Sincerely,
/s/ Jack D. Burks
Jack D. Burks
Managing Director of OFFITBANK
Portfolio Manager of the
Blanchard Short-Term Flexible Income Fund
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Flexible Tax-Free
Bond Fund for the fiscal year ended September 30, 1997.
["Graphic representation A5 omitted. See Appendix."]
The past fiscal year was an excellent one for investors in the Blanchard
Flexible Tax-Free Bond Fund. Interest rates declined during the first fiscal
quarter, but rose sharply in early 1997 as the Federal Reserve Board raised
interest rates to slow an extremely strong economy and quell inflation fears.
Although the economy continued to grow at a 3.5% - 4% rate over the next two
quarters, inflation continued moderate with the consumer price index rising only
2.2% over the past 12 months. Consequently, interest rates declined during the
final two quarters of the fund's fiscal year.
The Blanchard Flexible Tax-Free Bond Fund was invested in a portfolio of
longer-term, high-quality tax exempt bonds, with a maturity of approximately 20
years for most of the year. During the latter part of the fiscal year, cash
reserves were raised to reduce the average maturity of the fund in anticipation
of possible interest rate increases.
Overall, the fund had an excellent year, posting a total return of 9.59%
versus 8.43% for the Lehman Brothers Current Municipal Bond Index.+
Additionally, the fund was ranked #31 by Lipper Analytical Services out of 233
funds in its category of general municipal debt funds for total cumulative
reinvested performance for the twelve month period ended 9/30/97. The fund also
outperformed the Lipper General Municipal Debt Fund average of 8.59%.++
Morningstar has awarded the Blanchard Flexible Tax-Free Bond Fund its 4-star
rating for risk-adjusted performance for the overall period ended 9/30/97 in its
category of 1,374 municipal funds.*
Naturally, past performance is no guarantee of future performance. As with any
fixed income fund, investment return, yield, and principal value will vary with
changing market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original purchase price.
Thank you for your continued patronage.
Sincerely,
/s/ Kenneth J. McAlley
Kenneth J. McAlley
Executive Vice President
United States Trust Company of New York
Portfolio Manager of the
Blanchard Flexible Tax-Free Bond Fund
+Lehman Brothers Municipal Index is an unmanaged broad market performance
benchmark for the tax-exempt bond market. To be included in the Lehman
Brothers Municipal Bond Index, bonds must have a minimum credit rating of at
least Baa. Actual investments cannot be made in an index.
++Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the respective categories indicated. Lipper rankings and figures do not
reflect sales charges.
*Morningstar proprietary ratings reflect risk-adjusted performance through
9/30/97. The ratings are subject to change every month. Past performance is
not a guarantee of future results. Morningstar ratings are calculated from the
fund's three-year returns in excess of 90-day Treasury bill returns, and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The fund received 4 stars for the three-year period. It was rated among 1,374
municipal funds for the three-year period. The top ten percent of the funds in
the category receive 5 stars, the next 22.5% receive 4 stars, and the next 35%
receive 3 stars. The rating shown does not reflect certain management fees
which were waived during the period. If reflected, they may have impacted the
rating.
BLANCHARD GLOBAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------ -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--29.8%
-------------------------------------
AUSTRIA--0.1%
------------------------------
BANKING--0.0%
------------------------------
100 Bank Austria, AG $ 4,865
------------------------------
100 (a)Bank Austria AG, Rights 226
------------------------------ -----------
Total 5,091
------------------------------ -----------
CHEMICALS--0.0%
------------------------------
200 Lenzing AG 11,821
------------------------------ -----------
FINANCIAL SERVICES--0.0%
------------------------------
100 Creditanstalt-Bankverein 6,298
------------------------------
200 Creditanstalt-Bankverein, Pfd. 10,422
------------------------------ -----------
Total 16,720
------------------------------ -----------
PETROLEUM--0.1%
------------------------------
150 OMV AG 22,375
------------------------------ -----------
RUBBER & MISC. MATERIALS--0.0%
------------------------------
200 Radex-Heraklith 8,299
------------------------------ -----------
STEEL--0.0%
------------------------------
100 Boehler-Uddeholm 8,403
------------------------------ -----------
UTILITIES--0.0%
------------------------------
100 Oest Elektrizitats, Class A 7,081
------------------------------ -----------
TOTAL AUSTRIA 79,790
------------------------------ -----------
BRAZIL--0.0%
------------------------------
7,481 Rhodia-Ster S.A., GDR 18,702
------------------------------ -----------
DENMARK--0.1%
------------------------------
BANKING--0.1%
------------------------------
200 Den Danske Bank 21,787
------------------------------
400 Unidanmark, Class A 25,978
------------------------------ -----------
Total 47,765
------------------------------ -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------ ------------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-------------------------------------
DENMARK--CONTINUED
------------------------------
COMMUNICATIONS EQUIPMENT--0.0%
------------------------------
200 Tele Danmark AS, Class B $ 10,492
------------------------------ ------------
ENVIRONMENTAL SERVICES--0.0%
------------------------------
100 Danisco 5,662
------------------------------ ------------
INDUSTRIAL SERVICES--0.0%
------------------------------
100 Nkt Holding 7,728
------------------------------ ------------
MISCELLANEOUS--0.0%
------------------------------
300 Korn-Og Foderstof 9,363
------------------------------ ------------
TRANSPORTATION-AIR--0.0%
------------------------------
400 SAS Danmark AS 6,717
------------------------------ ------------
TOTAL DENMARK 87,727
------------------------------ ------------
FINLAND--0.2%
------------------------------
BANKING--0.0%
------------------------------
3,950 Merita Ltd, Class A 18,739
------------------------------ ------------
ELECTRICAL EQUIPMENT--0.1%
------------------------------
250 Nokia AB, Class K 23,672
------------------------------
500 Nokia AB-A 47,534
------------------------------ ------------
Total 71,206
------------------------------ ------------
MISCELLANEOUS--0.1%
------------------------------
36 Rauma Oy 748
------------------------------
1,300 UPM-Kymmene OY 36,118
------------------------------ ------------
Total 36,866
------------------------------ ------------
NON-FERROUS METALS--0.0%
------------------------------
500 Outokumpu Oy 9,119
------------------------------ ------------
TRADING COMPANY--0.0%
------------------------------
750 Kesko 10,560
------------------------------ ------------
TOTAL FINLAND 146,490
------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------------
FRANCE--0.7%
----------------------------------------
AUTOMOBILE--0.0%
----------------------------------------
150 Peugeot S.A. $ 19,772
---------------------------------------- -----------
BEVERAGE--0.2%
----------------------------------------
310 LVMH (Moet-Hennessy) 65,891
---------------------------------------- -----------
BROADCASTING--0.0%
----------------------------------------
150 Havas S.A. 10,182
---------------------------------------- -----------
BUILDING MATERIALS--0.1%
----------------------------------------
255 Compagnie de St. Gobain 39,329
----------------------------------------
280 Lafarge-Coppee 20,521
---------------------------------------- -----------
Total 59,850
---------------------------------------- -----------
CHEMICALS--0.1%
----------------------------------------
1,122 Rhone-Poulenc, Class A 44,633
---------------------------------------- -----------
FINANCIAL SERVICES--0.1%
----------------------------------------
260 AXA 17,442
----------------------------------------
230 Compagnie Financiere de Paribas, Class A 17,058
---------------------------------------- -----------
Total 34,500
---------------------------------------- -----------
MOTOR VEHICLE PARTS--0.0%
----------------------------------------
384 Michelin, Class B 21,813
---------------------------------------- -----------
PHARMACEUTICALS--0.2%
----------------------------------------
220 L'Oreal 88,072
----------------------------------------
290 Sanofi S.A. 26,934
---------------------------------------- -----------
Total 115,006
---------------------------------------- -----------
RETAILERS-BROADLINE--0.0%
----------------------------------------
60 Pinault-Printemps-Redoute S.A. 28,146
---------------------------------------- -----------
RETAILERS SPECIALTY--0.0%
----------------------------------------
275 Castorama Dubois Investisse 29,574
---------------------------------------- -----------
UTILITIES--0.0%
----------------------------------------
170 Lyonnaise des Eaux S.A. 18,970
---------------------------------------- -----------
TOTAL FRANCE 448,337
---------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------------
GERMANY--2.6%
-----------------------------------------
AIRLINES--0.1%
-----------------------------------------
2,500 Deutsche Lufthansa AG $ 49,237
----------------------------------------- -----------
AUTOMOTIVE & RELATED--0.1%
-----------------------------------------
1,000 Daimler Benz AG 82,515
----------------------------------------- -----------
BANKING--0.4%
-----------------------------------------
2,250 Bayerische Hypotheken-Und Wechsel-Bank AG 96,140
-----------------------------------------
2,700 Deutsche Bank AG 190,090
----------------------------------------- -----------
Total 286,230
----------------------------------------- -----------
CHEMICALS--0.2%
-----------------------------------------
4,500 Bayer AG 179,165
----------------------------------------- -----------
ELECTRICAL EQUIPMENT--0.6%
-----------------------------------------
5,650 Siemens AG 381,634
----------------------------------------- -----------
HEALTHCARE-GENERAL--0.1%
-----------------------------------------
1,500 Merck KGAA 57,302
----------------------------------------- -----------
INSURANCE-LIFE--0.6%
-----------------------------------------
1,500 Allianz AG Holding 361,895
----------------------------------------- -----------
MULTI-INDUSTRY--0.2%
-----------------------------------------
218 Viag AG 97,566
----------------------------------------- -----------
STEEL--0.1%
-----------------------------------------
200 Thyssen AG 46,634
----------------------------------------- -----------
UTILITIES-ELECTRIC--0.2%
-----------------------------------------
2,050 RWE AG 99,254
----------------------------------------- -----------
TOTAL GERMANY 1,641,432
----------------------------------------- -----------
HONG KONG--1.1%
-----------------------------------------
BANKING--0.2%
-----------------------------------------
4,844 Bank Of East Asia 18,093
-----------------------------------------
6,000 Hang Seng Bank, Ltd. 73,856
-----------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------
HONG KONG--CONTINUED
----------------------------------
BANKING--CONTINUED
----------------------------------
1,545 HSBC Holdings PLC $ 51,713
----------------------------------
1,200 Wing Lung Bank 7,118
---------------------------------- -----------
Total 150,780
---------------------------------- -----------
BROADCASTING--0.0%
----------------------------------
2,000 Television Broadcasting 7,082
---------------------------------- -----------
ENTERTAINMENT & RECREATION--0.0%
----------------------------------
3,000 Hong Kong & Shang Hot 3,644
----------------------------------
4,000 Shangri-La Asia 4,110
---------------------------------- -----------
Total 7,754
---------------------------------- -----------
FINANCIAL SERVICES--0.0%
----------------------------------
6,000 Peregrine Investment 10,196
---------------------------------- -----------
MULTI-INDUSTRY--0.2%
----------------------------------
9,000 Hutchison Whampoa 88,686
----------------------------------
3,000 Swire Pacific, Ltd. 22,971
---------------------------------- -----------
Total 111,657
---------------------------------- -----------
PROPERTY--0.1%
----------------------------------
2,000 Hysan Development Co., Ltd. 5,983
----------------------------------
5,033 New World Development Co., Ltd. 30,440
----------------------------------
4,000 Wharf Holdings Ltd. 14,732
---------------------------------- -----------
Total 51,155
---------------------------------- -----------
REAL ESTATE--0.3%
----------------------------------
5,000 Cheung Kong 56,216
----------------------------------
10,000 Sun Hung Kai Properties 117,601
---------------------------------- -----------
Total 173,817
---------------------------------- -----------
TELECOMMUNICATIONS--0.2%
----------------------------------
34,843 Hong Kong Telecommunications, Ltd. 78,800
---------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------
HONG KONG--CONTINUED
---------------------------------
UTILITIES--0.1%
---------------------------------
9,000 China Light and Power Co., Ltd. $ 49,548
---------------------------------
12,000 Hong Kong and China Gas Co., Ltd. 24,735
--------------------------------- -----------
Total 74,283
--------------------------------- -----------
TOTAL HONG KONG 665,524
--------------------------------- -----------
IRELAND--0.3%
---------------------------------
BANKING--0.0%
---------------------------------
1 Bank of Ireland PLC 7
--------------------------------- -----------
BUILDING MATERIALS--0.3%
---------------------------------
14,329 CRH PLC 163,425
--------------------------------- -----------
TOTAL IRELAND 163,432
--------------------------------- -----------
ITALY--1.0%
---------------------------------
AUTOMOTIVE & RELATED--0.2%
---------------------------------
37,510 Fiat SPA 133,859
---------------------------------
4,180 Fiat SPA 7,434
--------------------------------- -----------
Total 141,293
--------------------------------- -----------
BANKING--0.1%
---------------------------------
5,300 Banca Commerciale Italiana 15,229
---------------------------------
600 Imi 6,437
--------------------------------- -----------
Total 21,666
--------------------------------- -----------
BROADCASTING--0.0%
---------------------------------
3,500 Mediaset SPA 18,046
--------------------------------- -----------
FINANCE-0.0%
---------------------------------
6,200 Credito Italiano 16,774
--------------------------------- -----------
PAPER PRODUCTS--0.0%
---------------------------------
1,000 Burgo (Cartiere) SPA 6,488
--------------------------------- -----------
PETROLEUM--0.3%
---------------------------------
26,000 Eni SPA 163,729
--------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------------
ITALY--CONTINUED
---------------------------------------
RUBBER & MISC. MATERIALS--0.0%
---------------------------------------
2,300 Pirelli SPA $ 6,742
--------------------------------------- -----------
TELECOMMUNICATIONS--0.4%
---------------------------------------
46,000 Telecom Italia Mobile SPA 182,545
---------------------------------------
9,944 Telecom Italia SPA 66,249
--------------------------------------- -----------
Total 248,794
--------------------------------------- -----------
UTILITIES--0.0%
---------------------------------------
1,200 Edison SPA 6,458
--------------------------------------- -----------
TOTAL ITALY 629,990
--------------------------------------- -----------
JAPAN--10.3%
---------------------------------------
AIRLINES-0.0%
---------------------------------------
2,000 Japan Airlines Co. 7,276
--------------------------------------- -----------
AUTOMOTIVE & RELATED--1.0%
---------------------------------------
2,000 Denso Corp. 48,562
---------------------------------------
3,000 Honda Motor Co., Ltd. 104,666
---------------------------------------
5,000 Nissan Motor Co., Ltd. 29,833
---------------------------------------
15,000 Toyota Motor Credit Corp. 459,932
--------------------------------------- -----------
Total 642,993
--------------------------------------- -----------
BANKING--1.7%
---------------------------------------
9,000 Asahi Bank, Ltd. 52,208
---------------------------------------
18,000 Bank of Tokyo-Mitsubishi, Ltd. 343,084
---------------------------------------
9,000 Fuji Bank, Ltd., Tokyo 99,196
---------------------------------------
8,000 Industrial Bank of Japan, Ltd., Tokyo 99,445
---------------------------------------
6,000 Mitsubishi Trust & Banking Corp., Tokyo 93,478
---------------------------------------
4,000 Mitsui Trust & Banking 19,922
---------------------------------------
15,000 Sakura Bank, Ltd., Tokyo 71,725
---------------------------------------
10,000 Sumitomo Bank, Ltd., Osaka 150,825
---------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------
JAPAN--CONTINUED
-----------------------------------
BANKING--CONTINUED
-----------------------------------
8,000 Tokai Bank, Ltd., Nagoya $ 66,230
----------------------------------- -----------
Total 996,113
----------------------------------- -----------
BUILDING & CONSTRUCTION-0.0%
-----------------------------------
1,000 Obayashi Corp. 6,041
----------------------------------- -----------
BUILDING MATERIALS--0.0%
-----------------------------------
3,000 Takara Standard Co. 21,331
----------------------------------- -----------
CAPITAL GOODS--0.2%
-----------------------------------
13,000 Asahi Glass Co., Ltd. 101,052
----------------------------------- -----------
CHEMICALS & RELATED--0.4%
-----------------------------------
12,000 Daicel Chemical Industries 30,728
-----------------------------------
6,000 Sekisui Chemical Co. 45,198
-----------------------------------
1,000 Shin-Etsu Chemical Co. 27,513
-----------------------------------
6,000 Sumitomo Bakelite Co., Ltd. 42,562
-----------------------------------
2,000 Sumitomo Chemical Co. 7,342
-----------------------------------
3,000 Takeda Chemical Industries 89,998
----------------------------------- -----------
Total 243,341
----------------------------------- -----------
CHEMICAL-SPECIALTY--0.3%
-----------------------------------
2,000 Fuji Photo Film Co. 82,539
-----------------------------------
5,000 Shiseido Co. 80,385
----------------------------------- -----------
Total 162,924
----------------------------------- -----------
COMMUNICATION EQUIPMENT--0.3%
-----------------------------------
8,000 Matsushita Electric Industrial Co. 144,526
-----------------------------------
1 NTT Data Communications Systems Co. 45,330
----------------------------------- -----------
Total 189,856
----------------------------------- -----------
COMPUTERS--0.2%
-----------------------------------
6,000 Fujitsu, Ltd. 75,081
-----------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ---------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------------
JAPAN--CONTINUED
----------------------------------------
COMPUTERS--CONTINUED
----------------------------------------
6,000 NEC Corp. $ 73,092
---------------------------------------- -----------
Total 148,173
---------------------------------------- -----------
CONSUMER ELECTRONIC--0.4%
----------------------------------------
1,000 Rohm Co. 117,676
----------------------------------------
6,000 Sharp Corp. 54,695
----------------------------------------
1,000 Sony Corp. 94,473
---------------------------------------- -----------
Total 266,844
---------------------------------------- -----------
ELECTRONICS & ELECTRICAL EQUIPMENT--0.9%
----------------------------------------
500 Advantest 49,308
----------------------------------------
2,000 Canon Sales Co., Inc. 39,446
----------------------------------------
5,000 Canon, Inc. 146,267
----------------------------------------
16,000 Hitachi, Ltd. 139,223
----------------------------------------
600 Kyocera Corp. 39,231
----------------------------------------
1,000 Mitsubishi Corp. 9,696
----------------------------------------
1,000 Murata Manufacturing 43,258
----------------------------------------
1,000 Tokyo Electron, Ltd. 61,076
----------------------------------------
4,000 Yamatake-Honeywell 56,352
---------------------------------------- -----------
Total 583,857
---------------------------------------- -----------
FINANCIAL SERVICES--0.8%
----------------------------------------
2,200 Credit Saison Co., Ltd. 59,799
----------------------------------------
4,000 Daiwa Securities Co., Ltd. 24,530
----------------------------------------
134,000 (a)Nikkei 300 Stock Index List Fund 304,268
----------------------------------------
7,000 Nomura Securities Co., Ltd. 91,075
----------------------------------------
3,000 Yamaichi Securities Co., Ltd. 6,166
---------------------------------------- -----------
Total 485,838
---------------------------------------- -----------
FOOD PROCESSING--0.1%
----------------------------------------
3,000 House Foods Corp. 50,965
---------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ----------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
------------------------------------------
JAPAN--CONTINUED
-----------------------------------
HOUSING & CONSTRUCTION--0.1%
-----------------------------------
13,000 Taisei Corp. $ 48,587
----------------------------------- -----------
INSURANCE--0.2%
-----------------------------------
11,000 Sumitomo Marine & Fire 76,117
-----------------------------------
4,000 Tokio Marine and Fire Insurance Co. 48,065
----------------------------------- -----------
Total 124,182
----------------------------------- -----------
MACHINERY--0.3%
-----------------------------------
14,000 Komatsu, Ltd. 78,313
-----------------------------------
4,000 Mori Seiki Co. 46,739
-----------------------------------
4,000 Takuma Co., Ltd. 39,778
----------------------------------- -----------
Total 164,830
----------------------------------- -----------
NON-RESIDENTIAL CONSTRUCTION--0.1%
-----------------------------------
7,000 Sekisui House, Ltd. 66,711
----------------------------------- -----------
OIL & RELATED--0.0%
-----------------------------------
8,000 Mitsubishi Oil Co. 21,480
----------------------------------- -----------
PAPER PRODUCTS--0.0%
-----------------------------------
2,000 Nippon Paper Industries Co. 10,972
----------------------------------- -----------
PHARMACEUTICALS--0.4%
-----------------------------------
6,000 Chugai Pharmaceutical Co. 51,711
-----------------------------------
4,000 Kaken Pharmaceutical 13,823
-----------------------------------
2,000 Sankyo Co., Ltd. 69,280
-----------------------------------
4,000 Shionogi and Co. 24,894
-----------------------------------
3,000 Yamanouchi Pharmaceutical Co., Ltd. 74,086
----------------------------------- -----------
Total 233,794
----------------------------------- -----------
PHOTO EQUIPMENT & SUPPLIES--0.0%
-----------------------------------
1,000 Nikon Corp. 15,745
----------------------------------- -----------
PRINTING-COMMERCIAL--0.0%
-----------------------------------
1,000 Dai Nippon Printing Co., Ltd. 21,381
----------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
-----------------------------------------
JAPAN--CONTINUED
----------------------------------
REAL ESTATE--0.2%
----------------------------------
8,000 Mitsubishi Estate Co., Ltd. $ 116,682
---------------------------------- -----------
RETAIL--0.3%
----------------------------------
1,000 Daiei, Inc. 5,519
----------------------------------
5,000 Hankyu Department Stores, Inc. 41,435
----------------------------------
1,000 Isetan Co. 9,613
----------------------------------
2,000 Ito Yokado Co., Ltd. 108,395
---------------------------------- -----------
Total 164,962
---------------------------------- -----------
RUBBER & MISC. MATERIALS--0.1%
----------------------------------
3,000 Bridgestone Corp. 72,097
---------------------------------- -----------
SHIPBUILDING--0.2%
----------------------------------
27,000 Mitsubishi Heavy Industries, Ltd. 147,899
---------------------------------- -----------
STEEL--0.1%
----------------------------------
44,000 NKK Corp. 59,070
----------------------------------
9,000 Nippon Steel Co. 19,839
---------------------------------- -----------
Total 78,909
---------------------------------- -----------
TELECOMMUNICATIONS--0.9%
----------------------------------
62 Nippon Telegraph & Telephone Corp. 570,316
---------------------------------- -----------
TEXTILE & APPAREL--0.1%
----------------------------------
6,000 Nisshinbo Industries 39,728
---------------------------------- -----------
TRADING COMPANY--0.3%
----------------------------------
15,000 Itochu Corp. 51,960
----------------------------------
22,000 Marubeni Corp. 72,926
----------------------------------
4,000 Onward Kashiyama Co., Ltd. 57,678
---------------------------------- -----------
Total 182,564
---------------------------------- -----------
TRANSPORTATION--0.4%
----------------------------------
12 East Japan Railway Co. 56,286
----------------------------------
35,000 (a)Kawasaki Kisen Kaisha, Ltd. 38,286
----------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
--------------------------------------
JAPAN--CONTINUED
-------------------------------
TRANSPORTATION--CONTINUED
-------------------------------
28,000 Kinki Nippon Railway $ 159,874
------------------------------- -----------
Total 254,446
------------------------------- -----------
UTILITIES--0.3%
-------------------------------
900 Kansai Electric Power Co., Inc. 16,035
-------------------------------
1,000 Sumitomo Electric Industries 14,337
-------------------------------
8,100 Tokyo Electric Power Co. 155,731
------------------------------- -----------
Total 186,103
------------------------------- -----------
TOTAL JAPAN 6,427,992
------------------------------- -----------
NETHERLANDS--0.7%
-------------------------------
BANKING--0.1%
-------------------------------
1,621 ABN-Amro Hldgs N.V. 32,822
------------------------------- -----------
CONSUMER & RELATED--0.0%
-------------------------------
200 Heineken N.V. 35,080
------------------------------- -----------
FOOD PROCESSING--0.1%
-------------------------------
200 Unilever N.V. 42,687
------------------------------- -----------
HOUSEHOLD DURABLES--0.1%
-------------------------------
600 Philips Electronics N.V. 50,766
------------------------------- -----------
INSURANCE--0.2%
-------------------------------
315 Aegon N.V. 25,228
-------------------------------
1,065 Ahold N.V. 28,788
-------------------------------
1,436 ING Groep N.V. 65,945
------------------------------- -----------
Total 119,961
------------------------------- -----------
PETROLEUM--0.2%
-------------------------------
2,600 Royal Dutch Petroleum 145,526
------------------------------- -----------
TOTAL NETHERLANDS 426,842
------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
----------------------------------------
NEW ZEALAND--0.1%
---------------------------------
BUILDING MATERIALS--0.0%
---------------------------------
5,552 Fletcher Challenge Energy $ 6,936
--------------------------------- -----------
FOREST PRODUCTS--0.1%
---------------------------------
8,300 Carter Holt Harvey 18,026
---------------------------------
222 Fletcher Challenge Forests 277
--------------------------------- -----------
Total 18,303
--------------------------------- -----------
TELECOMMUNICATIONS--0.0%
---------------------------------
3,900 Telecom Corp. of New Zealand 19,788
--------------------------------- -----------
TOTAL NEW ZEALAND 45,027
--------------------------------- -----------
NORWAY--0.2%
---------------------------------
ENERGY--0.1%
---------------------------------
1,000 Norsk Hydro AS 59,591
--------------------------------- -----------
FOREST PRODUCTS--0.1%
---------------------------------
300 Norske Skogindustrier AS, Class A 11,271
---------------------------------
200 Norske Skogindustrier AS, Class B 6,867
--------------------------------- -----------
Total 18,138
--------------------------------- -----------
INSURANCE-LIFE--0.0%
---------------------------------
1,300 (a)Storebrand ASA 9,329
--------------------------------- -----------
MULTI-INDUSTRY--0.0%
---------------------------------
200 Aker AS, Class A 3,743
---------------------------------
40 Aker AS, Class B 681
---------------------------------
100 Orkla Borregaard AS, Class A 8,837
--------------------------------- -----------
Total 13,261
--------------------------------- -----------
NON-FERROUS METALS--0.0%
---------------------------------
400 Elkem AS, Class A 7,092
--------------------------------- -----------
TOTAL NORWAY 107,411
--------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ -------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------
SOUTH AFRICA--0.1%
--------------------------------
MINERAL PRODUCTS--0.1%
--------------------------------
20,000 Billiton PLC $ 77,030
-------------------------------- -----------
SPAIN--0.8%
--------------------------------
BANKING--0.1%
--------------------------------
300 Argentaria SA 17,947
--------------------------------
900 Banco Bilbao Vizcaya SA 27,705
--------------------------------
1,200 Banco Santander 39,311
-------------------------------- -----------
Total 84,963
-------------------------------- -----------
PETROLEUM--0.1%
--------------------------------
1,100 Repsol SA 47,531
-------------------------------- -----------
REAL ESTATE--0.3%
--------------------------------
6,000 Vallehermosa SA 165,405
-------------------------------- -----------
TELECOMMUNICATIONS--0.1%
--------------------------------
2,200 Telefonica de Espana 69,123
-------------------------------- -----------
UTILITIES--0.2%
--------------------------------
2,400 Endesa SA 51,209
--------------------------------
400 Gas Natural SDG SA 21,063
--------------------------------
2,200 Iberdrola SA 27,045
--------------------------------
600 Union Elec Fenosa 5,205
-------------------------------- -----------
Total 104,522
-------------------------------- -----------
TOTAL SPAIN 471,544
-------------------------------- -----------
SWEDEN--0.7%
--------------------------------
BANKING--0.0%
--------------------------------
1,500 Skand Enskilda BKN, Class A 18,188
--------------------------------
300 Svenska Handelsbanken, Stockholm 10,399
-------------------------------- -----------
Total 28,587
-------------------------------- -----------
COMMUNICATIONS--0.2%
--------------------------------
2,300 Telefonaktiebolaget LM Ericsson 110,491
-------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------------------------
SWEDEN--CONTINUED
-------------------------------------------------
MISCELLANEOUS--0.2%
-------------------------------------------------
2,600 Scania AB, Class A 78,814
-------------------------------------------------
2,600 Scania AB, Class B $ 78,814
------------------------------------------------- -----------
Total 157,628
------------------------------------------------- -----------
PHARMACEUTICALS--0.3%
-------------------------------------------------
8,800 Astra AB, Class A 162,372
------------------------------------------------- -----------
TOTAL SWEDEN 459,078
------------------------------------------------- -----------
SWITZERLAND--7.6%
-------------------------------------------------
AIRLINES-0.1%
-------------------------------------------------
30 Sairgroup 40,120
------------------------------------------------- -----------
BANKING--1.2%
-------------------------------------------------
600 Credit Suisse Group 81,064
-------------------------------------------------
200 Schweizerische Bankgesellschaft (UBS) 46,755
-------------------------------------------------
300 Schweizerische Bankgesellschaft (UBS) 350,454
-------------------------------------------------
900 Schweizerischer Bankverein 243,193
------------------------------------------------- -----------
Total 721,466
------------------------------------------------- -----------
BUILDING PRODUCTS--0.1%
-------------------------------------------------
50 Holderbank Financiere Glaris AG, Class B 47,442
-------------------------------------------------
100 Holderbank Financiere Glaris AG, Class R 19,527
------------------------------------------------- -----------
Total 66,969
------------------------------------------------- -----------
COMMERCIAL SERVICES--0.0%
-------------------------------------------------
15 SGS Societe Generale de Surveillance Holding S.A. 26,248
------------------------------------------------- -----------
ELECTRICAL EQUIPMENT--0.3%
-------------------------------------------------
95 ABB AG 139,913
-------------------------------------------------
10 Schindler Holding AG 12,445
-------------------------------------------------
50 Sulzer AG 38,023
------------------------------------------------- -----------
Total 190,381
------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ -------------------------------------------------------- ------------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
---------------------------------------------------------------
SWITZERLAND--CONTINUED
--------------------------------------------------------
FOOD PROCESSING--1.1%
--------------------------------------------------------
500 Nestle SA $ 696,507
-------------------------------------------------------- ------------
HEALTHCARE-GENERAL--1.6%
--------------------------------------------------------
100 Roche Holding AG 1,015,677
-------------------------------------------------------- ------------
HOUSEHOLD PRODUCTS--0.4%
--------------------------------------------------------
600 Zurich Versicherungsgesellschaft 261,139
-------------------------------------------------------- ------------
HUMAN RESOURCES--0.1%
--------------------------------------------------------
200 Adecco S.A. 80,446
-------------------------------------------------------- ------------
INSURANCE-LIFE--0.5%
--------------------------------------------------------
190 Schw Rueckversicherungs 284,922
-------------------------------------------------------- ------------
METAL & MINING--0.1%
--------------------------------------------------------
75 Alusuisse Lonza Holding AG 73,002
-------------------------------------------------------- ------------
MISCELLANEOUS--2.0%
--------------------------------------------------------
790 Novartis AG 1,211,909
-------------------------------------------------------- ------------
RETAIL-RESTAURANTS--0.0%
--------------------------------------------------------
50 Valora Holding AG 10,640
-------------------------------------------------------- ------------
UNASSIGNED--0.1%
--------------------------------------------------------
50 Societe Suisse pour la Microelectronique et l'Horlogerie 29,772
--------------------------------------------------------
200 Societe Suisse pour la Microelectronique et l'Horlogerie 27,537
-------------------------------------------------------- ------------
Total 57,309
-------------------------------------------------------- ------------
TOTAL SWITZERLAND 4,736,735
-------------------------------------------------------- ------------
UNITED KINGDOM--3.2%
--------------------------------------------------------
AEROSPACE--0.1%
--------------------------------------------------------
1,900 British Aerospace PLC 50,307
-------------------------------------------------------- ------------
BANKING--0.6%
--------------------------------------------------------
7,100 Lloyds TSB Group PLC 95,311
--------------------------------------------------------
18,028 National Westminster Bank PLC, London 272,242
-------------------------------------------------------- ------------
Total 367,553
-------------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------- -----------
<C> <S> <C>
FOREIGN SECURITIES SECTOR--CONTINUED
--------------------------------------------------------
UNITED KINGDOM--CONTINUED
-------------------------------------------------
BROADCASTING--0.4%
-------------------------------------------------
900 British Sky Broadcasting Group PLC $ 6,809
-------------------------------------------------
27,500 Carlton Communications PLC 227,572
------------------------------------------------- -----------
Total 234,381
------------------------------------------------- -----------
DIVERSIFIED OPERATIONS--0.2%
-------------------------------------------------
19,334 Williams Holdings PLC 115,040
------------------------------------------------- -----------
FOOD PROCESSING--0.2%
-------------------------------------------------
14,300 Allied Domecq PLC 113,334
------------------------------------------------- -----------
HEALTH CARE--0.5%
-------------------------------------------------
33,224 Smithkline Beecham Corp. 324,121
------------------------------------------------- -----------
MACHINERY--0.3%
-------------------------------------------------
8,800 Siebe PLC 176,949
------------------------------------------------- -----------
MULTI-INDUSTRY--0.3%
-------------------------------------------------
7,500 Hanson PLC, ADR 180,938
------------------------------------------------- -----------
OIL & RELATED--0.2%
-------------------------------------------------
10,370 British Petroleum Co. PLC 156,347
------------------------------------------------- -----------
PHARMACEUTICALS--0.2%
-------------------------------------------------
4,800 Glaxo Wellcome PLC 107,036
------------------------------------------------- -----------
PUBLISHING--0.2%
-------------------------------------------------
12,722 EMI Group PLC 124,933
------------------------------------------------- -----------
RETAIL--0.0%
-------------------------------------------------
5,468 Thorn EMI 12,318
------------------------------------------------- -----------
TELECOMMUNICATIONS--0.0%
-------------------------------------------------
1,125 Cable & Wireless 9,578
------------------------------------------------- -----------
TOTAL UNITED KINGDOM 1,972,835
------------------------------------------------- -----------
TOTAL FOREIGN SECURITIES SECTOR (IDENTIFIED COST
$18,032,118) 18,605,918
------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
--------- --------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--9.9%
-------------------------------------------------------------
ARGENTINA--0.3%
---------------------------------------------------
PETROLEUM--0.3%
---------------------------------------------------
21,385 Compania Naviera Perez Companc S.A., Class B $ 172,398
--------------------------------------------------- ------------
BRAZIL--1.4%
---------------------------------------------------
BANKING--0.1%
---------------------------------------------------
7,000,000 Banco Bradesco S.A., Pfd. 73,794
--------------------------------------------------- ------------
BASIC INDUSTRY--0.6%
---------------------------------------------------
4,387 (a)Cia Acos Especiais Itabira-Acesita, ADR 16,937
---------------------------------------------------
3,207 (a)Companhia Energetica de Minas Gerais, ADR 176,219
---------------------------------------------------
7,400 Companhia Vale Do Rio Doce, ADR 181,017
--------------------------------------------------- ------------
Total 374,173
--------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.6%
---------------------------------------------------
2,750 Telecomunicacoes Brasileras, ADR 354,063
--------------------------------------------------- ------------
STEEL--0.0%
---------------------------------------------------
1,211,792 Cia Acos Especiais Itabira-Acesita, Pfd. 2,632
--------------------------------------------------- ------------
UTILITIES--0.1%
---------------------------------------------------
150,000 Centrais Eletricas Brasileiras S.A., Pfd., Series B 84,887
---------------------------------------------------
6,588 Light Servicos de Eletricidade S.A. 2,820
--------------------------------------------------- ------------
Total 87,707
--------------------------------------------------- ------------
TOTAL BRAZIL 892,369
--------------------------------------------------- ------------
CHILE--0.8%
---------------------------------------------------
CONSUMER DURABLES--0.2%
---------------------------------------------------
4,200 Compania Cervecerias Unidas S.A., ADR 120,750
--------------------------------------------------- ------------
ENGINEERING-BUSINESS SERVICES--0.3%
---------------------------------------------------
5,319 Chilgener S.A., ADR 145,940
--------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
---------------------------------------------------
2,525 Compania Telecomunicacion Chile, ADR 81,747
--------------------------------------------------- ------------
UTILITIES--0.2%
---------------------------------------------------
3,750 (b)Chilectra S.A., ADR 118,378
--------------------------------------------------- ------------
TOTAL CHILE 466,815
--------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ------------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
--------------------------------------------------------------
COLOMBIA--0.4%
------------------------------------------------------
BANKING--0.3%
------------------------------------------------------
2,600 Banco Ganadero S.A., ADR, Class B $ 104,000
------------------------------------------------------
5,500 Banco Industrial Colombiano, ADR 98,313
------------------------------------------------------ ------------
Total 202,313
------------------------------------------------------ ------------
MISCELLANEOUS--0.1%
------------------------------------------------------
3,500 Cementos Diamante S.A., GDR 45,500
------------------------------------------------------ ------------
TOTAL COLOMBIA 247,813
------------------------------------------------------ ------------
GREECE--0.0%
------------------------------------------------------
BANKING--0.0%
------------------------------------------------------
422 Ergo Bank S.A. 28,267
------------------------------------------------------ ------------
INDIA--0.3%
------------------------------------------------------
CHEMICALS--0.1%
------------------------------------------------------
5,700 Indian Petrochemicals, GDR 58,397
------------------------------------------------------ ------------
STEEL--0.0%
------------------------------------------------------
5,500 Steel Authority of India, GDR 35,888
------------------------------------------------------ ------------
TEXTILES--0.2%
------------------------------------------------------
4,300 Reliance Industries, Ltd., GDR 98,631
------------------------------------------------------ ------------
TOTAL INDIA 192,916
------------------------------------------------------ ------------
INDONESIA--0.3%
------------------------------------------------------
BANKING--0.2%
------------------------------------------------------
275,626 (a)PT Bank Dagang Nasional 54,455
------------------------------------------------------
39,374 (a)PT Bank Dagang Nasional, Warrants 2/14/2000 2,274
------------------------------------------------------
260,814 (a)PT Bank International Indonesia 75,311
------------------------------------------------------
32,072 (a)PT Bank International Indonesia, Warrants 1/17/2000 2,720
------------------------------------------------------ ------------
Total 134,760
------------------------------------------------------ ------------
CAPITAL GOODS--0.1%
------------------------------------------------------
3,100 (a)PT Indosat, ADR 81,375
------------------------------------------------------ ------------
TOTAL INDONESIA 216,135
------------------------------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ --------------------------------------------- -----------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
----------------------------------------------------
KOREA--0.6%
---------------------------------------------
AUTOMOBILE--0.0%
---------------------------------------------
2,066 Hyundai Motor Service Co., Pfd. $ 13,999
--------------------------------------------- -----------
CAPITAL GOODS--0.1%
---------------------------------------------
3,284 (a)Anam Industrial Co., Ltd. 52,400
--------------------------------------------- -----------
COMPUTERS--0.1%
---------------------------------------------
5,750 Anam Industrial Co., Ltd., Pfd. 33,934
--------------------------------------------- -----------
ELECTRONICS & ELECTRICAL--0.0%
---------------------------------------------
2 (a)Samsung Electronics Co. 193
---------------------------------------------
18 (b)Samsung Electronics Co., GDR 968
--------------------------------------------- -----------
Total 1,161
--------------------------------------------- -----------
HOUSING & CONSTRUCTION--0.0%
---------------------------------------------
9,000 (a)Kumho Construction & Engineering Co., Pfd. 21,836
--------------------------------------------- -----------
MACHINERY--0.0%
---------------------------------------------
6,000 (a)(b)Daewoo Heavy Industries, Pfd. 23,213
--------------------------------------------- -----------
MULTI-INDUSTRY--0.2%
---------------------------------------------
2,283 (a)(b)Dong Bang Forwarding Co. 118,516
---------------------------------------------
913 (a)Dong Bang Forwarding Co., Rights 14,222
--------------------------------------------- -----------
Total 132,738
--------------------------------------------- -----------
PETROLEUM--0.1%
---------------------------------------------
2,571 (a)Yukong, Ltd. 47,767
--------------------------------------------- -----------
UTILITIES--0.1%
---------------------------------------------
3,200 (a)Korea Electric Power Corp. 70,995
--------------------------------------------- -----------
TOTAL KOREA 398,043
--------------------------------------------- -----------
MALAYSIA--0.9%
---------------------------------------------
AIRLINES--0.1%
---------------------------------------------
25,000 Malaysian Airline System 40,071
--------------------------------------------- -----------
BANKING--0.2%
---------------------------------------------
14,000 Commerce Asset Holdings Berhad 15,708
---------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ------------------------------------------------------ ----------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-------------------------------------------------------------
MALAYSIA--CONTINUED
------------------------------------------------------
BANKING--CONTINUED
------------------------------------------------------
1,750 (a)Commerce Asset Holdings Berhad, Warrants 12/31/2002 $ 566
------------------------------------------------------
25,000 RHB Capital BHD 29,591
------------------------------------------------------
12,000 Malayan Banking Berhad 60,291
------------------------------------------------------ ----------
Total 106,156
------------------------------------------------------ ----------
BEVERAGES--0.1%
------------------------------------------------------
40,000 Guinness Anchor Berhad 61,648
------------------------------------------------------ ----------
FOREST PRODUCTS--0.0%
------------------------------------------------------
10,000 Jaya Tiasa Holdings 27,587
------------------------------------------------------ ----------
INDUSTRIAL COMPONENT--0.0%
------------------------------------------------------
9,000 United Engineers, Ltd. 28,851
------------------------------------------------------ ----------
LEISURE & RECREATION--0.1%
------------------------------------------------------
12,000 Genting Berhad 37,358
------------------------------------------------------ ----------
MULTI-INDUSTRY--0.1%
------------------------------------------------------
35,000 Sime Darby Berhad 72,821
------------------------------------------------------ ----------
NON RESIDENTIAL CONSTRUCTION--0.1%
------------------------------------------------------
47,000 Renong Berhad 46,359
------------------------------------------------------ ----------
TELECOMMUNICATIONS--0.1%
------------------------------------------------------
13,500 Telekom Malaysia Berhad 40,988
------------------------------------------------------ ----------
UTILITIES--0.1%
------------------------------------------------------
18,000 Petronas Gas Berhad 53,263
------------------------------------------------------ ----------
TOTAL MALAYSIA 515,102
------------------------------------------------------ ----------
MEXICO--1.4%
------------------------------------------------------
FINANCIAL SERVICES--0.3%
------------------------------------------------------
4,900 (a)Carso Global Telecom, ADR 41,592
------------------------------------------------------
4,900 (a)Grupo Carso S.A. de C.V., Class A1, ADR 78,898
------------------------------------------------------
16,000 (a)Grupo Financiero Banamex Accivel, Class B 50,450
------------------------------------------------------
1,140 (a)Grupo Financiero Banamex Accivel, Class L 3,345
------------------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------- ------------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
--------------------------------------------------------------
MEXICO--CONTINUED
------------------------------------------------------
FINANCIAL SERVICES--CONTINUED
------------------------------------------------------
68 Grupo Financiero Inbursa, S.A. de C.V., Class B, ADR $ 1,504
------------------------------------------------------ ------------
Total 175,789
------------------------------------------------------ ------------
INDUSTRIAL & RELATED--0.1%
------------------------------------------------------
11,000 Apasco S.A. de C.V. 83,668
------------------------------------------------------ ------------
MULTI-INDUSTRY--0.2%
------------------------------------------------------
12,791 Alfa, S.A. de C.V., Class A 120,173
------------------------------------------------------ ------------
PAPER PRODUCTS--0.2%
------------------------------------------------------
25,000 Kimberly-Clark de Mexico 130,792
------------------------------------------------------ ------------
TELECOMMUNICATIONS--0.5%
------------------------------------------------------
110,000 Telefonos de Mexico 286,679
------------------------------------------------------ ------------
TELECOMMUNICATION SERVICES--0.1%
------------------------------------------------------
4,000 Grupo Televisa S.A. 71,094
------------------------------------------------------ ------------
TOTAL MEXICO 868,195
------------------------------------------------------ ------------
PHILIPPINES--0.1%
------------------------------------------------------
BANKING--0.0%
------------------------------------------------------
1,935 Metro Bank and Trust Co. 17,247
------------------------------------------------------ ------------
OIL & RELATED--0.1%
------------------------------------------------------
400,000 (a)Belle Corp. 52,174
------------------------------------------------------
80,000 (a)Belle Corp., warrants 10/6/2000 0
------------------------------------------------------ ------------
Total 52,174
------------------------------------------------------ ------------
TOTAL PHILIPPINES 69,421
------------------------------------------------------ ------------
PORTUGAL--0.6%
------------------------------------------------------
ENGINEERING-BUSINESS SERVICES--0.1%
------------------------------------------------------
Sonae Investimentos Sociedade Gestora de Participacoes
1,500 Sociais, S.A. 59,303
------------------------------------------------------ ------------
FINANCIAL SERVICES--0.2%
------------------------------------------------------
6,000 Banco Commercial Portugues, Class R 126,709
------------------------------------------------------ ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------------------
PORTUGAL--CONTINUED
----------------------------------------------------
FOOD & BEVERAGE--0.2%
----------------------------------------------------
1,399 Estabelecimentos Jeronimo Martins & Filho SGPS, S.A. $ 107,681
---------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
----------------------------------------------------
2,000 Portugal Telecom S.A. 86,751
---------------------------------------------------- ------------
TOTAL PORTUGAL 380,444
---------------------------------------------------- ------------
SINGAPORE--0.3%
----------------------------------------------------
BANKING--0.1%
----------------------------------------------------
3,000 Development Bank of Singapore, Ltd. 30,598
----------------------------------------------------
6,000 Oversea-Chinese Banking Corp., Ltd. 41,582
---------------------------------------------------- ------------
Total 72,180
---------------------------------------------------- ------------
BROADCASTING--0.0%
----------------------------------------------------
1,000 Singapore Press Holdings, Ltd. 14,711
---------------------------------------------------- ------------
ENTERTAINMENT & RECREATION--0.0%
----------------------------------------------------
3,000 Hotel Properties, Ltd. 3,707
---------------------------------------------------- ------------
MACHINERY--0.0%
----------------------------------------------------
1,250 Keppel Corp. 4,985
----------------------------------------------------
2,000 Van Der Horst, Ltd. 2,733
---------------------------------------------------- ------------
Total 7,718
---------------------------------------------------- ------------
PROPERTY--0.1%
----------------------------------------------------
2,000 City Developments, Ltd. 12,945
----------------------------------------------------
3,000 DBS Land Ltd. 7,297
----------------------------------------------------
2,000 First Capital Corp., Ltd. 4,472
----------------------------------------------------
9,000 United Overseas Bank, Ltd. 35,829
---------------------------------------------------- ------------
Total 60,543
---------------------------------------------------- ------------
TELECOMMUNICATIONS--0.1%
----------------------------------------------------
13,000 Singapore Telecommunications 22,014
---------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
------ ---------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------
SINGAPORE--CONTINUED
----------------------------------------
TRANSPORTATION-AIR--0.0%
----------------------------------------
3,000 Singapore Airlines, Ltd. $ 22,164
---------------------------------------- ------------
TOTAL SINGAPORE 203,037
---------------------------------------- ------------
SOUTH AFRICA--1.8%
----------------------------------------
BANKING--0.2%
----------------------------------------
7,186 Amalgamated Banks of South Africa 48,955
----------------------------------------
2,515 Nedcor, Ltd. 54,234
----------------------------------------
1,000 Standard Bank Investment Corp., Ltd. 44,523
---------------------------------------- ------------
Total 147,712
---------------------------------------- ------------
CHEMICAL--0.2%
----------------------------------------
9,000 Sasol, Ltd. 124,075
---------------------------------------- ------------
COAL--0.0%
----------------------------------------
419 Anglo American Coal Corp., Ltd. 24,454
---------------------------------------- ------------
ENTERTAINMENT--0.1%
----------------------------------------
62,743 Sun International (South Africa), Ltd. 38,503
---------------------------------------- ------------
FINANCIAL SERVICES--0.2%
----------------------------------------
312 (a)Dimension Data Holdings, Ltd. 1,305
----------------------------------------
4,500 Free State Consolidated Gold Mines, Ltd. 26,553
----------------------------------------
6,000 Malbak Limited 8,754
----------------------------------------
7,000 Rembrandt Group, Ltd. 63,384
---------------------------------------- ------------
Total 99,996
---------------------------------------- ------------
FOOD & BEVERAGE--0.0%
----------------------------------------
672 Foodcorp., Ltd. 4,326
---------------------------------------- ------------
HOUSEHOLD PRODUCTS--0.0%
----------------------------------------
837 Ellerine Holdings, Ltd. 6,645
----------------------------------------
81 (a)JD Group, Ltd. 613
---------------------------------------- ------------
Total 7,258
---------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
--------- -------------------------------------------------- ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
------------------------------------------------------------
SOUTH AFRICA--CONTINUED
--------------------------------------------------
INDUSTRIAL MANUFACTURING--0.2%
--------------------------------------------------
6,045 Barlow Ltd. $ 69,069
--------------------------------------------------
1,030 Anglo American Industrial Corp., Ltd. 38,676
-------------------------------------------------- ------------
Total 107,745
-------------------------------------------------- ------------
INSURANCE--0.3%
--------------------------------------------------
27,826 LibLife Strategic Investments, Ltd. 96,127
--------------------------------------------------
3,000 Liberty Life Association of Africa, Ltd. 87,544
-------------------------------------------------- ------------
Total 183,671
-------------------------------------------------- ------------
LODGING & RESTAURANT--0.2%
--------------------------------------------------
4,068 South African Breweries, Ltd. 118,055
-------------------------------------------------- ------------
MEDICAL-DRUGS--0.0%
--------------------------------------------------
989 South African Druggists, Ltd. 6,451
-------------------------------------------------- ------------
METALS & MINING--0.4%
--------------------------------------------------
3,000 Anglo American Platinum Corp., Ltd. 51,979
--------------------------------------------------
1,500 Anglo American Corporation of South Africa Limited 76,762
--------------------------------------------------
3,300 De Beers Centenary AG 96,299
--------------------------------------------------
4,000 Gencor Ltd. 9,441
-------------------------------------------------- ------------
Total 234,481
-------------------------------------------------- ------------
RETAIL-DIVERSIFIED--0.0%
--------------------------------------------------
2,284 New Clicks Holdings, Ltd. 2,960
-------------------------------------------------- ------------
TOTAL SOUTH AFRICA 1,099,687
-------------------------------------------------- ------------
TAIWAN--0.4%
--------------------------------------------------
MISCELLANEOUS--0.1%
--------------------------------------------------
7,018 (a)Walsin Lihwa Wire, GDR 56,846
-------------------------------------------------- ------------
NON-RESIDENTIAL CONSTRUCTION--0.1%
--------------------------------------------------
10,902 (a)Tuntex Distinct Corp., GDR 62,414
-------------------------------------------------- ------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- ------------------------------------------------ ------------
<C> <S> <C>
EMERGING MARKETS SECURITIES SECTOR--CONTINUED
-----------------------------------------------------------
TAIWAN--CONTINUED
------------------------------------------------
TECHNOLOGY--0.2%
------------------------------------------------
4,213 (a)Macronix International Co., Ltd., ADR $ 94,529
------------------------------------------------ ------------
TOTAL TAIWAN 213,789
------------------------------------------------ ------------
THAILAND--0.3%
------------------------------------------------
BANKING--0.1%
------------------------------------------------
27,000 Krung Thai Bank PLC 18,223
------------------------------------------------
13,500 Siam Commercial Bank 43,884
------------------------------------------------ ------------
Total 62,107
------------------------------------------------ ------------
BUILDING MATERIALS--0.0%
------------------------------------------------
2,000 Siam Cement Co., Ltd 32,837
------------------------------------------------ ------------
COMMUNICATIONS--0.1%
------------------------------------------------
35,000 (a)TelecomAsia Corp. 28,444
------------------------------------------------
9,000 United Communication Industry Public Co., Ltd. 26,777
------------------------------------------------ ------------
Total 55,221
------------------------------------------------ ------------
PETROLEUM--0.1%
------------------------------------------------
4,500 PTT Exploration and Production Public Co. 60,248
------------------------------------------------ ------------
TOTAL THAILAND 210,413
------------------------------------------------ ------------
TURKEY--0.0%
------------------------------------------------
MULTI-INDUSTRY--0.0%
------------------------------------------------
349 Koc Yatirim Ve Sanayi Mamulleri Pazarlama S.A. 132
------------------------------------------------ ------------
TOTAL EMERGING MARKETS SECURITIES SECTOR 6,174,976
(IDENTIFIED COST $6,248,756)
------------------------------------------------ ------------
COMMERCIAL PAPER--28.8%
-----------------------------------------------------------
FINANCE--28.8%
------------------------------------------------
$3,000,000 Ford Motor Credit Corp., 5.50%, 12/12/1997 2,969,670
------------------------------------------------
3,000,000 General Electric Capital Corp., 5.50%, 10/8/1997 2,996,792
------------------------------------------------
3,000,000 Hertz Corp., 5.50%, 12/12/1997 2,969,670
------------------------------------------------
3,000,000 Monte Rosa Capital Corp., 5.54%, 10/2/1997 2,999,538
------------------------------------------------
New Center Asset Trust, A1/P1 Series, 5.53%,
3,000,000 10/6/1997 2,997,696
------------------------------------------------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
FOREIGN VALUE
CURRENCY PAR IN U.S.
AMOUNT DOLLARS
------------ -------------------------------------------------- -----------
<C> <S> <C>
COMMERCIAL PAPER--CONTINUED
---------------------------------------------------------------
FINANCE--CONTINUED
--------------------------------------------------
$ 3,000,000 Sheffield Receivables Corp., 5.54%, 10/2/1997 $ 2,999,538
-------------------------------------------------- -----------
TOTAL COMMERCIAL PAPER (IDENTIFIED COST
$17,927,564) 17,932,904
-------------------------------------------------- -----------
U.S. FIXED INCOME SECURITIES SECTOR--10.7%
---------------------------------------------------------------
GOVERNMENT/AGENCY--10.7%
--------------------------------------------------
1,500,000 United States Treasury Bill, 12/11/1997 1,485,591
--------------------------------------------------
325,000 United States Treasury Bond, 7.25%, 8/15/2022 355,427
--------------------------------------------------
500,000 United States Treasury Bond, 7.50%, 11/15/2016 556,730
--------------------------------------------------
1,200,000 United States Treasury Bond, 7.625%, 11/15/2022 1,368,528
--------------------------------------------------
1,430,000 United States Treasury Bond, 11.75%, 11/15/2014 2,076,432
--------------------------------------------------
400,000 United States Treasury Note, 6.25%, 2/15/2003 404,000
--------------------------------------------------
350,000 United States Treasury Receipt PO Strip, 8/15/2005 216,097
--------------------------------------------------
350,000 United States Treasury Receipt IO Strip, 2/15/2005 223,298
-------------------------------------------------- -----------
TOTAL U.S. FIXED INCOME SECURITIES SECTOR
(IDENTIFIED COST $6,431,631) 6,686,103
-------------------------------------------------- -----------
FOREIGN FIXED INCOME SECURITIES SECTOR--17.1%
---------------------------------------------------------------
DENMARK--0.9%
--------------------------------------------------
3,310,000 Denmark--Bullet, Bond, 8.00%, 3/15/2006 562,497
-------------------------------------------------- -----------
FRANCE--3.7%
--------------------------------------------------
10,500,000 France (Govt. of), 6.50%, 10/25/2006 1,909,509
--------------------------------------------------
2,150,000 France O.A.T., Bond, 7.25%, 4/25/2006 409,622
-------------------------------------------------- -----------
Total 2,319,131
-------------------------------------------------- -----------
GERMANY--3.4%
--------------------------------------------------
1,040,000 Republic of Germany, Bond, 6.25%, 4/26/2006 620,604
--------------------------------------------------
287,000 Republic of Germany, Deb., 7.125%, 12/20/2002 178,442
--------------------------------------------------
1,065,000 Germany (Fed. Republic), 6.50%, 7/15/2003 646,130
--------------------------------------------------
1,140,000 Germany (Fed. Republic), Bond, 6.00%, 1/5/2006 669,438
-------------------------------------------------- -----------
Total 2,114,614
-------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
FOREIGN VALUE
CURRENCY PAR IN U.S.
AMOUNT DOLLARS
------------ --------------------------------------------------- -----------
<C> <S> <C>
FOREIGN FIXED INCOME SECURITIES SECTOR--CONTINUED
----------------------------------------------------------------
ITALY--1.2%
---------------------------------------------------
$880,000,000 Buoni Poliennali Del Tes, Deb., 10.50%, 4/15/1998 $ 519,182
---------------------------------------------------
310,000,000 Italy (Republic of), Deb., 10.50%, 4/1/2005 227,162
--------------------------------------------------- -----------
Total 746,344
--------------------------------------------------- -----------
NETHERLANDS--3.1%
---------------------------------------------------
1,690,000 Dutch Government Bond, 5.75%, 2/15/2007 864,572
---------------------------------------------------
580,000 Netherlands Government Bond, 7.50%, 4/15/2010 337,602
---------------------------------------------------
880,000 Dutch Government Bond, 7.25%, 10/1/2004 493,875
---------------------------------------------------
410,000 Netherlands Government Bond, 7.00%, 2/15/2003 225,363
--------------------------------------------------- -----------
Total 1,921,412
--------------------------------------------------- -----------
SPAIN--1.3%
---------------------------------------------------
104,600,000 Kingdom of Spain, Deb., 12.25%, 3/25/2000 817,732
--------------------------------------------------- -----------
SWEDEN--0.4%
---------------------------------------------------
1,600,000 Sweden (Kingdom of), 10.25%, 5/5/2000 236,091
--------------------------------------------------- -----------
UNITED KINGDOM--3.1%
---------------------------------------------------
245,000 United Kingdom Treasury Bond, 8.00%, 12/7/2015 455,561
---------------------------------------------------
239,000 United Kingdom Treasury, 7.75%, 9/8/2006 417,789
---------------------------------------------------
400,000 United Kingdom Treasury, 8.50%, 7/16/2007 737,321
---------------------------------------------------
190,000 United Kingdom Treasury, 9.75%, 8/27/2002 346,591
--------------------------------------------------- -----------
Total 1,957,262
--------------------------------------------------- -----------
TOTAL FOREIGN FIXED INCOME SECURITIES SECTOR
(IDENTIFIED COST $10,804,770) 10,675,083
--------------------------------------------------- -----------
(C) REPURCHASE AGREEMENT--1.9%
----------------------------------------------------------------
1,176,958 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(at amortized cost) 1,176,958
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $60,621,797)(D) $61,251,942
--------------------------------------------------- -----------
</TABLE>
BLANCHARD GLOBAL GROWTH FUND
- -------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $261,075 which represents 0.4% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $60,689,138 The
net unrealized appreciation of investments on a federal tax basis amounts to
$562,804 which is comprised of $2,899,362 appreciation and $2,336,558
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($62,197,366) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depositary Receipt
GDR--Global Depositary Receipt
IO--Interest Only
PO--Principal Only
PLC--Public Limited Company
SPA--Standby Purchase Agreement
STRIP--Separate Trading of Registered Interest & Principal of Securities
(See Notes which are an integral part of the Financial Statements)
BLANCHARD PRECIOUS METALS FUND, INC.
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
--------- -------------------------------- -----------
<C> <S> <C>
EQUITIES--84.5%
------------------------------------------
METALS & MINING--84.5%
--------------------------------
AUSTRALIA--1.0%
--------------------------------
600,000 (a)Croesus Mining NL $ 152,449
--------------------------------
1,000,000 (a)Laverton Gold NL 148,820
--------------------------------
1,258,000 (a)(b)Lone Star Exploration NL 200,253
--------------------------------
1,300,000 (a)Lone Star Exploration NL 215,500
-------------------------------- -----------
Total 717,022
-------------------------------- -----------
CANADA--53.0%
--------------------------------
1,640,000 (a)Ariel Resources, Ltd. 367,859
--------------------------------
421,000 Cambior, Inc. 4,736,840
--------------------------------
229,600 (a)Dayton Mining Corp. 803,600
--------------------------------
1,405,500 (a)(b)Eldorado Gold Corp., Ltd. 3,823,798
--------------------------------
230,000 (a)First Silver Reserve, Inc. 183,061
--------------------------------
95,200 Franco-Nevada Mining Corp., Ltd. 2,242,148
--------------------------------
721,000 (a)Geomaque Explorations, Ltd. 1,930,249
--------------------------------
50,000 (a)Goldcorp, Inc., Class A 318,750
--------------------------------
401,500 (a)Golden Knight Resources, Inc. 1,191,093
--------------------------------
316,000 (a)Greenstone Resources, Ltd. 3,235,339
--------------------------------
510,000 (a)Kinross Gold Corp. 2,836,875
--------------------------------
194,300 (a)Philex Gold, Inc. 773,235
--------------------------------
135,000 Placer Dome, Inc. 2,581,875
--------------------------------
4,115,069 (a)Santa Cruz Gold, Inc. 1,488,755
--------------------------------
1,260,000 (a)TVX Gold, Inc. 7,840,527
--------------------------------
466,000 (a)Viceroy Resource Corp. 1,180,131
-------------------------------- -----------
Total 35,534,135
-------------------------------- -----------
</TABLE>
BLANCHARD PRECIOUS METALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- ---------------------------------------------------- -----------
<C> <S> <C>
EQUITIES--CONTINUED
---------------------------------------------------------------
GHANA--4.8%
----------------------------------------------------
290,000 Ashanti Goldfields Co., GDR $ 3,190,000
---------------------------------------------------- -----------
SOUTH AFRICA--5.0%
----------------------------------------------------
551,700 East Rand Gold & Uranium Co., Ltd., ADR 764,325
----------------------------------------------------
200,000 Free State Consolidated Gold Mines Ltd., ADR 1,218,750
----------------------------------------------------
255,000 Vaal Reefs Explorations & Mining Co., Ltd., ADR 1,370,625
---------------------------------------------------- -----------
Total 3,353,700
---------------------------------------------------- -----------
UNITED STATES--20.7%
----------------------------------------------------
1,425,000 (a)Canyon Resources Corp. 3,918,750
----------------------------------------------------
260,000 Homestake Mining Co. 3,981,250
----------------------------------------------------
626,500 (a)Meridian Gold, Inc. 3,093,344
----------------------------------------------------
64,500 Newmont Mining Corp. 2,898,469
---------------------------------------------------- -----------
Total 13,891,813
---------------------------------------------------- -----------
TOTAL EQUITIES (IDENTIFIED COST $78,030,194) 56,686,670
---------------------------------------------------- -----------
WARRANTS--1.3%
---------------------------------------------------------------
227,500 (a)Atlas Corp., Warrants (expire 12/15/99) 1,138
----------------------------------------------------
75,000 (a)Canyon Resources Corp., Warrants (expire 3/20/99) --
----------------------------------------------------
(a)(b)Geomaque Explorations Ltd., Warrants (expire 870,084
325,000 3/19/99)
---------------------------------------------------- -----------
TOTAL WARRANTS (IDENTIFIED COST $827,565) 871,222
---------------------------------------------------- -----------
PREFERRED STOCK--0.8%
---------------------------------------------------------------
UNITED STATES--0.8%
----------------------------------------------------
25,000 Freeport-McMoRan Copper & Gold, Inc., Cumulative
Pfd., Series SILV (IDENTIFIED COST $432,868) 528,125
---------------------------------------------------- -----------
U.S. TREASURY SECURITIES--7.8%
---------------------------------------------------------------
U.S. TREASURY BILL--7.8%
----------------------------------------------------
$5,300,000 12/11/1997 (IDENTIFIED COST $5,248,217) 5,249,088
---------------------------------------------------- -----------
</TABLE>
BLANCHARD PRECIOUS METALS FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
---------- --------------------------------------------------- -----------
<C> <S> <C>
(C) REPURCHASE AGREEMENT--8.2%
--------------------------------------------------------------
$5,492,706 CS First Boston Corp., 6.05%, dated 9/30/1997, due
10/1/1997 (at amortized cost) $ 5,492,706
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $90,031,550)(D) $68,827,811
--------------------------------------------------- -----------
</TABLE>
(a) Non-income producing security.
(b) Certain of these securities are subject to restrictions on resale under
Federal Securities laws. At September 30, 1997, these securities amounted to
$4,894,135 with represents 7.3% of net assets.
(c) The repurchase agreements is fully collateralized by U.S.government and/or
agency obligations based on market prices at the date of the portfolio.
(d) The cost of investments for federal tax purposes amounts to $90,719,260. The
net unrealized depreciation of investments on a federal tax basis amounts to
$20,522,951 which is comprised of $1,599,113 appreciation and $22,122,064
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($67,037,240) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
GDR--Global Depository Receipt
(See Notes which are an integral part of the Financial Statements)
BLANCHARD FLEXIBLE INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--26.6%
---------------------------------------------------------------
AEROSPACE--1.1%
-------------------------------------------------
$ 1,700,000 Sequa Corp., Sr. Note, 8.75%, 12/15/2001 $ 1,738,250
------------------------------------------------- ------------
CONSUMER RELATED--1.3%
-------------------------------------------------
Host Marriot Travel Plaza, Sr. Note, 9.50%, 1,062,500
1,000,000 5/15/2005
-------------------------------------------------
John Q. Hammons Hotels, 1st Mtg. Bond, 8.875%, 1,015,000
1,000,000 2/15/2004
------------------------------------------------- ------------
Total 2,077,500
------------------------------------------------- ------------
FINANCE--3.5%
-------------------------------------------------
Americo Life, Inc., Sr. Sub. Note, 9.25%, 1,548,750
1,500,000 6/1/2005
-------------------------------------------------
1,000,000 Navistar Financial Corp. Owner Trust 1995-A , Sr.
Sub. Note, 8.875%, 11/15/1998 1,024,241
-------------------------------------------------
Presidential Life Corp., Sr. Note, 9.50%, 1,556,250
1,500,000 12/15/2000
-------------------------------------------------
Reliance Group Holdings, Inc., Sr. Note, 9.00%, 1,306,250
1,250,000 11/15/2000
------------------------------------------------- ------------
Total 5,435,491
------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.6%
-------------------------------------------------
1,000,000 EnviroSource, Inc., Sr. Note, 9.75%, 6/15/2003 1,005,000
------------------------------------------------- ------------
OIL REFINING--1.5%
-------------------------------------------------
2,250,000 PDV America, Sr. Note, 7.25%, 8/1/1998 2,267,957
------------------------------------------------- ------------
PAPER/FOREST PRODUCTS/CONTAINERS--4.9%
-------------------------------------------------
Doman Industries, Ltd., Sr. Note, 8.75%, 995,000
1,000,000 3/15/2004
-------------------------------------------------
1,250,000 Fort Howard Corp., Sr. Sub. Note, 9.00%, 2/1/2006 1,358,749
-------------------------------------------------
1,000,000 Maxxam Group, Inc., Sr. Note, 11.25%, 8/1/2003 1,065,000
-------------------------------------------------
1,000,000 Repap New Brunswick, 1st Priority Sr. Secd. Note,
9.875%, 7/15/2000 1,012,500
-------------------------------------------------
1,000,000 Repap Wisconsin, Inc., 1st Priority Sr. Secd.
Note, 9.25%, 2/1/2002 1,058,750
-------------------------------------------------
2,000,000 (a)Stone Container Finance Co. CDA, Company
Guarantee, 11.50%, 8/15/2006 2,130,000
------------------------------------------------- ------------
Total 7,619,999
------------------------------------------------- ------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
REAL ESTATE DEVELOPMENT--1.0%
-------------------------------------------------
Granite Development Partners, Sr. Note, Series B, $ 1,477,500
$ 1,500,000 10.83%, 11/15/2003
------------------------------------------------- ------------
RETAIL TRADE--0.7%
-------------------------------------------------
(a)Nine West Group, Inc., Sr. Note, 8.375%, 1,010,000
1,000,000 8/15/2005
------------------------------------------------- ------------
SERVICES--2.0%
-------------------------------------------------
1,000,000 (a)Calpine Corp., Sr. Note, 8.75%, 7/15/2007 1,022,500
-------------------------------------------------
HMH Properties, Inc., Sr. Note, Series B, 9.50%, 1,057,500
1,000,000 5/15/2005
-------------------------------------------------
Prime Hospitality Corp., Sr. Sub. Note, 9.75%, 1,060,000
1,000,000 4/1/2007
------------------------------------------------- ------------
Total 3,140,000
------------------------------------------------- ------------
STEEL--1.7%
-------------------------------------------------
1,500,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 1,552,500
-------------------------------------------------
Bethlehem Steel Corp., Sr. Note, 10.375%, 1,080,000
1,000,000 9/1/2003
------------------------------------------------- ------------
Total 2,632,500
------------------------------------------------- ------------
TELECOMMUNICATIONS/CABLE--2.0%
-------------------------------------------------
Centennial Cellular Corp., Sr. Note, 8.875%, 1,020,000
1,000,000 11/1/2001
-------------------------------------------------
Lenfest Communications Inc., Sr. Note, 8.375%, 1,007,500
1,000,000 11/1/2005
-------------------------------------------------
Teleport Communications Group, Inc., Sr. Note, 1,097,500
1,000,000 9.875%, 7/1/2006
------------------------------------------------- ------------
Total 3,125,000
------------------------------------------------- ------------
TRANSPORTATION--4.1%
-------------------------------------------------
Eletson Holdings, Inc., 1st Mtg. Note, 9.25%, 1,541,250
1,500,000 11/15/2003
-------------------------------------------------
1,389,000 Piedmont Aviation, 10.15%, 3/28/2003 1,451,505
-------------------------------------------------
852,000 Piedmont Aviation, 9.90%, 1/15/2001 862,650
-------------------------------------------------
1,500,000 Sea Containers Ltd., Sr. Note, 9.50%, 7/1/2003 1,552,500
-------------------------------------------------
896,000 USAir, Inc., 9.90%, 1/15/2001 885,920
------------------------------------------------- ------------
Total 6,293,825
------------------------------------------------- ------------
UTILITIES-ELECTRIC--2.2%
-------------------------------------------------
1,000,000 Cleveland Electric Illuminating Co., 1st Mtg.
Bond, 9.50%, 5/15/2005 1,090,000
-------------------------------------------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- ------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
UTILITIES-ELECTRIC--CONTINUED
-------------------------------------------------
$ 2,218,808 (a)Tucson Electric Power Co., 10.21%, 1/1/2009 $ 2,307,561
------------------------------------------------- ------------
Total 3,397,561
------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST 41,220,583
$39,374,399)
------------------------------------------------- ------------
FOREIGN SECURITIES--1.0%
---------------------------------------------------------------
TELECOMMUNICATIONS--1.0%
-------------------------------------------------
CAD 2,000,000 Rogers Cablesystems, Ltd., Sr. Secd. Note, 9.65%,
1/15/2014 (IDENTIFIED COST $1,511,716) 1,545,948
------------------------------------------------- ------------
MORTGAGE BACKED SECURITIES--31.1%
---------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--31.1%
-------------------------------------------------
35,403 Pool E00434, 7.00%, 5/1/2011 35,809
-------------------------------------------------
975,488 Pool E00466, 7.00%, 1/1/2012 986,676
-------------------------------------------------
993,214 Pool E00497, 7.00%, 7/1/2012 1,004,139
-------------------------------------------------
1,627,552 Pool E20217, 7.00%, 1/1/2011 1,646,202
-------------------------------------------------
3,643,090 Pool E20271, 7.00%, 11/1/2011 3,684,872
-------------------------------------------------
702,239 Pool E64769, 7.00%, 7/1/2011 710,292
-------------------------------------------------
264,596 Pool E64891, 7.00%, 7/1/2011 267,631
-------------------------------------------------
1,498,267 Pool E65184, 7.00%, 8/1/2011 1,515,450
-------------------------------------------------
440,315 Pool E65186, 7.00%, 8/1/2011 445,365
-------------------------------------------------
58,006 Pool E65399, 7.00%, 9/1/2011 58,671
-------------------------------------------------
459,199 Pool E65450, 7.00%, 10/1/2011 464,466
-------------------------------------------------
283,376 Pool E65454, 7.00%, 10/1/2011 286,626
-------------------------------------------------
163,361 Pool E65468, 7.00%, 10/1/2011 165,235
-------------------------------------------------
2,208,871 Pool E65490, 7.00%, 10/1/2011 2,234,205
-------------------------------------------------
2,821,959 Pool E65503, 7.00%, 10/1/2011 2,854,324
-------------------------------------------------
304,766 Pool E65597, 7.00%, 10/1/2011 308,261
-------------------------------------------------
241,313 Pool E65645, 7.00%, 11/1/2011 244,080
-------------------------------------------------
643,716 Pool E65660, 7.00%, 11/1/2011 651,099
-------------------------------------------------
786,446 Pool E65690, 7.00%, 11/1/2011 795,466
-------------------------------------------------
1,523,500 Pool E65702, 7.00%, 11/1/2011 1,540,973
-------------------------------------------------
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- --------------------------------------------- ------------
<C> <S> <C>
MORTGAGE BACKED SECURITIES--CONTINUED
-----------------------------------------------------------
$ 945,741 Pool E65703, 7.00%, 11/1/2011 $ 956,588
---------------------------------------------
1,908,905 Pool E65712, 7.00%, 12/1/2011 1,930,799
---------------------------------------------
326,516 Pool E65717, 7.00%, 11/1/2011 330,261
---------------------------------------------
1,026,390 Pool E65723, 7.00%, 11/1/2011 1,038,161
---------------------------------------------
409,609 Pool E65750, 7.00%, 11/1/2011 414,307
---------------------------------------------
34,080 Pool E65759, 7.00%, 12/1/2011 34,471
---------------------------------------------
3,252,636 Pool E67171, 7.00%, 7/1/2012 3,288,412
---------------------------------------------
2,981,906 Pool E67276, 7.00%, 8/1/2012 3,014,704
---------------------------------------------
30,851 Pool G10524, 7.00%, 5/1/2011 31,205
---------------------------------------------
596,894 Pool G10556, 7.00%, 7/1/2011 603,740
---------------------------------------------
298,671 Pool G10590, 7.00%, 10/1/2011 302,097
---------------------------------------------
16,291,034 Pool G10690, 7.00%, 7/1/2012 16,470,219
--------------------------------------------- ------------
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED 48,314,806
COST $47,988,240)
--------------------------------------------- ------------
U.S. TREASURY--37.5%
-----------------------------------------------------------
U.S. TREASURY BONDS--13.7%
---------------------------------------------
20,000,000 7.25%, 5/15/2004 21,256,240
--------------------------------------------- ------------
U.S. TREASURY NOTES--23.8%
---------------------------------------------
35,000,000 7.00%, 7/15/2006 36,914,047
--------------------------------------------- ------------
TOTAL U.S. TREASURY (IDENTIFIED COST 58,170,287
$56,623,205)
--------------------------------------------- ------------
(B)REPURCHASE AGREEMENT--2.9%
-----------------------------------------------------------
4,512,438 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) 4,512,438
--------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $153,764,062
$150,009,998)(C)
--------------------------------------------- ------------
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $6,470,061 which represents 4.2% of net assets.
(b) The repurchase agreement is fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $150,009,998.
The net unrealized appreciation of investments on a federal tax basis
amounts to $3,754,064 which is comprised of $3,781,564 appreciation and
$27,500 depreciation at September 30, 1997.
BLANCHARD FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
Note: The categories of investments are shown as a percentage of net assets
($155,222,701) at September 30, 1997.
The following acronyms are used throughout this portfolio:
CAD--Canadian Dollars
CDA--Community Development Administration
(See Notes which are an integral part of the Financial Statements)
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS--4.5%
---------------------------------------------------------------
FINANCIAL SERVICES--0.4%
---------------------------------------------------
$ 4,796 CMC Securities Corp. 1993-A, Series 1993-A, Class
A2, 7.50%, 2/25/2023 $ 4,785
---------------------------------------------------
583,666 Merrill Lynch Mortgage Investors, Series 1990-I,
Class A, 9.20%, 1/15/2011 583,223
--------------------------------------------------- ------------
Total 588,008
--------------------------------------------------- ------------
GOVERNMENT/AGENCY--4.1%
---------------------------------------------------
1,892,678 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-3,
Series 1992-3, Class A2, 6.45%, 10/25/2019 1,896,823
---------------------------------------------------
1,283,183 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-3,
Series 1992-3, Class A3, 6.05%, 6/25/2021 1,287,200
---------------------------------------------------
1,412,944 (a)Resolution Trust Corp. Mtg. Pass-Thru 1992-6,
Series 1992-6, Class A4, 7.36%, 11/25/2025 1,423,542
---------------------------------------------------
774,275 Resolution Trust Corp. Mtg. Pass-Thru 1992-C1,
Series 1992-C1, Class A1, 8.80%, 8/25/2023 781,778
--------------------------------------------------- ------------
Total 5,389,343
--------------------------------------------------- ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(IDENTIFIED COST $5,841,278) 5,977,351
--------------------------------------------------- ------------
CORPORATE BONDS--29.3%
---------------------------------------------------------------
AEROSPACE/DEFENSE--0.4%
---------------------------------------------------
500,000 Sequa Corp., Sr. Note, 8.75%, 12/15/2001 511,250
--------------------------------------------------- ------------
AIRLINES--0.1%
---------------------------------------------------
200,000 USAir, Inc., 9.80%, 1/15/2000 208,250
--------------------------------------------------- ------------
CHEMICALS--1.9%
---------------------------------------------------
500,000 Borden Chemicals & Plastics Operating, Note, 9.50%,
5/1/2005 528,750
---------------------------------------------------
Harris Chemical North America, Inc., Sr. Note, 523,750
500,000 10.25%, 7/15/2001
---------------------------------------------------
300,000 ISP Holdings, Inc., Sr. Note, 9.00%, 10/15/2003 315,000
---------------------------------------------------
500,000 Kaiser Aluminum & Chemical Corp., Sr. Note, 9.875%,
2/15/2002 522,500
---------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------------- ------------
<C> <S> <C>
CHEMICALS--CONTINUED
-------------------------------------------------
$ 600,000 SIFTO Canada, Inc., Sr. Note, 8.50%, 7/15/2000 $ 612,000
------------------------------------------------- ------------
Total 2,502,000
------------------------------------------------- ------------
CONSUMER RELATED--4.0%
-------------------------------------------------
750,000 Chiquita Brands International Inc., Sr. Note,
9.625%, 1/15/2004 795,000
-------------------------------------------------
800,000 HMH Properties, Inc., Sr. Note, Series B, 9.50%,
5/15/2005 846,000
-------------------------------------------------
2,460,000 RJR Nabisco, Inc., Note, 8.75%, 7/15/2007 2,615,172
-------------------------------------------------
1,000,000 Revlon Consumer Products Corp., Note, 9.375%,
4/1/2001 1,037,500
------------------------------------------------- ------------
Total 5,293,672
------------------------------------------------- ------------
CONTAINERS-PAPER/PLASTIC--0.8%
-------------------------------------------------
500,000 Container Corp. of America, Sr. Note, 11.25%,
5/1/2004 555,000
-------------------------------------------------
500,000 Sea Containers Ltd., 9.50%, 7/1/2003 517,500
------------------------------------------------- ------------
Total 1,072,500
------------------------------------------------- ------------
ENERGY MINERALS--1.4%
-------------------------------------------------
2,000,000 USX Marathon Group, 5.75%, 7/1/2001 1,962,500
------------------------------------------------- ------------
ENTERTAINMENT--4.2%
-------------------------------------------------
1,000,000 Caesars World, Inc., Sr. Sub. Note, 8.875%,
8/15/2002 1,037,500
-------------------------------------------------
1,000,000 Harrah's Operations, Inc., Sr. Sub. Note, 8.75%,
3/15/2000 1,027,500
-------------------------------------------------
405,000 Host Marriot Travel Plazas Inc., Sr. Note, 9.50%,
5/15/2005 430,312
-------------------------------------------------
900,000 Station Casinos, Inc., Sr. Sub. Note, 9.625%,
6/1/2003 904,500
-------------------------------------------------
1,000,000 Time Warner Entertainment Co. LP, Note, 9.625%,
5/1/2002 1,116,927
-------------------------------------------------
600,000 Trump Atlantic City Associations, Company
Guarantee, 11.25%, 5/1/2006 584,250
-------------------------------------------------
500,000 Viacom, Inc., Sub. Deb., 8.00%, 7/7/2006 500,000
------------------------------------------------- ------------
Total 5,600,989
------------------------------------------------- ------------
FINANCIAL SERVICES--1.9%
-------------------------------------------------
500,000 Navistar Financial Corp. Owner Trust 1995-A , Sr.
Sub. Note, 8.875%, 11/15/1998 512,120
-------------------------------------------------
500,000 Presidential Life Corp., Sr. Note, 9.50%,
12/15/2000 518,750
-------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
FINANCIAL SERVICES--CONTINUED
---------------------------------------------------
$ 1,000,000 Reliance Group Holdings, Inc., Sr. Note, 9.00%,
11/15/2000 $ 1,045,000
---------------------------------------------------
500,000 Williams Scotsman, Inc., Sr. Note, 9.875%, 6/1/2007 512,500
--------------------------------------------------- ------------
Total 2,588,370
--------------------------------------------------- ------------
INDUSTRIAL RELATED--2.9%
---------------------------------------------------
850,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 879,750
---------------------------------------------------
350,000 Bethlehem Steel Corp., Sr. Note, 10.375%, 9/1/2003 378,000
---------------------------------------------------
500,000 Exide Corp., Sr. Note, 10.75%, 12/15/2002 531,250
---------------------------------------------------
500,000 Fort Howard Corp., Sr. Sub. Note, 9.00%, 2/1/2006 543,499
---------------------------------------------------
700,000 John Q. Hammon Hotels, 1st Mtg. Bond, 8.875%,
2/15/2004 710,500
---------------------------------------------------
500,000 Unisys Corp., Deb., 9.50%, 7/15/1998 503,750
---------------------------------------------------
300,000 Unisys Corp., Sr. Note, 10.625%, 10/1/1999 311,250
--------------------------------------------------- ------------
Total 3,857,999
--------------------------------------------------- ------------
OIL REFINING--1.1%
---------------------------------------------------
1,000,000 Clark Oil Refining and Corp. Del, Sr. Note, 10.50%,
12/1/2001 1,035,000
---------------------------------------------------
500,000 PDV America Inc., Sr. Note, 7.25%, 8/1/1998 503,991
--------------------------------------------------- ------------
Total 1,538,991
--------------------------------------------------- ------------
PAPER PRODUCTS--2.0%
---------------------------------------------------
500,000 Repap New Brunswick Inc., 1st Priority Sr. Secd.
Note, 9.875%, 7/15/2000 506,250
---------------------------------------------------
500,000 Repap New Brunswick Inc., Sr. Note, 9.0625%,
7/15/2000 495,000
---------------------------------------------------
700,000 Repap Wisconsin, Inc., 1st Priority Sr. Secd. Note,
9.25%, 2/1/2002 741,125
---------------------------------------------------
700,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 714,875
---------------------------------------------------
200,000 Stone Container Corp., Sr. Sub. Note, 11.00%,
8/15/1999 208,500
--------------------------------------------------- ------------
Total 2,665,750
--------------------------------------------------- ------------
PRINTING & PUBLISHING--0.5%
---------------------------------------------------
600,000 World Color Press Inc., Sr. Sub. Note, 9.125%,
3/15/2003 630,750
--------------------------------------------------- ------------
RETAIL TRADE--0.7%
---------------------------------------------------
1,000,000 Nine West Group, Inc., Sr. Note, 8.375%, 8/15/2005 1,010,000
--------------------------------------------------- ------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
---------------------------------------------------------------
SERVICES--1.2%
---------------------------------------------------
$ 600,000 Fleming Cos., Inc., Sr. Note, 10.625%, 12/15/2001 $ 642,000
---------------------------------------------------
500,000 Marcus Cable Operating Co. LP, Sr. Disc. Note,
0/13.50%, 8/1/2004 453,750
---------------------------------------------------
500,000 Prime Hospitality Corp., 1st Mtg. Bond, 9.25%,
1/15/2006 526,875
--------------------------------------------------- ------------
Total 1,622,625
--------------------------------------------------- ------------
STEEL--0.6%
---------------------------------------------------
750,000 Wheeling Pittsburgh Corp., Sr. Note, 9.375%,
11/15/2003 774,375
--------------------------------------------------- ------------
TELECOMMUNICATIONS--4.0%
---------------------------------------------------
750,000 Centennial Cellular Corp., Sr. Note, 8.875%,
11/1/2001 765,000
---------------------------------------------------
750,000 Century Communications, Corp., Sr. Note, 9.75%,
2/15/2002 795,000
---------------------------------------------------
1,000,000 Comcast Corp., Sr. Sub. Deb., 9.375%, 5/15/2005 1,075,000
---------------------------------------------------
1,000,000 Videotron Group Ltd., Sr. Note, 10.625%, 2/15/2005 1,110,000
---------------------------------------------------
1,000,000 Lenfest Communications Inc., Sr. Note, 8.375%,
11/1/2005 1,007,500
---------------------------------------------------
500,000 Olympus Communications LP, Sr. Note, 10.625%,
11/15/2006 544,375
--------------------------------------------------- ------------
Total 5,296,875
--------------------------------------------------- ------------
TEXTILE PRODUCTS--0.4%
---------------------------------------------------
500,000 Dominion Textile USA Inc., Sr. Note, 8.875%,
11/1/2003 513,750
--------------------------------------------------- ------------
UTILITIES-ELECTRIC--1.2%
---------------------------------------------------
500,000 Jones Intercable, Inc., Sr. Note, 9.625%, 3/15/2002 537,500
---------------------------------------------------
1,000,000 Long Island Lighting Co., Deb., 7.30%, 7/15/1999 1,016,131
--------------------------------------------------- ------------
Total 1,553,631
--------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $37,300,571) 39,204,277
--------------------------------------------------- ------------
CORPORATE NOTE--0.8%
---------------------------------------------------------------
TELECOMMUNICATIONS--0.8%
---------------------------------------------------
1,000,000 Rogers Cablesystems Ltd., Note, 9.625%, 8/1/2002
(identified cost $1,006,758) 1,075,000
--------------------------------------------------- ------------
U.S. TREASURY OBLIGATIONS--61.8%
---------------------------------------------------------------
U.S. TREASURY NOTES--61.8%
---------------------------------------------------
15,000,000 5.75%, 12/31/1998 15,009,375
---------------------------------------------------
20,000,000 6.125%, 5/15/1998 20,075,000
---------------------------------------------------
</TABLE>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS--CONTINUED
---------------------------------------------------------------
U.S. TREASURY NOTES--CONTINUED
---------------------------------------------------
$20,000,000 6.25%, 3/31/1999 $ 20,143,740
---------------------------------------------------
27,000,000 6.875%, 8/31/1999 27,514,674
--------------------------------------------------- ------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST
$82,053,737) 82,742,789
--------------------------------------------------- ------------
(B)REPURCHASE AGREEMENT--2.9%
---------------------------------------------------------------
3,832,176 CS First Boston, 6.05%, dated 9/30/1997, due
10/1/1997 (at amortized cost) 3,832,176
--------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $130,034,520)(C) $132,831,593
--------------------------------------------------- ------------
</TABLE>
(a) Denotes variable rate securities which show current rate.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $130,034,520.
The net unrealized appreciation of investments on a federal tax basis
amounts to $2,797,073 which is comprised of $2,812,462 appreciation and
$15,389 depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($133,877,535) at September 30, 1997.
The following acronym is used throughout this portfolio:
LP--Limited Partnership
(See Notes which are an integral part of the Financial Statements)
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--94.5%
--------------------------------------------------------
ALASKA--4.1%
---------------------------------------------
$1,000,000 Valdez, AK Marine Terminal, Revenue Refunding
Bonds (Series B), 5.50% (BP Pipeline Inc.),
10/1/2028 AA $ 983,917
--------------------------------------------- -----------
CALIFORNIA--8.1%
---------------------------------------------
1,000,000 California State Department of Water
Resources, Revenue Refunding Bonds, 5.375%
(Original Issue Yield: 5.67%), 12/1/2027 AAA 994,002
---------------------------------------------
1,000,000 East Bay Municipal Utility District, CA,
Water System Subordinated Refunding Revenue
Bonds (Series 1996), 5.00% (FGIC
INS)/(Original Issue Yield: 5.39%), 6/1/2026 AAA 947,502
--------------------------------------------- -----------
Total 1,941,504
--------------------------------------------- -----------
FLORIDA--8.0%
---------------------------------------------
1,000,000 Dade County, FL Water & Sewer System, Revenue
Bonds, 5.25% (FGIC INS)/(Original Issue
Yield: 5.70%), 10/1/2026 AAA 979,577
---------------------------------------------
1,000,000 Florida State Board of Education Capital
Outlay, GO UT, (Series A), 5.00% (Original
Issue Yield: 5.40%), 6/1/2027 AA+ 948,163
--------------------------------------------- -----------
Total 1,927,740
--------------------------------------------- -----------
ILLINOIS--16.5%
---------------------------------------------
1,000,000 Cook County, IL, GO UT Refunding Bonds (Series B), 5.375% (MBIA
INS)/(Original Issue
Yield: 5.72%), 11/15/2018 AAA 1,001,236
---------------------------------------------
1,000,000 Illinois Health Facilities Authority, Revenue
Bonds Daily VRDNs (Healthcorp Affiliates) Aaa 1,000,000
---------------------------------------------
1,000,000 Illinois State Sales Tax, Refunding Revenue
Bonds (Series Q), 5.50% (Original Issue
Yield: 6.202%), 6/15/2020 AAA 1,000,000
---------------------------------------------
1,000,000 Metropolitan Pier & Exposition Authority, IL,
Revenue Refunding Bonds, 5.25% (McCormick
Plan Expansion Project)/(AMBAC INS)/(Original
Issue Yield: 5.90%), 6/15/2027 AAA 972,077
--------------------------------------------- -----------
Total 3,973,313
--------------------------------------------- -----------
</TABLE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
--------------------------------------------------------
INDIANA--4.2%
---------------------------------------------
$1,000,000 Purdue University, IN, Student Fees Revenue
Bonds (Series H), Weekly VRDNs (Purdue
University, IN LOC) AA- $ 1,000,000
--------------------------------------------- -----------
MASSACHUSETTS--3.9%
---------------------------------------------
1,000,000 Massachusetts Water Resources Authority,
Water Revenue Bonds, 5.00% (Original Issue
Yield: 5.35%), 12/1/2025 AAA 942,362
--------------------------------------------- -----------
MICHIGAN--4.1%
---------------------------------------------
1,000,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds,
5.25% (Henry Ford Health System, MI)/(Original Issue Yield:
5.70%), 11/15/2025 AA 984,047
--------------------------------------------- -----------
NEVADA--4.1%
---------------------------------------------
1,000,000 Clark County, NV School District, GO UT,
5.25% (Original Issue Yield: 5.83%),
6/15/2017 AAA 996,268
--------------------------------------------- -----------
NEW JERSEY--4.2%
---------------------------------------------
1,000,000 New Jersey State Transportation Trust Fund
Agency, Revenue Bonds, 5.25% (Original Issue
Yield: 5.70%), 6/15/2016 A+ 1,004,261
--------------------------------------------- -----------
NEW YORK--20.8%
---------------------------------------------
1,000,000 New York City Municipal Water Finance
Authority, Revenue Bonds, 5.50% (Original
Issue Yield: 5.855%), 6/15/2027 AAA 1,003,925
---------------------------------------------
1,000,000 New York State Dormitory Authority, Revenue
Bonds, 5.25% (Monte Fiore Medical
Center)/(AMBAC and FHA INSs)/(Original Issue
Yield: 5.53%), 2/1/2015 AAA 1,006,724
---------------------------------------------
1,000,000 New York State Local Government Assistance
Corp., Refunding Revenue Bonds (Series B),
5.50% (Original Issue Yield: 5.97%), 4/1/2021 A 1,003,043
---------------------------------------------
1,000,000 New York State Medical Care Facilities
Finance Agency, Revenue Refunding Bonds,
5.375% (Presbyterian Hospital)/(Original
Issue Yield: 5.52%), 2/15/2025 AAA 995,669
---------------------------------------------
1,000,000 Port Authority of New York and New Jersey,
Revenue Bonds (104th Series), 5.20% (AMBAC
INS)/(Original Issue Yield: 5.35%), 7/15/2021 AAA 990,487
--------------------------------------------- -----------
Total 4,999,848
--------------------------------------------- -----------
</TABLE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
--------------------------------------------------------
TEXAS--8.2%
---------------------------------------------
$1,000,000 Coastal Bend Health Facilities Development
Corp., TX, Revenue Bonds Weekly VRDNs
(Incarnate World Health Systems)/(First
National Bank of Chicago LOC) Aa3 $ 1,000,000
---------------------------------------------
1,000,000 San Antonio, TX, Electric & Gas, Revenue Refunding Bonds, 5.00%
(Original Issue Yield:
5.275%), 2/1/2014 AA 980,250
--------------------------------------------- -----------
Total 1,980,250
--------------------------------------------- -----------
WASHINGTON--4.2%
---------------------------------------------
1,000,000 Port of Seattle, WA, Revenue Bonds, 5.50%
(FGIC INS)/(Original Issue Yield: 5.80%),
10/1/2022 AAA 1,008,212
--------------------------------------------- -----------
WISCONSIN--4.2%
---------------------------------------------
1,000,000 Wisconsin State Transportation, Revenue Bonds
(Series B), 5.50% (Original Issue Yield:
5.912%), 7/1/2022 AA- 1,004,466
--------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST
$21,420,079) 22,746,188
--------------------------------------------- -----------
MUTUAL FUND SHARES--4.2%
--------------------------------------------------------
999,900 Dreyfus Tax Exempt Cash Management (AT NET
ASSET VALUE) 999,900
--------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST
$22,419,979)(A) $23,746,088
--------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
(a) The cost of investments for federal tax purposes amounts to $22,419,979. The
unrealized appreciation of investments on a federal tax basis amounts to
$1,326,109 at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($24,076,686) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company FHA--Federal Housing Administration GO--General Obligation
INS--Insured LOC--Letter of Credit MBIA--Municipal Bond Investors Assurance
UT--Unlimited Tax VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROUP OF FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD BLANCHARD
BLANCHARD BLANCHARD BLANCHARD SHORT -TERM FLEXIBLE
GLOBAL PRECIOUS METALS FLEXIBLE FLEXIBLE TAX-FREE
GROWTH FUND FUND, INC. INCOME FUND INCOME FUND BOND FUND
- ------------------------ ----------- --------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
- ------------------------
Investments in
repurchase agreements $ 1,176,958 $ 5,492,706 $ 4,512,438 $ 3,832,176 $ --
- ------------------------
Investments in
securities 60,074,984 63,335,105 149,251,624 128,999,417 23,746,088
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total investments in
securities, at value $61,251,942 $68,827,811 $153,764,062 $132,831,593 $23,746,088
- ------------------------
Cash -- -- -- -- 72
- ------------------------
Income receivable 330,910 191,606 2,362,460 2,479,981 365,497
- ------------------------
Receivable for
investments sold 1,820,484 485,614 -- -- --
- ------------------------
Receivable for shares
sold 1,350 1,250,418 72,325 46,320 41,115
- ------------------------
Net receivable for
foreign currency
exchange contracts sold 150,030 -- -- -- --
- ------------------------
Deferred organizational
costs -- -- 15,094 17,490 16,399
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total assets 63,554,716 70,755,449 156,213,941 135,375,384 24,169,171
- ------------------------ ----------- ----------- ------------ ------------ -----------
LIABILITIES:
- ------------------------
Payable for investments
purchased 1,024,123 2,114,799 -- -- --
- ------------------------
Payable for shares
redeemed 60,354 605,097 272,640 497,950 24,696
- ------------------------
Income distribution
payable -- -- 446,081 75,908 40,374
- ------------------------
Payable to Bank -- 803,519 -- 625,000 --
- ------------------------
Payable for forward
foreign currency
exchange contracts -- -- 7,439 -- --
- ------------------------
Payable for taxes
withheld 7,796 3,188 -- --
- ------------------------
Payable for daily
variation margin 63,340 -- -- -- --
- ------------------------
Accrued expenses 201,737 191,606 265,080 298,991 27,415
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total liabilities 1,357,350 3,718,209 991,240 1,497,849 92,485
- ------------------------ ----------- ----------- ------------ ------------ -----------
NET ASSETS CONSIST OF:
- ------------------------
Paid in capital 53,368,473 92,377,394 168,418,381 140,351,915 23,120,612
- ------------------------
Net unrealized
appreciation
(depreciation) of
investments, translation
of assets and
liabilities in foreign
currency, and futures
contracts 821,161 (21,203,902) 3,746,717 2,798,583 1,326,109
- ------------------------
Accumulated net realized
gain (loss) on
investments, foreign
currency transactions,
and futures contracts 7,100,967 (5,605,824) (16,630,125) (9,171,223) (354,461)
- ------------------------
Distributions in excess
of/Undistributed net
investment income 906,765 1,469,572 (312,272) (101,740) (15,574)
- ------------------------ ----------- ----------- ------------ ------------ -----------
Total Net Assets $62,197,366 $67,037,240 $155,222,701 $133,877,535 $24,076,686
- ------------------------ ----------- ----------- ------------ ------------ -----------
NET ASSET VALUE,
OFFERING PRICE AND
REDEMPTION PROCEEDS PER
SHARE: $ 10.54 $ 5.37 $ 4.98 $ 3.04 $ 5.56
- ------------------------ ----------- ----------- ------------ ------------ -----------
Shares Outstanding 5,899,615 12,486,361 31,152,932 44,036,295 4,328,344
- ------------------------ ----------- ----------- ------------ ------------ -----------
Investments, at
identified cost $60,621,797 $90,031,550 $150,009,998 $130,034,520 $22,419,979
- ------------------------ ----------- ----------- ------------ ------------ -----------
Investments, at tax cost $60,689,138 $90,719,260 $150,009,998 $130,034,520 $22,419,979
- ------------------------ ----------- ----------- ------------ ------------ -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BLANCHARD GROUP OF FUNDS
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD BLANCHARD
BLANCHARD BLANCHARD BLANCHARD SHORT -TERM FLEXIBLE
GLOBAL PRECIOUS METALS FLEXIBLE FLEXIBLE TAX-FREE
GROWTH FUND FUND, INC. INCOME FUND INCOME FUND BOND FUND
- ------------------------ ----------- --------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------
Dividends $ 376,712(a) $ 675,606(c) $ -- $ -- $ --
- ------------------------
Interest 2,434,670(b) 631,572 13,043,023 10,247,264 1,236,154
- ------------------------ ---------- ------------ ----------- ----------- ----------
Total income 2,811,382 1,307,178 13,043,023 10,247,264 1,236,154
- ------------------------ ---------- ------------ ----------- ----------- ----------
EXPENSES:
- ------------------------
Management fee 645,955 744,283 1,273,719 1,095,713 169,751
- ------------------------
Administrative personnel
and services fee 75,000 78,467 165,355 142,259 75,000
- ------------------------
Custodian fees 63,163 50,200 68,539 48,762 16,080
- ------------------------
Transfer and dividend
disbursing agent fees
and expenses 118,177 77,453 317,118 343,119 37,447
- ------------------------
Directors'/Trustees'
fees 2,098 2,544 3,267 3,420 1,598
- ------------------------
Auditing fees 20,726 21,698 20,688 12,277 26,804
- ------------------------
Legal fees 2,939 2,290 1,764 1,653 85
- ------------------------
Portfolio accounting
fees 49,714 54,606 57,885 49,725 43,386
- ------------------------
Distribution services
fee 484,467 558,212 424,573 365,238 56,584
- ------------------------
Share registration costs 11,775 21,568 12,098 13,477 11,706
- ------------------------
Printing and postage 61,840 28,849 33,894 48,635 7,825
- ------------------------
Insurance premiums 2,255 1,873 1,665 2,288 1,412
- ------------------------
Taxes 495 697 495 495 --
- ------------------------
Miscellaneous 2,018 1,786 34,211 18,580 17,258
- ------------------------ ---------- ------------ ----------- ----------- ----------
Total expenses 1,540,622 1,644,526 2,415,271 2,145,641 464,936
- ------------------------ ---------- ------------ ----------- ----------- ----------
WAIVERS--
- ------------------------
Waiver of management fee -- -- -- (129,528) (142,067)
- ------------------------
Waiver of administrative
personnel and services
fee -- -- -- -- (39,951)
- ------------------------
Waiver of distribution
services fee -- -- -- -- (56,584)
- ------------------------ ---------- ------------ ----------- ----------- ----------
Total waivers -- -- -- (129,528) (238,602)
- ------------------------ ---------- ------------ ----------- ----------- ----------
Net expenses 1,540,622 1,644,526 2,415,271 2,016,113 226,334
- ------------------------ ---------- ------------ ----------- ----------- ----------
Net investment income
(loss) 1,270,760 (337,348) 10,627,752 8,231,151 1,009,820
- ------------------------ ---------- ------------ ----------- ----------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS, FOREIGN
CURRENCY, AND FUTURES
CONTRACTS:
- ------------------------
Net realized gain (loss)
on investments, foreign
currency transactions,
and futures contracts 8,407,403 (2,561,982) 2,191,827 483,971 285,298
- ------------------------
Net change in unrealized
appreciation
(depreciation) of
investments, translation
of assets and liablities
in foreign currency, and
futures contracts (1,721,197) (9,413,528) 2,926,980 1,694,128 784,728
- ------------------------ ---------- ------------ ----------- ----------- ----------
Net realized and
unrealized gain (loss)
on investments 6,686,206 (11,975,510) 5,118,807 2,178,099 1,070,026
- ------------------------ ---------- ------------ ----------- ----------- ----------
Change in net assets
resulting from
operations $7,956,966 $(12,312,858) $15,746,559 $10,409,250 $2,079,846
- ------------------------ ---------- ------------ ----------- ----------- ----------
</TABLE>
(a) Net of Foreign taxes withheld $33,962.
(b) Net of Foreign taxes withheld $4,228.
(c) Net of Foreign taxes withheld $47,201.
(See Notes which are an integral part of the Financial Statements)
THE BLANCHARD GROUP OF FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD GLOBAL BLANCHARD PRECIOUS
GROWTH FUND METALS FUND, INC.
--------------------------------------- ----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
---------------- ------------- ------------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS:
----------------
OPERATIONS--
----------------
Net investment
income/operating
(loss) $ 1,270,760 $ 465,544 $ 295,860 $ (337,348) $ (500,885) $ (1,069,928)
----------------
Net realized
gain (loss) on
investments,
foreign currency
transactions and
futures
contracts 8,407,403 6,148,207 8,019,815 (2,561,982) 10,615,594 13,950,013
----------------
Net change in
unrealized
appreciation/depreciation
of investments,
translation of
assets and
liablities in
foreign
currency, and
futures
contracts (1,721,197) (5,394,534) 5,636,916 (9,413,528) (19,953,719) 13,616,081
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
operations 7,956,966 1,219,217 13,952,591 (12,312,858) (9,839,010) 26,496,166
---------------- ----------- ----------- ----------- ----------- ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS--
----------------
Distributions
from net
investment
income (1,170,525) -- (295,860) (2,843,687) -- --
----------------
Distributions
from net
realized gains (12,602,965) (20,849,369) -- --
----------------
Distributions in
excess of net
investment
income -- -- (274,732) -- -- --
----------------
Tax return of
capital -- -- -- -- -- --
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
distributions
to shareholders (13,773,490) -- (570,592) (23,693,056) -- --
---------------- ----------- ----------- ----------- ----------- ----------- ------------
SHARE
TRANSACTIONS--
----------------
Proceeds from
sale of shares 10,109,624 8,636,590 5,765,409 60,617,474 35,684,735 103,376,874
----------------
Net asset value
of shares issued
to shareholders
in payment of
distributions
declared 13,095,694 -- 548,261 21,735,905 -- --
----------------
Cost of shares
redeemed (23,098,557) (13,130,249) (35,601,975) (67,198,114) (67,247,212) (75,865,525)
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets
resulting from
share
transactions 106,761 (4,493,659) (29,288,305) 15,155,265 (31,562,477) 27,511,349
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Change in net
assets (5,709,763) (3,274,442) (15,906,306) (20,850,649) (41,401,487) 54,007,515
----------------
NET ASSETS:
----------------
Beginning of
period 67,907,129 71,181,571 87,087,877 87,887,889 129,289,376 75,281,861
---------------- ----------- ----------- ----------- ----------- ----------- ------------
End of period $62,197,366 $67,907,129 $71,181,571 $67,037,240 $87,887,889 $129,289,376
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Undistributed
net investment
income included
in net assets at
end of period $ 906,765 $ 818,136 $ -- $ 1,469,572 $ 2,856,971 $ 1,904,789
---------------- ----------- ----------- ----------- ----------- ----------- ------------
Net gain (loss)
as computed for
federal tax
purposes $ 7,911,101 $ 6,561,362 $ 5,881,028 $ 76,050 $ 9,039,433 $ 12,174,374
---------------- ----------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
BLANCHARD FLEXIBLE
INCOME FUND
--------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996
- --------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS:
- ---------------------------
OPERATIONS--
- ---------------------------
Net investment
income/operating
(loss) $10,627,752 $ 5,059,729 $ 14,539,300
- ---------------------------
Net realized
gain (loss) on
investments,
foreign currency
transactions and
futures
contracts 2,191,827 175,174 480,236
- ---------------------------
Net change in
unrealized
appreciation/depreciation
of investments,
translation of
assets and
liablities in
foreign
currency, and
futures
contracts 2,926,980 2,016,909 5,042,160
- --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
operations 15,746,559 7,251,812 20,061,696
- --------------------------- -------------- -------------- --------------
DISTRIBUTIONS TO
SHAREHOLDERS--
- ---------------------------
Distributions
from net
investment
income (10,302,558) (5,012,727) (15,359,777)
- ---------------------------
Distributions
from net
realized gains -- -- --
- ---------------------------
Distributions in
excess of net
investment
income -- -- --
- ---------------------------
Tax return of
capital (342,877) (48,762) --
- --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
distributions
to shareholders (10,645,435) (5,061,489) (15,359,777)
- --------------------------- -------------- -------------- --------------
SHARE
TRANSACTIONS--
- ---------------------------
Proceeds from
sale of shares 33,454,106 13,294,718 60,702,516
- ---------------------------
Net asset value
of shares issued
to shareholders
in payment of
distributions
declared 8,400,717 4,042,963 11,757,432
- ---------------------------
Cost of shares
redeemed (79,085,787) (38,410,603) (133,349,811)
- --------------------------- -------------- -------------- --------------
Change in net
assets
resulting from
share
transactions (37,230,964) (21,072,922) (60,889,863)
- --------------------------- -------------- -------------- --------------
Change in net
assets (32,129,840) (18,882,599) (56,187,944)
- ---------------------------
NET ASSETS:
- ---------------------------
Beginning of
period 187,352,541 206,235,140 262,423,084
- --------------------------- -------------- -------------- --------------
End of period $155,222,701 $187,352,541 $ 206,235,140
- --------------------------- -------------- -------------- --------------
Undistributed
net investment
income included
in net assets at
end of period $ -- $ -- $ --
- --------------------------- -------------- -------------- --------------
Net gain (loss)
as computed for
federal tax
purposes $ 1,771,520 $ (1,335,786) $ (3,223,064)
- --------------------------- -------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE BLANCHARD GROUP OF FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLANCHARD SHORT-TERM BLANCHARD FLEXIBLE
FLEXIBLE INCOME FUND TAX-FREE BOND FUND
------------------------------------------ -----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
- ------------------------ ------------- ------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
- ------------------------
OPERATIONS--
- ------------------------
Net investment income $ 8,231,151 $ 3,640,476 $ 3,088,222 $ 1,009,820 $ 461,956 $ 960,342
- ------------------------
Net realized gain (loss)
on investments, foreign
currency transactions
and futures contracts 483,971 (42,344) 511,538 285,298 39,445 891,432
- ------------------------
Net change in unrealized
appreciation/
depreciation of
investments, translation
of assets and liablities
in foreign currency, and
futures contracts 1,694,128 526,658 767,013 784,728 594,290 (406,293)
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from
operations 10,409,250 4,124,790 4,366,773 2,079,846 1,095,691 1,445,481
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS--
- ------------------------
Distributions from net
investment income (8,210,879) (3,150,985) (3,088,222) (1,005,915) (445,952) (960,342)
- ------------------------
Distributions from net
realized gains (45,361) -- -- -- -- --
- ------------------------
Distributions in excess
of net investment income -- -- (4,918) -- -- (8,706)
- ------------------------
Tax return of capital -- (529,561) -- -- -- --
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from
distributions to
shareholders (8,256,240) (3,680,546) (3,093,140) (1,005,915) (445,952) (969,048)
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
SHARE TRANSACTIONS--
- ------------------------
Proceeds from sale of
shares 34,559,663 12,700,025 13,369,396 10,279,470 6,936,750 26,287,368
- ------------------------
Proceeds from shares
issued in connection
with the acquisition of
Blanchard Short-Term
Global Income Fund -- -- 174,188,041 -- -- --
- ------------------------
Net asset value of
shares issued to
shareholders in payment
of distributions
declared 7,218,527 3,194,311 2,652,603 919,487 411,088 750,232
- ------------------------
Cost of shares redeemed (68,087,183) (36,071,531) (37,161,711) (10,766,336) (8,149,963) (24,287,075)
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets
resulting from share
transactions (26,308,993) (20,177,195) 153,048,329 432,621 (802,125) 2,750,525
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Change in net assets (24,155,983) (19,732,951) 154,321,962 1,506,552 (152,386) 3,226,958
- ------------------------
NET ASSETS:
- ------------------------
Beginning of period 158,033,518 177,766,469 23,444,507 22,570,134 22,722,520 19,495,562
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
End of period $133,877,535 $158,033,518 $177,766,469 $ 24,076,686 $22,570,134 $ 22,722,520
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Undistributed net
investment income
included in net assets
at end of period $ -- $ -- $ -- $ -- $ -- $ --
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
Net gain (loss) as
computed for federal tax
purposes $ 483,971 $ 87,710 $ 493,015 $ -- $ -- $ --
- ------------------------ ------------ ------------ ------------ ------------ ----------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
[This Page Intentionally Left Blank]
63
BLANCHARD GROUP OF FUNDS
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NET REALIZED AND DISTRIBUTIONS
UNREALIZED FROM NET
GAIN/(LOSS) REALIZED GAINS
NET ON INVESTMENTS, ON INVESTMENTS,
YEAR NET ASSET INVESTMENT FUTURES DISTRIBUTIONS DISTRIBUTIONS FUTURES
ENDED VALUE INCOME/ CONTRACTS, AND TOTAL FROM FROM NET IN EXCESS OF TAX CONTRACTS, AND
APRIL30/ BEGINNING OPERATING FOREIGN CURRENCY INVESTMENT INVESTMENT NET INVESTMENT RETURN FOREIGN CURRENCY
SEPTEMBER 30, OF PERIOD (LOSS) TRANSACTIONS OPERATIONS INCOME INCOME(E) OF CAPITAL TRANSACTIONS
- ------------- --------- ---------- ---------------- ---------- ------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BGGF
1993 $ 9.92 0.25 0.32 0.57 (0.30) -- -- (0.19)
1994 $10.00 0.03 1.29 1.32 -- -- -- (1.28)
1995 $10.04 0.08 (0.19) (0.11) -- -- -- --
1996 $ 9.71 0.04 1.86 1.90 (0.04) (0.04) -- --
1996(a) $11.53 0.08 0.13 0.21 -- -- -- --
1997 $11.74 0.23 1.04 1.27 (0.21) -- -- (2.26)
BPMF
1993 $ 5.04 (0.08)(h) 1.87(h) 1.79 -- -- -- --
1994 $ 6.83 (0.11)(h) 2.01(h) 1.90 -- -- -- --
1995 $ 8.73 (0.02) (0.41) (0.43) -- -- (0.09) (0.03)
1996 $ 7.12 (0.10) 2.75 2.65 -- -- -- --
1996(a) $ 9.77 (0.10) (0.77) (0.87) -- -- -- --
1997 $ 8.90 (0.02) (0.96) (0.98) (0.30) -- -- (2.25)
BFIF
1993(b) $ 5.00 0.21 0.09 0.30 (0.21) -- -- --
1994 $ 5.09 0.40 (0.17) 0.23 (0.36) -- (0.03) (0.08)
1995 $ 4.85 0.30 (0.13) 0.17 (0.00)(i) -- (0.31) --
1996 $ 4.71 0.28 0.10 0.38 (0.31) -- -- --
1996(a) $ 4.78 0.15 0.04 0.19 (0.13) -- (0.00)(i) --
1997 $ 4.84 0.30 0.15 0.45 (0.30) -- (0.01) --
BSTFIF
1993(c) $ 3.00 0.00(i) 0.00(i) 0.00(i) (0.00)(i) -- -- (0.00)(i)
1994 $ 3.00 0.17 (0.06) 0.11 (0.17) -- -- (0.01)
1995 $ 2.93 0.15 -- 0.15 (0.14) (0.00)(i) -- --
1996 $ 2.94 0.22 -- 0.22 (0.17) (0.00)(i) -- --
1996(a) $ 2.99 0.07 0.01 0.08 (0.06) (0.00)(i) (0.01) --
1997 $ 3.00 0.17 0.04 0.21 (0.17) -- -- (0.00)(i)
BFTFBF
1994(d) $ 5.00 0.18 (0.20) (0.02) (0.18) -- -- (0.03)
1995 $ 4.77 0.24 0.26 0.50 (0.23) (0.01) -- --
1996 $ 5.03 0.22 0.13 0.35 (0.22) -- -- --
1996(a) $ 5.16 0.11 0.15 0.26 (0.11) -- -- --
1997 $ 5.31 0.25 0.25 0.50 (0.25) -- -- --
<CAPTION>
DISTRIBUTIONS
IN EXCESS OF
NET REALIZED
GAINS ON
INVESTMENTS,
YEAR FUTURES
ENDED CONTRACTS, AND
APRIL30/ FOREIGN CURRENCY
SEPTEMBER 30, TRANSACTIONS(E)
- ------------- ----------------
<S> <C>
BGGF
1993 --
1994 --
1995 (0.22)
1996 --
1996(a) --
1997 --
BPMF
1993 --
1994 --
1995 (1.06)
1996 --
1996(a) --
1997 --
BFIF
1993(b) --
1994 --
1995 --
1996 --
1996(a) --
1997 --
BSTFIF
1993(c) --
1994 --
1995 --
1996 --
1996(a) --
1997 --
BFTFBF
1994(d) --
1995 --
1996 --
1996(a) --
1997 --
</TABLE>
* Computed on an annualized basis.
(a) The Funds have changed their fiscal year end from April 30 to September 30.
Reflects operations for the period from May 1, 1996 to September 30, 1996.
(b) Reflects operations for the period from November 2, 1992 (commencement of
operations) to April 30, 1993.
(c) Reflects operations for the period from April 16, 1993 (commencement of
operations) to April 30, 1993.
(d) Reflects operations for the period from August 12, 1993 (commencement of
operations) to April 30, 1994.
(e) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(f) Based on net asset value.
(g) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(h) Calculated based on average shares outstanding-prior years amounts restated
for comparative purposes.
(i) Less than one cent per share.
(j) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
------------------------------------
NET
INVESTMENT NET ASSETS,
NET ASSET INCOME/ EXPENSE END AVERAGE PORTFOLIO
TOTAL VALUE, AND TOTAL OPERATING WAIVER/ OF PERIOD COMMISSIONS TURNOVER
DISTRIBUTIONS OF PERIOD RETURN(F) EXPENSES (LOSS) REIMBURSEMENT(G) (000 OMITTED) RATE PAID(J) RATE
- ------------- ---------- --------- -------- ---------- ---------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(0.49) $10.00 6.08% 2.40% 1.72% -- $ 84,780 -- 138%
(1.28) $10.04 12.91% 2.61% 0.67% -- $109,805 -- 166%
(0.22) $ 9.71 (1.04%) 2.51% 0.76% -- $ 87,088 -- 221%
(0.08) $11.53 19.68% 2.54% 0.38% -- $ 71,182 -- 91%
-- $11.74 1.91% 2.52%* 1.60%* -- $ 67,907 $0.0040 47%
(2.47) $10.54 13.20% 2.39% 1.97% -- $ 62,197 $0.0049 49%
-- $ 6.83 35.50% 3.24% (1.46%) -- $ 32,636 -- 66%
-- $ 8.73 27.80% 2.46% (1.21%) -- $ 68,092 -- 174%
(1.18) $ 7.12 (4.39%) 2.49% (1.48%) -- $ 75,282 -- 116%
-- $ 9.77 37.03% 2.36% (1.27%) -- $129,289 -- 176%
-- $ 8.90 (8.90%) 2.32%* (1.13%)* -- $ 87,888 $0.0199 36%
(2.55) $ 5.37 (15.24%) 2.21% (0.45%) -- $ 67,037 $0.0125 97%
(0.21) $ 5.09 6.17% 0.20%* 9.02%* -- $315,845 -- 129%
(0.47) $ 4.85 4.11% 1.30% 7.10% -- $550,254 -- 346%
(0.31) $ 4.71 3.74% 1.58% 6.52% -- $262,423 -- 455%
(0.31) $ 4.78 8.06% 1.56% 6.06% -- $206,235 -- 347%
(0.13) $ 4.84 3.95% 1.59%* 7.38%* 0.01%* $187,353 -- 87%
(0.31) $ 4.98 9.53% 1.42% 6.26% -- $155,223 -- 101%
(0.00)(i) $ 3.00 0.15% 3.03%* 3.89%* -- $ 2,000 -- 36%
(0.18) $ 2.93 3.72% 0.63% 5.64% 1.42% $ 42,381 -- 212%
(0.14) $ 2.94 5.34% 1.38% 4.80% 0.75% $ 23,445 -- 84%
(0.17) $ 2.99 7.47% 1.44% 5.49% 0.40% $177,766 -- 291%
(0.07) $ 3.00 2.61% 1.39%* 5.26%* 0.25%* $158,034 -- 21%
(0.17) $ 3.04 7.24% 1.38% 5.63% 0.09% $133,878 -- 80%
(0.21) $ 4.77 (0.48%) 0.00%* 6.79%* 2.22%* $ 23,267 -- 190%
(0.24) $ 5.03 10.74% 1.00% 4.87% 1.17% $ 19,496 -- 170%
(0.22) $ 5.16 6.86% 1.05% 4.43% 1.25% $ 22,723 -- 275%
(0.11) $ 5.31 5.02% 1.01%* 4.83%* 1.23%* $ 22,570 -- 25%
(0.25) $ 5.56 9.59% 1.00% 4.46% 1.05% $ 24,077 -- 163%
</TABLE>
BLANCHARD GROUP OF FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
(1) ORGANIZATION
Blanchard Group of Funds consists of Blanchard Funds (the "Trust") and Blanchard
Precious Metals Fund, Inc. (the "Company") which are registered under the
Investment Company Act of 1940, as amended (the "Act"), as open-end management
investment companies. The Trust consists of six portfolios. The financial
statements of the following portfolios (individually referred to as the "Fund",
or collectively as the "Funds") are presented herein:
<TABLE>
<CAPTION>
PORTFOLIO NAME DIVERSIFICATION INVESTMENT OBJECTIVE
-------------- --------------- --------------------
<S> <C> <C>
Blanchard Global Growth Fund diversified Long-term capital growth.
("BGGF")
Blanchard Precious Metal Fund, non- Long-term capital appreciation and
Inc. ("BPMF") diversified preservation of purchasing power
through investments in
physical precious metals,
such as gold, silver,
platinum and palladium, and
in securities of companies
involved in precious metals.
A secondary objective of the
Fund is to reduce the risk of
loss of capital and decrease
the volatility often
associated with precious
metals investments by
changing the allocation of
its assets from precious
metals securities to physical
precious metals and/or
investing in short-term
instruments and government
securities during periods
when the Fund's portfolio
manager believes the precious
metals markets may experience
declines.
Blanchard Flexible Income Fund diversified High current income while seeking
("BFIF") opportunities for capital appreciation.
Blanchard Short-Term Flexible diversified High current income while seeking
Income Fund ("BSTFIF") opportunities for capital appreciation.
Blanchard Flexible Tax-Free Bond diversified High level of current interest income
Fund ("BFTFBF") exempt from federal income tax,
consistent with the preservation of
capital.
</TABLE>
In addition, the Trust offers Blanchard Asset Allocation Fund which is presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, and unlisted securities
and private placement securities are generally valued at the mean of the
latest bid and asked price as furnished by an independent pricing service.
Listed equity foreign valued at the last sale price reported on a national
securities exchange. Short-term foreign and domestic securities are valued at
the prices provided by an independent pricing service. However, short-term
foreign or domestic securities purchased with remaining maturities of sixty
days or less may be valued at amortized cost, which approximates fair market
value. Investments in open-end regulated investment companies are valued at
net asset value. Foreign government and corporate bonds are valued at the last
sales price reported on a national exchange. If the last sales price is not
available the securities are valued at the mean of the latest bid and ask
price as furnished by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Funds to require a custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Funds to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Funds' adviser to be creditworthy pursuant to guidelines and/or standards
reviewed or established by the Board of Trustees (the "Trustees"). Risks may
arise from the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Funds could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code").
Distributions in excess of net investment income were the result of certain
book and tax timing differences. These distributions do not represent a return
of capital for federal income tax purposes.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions. In addition, BPMF and BFIF reclassed a tax
return of capital. The following reclassifications have been made to the
financial statements as of September 30, 1997.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT
FUND PAID-IN ACCUMULATED NET INCOME/ DISTRIBUTIONS IN EXCESS
NAME CAPITAL REALIZED GAIN/LOSS OF NET INVESTMENT INCOME
------------ --------- ------------------ -------------------------------
<S> <C> <C> <C>
BGGF -- $ 11,606 $ (11,606)
BPMF $ 120,846 (1,911,826) 1,790,980
BFIF (342,877) (258,682) 601,559
</TABLE>
Net investment income, net realized gain/losses, and net assets were not
affected by this change.
FEDERAL TAXES--It is the Funds' policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
Withholding taxes on foreign interest have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
At September 30, 1997, BFIF, BSTFIF, and BFTFBF, for federal tax purposes, had
capital loss carryforwards, as noted below, which will reduce the Funds
taxable income arising from future net realized gain on investments, if any,
to the extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to relieve
the Funds of any liability for federal tax.
<TABLE>
<CAPTION>
FUNDS TOTAL TAX LOSS CARRYFORWARD
------ ---------------------------
<S> <C>
BFIF $16,630,124
BSTFIF 9,125,862
BFTFBF 354,460
</TABLE>
Pursuant to the Code, such capital loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
BFIF BSTFIF
---------------------------------------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT EXPIRATION YEAR EXPIRATION AMOUNT
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
2002 $12,071,274 2003 $9,125,862
2003 3,223,064
2004 1,335,786
</TABLE>
<TABLE>
<CAPTION>
BFTFBF
------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C> <C> <C>
2003 $354,460
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
Additionally, net capital losses, as noted below, attributable to security
transactions incurred after October 31, 1996 are treated as arising on October
1, 1997 the first day of the Funds' next taxable year.
<TABLE>
<CAPTION>
FUND TOTAL TAX LOSS PUSHFORWARD
---- --------------------------
<S> <C>
BPMF $4,504,362
BFIF 157,286
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
FUTURES CONTRACTS--BGGF purchases stock index futures contracts to manage
cashflows, enhance yield, and to potentially reduce transaction costs. Upon
entering into a stock index futures contract with a broker, the Fund is
required to deposit in a segregated account a specified amount of cash or U.S.
government securities. Futures contracts are valued daily and unrealized gains
or losses are recorded in a "variation margin" account. Daily, the Fund
receives from or pays to the broker a specified amount of cash based upon
changes in the variation margin account. When a contract is closed, the Fund
recognizes a realized gain or loss. For the period ended September 30, 1997,
BGGF had realized gains on futures contracts of $5,426,009. Futures contracts
have market risks, including the risk that the change in the value of the
contract may not correlate with changes in the value of the underlying
securities.
At September 30, 1997, BGGF had outstanding futures contracts as set forth
below:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION APPRECIATION
DATE CONTRACTS TO RECEIVE POSITION (DEPRECIATION)
----------- -------------------- -------- --------------
<S> <C> <C> <C>
December 1997 20 S&P 500 Long $332,326
December 1997 4 Long Gilt Long 17,265
December 1997 5 Notional Long 3,412
December 1997 7 CAC 40 Long 773
December 1997 7 Bund Long 15,831
December 1997 3 DAX Long 28,979
December 1997 221 Nikkei 300 Long (195,176)
December 1997 12 T Bond Long 43,438
December 1997 11 T Note Long 20,875
December 1997 5 ALL--Ords Long 253
December 1997 5 FT-SE Long 81,577
--------
Net Unrealized Appreciation on
Futures Contracts $349,553
</TABLE>
FOREIGN EXCHANGE CONTRACTS--BGGF, BPMF, BFIF, and BSTFIF may enter into
foreign currency exchange contracts as a way of managing foreign exchange rate
risk. BGGF, BPMF, BFIF, and BSTFIF may enter into these contracts for the
purchase or sale of a specific foreign currency at a
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
fixed price on a future date as a hedge or cross hedge against either specific
transactions or portfolio positions. The objective of the Funds foreign
currency hedging transactions is to reduce the risk that the U.S. dollar value
of the Funds foreign currency denominated securities will decline in value due
to changes in foreign currency exchange rates. All foreign currency exchange
contracts are "marked to market" daily at the applicable translation rates
resulting in unrealized gains or losses. Realized gains or losses are recorded
at the time the foreign currency exchange contract is offset by entering into
a closing transaction or by the delivery or receipt of the currency. Risk may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. At
September 30, 1997, only BGGF and BFIF had outstanding foreign exchange
contracts as set forth below:
BGGF
<TABLE>
<CAPTION>
CONTRACTS TO IN UNREALIZED
SETTLEMENT DELIVER/ EXCHANGE CONTRACTS AT APPRECIATION
DATE RECEIVE FOR VALUE (DEPRECIATION)
---------------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
CONTRACTS PURCHASED:
Australian Dollar 10/2/97 517,000 $ 388,913 $ 387,621 $ 1,292
Australian Dollar 1/5/98 330,000 240,059 240,195 (136)
Swiss Franc 10/2/97 7,812,500 5,368,856 5,372,931 (4,075)
Deutsche Mark 12/23/97 3,787,600 2,147,104 2,155,278 (8,174)
French Franc 10/2/97-1/5/98 15,903,400 2,662,152 2,687,859 (25,707)
British Pound 12/23/97 907,200 1,457,870 1,457,897 (27)
Netherlands Guilder 10/2/97 3,975,000 1,998,692 1,997,458 1,234
<CAPTION>
CONTRACTS SOLD:
<S> <C> <C> <C> <C> <C>
Swiss Franc 10/2/97-12/23/97 14,772,000 10,111,286 10,205,532 94,246
Deutsche Mark 12/23/97 971,000 552,489 552,533 44
French Franc 10/2/97 9,246,200 1,553,066 1,558,737 5,671
British Pound 12/23/97 127,000 204,286 204,093 (193)
Japanese Yen 12/18/97 414,228,700 3,460,752 3,472,727 11,975
Netherlands Guilder 10/2/97-12/23/97 7,950,000 3,931,396 4,005,276 73,880
--------
Net Unrealized Appreciation on Foreign Exchange Contracts $150,030
========
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
BFIF
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS AT APPRECIATION
DATE DELIVER/RECEIVE FOR VALUE (DEPRECIATION)
---------- --------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Contracts Sold:
Canadian Dollar 12/15/97 2,200,000 $1,591,320 $1,598,759 ($7,439)
-------
Net Unrealized Depreciation on Foreign Exchange Contracts ($7,439)
-------
</TABLE>
FOREIGN CURRENCY TRANSLATION--The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies ("FC") are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and
collected or paid are adjusted when reported by the custodian bank. The Funds
does not isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales of
FCs, currency gains or losses realized between the trade and settlement dates
on securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at fiscal year
end, resulting from changes in the exchange rate.
RESTRICTED SECURITIES--Restricted securities are securities that may only be
resold upon registration under federal or international securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities may
be resold in the secondary market in transactions exempt from registration.
Such restricted securities may be determined to be liquid under criteria
established by the Board of Trustees. The Fund will not incur any registration
costs upon such resales. The Funds' restricted securities are valued at the
price provided by dealers in the secondary market or, if no market prices are
available, at the fair value as determined by the Fund's pricing committee.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
Additional information on each restricted security held by BGGF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
----------------------------- ---------------- ----------------
<S> <C> <C>
Chilectra S.A. ADR 7/19/96 $91,177
Daewoo Heavy Industries, Pfd. 2/3/95-4/12/95 49,952
Samsung Electronics Co., GDR 1/3/95 917
Dong Bang Forwarding Co. 2/3/95-5/29/95 74,380
</TABLE>
Additional information on each restricted security held by BPMF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
--------------------------- ----------------- ----------------
<S> <C> <C>
Eldorado Gold Corp. Ltd. 04/08/96-08/14/97 $433,523
Geomaque Explorations Ltd.,
Warrants 3/11/97 827,565
Lone Star Exploration 2/26/96-3/26/97 587,746
</TABLE>
Additional information on each restricted security held by BFIF at September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
--------------------------- ------------------ ----------------
<S> <C> <C>
Calpine Corp. 7/2/1997 $ 996,412
Nine West Group, Inc. 7/1/1997 999,012
Stone Container Finance Co. 8/9/1996 2,000,000
Tucson Electric Power Co. 2/10/1993-12/22/93 2,098,170
</TABLE>
CHANGE IN FISCAL YEAR--The Funds changed their fiscal year-end from April 30
to September 30 beginning May 1, 1996.
DEFERRED EXPENSES--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
over a period not to exceed five years from each Fund's commencement date.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Articles of Incorporation permit the Directors to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
BGGF BPMF
--------------------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED
1997 1996 1996 1997 1996 APRIL 30, 1996
------------- ------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 973,160 748,872 559,635 9,876,823 3,728,778 11,891,108
Shares issued to
shareholders in payment
of distributions
declared 1,381,403 -- 52,311 3,428,378 -- --
Shares redeemed (2,237,898) (1,137,138) (3,413,086) (10,697,610) (7,081,402) (9,230,002)
----------- ----------- ----------- ----------- ----------- -----------
Net change resulting
from share transactions 116,665 (388,266) (2,801,140) 2,607,591 (3,352,624) 2,661,106
=========== =========== =========== =========== =========== ===========
<CAPTION>
BFIF BSTFIF
--------------------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996 1997 1996 1996
------------- ------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 6,828,666 2,777,685 12,498,920 11,452,843 4,248,564 4,477,310
Shares issued in
connection with the
acquisition of Blanchard
Short-Term Global Income
Fund -- -- -- -- -- 57,869,781
Shares issued to
shareholders in payment
of distributions
declared 1,711,576 844,211 2,424,612 2,391,887 1,070,524 888,044
Shares redeemed (16,127,237) (8,034 ,939) (27,527,713) (22,560,468) (12,096,346) (11,691,202)
----------- ----------- ----------- ----------- ----------- -----------
Net change resulting
from share transactions (7,586,995) (4,413,043) (12,604,181) (8,715,738) (6,777,258) 51,543,933
=========== =========== =========== =========== =========== ===========
<CAPTION>
BFTFBF
---------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
1997 1996 1996
------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,901,018 1,341,280 5,015,985
Shares issued to
shareholders in payment
of distributions
declared 169,611 78,775 142,764
Shares redeemed (1,995,557) (1,571,250) (4,631,991)
----------- ----------- -----------
Net change resulting
from share transactions 75,072 (151,195) 526,758
=========== =========== ===========
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(4) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEE--Virtus Capital Management, Inc., the Trust's manger (the
"Manager"), receives for its services an annual management fee based on a
percentage of each Fund's average daily net assets (see below).
<TABLE>
<CAPTION>
FUND ANNUAL RATE
------ -----------------------------------------------------------------------
<C> <S>
BGGF 1.00% of the first 150 million, 0.875% of the excess of 150 million but
not exceeding 300 million, 0.75% in excess of 300 million
BPMF 1.00% of the first 150 million, 0.875% of the excess of 150 million but
not exceeding 300 million, 0.75% in excess of 300 million
BFIF 0.75%
BSTFIF 0.75%
BFTFBF 0.75%
</TABLE>
The Manager may voluntarily choose to waive a portion of its fee. The Manager
can modify or terminate this voluntary waiver at any time at its sole
discretion.
SUB-ADVISORY FEE--To provide portfolio advisory services for the Funds, the
Manager has entered into sub-advisory agreements with the sub-advisers listed
below. Under the terms of each sub-advisory agreement, the Manager will pay each
sub-adviser a fee based on a percentage of each Fund's average daily net assets
(see below).
<TABLE>
<CAPTION>
FUND SUB-ADVISER ANNUAL RATE
------ --------------------------------------- -------------------------------
<C> <C> <S>
BGGF Mellon Capital Mortgage Corp. 0.375% of the first $100
million, 0.350% of the excess
of $100 million but not
exceeding $150 million, 0.325%
of the excess of $150 million
BPMF Cavelti Capital Management, Ltd. 0.30% of the first $150
million, 0.2625% of the excess
of $150 million but less than
$300 million, and 0.255% in
excess of $300 million
BFIF OFFITBANK 0.30% of the first $25 million,
0.25% of the next $25 million,
and 0.20% in excess of $50
million
BSTFIF OFFITBANK 0.30% of the first $25 million,
0.25% of the next $25 million,
and 0.20% in excess of $50
million
BFTFBF United States Trust Company of New York 0.20%
</TABLE>
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Funds with administrative
personnel and services. The fee paid to FAS is based on the level of average
aggregate daily net assets of the Funds and The Virtus Funds for the period. FAS
may voluntarily choose to waive a portion of its fee. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $75,000 per portfolio. FAS can modify or terminate this voluntary waiver
at any time at its sole discretion.
DISTRIBUTION SERVICES FEE--The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, each
Fund will reimburse Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
result in the sale of the Fund's Investment Shares. The Plan provides that the
Funds may incur distribution expenses up to 0.25% of the average daily net
assets of the BFIF, BSTFIF, and BFTFBF and up to 0.75% of the average daily net
assets of BGGF and BPMF, annually, to reimburse FSC. The distributor may
voluntarily choose to waive any portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Funds.
The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Funds' accounting records
for which it receives a fee. The fee is based on the level of each Fund's
average net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Signet Trust Company is the Funds' custodian for which it
receives a fee. The fee is based on the level of each Fund's average net assets
for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--The Funds' Manager paid the organization expenses of
the Funds listed below incurred prior to the public offering of its shares. The
Funds reimbursed the Manager for these expenses and has deferred and is
amortizing such expenses over five years from the date of commencement of the
Funds operations. Organizational expenses paid is as follows:
<TABLE>
<CAPTION>
FUND ORGANIZATIONAL EXPENSES
- ------ -----------------------
<S> <C>
BFIF $151,712
BSTFIF 80,724
BFTFBF 89,448
</TABLE>
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended September 30, 1997 were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ------ ------------ -----------
<S> <C> <C>
BGGF $ 44,853,363 $18,165,537
BPMF 63,481,368 66,049,224
BFIF 164,757,771 202,202,473
BSTFIF 109,275,828 128,141,491
BFTFBF 35,259,413 35,460,535
</TABLE>
BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(6) CONCENTRATION OF CREDIT RISK
BGGF, BPMF, and BFIF invest in securities of non-U.S. issuers. The political or
economic developments within a particular country or region may have an adverse
effect on the ability of domiciled issuers to meet their obligations.
Additionally, political or economic developments may have an effect on the
liquidity and volatility of portfolio securities and currency holdings.
(7) PROPOSED FUND MERGER
On July 18, 1997, Signet Banking Corporation ("Signet") entered into a
definitive Agreement and Plan of Reorganization whereby Signet was acquired by
First Union Corporation ("First Union"). It is anticipated that the merger will
be consummated on or about November 28, 1997.
As a result of this First Union merger, First Union will succeed to the
investment advisory and functions formerly performed for the Funds by various
units of Signet and various unaffiliated parties.
The Board of Trustees/Directors of the Funds has approved an Agreement and Plan
of Reorganization pursuant to which, on or about February 27, 1998, all of the
assets, and certain liabilities of the Funds would be acquired in exchange for
shares of similarly managed funds (the "Acquiring Funds") that is advised by
affiliates of First Union. The reorganization would result in the liquidation
and termination of the Funds. Pursuant to the reorganization, shareholders of
the Funds will receive, tax-free, the number of shares of the Acquiring Funds
having a value equal to the value of their shares immediately prior to the
reorganization. Consummation of the reorganization is subject to approval of the
shareholders of the Funds.
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of Blanchard Group of Funds:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Blanchard Group of Funds (comprising the
following portfolios: Blanchard Global Growth Fund, Blanchard Precious Metals
Fund, Inc., Blanchard Flexible Income Fund, Blanchard Short- Term Flexible
Income Fund, Blanchard Flexible Tax-Free Bond Fund) as of September 30, 1997,
and the related statements of operations for the year then ended, the statements
of changes in net assets for the year ended September 30, 1997 and the period
ended September 30, 1996, and the financial highlights for the periods ended in
1997 and 1996. The financial highlights for the periods ended in 1993, 1994 and
1995 were audited by other auditors, whose reports thereon dated June 20, 1995,
expressed an unqualified opinion. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Blanchard Group of
Funds as of September 30, 1997, the results of its operations, the changes in
its net assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
As more fully described in Note 7, in November, 1997 the Funds are expected to
enter into an Agreement and Plan of Reorganization, pursuant to which (subject
to Fund shareholder approval) on or about February 27, 1998, all of the assets,
and certain liabilities of the Funds would be acquired in exchange for shares of
similarly managed funds that are advised by affiliates of First Union
Corporation. The reorganization would result in the liquidation and termination
of the Funds.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
November 7, 1997
TRUSTEES/DIRECTORS OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
William J. Copeland President and Treasurer
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. John W. McGonigle
Edward C. Gonzales Executive Vice President and
Peter E. Madden Secretary
John E. Murray, Jr. Joseph S. Machi
Wesley W. Posvar Vice President and Assistant
Marjorie P. Smuts Treasurer
Richard B. Fisher
Vice President
C. Grant Anderson
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contain facts concerning
its objective and policies, management fees, expenses and other information.
PORTFOLIO ADVISERS B L A N C H A R D
Global Growth Fund GLOBAL GROWTH FUND
Mellon Capital Management Corp.
Precious Metals Fund, Inc. PRECIOUS METALS FUND, INC.
Cavelti Capital Management Ltd.
Flexible Income Fund FLEXIBLE INCOME FUND
OFFITBANK
Short-Term Flexible Income Fund SHORT-TERM FLEXIBLE INCOME FUND
OFFITBANK
Flexible Tax-Free Bond Fund FLEXIBLE TAX-FREE BOND FUND
United States Trust Company of New York
The Blanchard Group of Funds are available through Signet(R) Financial Services,
Inc., member NASD, and are advised by an affiliate, Virtus Capital Management,
Inc., which is
compensated for this service.
- ---------------------------------------------
INVESTMENT PRODUCTS ARE NOT DEPOSITS,
OBLIGATIONS OF, OR GUARANTEED BY ANY
BANK. THEY ARE NOT INSURED BY THE FDIC.
THEY INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL INVESTED.
- ---------------------------------------------
Federated Securities Corporation is the ANNUAL REPORT
distributor of the Funds. SEPTEMBER 30, 1997
Managed by: Virtus Capital
Management, Inc.
G01684-12
CUSIP 093212603/093212405/093265106/093212306/093254100
(2431)AR1197
A1. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Global Growth Fund (the "Fund") is represented by a broken line. The Standard &
Poor's 500 Index (the "S&P 500") is represented by a solid line. The line graph
is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 4/30/98 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$20,006 and $44,582, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, five-year, ten-year and the since inception (6/1/86) periods ended
9/30/97, which were 13.20%, 10.51%, 6.44% and 8.97%, respectively.
A2. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Precious Metals Fund (the "Fund") is represented by a broken line. The Toronto
Stock Exchange Gold & Silver Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Toronto Stock Exchange Gold & Silver
Index. The "x" axis reflects computation periods from 6/23/88 to 9/30/97. The
"y" axis reflects the cost of the investment. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to the
Toronto Stock Exchange Gold & Silver Index; the ending values were $11,167and
$13,936, respectively. The legend in the upper middle quadrant of the graphic
presentation indicates the Fund's Average Annual Total Return for the one-year,
five-year, and the since inception (6/23/88) periods ended 9/30/97, which were
(15.24%), 9.96%, and 1.27%, respectively.
A3. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Income Fund (the "Fund") is represented by a broken line. The Merrill
Lynch Aggregate Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Merrill Lynch Aggregate Bond Index.
The "x" axis reflects computation periods from 11/2/92 to 9/30/97. The "y" axis
reflects the cost of the investment. The right margin reflects the ending value
of the hypothetical investment in the Fund as compared to the Merrill Lynch
Aggregate Bond Index; the ending values were $14,003 and $14,387, respectively.
The legend in the upper middle quadrant of the graphic presentation indicates
the Fund's Average Annual Total Return for the one-year, and the since inception
(11/2/92) periods ended 9/30/97, which were 9.53% and 7.25%, respectively.
A4. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Short-Term Flexible Income Fund (the "Fund") is represented by a broken line.
The Merrill Lynch Short-Term Govenment Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Fund and the Merrill Lynch Short-Term
Govenment Index. The "x" axis reflects computation periods from 4/16/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Merrill Lynch Short-Term Govenment Index; the ending values were $12,940
and $12,709, respectively. The legend in the upper middle quadrant of the
graphic presentation indicates the Fund's Average Annual Total Return for the
one-year, and the since inception (4/16/93) periods ended 9/30/97, which were
7.24% and 5.95%, respectively.
A5. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Tax-Free Bond Fund (the "Fund") is represented by a broken line. The
Lehman Brothers Current Municipal Bond Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Fund and the Lehman Brothers Current
Municipal Bond Index. The "x" axis reflects computation periods from 8/12/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Lehman Brothers Current Municipal Bond Index; the ending values were
$13,553 and $12,485, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, and the since inception (8/12/93) periods ended 9/30/97, which
were 9.59% and 7.63%, respectively.
A6. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Asset Alocation Fund (the "Fund") is represented by a broken line. The Standard
& Poor's 500 Index (the "S&P 500") is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 6/6/96 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$14,534 and $14,571, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year and the since inception (6/6/96) periods ended 9/30/97, which were
38.64%, 33.03%, respectively.
<PAGE>
Keystone Strategic Income Fund
Pro Forma Combining Financial Statements (unaudited)
Statement of Assets and Liabilities (000's omitted)
April 30, 1997
<TABLE>
<CAPTION>
Keystone Blanchard Flexible Pro Forma
Strategic Income Income Adjustments Combined
-------------------------------------------------- ------------
<S> <C> <C> <C> <C>
Assets:
Investments at value (cost $192,569, $161,370 186,555 161,790 $348,345
and $353,938, respectively)
Foreign currency (cost $19, $0 and $19, respectively) 19 - 19
Cash 8 - 8
Interest receivable 3,705 3,252 6,957
Receivable for investment sold 4,615 - 4,615
Receivable for closed forward foreign currency
exchange contracts - 140 140
Unrealized appreciation on forward foreign currency
exchange contracts 46 22 68
Receivable for Fund shares sold 645 - 645
Prepaid expenses and other assets 102 15 117
-------------------------------------------------- ------------
Total Assets 195,695 165,219 360,914
Liabilities:
Payable for investments purchased 1,118 - 1,118
Payable for closed forward foreign currency
exchange contracts 118 - 118
Distributions to shareholders 553 1,116 1,669
Payable for Fund shares redeemed 638 - 638
Distribution fee payable 91 43 134
Due to related parties 9 192 201
Due to custodian - 41 41
Accrued expenses 58 88 146
------------------------------------------------------------------
Total Liabilities 2,585 1,480 4,065
------------------------------------------------------------------
Net Assets 193,110 163,739 356,849
==================================================================
Net assets are comprised of:
Paid-in capital 264,572 181,642 446,214
Undistributed net investment income (accumulated
distributions in excess of investment income) (576) 369 (207)
Accumulated net realized loss on investments (64,836) (18,714) (83,550)
Net unrealized appreciation (depreciation) on investments (6,050) 442 (5,608)
------------------------------------------------------------------
Net Assets 193,110 163,739 356,849
==================================================================
Class A Shares
Net Assets 58,725 163,739 222,464
Shares of Beneficial Interest Outstanding 8,614 33,755 (9,747)a 32,622
Net Asset Value $6.82 $4.85 $6.82
Maximum Offering Price (4.75%) $7.16 $7.16
Class B Shares
Net Assets 110,082 - 110,082
Shares of Beneficial Interest Outstanding 16,072 - - 16,072
Net Asset Value $6.85 - $6.85
Class C Shares
Net Assets 24,304 - 24,304
Shares of Beneficial Interest Outstanding 3,553 - - 3,553
Net Asset Value $6.84 - $6.84
Class Y Shares
Net Assets - - -
Shares of Beneficial Interest Outstanding - - -
Net Asset Value $6.65 - $6.65
</TABLE>
a Reflects the impact of converting shares of the target fund into the survivor
fund
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Keystone Strategic Income Fund
Pro Forma Combining Financial Statements (unaudited)
Statement of Operations (000's omitted)
April 30, 1997
<TABLE>
<CAPTION>
Keystone Blanchard Flexible Pro Forma
Strategic Income Income Adjustments Combined
-------------------------------------------------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Interest income (net of withholding taxes*) 18,829 14,319 $0 33,148
Other income 23 5 - 28
-------------------------------------------------- -------------
Total income 18,852 14,324 - 33,176
Expenses:
Advisory fee 1,397 1,378 (407) a 2,368
Administrative services fees 24 177 (157) a 44
Distribution fee 1,660 459 - 2,119
Transfer agent fee 549 472 30 b 1,051
Custodian fee 185 74 83 a 342
Professional fees 73 106 (85) c 94
Directors fees 34 4 24 d 62
Miscellaneous 51 163 (120) e 94
-------------------------------------------------------------------
Total Expenses 3,973 2,833 (632) 6,174
Less: Expenses paid indirectly (fee waivers) (63) (8) 8 f (63)
-------------------------------------------------------------------
Net expenses 3,910 2,825 (624) 6,111
-------------------------------------------------------------------
Net investment income 14,942 11,499 624 27,065
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments 3,898 1,302 - 5,200
Net change in unrealized appreciation
(depreciation) on investments (289) 1,639 - 1,350
-------------------------------------------------------------------
Net realized and unrealized loss on investments 3,609 2,941 - 6,550
-------------------------------------------------------------------
Net increase in net assets resulting from operations 18,551 14,440 624 33,615
===================================================================
</TABLE>
* Withholding taxes equalled $87, $2 and $88, respectively.
a Combined fund expense calculated as a % of net assets.
b Combined fund expense based on total accounts.
c Reflects elimination of acquired fund's audit, legal and accounting charges
d Reflects increased allocation of expense based on increased net assets.
e Reflects elimination of acquired fund's registration and printing costs and
reduction of other misc. expenses.
f Reflects elimination of expense waivers on acquired fund.
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Keystone Strategic Income Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
Schedule of Investments - April 30, 1997 (000's omitted)
<TABLE>
<CAPTION>
Keystone Blanchard Flexible
Strategic Fund Income Fund
--------------- ------------------
Maturity Market Market
Coupon Date Shares Value Shares Value
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIXED INCOME (93.4%)
COLLATERALIZED MORTGAGE OBLIGATIONS (0.0%) (Cost- $131)
Resolution Trust Corp. 10.50% 12/15/04 - - $133 $133
INDUSTRIAL BONDS & NOTES (33.3%)
Aerospace (1.1%)
Airplanes Pass Thru Trust 10.88% 3/15/19 500 553 - -
Sequa Corp. 8.75% 12/15/01 - - 1,700 1,683
UNC, Inc. 9.13% 7/15/03 - - 1,500 1,583
------------ ---------
553 3,266
Broadcasting (1.6%)
Ackerly Communications, Inc. 10.75% 10/1/03 775 814 - -
Echostar Satellite Broadcast Corp. (Eff. Yield 10.05%) (d) 0.00% 3/15/04 1,500 1,110 - -
K-III Communications Corp. (e) 8.50% 2/1/06 750 724 - -
Paxson Communications Corp. 11.63% 10/1/02 1,000 1,062 - -
SFX Broadcasting, Inc. (e) 10.75% 5/15/06 1,000 1,048 - -
Sinclair Broadcast Group, Inc. 10.00% 9/30/05 1,000 1,017 - -
------------ ---------
5,775 -
Cable/Other Video Distribution (2.4%)
Adelphia Communications Corp. (e) 9.88% 3/1/07 1,000 945 - -
Comcast Corp. 10.63% 7/15/12 500 555 - -
Diamond Cable Communications Co. (Eff. Yield 10.07%) (d) 0.00% 9/30/04 2,000 1,640 - -
Diamond Cable Communications Co. (Eff. Yield 10.48%) (d)(e) 0.00% 2/15/07 500 291 - -
Frontiervision 11.00% 10/15/06 250 250 - -
Fundy Cable Limited 11.00% 11/15/05 1,000 1,055 - -
Marcus Cable Operating Co. LP 13.50% 8/1/04 1,250 1,034 - -
Rogers Cablesystems Limited 10.13% 9/1/12 1,000 1,023 - -
Telewest Communications PLC (Eff. Yield 9.07%) (d) 0.00% 10/1/07 650 439 - -
Videotron Holdings PLC (Eff. Yield 11.00%) (d) 0.00% 8/15/05 2,000 1,620 - -
------------ ---------
8,852 -
Chemicals (1.6%)
Astor Corp. 10.50% 10/15/06 750 773 - -
Freedom Chemicals, Inc. 10.63% 10/15/06 750 778 - -
Kaiser Aluminum and Chemical Corp. 12.75% 2/1/03 1,000 1,085 - -
NL Industries, Inc. 11.75% 10/15/03 1,550 1,666 - -
Rexene Corp. 11.75% 12/1/04 675 746 - -
Texas Petrochemical Corp. 11.13% 7/1/06 500 520 - -
------------ ---------
5,568 -
Consumer (2.7%)
Consumers International, Inc. (e) 10.25% 4/1/05 500 515 - -
Exide Corp. 10.75% 12/15/02 1,000 1,025 - -
Fonda Group, Inc. (e) 9.50% 3/1/07 1,000 945 - -
Host Marriott Travel Plaza 9.50% 5/15/05 - - 1,000 1,025
International Semi-Tech Electronics, Inc. (Eff. Yield 11.98%) (d) 0.00% 8/15/03 1,025 554 - -
McLeod, Inc. (Eff. Yield 9.84%) (d) (e) 0.00% 3/1/07 1,250 713 - -
Revlon Consumer Products Corp. 10.88% 7/15/10 - - 1,600 1,646
Revlon Worldwide Corp. (Eff. Yield 10.75%) (d) (e) 0.00% 3/15/01 3,800 2,498 - -
Tracor, Inc. (e) 8.50% 3/1/07 1,000 980 - -
------------ ---------
7,230 2,671
Diversified Media (0.5%)
Cinemark USA, Inc. 9.63% 8/1/08 500 495 - -
Dawson Production Services, Inc. 9.38% 2/1/07 1,000 990 - -
Lifestyle Brands 10.00% 10/30/97 350 350 - -
------------ ---------
1,835 -
Energy (2.6%)
Clark USA, Inc. 10.88% 12/1/05 1,000 1,013 - -
Ferrellgas Partners Limited Partnership 9.38% 6/15/06 775 797 - -
HS Resources, Inc. 9.25% 11/15/06 1,250 1,220 - -
Maxus Energy Corp. 11.02% 5/15/01 - - 2,000 2,143
Nuevo Energy Co. 9.50% 4/15/06 1,000 1,020 - -
Parker Drilling Corp. (b) 9.75% 11/15/06 1,000 1,028 - -
Plains Resources, Inc. (e) 10.25% 3/15/06 500 520 - -
Triton Energy Corp. 9.75% 12/15/00 - - 1,000 1,073
Vintage Petroleum, Inc. 9.00% 12/15/05 500 496 - -
------------ ---------
6,094 3,216
Financial (1.8%)
Americo Life, Inc. 9.25% 6/1/05 - - 1,500 1,485
Navistar Financial Corp. 8.88% 11/15/98 - - 1,000 1,018
Presidential Life Corp. 9.50% 12/15/00 - - 1,500 1,538
Reliance Group Holdings, Inc. 9.00% 11/15/00 - - 1,250 1,281
Reliance Group Holdings, Inc. 9.75% 11/15/03 1,000 1,028 - -
------------ ---------
1,028 5,322
Foods/Tobacco/Beverages (1.1%)
Chiquita Brands International, Inc. 9.63% 1/15/04 500 510 - -
Iowa Select Farms (8/2/94-$2,243,310) (Eff. Yield 16.62%) (b) (d) 0.00% 2/15/04 4,336 2,880 - -
Ralphs Grocery Co. 11.00% 6/15/05 500 532 - -
------------ ---------
<CAPTION>
Pro Forma
Combined
-------------------------
Market
Adjustments Shares Value
----------------------------------------------
<S> <C> <C> <C>
FIXED INCOME (93.4%)
COLLATERALIZED MORTGAGE OBLIGATIONS (0.0%) (Cost- $131)
Resolution Trust Corp. $133 $133
INDUSTRIAL BONDS & NOTES (33.3%)
Aerospace (1.1%)
Airplanes Pass Thru Trust 500 553
Sequa Corp. 1,700 1,683
UNC, Inc. 1,500 1,583
-----------------
3,819
Broadcasting (1.6%)
Ackerly Communications, Inc. 775 814
Echostar Satellite Broadcast Corp. (Eff. Yield 10.05%) (d) 1,500 1,110
K-III Communications Corp. (e) 750 724
Paxson Communications Corp. 1,000 1,062
SFX Broadcasting, Inc. (e) 1,000 1,048
Sinclair Broadcast Group, Inc. 1,000 1,017
-----------------
5,775
Cable/Other Video Distribution (2.4%)
Adelphia Communications Corp. (e) 1,000 945
Comcast Corp. 500 555
Diamond Cable Communications Co. (Eff. Yield 10.07%) (d) 2,000 1,640
Diamond Cable Communications Co. (Eff. Yield 10.48%) (d)(e) 500 291
Frontiervision 250 250
Fundy Cable Limited 1,000 1,055
Marcus Cable Operating Co. LP 1,250 1,034
Rogers Cablesystems Limited 1,000 1,023
Telewest Communications PLC (Eff. Yield 9.07%) (d) 650 439
Videotron Holdings PLC (Eff. Yield 11.00%) (d) 2,000 1,620
-----------------
8,852
Chemicals (1.6%)
Astor Corp. 750 773
Freedom Chemicals, Inc. 750 778
Kaiser Aluminum and Chemical Corp. 1,000 1,085
NL Industries, Inc. 1,550 1,666
Rexene Corp. 675 746
Texas Petrochemical Corp. 500 520
-----------------
5,568
Consumer (2.7%)
Consumers International, Inc. (e) 500 515
Exide Corp. 1,000 1,025
Fonda Group, Inc. (e) 1,000 945
Host Marriott Travel Plaza 1,000 1,025
International Semi-Tech Electronics, Inc. (Eff. Yield 11.98%) (d) 1,025 554
McLeod, Inc. (Eff. Yield 9.84%) (d) (e) 1,250 713
Revlon Consumer Products Corp. 1,600 1,646
Revlon Worldwide Corp. (Eff. Yield 10.75%) (d) (e) 3,800 2,498
Tracor, Inc. (e) 1,000 980
-----------------
9,901
Diversified Media (0.5%)
Cinemark USA, Inc. 500 495
Dawson Production Services, Inc. 1,000 990
Lifestyle Brands 350 350
-----------------
1,835
Energy (2.6%)
Clark USA, Inc. 1,000 1,013
Ferrellgas Partners Limited Partnership 775 797
HS Resources, Inc. 1,250 1,220
Maxus Energy Corp. 2,000 2,143
Nuevo Energy Co. 1,000 1,020
Parker Drilling Corp. (b) 1,000 1,028
Plains Resources, Inc. (e) 500 520
Triton Energy Corp. 1,000 1,073
Vintage Petroleum, Inc. 500 496
-----------------
9,310
Financial (1.8%)
Americo Life, Inc. 1,500 1,485
Navistar Financial Corp. 1,000 1,018
Presidential Life Corp. 1,500 1,538
Reliance Group Holdings, Inc. 1,250 1,281
Reliance Group Holdings, Inc. 1,000 1,028
-----------------
6,350
Foods/Tobacco/Beverages (1.1%)
Chiquita Brands International, Inc. 500 510
Iowa Select Farms (8/2/94-$2,243,310) (Eff. Yield 16.62%) (b) (d) 4,336 2,880
Ralphs Grocery Co. 500 532
-----------------
</TABLE>
<PAGE>
Keystone Strategic Income Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
Schedule of Investments - April 30, 1997 (000's omitted)
<TABLE>
<CAPTION>
Keystone Blanchard Flexible
Strategic Fund Income Fund
------------------------ -----------------------
Maturity Market Market
Coupon Date Shares Value Shares Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3,922 -
Forest Products/Containers (1.8%)
Affiliated Newspaper Investments, Inc. (Eff. Yield 9.20%) (d) 0.00% 7/1/06 1,000 855 - -
Container Corp. of America 11.25% 5/1/04 1,000 1,070 - -
Four M Corp. (e) 12.00% 6/1/06 375 368 - -
Owens-Illinois, Inc. 10.50% 6/15/02 934 985 - -
Printpack, Inc. 10.63% 8/15/06 350 359 - -
Rainy River Forest Products, Inc. 10.75% 10/15/01 1,000 1,095 - -
Sea Containers Limited 12.50% 12/1/04 500 549 - -
Stone Container Corp. (e) 10.75% 10/1/02 1,000 1,005 - -
---------- --------------
6,286 -
Gaming (2.3%)
Casino America, Inc. 12.50% 8/1/03 1,000 1,008 -
Grand Palais Casino, Inc. (8/15/94- $2,488,391) (a) (b) (c) 18.25% 11/1/97 2,488 0 - -
Lodgenet Entertainment Corp. (b) (e) 10.25% 12/15/06 1,000 971 -
Magestic Star Casino LLC 12.75% 5/15/03 1,150 1,242 - -
Prime Hospitality Corp. (e) 9.75% 4/1/07 500 508 - -
Prime Hospitality Corp. 9.25% 1/15/06 500 509 - -
Showboat, Inc. 13.00% 8/1/09 1,000 1,130 - -
Starcraft Corp. (a) (b) (c) 16.50% 1/15/98 750 15 - -
Sun International Hotels Limited (e) 9.00% 3/15/07 1,000 990 - -
Sun World International, Inc. (e) 11.25% 4/15/04 1,000 1,030 - -
TCI Satellite Entertainment, Inc. (e) 10.88% 2/15/07 750 714 - -
TCI Satellite Entertainment, Inc. (e) 12.25% 2/15/07 250 131 - -
---------- --------------
8,248 -
Housing (0.3%)
Continental Homes Holding Corp. 10.00% 4/15/06 1,000 985 - -
---------- --------------
Industrial Services (0.8%)
ADT Operations 9.25% 8/1/03 - - 1,000 1,052
Bell & Howell Oper. Co. 9.25% 7/15/00 - - 1,000 1,015
EnviroSource, Inc. 9.75% 6/15/03 - - 1,000 958
---------- --------------
- 3,025
Oil Refining (0.6%)
PDV America 7.25% 8/1/98 - - 2,250 2,254
---------- --------------
Paper/Forest Products/Containers (2.9%)
Doman Industries, Ltd. 8.75% 3/15/04 - - 1,000 933
Fort Howard Corp. 9.00% 2/1/06 - - 1,250 1,272
Gaylord Container Corp. 11.50% 5/15/01 - - 1,000 1,045
Maxxam Group, Inc. 11.25% 8/1/03 - - 1,000 1,015
Owens-Illinois, Inc. 10.00% 8/1/02 - - 2,500 2,637
Repap New Brunswick, Inc. 9.88% 7/15/00 - - 1,000 1,000
Repap Wisconsin, Inc. 9.25% 2/1/02 - - 1,000 995
Stone Container Finance Corp. 11.50% 8/15/06 - - 2,000 1,840
---------- --------------
- 10,737
Real Estate Development (0.4%)
Granite Development Partners LP 10.83% 11/15/03 - - 1,500 1,470
---------- --------------
Retail (0.5%)
Cole National Group, Inc. 11.25% 10/1/01 800 872 - -
Finlay Fine Jewelry Corp. 10.63% 5/1/03 1,000 1,045 - -
---------- --------------
1,917 -
Services (0.6%)
HMH Properties, Inc. 9.50% 5/15/05 - - 1,000 1,025
Prime Hospitality Corp. (e) 9.75% 4/1/07 - - 1,000 1,025
---------- --------------
- 2,050
Steel (1.2%)
Armco, Inc. 9.38% 11/1/00 - - 1,500 1,519
Bethlehem Steel Corp. 10.38% 9/1/03 - - 1,000 1,042
Earle M. Jorgensen Co. 10.75% 3/1/00 - - 1,000 960
Northwestern Steel & Wire Co. 9.50% 6/15/01 - - 1,000 910
---------- --------------
- 4,431
Telecommunications (2.6%)
Cablevision Systems Corp. 10.75% 4/1/04 - - 1,000 1,036
Centennial Cellular Corp. 8.88% 11/1/01 - - 1,000 975
Dial Call Communications, Inc. (Eff. Yield 11.24%) (d) 0.00% 12/15/05 1,000 743 - -
Lenfest Communications, Inc. 8.38% 11/1/05 - - 1,000 956
Nextel Communications, Inc. (Eff. Yield 10.70%) (d) 0.00% 8/15/04 2,900 2,110 - -
Storer Communications, Inc. 10.00% 5/15/03 - - 1,000 1,010
Teleport Communications Group (Eff. Yield 8.97%) (d) 0.00% 7/1/07 1,000 687 - -
Teleport Communications Group 9.88% 7/1/06 525 547 1,000 1,050
---------- --------------
4,087 5,027
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Combined
----------------------------------------------
Market
Adjustments Shares Value
----------------------------------------------
<S> <C> <C> <C>
3,922
Forest Products/Containers (1.8%)
Affiliated Newspaper Investments, Inc. (Eff. Yield 9.20%) (d) 1,000 855
Container Corp. of America 1,000 1,070
Four M Corp. (e) 375 368
Owens-Illinois, Inc. 934 985
Printpack, Inc. 350 359
Rainy River Forest Products, Inc. 1,000 1,095
Sea Containers Limited 500 549
Stone Container Corp. (e) 1,000 1,005
-----------------
6,286
Gaming (2.3%)
Casino America, Inc. 1,000 1,008
Grand Palais Casino, Inc. (8/15/94- $2,488,391) (a) (b) (c) 2,488 0
Lodgenet Entertainment Corp. (b) (e) 1,000 971
Magestic Star Casino LLC 1,150 1,242
Prime Hospitality Corp. (e) 500 508
Prime Hospitality Corp. 500 509
Showboat, Inc. 1,000 1,130
Starcraft Corp. (a) (b) (c) 750 15
Sun International Hotels Limited (e) 1,000 990
Sun World International, Inc. (e) 1,000 1,030
TCI Satellite Entertainment, Inc. (e) 750 714
TCI Satellite Entertainment, Inc. (e) 250 131
-----------------
8,248
Housing (0.3%)
Continental Homes Holding Corp. 1,000 985
-----------------
Industrial Services (0.8%)
ADT Operations 1,000 1,052
Bell & Howell Oper. Co. 1,000 1,015
EnviroSource, Inc. 1,000 958
-----------------
3,025
Oil Refining (0.6%)
PDV America 2,250 2,254
-----------------
Paper/Forest Products/Containers (2.9%)
Doman Industries, Ltd. 1,000 933
Fort Howard Corp. 1,250 1,272
Gaylord Container Corp. 1,000 1,045
Maxxam Group, Inc. 1,000 1,015
Owens-Illinois, Inc. 2,500 2,637
Repap New Brunswick, Inc. 1,000 1,000
Repap Wisconsin, Inc. 1,000 995
Stone Container Finance Corp. 2,000 1,840
-----------------
10,737
Real Estate Development (0.4%)
Granite Development Partners LP 1,500 1,470
-----------------
Retail (0.5%)
Cole National Group, Inc. 800 872
Finlay Fine Jewelry Corp. 1,000 1,045
-----------------
1,917
Services (0.6%)
HMH Properties, Inc. 1,000 1,025
Prime Hospitality Corp. (e) 1,000 1,025
-----------------
2,050
Steel (1.2%)
Armco, Inc. 1,500 1,519
Bethlehem Steel Corp. 1,000 1,042
Earle M. Jorgensen Co. 1,000 960
Northwestern Steel & Wire Co. 1,000 910
-----------------
4,431
Telecommunications (2.6%)
Cablevision Systems Corp. 1,000 1,036
Centennial Cellular Corp. 1,000 975
Dial Call Communications, Inc. (Eff. Yield 11.24%) (d) 1,000 743
Lenfest Communications, Inc. 1,000 956
Nextel Communications, Inc. (Eff. Yield 10.70%) (d) 2,900 2,110
Storer Communications, Inc. 1,000 1,010
Teleport Communications Group (Eff. Yield 8.97%) (d) 1,000 687
Teleport Communications Group 1,525 1,597
-----------------
9,114
</TABLE>
<PAGE>
Keystone Strategic Income Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
Schedule of Investments - April 30, 1997 (000's omitted)
<TABLE>
<CAPTION>
Keystone Blanchard Flexible
Strategic Fund Income Fund
-----------------------------------------------------
Maturity Market Market
Coupon Date Shares Value Shares Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Transportation (1.9%)
Eletson Holdings, Inc. 9.25% 11/15/03 500 490 1,500 1,481
Piedmont Aviation, Inc. 9.90% 1/15/01 - - 852 866
Piedmont Aviation, Inc. 10.15% 3/28/03 - - 1,389 1,389
Sea Containers, Ltd. 9.50% 7/1/03 - - 1,500 1,511
USAir, Inc. 9.90% 1/15/01 - - 896 883
----------- -----------
490 6,130
Utilities-Electric (1.3%)
Cleveland Electric Illuminating Co. 9.50% 5/15/05 - - 1,000 1,069
CTC Mansfield Funding Corp. 10.25% 3/30/03 - - 1,478 1,530
Tuscon Electric Power Co. 10.21% 1/1/09 - - 2,219 2,196
----------- -----------
- 4,795
Wireless Communications (0.4%)
Rogers Cantel 9.38% 6/1/08 500 514 - -
Vanguard Cellular Systems, Inc. 9.38% 4/15/06 1,000 975 - -
----------- -----------
1,489 -
TOTAL INDUSTRIAL BONDS & NOTES (Cost-$120,071) 64,357 54,394
MORTGAGE-BACKED SECURITIES (26.6%)
CWMBS, Inc. 7.84% 11/1/26 1,998 1,953 - -
FHLMC Participation Certificate Pool #607352 7.68% 4/1/22 7,612 7,991 - -
FHLMC Participation Certificate Pool #E65399 7.00% 9/1/11 - - 60 59
FHLMC Participation Certificate Pool #E64769 7.00% 7/1/11 - - 715 710
FHLMC Participation Certificate Pool #E64891 7.00% 7/1/11 - - 276 273
FHLMC Participation Certificate Pool #E65184 7.00% 8/1/11 - - 1,547 1,535
FHLMC Participation Certificate Pool #E65186 7.00% 8/1/11 - - 467 463
FHLMC Participation Certificate Pool #E65450 7.00% 10/1/11 - - 468 464
FHLMC Participation Certificate Pool #E65454 7.00% 10/1/11 - - 311 309
FHLMC Participation Certificate Pool #E65490 7.00% 10/1/11 - - 2,248 2,231
FHLMC Participation Certificate Pool #E65468 7.00% 10/1/11 - - 166 165
FHLMC Participation Certificate Pool #E65503 7.00% 10/1/11 - - 2,921 2,899
FHLMC Participation Certificate Pool #E65597 7.00% 10/1/11 - - 320 317
FHLMC Participation Certificate Pool #E65645 7.00% 11/1/11 - - 247 245
FHLMC Participation Certificate Pool #E65660 7.00% 11/1/11 - - 655 650
FHLMC Participation Certificate Pool #E65717 7.00% 11/1/11 - - 334 331
FHLMC Participation Certificate Pool #E65690 7.00% 11/1/11 - - 826 819
FHLMC Participation Certificate Pool #E65702 7.00% 11/1/11 - - 1,601 1,589
FHLMC Participation Certificate Pool #E65703 7.00% 11/1/11 - - 974 966
FHLMC Participation Certificate Pool #E65712 7.00% 12/1/11 - - 1,947 1,932
FHLMC Participation Certificate Pool #E65750 7.00% 11/1/11 - - 424 421
FHLMC Participation Certificate Pool #E65723 7.00% 11/1/11 - - 1,056 1,048
FHLMC Participation Certificate Pool #E65759 7.00% 12/1/11 - - 35 35
FHLMC Participation Certificate Pool #G10524 7.00% 6/1/11 - - 33 32
FHLMC Participation Certificate Pool #G10556 7.00% 7/1/11 - - 625 620
FHLMC Participation Certificate Pool #G10590 7.00% 10/1/11 - - 309 307
FHLMC Participation Certificate Pool #E00434 7.00% 5/1/11 - - 37 37
FHLMC Participation Certificate Pool #E20217 7.00% 1/1/11 - - 1,744 1,731
FHLMC Participation Certificate Pool #E20271 7.00% 11/1/11 - - 3,785 3,756
FHLMC Participation Certificate Pool #846298 7.19% 8/1/22 2,626 2,720 - -
FNMA Grantor Trust 95-T5A 7.00% 3/17/35 1,171 1,127 - -
FNMA Pool #322356 7.00% 9/1/25 4,452 4,322 - -
FNMA Pool #324193 7.00% 9/1/25 5,886 5,715 - -
GNMA Pool #353016 8.00% 1/15/25 - - 454 462
GNMA Pool #354163 8.00% 8/15/26 - - 556 565
GNMA Pool #354714 6.50% 12/15/23 9,933 9,420 - -
GNMA Pool #361590 8.00% 7/15/24 - - 162 165
GNMA Pool #361942 8.00% 5/15/25 - - 259 263
GNMA Pool #365136 8.00% 9/15/24 - - 46 47
GNMA Pool #369463 8.00% 1/15/25 - - 470 478
GNMA Pool #369485 8.00% 9/15/24 - - 873 889
GNMA Pool #370587 8.00% 9/15/25 - - 555 564
GNMA Pool #372365 8.00% 7/15/26 - - 875 889
GNMA Pool #375080 8.00% 4/15/25 - - 194 197
GNMA Pool #375189 8.00% 2/15/24 - - 52 53
GNMA Pool #376175 8.00% 2/15/25 - - 240 244
GNMA Pool #376198 8.00% 5/15/25 - - 71 72
GNMA Pool #377404 8.00% 1/15/25 - - 59 60
GNMA Pool #377608 8.00% 8/15/25 - - 382 388
GNMA Pool #379597 8.00% 5/15/25 - - 554 563
GNMA Pool #380634 8.00% 10/15/24 - - 29 30
GNMA Pool #382067 8.00% 5/15/25 - - 52 53
GNMA Pool #384598 8.00% 4/15/25 - - 438 445
GNMA Pool #384600 8.00% 5/15/25 - - 827 841
GNMA Pool #384694 8.00% 8/15/25 - - 556 566
GNMA Pool #385904 8.00% 9/15/24 - - 723 735
GNMA Pool #386613 8.00% 11/15/24 - - 377 383
GNMA Pool #386721 8.00% 4/15/25 - - 732 744
GNMA Pool #388751 8.00% 6/15/24 - - 101 103
GNMA Pool #388757 8.00% 9/15/24 - - 203 207
GNMA Pool #389603 8.00% 9/15/24 - - 802 816
GNMA Pool #390602 8.00% 9/15/24 - - 750 764
GNMA Pool #390343 8.00% 4/15/25 - - 597 607
GNMA Pool #392003 8.00% 9/15/24 - - 82 83
GNMA Pool #392233 8.00% 5/15/24 - - 48 49
GNMA Pool #392550 8.00% 9/15/24 - - 36 37
GNMA Pool #393260 8.00% 4/15/25 - - 724 736
GNMA Pool #393769 8.00% 5/15/25 - - 109 111
<CAPTION>
Pro Forma
Combined
---------------------------
Market
Adjustments Shares Value
---------------------------------------------
<S> <C> <C> <C>
Transportation (1.9%)
Eletson Holdings, Inc. 2,000 1,971
Piedmont Aviation, Inc. 852 866
Piedmont Aviation, Inc. 1,389 1,389
Sea Containers, Ltd. 1,500 1,511
USAir, Inc. 896 883
-------------
6,620
Utilities-Electric (1.3%)
Cleveland Electric Illuminating Co. 1,000 1,069
CTC Mansfield Funding Corp. 1,478 1,530
Tuscon Electric Power Co. 2,219 2,196
-------------
4,795
Wireless Communications (0.4%)
Rogers Cantel 500 514
Vanguard Cellular Systems, Inc. 1,000 975
-------------
1,489
TOTAL INDUSTRIAL BONDS & NOTES (Cost-$120,071) 118,751
MORTGAGE-BACKED SECURITIES (26.6%)
CWMBS, Inc. 1,998 1,953
FHLMC Participation Certificate Pool #607352 7,612 7,991
FHLMC Participation Certificate Pool #E65399 60 59
FHLMC Participation Certificate Pool #E64769 715 710
FHLMC Participation Certificate Pool #E64891 276 273
FHLMC Participation Certificate Pool #E65184 1,547 1,535
FHLMC Participation Certificate Pool #E65186 467 463
FHLMC Participation Certificate Pool #E65450 468 464
FHLMC Participation Certificate Pool #E65454 311 309
FHLMC Participation Certificate Pool #E65490 2,248 2,231
FHLMC Participation Certificate Pool #E65468 166 165
FHLMC Participation Certificate Pool #E65503 2,921 2,899
FHLMC Participation Certificate Pool #E65597 320 317
FHLMC Participation Certificate Pool #E65645 247 245
FHLMC Participation Certificate Pool #E65660 655 650
FHLMC Participation Certificate Pool #E65717 334 331
FHLMC Participation Certificate Pool #E65690 826 819
FHLMC Participation Certificate Pool #E65702 1,601 1,589
FHLMC Participation Certificate Pool #E65703 974 966
FHLMC Participation Certificate Pool #E65712 1,947 1,932
FHLMC Participation Certificate Pool #E65750 424 421
FHLMC Participation Certificate Pool #E65723 1,056 1,048
FHLMC Participation Certificate Pool #E65759 35 35
FHLMC Participation Certificate Pool #G10524 33 32
FHLMC Participation Certificate Pool #G10556 625 620
FHLMC Participation Certificate Pool #G10590 309 307
FHLMC Participation Certificate Pool #E00434 37 37
FHLMC Participation Certificate Pool #E20217 1,744 1,731
FHLMC Participation Certificate Pool #E20271 3,785 3,756
FHLMC Participation Certificate Pool #846298 2,626 2,720
FNMA Grantor Trust 95-T5A 1,171 1,127
FNMA Pool #322356 4,452 4,322
FNMA Pool #324193 5,886 5,715
GNMA Pool #353016 454 462
GNMA Pool #354163 556 565
GNMA Pool #354714 9,933 9,420
GNMA Pool #361590 162 165
GNMA Pool #361942 259 263
GNMA Pool #365136 46 47
GNMA Pool #369463 470 478
GNMA Pool #369485 873 889
GNMA Pool #370587 555 564
GNMA Pool #372365 875 889
GNMA Pool #375080 194 197
GNMA Pool #375189 52 53
GNMA Pool #376175 240 244
GNMA Pool #376198 71 72
GNMA Pool #377404 59 60
GNMA Pool #377608 382 388
GNMA Pool #379597 554 563
GNMA Pool #380634 29 30
GNMA Pool #382067 52 53
GNMA Pool #384598 438 445
GNMA Pool #384600 827 841
GNMA Pool #384694 556 566
GNMA Pool #385904 723 735
GNMA Pool #386613 377 383
GNMA Pool #386721 732 744
GNMA Pool #388751 101 103
GNMA Pool #388757 203 207
GNMA Pool #389603 802 816
GNMA Pool #390602 750 764
GNMA Pool #390343 597 607
GNMA Pool #392003 82 83
GNMA Pool #392233 48 49
GNMA Pool #392550 36 37
GNMA Pool #393260 724 736
GNMA Pool #393769 109 111
</TABLE>
<PAGE>
Keystone Strategic Income Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
Schedule of Investments - April 30, 1997 (000's omitted)
<TABLE>
<CAPTION>
Keystone Blanchard Flexible
Strategic Fund Income Fund
------------------------------------------
Maturity Market Market
Coupon Date Shares Value Shares Value
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GNMA Pool #394649 8.00% 8/15/24 - - 203 207
GNMA Pool #395262 8.00% 8/15/24 - - 214 217
GNMA Pool #396925 8.00% 7/15/25 - - 782 795
GNMA Pool #398734 8.00% 6/15/26 - - 285 289
GNMA Pool #398746 8.00% 6/15/26 - - 33 34
GNMA Pool #398502 8.00% 3/15/26 - - 354 360
GNMA Pool #398646 8.00% 5/15/26 - - 500 508
GNMA Pool #398807 8.00% 7/15/26 - - 723 735
GNMA Pool #399971 8.00% 6/15/26 - - 616 626
GNMA Pool #400737 8.00% 5/15/24 - - 220 224
GNMA Pool #401191 8.00% 11/15/24 - - 655 668
GNMA Pool #401819 8.00% 4/15/25 - - 134 136
GNMA Pool #402263 8.00% 12/15/24 - - 568 578
GNMA Pool #402680 8.00% 5/15/26 - - 631 642
GNMA Pool #404080 8.00% 4/15/25 - - 54 54
GNMA Pool #403582 8.00% 1/15/25 - - 45 46
GNMA Pool #403965 8.00% 9/15/24 - - 807 823
GNMA Pool #405873 8.00% 5/15/25 - - 380 386
GNMA Pool #405937 8.00% 7/15/25 - - 151 153
GNMA Pool #405449 8.00% 4/15/25 - - 372 378
GNMA Pool #406638 8.00% 5/15/25 - - 97 98
GNMA Pool #408449 8.00% 5/15/25 - - 185 188
GNMA Pool #409740 8.00% 5/15/25 - - 146 148
GNMA Pool #410214 8.00% 12/15/25 - - 28 28
GNMA Pool #410284 8.00% 9/15/25 - - 555 564
GNMA Pool #410554 8.00% 12/15/25 - - 350 355
GNMA Pool #410858 8.00% 12/15/25 - - 31 32
GNMA Pool #413170 8.00% 10/15/25 - - 410 416
GNMA Pool #412618 8.00% 6/15/26 - - 790 804
GNMA Pool #414080 8.00% 8/15/25 - - 368 374
GNMA Pool #413535 8.00% 10/15/25 - - 337 343
GNMA Pool #413553 8.00% 11/15/25 - - 86 88
GNMA Pool #415464 8.00% 7/15/25 - - 223 227
GNMA Pool #418481 8.00% 9/15/25 - - 378 384
GNMA Pool #423964 8.00% 7/15/26 - - 915 930
GNMA Pool #424694 8.00% 12/15/25 - - 888 904
GNMA Pool #425651 8.00% 6/15/26 - - 627 637
GNMA Pool #435289 8.00% 7/15/26 - - 741 754
GNMA Pool #193576 8.00% 7/15/26 - - 648 660
GNMA Pool #326542 8.00% 5/15/22 - - 41 42
GNMA Pool #334760 8.00% 8/15/25 - - 29 29
GNMA Pool #338684 8.00% 7/15/24 - - 37 38
GNMA Pool #780195 8.00% 7/15/25 - - 41 42
GNMA Pool #780249 8.00% 9/15/25 - - 122 124
GNMA Pool #780247 8.00% 9/15/25 - - 833 848
GNMA Pool #780163 6.50% 7/15/09 7,944 7,771 - -
----------- ----------
41,019 54,069
TOTAL MORTGAGE-BACKED SECURITIES (Cost $95,345) 41,019 54,069
FOREIGN BONDS (U. S. DOLLARS) (9.4%)
Argentina Republic 11.38% 1/30/17 1,500 1,595 - -
Argentina Global 11.00% 10/9/06 2,500 2,691 - -
Brazil (Federal Republic of) 8.00% 4/15/14 8,150 6,184 - -
Comtel Brasileira (e) 10.75% 9/26/04 5,500 5,692 - -
Grupo Industrial Durango S.A. 12.00% 7/15/01 2,500 2,675 - -
Grupo Industrial Durango S.A. 12.63% 8/1/03 400 431 - -
Grupo Televisa S.A. (e) 11.88% 5/15/06 2,900 3,089 - -
Indah Kiat International Finance Co. 11.88% 6/15/02 3,000 3,210 - -
Intermedia Capital Partners (e) 11.25% 8/1/06 500 514 - -
Ispat Mexicana S. A. 10.38% 3/15/01 750 765 - -
Klabin Fabricadora Papel 10.00% 12/20/01 5,000 5,024 - -
Rogers Cablesystems, Ltd. 9.65% 1/15/14 - - 2,000 1,392
TV Azteca SA DE CV (e) 10.50% 2/15/07 425 418 -
----------- ----------
32,288 1,392
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost-$33,211) 32,288 1,392
FOREIGN BONDS (NON U. S. DOLLARS) (5.2%)
Canada Government 8.75% 12/1/05 CD 8,250 6,743 - -
Denmark (Kingdom of) 8.00% 5/12/03 DK35,500 5,975 - -
Germany (Federal Republic of) 6.88% 5/12/05 DM 9,400 5,863 - -
----------- ----------
18,581 -
TOTAL FOREIGN BONDS (NON U. S. DOLLARS) (Cost- $20,140) 18,581 -
U. S. TREASURY OBLIGATIONS (19.1%)
U.S. Treasury Bills 0.00% 3/5/98 5,900 5,623 - -
U.S. Treasury Bonds 7.88% 2/15/21 7,723 8,442 - -
U.S. Treasury Bonds 6.50% 11/15/26 4,180 3,926 - -
U.S. Treasury Notes 6.25% 3/31/99 2,500 2,500 - -
U.S. Treasury Notes 6.13% 12/31/01 1,250 1,228 - -
U.S. Treasury Bond 7.25% 5/15/04 - - 20,000 20,625
U.S. Treasury Notes 7.00% 7/15/06 - - 25,000 25,414
----------- ----------
21,719 46,039
TOTAL U. S. TREASURY OBLIGATIONS (Cost-$67,816) 21,719 46,039
TOTAL FIXED INCOME (Cost-$336,714) 177,964 156,027
Shares Shares
---------- ----------
COMMON STOCKS/WARRANTS (0.3%)
Casino America, Inc. (a) 105 222 - -
Casino America, Inc., wts. (a) 20 - - -
Colorado Gaming and Entertainment Co.(a) 170 766 - -
Grand Palais Casinos, Inc., Series A, wts.(8/15/94-$727) (a) (b) 73 - - -
<CAPTION>
Pro Forma
Combined
----------------------
Market
Adjustments Shares Value
-------------------------------------------
<S> <C> <C> <C>
GNMA Pool #394649 203 207
GNMA Pool #395262 214 217
GNMA Pool #396925 782 795
GNMA Pool #398734 285 289
GNMA Pool #398746 33 34
GNMA Pool #398502 354 360
GNMA Pool #398646 500 508
GNMA Pool #398807 723 735
GNMA Pool #399971 616 626
GNMA Pool #400737 220 224
GNMA Pool #401191 655 668
GNMA Pool #401819 134 136
GNMA Pool #402263 568 578
GNMA Pool #402680 631 642
GNMA Pool #404080 54 54
GNMA Pool #403582 45 46
GNMA Pool #403965 807 823
GNMA Pool #405873 380 386
GNMA Pool #405937 151 153
GNMA Pool #405449 372 378
GNMA Pool #406638 97 98
GNMA Pool #408449 185 188
GNMA Pool #409740 146 148
GNMA Pool #410214 28 28
GNMA Pool #410284 555 564
GNMA Pool #410554 350 355
GNMA Pool #410858 31 32
GNMA Pool #413170 410 416
GNMA Pool #412618 790 804
GNMA Pool #414080 368 374
GNMA Pool #413535 337 343
GNMA Pool #413553 86 88
GNMA Pool #415464 223 227
GNMA Pool #418481 378 384
GNMA Pool #423964 915 930
GNMA Pool #424694 888 904
GNMA Pool #425651 627 637
GNMA Pool #435289 741 754
GNMA Pool #193576 648 660
GNMA Pool #326542 41 42
GNMA Pool #334760 29 29
GNMA Pool #338684 37 38
GNMA Pool #780195 41 42
GNMA Pool #780249 122 124
GNMA Pool #780247 833 848
GNMA Pool #780163 7,944 7,771
-------------
95,088
TOTAL MORTGAGE-BACKED SECURITIES (Cost $95,345) 95,088
FOREIGN BONDS (U. S. DOLLARS) (9.4%)
Argentina Republic 1,500 1,595
Argentina Global 2,500 2,691
Brazil (Federal Republic of) 8,150 6,184
Comtel Brasileira (e) 5,500 5,692
Grupo Industrial Durango S.A. 2,500 2,675
Grupo Industrial Durango S.A. 400 431
Grupo Televisa S.A. (e) 2,900 3,089
Indah Kiat International Finance Co. 3,000 3,210
Intermedia Capital Partners (e) 500 514
Ispat Mexicana S. A. 750 765
Klabin Fabricadora Papel 5,000 5,024
Rogers Cablesystems, Ltd. 2,000 1,392
TV Azteca SA DE CV (e) 425 418
-------------
33,680
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost-$33,211) 33,680
FOREIGN BONDS (NON U. S. DOLLARS) (5.2%)
Canada Government CD 8,250 6,743
Denmark (Kingdom of) DK 35,500 5,975
Germany (Federal Republic of) DM 9,400 5,863
-------------
18,581
TOTAL FOREIGN BONDS (NON U. S. DOLLARS) (Cost- $20,140) 18,581
U. S. TREASURY OBLIGATIONS (19.1%)
U.S. Treasury Bills 5,900 5,623
U.S. Treasury Bonds 7,723 8,442
U.S. Treasury Bonds 4,180 3,926
U.S. Treasury Notes 2,500 2,500
U.S. Treasury Notes 1,250 1,228
U.S. Treasury Bond 20,000 20,625
U.S. Treasury Notes 25,000 25,414
-------------
67,758
TOTAL U. S. TREASURY OBLIGATIONS (Cost-$67,816) 67,758
TOTAL FIXED INCOME (Cost-$336,714) 333,991
Shares
--------------
COMMON STOCKS/WARRANTS (0.3%)
Casino America, Inc. (a) 105 222
Casino America, Inc., wts. (a) 20 -
Colorado Gaming and Entertainment Co.(a) 170 766
Grand Palais Casinos, Inc., Series A, wts.(8/15/94-$727) (a) (b) 73 -
</TABLE>
<PAGE>
Keystone Strategic Income Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
Schedule of Investments - April 30, 1997 (000's omitted)
<TABLE>
<CAPTION>
Keystone
Strategic Fund
-----------------------------
Maturity Market
Coupon Date Shares Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Grand Palais Casinos, Inc., Series B, wts.(8/15/94-$397)(a)(b) 40 -
Grand Palais Casinos, Inc., Series C, wts.(8/15/94-$3,507)(a)(b) 351 -
Grand Palais Casinos, Inc., Series D, wts.(8/15/94-$-0-)(a)(b) 160 -
Grand Palais Casinos, Inc., wts.(8/15/94-$57)(a)(b) 87 -
Iowa Select Farms, wts. (2/4/94-$955,122)(a)(b) 118 118
Nextel Communications Inc., wts.(a) 5 -
-----------
1,106
TOTAL COMMON STOCKS/WARRANTS (Cost-$3,034) 1,106
PREFERRED STOCK (0.3%)(Cost-$2,106)
Ampex Corp.(a)(b)(c) 2 1,164
<CAPTION>
Shares
---------------
<S> <C> <C> <C> <C>
SHORT-TERM U.S. GOVERNMENT AGENCY OBLIGATION (1.2%)(Cost - $4,170)
Federal Home Loan Bank 5.28% 5/1/97 $4,170 4,170
REPURCHASE AGREEMENTS (2.2%)
CS First Boston, Inc. Repurchase Agreement (maturity value $5,764) 5.35% 5/1/97 - -
Keystone Joint Repurchase Agreement (Investments in repurchase
agreements, in a joint trading account, dated 4/30/97, maturity 5.50% 5/1/97 2,151 2,151
--------------
value $2,151) (f) 2,151
TOTAL REPURCHASE AGREEMENTS (Cost- $7,914) 2,151
TOTAL INVESTMENTS (Cost-$353,938)(97.6%) 186,555
OTHER ASSETS AND LIABILITIES-NET (2.4%) 6,555
NET ASSETS (100.0%) 193,110
<CAPTION>
Blanchard Flexible Pro Forma
Income Fund Combined
---------------------------- -----------------
Market Market
Shares Value Adjustments Shares Value
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Grand Palais Casinos, Inc., Series B, wts.(8/15/94-$397)(a)(b) - - 40 -
Grand Palais Casinos, Inc., Series C, wts.(8/15/94-$3,507)(a)(b) - - 351 -
Grand Palais Casinos, Inc., Series D, wts.(8/15/94-$-0-)(a)(b) - - 160 -
Grand Palais Casinos, Inc., wts.(8/15/94-$57)(a)(b) - - 87 -
Iowa Select Farms, wts. (2/4/94-$955,122)(a)(b) - - 118 118
Nextel Communications Inc., wts.(a) - - 5 -
------- --------
- 1,106
TOTAL COMMON STOCKS/WARRANTS (Cost-$3,034) - 1,106
PREFERRED STOCK (0.3%)(Cost-$2,106)
Ampex Corp.(a)(b)(c) - - 2 1,164
<CAPTION>
Shares Shares
-------------- ----------
<S> <C> <C> <C> <C>
SHORT-TERM U.S. GOVERNMENT AGENCY OBLIGATION (1.2%)(Cost - $4,170)
Federal Home Loan Bank $0 - $4,170 4,170
REPURCHASE AGREEMENTS (2.2%)
CS First Boston, Inc. Repurchase Agreement (maturity value $5,764) 5,763 5,763 5,763 5,763
Keystone Joint Repurchase Agreement (Investments in repurchase
agreements, in a joint trading account, dated 4/30/97, maturity - - 2,151 2,151
--------- --------
value $2,151) (f) 5,763 7,914
TOTAL REPURCHASE AGREEMENTS (Cost- $7,914) 5,763 7,914
TOTAL INVESTMENTS (Cost-$353,938)(97.6%) 161,790 348,345
OTHER ASSETS AND LIABILITIES-NET (2.4%) 1,949 8,504
NET ASSETS (100.0%) 163,739 356,849
</TABLE>
<PAGE>
Keystone Strategic Income Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
Schedule of Investments - April 30, 1997 (000's omitted)
(a) Non-income producing.
(b) All or a portion of these securities are either (1) restricted securities
(i.e., securities which may not be publicly sold without registration under
the Federal Securities Act of 1933) or (2) illiquid securities, and are
valued using market quotations where readily available. In the absence of
market quotations, the securities are valued based upon their fair value
determined under procedures approved by the Board of Trustees. The Fund may
make investments in an amount up to 15% of the value of the Fund's net
assets in such securities. The date of acquisition and cost are set forth
in parentheses after the description of each restricted security. On the
date of acquisition there were no market quotations on similar securities
and the securities were valued at acquisition cost. At April 30, 1997, the
fair value of these restricted securities was $2,998,243 (0.84% of the
Fund's net assets).
(c) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on these securities. At April 30,
1997, the face value of these securities was $1,179,265 (0.33% of the
Fund's net assets).
(d) Effective yield (calculated at the date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
(e) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
(f) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at April 30, 1997.
Legend of Portfolio Abbreviations:
CWMBS-Countrywide Mortgage Backed Securities
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA Government National Mortgage Association
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
Exchange U.S. $ Value at In Exchange Net Unrealized
Date April 30, 1997 for U.S. $ Appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
Forward Foreign Currency
Exchange Contracts to Sell:
Contracts to Dollar
----------------------------
STRATEGIC INCOME FUND
<S> <C> <C> <C> <C>
5/27/97 6,619 Canadian Dollar 4,743 4,747 4
7/11/97 10,089 Deutsche Mark 5,856 5,879 23
7/11/97 39,139 Danish Krone 5,963 5,982 19
-----------
46
BLANCHARD FLEXIBLE FIXED INCOME
9/25/97 2,040 Canadian Dollar 1,474 1,496 22
-----------
COMBINED TOTAL 68
===========
</TABLE>
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Keystone Strategic Income Fund
Notes to Pro Forma Combining Financial Statements (Unaudited)
April 30, 1997
1. Basis of Combination - The Pro Forma Combining Statement of Assets and
Liabilities, including the Pro Forma Schedule of Investments, and the related
Pro Forma Combining Statement of Operations ("Pro Forma Statements") reflect the
accounts of Keystone Strategic Income Fund (SIF) and Blanchard Flexible Income
Fund (BFIF) at April 30, 1997 and for the year then ended.
The Pro Forma Statements give effect to the proposed Agreement and Plan of
Reorganization (the "Reorganization") to be submitted to shareholders of BFIF.
The Reorganization provides for the acquisition of all assets and liabilities of
BFIF by SIF,in exchange for Class A shares of SIF. Thereafter, there will be a
distribution of Class A shares of SIF to shareholders of BFIF in liquidation and
subsequent termination thereof. As a result of the Reorganization, the
shareholders of BFIF will become the owners of that number of full and
fractional Class A shares of SIF having an aggregate net asset value equal to
the aggregate net asset value of their shares of BFIF as of the close of
business immediately prior to the date that BFIF assets are exchanged for Class
A shares of SIF.
The Pro Forma Statements reflect the expenses of each Fund in carrying out its
obligations under the Reorganization as though the merger occurred at the
beginning of the period presented.
The information contained herein is based on the experience of each Fund for the
period ended April 30, 1997 and is designed to permit shareholders of the
consolidating mutual funds to evaluate the financial effect of the proposed
Reorganization. The expenses of BFIF in connection with the Reorganization
(including the cost of any proxy soliciting agents) will be borne by First Union
National Bank of North Carolina. It is not anticipated that the securities of
the combined portfolio will be sold in significant amounts in order to comply
with the policies and investment practices of SIF.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of each Fund incorporated by reference in the Statement of
Additional Information.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assume the issuance of Class A shares of SIF which would have been issued at
April 30, 1997 in connection with the proposed Reorganization. Shareholders of
BFIF would receive Class A shares of SIF based on a conversion ratio determined
on April 30, 1997. The conversion ratio is calculated by dividing the net asset
value of BFIF by the net asset value per share of the Class A shares of SIF.
3. Pro Forma Operations - The Pro Forma Combining Statement of Operations
assumes similar rates of gross investment income for the investments of each
Fund. Accordingly, the combined gross investment income is equal to the sum of
the Funds' gross investment income. Pro Forma operating expenses include the
actual expenses of the Funds adjusted to reflect the expected expenses of the
combined entity. The investment advisory and distribution fees have been
charged to the combined Fund based on the fee schedule in effect for SIF at the
combined level of average net assets for the year ended April 30, 1997.
<PAGE>
EVERGREEN FIXED INCOME TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust. Incorporated by reference to
Evergreen Fixed Income Trust's Registration Statement on Form N-
1A filed on October 8, 1997 - Registration No. 333-37433 ("Form
N-1A Registration Statement").
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit A to Prospectus contained in
Part A of this Registration Statement.
5. Declaration of Trust of Evergreen Fixed Income Trust Articles II.,
III.(6)(c), IV.(3), IV.(8), V., VI., VII. and VIII.
and By-Laws Articles II., III and VIII.
6(a). Form of Investment Advisory Agreement between Keystone Investment
Management Company and Evergreen Fixed Income Trust. Incorporated by reference
to the Form N-1A Registration Statement.
6(b). Form of Interim Management Contract. Exhibit B to
Prospectus contained in Part A of this Registration Statement.
6(c). Form of Interim Sub-Advisory Agreement. Exhibit C to
Prospectus contained in Part A of this Registration Statement.
7(a). Principal Underwriting Agreement between Evergreen Distributor, Inc. and
Evergreen Fixed Income Trust. Incorporated by reference to the Form N-1A
Registration Statement.
7(b). Form of Dealer Agreement for Class A, Class B and Class C shares used by
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
<PAGE>
8. Deferred Compensation Plan. Incorporated by reference to the Form N-1A
Registration Statement.
9. Custody Agreement between State Street Bank and Trust Company and Evergreen
Fixed Income Trust. Incorporated by reference to the Form N-1A Registration
Statement.
10(a). Rule 12b-1 Distribution Plan. Incorporated by reference to the Form N-1A
Registration Statement.
10(b). Multiple Class Plan. Incorporated by reference to the
Form N-1A Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. Filed herewith.
13. Not applicable.
14(a). Consent of KPMG Peat Marwick LLP. Filed herewith.
14(b). Consent of Deloitte & Touche LLP. Filed herewith.
15. Not applicable.
16. Powers of Attorney. Previously filed.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that
is filed under paragraph (1) above will be filed as a part of an amendment to
the Registration Statement and will not be used until the amendment is
effective, and that, in
<PAGE>
determining any liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new Registration Statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post- Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of New York and State of New York, on the 22nd day of
December, 1997.
EVERGREEN FIXED INCOME TRUST
By: /s/ William J. Tomko
-----------------------
Name: William J. Tomko
Title: President
As required by the Securities Act of 1933, the following persons
have signed this Post-Effective Amendment No. 1 to the Registration Statement in
the capacities indicated on the 22nd day of December, 1997.
Signatures Title
- ---------- -----
/s/William J. Tomko President and
- ------------------- Treasurer
William J. Tomko
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
<PAGE>
Gerald M. McDonnell
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
12 Tax Opinion and Consent of Sullivan & Worcester LLP
14(a) Consent of KPMG Peat Marwick LLP
14(b) Consent of Deloitte & Touche LLP
17 Form of Proxy
- --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
December 23, 1997
Evergreen Fixed Income Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Fixed Income Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 17, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Evergreen Strategic Income Fund (the "Acquiring Fund"), a series of the Trust.
We understand that the Trust is about to file Post- Effective Amendment No. 1 to
its Registration Statement on Form N-14 (Registration No. 333-39871) for the
purpose of registering shares of the Acquiring Fund under the Securities Act of
1933, as amended (the "1933 Act"), in connection with the proposed acquisition
by the Acquiring Fund of all of the assets of Blanchard Flexible Income Fund
(the "Acquired Fund"), a series of a Massachusetts business trust with
transferable shares, in exchange solely for shares of the Acquiring Fund and the
assumption by the Acquiring Fund of certain identified liabilities of the
Acquired Fund pursuant to an Agreement and Plan of Reorganization, the form of
which is included in the Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and
the District of Columbia and generally do not purport to be familiar with the
laws of the State of Delaware.
<PAGE>
To the extent that the conclusions based on the laws of the State of Delaware
are involved in the opinion set forth herein below, we have relied, in rendering
such opinions, upon our examination of Chapter 38 of Title 12 of the Delaware
Code Annotated, as amended, entitled "Treatment of Delaware Business Trusts"
(the "Delaware business trust law") and on our knowlege of interpretation of
analogous common law of The Commonwealth of Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on February 20, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
December 22, 1997
Blanchard Flexible Income Fund
Evergreen Strategic Income Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of Blanchard Flexible
Income Fund by Evergreen Strategic Income Fund
Ladies and Gentlemen:
You have asked for our opinion as to certain Federal income tax
consequences of the transactions described below:
Parties to the Transaction. Blanchard Flexible Income Fund
("Target Fund") is a series of Blanchard Funds, a Massachusetts
business trust.
Evergreen Strategic Income Fund ("Acquiring Fund") is a
series of Evergreen Fixed Income Trust, a Delaware business
trust.
Description of Proposed Transaction. Acquiring Fund will issue its
shares to Target Fund and assume certain stated liabilities of Target Fund, in
exchange for all of the assets of Target Fund. Target Fund will then immediately
dissolve and distribute all of the Acquiring Fund shares which it holds to its
shareholders pro rata in proportion to their shareholdings in Target Fund, in
complete redemption of all outstanding shares of Target Fund.
Scope of Review and Assumptions. In rendering our opinion, we have
reviewed and relied upon the form of Agreement and Plan of Reorganization (the
"Reorganization Agreement") between Acquiring Fund and Target Fund dated as of
November 26, 1997 which is enclosed in a draft prospectus/proxy statement to be
dated January 5, 1998 which describes the proposed transaction, and on the
information provided in such prospectus/proxy statement. We have relied, without
independent verification, upon the factual statements made therein, and assume
that there will be no change in material facts disclosed therein between the
date of this letter and the date of the closing of the
<PAGE>
transaction. We further assume that the transaction will be carried out in
accordance with the Reorganization Agreement.
Representations. Written representations, copies of which are attached
hereto, have been made to us by the appropriate officers of Target Fund and of
Acquiring Fund, and we have without independent verification relied upon such
representations in rendering our opinions.
Opinions
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, we have the following opinions:
1. The acquisition by Acquiring Fund of all of the assets of Target
Fund solely in exchange for voting shares of Acquiring Fund and assumption of
certain specified liabilities of Target Fund followed by the distribution by
Target Fund of said Acquiring Fund shares to the shareholders of Target Fund in
exchange for their Target Fund shares will constitute a reorganization within
the meaning of ss. 368(a)(1)(C) of the Code, and Acquiring Fund and Target Fund
will each be "a party to a reorganization" within the meaning of ss. 368(b) of
the Code.
2. No gain or loss will be recognized to Target Fund upon the transfer
of all of its assets to Acquiring Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of certain specified liabilities
of Target Fund, or upon the distribution of such Acquiring Fund voting shares to
the shareholders of Target Fund in exchange for all of their Target Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of any liabilities of Target
Fund.
4. The basis of the assets of Target Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund
immediately prior to the transfer, and the holding period of the assets of
Target Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Target Fund.
5. The shareholders of Target Fund will recognize no gain or loss upon
the exchange of all of their Target Fund shares solely for Acquiring Fund voting
shares.
<PAGE>
6. The basis of the Acquiring Fund voting shares to be received by the
Target Fund shareholders will be the same as the basis of the Target Fund shares
surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Target Fund shareholders will include the period during which
the Target Fund shares surrendered in exchange therefor were held, provided the
Target Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in such
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Fixed Income Trust
We consent to the use of our report dated May 30, 1997 for Evergreen Strategic
Income Fund (formerly Keystone Strategic Income Fund) incorporated by reference
herein and to the reference to our firm under the caption "FINANCIAL STATEMENTS
AND EXPERTS" in the prospectus/proxy statement.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
December 22, 1997
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Evergreen Fixed Income Trust on Form N-14 of our report on Blanchard Flexible
Income Fund dated November 7, 1997, appearing in the Annual Report of The
Blanchard Funds for the year ended September 30, 1997, and to the reference to
us under the heading "Financial Statements and Experts" in the Prospectus/Proxy
Statement, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 22, 1997
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
BLANCHARD FLEXIBLE INCOME FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
C. Grant Anderson, Carol B. Kayworth, Patricia F. Conner, Ann M. Scanlon and
Catherine C. Ryan or any of them as Proxies of the undersigned, with full power
of substitution, to vote on behalf of the undersigned all shares of Blanchard
Flexible Income Fund ("Flexible Income") that the undersigned is entitled to
vote at the special meeting of shareholders of Flexible Income to be held at
2:00 p.m. on Friday, February 20, 1998 at the offices of the Evergreen Funds,
200 Berkeley Street, Boston, Massachusetts 02116 and at any adjournments
thereof, as fully as the undersigned would be entitled to vote if personally
present
.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON
THIS PROXY. If joint owners, EITHER may sign this
Proxy. When signing as attorney, executor,
administrator, trustee, guardian, or custodian for a
minor, please give your full title. When signing on
behalf of a corporation or as a partner for a
partnership, please give the full corporate or
partnership name and your title, if any.
Date , 199
----------------------------------------
----------------------------------------
Signature(s) and Title(s), if applicable
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF BLANCHARD
FUNDS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTION TO
BE TAKEN ON THE FOLLOWING PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED
AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF
TRUSTEES OF BLANCHARD FUNDS RECOMMENDS A VOTE FOR THE PROPOSALS. PLEASE MARK
YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK. EXAMPLE: X
---
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Strategic Income Fund, a series of Evergreen Fixed Income Trust, will (i)
acquire all of the assets of Flexible Income in exchange for shares of Evergreen
Strategic Income Fund; and (ii) assume certain identified liabilities of
Flexible Income, as substantially described in the accompanying Prospectus/Proxy
Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To approve the proposed Interim Management Contract with Virtus
Capital Management, Inc.
- ---- FOR ---- AGAINST ---- ABSTAIN
3. To approve the proposed Interim Sub-Advisory Agreement between
Virtus Capital Management, Inc. and OFFITBANK.
- ---- FOR ---- AGAINST ---- ABSTAIN
4. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
