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 today.
<PAGE>
If you have any questions about this proxy, please call our proxy solicitor,
Shareholder Communications Corporation, at 800-733-8481 ext. 437. You may also
FAX your completed and signed proxy card to 800-733-1885. If we do not receive
your completed proxy card after several weeks, you may be contacted by
Shareholder Communications Corporation who will remind you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
Blanchard Funds
<PAGE>
BLANCHARD FUNDS
BLANCHARD FLEXIBLE 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
<PAGE>
calling Evergreen Strategic 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
Comparison of the Interim Sub-Advisory Agreement
and the Previous Sub-Advisory Agreement........................38
ADDITIONAL INFORMATION.......................................................40
<PAGE>
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.
Comparison of Class A Shares
of Evergreen Strategic Income With
Shares of Flexible Income
<TABLE>
<CAPTION>
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% 0.75% 0.59%
12b-1 Fees (1) 0.23% 0.25% 0.25%
Other Expenses 0.41% 0.42% 0.41%
------ ------ -----
Annual Fund 1.28% (2) 1.42% 1.25%
Operating Expenses ------ ------ ------
------ ------ ------
</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).
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.
<PAGE>
<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), 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
<PAGE>
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."
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
<PAGE>
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 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,
<PAGE>
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
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Evergreen 6.41% 7.36% 8.33% 2/13/87
Strategic
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.
<PAGE>
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:
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.
<PAGE>
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
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
<PAGE>
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
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.
<PAGE>
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
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
<PAGE>
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 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.
<PAGE>
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 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,
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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
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
<PAGE>
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 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.
<PAGE>
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
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;
<PAGE>
(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 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
<PAGE>
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.
Capitalization of Flexible Income,
Evergreen Strategic Income and Evergreen
Strategic Income (Pro Forma)
<TABLE>
<CAPTION>
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
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........................ 31,152,932 9,280,358 31,008,874
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
<PAGE>
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 30,097,107
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
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.
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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.
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
<PAGE>
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).
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.
<PAGE>
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 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
<PAGE>
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." 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
<PAGE>
performance record and will make a change, if necessary, subject to approval of
the Board of Trustees and shareholders.
FAS currently acts as administrator of 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."
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
<PAGE>
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 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
<PAGE>
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
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
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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
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. Francis, Chief First Union National Bank
Investment Officer 201 South College Street
Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Clemons Rosson, Vice Virtus Capital Management, Inc.
President, Assistant 707 East Main Street
Secretary Suite 1300
Richmond, Virginia 23219
L. Robert Cheshire, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
John E. Gray, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Dillon S. Harris, Jr., Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
J. Kellie Allen, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
DIRECTORS:
<PAGE>
Name Address
- ---- -------
David C. Francis First Union National Bank
201 South College 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
- ---- -------
OFFITBANK
Morris W. 520 Madison Avenue
Offit, Chairman, Chief New York, New York 10022
Executive Officer
OFFITBANK
Wallace Mathai-Davis, 520 Madison Avenue
Chief Financial Officer, New York, New York 10022
Secretary
OFFITBANK
Vincent M. Rella, 520 Madison Avenue
Comptroller New York, New York 10022
OFFITBANK
Stephen B. Wells, 520 Madison Avenue
Compliance Officer New York, New York 10022
OFFITBANK
520 Madison Avenue
New York, New York 10022
DIRECTORS:
Address
Name -------
- ----
H. Furlong Baldwin OFFITBANK
520 Madison Avenue
New York, New York 10022
OFFITBANK
520 Madison Avenue
Morris W. Offit New York, New York 10022
OFFITBANK
520 Madison Avenue
Alessandro New York, New York 10022
C. Di Montezemolo
OFFITBANK
David I. Margolis 520 Madison Avenue
New York, New York 10022
<PAGE>
OFFITBANK
Harvey M. Meyerhoff 520 Madison Avenue
New York, New York 10022
Dr. George R. Packard OFFITBANK
520 Madison Avenue
New York, New York 10022
Edward V. Regan OFFITBANK
520 Madison Avenue
New York, New York 10022
B. Lnace Saverteig OFFITBANK
520 Madison Avenue
New York, New York 10022
Ricardo Steinbruch OFFITBANK
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 thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
(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.
(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
<PAGE>
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 that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with
<PAGE>
federal securities and other laws and regulations 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 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
<PAGE>
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 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
<PAGE>
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
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
<PAGE>
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.
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
<PAGE>
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.
(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
<PAGE>
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
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
<PAGE>
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.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
<PAGE>
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Blanchard Funds'
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Blanchard Funds.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the
Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
<PAGE>
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The 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 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
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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 standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has
<PAGE>
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
TERMINATION
<PAGE>
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 this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of the
<PAGE>
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 Flexible .75%
Income Fund
Blanchard Flexible Tax-Free .75%
Bond Fund
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th
<PAGE>
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 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.
<PAGE>
6. Expenses. The Sub-Adviser shall maintain, at its expense and without
cost to the Manager or the Fund, a trading function in order to carry out its
obligations under subparagraph (f) of paragraph 2 hereof to place orders for the
purchase and sale of portfolio securities for the Fund.
7. Delegation of Responsibilities. Upon request of the Manager and with
the approval of the Trust's Board of Trustees, the Sub-Adviser may perform
services on behalf of the Fund which are not required by this Agreement. Such
services will be performed on behalf of the Fund and the Sub-Adviser's cost in
rendering such services may be billed monthly to the Manager, subject to
examination by the Manager's independent accountants. Payment or assumption by
the Sub-Adviser of any Fund expense that the Sub-Adviser is not required to pay
or assume under this Agreement shall not relieve the Manager or the Sub-Adviser
of any of their obligations to the Fund or obligate the Sub-Adviser to pay or
assume any similar Fund expense on any subsequent occasions.
8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Sub- Adviser a monthly fee at the
annual rate of .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
<PAGE>
companies) and to engage in other activities, so long as its services under this
Agreement are not impaired thereby.
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
<PAGE>
party, it is agreed that the address of the Manager for this purpose shall be
707 East Main Street, Suite 1300, Richmond, Virginia 23219, that of the Trust
for this purpose shall be Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779, 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.
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<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
