UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [ ] Post-Effective
Amendment No. Amendment No.
EVERGREEN FOUNDATION TRUST
(Exact name of registrant as specified in charter)
Area Code and Telephone Number: (914) 694-2020
2500 Westchester Avenue
Purchase, New York 10577
(Address of principal executive offices)
James P. Wallin, Esq.
Evergreen Asset Management Corp.
2500 Westchester Avenue
Purchase, New York 10577
(Name and address of agent for service)
Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Section 24(f) of the Investment Company Act
of 1940 (File No. 33-31803); accordingly, no fee is payable herewith. Pursuant
to Rule 429 under the Securities Act of 1933, this Registration Statement
relates to the aforementioned registration on Form N-1A. A Rule 24f-2 Notice for
the Registrant's most recent fiscal year ended December 31, 1996 was filed with
the Commission on or about February 28, 1997.
It is proposed that this filing will become effective thirty days after
filing pursuant to Rule 488 under the Securities Act of 1933.
<PAGE>
EVERGREEN FOUNDATION TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Statement Cross Reference Sheet; Cover Page
and Outside Front Cover Page of
Prospectus
2. Beginning and Outside Back Cover Page Table of Contents
of Prospectus
3. Fee Table, Synopsis Information and Comparison of Fees and Expenses;
Risk Factors Summary; Risks
4. Information About the Transaction Summary; Reasons for the
Reorganization; Comparative
Information on Shareholders' Rights;
Exhibit A (Agreement and Plan of
Reorganization)
5. Information about the Registrant Cover Page; Summary; Comparison of
Investment Objectives and Policies;
Comparative Information on
Shareholders' Rights; Additional
Information
6. Information about the Company Cover Page; Summary; Comparison of
Being Acquired Investment Objectives and Policies;
Comparative Information on
Shareholders' Rights; Additional
Information
7. Voting Information Cover Page; Summary; Voting
Information Concerning the Meeting
8. Interest of Certain Persons Financial Statements and Experts;
and Experts Legal Matters
9. Additional Information Required for Inapplicable
Reoffering by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information About the Statement of Additional Information
Registrant of the Evergreen Foundation Fund
dated April 1, 1997
<PAGE>
13. Additional Information about Statement of Additional Information
the Company Being Acquired of Keystone Balanced Fund II dated
August 16, 1996, as Supplemented
January 1, 1997
14. Financial Statements Financial Statements dated
December 31, 1996
of Keystone Balanced Fund II
Financial Statements dated
December 31, 1996 of
Evergreen Foundation Fund
Item of Part C of Form N-14
15. Indemnification Incorporated by Reference to Part A
Caption - "Comparative Information
on Shareholders' Rights - Liability
and Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
[EVERGREEN KEYSTONE LOGO]
May, 1997
Dear Shareholder:
We are please to announce that the Evergreen Keystone merger is well underway,
and with the combined power of Evergreen Keystone we will be able to bring our
investment and service capabilities to a new level. One of the areas we are
focusing on is merging funds with similar objectives to maximize the potential
for greater operating efficiencies and lower overall fees and expenses.
The enclosed Prospectus/Proxy Statement contains our proposal to combine the
Keystone Balanced Fund II with the Evergreen Foundation Fund. This proposal is
scheduled to be voted on at a special meeting of shareholders of the Keystone
Balanced Fund II on June 30, 1997.
The merger has been structured as a tax-free transaction for shareholders. We
believe it will result in one combined fund with lower management fees and
operating expenses and greater efficiencies than two separate funds. This merger
is not expected to affect the total value of your investment.
SUMMARY OF BENEFITS
o Lower management fees and operating expenses
o Potential for greater operating efficiencies
The Fund's Trustees have very carefully reviewed this proposed reorganization
and believe it is in the best interests of shareholders. They recommend you vote
FOR the proposal, which is described in detail in the attached Prospectus/Proxy
Statement.
VOTING INSTRUCTIONS
This package contains the materials you will need to vote. To vote, please sign
the attached proxy card and return it today in the postage-paid envelope. It is
extremely important that you vote, no matter how many shares you own. This is an
opportunity to voice your opinion on any important matter affecting your
investment. Voting promptly helps to reduce the cost of additional mailings.
18995
<PAGE>
If you have any questions regarding the proposed transaction or if you would
like additional information about the Evergreen Keystone family of mutual funds,
please telephone your financial adviser or Evergreen Keystone at 1-800-xxx-xxxx.
Albert H. Elfner, III George S. Bissell
CHAIRMAN CHAIRMAN OF THE BOARD
Keystone Investment Management Company Keystone Funds
18995
<PAGE>
KEYSTONE BALANCED FUND II
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
--------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 30, 1997
--------------------------------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Meeting") of
Shareholders of Keystone Balanced Fund II will be held at the offices of the
Fund, 200 Berkeley Street, Boston, Massachusetts on Monday, June 30, 1997 at
3:00 p.m., Eastern time, for the following purposes:
1. To approve or disapprove an Agreement and Plan of Reorganization (the
"Plan"), providing for the acquisition of all of the assets of the
Keystone Balanced Fund II by the Evergreen Foundation Fund in exchange
for shares of the Evergreen Foundation Fund, and the assumption by the
Evergreen Foundation Fund of [_________] liabilities of the Keystone
Balanced Fund II. The Plan also provides for distribution of such
shares of the Evergreen Foundation Fund to shareholders of the Keystone
Balanced Fund II in liquidation and subsequent termination of the
Keystone Balanced Fund II. A vote in favor of the Plan is a vote in
favor of the liquidation and dissolution of the Keystone Balanced Fund
II.
2. To transact any other business which may properly come before the
Meeting or any adjournment thereof.
The Trustees of Keystone Balanced Fund II have fixed the close of
business on May 2, 1997 as the record date for the determination of shareholders
of the Keystone Balanced Fund II 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 TO THE
ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Trustees
George O. Martinez
May [ ___ ], 1997 SECRETARY
18995
<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, Jr. John B. Smith, Jr., Executor
18995
<PAGE>
SUBJECT TO COMPLETION, APRIL 11, 1997
PRELIMINARY COPY
PROSPECTUS/PROXY STATEMENT DATED MAY [ ___ ], 1997
Acquisition of Assets of
KEYSTONE BALANCED FUND II
200 Berkeley Street
Boston, Massachusetts 02116
By and in Exchange for Shares of
EVERGREEN FOUNDATION FUND
a series of
Evergreen Foundation Trust
2500 Westchester Avenue
Purchase, New York 10577
This Prospectus/Proxy Statement is being furnished to shareholders of
Keystone Balanced Fund II (the "Keystone Balanced Fund") in connection with a
proposed Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of the Keystone Balanced Fund for consideration at a Special
Meeting of Shareholders to be held on June 30, 1997 at 3:00 p.m. at the offices
of the Fund, 200 Berkeley Street, Boston, Massachusetts, and any adjournments
thereof (the "Meeting"). The Plan provides for all of the assets of the Keystone
Balanced Fund to be acquired by Evergreen Foundation Fund in exchange for shares
of the Evergreen Foundation Fund and the assumption by the Evergreen Foundation
Fund of [_________________] liabilities of the Keystone Balanced Fund
(hereinafter referred to as the "Reorganization"). Following the Reorganization,
shares of the Evergreen Foundation Fund will be distributed to shareholders of
the Keystone Balanced Fund in liquidation of the Keystone Balanced Fund and the
Keystone Balanced Fund will be terminated. Holders of shares of the Keystone
Balanced Fund will receive shares of the Class of Evergreen Foundation Fund (the
"Corresponding Shares") having the same letter designation and the same
distribution-related fees, shareholder servicing-related fees and contingent
deferred sales charges ("CDSCs"), if any, as the shares of the Class of the
Keystone Balanced Fund held by them prior to the Reorganization. As a result of
the proposed Reorganization, shareholders of the Keystone Balanced Fund will
receive that number of full and fractional Corresponding Shares of the Evergreen
Foundation Fund having an aggregate net asset value equal to the aggregate net
asset value of such shareholder's shares of the Keystone Balanced Fund. The
Reorganization is being structured as a tax-free reorganization for federal
income tax purposes.
The Evergreen Foundation Fund is a separate series of Evergreen
Foundation Trust, an open-end management investment company registered under the
Investment Company Act of 1940, as
18995
<PAGE>
amended (the "1940 Act"). The Evergreen Foundation Fund seeks, in order of
priority, reasonable income, conservation of capital and capital appreciation.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Evergreen Foundation
Fund that shareholders of the Keystone Balanced Fund 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 May [
__ ], 1997, relating to this Prospectus/Proxy Statement and the Reorganization,
which includes the financial statements of the Evergreen Foundation Fund dated
December 31, 1996 and the financial statements of the Keystone Balanced Fund
dated June 30, 1996 and December 31, 1996, 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 the Evergreen Foundation Fund at 2500 Westchester
Avenue, Purchase, New York 10577 or by calling toll-free 1-800-807-2940.
The Prospectus of the Evergreen Foundation Fund relating to Class A,
Class B and Class C shares dated May 1, 1997 and its Annual Report for the
fiscal year ended December 31, 1996 are incorporated herein by reference in
their entirety, insofar as they relate to the Evergreen Foundation Fund only,
and not to any other fund described therein. Shareholders of the Keystone
Balanced Fund will receive, with this Prospectus/Proxy Statement, copies of the
Prospectus of the Evergreen Foundation Fund. Additional information about the
Evergreen Foundation Fund 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 or calling to the Evergreen
Foundation Fund at the address or telephone number listed in the preceding
paragraph.
The Prospectus of the Keystone Balanced Fund dated August 16, 1996, as
supplemented January 1, 1997, is incorporated herein in its entirety by
reference. Copies of the Prospectus and a Statement of Additional Information
dated the same date are available upon request without charge by writing to the
Keystone Balanced Fund at 200 Berkeley Street, Boston, Massachusetts 02116 or by
calling toll-free 1-800-343-2898.
Included as Exhibit A of this Prospectus/Proxy Statement is a copy of
the Plan.
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 FIRST UNION CORPORATION ("FIRST UNION") OR ANY OF ITS
SUBSIDIARIES, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION OR ANY OF ITS
SUBSIDIARIES, AND ARE NOT INSURED OR OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
PAGE
COMPARISON OF FEES AND EXPENSES.............................................6
SUMMARY ...................................................................9
Proposed Plan of Reorganization....................................9
Tax Consequences..................................................10
Investment Objectives and Policies of the Evergreen
Foundation Fund and the Keystone Balanced Fund .............10
Comparative Performance Information of Each Fund..................10
Management of the Funds...........................................11
Investment Advisers and Sub-adviser...............................11
Portfolio Management..............................................13
Distribution of Shares............................................13
Purchase and Redemption Procedures................................15
Exchange Privileges...............................................15
Dividend Policy...................................................15
RISKS ..................................................................16
REASONS FOR THE REORGANIZATION.............................................17
Agreement and Plan of Reorganization..............................18
Federal Income Tax Consequences...................................20
Pro-forma Capitalization..........................................21
Shareholder Information...........................................22
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES...........................23
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS ...........................25
Form of Organization..............................................25
Capitalization....................................................25
Shareholder Liability.............................................26
Shareholder Meetings and Voting Rights............................26
Liquidation or Dissolution........................................26
Liability and Indemnification of Trustees.........................27
Rights of Inspection..............................................27
ADDITIONAL INFORMATION.....................................................27
VOTING INFORMATION CONCERNING THE MEETING..................................28
FINANCIAL STATEMENTS AND EXPERTS...........................................30
LEGAL MATTERS..............................................................31
OTHER BUSINESS.............................................................31
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class A, Class B, and Class C shares of the Evergreen
Foundation Fund set forth in the following tables and examples are based on the
expenses for the fiscal year ended December 31, 1996. The amounts for Class A,
Class B, and Class C shares of the Keystone Balanced Fund set forth in the
following tables and in the examples are estimates based on the Keystone
Balanced Fund's fiscal year ending June 30, 1997. All amounts are adjusted for
voluntary expense waivers. The amounts for the Evergreen Foundation Fund pro
forma are based on what the combined expenses would have been for the twelve
months ended December 31, 1996.
The following tables show for the Evergreen Foundation Fund and the
Keystone Balanced Fund the shareholder transaction expenses and annual fund
operating expenses associated with an investment in the Class A, Class B, and
Class C shares of each Fund.
<TABLE>
<CAPTION>
COMPARISON OF CLASS A, CLASS B, AND CLASS C SHARES OF THE EVERGREEN FOUNDATION FUND WITH
CORRESPONDING SHARES OF THE KEYSTONE BALANCED FUND
EVERGREEN FOUNDATION FUND KEYSTONE BALANCED FUND
Shareholder Transaction Expenses CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on 4.75% None None 4.75% None None
Purchases (as a percentage of offering
price)
Maximum Sales Load Imposed on None None None None None None
Reinvested Dividends (as a percentage
of offering price)
Contingent Deferred Sales Charge (as a None 5.00% in the 1.00% in the None 5.00% in the 1.00% in
percentage of original purchase price first year, first year first year, the first
or redemption proceeds, whichever is declining to and 0.00% declining to year and
lower) 1.00% in the thereafter 1.00% in the 0.00%
sixth year sixth year thereafter
and 0.00% and 0.00%
thereafter thereafter
Exchange Fee None None None None None None
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Advisory Fees 0.800% 0.800% 0.800% 0.650% 0.650% 0.650%
12b-1 Fees 0.250%(1) 1.000% (1) 1.000% (1) 0.250% 1.000% 1.000%
Other Expenses 0.190% 0.190% 0.190% 0.600%(2) 0.600%(2) 0.600%(2)
Annual Fund Operating Expenses 1.240% 1.990% 1.990% 1.500% 2.250% 2.250%
</TABLE>
<TABLE>
<CAPTION>
EVERGREEN FOUNDATION FUND PRO FORMA
Shareholder Transaction Expenses Class A Class B Class C
-------------- ------------------- ------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as 4.75% None None
a percentage of offering price)
Maximum Sales Load Imposed on Reinvested None None None
Dividends (as a percentage of offering price)
Contingent Deferred Sales Charge (as a None 5.00% in the 1.00% in the
percentage of original purchase price or first year, first year and
redemption proceeds, whichever is lower) declining to 0.00%
1.00% in the thereafter
sixth year and
0.00% thereafter
Exchange Fee None None None
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Advisory Fees 0.800% 0.800% 0.800%
12b-1 Fees 0.250%(1) 1.000% (1) 1.000% (1)
Other Expenses 0.190% 0.190% 0.190%
Annual Fund Operating Expenses 1.240% 1.990% 1.990%
- --------------------
</TABLE>
(1) Class A shares can pay up to .75 of 1% of average net assets as a 12b-1
fee. For the foreseeable future, the Class A 12b-1 fees will be limited to .25
of 1% of average net assets. For Class B and Class C shares of Evergreen
Foundation Fund, a portion of the 12b-1 fees equivalent to .25 of 1% of average
net assets will be shareholder servicing-related. Distribution-related 12b-1
fees will be limited to .75 of 1% of average net assets as permitted under the
rules of the National Association of Securities Dealers, Inc.
(2) Reflects agreement by Keystone Investment Management Company to
voluntarily reimburse the Keystone Balanced Fund for certain class specific
expenses. The Keystone Balanced Fund's investment adviser may cease or modify
such waivers and reimbursements at any time. Absent such agreement, the
estimated operating expenses for the Keystone Balanced Fund for the year ending
June 30, 1997, will be as follows:
Class A Class B Class C
-------------- ------------- -------------
Keystone Balanced Fund 2.52% 3.27% 3.27%
EXAMPLES. The following tables show for each Fund, and for the
Evergreen Foundation Fund, 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, and additionally
for Class B and Class C shares, no redemption at the end of each period.
<TABLE>
<CAPTION>
EVERGREEN FOUNDATION KEYSTONE BALANCED
FUND FUND
One Three Five Ten One Three
YEAR YEARS YEARS YEARS YEAR YEARS
<S> <C> <C> <C> <C> <C> <C>
Class A $60 $85 $112 $190 $62 $93
Class B
Assuming redemption at end of period $70 $92 $127 $203 $73 $100
Class B
Assuming no redemption at end of period $20 $62 $107 $203 $23 $70
Class C
Assuming redemption at end of period $30 $62 $107 $232 $33 $70
Class C $20 $62 $107 $232 $23 $70
Assuming no redemption at end of period
</TABLE>
EVERGREEN FOUNDATION FUND PRO FORMA
One Three Five Ten
YEAR YEARS YEARS YEARS
Class A $60 $85 $112 $190
Class B $70 $92 $127 $203
Assuming redemption at end of period
Class B $20 $62 $107 $203
Assuming no redemption at end of
period
Class C $30 $62 $107 $232
Assuming redemption at end of period
Class C $20 $62 $107 $232
Assuming no redemption at end of
period
The purpose of the foregoing examples is to assist a Keystone Balanced
Fund shareholder in understanding the various costs and expenses that an
investor in the Evergreen Foundation Fund 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 the Keystone Balanced
Fund. These examples should not be considered a representation of past or future
expenses or annual returns. Actual expenses may be greater or less than those
shown. Moreover, while the examples assume a 5% annual return, a Fund's actual
performance will vary and may result in actual returns greater or less than 5%.
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ADDITIONAL
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, THE
PROSPECTUS OF THE EVERGREEN FOUNDATION FUND DATED MAY 1, 1997 AND THE PROSPECTUS
OF THE KEYSTONE BALANCED FUND DATED AUGUST 16, 1996, AS SUPPLEMENTED JANUARY 1,
1997 (WHICH ARE INCORPORATED HEREIN BY REFERENCE) AND THE PLAN, A FORM OF WHICH
IS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS EXHIBIT A.
PROPOSED PLAN OF REORGANIZATION
The Plan provides for the transfer of all of the assets of the Keystone
Balanced Fund in exchange for shares of the Evergreen Foundation Fund and the
assumption by the Evergreen Foundation Fund of [________________] liabilities of
the Keystone Balanced Fund. (The Keystone Balanced Fund and the Evergreen
Foundation Fund each may also be referred to in this Prospectus/Proxy Statement
as a "Fund" and together, as the "Funds"). The Plan also calls for the
distribution of shares of the Evergreen Foundation Fund to Keystone Balanced
Fund shareholders in liquidation of the Keystone Balanced Fund as part of the
Reorganization. As a result of the Reorganization, the shareholders of the
Keystone Balanced Fund will become the owners of that number of full and
fractional Corresponding Shares of Evergreen Foundation Fund having an aggregate
net asset value equal to the aggregate net asset value of the shareholder's
shares of the Keystone Balanced Fund as of the close of business immediately
prior to the date that the Keystone Balanced Fund's assets are exchanged for
shares of the Evergreen Foundation Fund.
The Trustees of the Keystone Balanced Fund, 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 the Keystone Balanced Fund and that the
interests of the shareholders of the Keystone Balanced Fund 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 Keystone Balanced
Fund's shareholders.
THE BOARD OF TRUSTEES OF THE KEYSTONE BALANCED FUND RECOMMENDS APPROVAL BY
SHAREHOLDERS OF THE KEYSTONE BALANCED FUND OF THE PLAN EFFECTING THE
REORGANIZATION.
The Trustees of the Evergreen Foundation Fund have also approved the Plan,
and accordingly, the Evergreen Foundation Fund's participation in the
Reorganization.
Approval of the Reorganization on the part of the Keystone Balanced Fund
will require the affirmative vote of a majority of the shares present and
entitled to vote, with all classes voting together as a single class, at a
meeting at which a quorum is present. A majority of the outstanding shares of
the Fund, represented in person or by proxy, is required to constitute a quorum
at the Meeting. See "Voting Information Concerning the Meeting." The
Reorganization is scheduled to take place on or about July [ __ ], 1997.
If the shareholders of the Keystone Balanced Fund do not vote to approve
the Reorganization, the Trustees of the Keystone Balanced Fund will consider
other possible courses of action in the best interests of shareholders.
TAX CONSEQUENCES
Prior to or at the completion of the Reorganization, the Keystone Balanced
Fund will have received an opinion of counsel that the Reorganization has been
structured so that no gain or loss will be recognized by the Keystone Balanced
Fund or its shareholders for federal income tax purposes as a result of the
receipt of shares of the Evergreen Foundation Fund in the Reorganization. The
holding period and aggregate tax basis of the Corresponding Shares of the
Evergreen Foundation Fund that are received by Keystone Balanced Fund
shareholders will be the same as the holding period and aggregate tax basis of
shares of the Keystone Balanced Fund previously held by such shareholders,
provided that shares of the Keystone Balanced Fund are held as capital assets.
In addition, the holding period and tax basis of the assets of the Keystone
Balanced Fund in the hands of the Evergreen Foundation Fund as a result of the
Reorganization will be the same as in the hands of the Keystone Balanced Fund
immediately prior to the Reorganization and no gain or loss will be recognized
by the Evergreen Foundation Fund upon the receipt of the assets of the Keystone
Balanced Fund in exchange for shares of the Evergreen Foundation Fund and the
assumption by the Evergreen Foundation Fund of [________________] liabilities of
the Keystone Balanced Fund.
INVESTMENT OBJECTIVES AND POLICIES OF THE EVERGREEN FOUNDATION FUND AND THE
KEYSTONE BALANCED FUND
The investment objective of the Evergreen Foundation Fund is to achieve,
in order of priority, reasonable income, conservation of capital, and capital
appreciation. The Evergreen Foundation Fund invests principally in
income-producing common and preferred stocks, securities convertible into or
exchangeable for common stocks and fixed income securities. The investment
objective of the Keystone Balanced Fund is to provide current income and capital
appreciation consistent with the preservation of principal. In pursuing this
objective, the Fund invests in a balance of equity and debt securities.
Generally, the Keystone Balanced Fund purchases common and preferred stocks for
growth and income and buys various debt securities for income and relative
stability. See "Comparison of Investment Objectives and Policies" below.
COMPARATIVE PERFORMANCE INFORMATION OF EACH FUND
Discussions of the manner of calculation of total return are contained in
the respective Prospectuses and Statements of Additional Information of the
Funds. The average annual total return of the Class A, Class B and Class C
shares of the Evergreen Foundation Fund for the one period ended March 31, 1997
and for both Funds for the periods from inception through March 31, 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.
AVERAGE ANNUAL TOTAL RETURN
1 Year Ended Since Inception Inception
March 31, 1997 To March 31, 1997 Date
Evergreen Foundation Fund (2)
Class A shares 7.47% 15.16% 1/3/95
Class B shares 7.02% 15.69% 1/3/95
Class C shares 11.03% 16.73% 1/3/95
Keystone Balanced Fund (1)(2)
Class A shares NA 4.86% 8/30/96
Class B shares NA 4.78% 8/30/96
Class C shares NA 8.68% 8/30/96
- --------------------
(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.
(2) Not annualized.
Important information about the Evergreen Foundation Fund is also
contained in Management's Discussion of the Evergreen Foundation Fund's
Performance, attached hereto as Exhibit B. This information also appears in the
Evergreen Foundation Fund's most recent Annual Report.
MANAGEMENT OF THE FUNDS
The overall management of the Evergreen Foundation Fund and of the
Keystone Balanced Fund is the responsibility of, and is supervised by, their
respective Board of Trustees.
INVESTMENT ADVISERS AND SUB-ADVISER
EVERGREEN FOUNDATION FUND. Evergreen Asset Management Corp. ("Evergreen
Asset") serves as investment adviser to the Evergreen Foundation Fund. Evergreen
Asset, with its predecessors, has served as investment adviser to the Evergreen
family of mutual funds since 1971. Evergreen Asset is a wholly-owned subsidiary
of First Union National Bank of North Carolina ("FUNB"). FUNB is a subsidiary of
First Union, the sixth largest bank holding company in the United States. The
Capital Management Group of FUNB and Evergreen Asset manage the Evergreen family
of mutual funds with assets of approximately $29 billion as of February 28,
1997. For further information regarding Evergreen Asset, FUNB and First Union,
see "Management of the Funds -- Investment Advisers" in the Prospectus of the
Evergreen Foundation Fund.
Evergreen Asset manages investments, provides various administrative
services and supervises the daily business affairs of the Evergreen Foundation
Fund subject to the authority of the Trustees. Evergreen Asset is entitled to
receive from the Evergreen Foundation Fund an annual fee equal to 0.875 of 1.00%
of average daily net assets of the Evergreen Foundation Fund on the first $750
million in assets, 0.75 of 1.00% of average daily net assets on the next $250
million in assets, and 0.7 of 1.00% of average daily net assets in excess of $1
billion. The fee paid by the Evergreen Foundation Fund is higher than the rate
paid by most other investment companies. From time to time Evergreen Asset may,
at its discretion, also reduce or waive its fee or reimburse the Evergreen
Foundation Fund for certain of its other expenses in order to reduce its expense
ratio. Evergreen Asset may reduce or cease these voluntary waivers and
reimbursements at any time.
Evergreen Asset has entered into a sub-advisory agreement with Lieber &
Company which provides that Lieber & Company's research department and staff
will furnish Evergreen Asset with information, investment recommendations,
advice and assistance, and will be generally available for consultation on the
Evergreen Foundation Fund. Lieber & Company will be reimbursed by Evergreen
Asset in connection with the rendering of services on the basis of the direct
and indirect costs of performing such services. There is no additional charge to
the Evergreen Foundation Fund for the services provided by Lieber & Company. The
address of both Evergreen Asset and Lieber & Company is 2500 Westchester Avenue,
Purchase, New York 10577. Lieber & Company is an indirect, wholly-owned,
subsidiary of First Union.
KEYSTONE BALANCED FUND. Keystone Investment Management Company
("Keystone") serves as the investment adviser for the Keystone Balanced Fund.
Keystone manages the investment and reinvestment of the Fund's assets,
supervises the operation of the Fund and provides all necessary office space,
facilities and equipment.
The Fund pays Keystone a fee for its services at the annual rate set forth
below:
AVERAGE AGGREGATE NET
ASSET VALUE OF THE SHARES
ANNUAL MANAGEMENT FEE INCOME OF THE FUND
- ----------------------- ---------------------------- -------------------------
1.5% of Gross Dividend
and Interest Income plus
---------------------------- -------------------------
0.60% of the first $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 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 $ 500,000,000, plus
0.30% of the amounts over $1,000,000,000.
PORTFOLIO MANAGEMENT
The portfolio manager of the Evergreen Foundation Fund is Stephen A.
Lieber, who is Chairman and Co-Chief Executive Officer of Evergreen Asset, and
has been associated with Evergreen Asset and its predecessor since 1969. Mr.
Lieber has served as the Fund's portfolio manager since its inception in
January, 1990.
DISTRIBUTION OF SHARES
Evergreen Keystone Distributor, Inc. ("EKD"), an indirect, wholly-owned
subsidiary of The BISYS Group, Inc., acts as underwriter of both the Evergreen
Foundation Fund's and Keystone Balanced Fund's shares. EKD distributes each
Fund's shares directly or through broker-dealers, banks (including FUNB), or
other financial intermediaries. The Evergreen Foundation Fund offers four
classes of shares: Class A, Class B, Class C and Class Y. The Keystone Balanced
Fund offers three classes of shares: Class A, Class B and Class C. Each Class
has separate distribution arrangements. (See "Distribution-Related and
Shareholder Servicing-Related Expenses" below.) No Class bears the distribution
expenses relating to the shares of any other Class.
In the proposed Reorganization, shareholders of the Keystone Balanced Fund
will receive the corresponding Class of shares of the Evergreen Foundation Fund
which they currently hold in the Keystone Balanced Fund. The Class A, Class B
and Class C shares of the Evergreen Foundation Fund have identical arrangements
with respect to the imposition of initial sales charges, CDSCs and distribution
and service fees as the comparable Class of shares of the Keystone Balanced
Fund. Because the Reorganization will be effected at net asset value without the
imposition of a sales charge, Evergreen Foundation Fund shares acquired by
shareholders of the Keystone Balanced Fund pursuant to the proposed
Reorganization would not be subject to any initial sales charge or CDSC as a
result of the Reorganization. However, holders of Evergreen Foundation Fund
shares acquired as a result of the Reorganization would continue to be subject
to a CDSC upon subsequent redemptions to the same extent as if they had
continued to hold their shares of the Keystone Balanced Fund.
The following is a summary description of charges and fees for each of the
different Classes of shares of both the Evergreen Foundation Fund and the
Keystone Balanced Fund. More detailed descriptions of the distribution
arrangements applicable to the Classes of shares are contained in the respective
Evergreen Foundation Fund Prospectus and Keystone Balanced Fund 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.
CLASS B SHARES. Class B shares are sold without an initial sales charge
but are subject to a CDSC, which ranges from 5% to 1%, if shares are redeemed
during the first six years after the month of purchase. In addition, Class B
shares are subject to distribution-related fees and shareholder
servicing-related fees as described below. Class B shares issued in the
Reorganization will automatically convert to Class A in accordance with the
conversion schedule in effect at the time the Keystone Balanced Fund shares were
originally purchased.
Class B shares are subject to higher distribution-related fees than the
corresponding Class A shares of each Fund on which a front-end sales charge is
imposed (until they convert to Class A shares). The higher fees mean a higher
expense ratio, so Class B shares pay correspondingly lower dividends and may
have a lower net asset value than Class A shares of the Fund.
CLASS C SHARES. Class C shares are sold without an initial sales charge
but, as indicated below, are subject to distribution and shareholder
servicing-related fees. Class C shares are subject to a 1% CDSC if such shares
are redeemed during the month of purchase and the 12-month period following the
month of purchase. No CDSC is imposed on amounts redeemed thereafter. Class C
shares incur higher distribution and/or shareholder service fees than Class A
shares but, unlike Class B shares, do not convert to any other class of shares.
The amount of the CDSCs applicable to redemptions of Class B and Class C
shares are charged as a percentage of the lesser of the then current net asset
value or original cost. The CDSC is deducted from the amount of the redemption
and is paid to the respective Fund's distributor or its predecessor, as the case
may be. Shares of each Fund acquired through dividend or distribution
reinvestment are not subject to a CDSC. For purposes of determining the schedule
of CDSCs, and the time of conversion to Class A shares, applicable to shares of
Evergreen Foundation Fund received by Keystone Balanced Fund shareholders in the
Reorganization, Evergreen Foundation Fund will treat such shares as having been
sold on the date the shares of the Keystone Balanced Fund were originally
purchased by the Keystone Balanced Fund shareholder. Additional information
regarding the Classes of shares of each Fund is included in its respective
Prospectus and Statement of Additional Information.
DISTRIBUTION-RELATED AND SHAREHOLDER SERVICING-RELATED EXPENSES. Each Fund
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 .75 of 1%, in the case of the Evergreen Foundation Fund, and .25 of 1% in
the case of the Keystone Balanced Fund, of average daily net assets attributable
to the Class. Payments with respect to Class A shares of the Evergreen
Foundation Fund are currently limited to .25 of 1% of average daily net assets
attributable to the Class, which amount may be increased to the full plan rate
for such Fund by the Trustees without shareholder approval.
Each Fund has also adopted a Rule 12b-1 plan with respect to its Class B
and Class C shares under which the Class may pay for distribution-related and
shareholder servicing-related expenses at an annual rate which may not exceed 1%
of average daily net assets attributable to the Class.
The Class B and Class C Rule 12b-1 plans provide for the payment in
respect of "shareholder services" at an annual rate which may not exceed .25 of
1% (making total Rule 12b-1 fees for Class B and Class C shares payable at a
maximum annual rate of 1.00%). Consistent with the requirements of Rule 12b-1
and the applicable rules of the National Association of Securities Dealers,
Inc., following the Reorganization the Evergreen Foundation Fund may make
distribution-related and shareholder servicing-related payments with respect to
Keystone Balanced Fund shares sold prior to the Reorganization, including
payments to the Keystone Balanced Fund's former underwriter.
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, distribution-related fees
and shareholder servicing-related fees are described above. Investments in the
Funds are not insured. The minimum initial purchase requirement for each Fund is
$1,000. There is no minimum for subsequent purchases of shares of either Fund.
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. The Evergreen Foundation Fund and the Keystone Balanced Fund each 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
Each Fund currently has identical exchange privileges. No sales charge is
imposed on an exchange. An exchange which represents an initial investment in
another fund must amount to at least $1,000. The current exchange privileges,
and the requirements and limitations attendant thereto, are described in the
Funds' respective Prospectuses and Statements of Additional Information.
DIVIDEND POLICY
Each Fund distributes its investment company taxable income quarterly and
net long-term capital gains at least annually. Dividends and distributions are
reinvested in additional shares of the same class of the respective Fund, or
paid in cash, as a shareholder has elected. See the respective Prospectuses of
the Funds for further information concerning dividends and distributions.
After the Reorganization, shareholders of the Keystone Balanced Fund that
have elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from the Evergreen Foundation Fund
reinvested in shares of the Evergreen Foundation Fund. Shareholders of the
Keystone Balanced Fund that have elected to receive dividends and/or
distributions in cash will receive dividends and/or distributions from the
Evergreen Foundation Fund in cash after the Reorganization, although they may,
after the Reorganization, elect to have such dividends and/or distributions
reinvested in additional shares of the Evergreen Foundation Fund.
Each Fund has qualified and intends to continue to qualify to be treated
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). While so qualified, so long as each Fund distributes all
of its 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. There is no assurance that investment performances will be positive
and that the Funds will meet their investment objectives.
Evergreen Foundation Fund may invest up to 15% of its net assets in
investments related to real estate, including real estate investment trusts
("REITS"). Risks associated with investment in securities of companies in the
real estate industry include: declines in the value of real estate, risks
related to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, variations in rental income,
changes in neighborhood values, the appeal of properties to tenants and
increases in interest rates. In addition, equity REITS may be affected by
changes in the value of underlying property owned by the trusts, while mortgage
REITS may be affected by the quality of credit extended. Equity and mortgage
REITS are dependent upon management skills, may not be diversified and are
subject to the risks of financing projects. Such trusts are also subject to
heavy cash flow dependency, defaults by borrowers, self liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Code and to maintain exemption from the 1940 Act. In the event an issuer of debt
securities collateralized by real estate defaulted, it is conceivable that the
Fund could end up holding the underlying real estate.
The Keystone Balanced Fund may invest up to 35% of its total assets in
securities which are rated below investment grade, commonly known as junk bonds.
Investments in junk bonds are subject to greater risk of loss of principal and
interest. In addition, the Keystone Balanced Fund may invest up to 35% of its
assets in foreign securities. Securities of foreign issuers generally entail
more risk than those of domestic issuers. The Evergreen Foundation Fund does not
invest in securities rated lower than A by Moody's Investor Service, Inc.
("Moody's) or Standard & Poor's Ratings Service ("S&P"), a division of
McGraw-Hill Companies, Inc., and does not invest in foreign securities.
REASONS FOR THE REORGANIZATION
At a regular meeting held on March 12, 1997, the Board of Trustees of the
Keystone Balanced Fund considered and approved the Reorganization as in the best
interests of the Fund and its shareholders and determined that the interests of
the existing shareholders of the Keystone Balanced Fund will not be diluted as a
result of the transactions contemplated by the Reorganization.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between the Evergreen Foundation Fund and the Keystone Balanced Fund.
Specifically, the Evergreen Foundation Fund and the Keystone Balanced Fund have
substantially similar 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 a reorganization with another Evergreen Keystone mutual
fund with a greater level of assets. As of February 28, 1997, the Evergreen
Foundation Fund's assets were approximately $1.69 billion and the Keystone
Balanced Fund's assets were approximately $7.9 million.
In addition, assuming that an alternative to the Reorganization would be
to propose that the Keystone Balanced Fund continue its existence, the Keystone
Balanced Fund would be offered through common distribution channels with the
substantially identical Evergreen Foundation Fund. The Keystone Balanced Fund
would also have to bear the cost of maintaining its separate existence. Keystone
and Evergreen Asset believe that the prospect of dividing the resources of the
Evergreen Keystone mutual fund organization between two substantially identical
funds could result in the Keystone Balanced 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, both Keystone and Evergreen Asset believe that the proposed
Reorganization would be in the best interest of each Fund and its shareholders.
The Board of Trustees of the Keystone Balanced Fund met and considered the
recommendation of Keystone and Evergreen Asset, 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 shareholder
interests; (iii) expense ratios, fees and expenses of the Keystone Balanced Fund
and the Evergreen Foundation Fund; (iv) the comparative performance records of
each of the Funds; (v) compatibility of their investment objectives and
policies; (vi) service features available to shareholders in the respective
funds; (vii) the investment experience, expertise and resources of Evergreen
Asset; (viii) the fact that FUNB will bear the expenses incurred by the Keystone
Balanced Fund in connection with the Reorganization; (ix) the fact that the
Evergreen Foundation Fund will assume [_________________] liabilities of the
Keystone Balanced Fund; and (x) the expected federal income tax consequences of
the Reorganization.
The Trustees also considered the benefits to be derived by shareholders of
the Keystone Balanced Fund from the sale of its assets to the Evergreen
Foundation Fund. 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 by shareholders of the Keystone Balanced Fund
in the combined fund. In addition, the Trustees considered that there are
alternatives available to shareholders of the Keystone Balanced Fund, 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 the Evergreen Foundation Fund also concluded at a
regular meeting on March 11, 1997 that the proposed Reorganization would be in
the best interests of shareholders of the Evergreen Foundation Fund and that the
interests of the shareholders of the Evergreen Foundation Fund will not be
diluted as a result of the transactions contemplated by the Reorganization.
THE TRUSTEES OF THE KEYSTONE BALANCED FUND RECOMMEND THAT THE SHAREHOLDERS
OF THE KEYSTONE BALANCED FUND 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 the Evergreen Foundation Fund will acquire all of
the assets of the Keystone Balanced Fund in exchange for shares of the Evergreen
Foundation Fund and the assumption by the Evergreen Foundation Fund of [_____
_________] liabilities of the Keystone Balanced Fund on or about July [ __ ],
1997 or such other date as may be agreed upon by the parties (the "Closing
Date"). Prior to the Closing Date, the Keystone Balanced Fund will endeavor to
discharge all of its known liabilities and obligations. The Evergreen Foundation
Fund will not assume any liabilities or obligations of the Keystone Balanced
Fund other than those reflected in an unaudited statement of assets and
liabilities of the Keystone Balanced Fund prepared as of the close of regular
trading on the NYSE, currently 4:00 p.m. Eastern time, on the business day
immediately prior to the Closing Date. The number of full and fractional shares
of each Class of the Evergreen Foundation Fund to be received by the
shareholders of the Keystone Balanced Fund will be determined by dividing the
value of the assets of the Keystone Balanced Fund to be acquired by the ratio of
the net asset value per share of each respective Class of the Evergreen
Foundation Fund and each Class of the Keystone Balanced Fund, computed 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 both Funds, will
compute the value of the Funds' 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 the Evergreen Foundation
Fund, 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, the Keystone Balanced Fund shall 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 Keystone Balanced Fund's shareholders (in shares of the
Keystone Balanced Fund, or in cash, as the shareholder has previously elected)
all of the Keystone Balanced Fund's investment company taxable income for the
taxable year 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 years ending on or prior to the Closing Date (after reductions for
any capital loss carry forward).
As soon after the Closing Date as conveniently practicable, the Keystone
Balanced Fund will liquidate and distribute pro rata to shareholders of record
as of the close of business on the Closing Date the full and fractional
Corresponding Shares of the Evergreen Foundation Fund received by the Keystone
Balanced Fund. Such liquidation and distribution will be accomplished by the
establishment of accounts in the names of the Keystone Balanced Fund's
shareholders on the share records of the Evergreen Foundation Fund's transfer
agent. Each account will represent the respective pro rata number of full and
fractional Corresponding Shares of the Evergreen Foundation Fund due to the
Keystone Balanced Fund's shareholders. All issued and outstanding shares of the
Keystone Balanced Fund, including those represented by certificates, will be
canceled. The Evergreen Foundation Fund does not issue share certificates to
shareholders. The shares of the Evergreen Foundation Fund to be issued will have
no preemptive or conversion rights. After such distribution and the winding up
of its affairs, the Keystone Balanced Fund will be terminated. In connection
with such termination, the Keystone Balanced Fund will file with the SEC an
application for deregistration as a registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by the Keystone Balanced Fund'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 the
Keystone Balanced Fund's shareholders, the Plan may be terminated (a) by the
mutual agreement of the Keystone Balanced Fund and the Evergreen Foundation
Fund; 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 the Keystone Balanced Fund in connection with the
Reorganization (including the cost of any proxy soliciting agents) and the
expenses of the Evergreen Foundation Fund will be borne by FUNB whether or not
the Reorganization is consummated.
If the Reorganization is not approved by shareholders of the Keystone
Balanced Fund, the Board of Trustees of the Keystone Balanced Fund 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, the Keystone Balanced Fund will receive an
opinion of counsel 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 the Keystone Balanced Fund solely
in exchange for shares of the Evergreen Foundation Fund and the assumption by
the Evergreen Foundation Fund of [________________] liabilities, followed by the
distribution of the Evergreen Foundation Fund's shares by the Keystone Balanced
Fund in dissolution and liquidation of the Keystone Balanced Fund, will
constitute a "reorganization" within the meaning of section 368(a)(1)(C) of the
Code, and the Evergreen Foundation Fund and the Keystone Balanced Fund will each
be a "party to a reorganization" within the meaning of section 368(b) of the
Code;
(2) No gain or loss will be recognized by the Keystone Balanced Fund on
the transfer of all of its assets to the Evergreen Foundation Fund solely in
exchange for the Evergreen Foundation Fund's shares and the assumption by the
Evergreen Foundation Fund of [__________________] liabilities of the Keystone
Balanced Fund or upon the distribution of the Evergreen Foundation Fund's shares
to the Keystone Balanced Fund's shareholders in exchange for their shares of the
Keystone Balanced Fund;
(3) The tax basis of the assets transferred will be the same to the
Evergreen Foundation Fund as the tax basis of such assets to the Keystone
Balanced Fund immediately prior to the Reorganization, and the holding period of
such assets in the hands of the Evergreen Foundation Fund will include the
period during which the assets were held by the Keystone Balanced Fund;
(4) No gain or loss will be recognized by the Evergreen Foundation Fund
upon the receipt of the assets from the Keystone Balanced Fund solely in
exchange for the shares of the Evergreen Foundation Fund and the assumption by
the Evergreen Foundation Fund of [_________________] liabilities of the Keystone
Balanced Fund;
(5) No gain or loss will be recognized by the Keystone Balanced Fund's
shareholders upon the issuance of the shares of the Evergreen Foundation Fund to
them, provided they receive solely such shares (including fractional shares) in
exchange for their shares of the Keystone Balanced Fund; and
(6) The aggregate tax basis of the shares of the Evergreen Foundation
Fund, including any fractional shares, received by each of the shareholders of
the Keystone Balanced Fund pursuant to the Reorganization will be the same as
the aggregate tax basis of the shares of the Keystone Balanced Fund held by such
shareholder immediately prior to the Reorganization, and the holding period of
the shares of the Evergreen Foundation Fund, including fractional shares,
received by each such shareholder will include the period during which the
shares of the Keystone Balanced Fund exchanged therefor were held by such
shareholder (provided that the shares of the Keystone Balanced Fund 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, each Keystone Balanced Fund shareholder
would recognize a taxable gain or loss equal to the difference between his or
her tax basis in his or her Keystone Balanced Fund shares and the fair market
value of the Evergreen Foundation Fund shares he or she received. Shareholders
of the Keystone Balanced Fund should consult their tax advisers regarding the
effect, if any, of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion relates only to the federal income
tax consequences of the Reorganization, shareholders of the Keystone Balanced
Fund should also consult their tax advisers as to state and local tax
consequences, if any, of the Reorganization.
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 the Evergreen Foundation Fund.
PRO-FORMA CAPITALIZATION
The following table sets forth the capitalization of the Evergreen
Foundation Fund and the Keystone Balanced Fund as of February 28, 1997 and 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 0.67, 0.67, and 0.67 Class A, Class B and Class C shares,
respectively, of the Evergreen Foundation Fund issued for each Class A, Class B
and Class C share, respectively, of the Keystone Balanced Fund.
CAPITALIZATION OF THE EVERGREEN FOUNDATION FUND AND KEYSTONE BALANCED FUND
Evergreen
Evergreen Foundation
Keystone Foundation Fund After
Balanced Fund Fund Reorganization
------------------ ---------------- -----------------
Net Assets (in 000's)
Class A $ 2,010,871 $ 224,640,677 $ 226,651,548
Class B $ 5,480,475 $ 610,544,128 $ 616,024,603
Class C $ 373,158 $ 28,239,270 $ 28,612,428
Class Y $ 0 $ 824,922,775 $ 824,922,775
Total $ 7,864,504 $ 1,688,346,850 $1,696,211,354
Evergreen
Evergreen Foundation
Keystone Foundation Fund After
Balanced Fund Fund Reorganization
------------------- ------------------ -----------------
Net Asset Value Per
Share
Class A $11.09 $16.64 $16.64
Class B $11.10 $16.56 $16.56
Class C $11.09 $16.56 $16.56
Class Y N/A $16.67 $16.67
Shares Outstanding
Class A 181,380 13,497,224 13,618,070
Class B 493,795 36,865,092 37,196,038
Class C 33,656 1,705,646 1,728,180
Class Y 0 49,490,163 49,490,163
-------- ----------- -----------
Total 708,831 101,558,125 102,032,451
======= =========== ===========
The table set forth above should not be relied on to reflect the number of
shares to be received by Keystone Balanced Fund shareholders in the
Reorganization; the actual number of shares to be received will depend upon the
net asset value and number of shares outstanding of each Fund at the time of the
Reorganization.
SHAREHOLDER INFORMATION
As of May 2, 1997 (the "Record Date"), there were the following number of
each Class of shares of beneficial interest of the Keystone Balanced Fund and
the Evergreen Foundation Fund outstanding:
Class of Shares Evergreen Foundation Keystone Balanced
Fund Fund
- -------------------- ------------------------ ------------------------
Class A
Class B
Class C
Class Y
All Classes
As of the Record Date, the officers and Trustees of the Keystone Balanced
Fund beneficially owned as a group less than 1% of the outstanding shares of the
Keystone Balanced Fund. To the Keystone Balanced Fund's knowledge, the following
persons owned beneficially or of record more than 5% of the Keystone Balanced
Fund's total outstanding shares as of the Record Date:
[ insert table ]
As of the Record Date, the officers and Trustees of the Evergreen
Foundation Fund beneficially owned as a group less than 1% of the outstanding
shares of the Evergreen Foundation Fund. To the Evergreen Foundation Fund's
knowledge, the following persons owned beneficially or of record more than 5% of
the Evergreen Foundation Fund's total outstanding shares as of the Record Date:
<TABLE>
<CAPTION>
Percentage of
Percentage Total Shares
Number of of Class Before Outstanding After
NAME AND ADDRESS CLASS SHARES REORGANIZATION REORGANIZATION
<S> <C> <C> <C> <C>
Charles Schwab & Co. Inc. A
101 Montgomery Street
San Francisco, CA 94104-4122
Charles Schwab & Co. Inc. Y
101 Montgomery Street
San Francisco, CA 94104-4122
First Union National Bank/EB Y
Reinvest Account
Attn: Trust Operations Fund Group
401 S. Tryon Street
3rd Floor, CMG 1151
Charlotte, NC 28202-1911
Mac & Co. Y
c/o Lieber & Co.
A/C 195-6432
c/o Mellon Bank NA
Mutual Funds
P.O.Box 320
Pittsburgh, PA 15230-0320
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectuses and Statements of
Additional Information of the Funds. The investment objectives, policies and
restrictions of the Evergreen Foundation Fund can be found in the Prospectus of
the Evergreen Foundation Fund under the caption "Investment Objectives and
Policies." The Evergreen Foundation Fund's Prospectus also offers additional
funds advised by Evergreen Asset or the Capital Management Group of FUNB. These
additional funds are not involved in the Reorganization, their investment
objectives, policies and restrictions are not discussed in this Prospectus/Proxy
Statement and their shares are not offered hereby. The investment objectives,
policies and restrictions of the Keystone Balanced Fund can be found in the
Prospectus of the Keystone Balanced Fund under the caption "Investment Objective
and Policies."
The investment objectives of the Evergreen Foundation Fund, in order of
priority, are reasonable income, conservation of capital and capital
appreciation. The Evergreen Foundation Fund's investment objective is a
fundamental policy which cannot be changed without shareholder approval. The
Fund seeks to achieve its objectives by investing in a combination of common
stocks, preferred stocks, securities convertible into or exchangeable for common
stocks, corporate and U. S. Government debt obligations, and short-term debt
instruments, such as commercial paper. The Fund's common stock investments will
include those that (at the time of purchase) pay dividends and in the view of
the Fund's investment adviser have potential for capital enhancement. Under
normal circumstances, the Fund anticipates that at least 25% of its net assets
will consist of fixed income securities. The balance will be invested in equity
securities (including securities convertible into equity securities).
The Keystone Balanced Fund seeks to provide current income and capital
appreciation consistent with the preservation of principal. The Keystone
Balanced Fund's objective is fundamental and cannot be changed without
shareholder approval. To achieve its objective, the Keystone Balanced Fund
invests in a balance of equity and debt securities. Generally, the Fund
purchases common and preferred stocks for growth and income and buys various
debt securities for income and relative stability. Keystone allocates the Fund's
assets in accordance with its assessment of economic conditions and investment
opportunities. Under normal market conditions, the Fund will invest a majority
of its assets in equity securities. The Fund will always maintain, however, at
least 25% of its total assets in fixed income securities.
Both the Evergreen Foundation Fund and Keystone Balanced Fund may invest
in debt obligations issued or guaranteed by the U.S. Government or its agencies
or instrumentalities. The fixed income portion of the Evergreen Foundation
Fund's portfolio may also include: (i) corporate obligations rated no lower than
A by Moody's or S&P; (ii) obligations of banks or banking institutions having
total assets of more than $2 billion which are members of the Federal Deposit
Insurance Corporation; and (iii) commercial paper of high quality (rated no
lower than A-2 by S&P or Prime-2 by Moody's or, if not rated, issued by
companies which have an outstanding long-term debt issue rated AAA or AA by S&P
or Aaa or Aa by Moody's).
In comparison, a minimum of 50% of the Keystone Balanced Fund's
investments in debt securities must be rated investment grade or higher, i.e.,
debt securities rated at least Baa by Moody's or at least BBB by S&P or, if
unrated, deemed by Keystone to be of comparable quality. Conversely, subject to
the Fund's general limitations on below-investment grade debt securities, 50% of
the Fund's investments in debt securities could, from time to time, consist of
below-investment grade debt securities.
If any security invested in by either of the Funds loses its rating or has
its rating reduced after the Fund has purchased it, the Fund is not required to
sell or otherwise dispose of the security, but may consider doing so.
The Keystone Balanced Fund may invest from 5% to 35% of its total assets
in below-investment grade debt securities. The Fund will not invest in debt
securities rated below B by either rating agency, or, if unrated, deemed by
Keystone to be of comparable quality. Compared to investment grade bonds, lower
rated bonds usually produce higher yields and involve higher risks.
Below-investment grade bonds are considered predominantly speculative and may be
subject to greater price volatility and greater risk of default. Either of these
factors can adversely affect the Fund's return and share price.
In contrast to the Evergreen Foundation Fund which does not invest in
foreign securities, the Keystone Balanced Fund may invest up to 35% of its
assets in foreign securities. Securities of foreign issuers generally entail
more risk than those of domestic issuers. Fluctuations in foreign exchange rates
impose an additional level of risk, possibly affecting the value of the Fund's
foreign investments and earnings, as well as gains and losses realized through
trades, and the unrealized appreciation or depreciation of investments. The Fund
may also incur costs when it shifts assets from one country to another.
Investing in securities of issuers located in emerging market countries involves
additional risks.
The characteristics of each investment policy and the associated risks are
described in the Prospectus and Statement of Additional Information of each
Fund. Both the Evergreen Foundation Fund and the Keystone Balanced Fund 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
FORM OF ORGANIZATION
The Keystone Balanced Fund and the Evergreen Foundation Trust are open-end
management investment companies registered with the SEC under the 1940 Act,
which continuously offer shares to the public. Each is organized as a
Massachusetts business trust and is governed by a Declaration of Trust, By-Laws
and Board of Trustees. Both are also governed by applicable Massachusetts and
Federal law. The Evergreen Foundation Fund is a series of Evergreen Foundation
Trust.
CAPITALIZATION
The beneficial interests in the Evergreen Foundation Fund are represented
by an unlimited number of transferable shares of beneficial interest with a
$.0001 par value per share. The beneficial interests in the Keystone Balanced
Fund are represented by an unlimited number of transferable shares of beneficial
interest with no par value. The respective Declarations of Trust under which
each Fund has been established permit the respective 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 have equal voting rights with respect to matters
affecting shareholders of all classes of each Fund, and in the case of the
Evergreen Foundation Fund, each series of the Evergreen Foundation Trust, and
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 Keystone Balanced Fund's Trustees or Evergreen Foundation
Trust's Trustees. Shareholders of each Fund vote separately, by class, as to
matters, such as approval or amendments of Rule 12b-1 distribution plans that
affect only their particular class and, in the case of the Evergreen Foundation
Fund, which is a series of the Evergreen Foundation Trust, by series as to
matters, such as approval or amendments of investment advisory agreements or
proposed reorganizations, that affect only their particular series.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the respective Declarations of Trust under which the
Funds were established disclaim shareholder liability for acts or obligations of
the series and require that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Funds or the
Trustees. The Declarations of Trust provide 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. A
substantial number of mutual funds in the United States are organized as
Massachusetts business trusts.
SHAREHOLDER MEETINGS AND VOTING RIGHTs
Neither the Keystone Balanced Fund nor Evergreen Foundation Trust, on
behalf of the Evergreen Foundation Fund or any of its other series, is required
to hold annual meetings of shareholders. However, a meeting of shareholders for
the purpose of voting upon the question of removal of a Trustee must be called
when requested in writing by the holders of at least 10% of the outstanding
shares. 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. Evergreen Investment
Trust and the Keystone Balanced Fund currently do not intend to hold regular
shareholder meetings. Neither permits cumulative voting. A majority of shares
outstanding and entitled to vote on a matter constitutes a quorum for
consideration of such matter. In either case, a majority of the shares voting is
sufficient to act on a matter (unless otherwise specifically required by the
applicable governing documents or other law, including the 1940 Act).
LIQUIDATION OR DISSOLUTION
In the event of the liquidation of a Fund 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 the Fund held by them and
recorded on the books of the Fund.
LIABILITY AND INDEMNIFICATION OF TRUSTEES
The Declaration of Trust of the Evergreen Foundation Trust provides that
no Trustee or officer shall be liable to the Fund or to any shareholder,
Trustee, officer, employee or agent of the Fund for any action or failure to act
except for his or her own bad faith, willful misfeasance, gross negligence or
reckless disregard of his or her duties. The By-laws of Evergreen Foundation
Trust provide that present and former Trustees or officers are generally
entitled to indemnification against liabilities and expenses with respect to
claims related to their position with the Fund unless, in the case of any
liability to the Fund or its shareholders, it shall have been determined that
such Trustee or officer is liable by reason of his or her willful misfeasance,
bad faith, gross negligence or reckless disregard of his or her duties involved
in the conduct of his or her office.
The Declaration of Trust of the Keystone Balanced Fund provides that a
Trustee will not be liable for errors of judgment or mistake of fact or law, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of his duties involved in the conduct of
his office. The Declaration of Trust provides that a Trustee or officer is
entitled to indemnification against liabilities and expenses with respect to
claims related to his or her position with the Keystone Balanced Fund, unless
such Trustee or officer shall have been adjudicated to have acted with bad
faith, willful misfeasance, or gross negligence, or in reckless disregard of his
or her duties, or not to have acted in good faith in the reasonable belief that
his or her action was in the best interest of the Keystone Balanced Fund, or, in
the event of settlement, unless there has been a determination that such Trustee
or officer has not engaged in willful misfeasance, bad faith, gross negligence,
or reckless disregard of his or her duties.
RIGHTS OF INSPECTION
Shareholders of the respective Funds have the same right to inspect in
Massachusetts the governing documents, records of meetings of shareholders,
shareholder lists, share transfer records, accounts and books of the Fund as are
permitted shareholders of a corporation under the Massachusetts corporation law.
The purpose of inspection must be for interests of shareholders relative to the
affairs of the Fund.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws and Massachusetts law and is
not a complete description of those documents or law. Shareholders should refer
to the provisions of such respective Declarations of Trust, By-Laws, and
Massachusetts law directly for more complete information.
ADDITIONAL INFORMATION
EVERGREEN FOUNDATION FUND. Information concerning the operation and
management of the Evergreen Foundation Fund is incorporated herein by reference
from the Prospectus dated May 1, 1997, a copy of which is enclosed, and
Statement of Additional Information dated May 1, 1997. A copy of such Statement
of Additional Information is available upon request and without charge by
writing to the Evergreen Foundation Fund, at the address listed on the cover
page of this Prospectus/Proxy Statement or by calling toll-free 1-800-807-2940.
KEYSTONE BALANCED FUND. Information about the Keystone Balanced Fund is
included in its current Prospectus dated August 16, 1996, as supplemented
January 1, 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, Statement of Additional Information, and
the Fund's Semi-Annual Report dated December 31, 1996, are available upon
request and without charge by writing to the address listed on the cover page of
this Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
The Evergreen Foundation Trust and the Keystone Balanced Fund 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 Board of Trustees of the Keystone Balanced Fund
to be used at the Special Meeting of Shareholders to be held at 3:00 p.m., June
30, 1997, at the offices of the Keystone Balanced Fund, 200 Berkeley Street,
Boston, Massachusetts 02116 and at any adjournments thereof. This
Prospectus/Proxy Statement, along with a Notice of the Meeting and a proxy card,
is first being mailed to shareholders on or about May [ __ ], 1997. 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 shares outstanding 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 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 have no effect on the outcome of the vote to approve the Plan. A proxy may
be revoked at any time on or before the Meeting by written notice to the
Secretary of the Keystone Balanced Fund, 200 Berkeley Street, Boston,
Massachusetts 02116. 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.
Approval of the Plan will require the affirmative vote of a majority of
the shares present and entitled to vote, with all classes voting together as a
single class. 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 FUNB or Keystone, their affiliates or
other representatives of the Keystone Balanced Fund (who will not be paid for
their solicitation activities). Corporate Investors Communications, Inc. ("CIC")
has been engaged by the Keystone Balanced Fund to assist in soliciting proxies,
and may contact certain shareholders of the Keystone Balanced Fund over the
telephone. Shareholders that are contacted by CIC may be asked to cast their
vote by telephonic proxy. Such proxies will be recorded in accordance with the
procedures set forth below. The Keystone Balanced Fund believes these procedures
are reasonably designed to ensure that the identity of the shareholder casting
the vote is accurately determined and that the voting instructions of the
shareholder are accurately reflected. The Keystone Balanced Fund has received an
opinion of Sullivan & Worcester LLP that addresses the validity, under the
applicable law of the Commonwealth of Massachusetts, of a proxy given orally.
The opinion concludes that a Massachusetts court would find that there is no
Massachusetts law or Massachusetts public policy against the acceptance of
proxies signed by an orally-authorized agent.
In all cases where a telephonic proxy is solicited, the CIC representative
will ask you for your full name, address, social security or employer
identification number, title (if you are authorized to act on behalf of an
entity, such as a corporation), and number of shares owned. If the information
solicited agrees with the information provided to CIC by the transfer agent to
the Keystone Balanced Fund, then the CIC representative will explain the
process, read the proposals listed on the proxy card and ask for your
instructions on each proposal. The CIC representative, although he or she will
answer questions about the process, will not recommend to the shareholder how he
or she should vote, other than to read any recommendations set forth in the
proxy statement. Within 72 hours, CIC will send you a letter or mailgram to
confirm your vote and ask you to call immediately if your instructions are not
correctly reflected in the confirmation.
It is expected that the cost of retaining CIC to assist in the proxy
solicitation process will not exceed $[________], which cost will be borne by
FUNB.
If you wish to participate in the Meeting, but do not wish to give your
proxy by telephone, you may still submit the proxy card included with this
Prospectus/Proxy Statement or attend in person. Any proxy given by you, whether
in writing or by telephone, is revocable.
In the event that sufficient votes to approve the Reorganization are not
received by June 30, 1997, 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 the
Keystone Balanced Fund 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 the Evergreen
Foundation Fund which they receive in the transaction at their then-current net
asset value subject to any applicable CDSC. Shares of the Keystone Balanced Fund
may be redeemed at any time prior to the consummation of the Reorganization.
Keystone Balanced Fund shareholders may wish to consult their tax advisers as to
any differing consequences of redeeming Keystone Balanced Fund shares prior to
the Reorganization or exchanging such shares in the Reorganization.
The Keystone Balanced Fund 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 the Keystone
Balanced Fund at the address set forth on the cover of this Prospectus/Proxy
Statement such that they will be received by the Keystone Balanced Fund in a
reasonable period of time prior to any such meeting.
The votes of the shareholders of the Evergreen Foundation Fund are not
being solicited by this Prospectus/Proxy Statement and are not required to carry
out the Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise the Keystone Balanced Fund 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 the Keystone Balanced Fund as of June 30, 1996
(audited) and December 31, 1996 (unaudited) have been incorporated by reference
into this Prospectus/Proxy Statement. The financial statements as of June 30,
1996 have been incorporated by reference into this Prospectus/Proxy 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 of the Evergreen Foundation Fund as of December
31, 1996 and the financial highlights for the periods indicated therein have
been incorporated by reference into or included in this Prospectus/Proxy
Statement in reliance on 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 auditing and accounting.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the Evergreen
Foundation Fund will be passed upon by Sullivan & Worcester LLP, Washington,
D.C.
OTHER BUSINESS
The Trustees of the Keystone Balanced Fund 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 BOARD OF TRUSTEES OF THE KEYSTONE BALANCED FUND, INCLUDING THE
INDEPENDENT TRUSTEES, RECOMMENDS APPROVAL OF THE PLAN AND ANY UNMARKED PROXIES
WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE
PLAN.
May [ __ ] , 1997
18995
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of this
day of , 1997, by and between Evergreen Foundation Trust, a Massachusetts
business trust, with its principal place of business at 2500 Westchester Avenue,
Purchase, New York 10577, with respect to its Evergreen Foundation Fund series
(the "Acquiring Fund"), and Keystone Balanced Fund II, a Massachusetts business
trust, with its principal place of business at 200 Berkeley Street, Boston,
Massachusetts 02116, with respect to its Keystone Balanced Fund II 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, Class B and Class C shares of
beneficial interest, $.0001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of [_____
______] liabilities of the Selling Fund; (iii) and 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 a registered investment
company and a separate investment series of an open-end, registered investment
company of the management type, respectively, 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 Evergreen Foundation Trust have determined that the
exchange of all of the assets of the Selling Fund for Acquiring Fund Shares and
the assumption of [_____________] 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 and that the interests of the
existing shareholders of the Acquiring Fund will not be diluted as a result of
the transactions contemplated herein;
WHEREAS, the Trustees of the Keystone Balanced Fund II have determined that the
Selling Fund should exchange all of its assets and [______________] 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;
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 [____________] 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 futures interests 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 Selling Fund
reserves the right to sell any of such securities, but will not, without the
prior written approval of the Acquiring Fund, acquire any additional securities
other than securities of the type in which the Acquiring Fund is permitted to
invest.
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. In the event that the Selling Fund holds any investments that the
Acquiring Fund may not hold, the Selling 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.
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 behalfof 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 permitted to be charged to the Acquiring Fund under the
National Association of Securities Dealers, Inc. Conduct Rule 2830 minus the
amount of the sales charges paid or accrued (including asset based sales
charges), plus permitted interest ("Aggregate NASD Cap"), the Acquiring Fund
will add to its Aggregate NASD Cap existing immediately prior to the
Reorganization the Aggregate NASD Cap of the Selling Fund immediately prior to
the Reorganization.
1.4 LIQUIDATION AND DISTRIBUTION. On or soon after the Closing Date as is
conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Valuation Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1; and (b) the Selling Fund will thereupon proceed to dissolve as
set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund to open accounts
on the share records of the Acquiring Fund in the names of the Selling Fund
Shareholders and representing the respective pro rata number of the Acquiring
Fund Shares due such shareholders. All issued and outstanding shares of the
Selling Fund will simultaneously be cancelled 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 Evergreen
Foundation 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 Exchange on the Valuation Date, using the
valuation procedures set forth in the Evergreen Foundation 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.
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 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
Keystone Investment Management Company, 200 Berkeley Street, Boston, MA 02116,
or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as custodian
for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets shall have been delivered in
proper form to the Acquiring Fund on the Closing Date; and (b) all necessary
taxes including all applicable Federal and state stock transfer stamps, if any,
shall have been paid, or provision for payment shall have been made, in
conjunction with the delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation Date (a)
the New York Stock Exchange or another primary trading market for portfolio
securities of the Acquiring Fund or the Selling Fund shall be closed to trading
or trading thereon shall be restricted; or (b) trading or the reporting of
trading on said Exchange or elsewhere shall be disrupted so that accurate
appraisal of the value of the net assets of the Acquiring Fund or the Selling
Fund is impracticable, the Valuation Date shall be postponed until the first
business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Keystone Service Company, as
transfer agent for the Selling Fund as of the Closing Date ("EKSC"), 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 EKSC, 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 the Keystone Balanced Fund II, 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 the sole 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 registered
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.
(d) The Selling Fund is not, and the execution, delivery, and performance
of this Agreement (subject to shareholder approval) will not, result in
a violation of any provision of the Keystone Balanced Fund II's
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.
(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 December 31, 1996 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 December 31, 1996, there has not been any material adverse change
in the Selling Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Selling Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by the
Acquiring Fund. For the purposes of this subparagraph (h), a decline
in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all Federal and other tax returns and reports of
the Selling Fund required by law to have been filed by such dates shall
have been filed, and all Federal and other taxes shown due on said
returns and reports shall have been paid, or provision shall have been
made for the payment thereof. To the best of the Selling Fund's
knowledge, no such return is currently under audit, and no assessment
has been asserted with respect to such returns.
(j) For each fiscal year of its operation, the Selling Fund has met the
requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each
such year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are, and at the
Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (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 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 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 Massachusetts
business trust duly organized, validly existing and in good standing
under the laws of The Commonwealth of Massachusetts.
(b) The Acquiring 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 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 a violation of the Evergreen
Foundation Trust's Declaration of Trust or By-Laws or of any material
agreement, indenture, instrument, contract, lease, or other undertaking
to which the Acquiring Fund is a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling Fund and
accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is
presently pending or to its knowledge threatened against the Acquiring
Fund or any of its properties or assets, which, if adversely
determined, would materially and adversely affect its financial
condition and the conduct of its business or the ability of the
Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the
basis for the institution of such proceedings and is not a party to or
subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions contemplated
herein.
(f) The financial statements of the Acquiring Fund at December 31, 1996
have been audited by KPMG Peat Marwick LLP, certified public
accountants, and 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 December 31, 1996, 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 (except that, under Massachusetts law,
shareholders of the Acquiring Fund could, under certain circumstances,
be held personally liable for obligations of the Acquiring Fund). The
Acquiring Fund does not have outstanding any options, warrants, or
other rights to subscribe for or purchase any Acquiring Fund Shares,
nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement have been
duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of
the Acquiring Fund enforceable in accordance with its terms, subject as
to enforcement, to bankruptcy, insolvency, reorganization, moratorium,
and other laws relating to or affecting creditors' rights and to
general equity principles.
(l) The Acquiring Fund Shares to be issued and delivered to the Selling
Fund, for the account of the Selling Fund Shareholders, pursuant to the
terms of this Agreement will, at the Closing Date, have been duly
authorized and, when so issued and delivered, will be duly and validly
issued Acquiring Fund Shares, and will be fully paid and non-assessable
(except that, under Massachusetts law, shareholders of the Acquiring
Fund could, under certain circumstances, be held personally liable for
obligations of the Acquiring Fund).
(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.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5. 1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling Fund each
will operate its business in the ordinary course between the date hereof and the
Closing Date. It being understood that such ordinary course of business will
include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. The Keystone Balanced Fund II 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 certified by the Keystone Balanced
Fund II's President, its Treasurer, and its independent auditors.
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.
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 Evergreen Foundation 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 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 Acquiring 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
Acquiring Fund, and, assuming that the Prospectus and Proxy Statement,
and Registration Statement comply with the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution and delivery of this Agreement by the Selling
Fund, is a valid and binding obligation of the Acquiring Fund
enforceable against the Acquiring Fund in accordance with its terms,
subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium, and other laws relating to or affecting creditors' rights
generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the net asset
value thereof has been paid, the Acquiring Fund Shares to be issued and
delivered to the Selling Fund on behalf of the Selling Fund
Shareholders as provided by this Agreement are duly authorized and upon
such delivery will be legally issued and outstanding and fully paid and
non-assessable (except that, under Massachusetts law, shareholders of
the Acquiring Fund could, under certain circumstances, be held
personally liable for obligations of the Acquiring Fund), 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 Commonwealth of
Massachusetts 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.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund contained
in this Agreement shall be true and correct as of the date hereof and as of the
Closing Date with the same force and effect as if made on and as of the Closing
Date, and the Selling Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by the Keystone Balanced Fund
II's President or Vice President and its Treasurer or Assistant Treasurer, in
form and substance satisfactory to the Acquiring Fund and dated as of the
Closing Date, to such effect and as to such other matters as the Acquiring Fund
shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a statement of
the Selling Fund's assets and liabilities, together with a list of the Selling
Fund's portfolio securities showing the tax costs of such securities by lot and
the holding periods of such securities, as of the Closing Date, certified by the
Treasurer of the Keystone Balanced Fund II.
7.3 The Acquiring Fund shall have received on the Closing Date an opinion of
Sullivan & Worcester LLP, counsel to the Selling Fund, in a form satisfactory to
the Acquiring Fund covering the following points:
(a) The Selling Fund is the sole 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 the sole 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) his Agreement has been duly authorized, executed and delivered by the
Selling Fund, and, assuming that the Prospectus and Proxy Statement,
and Registration Statement comply with the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder 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.
(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.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Selling Fund in accordance with the provisions of the Keystone Balanced Fund
II's 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 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 investment company taxable
income for all taxable years ending on or prior to the Closing Date (computed
without regard to any deduction for dividends paid) and all of its net capital
gain realized in all taxable years 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 substantially all of the Selling Fund assets in
exchange for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of [________________] 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
[________________] 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 [_________________] 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 Selling Fund Shareholders upon
the exchange of their Selling Fund shares for the Acquiring Fund Shares
in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares received by each
Selling Fund Shareholder pursuant to the Reorganization will be the
same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding
period of the Acquiring Fund Shares to be received by each Selling Fund
Shareholder will include the period during which the Selling Fund
shares exchanged therefor were held by such shareholder (provided the
Selling Fund shares were held as capital assets on the date of the
Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the Acquiring Fund
will be the same as the tax basis of such assets to the Selling Fund
immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will
include the period during which those assets were held by the Selling
Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a letter
addressed to the Acquiring Fund, in form and substance satisfactory to the
Acquiring Fund, to the effect that
(a) they are independent certified public accountants with respect to the
Selling Fund within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of
appropriate officials of the Keystone Balanced Fund II 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 Evergreen Foundation
Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information pursuant to
procedures customarily utilized by the Acquiring Fund in valuing its
own assets; and
(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 ratio appearing in the
Registration Statement and Prospectus and Proxy Statement agree with
underlying accounting records of the Selling Fund or to 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 Evergreen Foundation Trust 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 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 underlying accounting records of the
Acquiring Fund or to written estimates by each Fund's management and
were found to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received from KPMG
Peat Marwick LLP a letter addressed to the Acquiring Fund and the Selling Fund,
dated on the Closing Date 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 substantially 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 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 of North Carolina. 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 cost 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
survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Acquiring
Fund and the Selling Fund. In addition, either the Acquiring Fund or the Selling
Fund may at its option terminate this Agreement at or prior to the Closing Date
because
(a) of a breach by the other of any representation, warranty, or
agreement contained herein to be performed at or prior to the Closing
Date, if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the obligations of the
terminating party has not been met and it reasonably appears that it
will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful default,
there shall be no liability for damages on the part of either the Acquiring
Fund, the Selling Fund, Evergreen Foundation Trust, the Keystone Balanced Fund
II, or their respective Trustees or officers, to the other party or its Trustees
or officers.
ARTICLE XII
AMENDMENTS
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 Keystone Balanced Fund II 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 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 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 the Evergreen
Foundation Trust or the Keystone Balanced Fund II, personally, but bind only the
trust property of the Selling Fund and the Acquiring Fund, as provided in the
Declarations of Trust of the Evergreen Foundation Trust and the Keystone
Balanced Fund II. The execution and delivery of this Agreement have been
authorized by the Trustees of the Keystone Balanced Fund II on behalf of the
Selling Fund, and the Evergreen Foundation Trust on behalf of the Acquiring Fund
and signed by authorized officers of the Keystone Balanced Fund II and the
Evergreen Foundation 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 Keystone
Balanced Fund II and the Evergreen Foundation Trust as provided in their
respective Declarations of Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN FOUNDATION TRUST
ON BEHALF OF EVERGREEN FOUNDATION
FUND
By:
Name:
Title:
KEYSTONE BALANCED FUND II
By:
Name:
Title:
<PAGE>
EXHIBIT B
EVERGREEN FOUNDATION FUND --
CLASS A, B AND C SHARES
FINANCIAL HIGHLIGHTS
(Picture of statue appears here)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
JANUARY 3, JANUARY 3,
YEAR 1995* YEAR 1995* YEAR
ENDED THROUGH ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period..................... $15.12 $12.24 $15.07 $12.24 $15.07
Income from investment operations:
Net investment income................................... .50 .44 .40 .36 .40
Net realized and unrealized gain on investments......... 1.16 3.14 1.15 3.09 1.14
Total from investment operations...................... 1.66 3.58 1.55 3.45 1.54
Less distributions to shareholders from:
Net investment income................................... (.50) (.47) (.40) (.39) (.40)
Net realized gain on investments........................ (.15) (.23) (.15) (.23) (.15)
Total distributions................................... (.65) (.70) (.55) (.62) (.55)
Net asset value, end of period........................... $16.13 $15.12 $16.07 $15.07 $16.06
TOTAL RETURN+............................................ 11.3% 29.7% 10.5% 28.7% 10.4%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (in millions)................. $206 $107 $570 $296 $27
Ratios to average net assets:
Expenses................................................ 1.24% 1.33%++# 1.99% 2.07%++ 1.99%
Net investment income................................... 3.39% 3.73%++# 2.64% 2.99%++ 2.64%
Portfolio turnover rate.................................. 10% 28% 10% 28% 10%
Average commission rate paid per share................... $.0649 N/A $.0649 N/A $.0649
<CAPTION>
CLASS C
JANUARY 3,
1995*
THROUGH
DECEMBER 31,
1995
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period..................... $12.24
Income from investment operations:
Net investment income................................... .34
Net realized and unrealized gain on investments......... 3.09
Total from investment operations...................... 3.43
Less distributions to shareholders from:
Net investment income................................... (.37)
Net realized gain on investments........................ (.23)
Total distributions................................... (.60)
Net asset value, end of period........................... $15.07
TOTAL RETURN+............................................ 28.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (in millions)................. $11
Ratios to average net assets:
Expenses................................................ 2.23%++#
Net investment income................................... 2.83%++#
Portfolio turnover rate.................................. 28%
Average commission rate paid per share................... N/A
</TABLE>
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
++ Annualized.
# Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of operating expenses and net investment income to average net assets would
have been the following:
<TABLE>
<CAPTION>
JANUARY 3, 1995*
THROUGH
DECEMBER 31, 1995
CLASS A CLASS C
SHARES SHARES
<S> <C> <C>
Expenses................................................................... 1.34% 2.37%
Net investment income...................................................... 3.72% 2.69%
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
EVERGREEN FOUNDATION FUND --
CLASS Y SHARES
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Picture of statue appears here)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of year.................................................... $15.13 $12.27 $13.12 $11.98
Income (loss) from investment operations:
Net investment income................................................................ .54 .51 .42 .31
Net realized and unrealized gain (loss) on investments............................... 1.16 3.07 (.57) 1.55
Total from investment operations................................................... 1.70 3.58 (.15) 1.86
Less distributions to shareholders from:
Net investment income................................................................ (.54) (.49) (.42) (.31)
Net realized gain on investments..................................................... (.15) (.23) (.28) (.41)
Total distributions................................................................ (.69) (.72) (.70) (.72)
Net asset value, end of year.......................................................... $16.14 $15.13 $12.27 $13.12
TOTAL RETURN+......................................................................... 11.5% 29.7% (1.1%) 15.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of year (in millions)................................................ $809 $623 $332 $240
Ratios to average net assets:
Expenses............................................................................. .99% 1.07% 1.14% 1.20%
Net investment income................................................................ 3.64% 3.89% 3.51% 2.81%
Portfolio turnover rate............................................................... 10% 28% 33% 60%
Average commission rate paid per share................................................ $.0649 N/A N/A N/A
<CAPTION>
1992
<S> <C>
PER SHARE DATA:
Net asset value, beginning of year.................................................... $10.75
Income (loss) from investment operations:
Net investment income................................................................ .27
Net realized and unrealized gain (loss) on investments............................... 1.83
Total from investment operations................................................... 2.10
Less distributions to shareholders from:
Net investment income................................................................ (.24)
Net realized gain on investments..................................................... (.63)
Total distributions................................................................ (.87)
Net asset value, end of year.......................................................... $11.98
TOTAL RETURN+......................................................................... 20.0%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of year (in millions)................................................ $64
Ratios to average net assets:
Expenses............................................................................. 1.40%#
Net investment income................................................................ 2.93%#
Portfolio turnover rate............................................................... 127%
Average commission rate paid per share................................................ N/A
</TABLE>
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
# Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets, would have been
the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1992
<S> <C>
Expenses.................................................................. 1.43%
Net investment income..................................................... 2.90%
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
EVERGREEN FOUNDATION FUND
(Picture of statue appears here)
A REPORT FROM YOUR
PORTFOLIO MANAGER
STEPHEN A. LIEBER
In 1996, Evergreen Foundation Fund provided an 11.5%* total (Picture of
return (Class Y, no-load shares). Since inception on January Stephen A. Lieber
2, 1990, through December 31, 1996, the Fund (Class Y shares) appears here)
has provided an average annual compound return of 16.3%. The
Fund's five-year average annual compound return ended December
31, was 14.7%. The 12-month total return ended December 31,
and the average annual compound return for the period since
their inception on January 31, 1995, through December 31,
1996, for the Fund's Class A shares were 6.0% and 17.3%,
respectively. (Please see page 31 for additional performance
information.)
Nineteen-ninety-six was an unusual year in the history of
this Fund, with a substantial decline in the United States government bond
market negatively affecting its performance in the first five months. During the
first half of the year, the bond decline was only partially offset by a rise in
the Fund's common stock portfolio. In the second half of the year, there was a
major increase in the common stock portfolio and a sizable bond market recovery.
For the year, common stocks drove the performance of the Fund with their total
return, as a group, of 28.9%, nearly 600 basis points in excess of that of the
S&P 500 Reinvested Index** which returned 23.0% for the year. The fixed income
portfolio provided a 1.0% decline for the period, as compared with a 2.9% total
return for the Lehman Government/Corporate Bond Index***. While aiming primarily
to invest in common stocks, we did take the opportunity of an extraordinary drop
in the bond market in August to purchase long-term U. S. Treasury bonds on
yields as high as 7.3%, which contrasted favorably with the 6.6% available on
long-term U.S. Treasuries at the year-end.
Inflation fears led to a rising so-called "inflation premium" in the bond
market, bringing the sharp decline through May. These fears were stimulated by
the publication of statistics showing a rising trend of employment. While our
forecasts and analysis of current trends did not suggest that inflation would
increase -- which proved correct in full-year statistics -- nonetheless, we
recognized that in the prevailing environment, we could best seek returns by
shifting to a higher proportion of stocks in the portfolio. By year-end, the
asset allocation had shifted to 56.2% in equities, 35.3% in intermediate and
long-term bonds, and 8.5% in short-term cash equivalents, as compared with the
beginning of the year's 42.3% in equities, 48.1% in long-term bonds, and 9.6% in
short-term cash equivalents. This sizable reallocation of assets is consistent
with the way the Fund has been managed since its inception. While striving to
maintain a low-risk and comparatively high-yield portfolio of the highest
quality bonds as a risk averse core for the Fund's investments, we also seek to
provide capital appreciation primarily through investment in common stocks.
FIGURES REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS.
* PERFORMANCE FIGURES INCLUDE REINVESTMENT OF INCOME DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE.
INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
CLASS A SHARES ARE SUBJECT TO A MAXIMUM 4.75% FRONT END SALES CHARGE. THE
FUND ALSO OFFERS CLASS B SHARES WHICH ARE SUBJECT TO A MAXIMUM 5% CONTINGENT
DEFERRED SALES CHARGE, AND CLASS C SHARES WHICH ARE SUBJECT TO A 1%
CONTINGENT DEFERRED SALES CHARGE WITHIN THE FIRST YEAR OF PURCHASE.
PERFORMANCE FOR THESE CLASSES OF SHARES MAY BE DIFFERENT.
** THE S&P 500 IS AN UNMANAGED INDEX OF COMMON STOCKS IN INDUSTRY,
TRANSPORTATION, FINANCE, AND PUBLIC UTILITIES, DENOTING GENERAL MARKET
PERFORMANCE AS MONITORED BY STANDARD & POOR'S CORP.
*** THE LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX IS AN UNMANAGED REINVESTED
INDEX OF GOVERNMENT AND CORPORATE BONDS WITH REMAINING MATURITIES OF 1 TO 7
YEARS AND RATED SINGLE A OR HIGHER. AN INVESTMENT CAN NOT BE MADE IN AN
INDEX.
28
<PAGE>
EVERGREEN FOUNDATION FUND
(Picture of statue appears here)
A REPORT FROM YOUR
PORTFOLIO MANAGER -- (CONTINUED)
Our strategy for the use of cash equivalents was to treat these funds as a
reserve to buy common stocks in periods of market volatility, and sector or
company weakness. They allowed for a quick and sizable response to the
appearance of what your management considered to be bargain buying
opportunities. There were three major opportunities for such purchases during
the year. The first was during the sell-off in technology stocks during January.
Major purchases made at that time included initiating a position in Microsoft
Corp., which appreciated 64.5% by year-end, adding to a position in
International Business Machines Corp. (IBM) which appreciated 36.1%, and adding
to Avnet, Inc., up 34.2%. Each was viewed as a dynamic growth company which we
were able to purchase on an undervalued basis. During the major decline in the
summer, over fifty purchases were made for the portfolio. Here too, sizable
subsequent gains were achieved. Medtronic, Inc. increased 37.0% to year-end,
Cisco Systems, Inc., 28.3%, Patriot American Hospitality, Inc., 52.6%, Sunstone
Hotel Investors, Inc., 32.4%, and Intel Corp., 24.2%. During the tax-loss
selling period at year-end, we had further opportunities to purchase growth
stocks on a value basis. Among these new positions were shares of Beneficial
Corp., and KLA Instruments and the convertible preferreds of First Union Real
Estate Equity & Mortgage Investments and The Home Depot, Inc.
The strategy of buying growth stocks on a value basis provided substantial
appreciation over the course of the year. The Fund's top ten holdings in terms
of performance in the portfolio were: PHH Corp., +163.9%, Intel Corp., +130.0%,
Intel Corp. Warrants, +102.8%, Microsoft Corp., +99.0%, Peoples Heritage
Financial Group Inc., +97.1%, Starwood Lodging Trust, +90.4%, Patriot American
Hospitality, Inc., +83.0%, Roadway Express, Inc. +76.0%, Cisco Systems, Inc.,
+72.2%, and IBM, +69.6%.
The bottom ten performers for the year declined between 13.3% and 54.8%. Of
these, Caliber Systems, Inc., (which is the resulting company after Roadway
Services, Inc., spun off Roadway Express, Inc.) and eight of the ten have
reversed their declines subsequent to the Fund's fiscal year-end.
Sizable gains were taken during the year, most on partial sales of positions
held. These ranged from 454.4% in the shares of Nautica Enterprises, Inc., held
for a three-year and four-month period, 281.8% in shares of Guidant Corp., held
over a two-year period, to 128.0% in MedPartners, Inc. (originally Caremark
International Inc.), held over a three-year and nine-month period, and 108.8% in
shares of PHH Corp., held over a fourteen-month period. An important factor in
both realized and unrealized gains was corporate mergers and acquisitions.
Typically, the Evergreen Funds, which are focused on the purchase of growth on
an undervalued basis, find that a significant percentage of holdings are
subsequently acquired by other corporations. The results in 1996 followed the
pattern. Sixteen of the Fund's holdings received acquisition bids during the
year. Gains on the acquisitions which were completed ranged up to 139.0% in the
case of Baybanks, Inc., which was acquired by Bank of Boston Corp. On average
for those completed, the return for the Fund was 53.2%. Financial institutions
predominated, including five banks, as well as two insurance companies, two real
estate companies, two health care service companies, one railroad, Conrail,
Inc.; one utility, Long Island Lighting Co.; and one multiple financial service
company, PHH Corp.
While seeking companies whose undervaluation may be eventually realized
through acquisition, we also concentrate research and stock selection on
companies which are in the process of a corporate restructuring which will
unlock values. Two major holdings purchased during the year in this category
were the shares of E.I. Du Pont de Nemours & Co., Inc., purchased during market
weakness in July, and Monsanto Co. We see their potential, not merely as
unlocking values, but also as transitioning the companies into concentrating on
their growth potentials. This is consistent with our whole "value-timing"
strategy of seeking undervalued growth opportunities.
29
<PAGE>
EVERGREEN FOUNDATION FUND
(Picture of statue appears here)
A REPORT FROM YOUR
PORTFOLIO MANAGER -- (CONTINUED)
Entering the new year, we see the Fund as positioned for an environment of
moderate economic growth with inflation held in check. The best investment
returns are likely to come from companies with outstanding new products or
services, the ability to generate new markets, or to reveal underlying, but
hitherto obscured growth trends. We expect such equities to outperform the
market. Our fixed income commitment, much reduced as a percentage from that at
the beginning of the year, will continue to be subject to adjustment as business
trends and underlying economic pressures materialize. We anticipate that this
will be a year of much more governmental effort to achieve a long-term budget
solution, which should further deflate investor inflationary expectations. The
economy should continue to have limited price rises due to heightened
international competition, as a consequence of the increase of the dollar versus
other currencies, and of the spread of industrial capacity worldwide.
Corporations will, we believe, continue to show voracious appetites for buying
other companies to supplement their own growth potential, while utilizing the
excess cash generated in the strong economy of the last few years to buy back
their shares and, thus, provide enhanced earnings power for continuing
shareholders. This is an environment which, we believe, should be favorable for
the present positioning of the Fund.
Our research and portfolio management group, and our entire staff, appreciate
the confidence shown in us by the many new shareholders who have joined the Fund
in 1996. We shall endeavor to equal or surpass the Fund's long-term performance.
30
<PAGE>
EVERGREEN FOUNDATION FUND
(Picture of statue appears here)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN FOUNDATION FUND
The graphs below compare a $10,000 investment in the Evergreen Foundation
Fund (Class A, Class B, Class C and Class Y Shares) with a similar investment in
the S&P 500 Index and Lipper Balanced Funds Average.
[CHARTS TO FOLLOW.]
CLASS A
1-YEAR TOTAL RETURN = 6.0%
AVERAGE ANNUAL COMPOUND RETURN
SINCE INCEPTION = 17.3%
$9,000 $11,000 $13,000 $15,000 $17,000
1/3/95*
6/30/95
12/31/95
6/30/96
12/31/96
CLASS B
1-YEAR TOTAL RETURN = 5.5%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 17.6%
$9,000 $11,000 $13,000 $15,000 $17,000
1/3/95*
6/30/95
12/31/95
6/30/96
12/31/96
CLASS C
1-YEAR TOTAL RETURN = 9.4%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 19.1%
$9,000 $11,000 $13,000 $15,000 $17,000
1/3/95*
6/30/95
12/31/95
6/30/96
12/31/96
CLASS Y
1-YEAR TOTAL RETURN = 11.5%
AVERAGE ANNUAL COMPOUND RETURN:
5-YEAR = 14/7%
SINCE INCEPTION = 16.3%
$9,000 $13,000 $17,000 $21,000 $25,000 $29,000
1/2/90*
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
12/31/96
EVERGREEN FOUNDATION FUND
S&P 500 INDEX
LIPPER BALANCED FUND INDEX
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
and Class C Shares, assuming full redemption on December 31, 1996; (c) all
recurring fees (including investment advisory fees net of fee waiver) were
deducted; and (d) all dividends and distributions were reinvested.
The S&P 500 Index is unmanaged and includes the reinvestment of income, but
does not reflect the payment of transaction costs and advisory fees associated
with an investment in the Fund.
31
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
KEYSTONE BALANCED FUND II
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
By and In Exchange For Shares of
EVERGREEN FOUNDATION FUND
A Series of
Evergreen Foundation Trust
2500 Westchester Avenue
Purchase, New York 10577
(800) 807-2940
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of the Keystone Balanced Fund II
(the "Keystone Balanced Fund") to Evergreen Foundation Fund (the "Evergreen
Foundation Fund"), a series of the Evergreen Foundation Trust, in exchange for
Class A, Class B and Class C Shares of beneficial interest, $.0001 par value per
Share, of the Evergreen Foundation Fund, consists of this cover page and the
following described documents, each of which is attached hereto and incorporated
by reference herein:
(1) The Statement of Additional Information of the Evergreen Foundation
Fund dated May 1, 1997;
(2) The Statement of Additional Information of the Keystone Balanced Fund
dated August 16, 1996, as Supplemented January 1, 1997;
(3) Annual Report of the Evergreen Foundation Fund for the year ended
December 31, 1996; and
(4) The Semiannual Report of the Keystone Balanced Fund dated
December 31, 1996.
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the Proxy
Statement/Prospectus of the Evergreen Foundation Fund and Keystone Balanced Fund
dated __________, 1997. A copy of the Proxy Statement/Prospectus may by obtained
without charge by calling or writing to the Evergreen Foundation Fund or
Keystone Balanced Fund at the telephone numbers or addresses set forth above.
The date of this Statement of Additional Information is ____________, 1997.
<PAGE>
KEYSTONE BALANCED FUND II
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 16, 1996
AS SUPPLEMENTED JANUARY 1, 1997
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Balanced Fund II (the "Fund") dated August 16, 1996, as supplemented. You may
obtain a copy of the prospectus from the Fund's principal underwriter, Evergreen
Keystone Distributor, Inc., or your broker-dealer. Evergreen Keystone
Distributor, Inc. is located at 230 Park Avenue, New York, New York 10169.
TABLE OF CONTENTS
Page
The Fund ...................................................................2
Investment Objective and Strategies.........................................2
Investment Restrictions.....................................................2
Distributions and Taxes.....................................................5
Valuation of Securities.....................................................5
Brokerage...................................................................6
Sales Charges...............................................................8
Distribution Plans.........................................................10
Trustees and Officers......................................................13
Investment Adviser.........................................................16
Principal Underwriter......................................................18
Sub-administrator..........................................................19
Declaration of Trust.......................................................20
Standardized Total Return and Yield Quotations.............................21
Additional Information.....................................................22
Appendix .................................................................A-1
Financial Statements......................................................F-1
18502
<PAGE>
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THE FUND
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The Fund is an open-end, diversified management investment company
commonly known as a mutual fund. The Fund was formed as a Massachusetts business
trust on June 19, 1996.
Keystone Investment Management Company ("Keystone") is the Fund's
investment adviser. Evergreen Keystone Distributor, Inc. (formerly Evergreen
Funds Distributor, Inc.) ("EKD" or the "Principal Underwriter") is the Fund's
principal underwriter. Evergreen Keystone Investment Services, Inc. (formerly
Keystone Investment Distributors Company) ("EKIS") is the predecessor to the
Principal Underwriter. See "Investment Adviser" and "Principal Underwriter"
below.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND STRATEGIES
- --------------------------------------------------------------------------------
The Fund seeks to provide current income and capital appreciation
consistent with the preservation of principal.
The Fund invests in a balance of equity and debt securities. Generally,
the Fund purchases common and preferred stocks for growth and income and buys
various debt securities for income and relative stability. Keystone allocates
the Fund's assets in accordance with its assessment of economic conditions and
investment opportunities. Under normal market conditions, the Fund will invest a
majority of its assets in equity securities. The Fund will always maintain at
least 25% of its total assets in fixed income securities.
The Fund may invest up to 35% of its assets in foreign securities.
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without the approval of a majority of the Fund's
outstanding shares (as defined in the Investment Company Act of 1940, as amended
("1940 Act")). Unless otherwise stated, all references to Fund assets are in
terms of current market value.
The Fund may not do the following:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets, determined at market or other fair value at the time
of purchase, in the securities of any one issuer, or invest in more than 10% of
the outstanding voting securities of any one issuer, all as determined
immediately after such investment; provided that these limitations do not apply
to investments in securities issued or guaranteed by the United States ("U.S.")
government or its agencies or instrumentalities;
(2) concentrate its investments in the securities of issuers in any one
industry other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities;
(3) borrow money, except that the Fund may (a) borrow from any bank,
provided that, immediately after any such borrowing there is asset coverage of
at least 300% for all borrowings; and (b) enter into reverse repurchase
agreements;
(4) issue senior securities, except that the Fund may (a) make
permitted borrowings of money; (b) enter into firm commitment agreements and
collateral arrangements with respect to the writing of options on securities and
engage in permitted transactions in futures and options thereon and forward
contracts; and (c) issue shares of any additional permitted classes or series of
shares;
(5) engage in the business of underwriting securities issued by other
persons, except insofar as the Fund may be deemed to be an underwriter in
connection with the disposition of its portfolio investments;
(6) invest in real estate or commodities, except that the Fund may (a)
invest in securities directly or indirectly secured by real estate and interests
therein and securities of companies that invest in real estate and interests
therein, including mortgages and other liens; and (b) enter into financial
futures contracts and options thereon for hedging purposes and enter into
forward contracts; and
(7) make loans, except that the Fund may (a) make, purchase, or hold
publicly and nonpublicly offered debt securities (including convertible
securities) and other debt investments, including loans, consistent with its
investment objective; (b) lend its portfolio securities to broker-dealers; and
(c) enter into repurchase agreements.
It is the position of the staff of the Securities and Exchange
Commission (the "Commission") that investment (including holdings of debt
securities) of 25% or more of the value of the Fund's assets in any one industry
represents concentration; it being understood that securities issued by the U.S.
government or state governments or political subdivisions thereof are excluded
from the calculation because these issuers are not considered by the staff of
the Commission to be members of any industry.
OTHER FUNDAMENTAL POLICIES
Notwithstanding any other investment policy or restriction, the Fund
may invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment
objectives, policies, and restrictions as the Fund.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the non-fundamental policies set forth below,
which may be changed without shareholder approval.
The Fund may not do the following:
(1) borrow money except for temporary or emergency purposes (not for
leveraging or investment), and it will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding;
(2)(a) sell securities short (except by selling futures contracts or
writing covered options), unless it owns, or by virtue of ownership of other
securities, has the right to obtain, without additional consideration,
securities identical in kind and amount to the securities sold short; or (b)
purchase securities on margin, except for such short-term credits as are
necessary for the clearance of transactions, and provided that the Fund may make
initial and variation so-called "margin" payments in connection with purchases
or sales of futures contracts or of options on futures contracts or forwards or
other similar instruments;
(3) pledge, mortgage, or hypothecate its assets, except that the Fund
may pledge not more than one-third of its total assets (taken at current value)
to secure borrowings made in accordance with its investment restrictions on
borrowings, and provided that the Fund may make initial and variation margin
payments in connection with purchases or sales of futures contracts or of
options on futures contracts or forwards or other similar instruments;
(4) purchase the securities of any other investment company, except by
purchase in the open market subject only to customary broker's commissions and
provided that any such purchase will not result in duplication of sales charges
or management fees, and except in connection with any merger, consolidation, or
reorganization;
(5) invest in oil, gas, or other mineral leases or development programs
(except the Fund may invest in companies that own or invest in such interests);
(6) invest in real estate limited partnerships; and
(7) purchase warrants, valued at the lower of cost or market, in excess
of 5% of the value of the Fund's net assets; included within that amount, but
not to exceed 2% of the value of the Fund's net assets, may be warrants that are
not listed on the New York or American Stock Exchanges; warrants acquired by the
Fund at any time in units or attached to securities are not subject to this
restriction.
OTHER NON-FUNDAMENTAL POLICIES
The Fund intends to follow the policies of the Commission as they are
adopted from time to time with respect to illiquid securities, including (1)
treating as illiquid securities that may not be disposed of in the ordinary
course of business within seven days at approximately the value at which the
Fund has valued the investment on its books; and (2) limiting its holdings of
such securities to 15% of its net assets. The purchase of restricted securities
is not to be deemed engaging in underwriting.
In order to permit the sale of Fund shares in certain or foreign
countries, the Fund may make commitments more restrictive than the investment
restrictions and undertakings described above. Should the Fund determine that
any such commitment is no longer in the best interests of the Fund, it may
revoke the commitment by terminating sales of its shares in the country
involved.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund distributes to its shareholders dividends from net investment
income quarterly and net realized capital gains, if any, annually in shares or,
at the option of the shareholder, in cash. Distributions are taxable whether
received in cash or additional shares. Shareholders who have not opted, prior to
the record date for any distribution, to receive cash will receive a number of
distributed shares determined on the basis of the amount of the distribution and
the Fund's net asset value per share computed at the end of the day on the
record date after adjustment for the distribution. Net asset value is used in
computing the number of shares in both gains and income distribution
reinvestments. Account statements and/or checks as appropriate will be mailed to
shareholders within seven days after the Fund pays the distribution. Unless the
Fund receives instructions to the contrary from a shareholder before the record
date, it will assume that the shareholder wishes to receive that distribution
and future gains and income distributions in shares. Instructions continue in
effect until changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder regardless of the period of time Fund shares have been held by the
shareholder. If such shares are held less than six months and redeemed at a
loss, however, the shareholder will recognize a long-term capital loss on such
shares to the extent of the long-term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been pre-determined, to the best
of the Fund's ability, to be taxable as ordinary income. Shareholders of the
Fund will be advised annually of the federal income tax status of distributions.
- --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's securities are generally determined as
follows:
(1) securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Trustees;
(2) securities traded in the over-the-counter market, other than on
NMS, for which market quotations are readily available, are valued at the mean
of the bid and asked prices at the time of valuation;
(3) instruments maturing in more than sixty days, for which market
quotations are readily available, are valued at current market value;
(4) instruments purchased maturing in sixty days or less (including all
master demand notes) are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market;
(5) instruments maturing in more than sixty days when purchased that
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest, approximates
market; and
(6) the following securities are valued at prices deemed in good faith
to be fair under procedures established by the Board of Trustees: (a)
securities, including restricted securities, for which complete quotations are
not readily available; (b) listed securities or those on NMS if, in the Fund's
opinion, the last sales price does not reflect a current market value or if no
sale occurred; and (c) other assets.
The Fund believes that reliable market quotations are generally not
readily available for purposes of valuing certain fixed income securities. As a
result, it is likely that most of the valuations for such securities will be
based upon their fair value determined under procedures that have been approved
by the Board of Trustees. The Board of Trustees has authorized the use of a
pricing service to determine the fair value of such fixed income securities and
certain other securities.
Foreign securities for which market quotations are not readily
available are valued on the basis of valuations provided by a pricing service,
approved by the Fund's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities and various relationships between
securities and yield to maturity in determining value.
- --------------------------------------------------------------------------------
BROKERAGE
- --------------------------------------------------------------------------------
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large block
is involved;
4. the broker's readiness to execute potentially difficult transactions
in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information.
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research and other statistical and
factual information from a broker, the Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement (as defined below). Keystone believes that the
cost, value and specific application of such information are indeterminable and
cannot be practically allocated between the Fund and its other clients who may
indirectly benefit from the availability of such information. Similarly, the
Fund may indirectly benefit from information made available as a result of
transactions effected for Keystone's other clients. Under the Advisory
Agreement, Keystone is permitted to pay higher brokerage commissions for
brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone follows such a practice,
it will do so on a basis that is fair and equitable to the Fund.
Neither the Fund nor Keystone intends on placing securities
transactions with any particular broker. The Fund's Board of Trustees has
determined, however, that the Fund may consider sales of Fund shares as a factor
in the selection of brokers to execute portfolio transactions, subject to the
requirements of best execution described above.
BROKERAGE COMMISSIONS
The Fund expects to purchase and sell its equity securities through
brokerage transactions for which commissions are payable. Purchases and sales of
debt securities will usually be principal transactions. Such debt securities,
however, are purchased directly from the issuer or from an underwriter or market
maker for the securities. The Fund does not usually pay brokerage commissions
when buying a security in a principal transaction. Purchases from underwriters
will include the underwriting commission or concession. Purchases from dealers
serving as market makers will include a dealer's mark up or reflect a dealer's
mark down. Where transactions are made in the over-the-counter market, the Fund
will deal with primary market makers unless more favorable prices are otherwise
obtainable.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, the Principal Underwriter, or any of their affiliated
persons, as defined in the 1940 Act.
The Board of Trustees will, from time to time, review the Fund's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the Board
of Trustees may change, modify or eliminate any of the foregoing practices.
- --------------------------------------------------------------------------------
SALES CHARGES
- --------------------------------------------------------------------------------
The Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, the Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. The Fund charges a CDSC
as reimbursement for certain expenses, such as commissions or shareholder
servicing fees, that it has incurred in connection with the sale of its shares
(see "Distribution Plans"). If imposed, the Fund deducts CDSCs from the
redemption proceeds you would otherwise receive. CDSCs attributable to your
shares are, to the extent permitted by the National Association of Securities
Dealers, Inc. ("NASD"), paid to the Principal Underwriter or its predecessor.
See the prospectus for additional information on a particular class.
CLASS DISTINCTIONS
CLASS A SHARES
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
CLASS B SHARES
The Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
the Fund charges a CDSC on shares redeemed as follows:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase....................5.00%
Second twelve-month
period following the month of purchase....................4.00%
Third twelve-month
period following the month of purchase....................3.00%
Fourth twelve-month
period following the month of purchase....................3.00%
Fifth twelve-month
period following the month of purchase....................2.00%
Sixth twelve-month
period following the month of purchase....................1.00%
Thereafter.....................................................0.00%
Class B shares purchased after January 1, 1997, that have been
outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificate to Evergreen Keystone Service
Company (formerly Keystone Investor Resource Center, Inc.) ("EKSC") the Fund's
transfer and dividend disbursing agent.)
CLASS C SHARES
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Fund
offers Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Fund will charge a CDSC of 1.00%, if you redeem
shares purchased after January 1, 1997, during the month of your purchase and
the 12-month period following the month of your purchase. See "Calculation of
Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares. Upon request for redemption, the
Fund will redeem shares not subject to the CDSC first. Thereafter, the Fund will
redeem shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
EXCHANGES
The Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, the Fund will compute any
future CDSC based upon the date you originally purchased the shares you tendered
for exchange.
WAIVER OF SALES CHARGES Purchases of the Fund's Class A shares made
after January 1, 1997, (i) in the amount of $1 million or more; (ii) by a
corporate or certain other qualified retirement plan or a non-qualified deferred
compensation plan or a Title 1 tax sheltered annuity or TSA plan sponsored by an
organization having 100 or more eligible employees (a "Qualifying Plan") or a
TSA plan sponsored by a public educational entity having 5,000 or more eligible
employees (an "Educational TSA Plan"); or (iii) by (a) institutional investors,
which may include bank trust departments and registered investment advisers; (b)
investment advisers, consultants or financial planners who place trades for
their own accounts or the accounts of their clients and who charge such clients
a management, consulting, advisory or other fee; (c) clients of investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisers or
financial planners on the books of the broker-dealer through whom shares are
purchased; (d) institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with the Fund by the broker-dealer;
and (e) employees of First Union National Bank of North Carolina ("FUNB") and
its affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
Shares of the Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations, or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
Keystone, the Principal Underwriter, and certain of their affiliates who have
been such for not less than ninety days, and to members of the immediate
families of such persons; (2) a pension and profit-sharing plan established by
such companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees, and sales representatives;
or (3) a registered representative of a firm with a dealer agreement with the
Principal Underwriter; provided, however, that all such sales are made upon the
written assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No initial sales charge or CDSC is imposed on purchases or redemptions
of shares of the Fund by a bank or trust company in a single account in the name
of such bank or trust company as trustee, if the initial investment in shares of
the Fund or any fund in the Keystone Investments Family of Funds, purchased
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1.00% of the amount invested.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC
will be imposed on any redemptions made specifically by an individual
participant in the Qualifying Plan. This waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund
in the event of (1) death or disability of the shareholder; (2) a lump-sum
distribution from a benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of an
account having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under a Systematic Income Plan of up to 1.0% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
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DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").
The Fund's Class A, B, and C Distribution Plans have been approved by
the Fund's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees").
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1.00% of the aggregate average daily net asset
value of its shares, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the Distribution Plan, plus interest at
the prime rate plus 1% on such amounts (less any CDSCs paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is currently limited to 0.25% of the Fund's
average daily net asset value attributable to Class A shares, to finance any
activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to the
Principal Underwriter of the Fund to enable the Principal Underwriter to pay or
to have paid to others who sell Class A shares a service or other fee, at any
such intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLAN
The Class B Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class B shares sold since inception of a Distribution Plan; (2) to enable the
Principal Underwriter to pay or to have paid to others a service fee, at such
intervals as the Principal Underwriter may determine, in respect of Class B
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share
sold. The broker-dealer or other party may also receive service fees at an
annual rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient and outstanding on the books of the Fund for
specified periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with the Class B
Distribution Plan that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund ("Advances"). The Principal
Underwriter intends to seek full reimbursement of such Advances from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
reimbursements of Advances, the effect would be to extend the period of time
during which the Fund incurs the maximum amount of costs allowed by the Class B
Distribution Plan.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to the
Principal Underwriter sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning with the Fund's initial public offering
through November 30, 1996. The Fund has agreed not to reduce the rate of payment
of 12b-1 fees in respect of such Class B shares unless it terminates such
shares' Distribution Plan completely. If it terminates such Distribution Plans,
the Fund may be subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to
compensate broker-dealers or other persons for distributing shares of the Fund
will be provided by FUNB or its affiliates.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class C shares sold since inception of the Distribution Plan; (2) to enable
the Principal Underwriter to pay or to have paid to others a service fee, at
such intervals as the Principal Underwriter may determine, in respect of Class C
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, broker-dealers or others receive a commission at an
annual rate of 0.75% (subject to NASD rules) plus service fees at the annual
rate of 0.25%, respectively, of the average daily net asset value of each Class
C share maintained by the recipient and outstanding on the books of the Fund for
specified periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Trustees to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
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TRUSTEES AND OFFICERS
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Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Professor, Finance Department, George
Washington University; President, Amling & Company
(invest ment advice); and former Member, Board of
Advisers, Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Trustee of all the Evergreen funds other
than Evergreen Investment Trust; real estate
developer and construction consultant; and
President of Centrum Equities and Centrum
Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Investment Counselor to Appleton
Partners, Inc.; and former Managing Director,
Seaward Management Corporation (investment advice).
FOSTER BAM: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Trustee of all the Evergreen funds other
than Evergreen Investment Trust; Partner in the law
firm of Cummings & Lockwood; Director, Symmetrix,
Inc. (sulphur company) and Pet Practice, Inc.
(veterinary services); and former Director,
Chartwell Group Ltd. (Manufacturer of office
furnishings and accessories), Waste Disposal
Equipment Acquisition Corporation and
Rehabilitation Corporation of America
(rehabilitation hospitals).
*GEORGE S. BISSELL: Chairman of the Board, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, Chief
Executive Officer and Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman of the Board and Trustee of
Anatolia College; Trustee of University Hospital
(and Chairman of its Investment Committee); former
Director and Chairman of the Board of Hartwell
Keystone; and former Chairman of the Board,
Director and Chief Executive Officer of Keystone
Investments.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Principal, Padanaram Associates, Inc.;
and former Executive Director, Coalition of
Essential Schools, Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; and former Director, Peoples Bank
(Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Trustee, Treasurer and Chairman of the
Finance Committee, Cambridge College; Chairman
Emeritus and Director, American Institute of Food
and Wine; Chairman and President, Oldways
Preservation and Exchange Trust (education); former
Chairman of the Board, Director, and Executive Vice
President, The London Harness Company; former
Managing Partner, Roscommon Capital Corp.; former
Chief Executive Officer, Gifford Gifts of Fine
Foods; former Chairman, Gifford, Drescher &
Associates (environmental consulting); and former
Director, Keystone Investments and Keystone.
JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Chairman and Trustee of the Evergreen
funds; former Chairman of the Distribution
Foundation for the Carolinas; and former Vice
President of Lance Inc. (food manufacturing).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Chairman of the Board and Chief Executive
Officer, Carson Products Company; Director of
Phoenix Total Return Fund and Equifax, Inc.;
Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge
Series Fund; and former President, Morehouse
College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Chairman and Of Counsel, Keyser, Crowley
& Meub, P.C.; Member, Governor's (VT) Council of
Eco nomic Advisers; Chairman of the Board and
Director, Central Vermont Public Service
Corporation and Lahey Hitchcock Clinic; Director,
Vermont Yankee Nuclear Power Corporation, Grand
Trunk Corporation, Grand Trunk Western Railroad,
Union Mutual Fire Insurance Company, New England
Guaranty Insurance Company, Inc., and the
Investment Company Institute; former Director and
President, Associated Industries of Vermont; former
Director of Keystone, Central Vermont Railway,
Inc., S.K.I. Ltd., and Arrow Financial Corp.; and
former Director and Chairman of the Board, Proctor
Bank and Green Mountain Bank.
GERALD M. MCDONELL: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Trustee of the Evergreen funds; and Sales
Representative with Nucor-Yamoto, Inc. (Steel
producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Trustee of the Evergreen funds; former
Vice President and Director of Rexham Corporation;
and former Director of Carolina Cooperative Federal
Credit Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Trustee of the Evergreen funds; and
Partner in the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Vice Chair and former Executive Vice
President, DHR International, Inc. (executive
recruitment); former Senior Vice President, Boyden
International Inc. (executive recruit ment); and
Director, Commerce and Industry Association of New
Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
RUSSELL A. SALTON, III MD: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Trustee of the Evergreen funds; Medical
Director, U.S. Health Care/Aetna Health Services;
and former Managed Health Care Consultant; former
President, Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Trustee of the Evergreen funds; and
Attorney, Law Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Chairman, Environmental Warranty, Inc.
(Insurance agency); Executive Consultant, Drake
Beam Morin, Inc. (executive outplacement); Director
of Connecticut Natural Gas Corporation, Hartford
Hospital, Old State House Association, Middlesex
Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees,
Hartford Graduate Center; Trustee, Greater Hartford
YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corporation;
former Trustee, Kingswood-Oxford School; and former
Managing Director and Consultant, Russell Miller,
Inc.
*ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families
of Funds; Partner, Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C.; Adjunct
Professor of Law and former Associate Dean, St.
John's University School of Law; Adjunct Professor
of Law, Touro College School of Law; and former
President, Nassau County Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Investments Families of Funds; President and
Treasurer of the Evergreen funds; Senior Managing
Director, Furman Selz LLC since 1992; Managing
Director from 1984 to 1992; 230 Park Avenue, Suite
910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Investments Families of Funds;
Senior Vice President and Director of
Administration and Regulatory Services, BISYS Fund
Services; 3435 Stelzer Road, Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
Mr. Bissell is deemed an "interested person" of the Fund by virtue of
his ownership of stock of First Union Corporation ("First Union"), of which
Keystone is an indirect wholly-owned subsidiary. See "Investment Adviser." Mr.
Pettit and Mr. Simons may each be deemed an "interested person" as a result of
certain legal services rendered to a subsidiary of First Union by their
respective law firms, Holcomb and Pettit, P.A. and Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C. As of the date hereof, Mr. Pettit and Mr.
Simons are each applying for an exemption from the SEC which would allow them to
retain their status as an Independent Trustee.
After the transfer of EKD and its related mutual fund distribution and
administration business to BISYS, it is expected that all of the officers of the
Fund will be officers and/or employees of BISYS.
See "Sub-administrator."
Annual retainers and meeting fees paid by all funds in the Keystone
Investments Families of Funds (which includes more than thirty mutual funds) for
the calendar year ended December 31, 1995 totaled approximately $450,716. As of
July 31, 1996, the Trustees and officers beneficially owned less than 1% of the
Fund's then outstanding Class A, Class B and Class C shares, respectively.
Except as set forth above, the address of all of the Fund's Trustees
and officers and the address of the Fund is 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
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INVESTMENT ADVISER
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Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, the predecessor corporation to Keystone
Investments and indirectly each subsidiary of Keystone Investments, including
Keystone, were acquired (the "Acquisition") by FUNB, a wholly-owned subsidiary
of First Union Corporation ("First Union"). The predecessor corporation to
Keystone Investments was acquired by FUNB by merger into a wholly-owned
subsidiary of FUNB, which entity then succeeded to the business of the
predecessor corporation. Contemporaneously with the Acquisition, the Fund
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with EKD, a wholly-owned subsidiary of Furman
Selz LLC ("Furman Selz"). The new investment advisory agreement (the "Advisory
Agreement") was approved by the shareholders of the Fund on December 9, 1996,
and became effective on December 11, 1996.
Keystone Investments and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $133.9 billion in consolidated assets as of
September 30, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, together with Lieber & Company and
Evergreen Asset Management Corp., wholly-owned subsidiaries of FUNB, manage or
otherwise oversee the investment of over $50 billion in assets belonging to a
wide range of clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees of Independent
Trustees; (5) brokerage commissions, brokers' fees and expenses; (6) issue and
transfer taxes; (7) costs and expenses under the Distribution Plan; (8) taxes
and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for the Fund and for the Independent Trustees of
the Fund on matters relating to the Fund; (14) charges and expenses of filing
annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
The Fund pays Keystone a fee for its services at the annual rate of:
ANNUAL AGGREGATE NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE INCOME OF THE FUND
1.5% of
Gross Dividend and
Interest Income, Plus
0.60% of the first $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 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 $ 500,000,000, plus
0.30% of amounts over $ 1,000,000,000.
Keystone's fee is computed as of the close of business each business day and
payable daily.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
Keystone has currently voluntarily limited the expenses of the Fund's
Class A, B, and C shares to 1.50%, 2.25%, and 2.25% of each class's average
daily net assets respectively. Keystone intends to continue the foregoing
expense limitations on a calendar month-by-month basis. Keystone will
periodically evaluate these limitations and may modify or terminate them in the
future. Keystone will not be required to reimburse the Fund to the extent such
reimbursement would result in the Fund's inability to qualify as a regulated
investment company under the Internal Revenue Code.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaces EKIS as the Fund's principal underwriter.
EKIS may no longer act as principal underwriter of the Fund due to regulatory
restrictions imposed by the Glass-Steagall Act upon national banks such as FUNB
and their affiliates, that prohibit such entities from acting as the
underwriters of mutual fund shares. While EKIS may no longer act as principal
underwriter of the Fund as discussed above, EKIS may continue to receive
compensation from the Fund or the Principal Underwriter in respect of
underwriting and distribution services performed prior to the termination of
EKIS as principal underwriter. In addition, EKIS may also be compensated by the
Principal Underwriter for the provision of certain marketing support services to
the Principal Underwriter at an annual rate of up to .75% of the average daily
net assets of the Fund, subject to certain restrictions.
The Principal Underwriter, as agent, has agreed to use its best efforts
to find purchasers for the shares. The Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from broker-dealers, and others, acting as principals, for sales of
shares to them. The Underwriting Agreements provide that the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. The Principal
Underwriter or EKIS, its predecessor, may receive payments from the Fund
pursuant to the Fund's Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the public offering price of the shares, which is determined in accordance
with the provisions of the Fund's Declaration of Trust, By-Laws, current
prospectuses and statement of additional information. All orders are subject to
acceptance by the Fund and the Fund reserves the right, in its sole discretion,
to reject any order received. Under the Underwriting Agreements, the Fund is not
liable to anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
The Principal Underwriter has agreed that it will, in all respects,
duly conform with all state and federal laws applicable to the sale of the
shares. The Principal Underwriter has also agreed that it will indemnify and
hold harmless the Fund and each person who has been, is, or may be a Trustee or
officer of the Fund against expenses reasonably incurred by any of them in
connection with any claim, action, suit, or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
Each Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Fund's Independent Trustees, and (ii) by vote of a majority of
the Fund's Trustees, in each case, cast in person at a meeting called for that
purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of Fund shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and Fund data files.
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SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
Furman Selz provides officers and certain administrative services to
the Fund pursuant to a sub-administration agreement. For its services under that
agreement Furman Selz will receive from Keystone an annual fee at the maximum
annual rate of .01% of the average daily net assets of the Fund.
Furman Selz is located at 230 Park Avenue, New York, New York 10169.
It is expected that on or about January 2, 1997, Furman Selz will
transfer EKD, and its related mutual fund distribution and administration
business, to BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated June 19, 1996 (the "Declaration of Trust"). The Fund
is similar in most respects to a business corporation. The principal distinction
between the Fund and a corporation relates to the shareholder liability
described below. A copy of the Declaration of Trust is filed as an exhibit to
the Registration Statement, of which this statement of additional information is
a part. This summary is qualified in its entirety by reference to the
Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund is
authorized to issue additional classes or series of shares. The Fund currently
issues Class A, B and C shares, but may issue additional classes or series of
shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Fund were held to be a partnership, the possibility of the
shareholders' incurring financial loss for that reason appears remote because
the Fund's Declaration of Trust (1) contains an express disclaimer of
shareholder liability for obligations of the Fund; (2) requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees; and (3) provides for
indemnification out of the Fund's property for any shareholder held personally
liable for the obligations of the Fund.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matters, shares are entitled to one vote per share. Shares
generally vote together as one class on all matters. Classes of shares of the
Fund have equal voting rights except that each class of shares has exclusive
voting rights with respect to its respective Distribution Plan. No amendment may
be made to the Declaration of Trust that adversely affects any class of shares
without the approval of a majority of the shares of that class. Shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of the Trustees to
be elected at a meeting and, in such event, the holders of the remaining 50% or
less of the shares voting will not be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time, the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the Fund's outstanding shares.
Any Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
The Trustees have absolute and exclusive control over the management
and disposition of assets of the Fund and may perform such acts as in their sole
judgment and discretion are necessary and proper for conducting the business and
affairs of the Fund or promoting the interests of the Fund and the shareholders.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment, all dividends and distributions are added and the maximum sales
charge deducted and all recurring fees charged to all shareholder accounts are
deducted. The ending redeemable value assumes a complete redemption at the end
of the relevant periods.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund does not presently
intend to advertise current yield.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
GENERAL
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian (the "Custodian") of all securities and
cash of the Fund. The Custodian performs no investment management functions for
the Fund, but, in addition to its custodial services, is responsible for
accounting and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, serves as the independent auditors for the Fund.
EKSC 101 Main Street, Cambridge, Massachusetts 02142, a wholly-owned
subsidiary of Keystone, acts as transfer agent and dividend disbursing agent for
the Fund.
As of July 31, 1996, Keystone owned 100% of the Fund's outstanding
Class A, B, and C shares.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and statement of additional information omit
certain information contained in the Fund's Registration Statement filed with
the Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.
The Fund is one of 16 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
In addition to the Fund, the Keystone America Fund Family consists of the
following Funds having the various investment objectives described below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long-term capital growth through
investments primarily in equity securities of companies with small market
capitalizations.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of four separate series
of shares investing in different portfolio securities each of which seeks the
highest possible current income, exempt from federal income taxes and applicable
state taxes.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities each of
which seeks the highest possible current income, exempt from federal income
taxes and applicable state taxes.
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long-term capital growth by
investing primarily in equity securities.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds.
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
<PAGE>
A-1
APPENDIX
This Appendix provides additional information about the various
securities in which the Fund may invest and investment techniques that the Fund
may employ. Specifically, the Appendix provides a more detailed explanation of
(i) stock and corporate bond ratings, (ii) high yield, high risk bonds, (iii)
limited partnerships, (iv) money market instruments, and (v) derivative
instruments.
COMMON AND PREFERRED STOCK RATINGS
S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors,
such as product and industry position, corporate resources and financial policy,
with results that make some common stocks more highly esteemed than others,
Standard & Poor's Corporation ("S&P") believes that earnings and dividend
performance is the end result of the interplay of these factors and that, over
the long run, the record of this performance has a considerable bearing on
relative quality. S&P rankings, however, do not reflect all of the factors,
tangible or intangible, that bear on stock quality.
Growth and stability of earnings and dividends are deemed key elements
in establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on per-share
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
MOODY'S COMMON STOCK RANKINGS
Moody's Investors Services, Inc. ("Moody's") presents a concise statement of
the important characteristics of a company and an evaluation of the grade
(quality) of its common stock. Data presented includes: (I) capsule stock
information which reveals short and long term growth and yield afforded by the
indicated dividend, based on a recent price; (ii) a long term price chart which
shows patterns of monthly stock price movements and monthly trading volumes;
(iii) a breakdown of a company's capital account which aids in determining the
degree of conservatism or financial leverage in a company's balance sheet; (iv)
interim earnings for the current year to date, plus three previous years; (v)
dividend information; (vi) company background; (vii) recent corporate
developments; (viii) prospects for a company in the immediate future and the
next few years; and (ix) a ten year comparative statistical analysis.
This information provides investors with information on what a company does,
how it has performed in the past, how it is performing currently and what its
future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position. Evaluation is represented by the following grades:
1. High Grade
2. Investment Grade
3. Medium Grade
4. Speculative Grade
MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. AAA: An issue that is rated "AAA" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. AA: An issue that is rated "AA" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
3. A: An issue that is rated "A" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in the "aaa"
and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
4. BAA: An issue that is rated "BAA" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
5. BA: An issue that is rated "BA" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. B: An issue that is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
7. CAA: An issue that is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
8. CA: An issue that is rated "CA" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
9. C: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the creditworthiness
of an obligor, including obligors outside the U.S., with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees. Ratings of foreign obligors do not take into
account currency exchange and related uncertainties. The ratings are based on
current information furnished by the issuer or obtained by S&P from other
sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
1. likelihood of default - capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. nature of and provisions of the obligation; and
3. protection afforded by and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. AAA - Bonds that are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
2. AA - Bonds that are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in AAA securities.
3. A - Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
4. BAA - Bonds that are rated BAA are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. BA - Bonds that are rated BA are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
6. B - Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Keystone considers the ratings of Moody's and S&P assigned to various
securities, but does not rely solely on ratings assigned by Moody's and S&P
because (I) Moody's and S&P assigned ratings are based largely on historical
financial data and may not accurately reflect the current financial outlook of
companies; and (ii) there can be large differences among the current financial
conditions of issuers within the same rating category.
BELOW INVESTMENT GRADE BONDS
Prior to the 1980's, corporate bonds were primarily issued to finance growth
and development. Below investment grade bonds were predominantly bonds that
often traded at discounts from par because the company's credit ratings had been
downgraded. The rapid growth of the noninvestment grade sector of the bond
market during the 1980s was largely attributable to the issuance of such bonds
to finance corporate reorganizations. This growth paralleled a long economic
expansion. An economic downturn could severely disrupt the market for high
yield, high risk bonds and adversely affect the value of outstanding bonds and
the ability of issuers to repay principal and interest.
In addition, investors should be aware of the following risks relating to
high yield, high risk debt securities:
1. Securities rated BB or lower by S&P or Ba or lower by Moody's are
considered predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments.
2. The lower ratings of certain securities held by the Fund reflect a
greater possibility that adverse changes in the financial condition of the
issuer, or in general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuer to make payments of
interest and principal, especially if the issuer is highly leveraged. Such
issuer's ability to meet its debt obligations may also be adversely affected by
specific corporate developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
Also, an economic downturn or an increase in interest rates may increase the
potential for default by the issuers of these securities.
3. The value of certain securities held by the Fund may be more susceptible
to real or perceived adverse economic, company or industry conditions and
publicity than is the case for higher quality securities.
4. The values of certain securities, like those of other fixed income
securities, fluctuate in response to changes in interest rates. When interest
rates decline, the value of a portfolio invested in bonds can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
bonds can be expected to decline. However, the prices of these bonds are
generally less sensitive to interest rate changes than higher-rated bonds, but
more sensitive to adverse or positive economic changes or individual corporate
developments.
5. The secondary market for certain securities held by the Fund may be less
liquid at certain times than the secondary market for higher quality debt
securities, which may have an adverse effect on market price and the Fund's
ability to dispose of particular issues and may also make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing its
assets.
6. Zero coupon bonds and Payment in Kind bonds ("PIKs") involve additional
special considerations. A zero coupon bond represents ownership in serially
maturing interest payments or principal payments on specific underlying notes
and bonds, including coupons relating to such notes and bonds. The interest and
principal payments are direct obligations of the issuer. A zero coupon bond
entitles the holder to receive a single payment at maturity. There are no
periodic interest payments on a zero coupon bond. PIK bonds are debt obligations
that provide that the issuer may, at its option, pay interest on such bonds in
cash or in the form of additional debt obligations. PIK bonds trade flate (i.e.,
without accrued interest). Their price is expected to reflect an amount
representing accredit interest since the last payment.
Such investments may experience greater fluctuation in value due to changes
in interest rates than debt obligations that pay interest currently. Even though
these investments do not pay current interest in cash, the Fund is, nonetheless,
required by tax laws to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate investments in order to fulfill its intention
to distribute substantially all of its net income as dividends.
LIMITED PARTNERSHIPS
The Fund may invest in limited and master limited partnerships. A limited
partnership is a partnership consisting of one or more general partners, jointly
and severally responsible as ordinary partners, and by whom the business is
conducted, and one or more limited partners who contribute cash as capital to
the partnership and who generally are not liable for the debts of the
partnership beyond the amounts contributed. Limited partners are not involved in
the day-to-day management of the partnership. They receive income, capital gains
and other tax benefits associated with the partnership project in accordance
with terms established in the partnership agreement. Typical limited
partnerships are in real estate, oil and gas and equipment leasing, but they
also finance movies, research and development and other projects.
For an organization classified as a partnership under the Internal Revenue
Code, each item of income, gain, loss, deduction and credit is not taxed at the
partnership level but flows through to the holder of the partnership unit. This
allows the partnership to avoid taxation and to pass through income to the
holder of the partnership unit at lower individual rates.
A master limited partnership is a publicly traded limited partnership. The
partnership units are registered with the Commission and are freely exchanged on
a securities exchange or in the over-the-counter market.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of one
year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes), and obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
some of which may be subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper will consist of issues rated at the time of purchase A-1 by
S&P, or PRIME-1 by Moody's; or, if not rated, will be issued by companies which
have an outstanding debt issue rated at the time of purchase AAA, AA or A by
Moody's, or AAA, AA or A by S&P, or will be determined by Keystone to be of
comparable quality.
S&P RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The top category is as follows:
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category
are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety.
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's commercial
paper ratings are opinions of the ability of issuers to repay punctually
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following designation, judged to be investment grade, to
indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated PRIME-1 (or related supporting institutions) are
deemed to have a superior capacity for repayment of short term promissory
obligations. Repayment capacity of PRIME-1 issuers is normally evidenced by
the following characteristics:
(a) leading market positions in well-established industries;
(b) high rates of return on funds employed;
(c) conservative capitalization structures with moderate reliance
on debt and ample asset protection;
(d) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and
(e) well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
U.S. CERTIFICATES OF DEPOSIT
U.S. Certificates of deposit are receipts issued by a U.S. bank in exchange
for the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
U.S. Certificates of deposit will be limited to U.S. dollar denominated
certificates of U.S. banks, including their branches abroad, which are members
of the Federal Reserve System or the Federal Deposit Insurance Corporation, and
of U.S. branches of foreign banks, each of which have total assets at the time
of purchase in excess of $1 billion.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a variety of
Treasury securities that differ only in their interest rates, maturities and
dates of issuance and securities issued by the Government National Mortgage
Association ("GNMA"). Treasury bills have maturities of one year or less.
Treasury notes have maturities of one to ten years and Treasury bonds generally
have maturities of greater than ten years at the date of issuance. GNMA
securities include GNMA mortgage pass-through certificates. Such securities are
supported by the full faith and credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Maritime
Administration, The Tennessee Valley Authority, District of Columbia Armory
Board and Federal National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities, such as
securities of Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in the securities issued by such an instrumentality only when Keystone
determines under standards established by the Board of Trustees that the credit
risk with respect to the instrumentality does not make its securities unsuitable
investments. While the Fund may invest in such instruments, U.S. government
securities do not include international agencies or instrumentalities in which
the U.S. government, its agencies or instrumentalities participate, such as the
World Bank, Asian Development Bank or the Interamerican Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
DERIVATIVE INSTRUMENTS
Derivatives have been variously defined to include forwards, futures,
options, mortgage-backed securities, other asset-backed securities and
structured securities, such as interest rate swaps, equity swaps, index swaps,
currency swaps and caps and floors. These basic vehicles can also be combined to
create more complex products, called hybrid derivatives. The following
discussion addresses options, futures, foreign currency transactions,
mortgage-backed and other asset-backed securities, structured securities, swaps,
caps, and floors.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS
The Fund writes only covered options. Options written by the Fund will
normally have expiration dates of not more than nine months from the date
written. The exercise price of the options may be below, equal to, or above the
current market values of the underlying securities at the times the options are
written.
Unless the option has been exercised, the Fund may close out an option it
has written by effecting a closing purchase transaction, whereby it purchases an
option covering the same underlying security and having the same exercise price
and expiration date ("of the same series") as the one it has written. If the
Fund desires to sell a particular security on which it has written a call
option, it will effect a closing purchase transaction prior to or concurrently
with the sale of the security. If the Fund is able to enter into a closing
purchase transaction, the Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option.
An option position may be closed out only in a secondary market for an
option of the same series. Although the Fund will generally write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any particular time, and for some options no secondary market may exist. In such
event it might not be possible to effect a closing transaction in a particular
option. If the Fund as a covered call option writer is unable to effect a
closing purchase transaction, it will not be able to sell the underlying
securities until the option expires or it delivers the underlying securities
upon exercise.
Because the Fund intends to qualify as a regulated investment company under
the Internal Revenue Code, the extent to which the Fund may write covered call
options and enter into so-called "straddle" transactions involving put and call
options may be limited.
Many options are traded on registered securities exchanges. Options traded
on such exchanges are issued by the Options Clearing Corporation ("OCC"), a
clearing corporation which assumes responsibility for the completion of options
transactions.
OPTION WRITING AND RELATED RISKS
The Fund may write covered call and put options. A call option gives the
purchaser of the option the right to buy, and the writer the obligation to sell,
the underlying security at the exercise price during the option period.
Conversely, a put option gives the purchaser the right to sell, and the writer
the obligation to buy, the underlying security at the exercise price during the
option period.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time as the writer effects a closing purchase
transaction by purchasing an option of the same series as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. For options traded on national securities exchanges
("Exchanges"), to secure the obligation to deliver the underlying security in
the case of a call option, the writer of the option is required to deposit in
escrow the underlying security or other assets in accordance with the rules of
the OCC, an institution created to interpose itself between buyers and sellers
of options. Technically, the OCC assumes the order side of every purchase and
sale transaction on an Exchange and, by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the underlying securities alone. In return for the premium, the
covered call option writer has given up the opportunity for profit from a price
increase in the underlying security above the exercise price so long as the
option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of a premium, so long as the price of the underlying security remains above the
exercise price, but assumes an obligation to purchase the underlying security
from the buyer of the put option at the exercise price, even though the price of
the security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. In addition, the premium paid for the put effectively increases the
cost of the underlying security, thus reducing the yield otherwise available
from such securities.
Because the Fund can write only covered options, it may at times be unable
to write additional options unless it sells a portion of its portfolio holdings
to obtain new securities against which it can write options. This may result in
higher portfolio turnover and correspondingly greater brokerage commissions and
other transaction costs.
To the extent that a secondary market is available the covered option writer
may close out options it has written prior to the assignment of an exercise
notice by purchasing, on a closing purchase transaction, an option of the same
series as the option previously written. If the cost of such a closing purchase,
plus transaction costs, is greater than the premium received upon writing the
original option, the writer will incur a loss in the transaction.
PURCHASING PUT AND CALL OPTIONS
The Fund can close out a put option it has purchased by effecting a closing
sale transaction; for example, the Fund may close out a put option it has
purchased by selling a put option. If, however, a secondary market does not
exist at a time the Fund wishes to effect a closing sale transaction, the Fund
will have to exercise the option to realize any profit. In addition, in a
transaction in which the Fund does not own the security underlying a put option
it has purchased, the Fund would be required, in the absence of a secondary
market, to purchase the underlying security before it could exercise the option.
In each such instance, the Fund would incur additional transaction costs. The
Fund may also purchase call options for the purpose of offsetting previously
written call options of the same series.
The Fund would normally purchase call options in anticipation of an increase
in the market value of securities of the type in which the Fund may invest. The
purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain if, during the option period,
the value of such securities exceeded the sum of the exercise price, the premium
paid and transaction costs; otherwise the Fund would realize a loss on the
purchase of the call option.
The Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio (protective puts) or securities
of the type in which it is permitted to invest. The purchase of a put option
would entitle the Fund, in exchange for the premium paid, to sell specified
securities at a specified price during the option period. The purchase of
protective puts is designed merely to offset or hedge against a decline in the
market value of the Fund's securities. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes in the
value of underlying portfolio securities. Put options may also be purchased by
the Fund for the purpose of affirmatively benefitting from a decline in the
price of securities which the Fund does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize a loss on the purchase
of the put option.
The Fund may purchase put and call options on securities indices for the
same purposes as the purchase of options on securities. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
OPTIONS TRADING MARKETS
Options in which the Fund will trade are generally listed on Exchanges.
Exchanges on which such options currently are traded include the Chicago Board
Options Exchange and the New York, American, Pacific, and Philadelphia Stock
Exchanges. Options on some securities may not be listed on any Exchange, but
traded in the over-the-counter market. Options traded in the over-the-counter
market involve the additional risk that securities dealers participating in such
transactions would fail to meet their obligations to the Fund. The use of
options traded in the over-the-counter market may be subject to limitations
imposed by certain state securities authorities. In addition to the limits on
its use of options discussed herein, the Fund is subject to the investment
restrictions described in the prospectus and the statement of additional
information.
The staff of the Commission currently is of the view that the premiums which
the Fund pays for the purchase of unlisted options, and the value of securities
used to cover unlisted options written by the Fund are considered to be invested
in illiquid securities or assets for the purpose of the Fund's compliance with
its policies pertaining to illiquid securities.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in U.S. Treasury bonds
and notes tends to center on the most recently auctioned issues, new series of
options with expirations to replace expiring options on particular issues will
not be introduced indefinitely. Instead, the expirations introduced at the
commencement of options trading on a particular issue will be allowed to run
their course, with the possible addition of a limited number of new expirations
as the original ones expire. Options trading on each series of bonds or notes
will thus be phased out as new options are listed on the more recent issues, and
a full range of expiration dates will not ordinarily be available for every
series on which options are traded.
ON TREASURY BILLS. Because the deliverable U.S. Treasury bill changes from
week to week, writers of U.S. Treasury bill call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long position in
U.S. Treasury bills with a principal amount corresponding to the option contract
size, the Fund may be hedged from a risk standpoint. In addition, the Fund will
maintain in a segregated account with the Fund's Custodian liquid assets
maturing no later than those which would be deliverable in the event of an
assignment of an exercise notice to ensure that it can meet its open option
obligations.
ON GNMA CERTIFICATES. Options on GNMA certificates are not currently traded
on any Exchange. However, the Fund may purchase and write such options in the
over the counter market or, should they commence trading, on any Exchange.
Since the remaining principal balance of GNMA certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call holding GNMA certificates as "cover" to satisfy its delivery obligation in
the event of assignment of an exercise notice, may find that its GNMA
certificates no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered.
A GNMA certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to present cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA certificate with a certificate
which represents cover. When the Fund closes its position or replaces the GNMA
certificate, it may realize an unanticipated loss and incur transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be closed
out only in a secondary market for an option of the same series. Although the
Fund will generally purchase or write only those options for which there appears
to be an active secondary market, there is no assurance that a liquid secondary
market will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event, it might not be possible
to effect closing transactions in particular options, with the result that the
Fund would have to exercise its options in order to realize any profit and might
incur transaction costs in connection therewith. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the following:
(i) insufficient trading interest in certain options; (ii) restrictions imposed
on transactions (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an Exchange or by a
broker; (v) inadequacy of the facilities of an Exchange, the OCC or a broker to
handle current trading volume; or (vi) a decision by one or more Exchanges or a
broker to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market in that class or series of options
would cease to exist, although outstanding options that had been issued as a
result of trades would generally continue to be exercisable in accordance with
their terms.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
The Fund intends to engage in options transactions that are related to
currency and other financial futures contracts for hedging purposes and in
connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts and
related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to enter into such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather than in
the securities markets. A futures contract creates an obligation by the seller
to deliver to the buyer the commodity specified in the contract at a specified
future time for a specified price. The futures contract creates an obligation by
the buyer to accept delivery from the seller of the commodity specified at the
specified future time for the specified price. In contrast, a spot transaction
creates an immediate obligation for the seller to deliver and the buyer to
accept delivery of and pay for an identified commodity. In general, futures
contracts involve transactions in fungible goods such as wheat, coffee and
soybeans. However, in the last decade an increasing number of futures contracts
have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. The
principal financial futures exchanges in the U.S. are The Board of Trade of the
City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options. Options on currency and other
financial futures contracts are similar to options on stocks except that an
option on a currency or other financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) rather than to purchase or sell stock, currency or other
financial instruments at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account. This amount represents the amount by which the market price of
the futures contract at exercise exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised the last trading day prior to the expiration
date of the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and value of the futures
contract.
The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on financial futures contracts is
analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of call options on currency and other financial futures
contracts represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, the purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on currency or other financial futures
contracts may be purchased to hedge against an interest rate increase or a
market advance when the Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and other
financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas that may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund intends that its futures contracts and related options transactions
will be entered into for traditional hedging purposes. That is, futures
contracts will be sold to protect against a decline in the price of securities
that the Fund owns or futures contracts will be purchased to protect the Fund
against an increase in the price of securities it intends to purchase. The Fund
does not intend to enter into futures contracts for speculation.
In instances involving the purchase or sale of futures contracts by the
Fund, an amount of cash and cash equivalents or securities equal to the market
value of the futures contracts will be deposited in a segregated account with
the Fund's custodian. In addition, in the case of a purchase, the Fund may be
required to make a deposit to a margin account with a Broker to collateralize
the position, and in the case of a sale, the Fund may be required to make daily
deposits to the buyer's margin account. The Fund would make such deposits in
order to insure that the use of such futures is unleveraged.
RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and are
influenced, among other things, by changes in stock prices, market conditions,
prevailing interest rates and anticipation of future stock prices, market
movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts and
of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. A decision of
whether, when and how to hedge involves the exercise of skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Because of the low margin deposits required, futures trading normally
involves an extremely high degree of leverage. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss, as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a 10% decrease
in the value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. In order to be certain that the Fund has sufficient assets
to satisfy its obligations under a futures contract, the Fund will establish a
segregated account in connection with its futures contracts which will hold cash
or cash equivalents equal in value to the current value of the underlying
instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for currency and other financial
futures contracts, there are several special risks relating to options on
futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular option or at any particular time. The Fund will not purchase options
on any futures contract unless and until it believes that the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund invests
in foreign securities they usually will be denominated in foreign currencies and
the Fund temporarily may hold funds in foreign currencies. Thus, the Fund's
share value will be affected by changes in exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Fund may engage in forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two parties
agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the U.S. is regulated under the Commodity Exchange Act by the CFTC
and NFA. Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to only engage in currency futures contracts for
hedging purposes, and not for speculation. The Fund may engage in currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies that will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a variety of
currencies in both the U.S. and Europe. On the Philadelphia Stock Exchange, for
example, contracts for half the size of the corresponding futures contracts on
the Chicago Board Options Exchange are traded with up to nine months maturity in
marks, sterling, yen, Swiss francs and Canadian dollars. Options can be
exercised at any time during the contract life and require a deposit subject to
normal margin requirements. Since a futures contract must be exercised, the Fund
must continually make up the margin balance. As a result, a wrong price move
could result in the Fund losing more than the original investment as it cannot
walk away from the futures contract as it can an option contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in connection
with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is analogous to
the purchase of protective puts on individual stocks, where an absolute level of
protection is sought below which no additional economic loss would be incurred
by the Fund. Put options may be purchased to hedge a portfolio of foreign stocks
or foreign debt instruments or a position in the foreign currency upon which the
put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments, the
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign currency
values in response to shifting market supply and demand. When the Fund buys or
sells a foreign currency, an exposure called an open position is created. Until
the time that position can be "covered" by selling or buying an equivalent
amount of the same currency, the Fund is exposed to the risk that the exchange
rate might move against it. Since exchange rate changes can readily move in one
direction, a position carried overnight or over a number of days involves
greater risk than one carried a few minutes or hours. Techniques such as foreign
currency forward and futures contracts and options on foreign currency are
intended to be used by the Fund to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and lending
longer term to benefit from the normal tendency of interest rates to be higher
for longer maturities. However in foreign exchange trading, while the maturity
pattern of interest rates for one currency is important, it is the differential
between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Fund enters into a foreign exchange contract, it faces a risk,
however small, that the counterparty will not perform under the contract. As a
result there is a credit risk, although no extension of "credit" is intended. To
limit credit risk, the Fund intends to evaluate the creditworthiness of each
other party.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone differences between the
U.S. and foreign nations. If the Fund sells sterling it generally must pay
pounds to a counterparty earlier in the day than it will be credited with
dollars in New York. In the intervening hours, the buyer can go into bankruptcy
or can be declared insolvent. Thus, the dollars may never be credited to the
Fund.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents or limits on inflows of investment funds from abroad. Governments take
such measures for example to improve control over the domestic banking system or
to influence the pattern of receipts and payments between residents and
foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payment interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important exchange
market impact. Most disruptive are changes in rules that interfere with the
normal payments mechanism. If government regulations change and a counterparty
is either forbidden to perform or is required to do something extra, then the
Fund might be left with an unintended open position or an unintended maturity
mismatch. Dealing with such unintended long or short positions could result in
unanticipated costs to the Fund.
Other changes in official regulations influence international investment
transactions. If one of the factors affecting the buying or selling of a
currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain) or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and controls on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the Fund
may be dealing with a foreign trader whose home country is facing a payments
problem. Even though the foreign trader intends to perform on its foreign
exchange contracts, the contracts are tied to other external liabilities the
country has incurred. As a result performance may be delayed, and can result in
unanticipated cost to the Fund. This aspect of country risk is a major element
in the Fund's credit judgment as to with whom it will deal and in what amounts.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Fund, if permitted by its investment policies, may also invest in fixed
rate and adjustable rate collateralized mortgage obligations ("CMOs"), including
CMOs with rates that move inversely to market rates that are issued by and
guaranteed as to principal and interest by the U.S. government, its agencies or
instrumentalities. The principal governmental issuer of CMOs is FNMA. In
addition, FHLMC issues a significant number of CMOs. The Fund, if permitted to
invest in CMOs, will not invest in CMOs that are issued by private issuers. CMOs
are debt obligations collateralized by Mortgage Securities in which the payment
of the principal and interest is supported by the credit of, or guaranteed by,
the U.S. government or an agency or instrumentality of the U.S. government. The
secondary market for CMOs is actively traded.
CMOs are structured by redirecting the total payment of principal and
interest on the underlying Mortgage Securities used as collateral to create
classes with different interest rates, maturities and payment schedules. Instead
of interest and principal payments on the underlying Mortgage Securities being
passed through or paid pro rata to each holder (e.g., the Fund), each class of a
CMO is paid from and secured by a separate priority payment of the cash flow
generated by the pledged Mortgage Securities.
Most CMO issues have at least four classes. Classes with an earlier maturity
receive priority on payments to assure the early maturity. After the first class
is redeemed, excess cash flow not necessary to pay interest on the remaining
classes is directed to the repayment of the next maturing class until that class
is fully redeemed. This process continues until all classes of the CMO issue
have been paid in full. Among the CMO classes available are floating
(adjustable) rate classes, which have characteristics similar to ARMS, and
inverse floating rate classes whose coupons vary inversely with the rate of some
market index. The Fund, if allowed to purchase CMOs, may purchase any class of
CMO other than the residual (final) class.
INTEREST-RATE SWAP CONTRACTS
Interest rate swaps are OTC agreements between parties and counterparties to
make periodic payments to each other for a stated time, generally entered into
for the purpose of changing the nature or amount of interest being received on
debt securities held by one or both parties. The calculation of these payments
is based on an agreed-upon amount called the "notional amount." The notional
amount is not typically exchanged in swaps (except in currency swaps). The
periodic payments may be fixed or floating. Floating payments change (positively
or inversely) with fluctuations in interest or currency rates or equity or
commodity prices, depending on the swap contract's terms. Swaps may be used to
hedge against adverse changes in interest rates, for instance. Thus, if
permitted by its investment policies, the Fund may have a portfolio of debt
instruments (ARM's, for instance) the floating interest rates of which adjust
frequently because they are tied positively to changes in market interest rates.
The Fund would then be exposed to interest rate risk because a decline in
interest rates would reduce the interest receipts on its portfolio. If the
investment adviser believed interest rates would decline, the Fund, if permitted
by its investment policies, could enter into an interest rate swap with another
financial institution to hedge the interest rate risk. In the swap contract, the
Fund would agree to make payments based on a floating interest rate in exchange
for receiving payments based on a fixed interest rate. Thereafter, if interest
rates declined, the Fund's fixed rate receipts on the swap would offset the
reduction in its portfolio receipts. If interest rates rose, the higher rates
the Fund could obtain from new portfolio investments (assuming sale of existing
investments) would offset the higher rates it paid under the swap agreement.
EQUITY SWAP CONTRACTS
The counterparty to an equity swap contract would typically be a bank,
investment banking firm or broker/dealer. For example, the counterparty would
generally agree to pay the Fund the amount, if any, by which the notional amount
of the equity swap contract would have increased in value if such notional
amount had been invested in the stocks comprising the S&P 500 Index in
proportion to the composition of the Index, plus the dividends that would have
been received on those stocks. The Fund would agree to pay to the counterparty a
floating rate of interest (typically the London Inter Bank Offered Rate) on the
notional amount of the equity swap contract plus the amount, if any, by which
that notional amount would have decreased in value had it been invested in such
index stocks. Therefore, the return to the Fund on any equity swap contract
should be the gain or loss on the notional amount plus dividends on the stocks
comprising the S&P 500 Index less the interest paid by the Fund on the notional
amount. If permitted by its investment policies, the Fund will only enter into
equity swap contracts on a net basis, I.E., the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any payments. Payments under equity swap contracts may be made at the
conclusion of the contract or periodically during its term.
If permitted by its investment policies, the Fund may also from time to time
enter into the opposite side of equity swap contracts (I.E., where the Fund is
obligated to pay the increase (net of interest) or received the decrease (plus
interest) on the contract) to reduce the amount of the Fund's equity market
exposure consistent with the Fund's investment objective(s) and policies. These
positions are sometimes referred to as "reverse equity swap contracts."
Equity swap contracts will not be used to leverage the Fund. Since the
Commission considers equity swap contracts and reverse equity swap contracts to
be illiquid securities, the Fund will not invest in equity swap contracts or
reverse equity swap contracts if the total value of such investments together
with that of all other illiquid securities that the Fund owns would exceed the
Fund's limitations on investments in illiquid securities.
The Fund does not believe that its obligations under equity swap contracts
or reverse equity swap contracts are senior securities and, accordingly, the
Fund will not treat them as being subject to its borrowing restrictions.
However, the net amount of the excess, if any, of the Fund's obligations over
its respective entitlement with respect to each equity swap contract and each
reverse equity swap contract will be accrued on a daily basis and an amount of
cash, U. S. Government Securities or other liquid high quality debt securities
having an aggregate market value at lease equal to the accrued excess will be
maintained in a segregated account by the Fund's Custodian.
CURRENCY SWAPS, INDEX SWAPS AND CAPS AND FLOORS
A currency swap is an agreement to exchange cash flows on a notional amount
of two or more currencies based on the relative value differential among them.
An index swap is an agreement to swap cash flows on a notional amount based on
changes in the values of reference indices. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds an
agree-upon interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser to receive payments of interest on
a notional principal amount from the party selling such interest rate floor. If
permitted by the Fund's investment policies, the investment adviser expects to
enter into these types of transactions on behalf of the Fund primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date rather than for speculative purposes.
Accordingly, if permitted by the Fund's investment policies, the Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors unless it owns securities or other instruments
providing the income stream the Fund may be obligated to pay. Caps and floors
require segregation of assets with a value equal to the Fund's net obligation,
if any.
SPECIAL RISKS OF SWAPS, CAPS AND FLOORS
As with futures, options, forward contracts, and mortgage backed and other
asset-backed securities, the use of swap, cap and floor contracts exposes the
Fund to additional investment risk and transaction costs. These risks include
operational risk, market risk and credit risk.
Operational risk includes, among others, the risks that the investment
adviser will incorrectly analyze market conditions or will not employ
appropriate strategies and monitoring with respect to these instruments or will
be forced to defer closing out certain hedged positions to avoid adverse tax
consequences.
Market risk includes, among others, the risks of imperfect correlations
between the expected values of the contracts, or their underlying bases, and
movements in the prices of the securities or currencies being hedged, and the
possible absence of a liquid secondary market for any particular instrument at
any time. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively more illiquid. Nevertheless, a secondary market for swaps
is never assured, and caps and floors, which are more recent innovations for
which standardized documentation has not yet been fully developed, are much less
liquid than swaps.
Credit risk is primarily the risk that counterparties may be financially
unable to fulfill their contracts on a timely basis, if at all. If there is a
default by the counterparty to any such contract, the Fund will be limited to
contractual remedies pursuant to the agreements related to the transaction.
There is no assurance that contract counterparties will be able to meet contract
obligations or that, in the event of default, the Fund will succeed in pursuing
contractual remedies. The Fund thus assumes the risk that it may be delayed in
or prevented from obtaining payments owed to it pursuant to such contracts. The
Fund will closely monitor the credit of swap counterparties in order to minimize
this risk. The Fund will not enter into any equity swap contract or reverse
equity swap contract unless, at the time of entering into such transaction, the
unsecured senior debt of the counterparty is rated at least A by Moody's or S&P.
<PAGE>
F-1
KEYSTONE BALANCED FUND II
STATEMENT OF NET ASSETS
JUNE 30, 1996
ASSETS:
Cash (Note 1) $100,000
Prepaid registration 60,000
Organizational expenses (Note 2) 25,200
--------
Total assets 185,200
LIABILITIES:
Accrued expenses 85,200
--------
NET ASSETS $100,000
========
Net assets represented by: (Note 3)
Class A Shares: Net assets equivalent to $10.00
per share for 4,000 shares $ 40,000
Class B Shares: Net assets equivalent to $10.00
per share for 3,000 shares 30,000
Class C Shares: Net assets equivalent to $10.00
per share for 3,000 shares 30,000
--------
Total net assets $100,000
========
Net asset value and redemption price per share:
Class A $10.00
======
Class B $10.00
======
Class C $10.00
======
Offering price per share:
Class A (Including 5.75% sales charge) $10.61
======
Class B $10.00
======
Class C $10.00
======
See Notes to Statement of Net Assets
18502
<PAGE>
F-2
KEYSTONE BALANCED FUND II
NOTES TO STATEMENT OF NET ASSETS
JUNE 30, 1996
1. Keystone Balanced Fund II (the "Fund") was organized on June 19, 1996,
and had no operations prior to June 30, 1996 other than organizational matters
and activities in connection with the purchase of 10,000 shares of the Fund by
Keystone Investment Management Company ("Keystone"). The Fund is a mutual fund
that seeks income and capital appreciation by investing in a balanced portfolio.
Keystone is a wholly-owned subsidiary of Keystone Investments,
Inc.("Keystone Investments"), a private corporation predominantly owned by
current and former members of management and certain employees of Keystone
Investments and its affiliates.
The Fund currently offers three classes of shares. Class A shares are
subject to a maximum sales charge of 5.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption that varies depending on when shares were purchased and how long
they have been held. Class C shares are sold subject to a contingent deferred
sales charge payable upon redemption within the year of purchase. Class C shares
are available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company, the Fund's principal
underwriter.
2. In the event any of the initial shares are redeemed by any holder thereof
during the five year amortization period, redemption proceeds will be reduced by
any unamortized organizational expenses in the same proportion as the number of
initial shares of the Fund being redeemed bears to the number of initial shares
of the Fund outstanding at the time of the redemption.
3. The Fund is authorized to issue an unlimited number of shares of
beneficial interest, without par value.
4. Pursuant to its Investment Management and Advisory Agreement with the
Fund, Keystone provides investment advisory and management services to the Fund.
Keystone manages the investment and reinvestment of the Fund's assets,
supervises the operation of the Fund, provides all necessary office space,
facilities, equipment and personnel and arranges, at the request of the Fund,
for its employees to serve as officers or agents of the Fund.
The management fee is calculated at a rate of 1.50% of the Fund's gross
investment income plus an amount determined by applying percentage rates, that
start at 0.60% and decline as net assets increase to 0.30% per annum, to the net
asset value of the Fund.
5. The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares pursuant
to Rule 12b-1 under the Investment Company Act of 1940.
The Class A Distribution Plan provides for payments, which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares, to pay expenses of the distribution of Class A shares.
The Class B and Class C Distribution Plans provide for payments at an annual
rate of up to 1.00% of the average daily net asset value of Class B or Class C
shares, of which 0.75% may be used to pay distribution expenses and 0.25% may be
used to pay shareholder service fees.
<PAGE>
F-4
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholder
Keystone Balanced Fund II
We have audited the accompanying statement of net assets of Keystone Balanced
Fund II as of June 30, 1996. This financial statement is the responsibility of
the Fund's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit of a statement of net assets includes examining, on a
test basis, evidence supporting the amounts and disclosures in that statement of
net assets. An audit of a statement of net assets also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall statement of net assets presentation. We believe that
our audit of the statement of net assets provides a reasonable basis for our
opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of Keystone Balanced Fund II at
June 30, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
July 1, 1996
18502
<PAGE>
EVERGREEN FOUNDATION FUND
STATEMENT OF INVESTMENTS
DECEMBER 31, 1996
(Picture of statue appears here)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- 55.1%
AEROSPACE & DEFENSE -- .4%
60,000 Boeing Co....................... $ 6,382,500
AUTOMOTIVE EQUIPMENT &
MANUFACTURING -- 1.2%
581,500 Chrysler Corp................... 19,189,500
BANKS -- 5.0%
16,600 AmSouth Bancorp................. 803,025
50,000 Bancfirst Corp.................. 1,362,500
390,700 Bank of Boston Corp............. 25,102,475
140,000 Barnett Banks, Inc.............. 5,757,500
93,375 BSB Bancorp, Inc................ 2,497,781
57,000 Cape Cod Bank & Trust Co........ 1,282,500
20,000 CB Bancshares, Inc.............. 585,000
92,500 Central Fidelity Banks, Inc..... 2,381,875
48,500 Crestar Financial Corp.......... 3,607,188
90,138 First Chicago NBD Corp.......... 4,844,918
3,600 First Empire State Corp......... 1,036,800
196,800 First of America Bank Corp...... 11,832,600
7,500 First Security Corp............. 253,125
58,500 First Union Corp. **............ 4,329,000
70,801 Hibernia Corp. Cl. A............ 938,113
25,000 Mississippi Valley Bancshares,
Inc............................. 1,062,500
66,150 Peoples Heritage Financial
Group........................... 1,852,200
102,000 Seacoast Banking Corp. of
Florida Cl. A................... 2,658,375
114,100 Standard Federal Bank........... 6,489,437
32,500 U.S. Trust Corp................. 2,567,500
81,244,412
BUILDING, CONSTRUCTION &
FURNISHINGS -- 1.0%
122,800 Armstrong World Industries,
Inc............................. 8,534,600
149,300 Continental Homes Holding
Corp............................ 3,172,625
20,000* M/I Schottenstein Homes, Inc.... 220,000
20,000 Macerich Co. (The).............. 522,500
264,000* Pacific Greystone Corp.......... 2,904,000
15,353,725
BUSINESS EQUIPMENT &
SERVICES -- 1.1%
60,000* Cisco Systems, Inc.............. 3,817,500
72,000 International Business Machines
Corp............................ 10,872,000
50,000 Lucent Technologies, Inc........ 2,312,500
<CAPTION>
SHARES VALUE
</TABLE>
BUSINESS EQUIPMENT &
SERVICES -- CONTINUED
<TABLE>
<C> <S> <C>
10,000* Policy Management Systems
Corp............................ $ 461,250
25,200 Wackenhut Corp. (The) Cl. B..... 384,300
17,847,550
CHEMICAL & AGRICULTURAL
PRODUCTS -- 3.0%
85,000 A. Schulman, Inc................ 2,082,500
30,000 Air Products & Chemicals,
Inc............................. 2,073,750
248,000 Du Pont (E. I.) de Nemours...... 23,405,000
70,000 Grace (W.R.) & Co............... 3,622,500
40,000 H.B. Fuller Co.................. 1,880,000
201,500 Monsanto Co..................... 7,833,312
75,000 Nalco Chemical Co............... 2,709,375
65,000 Pioneer Hi-Bred International,
Inc............................. 4,550,000
20,000 Praxair, Inc.................... 922,500
49,078,937
COMMUNICATION SYSTEMS &
SERVICES -- .9%
98,333* 360 Communications Co........... 2,273,951
20,000* AirTouch Communications......... 505,000
286,000 Sprint Corp..................... 11,404,250
14,183,201
CONSUMER PRODUCTS &
SERVICES -- 3.4%
55,000 American Greetings Corp. Cl.
A............................... 1,560,625
75,000 Black & Decker Corp............. 2,259,375
20,000* Broderbund Software, Inc........ 595,000
23,311 Consolidated Products, Inc...... 454,565
120,000 CPC International, Inc.......... 9,300,000
148,800 Goodyear Tire & Rubber Co.
(The)........................... 7,644,600
95,000 H. & R. Block, Inc.............. 2,755,000
178,800 International Flavors &
Fragrances, Inc................. 8,046,000
53,800 Kimberly-Clark Corp............. 5,124,450
50,100* Nautica Enterprises, Inc........ 1,265,025
95,400 Procter & Gamble Co. (The)...... 10,255,500
78,500 Tupperware Corp................. 4,209,562
20,000 V.F. Corp....................... 1,350,000
54,819,702
DIVERSIFIED COMPANIES -- 2.0%
8,000 Cooper Industries, Inc.......... 337,000
222,400 General Electric Co............. 21,989,800
</TABLE>
32
<PAGE>
EVERGREEN FOUNDATION FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1996
(Picture of statue appears here)
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- CONTINUED
DIVERSIFIED COMPANIES -- CONTINUED
<S> <C> <C>
33,000 Minnesota Mining & Mortgage
Co.............................. $ 2,734,875
120,800 PPG Industries, Inc............. 6,779,900
31,841,575
ELECTRICAL EQUIPMENT &
ELECTRONICS -- 7.2%
173,400 AMP, Inc........................ 6,654,225
216,511 Avnet, Inc...................... 12,611,766
20,000 Computer Associates
International, Inc.............. 995,000
430,800 Hewlett-Packard Co.............. 21,647,700
340,800 Intel Corp...................... 44,623,500
65,000* Intel Corp. $41.75
Warrants Expiring 03/14/98...... 5,996,250
183,800* Microsoft Corp.................. 15,186,475
224,000* Sun Microsystems, Inc........... 5,754,000
70,000 Wyle Electronics................ 2,765,000
116,233,916
ENERGY -- 1.2%
260,000 Equitable Resources, Inc........ 7,735,000
30,500 Exxon Corp...................... 2,989,000
45,300 Mobil Corp...................... 5,537,926
43,103 Seitel, Inc..................... 1,724,120
33,877 Union Pacific Resource Group,
Inc............................. 990,901
18,976,947
FINANCE & INSURANCE -- 8.1%
10,668 Aetna, Inc...................... 853,440
120,000 Allstate Corp. (The)............ 6,945,000
55,300 AMBAC, Inc...................... 3,670,537
85,450 American International Group,
Inc............................. 9,249,962
159,000 Beneficial Corp................. 10,076,625
148,350 Countrywide Credit Industries,
Inc............................. 4,246,519
95,000 Degeorge Financial Corp......... 130,625
20,000 FBL Financial Group, Inc........ 497,500
10,000 Federal Home Loan Mortgage
Corp............................ 1,101,250
788,000 Federal National Mortgage
Association..................... 29,353,000
50,000 Hartford Steam Boiler Inspection
& Insurance Co. (The)........... 2,318,750
70,000 John Alden Financial Corp....... 1,295,000
130,000 John Nuveen Co. (The)........... 3,445,000
172,200 Marsh & McLennan Co., Inc....... 17,908,800
<CAPTION>
SHARES VALUE
</TABLE>
FINANCE & INSURANCE -- CONTINUED
<TABLE>
<C> <S> <C>
100,700 Merrill Lynch & Co., Inc........ $ 8,207,050
174,600 MGIC Investment Corp............ 13,269,600
155,000 NAC RE Corp..................... 5,250,625
235,000 North American Mortgage Co...... 4,641,250
35,000 Ohio Casualty Corp.............. 1,242,500
40,300 Raymond James Financial, Inc.... 1,214,038
150,800 Wilmington Trust Corp........... 5,956,600
130,873,671
FOOD & BEVERAGE
PRODUCTS -- .1%
30,000 Pepsico, Inc.................... 877,500
FOREST PRODUCTS -- .5%
88,000 Union Camp Corp................. 4,202,000
45,000 Willamette Industustries, Inc... 3,133,125
7,335,125
HEALTHCARE PRODUCTS &
SERVICES -- 6.2%
185,700 Abbott Laboratories............. 9,424,275
94,000 Alza Corp....................... 2,432,250
1,750* Alza Corp. $65.00
Warrants Expiring 12/31/1999.... 219
140,000 American Home Products Corp..... 8,207,500
50,000 Bristol-Myers Squibb Co......... 5,437,500
180,900 Columbia/HCA Healthcare Corp.... 7,371,675
34,275 Guidant Corp.................... 1,953,675
102,800 Johnson & Johnson............... 5,114,300
221,262 Lilly (Eli) & Co................ 16,152,126
65,000* Lincare Holdings, Inc........... 2,665,000
100,000* Living Centers of America,
Inc............................. 2,775,000
80,000 McKesson Corp................... 4,480,000
151,750* MedPartners, Inc................ 3,186,750
60,800 Medtronic, Inc.................. 4,134,400
164,758 Merck & Co., Inc................ 13,057,071
60,000 Pfizer, Inc..................... 4,972,500
66,000 Schering-Plough Corp............ 4,273,500
9,200 Shared Medical System Corp...... 453,100
44,900 Superior Surgical Manufacturing
Co., Inc........................ 606,150
1,750 Therapeutic Discovery Corp...... 19,469
50,000 Warner-Lambert Co............... 3,750,000
100,466,460
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- 1.7%
65,000 Applied Power, Inc.............. 2,575,625
</TABLE>
33
<PAGE>
EVERGREEN FOUNDATION FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1996
(Picture of statue appears here)
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- CONTINUED
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- CONTINUED
<C> <S> <C>
10,000 BemisCo., Inc................... $ 368,750
92,000 Corning, Inc.................... 4,255,000
7,000 FlightSafety Int'l, Inc......... 350,000
110,700 PHH Corp........................ 4,760,100
30,000 Pittston Brink's Group.......... 810,000
162,000 Snap-On, Inc.................... 5,771,250
6,000* Strattec Security Corp.......... 109,500
111,900 Timken Co. (The)................ 5,133,413
50,000 Trinity Industries, Inc......... 1,875,000
30,000* UCAR International, Inc......... 1,128,750
27,137,388
MACHINERY -- DIVERSIFIED -- .5%
200,000 Deere & Co...................... 8,125,000
PUBLISHING, BROADCASTING &
ENTERTAINMENT -- .5%
20,000 Belo A H Corp................... 697,500
20,000 Cox Communications, Inc......... 462,500
50,993 Disney Walt Co. (The)........... 3,550,388
20,000 Gaylord Entertainment Co. Cl.
A............................... 457,500
2,500* Lin Television Corp............. 105,625
55,000 Time Warner, Inc................ 2,062,500
3,000 Washington Post Co. (The)....... 1,005,375
8,341,388
REAL ESTATE -- 5.9%
30,000* Alexander's, Inc................ 2,373,750
23,400 Arbor Property Trust............ 169,650
50,000 Bay Apartment Communities,
Inc............................. 1,800,000
50,009 Bradley Real Estate, Inc........ 900,162
125,000 Cali Realty Corp................ 3,859,375
270,400 Capstead Mortgage Corp.......... 6,489,600
111,900 CarrAmerica Realty Corp......... 3,273,075
40,000 Chelsea GCA Realty, Inc......... 1,385,000
184,900 Columbus Realty Trust........... 4,206,475
140,000 Crescent Real Estate Equities,
Inc............................. 7,385,000
305,300 Crown American Realty Trust..... 2,289,750
50,300 CWM Mortgage Holdings, Inc...... 1,081,450
105,200 Essex Property Trust, Inc....... 3,090,250
83,000 Evans Withycombe Residential,
Inc............................. 1,743,000
165,000 FAC Realty, Inc................. 1,093,125
90,000 FelCor Suite Hotels, Inc........ 3,183,750
100,200 Gables Residential Trust........ 2,905,800
174,000 Glimcher Realty Trust........... 3,828,000
<CAPTION>
SHARES VALUE
</TABLE>
REAL ESTATE -- CONTINUED
<TABLE>
<C> <S> <C>
28,000 Highwoods Properties, Inc....... $ 945,000
14,076 Homestead Village Properties,
Inc............................. 253,368
9,443 Homestead Village Properties,
Inc............................. 76,724
363,216 Horizon Group, Inc.............. 7,218,918
7,000 JP Realty, Inc.................. 181,125
142,000 Kranzco Realty Trust............ 2,396,250
15,000 Liberty Property Trust.......... 386,250
57,000 Marriott International, Inc..... 3,149,250
26,700 Mills Corp. (The)............... 637,463
48,100 Oasis Residential, Inc.......... 1,094,275
20,000 Patriot American Hospitality,
Inc............................. 862,500
130,000 Post Property, Inc.............. 5,232,500
100,000 Prentiss Property Trust......... 2,500,000
90,000 Public Storage, Inc............. 2,790,000
70,416 Security Capital Industrial
Trust........................... 1,505,142
111,992 Security Capital Pacific
Trust........................... 2,561,817
100,000 Sovran Self Storage, Inc........ 3,125,000
98,500 Starwood Lodging Trust.......... 5,429,812
22,900 Storage USA, Inc................ 861,613
45,000 Sunstone Hotel Investors, Inc... 590,625
57,900 Tanger Factory Outlet Centers,
Inc............................. 1,570,537
20,000 Taubman Centers, Inc............ 257,500
25,000 Urban Shopping Centers, Inc..... 725,000
95,407,881
RETAILING & WHOLESALE -- 1.0%
30,000 Fingerhut Cos., Inc............. 367,500
10,000 Home Depot, Inc. (The).......... 501,250
133,000 Lowe's Cos., Inc................ 4,721,500
195,600 Mercantile Stores Co., Inc...... 9,657,750
25,000 Walgreen Co..................... 1,000,000
16,248,000
THRIFT INSTITUTIONS -- .2%
4,000 Golden West Financial Corp...... 252,500
80,000 Webster Financial Corp.......... 2,940,000
3,192,500
TRANSPORTATION -- 1.0%
35,000 Burlington Northern Santa Fe.... 3,023,125
34,000 Caliber System, Inc............. 654,500
70,000 Conrail, Inc.................... 6,973,750
20,000 KLM Royal Dutch Air Lines....... 557,500
17,000 Roadway Express, Inc............ 329,375
</TABLE>
34
<PAGE>
EVERGREEN FOUNDATION FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1996
(Picture of statue appears here)
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS -- CONTINUED
TRANSPORTATION -- CONTINUED
<S> <C> <C>
80,000 Union Pacific Corp.............. $ 4,810,000
16,348,250
UTILITIES -- ELECTRIC -- .1%
100,000 Long Island Lighting Co......... 2,212,500
UTILITIES -- 1.9%
10,000 AT & T Corp..................... 435,000
150,000 Bell Atlantic Corp.............. 9,712,500
325,000 GTE Corp........................ 14,787,500
30,000 NYNEX Corp...................... 1,443,750
40,000 PP&L Resources, Inc............. 920,000
100,000 Public Service Enterprise Group,
Inc............................. 2,725,000
32,000 TNP Enterprises, Inc............ 876,000
30,899,750
CHEMICALS -- .4%
170,000 Morton International, Inc....... 6,927,500
DIVERSIFIED -- .4%
283,800 Frontier Corp................... 6,420,975
NATURAL GAS -- .1%
22,000 Consolidated Natural Gas Co..... 1,215,500
OTHER -- .1%
5,000 Clorox Co....................... 501,875
10,000 General Motors Corp............. 557,500
10,000* KLA Instruments Corp............ 355,000
10,000 Premark International, Inc...... 222,500
1,636,875
TOTAL COMMON STOCKS
(COST $677,549,174)........... 888,818,228
PREFERRED STOCKS -- .0% (A)
HEALTHCARE PRODUCTS &
SERVICES -- .0% (A)
70,000* Fresenius National Med Care,
Inc. Cl. D (COST $14,317)....... 9,100
CONVERTIBLE PREFERRED STOCKS -- .8%
ELECTRICAL EQUIPMENT &
SERVICES -- .1%
100,000 Westinghouse Elec. Corp.
$1.30, Series C, PEPS, 144A..... 1,769,000
FINANCE & INSURANCE -- .0% (A)
3,557 Aetna, Inc...................... 282,337
<CAPTION>
SHARES VALUE
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS -- CONTINUED
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- .0% (A)
500,000 Home Depot, Inc. (The)
3.25%, 10/01/01................. $ 487,500
METAL PRODUCTS &
SERVICES -- .4%
100,000 Timet Capital Trust I
6.625%, BUCS, 144A.............. 5,425,000
REAL ESTATE -- .3%
115,000 First Union Real Estate Equity
& Mortgage Investments.......... 4,628,750
TOTAL CONVERTIBLE PREFERRED
STOCKS
(COST $9,980,605)............. 12,592,587
<CAPTION>
PRINCIPAL
AMOUNT
<C> <S> <C>
CONVERTIBLE DEBENTURES -- .3%
BUILDING, CONSTRUCTION &
FURNISHINGS -- .0% (A)
$ 500,000 Engle Homes, Inc.
7.00%, 3/1/03................... 435,000
HEALTHCARE PRODUCTS &
SERVICES -- .1%
750,000 Maxxim Medical, Inc.
6.75%, 3/1/03................... 727,500
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES -- .1%
2,000,000 Robbins & Myers, Inc.
6.50%, 9/1/03................... 2,250,000
NATURAL GAS -- .1%
1,328,000 Consolidated Natural Gas Co.
7.25%, 12/15/15................. 1,402,700
TOTAL CONVERTIBLE DEBENTURES
(COST $4,784,665)............. 4,815,200
U.S. GOVERNMENT & AGENCY
OBLIGATIONS -- 35.3%
TENNESSEE VALLEY AUTHORITY --
1.1%
8,000,000 7.25%, 7/15/43.................. 7,807,232
10,000,000 7.85%, 6/15/44.................. 10,112,200
17,919,432
FEDERAL NATIONAL MORTGAGE
ASSN. -- .1%
1,000,000 8.10%, 8/12/19.................. 1,121,520
</TABLE>
35
<PAGE>
EVERGREEN FOUNDATION FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1996
(Picture of statue appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS -- CONTINUED
U.S. TREASURY BONDS -- 30.0%
$150,000,000 6.25%, 8/15/23................. $ 140,625,000
125,000,000 7.125%, 2/15/23................ 130,468,750
49,000,000 7.25%, 5/15/16................. 51,756,250
7,000,000 7.625%, 11/15/22............... 7,726,250
10,000,000 8.00%, 11/15/21................ 11,465,620
25,000,000 8.125%, 5/15/21................ 29,007,800
50,000,000 8.125%, 8/15/19................ 57,796,850
30,000,000 8.375%, 8/15/08................ 33,215,610
10,000,000 8.50%, 2/15/20................. 12,003,120
7,000,000 10.00%, 5/15/10................ 8,561,875
1,000,000 10.625%, 8/15/15............... 1,413,750
484,040,875
U.S. TREASURY NOTES -- 4.1%
30,000,000 5.75%, 8/15/03................. 29,109,360
15,000,000 6.50%, 8/15/05................. 15,107,805
13,000,000 7.25%, 5/15/04................. 13,686,556
8,000,000 7.25%, 8/15/04................. 8,425,000
66,328,721
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS
(COST $578,814,301)............ 569,410,548
SHORT-TERM INVESTMENTS -- 8.0%
14,000,000 A.H. Robins Co., Inc.
5.55%, 2/6/97.................. 13,922,300
12,000,000 B.I. Funding, Inc.
5.50%, 2/19/97................. 11,910,167
Eiger Capital Corp.
800,000 5.45%, 1/13/97................. 798,547
5,600,000 5.50%, 1/16/97................. 5,587,166
47,000,000 Federal National Mortgage
Association Discount Notes
5.28%, 2/3/97.................. 46,772,520
1,700,000 Gold Crown Managers Acceptance
5.65%, 1/22/97................. 1,694,397
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS -- CONTINUED
Golden Managers Acceptance
Corp.
$ 4,800,000 5.45%, 1/8/97.................. $ 4,794,913
1,300,000 5.45%, 1/22/97................. 1,295,867
500,000 J.P. Morgan & Co., Inc.
5.47%, 1/16/97................. 498,860
400,000 Johnson Control, Inc.
6.20%, 1/15/97................. 399,036
450,000 Mitsubishi International Corp.
5.55%, 1/9/97.................. 449,445
4,400,000 Montana Blanc Capital Corp.
5.45%, 1/13/97................. 4,392,007
10,400,000 PHH Corp.
5.50%, 2/7/97.................. 10,341,211
21,400,000 Receivables Capital Corp.
5.70%, 1/27/97................. 21,311,903
Unifunding, Inc.
400,000 5.44%, 1/6/97.................. 399,698
2,000,000 5.55%, 2/7/97.................. 1,988,592
2,600,000 Virginia Electric & Power Co.
5.40%, 1/10/97................. 2,596,490
TOTAL SHORT-TERM INVESTMENTS
(COST $129,153,119)............ 129,153,119
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS --
(COST $1,400,296,181).. 99.5% 1,604,798,782
OTHER ASSETS AND
LIABILITIES -- NET... 0.5 7,357,308
NET ASSETS............. 100.0% $1,612,156,090
</TABLE>
* Non-income producing securities.
** At December 31, 1996 the Fund owned 58,500 shares of common stock of First
Union at a cost of $2,358,441. During the period ended December 31, 1996 the
Fund earned $128,700 in dividend income from this investment. These shares
were purchased by the Fund prior to the acquisition of the investment adviser
and Lieber & Company by First Union.
+ Consists of one share Starwood Lodging Trust and one share Starwood Lodging
Corp. common stock.
(a) Less than one tenth of one percent.
ADR -- American Depositary Receipts
BUCS -- Beneficial Unsecured Convertible Securities
PEPS -- Participating Equity Preferred Shares
See accompanying notes to financial statements.
36
<PAGE>
EVERGREEN FOUNDATION FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(Picture of statue appears here)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $1,400,296,181)....................................................... $1,604,798,782
Cash........................................................................................................ 843,137
Dividends and interest receivable........................................................................... 14,449,437
Receivable for Fund shares sold............................................................................. 5,517,342
Receivable for investments sold............................................................................. 2,177,770
Prepaid expenses............................................................................................ 22,777
Total assets.......................................................................................... 1,627,809,245
LIABILITIES:
Payable for investments purchased........................................................................... 10,955,973
Payable for Fund shares repurchased......................................................................... 1,991,834
Accrued advisory fee........................................................................................ 1,077,476
Distribution fee payable.................................................................................... 855,281
Accrued expenses............................................................................................ 772,591
Total liabilities..................................................................................... 15,653,155
NET ASSETS..................................................................................................... $1,612,156,090
NET ASSETS CONSIST OF:
Paid-in capital............................................................................................. $1,398,455,698
Undistributed net investment income......................................................................... 25,764
Undistributed net realized gain on investment transactions.................................................. 9,172,027
Net unrealized appreciation of investments.................................................................. 204,502,601
Net assets............................................................................................ $1,612,156,090
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($206,331,719 (division sign) 12,795,763 shares of beneficial interest outstanding).......... $ 16.13
Sales charge -- 4.75% of offering price..................................................................... .80
Maximum offering price................................................................................ $ 16.93
Class B Shares ($570,405,287 (division sign) 35,506,081 shares of beneficial interest outstanding).......... $ 16.07
Class C Shares ($26,576,977 (division sign) 1,654,832 shares of beneficial interest outstanding)............ $ 16.06
Class Y Shares ($808,842,107 (division sign) 50,106,550 shares of beneficial interest outstanding).......... $ 16.14
</TABLE>
See accompanying notes to financial statements.
37
<PAGE>
EVERGREEN FOUNDATION FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(Picture of statue appears here)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................................................... $ 15,724,373
Interest.................................................................................... 48,429,872
Total investment income............................................................... 64,154,245
EXPENSES:
Advisory fee................................................................................ $11,140,780
Distribution fee -- Class A Shares.......................................................... 414,289
Distribution fee -- Class B Shares.......................................................... 3,487,899
Shareholder services fee -- Class B Shares.................................................. 1,162,633
Distribution fee -- Class C Shares.......................................................... 152,488
Shareholder services fee -- Class C Shares.................................................. 50,829
Transfer agent fee.......................................................................... 1,331,778
Registration and filing fees................................................................ 408,920
Custodian fee............................................................................... 365,915
Reports and notices to shareholders......................................................... 294,100
Professional fees........................................................................... 81,041
Insurance................................................................................... 41,820
Trustees' fees and expenses................................................................. 7,176
Miscellaneous............................................................................... 21,600
Total expenses........................................................................ 18,961,268
Net investment income.......................................................................... 45,192,977
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions................................................ 21,629,530
Net increase in unrealized appreciation of investments...................................... 96,176,448
Net gain on investments........................................................................ 117,805,978
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................... $162,998,955
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
EVERGREEN FOUNDATION FUND
STATEMENT OF CHANGES IN NET ASSETS
(Picture of statue appears here)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................................................... $ 45,192,977 $ 22,897,807
Net realized gain on investment transactions........................................ 21,629,530 9,385,074
Net change in unrealized appreciation of investments................................ 96,176,448 121,111,375
Net increase in net assets resulting from operations.......................... 162,998,955 153,394,256
DISTRIBUTIONS TO SHAREHOLDERS FROM:
NET INVESTMENT INCOME:
Class A Shares...................................................................... (5,718,718) (1,908,188)
Class B Shares...................................................................... (12,786,120) (4,488,521)
Class C Shares...................................................................... (568,120) (170,820)
Class Y Shares...................................................................... (26,366,104) (16,164,235)
Total distributions from net investment income................................... (45,439,062) (22,731,764)
NET REALIZED GAIN ON INVESTMENTS:
Class A Shares...................................................................... (1,819,496) (993,303)
Class B Shares...................................................................... (5,077,907) (2,824,116)
Class C Shares...................................................................... (231,947) (113,415)
Class Y Shares...................................................................... (7,335,097) (7,827,124)
Total distributions from net realized gain on investments........................ (14,464,447) (11,757,958)
Total distributions to shareholders........................................... (59,903,509) (34,489,722)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold........................................................... 717,070,601 652,779,207
Proceeds from reinvestment of distributions......................................... 55,523,207 32,843,419
Payment for shares redeemed......................................................... (301,222,020) (98,358,101)
Net increase resulting from Fund share transactions.............................. 471,371,788 587,264,525
Net increase in net assets.................................................... 574,467,234 706,169,059
NET ASSETS:
Beginning of year................................................................... 1,037,688,856 331,519,797
End of year (including undistributed net investment income of $25,764 and $271,849,
respectively)..................................................................... $1,612,156,090 $ 1,037,688,856
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
EVERGREEN FOUNDATION FUND --
CLASS A, B AND C SHARES
FINANCIAL HIGHLIGHTS
(Picture of statue appears here)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
JANUARY 3, JANUARY 3,
YEAR 1995* YEAR 1995* YEAR
ENDED THROUGH ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period..................... $15.12 $12.24 $15.07 $12.24 $15.07
Income from investment operations:
Net investment income................................... .50 .44 .40 .36 .40
Net realized and unrealized gain on investments......... 1.16 3.14 1.15 3.09 1.14
Total from investment operations...................... 1.66 3.58 1.55 3.45 1.54
Less distributions to shareholders from:
Net investment income................................... (.50) (.47) (.40) (.39) (.40)
Net realized gain on investments........................ (.15) (.23) (.15) (.23) (.15)
Total distributions................................... (.65) (.70) (.55) (.62) (.55)
Net asset value, end of period........................... $16.13 $15.12 $16.07 $15.07 $16.06
TOTAL RETURN+............................................ 11.3% 29.7% 10.5% 28.7% 10.4%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (in millions)................. $206 $107 $570 $296 $27
Ratios to average net assets:
Expenses................................................ 1.24% 1.33%++# 1.99% 2.07%++ 1.99%
Net investment income................................... 3.39% 3.73%++# 2.64% 2.99%++ 2.64%
Portfolio turnover rate.................................. 10% 28% 10% 28% 10%
Average commission rate paid per share................... $.0649 N/A $.0649 N/A $.0649
<CAPTION>
CLASS C
JANUARY 3,
1995*
THROUGH
DECEMBER 31,
1995
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period..................... $12.24
Income from investment operations:
Net investment income................................... .34
Net realized and unrealized gain on investments......... 3.09
Total from investment operations...................... 3.43
Less distributions to shareholders from:
Net investment income................................... (.37)
Net realized gain on investments........................ (.23)
Total distributions................................... (.60)
Net asset value, end of period........................... $15.07
TOTAL RETURN+............................................ 28.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (in millions)................. $11
Ratios to average net assets:
Expenses................................................ 2.23%++#
Net investment income................................... 2.83%++#
Portfolio turnover rate.................................. 28%
Average commission rate paid per share................... N/A
</TABLE>
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charges are not reflected.
++ Annualized.
# Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of operating expenses and net investment income to average net assets would
have been the following:
<TABLE>
<CAPTION>
JANUARY 3, 1995*
THROUGH
DECEMBER 31, 1995
CLASS A CLASS C
SHARES SHARES
<S> <C> <C>
Expenses................................................................... 1.34% 2.37%
Net investment income...................................................... 3.72% 2.69%
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
EVERGREEN FOUNDATION FUND --
CLASS Y SHARES
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Picture of statue appears here)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of year.................................................... $15.13 $12.27 $13.12 $11.98
Income (loss) from investment operations:
Net investment income................................................................ .54 .51 .42 .31
Net realized and unrealized gain (loss) on investments............................... 1.16 3.07 (.57) 1.55
Total from investment operations................................................... 1.70 3.58 (.15) 1.86
Less distributions to shareholders from:
Net investment income................................................................ (.54) (.49) (.42) (.31)
Net realized gain on investments..................................................... (.15) (.23) (.28) (.41)
Total distributions................................................................ (.69) (.72) (.70) (.72)
Net asset value, end of year.......................................................... $16.14 $15.13 $12.27 $13.12
TOTAL RETURN+......................................................................... 11.5% 29.7% (1.1%) 15.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of year (in millions)................................................ $809 $623 $332 $240
Ratios to average net assets:
Expenses............................................................................. .99% 1.07% 1.14% 1.20%
Net investment income................................................................ 3.64% 3.89% 3.51% 2.81%
Portfolio turnover rate............................................................... 10% 28% 33% 60%
Average commission rate paid per share................................................ $.0649 N/A N/A N/A
<CAPTION>
1992
<S> <C>
PER SHARE DATA:
Net asset value, beginning of year.................................................... $10.75
Income (loss) from investment operations:
Net investment income................................................................ .27
Net realized and unrealized gain (loss) on investments............................... 1.83
Total from investment operations................................................... 2.10
Less distributions to shareholders from:
Net investment income................................................................ (.24)
Net realized gain on investments..................................................... (.63)
Total distributions................................................................ (.87)
Net asset value, end of year.......................................................... $11.98
TOTAL RETURN+......................................................................... 20.0%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of year (in millions)................................................ $64
Ratios to average net assets:
Expenses............................................................................. 1.40%#
Net investment income................................................................ 2.93%#
Portfolio turnover rate............................................................... 127%
Average commission rate paid per share................................................ N/A
</TABLE>
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
# Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were assumed or waived by the investment adviser, the annualized ratios
of expenses and net investment income to average net assets, would have been
the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1992
<S> <C>
Expenses.................................................................. 1.43%
Net investment income..................................................... 2.90%
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
The Evergreen Balanced Funds (the "Funds") are separate series of open-end
management companies registered under the Investment Company Act of 1940, as
amended (the "Act"). The Balanced Funds consist of Evergreen American Retirement
Fund ("American Retirement"), Evergreen Balanced Fund ("Balanced"), Evergreen
Foundation Fund ("Foundation") and Evergreen Tax Strategic Foundation Fund ("Tax
Strategic") known collectively as the Funds.
American Retirement's investment objectives, in order of priority, are
conservation of capital, reasonable income and capital growth. Balanced's
investment objective is to achieve long-term total return through capital
appreciation, dividends and interest income. Foundation's investment objectives,
in order of priority, are reasonable income, conservation of capital and capital
appreciation. Tax Strategic's investment objective is to maximize the after-tax
total return on its portfolio of investments by investing in equities as well as
municipal securities, which are exempt from Federal income tax.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements. These policies are
in conformity with generally accepted accounting principles.
SECURITY VALUATIONS -- Investments in securities traded on a national
securities exchange or included on the NASDAQ National Market System ("NMS") are
valued at the last reported sales price. Securities traded on an exchange or NMS
for which there has been no sale and other securities traded in the
over-the-counter market are valued at the mean between the last reported bid and
asked price. Unlisted securities for which market quotations are not readily
available are valued at a price quoted by one or more brokers. Debt securities
(other than short-term obligations) are valued on the basis of valuations
provided by a pricing service. Securities for which market quotations are not
readily available are valued at their respective fair value as determined in
good faith by the Board of Trustees. Short-term investments are valued at
amortized cost, which approximates market value.
SECURITY TRANSACTIONS -- Security transactions are accounted for on the
date purchased or sold. Net realized gains or losses are determined on the
identified cost basis.
INVESTMENT INCOME AND EXPENSES -- Dividend income is recorded on the
ex-dividend date. Interest income and expenses are accrued daily.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by the Federal Reserve Bank and are designated as being held
on each Fund's behalf by its custodian under a book-entry system. Each Fund
monitors the adequacy of the collateral on a daily basis and can require the
seller to provide additional collateral in the event the market value of the
securities pledged falls below the carrying value of the repurchase agreement,
including accrued interest. Each Fund will only enter into repurchase agreements
with banks and other financial institutions which are deemed by the investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income
are distributed quarterly for each of the Funds. Distributions from net realized
capital gains on investments, if any, will be distributed at least annually.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from amounts available under generally accepted
accounting principles. These differences are primarily due to differing
treatments for wash sales. To the extent these differences are permanent in
nature, such amounts are reclassified within the components of net assets.
56
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- continued
As of December 31, 1996, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to paid-in
capital.
<TABLE>
<CAPTION>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT REALIZED GAIN
INCOME ON INVESTMENTS
<S> <C> <C>
Balanced......... ($ 172,629) $172,629
Tax Strategic.... ($ 16,641) $ 13,576
</TABLE>
INCOME TAXES -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable net income and net realized capital
gains to its shareholders. Accordingly, no provisions for Federal income or
excise taxes are necessary. To the extent that realized capital gains can be
offset by capital loss carryforwards, it is each Fund's policy not to distribute
such gains.
ALLOCATION OF EXPENSES -- Expenses specifically identifiable to a class of
shares are charged to that class. Expenses common to a Trust as a whole are
allocated to the funds in that Trust. Investment income, net of expenses (other
than class specific expenses) and realized and unrealized gains and losses are
allocated daily to each class of shares based upon the relative proportion of
net assets of each class.
UNAMORTIZED ORGANIZATION EXPENSES -- The expenses of Tax Strategic incurred
in connection with its organization are being deferred and amortized over a
period of benefit not to exceed 60 months from the date it commenced operations.
USE OF ESTIMATES -- The preparation of the financial statements is in
accordance with generally accepted accounting principles which requires
management to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AGREEMENTS -- First Union National Bank of North
Carolina ("First Union"), Balanced's investment adviser, is entitled to an
annual fee of .50 of 1% of Balanced's average daily net assets pursuant to the
Fund's investment advisory agreement.
Pursuant to an agreement with American Retirement's, Foundation's and Tax
Strategic's investment adviser, Evergreen Asset Management Corp. ("Evergreen
Asset"), a wholly owned subsidiary of First Union, Evergreen Asset is entitled
to an annual fee based on each of American Retirement's, Foundation's and Tax
Strategic's average daily net assets, respectively, in accordance with the
following schedules:
<TABLE>
<CAPTION>
FOUNDATION AND AMERICAN
TAX STRATEGIC RETIREMENT
<S> <C> <C> <C>
First $750 million 0.875% First $750 million 0.75%
Next $250 million 0.750% Over $750 million 0.70%
Over $1 billion 0.700%
</TABLE>
For American Retirement and Tax Strategic, Evergreen Asset voluntarily
waived advisory fees of $24,841 and $90,551, respectively, and voluntarily
reimbursed other expenses amounting to $3,400 and $11,339, respectively.
Evergreen Asset can modify or terminate voluntary waivers and reimbursements at
any time.
Lieber & Company, an affiliate of First Union, is the investment
sub-adviser to American Retirement, Foundation and Tax Strategic and also
provides brokerage services with respect to substantially all security
transactions of these Funds effected on the New York or American Stock
Exchanges. For the year ended December 31, 1996, American Retirement,
57
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
Foundation and Tax Strategic incurred brokerage commissions of $51,579, $680,252
and $50,033 with Lieber & Company. Lieber & Company is reimbursed by Evergreen
Asset, at no additional expense to these Funds, for its cost of providing
investment advisory services.
ADMINISTRATION AGREEMENT -- Evergreen Asset furnishes American Retirement,
Foundation and Tax Strategic with administrative services as part of their
advisory agreements and accordingly, these Funds do not pay a separate
administration fee. Through December 31, 1996 Furman Selz LLC ("Furman Selz")
was each of the Funds' sub-administrator. As sub-administrator, Furman Selz
provided the officers of the Funds. For these Funds, Furman Selz' fee was paid
by Evergreen Asset and was not a fund expense.
Evergreen Asset is Balanced's administrator and Furman Selz was its
sub-administrator through December 31, 1996. Evergreen Asset's and Furman Selz'
fees for Balanced were based on the average daily net assets of all of the funds
administered by Evergreen Asset for which either First Union or Evergreen Asset
was also the investment adviser. These fees were calculated at the following
annual rates:
<TABLE>
<CAPTION>
ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<C> <S>
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% in excess of $30 billion
<CAPTION>
SUB-ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<C> <S>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% in excess of $25 billion
</TABLE>
At December 31, 1996, assets for which Evergreen Asset was the
administrator for which either Evergreen Asset or First Union was investment
adviser totalled approximately $17.0 billion.
Effective January 1, 1997, Bisys Group, Inc. ("Bisys") acquired Furman
Selz' mutual fund unit and accordingly, Bisys Fund Services became
sub-administrator. The administration fee structure has remained unchanged.
PLANS OF DISTRIBUTION -- The Funds have adopted for their Class A, Class B,
and Class C shares, Distribution Plans (the "Plans") pursuant to Rule 12b-1
under the Act. Under the terms of the Plans, the Funds may incur
distribution-related and shareholder servicing expenses which may not exceed an
annual fee of .75 of 1% for Class A and an annual fee of 1% for Class B and
Class C Shares. For each of the Funds, the payments for Class A were voluntarily
limited to .25 of 1% of average daily net assets.
In connection with their Plans, American Retirement, Foundation and Tax
Strategic have entered into distribution agreements with Evergreen Keystone
Distributor, Inc. ("EKD") (formerly Evergreen Funds Distributor, Inc.), a
subsidiary of Furman Selz, whereby American Retirement, Foundation and Tax
Strategic will compensate EKD for its services at a rate which may not exceed an
annual fee of .25 of 1% of Class A Shares' average daily net assets and an
annual fee of 1% of Class B and Class C Shares' average daily net assets. A
portion of the payments for Class B and C Shares, up to .25 of 1% may constitute
a shareholder services fee. EKD has entered into a Shareholder Services
Agreement with First Union Brokerage Services ("FUBS"), an affiliate of First
Union, whereby they will compensate FUBS for certain services provided to
shareholders and/or maintenance of shareholder accounts relating to each of the
Fund's Class B and Class C Shares.
58
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
In connection with its plan, Balanced entered into a distribution agreement
with EKD whereby it will compensate EKD for its services at a rate which may not
exceed an annual fee of .25 of 1% of Class A average daily net assets and an
annual fee of .75 of 1% of Class B and Class C average daily net assets for
certain services provided to Class A, B and C shareholders. Balanced has entered
into a shareholder services agreement with FUBS, and will pay FUBS, an annual
fee of up to .25 of 1% of the average net assets of its Class B and Class C
shares. This fee is designed to obtain certain services for shareholders and to
maintain shareholder accounts. With the acquisition of Furman Selz' mutual fund
unit by Bisys effective January 1, 1997, EKD became a subsidiary of Bisys.
SALES CHARGES -- EKD has advised the Funds that it has retained the
following amounts from front-end sales charges resulting from sales of Class A
Shares during the year ended December 31, 1996:
<TABLE>
<CAPTION>
FRONT-END
SALES
CHARGES
<S> <C>
American Retirement $20,024
Balanced 9,150
Foundation 57,736
Tax Strategic 25,078
</TABLE>
OTHER SERVICES WITH AFFILIATES -- State Street Bank & Trust Company ("State
Street") is the transfer agent, dividend disbursing agent and shareholder
servicing agent for the Funds. For certain accounts in American Retirement,
Balanced and Foundation, First Union has been sub-contracted by State Street to
maintain shareholder sub-account records, take fund purchase and redemption
orders and answer inquiries. For each account, First Union is entitled to a
monthly fee which totaled $5,560, $187,538 and $151,484 for American Retirement,
Balanced and Foundation, respectively, for the year ended December 31, 1996.
NOTE 4 -- SHARES OF BENEFICIAL INTEREST
The Funds have an unlimited number of $0.0001 par value shares of
beneficial interest authorized. The shares are divided into classes which are
designated Class A, Class B, Class C and Class Y shares. Class A shares are sold
with a front-end sales charge of up to 4.75%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class B shares will automatically convert to
Class A shares seven years after the date of purchase. Class C shares are sold
with a contingent deferred sales charge of 1% for shares redeemed during the
first year after the date of purchase. Class Y shares are sold without a sales
charge and are available only to investment advisory clients of First Union and
its affiliates, certain institutional investors or Class Y shareholders of
record of certain other funds managed by First Union and its affiliates as of
December 30, 1994. The classes have identical voting, dividend, liquidation and
other rights, except that Class A, Class B and Class C shares bear distribution
expenses (see Note 3) and have exclusive voting rights with respect to their
distribution plans.
59
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED*
AMERICAN RETIREMENT DECEMBER 31, 1996 DECEMBER 31, 1995
CLASS A SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold.......................................................... 762,980 $10,140,786 103,126 $ 1,278,749
Shares issued on reinvestment of distributions....................... 19,559 264,707 1,195 14,909
Shares redeemed...................................................... (84,770) (1,127,903) (186) (2,372)
Net increase......................................................... 697,769 9,277,590 104,135 1,291,286
CLASS B
Shares sold.......................................................... 3,892,133 51,648,645 380,412 4,651,965
Shares issued on reinvestment of distributions....................... 81,733 1,103,810 4,314 53,311
Shares redeemed...................................................... (175,385) (2,331,018) (6,548) (80,579)
Net increase......................................................... 3,798,481 50,421,437 378,178 4,624,697
CLASS C
Shares sold.......................................................... 100,739 1,334,965 8,507 104,262
Shares issued on reinvestment of distributions....................... 2,161 29,233 70 878
Shares redeemed...................................................... (3,928) (53,590) -- --
Net increase......................................................... 98,972 1,310,608 8,577 105,140
CLASS Y
Shares sold.......................................................... 287,843 3,807,908 280,323 3,219,576
Shares issued on reinvestment of distributions....................... 103,943 1,392,828 106,983 1,270,557
Shares redeemed...................................................... (481,537) (6,415,509) (808,529) (9,380,520)
Net decrease......................................................... (89,751) (1,214,773) (421,223) (4,890,387)
Total net increase resulting from Fund share transactions............ 4,505,471 $59,794,862 69,667 $ 1,130,736
</TABLE>
* The Fund share activity for Class A, Class B and Class C shares reflects the
period from January 3, 1995 (commencement of class operations) through
December 31, 1995.
60
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
BALANCED DECEMBER 31, 1996 DECEMBER 31, 1995
CLASS A SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold................................................... 450,824 $ 5,988,616 174,514 $ 2,180,996
Shares issued on reinvestment of distributions................ 372,747 4,905,076 228,390 2,924,585
Shares redeemed............................................... (680,925) (9,159,435) (883,230) (10,834,925)
Net increase (decrease)....................................... 142,646 1,734,257 (480,326) (5,729,344)
CLASS B
Shares sold................................................... 529,783 7,095,087 331,882 4,113,278
Shares issued on reinvestment of distributions................ 883,591 11,640,482 528,256 6,788,533
Shares redeemed............................................... (1,260,613) (16,901,766) (1,507,091) (18,590,977)
Net increase (decrease)....................................... 152,761 1,833,803 (646,953) (7,689,166)
CLASS C
Shares sold................................................... 19,191 256,143 6,207 78,623
Shares issued on reinvestment of distributions................ 2,215 28,991 1,346 17,328
Shares redeemed............................................... (16,775) (220,556) (2,122) (27,063)
Net increase.................................................. 4,631 64,578 5,431 68,888
CLASS Y
Shares sold................................................... 16,615,288 221,340,376 13,282,634 164,605,419
Shares issued on reinvestment of distributions................ 3,659,774 48,208,895 4,419,582 56,436,034
Shares redeemed............................................... (22,526,104) (302,083,357) (25,032,555) (313,833,958)
Net decrease.................................................. (2,251,042) (32,534,086) (7,330,339) (92,792,505)
Total net decrease resulting from Fund share
transactions................................................ (1,951,004) ($ 28,901,448) (8,452,187) ($106,142,127)
</TABLE>
61
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED*
DECEMBER 31, 1996 DECEMBER 31, 1995
FOUNDATION SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold.................................................... 8,413,021 $126,479,881 7,433,192 $103,904,500
Shares issued on reinvestment of distributions................. 474,763 7,335,750 194,159 2,828,216
Shares redeemed................................................ (3,177,106) (47,846,922) (542,266) (7,709,611)
Net increase................................................... 5,710,678 85,968,709 7,085,085 99,023,105
CLASS B
Shares sold.................................................... 18,909,215 282,822,448 19,717,460 275,013,438
Shares issued on reinvestment of distributions................. 1,109,399 17,095,215 487,710 7,076,078
Shares redeemed................................................ (4,174,149) (62,881,641) (543,554) (7,846,692)
Net increase................................................... 15,844,465 237,036,022 19,661,616 274,242,824
CLASS C
Shares sold.................................................... 1,165,822 17,413,787 761,087 10,573,728
Shares issued on reinvestment of distributions................. 43,393 668,629 19,172 277,286
Shares redeemed................................................ (308,109) (4,629,756) (26,533) (379,480)
Net increase................................................... 901,106 13,452,660 753,726 10,471,534
CLASS Y
Shares sold.................................................... 19,300,331 290,354,485 18,505,940 263,287,541
Shares issued on reinvestment of distributions................. 1,977,198 30,423,613 1,558,776 22,661,839
Shares redeemed................................................ (12,328,011) (185,863,701) (5,965,644) (82,422,318)
Net increase................................................... 8,949,518 134,914,397 14,099,072 203,527,062
Total net increase resulting from Fund share
transactions................................................. 31,405,767 $471,371,788 41,599,499 $587,264,525
</TABLE>
* The Fund share activity for Class A, Class B and Class C shares reflect the
period from January 3, 1995 (commencement of class operations) through
December 31, 1995.
62
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
TAX STRATEGIC SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A
Shares sold.............................................................. 652,149 $ 8,273,511 215,649 $ 2,527,734
Shares issued on reinvestment of distributions........................... 26,949 357,306 8,759 105,291
Shares redeemed.......................................................... (73,546) (929,252) (2,950) (36,239)
Net increase............................................................. 605,552 7,701,565 221,458 2,596,786
CLASS B
Shares sold.............................................................. 1,563,566 19,725,070 550,703 6,364,106
Shares issued on reinvestment of distributions........................... 59,693 793,572 21,721 260,033
Shares redeemed.......................................................... (85,378) (1,087,302) (34,427) (407,693)
Net increase............................................................. 1,537,881 19,431,340 537,997 6,216,446
CLASS C
Shares sold.............................................................. 263,684 3,324,801 39,093 457,822
Shares issued on reinvestment of distributions........................... 6,172 81,908 1,561 18,761
Shares redeemed.......................................................... (5,604) (70,810) -- --
Net increase............................................................. 264,252 3,335,899 40,654 476,583
CLASS Y
Shares sold.............................................................. 63,086 768,496 92,229 1,062,541
Shares issued on reinvestment of distributions........................... 26,475 341,313 66,375 774,666
Shares redeemed.......................................................... (84,857) (1,055,874) (84,665) (952,606)
Net increase............................................................. 4,704 53,935 73,939 884,601
Total net increase resulting from Fund share transactions................ 2,412,389 $30,522,739 874,048 $10,174,416
</TABLE>
* For Class A, Class B, and Class C shares, the Fund share transaction activity
reflects the period January 17, 1995, January 6, 1995, and March 3, 1995,
respectively (commencement of class operations) through December 31, 1995.
NOTE 5 -- INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from sales of investments, excluding
short-term securities for the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
American Retirement.... $ 61,282,970 $ 10,474,200
Balanced............... 301,410,563 419,093,895
Foundation............. 435,891,619 116,921,520
Tax Strategic.......... 59,793,904 34,152,600
</TABLE>
On December 31, 1996, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost for federal
tax purposes was as follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION NET TAX COST
<S> <C> <C> <C> <C>
American Retirement.... $ 13,825,539 $ 1,154,915 $ 12,670,624 $ 104,513,650
Balanced............... 172,241,593 8,122,511 164,119,082 730,753,100
Foundation............. 232,321,512 27,939,388 204,382,124 1,400,416,658
Tax Strategic.......... 7,198,915 131,677 7,067,238 50,263,081
</TABLE>
63
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 6 -- CONCENTRATION OF CREDIT RISK
Tax Strategic invests the municipal bond portion of its portfolio in
obligations issued by states, territories and possessions of the United States
and by their political subdivisions and duly constituted authorities. The
issuers' abilities to meet their obligations may be affected by economic and
political developments in a specific state or region. Certain debt obligations
held in the Fund's municipal portfolio may be entitled to the benefit of standby
letters of credit or other guarantees of banks or other financial institutions.
NOTE 7 -- FINANCING AGREEMENT
Effective July 3, 1996, a financing agreement was put in place between all
of the Evergreen Funds and State Street. Under this agreement, State Street
provided an unsecured line of credit facility, in the aggregate amount of $100
million ($50 million committed and $50 million uncommitted), to be accessed by
the Funds for temporary or emergency purposes only and is subject to each
participating Fund's borrowing restrictions.
Effective October 31, 1996, a new financing agreement was put in place
between all of the Evergreen Funds and State Street, Societe Generale and ABN
AMRO Bank N.V. (collectively, the "Banks"). Under this agreement, the Banks
provide an unsecured line of credit facility in the aggregate amount of $225
million ($112.5 million committed and $112.5 million uncommitted) allocated
evenly between the Banks. Borrowings under these facilities bear interest at
.75% per annum above the Federal Funds rate. A commitment fee of .10% per annum
will be incurred on the unused portion of the committed facility which would be
allocated to all participating funds.
The Funds had no borrowings under the financing agreements during the year
ended December 31, 1996.
NOTE 8 -- DEFERRED TRUSTEE'S FEES
Each Trustee may defer any or all compensation related to performance of
duties as a Trustee of the Funds. Each Trustee's deferred balances are allocated
to deferral accounts which are included in the accrued expenses for each Fund.
The investment performance of the deferral accounts are based on the investment
performance of certain Evergreen Funds. Any gains earned or losses incurred in
the deferral accounts are reported in each Fund's Trustee's fees and expenses.
Trustees will be paid either in one lump sum or in quarterly installments for up
to ten years at their election, not earlier than either the year in which the
Trustee ceases to be a member of the Board of Trustees or January 1, 2000. As of
December 31, 1996, the value of the Trustees deferral accounts was $8,419,
$23,045, $7,206 and $2,978 for American Retirement, Balanced, Foundation and Tax
Strategic, respectively.
64
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND SHAREHOLDERS OF
EVERGREEN AMERICAN RETIREMENT FUND
EVERGREEN BALANCED FUND
EVERGREEN FOUNDATION FUND
EVERGREEN TAX STRATEGIC FOUNDATION FUND
We have audited the accompanying statements of assets and liabilities,
including the statements of investments, for the Evergreen Balanced Funds listed
below as of December 31, 1996, and the related statements of operations, changes
in net assets, and the financial highlights for each of the periods listed
below:
EVERGREEN AMERICAN RETIREMENT FUND -- statement of operations, statement of
changes in net assets and financial highlights for the year ended December
31, 1996. The statement of changes in net assets for the year ended December
31, 1995 and the financial highlights for each of the years in the four-year
period ended December 31, 1995 were audited by other auditors, whose report
thereon dated February 15, 1996 was unqualified.
EVERGREEN BALANCED FUND -- statement of operations for the year ended
December 31, 1996, statements of changes in net assets for each of the years
in the two-year period then ended and the financial highlights for each of
the years in the five-year period then ended.
EVERGREEN FOUNDATION FUND -- statement of operations, statement of changes
in net assets and financial highlights for the year ended December 31, 1996.
The statement of changes in net assets for the year ended December 31, 1995
and the financial highlights for each of the years in the four-year period
ended December 31, 1995 were audited by other auditors, whose report thereon
dated February 15, 1996 was unqualified.
EVERGREEN TAX STRATEGIC FOUNDATION FUND -- statement of operations,
statement of changes in net assets and financial highlights for the year
ended December 31, 1996. The statement of changes in net assets for the year
ended December 31, 1995 and the financial highlights for each of the years
in the two-year period ended December 31, 1995 and the period from November
2, 1993 (commencement of operations) through December 31, 1993 were audited
by other auditors, whose report thereon dated February 15, 1996 was
unqualified.
These financial statements and financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights audited
by us and referred to above present fairly, in all material respects, the
financial position of Evergreen American Retirement Fund, Evergreen Balanced
Fund, Evergreen Foundation Fund and Evergreen Tax Strategic Foundation Fund as
of December 31, 1996, and the results of their operations, changes in their net
assets and the financial highlights for each of the periods listed above in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
February 19, 1997
65
<PAGE>
TRUSTEES AND OFFICERS
TRUSTEES:
Laurence B. Ashkin*
Foster Bam*
James S. Howell, Chairman
Robert J. Jeffries*+
Gerald M. McDonnell
Thomas L. McVerry
William W. Pettit
Russell A. Salton, III M.D.
Michael S. Scofield
OFFICERS:
John J. Pileggi
President and Treasurer
George O. Martinez
Secretary
Sheryl Hirschfeld
Assistant Secretary
Stephen W. St. Clair
Assistant Treasurer
* These individuals are not trustees for Balanced.
+ Trustee Emeritus
FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
During the fiscal year ended December 31, 1996, American Retirement, Balanced,
Foundation and Tax Strategic paid $498,967, $74,293,460, $9,919,612 and
$850,061, respectively, of net long term capital gain distributions.
During the fiscal year ended December 31, 1996, Tax Strategic paid $616,906 of
tax-exempt distributions. Of the total tax exempt distributions, 9.14%, 9.10%,
9.13%, and 9.13% is subject to alternative minimum tax for Class Y, Class A,
Class B and Class C shares, respectively.
For corporate taxpayers, 67.33%, 36.81%, 34.11% and 79.29% of the ordinary
income distributions paid during the fiscal year ended December 31, 1996 by
American Retirement, Balanced, Foundation and Tax Strategic, respectively,
qualified for corporate dividends received deduction.
<PAGE>
KEYSTONE BALANCED FUND II
SEMI-ANNUAL REPORT
DECEMBER 31, 1996
SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
Market
Shares Value
- ---------------------------------------------------------------
COMMON STOCKS (51.6%)
CANADA (1.7%)
BUSINESS SERVICES (0.9%)
Laidlaw, Inc. 6,000 $ 69,000
- ---------------------------------------------------------------
TELECOMMUNICATIONS (0.8%)
Northern Telecom Ltd. 900 55,687
- ---------------------------------------------------------------
TOTAL CANADA 124,687
- ---------------------------------------------------------------
GERMANY (1.3%)
TELECOMMUNICATIONS (1.3%)
Deutsche Telekom AG, ADR (b) 4,500 91,687
- ---------------------------------------------------------------
UNITED STATES (48.6%)
ADVERTISING & PUBLISHING (0.9%)
Tribune Co. 800 63,100
- ---------------------------------------------------------------
AEROSPACE (2.1%)
Boeing Co. 800 85,100
United Technologies Corp. 1,000 66,000
- ---------------------------------------------------------------
151,100
- ---------------------------------------------------------------
AUTOMOTIVE (0.9%)
Chrysler Corp. 1,900 62,700
- ---------------------------------------------------------------
BUSINESS SERVICES (1.1%)
Rental Service Corp. (b) 3,000 83,438
- ---------------------------------------------------------------
CAPITAL GOODS (3.2%)
Deere & Co. 1,700 69,063
Emerson Electric Co. 1,000 96,750
General Electric Co. 700 69,212
- ---------------------------------------------------------------
235,025
- ---------------------------------------------------------------
CHEMICALS (1.5%)
du Pont de Nemours & Co. 600 56,625
Monsanto Co. 1,300 50,537
- ---------------------------------------------------------------
107,162
- ---------------------------------------------------------------
CONSUMER GOODS (1.0%)
Procter & Gamble Co. 700 75,250
- ---------------------------------------------------------------
DIVERSIFIED COMPANIES (1.4%)
Minnesota Mining & Manufacturing Co. 1,200 $ 99,450
- ---------------------------------------------------------------
DRUGS (3.2%)
American Home Products Corp. 1,000 58,625
Johnson & Johnson 1,700 84,575
Rhone-Poulenc Rorer, Inc. 1,100 85,938
- ---------------------------------------------------------------
229,138
- ---------------------------------------------------------------
ELECTRONICS (2.3%)
Analog Devices, Inc. (b) 3,000 101,625
Intel Corp. 500 65,469
- ---------------------------------------------------------------
167,094
- ---------------------------------------------------------------
FINANCE (3.8%)
Bank of Boston Corp. 1,100 70,675
Federal National Mortgage Association 1,400 52,150
Nationsbank Corp. 600 58,650
Student Loan Marketing Association 1,000 93,125
- ---------------------------------------------------------------
274,600
- ---------------------------------------------------------------
FOODS (4.1%)
Anheuser-Busch Cos., Inc. 1,700 68,000
Nabisco Holdings Corp., Class A 1,800 69,975
Philip Morris Cos., Inc. 600 67,575
Pioneer Hi Bred International, Inc. 1,300 91,000
- ---------------------------------------------------------------
296,550
- ---------------------------------------------------------------
METALS & MINING (0.8%)
Nucor Corp. 1,100 56,100
- ---------------------------------------------------------------
NATURAL GAS (0.8%)
Sonat, Inc. 1,200 61,800
- ---------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (1.4%)
Hewlett Packard Co. 2,000 100,500
- ---------------------------------------------------------------
OIL (4.9%)
Atlantic Richfield Co. 600 79,500
Exxon Corp. 700 68,600
Kerr McGee Corp. 900 64,800
Mobil Corp. 600 73,350
Pennzoil Co. 1,300 73,450
- ---------------------------------------------------------------
359,700
- ---------------------------------------------------------------
<PAGE>
PAGE 8
- ---------------------------------------------------------------
Keystone Balanced Fund II
OIL SERVICES (2.3%)
Halliburton Co. 1,600 $ 96,400
Schlumberger, Ltd. 700 69,914
- ---------------------------------------------------------------
166,314
- ---------------------------------------------------------------
REAL ESTATE (5.0%)
Arden Realty, Inc. (R.E.I.T.) 4,000 111,000
Beacon Properties (R.E.I.T.) 2,200 80,575
Patriot American Hospitality, Inc.
(R.E.I.T.) 1,600 69,000
Prentiss Properties Trust (R.E.I.T.) 4,000 100,000
- ---------------------------------------------------------------
360,575
- ---------------------------------------------------------------
RETAIL (0.7%)
Kmart Financing, Inc. 1,100 53,625
- ---------------------------------------------------------------
TELECOMMUNICATIONS (5.0%)
Ameritech Corp. 1,000 60,625
Bell Atlantic Corp. 1,000 64,750
Bellsouth Corp 1,600 64,600
GTE Corp. 1,400 63,700
Lucent Technologies, Inc. 1,100 50,875
SBC Communications, Inc. 1,200 62,100
- ---------------------------------------------------------------
366,650
- ---------------------------------------------------------------
TRANSPORTATION (0.8%)
Norfolk Southern Corp. 700 $ 61,250
- ---------------------------------------------------------------
UTILITIES (1.4%)
Boston Edison Co. 3,800 102,125
- ---------------------------------------------------------------
TOTAL UNITED STATES 3,533,246
- ---------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$3,383,944) 3,749,620
- ---------------------------------------------------------------
CONVERTIBLE/PREFERRED STOCKS (4.8%)
Alco Standard Corp., ADS 700 66,850
Conseco, Inc. 1,000 113,750
Fuji International Financing Bermuda
Trust, ADR (b) 2 61,829
Sunamerica, Inc. 2,500 105,625
- ---------------------------------------------------------------
TOTAL CONVERTIBLE/PREFERRED STOCKS
(Cost--$314,447) 348,054
- ---------------------------------------------------------------
Interest Maturity Par Market
Rate Date Value Value
- ------------------------------------------------------------------------------
FIXED INCOME (41.4%)
CONVERTIBLE BONDS & NOTES (2.8%)
CAPITAL GOODS (1.5%)
Robbins & Myers, Inc. 6.50% 2003 $100,000 $110,500
- ------------------------------------------------------------------------------
RETAIL (1.3%)
Saks Holdings, Inc. 5.50 2006 100,000 91,875
- ------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS & NOTES (Cost--$200,000) 202,375
- ------------------------------------------------------------------------------
BANK & FINANCE BONDS & NOTES (1.1%)
Swift Energy Co. 6.25 2006 75,000 81,281
- ------------------------------------------------------------------------------
TOTAL BANK & FINANCE BONDS & NOTES (Cost--$75,000) 81,281
- ------------------------------------------------------------------------------
<PAGE>
PAGE 9
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
Interest Maturity Par Market
Rate Date Value Value
- ------------------------------------------------------------------------------
UNITED STATES GOVERNMENT (AND AGENCY)
ISSUES (37.5%)
U.S. Treasury Notes 6.13% 1998 $535,000 $ 537,338
U.S. Treasury Notes 6.50 2001 900,000 909,846
U.S. Treasury Notes 6.50 2005 630,000 634,038
U.S. Treasury Bonds 6.75 2026 340,000 342,550
Federal Home Loan Bank, Cons.
Discount Note 1997 300,000 299,814
- ------------------------------------------------------------------------------
TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES
(Cost--$2,697,969) 2,723,586
- ------------------------------------------------------------------------------
TOTAL FIXED INCOME (Cost--$2,972,969) 3,007,242
- ------------------------------------------------------------------------------
Maturity
Value
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (1.8%)
REPURCHASE AGREEMENTS (1.8%)
Investments in repurchase
agreements, in a joint
trading account, purchased
12/31/96, 6.716%, maturing
1/2/97 (Cost $130,000) (a) $130,050 $ 130,000
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$6,801,360) 7,234,916
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (0.4%) 28,008
- ------------------------------------------------------------------------------
NET ASSETS (100.0%) $7,262,924
- ------------------------------------------------------------------------------
(a) The repurchase agreements are fully collateralized by U. S. government
and/or agency obligations based on market prices at December 31, 1996.
(b) Non-income-producing security.
Legend of Portfolio Abbreviations:
ADR--American Depository Receipt
ADS---American Depository Share
REIT--Real Estate Investment Trust
See Notes to Financial Statements.
<PAGE>
PAGE 10
- ------------------------------------------------------------------------------
Keystone Balanced Fund II
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
Period from September 3, 1996
(commencement of investment
operations) to December 31, 1996
- ------------------------------------------------------------------------------
(Unaudited)
Net asset value beginning of period $ 10.00
- ------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.080
Net realized and unrealized gain on
investments and foreign currency related
transactions 0.916
- ------------------------------------------------------------------------------
Total from investment operations 0.996
- ------------------------------------------------------------------------------
Less distributions from
Net investment income (0.080)
Net realized gain from investments (0.016)
- ------------------------------------------------------------------------------
Total distributions (0.096)
- ------------------------------------------------------------------------------
Net asset value end of period $ 10.90
- ------------------------------------------------------------------------------
Total return (a) 10.00%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.56%(b)(c)
Total expenses excluding reimbursement 2.16%(c)
Net investment income 2.65%(c)
Portfolio turnover rate 64%
Average commission rate paid $0.0783
- ------------------------------------------------------------------------------
Net assets end of period (thousands) $ 1,850
- ------------------------------------------------------------------------------
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% for the period ended December 31, 1996.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 11
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
Period from September 3, 1996
(commencement of investment
operations) to December 31, 1996
- ------------------------------------------------------------------------------
(Unaudited)
Net asset value beginning of period $ 10.00
- ------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.060
Net realized and unrealized gain on
investments and foreign currency related
transactions 0.926
- ------------------------------------------------------------------------------
Total from investment operations 0.986
- ------------------------------------------------------------------------------
Less distributions from
Net investment income (0.060)
Net realized gain from investments (0.016)
- ------------------------------------------------------------------------------
Total distributions (0.076)
- ------------------------------------------------------------------------------
Net asset value end of period $ 10.91
- ------------------------------------------------------------------------------
Total return (a) 9.89%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.29%(b)(c)
Total expenses excluding reimbursement 4.87%(c)
Net investment income 1.94%(c)
Portfolio turnover rate 64%
Average commission rate paid $0.0783
- ------------------------------------------------------------------------------
Net assets end of period (thousands) $ 5,224
- ------------------------------------------------------------------------------
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 2.25% for the period ended December 31, 1996.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- ------------------------------------------------------------------------------
Keystone Balanced Fund II
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
Period from September 3, 1996
(commencement of investment
operations) to December 31, 1996
- ------------------------------------------------------------------------------
(Unaudited)
Net asset value beginning of period $ 10.00
- ------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.070
Net realized and unrealized gain on
investments and foreign currency related
transactions 0.906
- ------------------------------------------------------------------------------
Total from investment operations 0.976
- ------------------------------------------------------------------------------
Less distributions from
Net investment income (0.060)
Net realized gains from investments (0.016)
- ------------------------------------------------------------------------------
Total distributions (0.076)
- ------------------------------------------------------------------------------
Net asset value at the end of period $ 10.90
- ------------------------------------------------------------------------------
Total return (a) 9.79%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.29%(b)(c)
Total expenses excluding reimbursement 4.93%(c)
Net investment income 2.01%(c)
Portfolio turnover rate 64%
Average commission rate paid $0.0783
- ------------------------------------------------------------------------------
Net assets end of period (thousands) $ 189
- ------------------------------------------------------------------------------
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 2.25% for the period ended December 31, 1996.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 13
- ------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996 (Unaudited)
- -------------------------------------------------------------------------
Assets
Investments at market value
(identified cost--$6,801,360) $7,234,916
Cash 1,148
Receivable for:
Investments sold 24,862
Dividends and interest 54,175
Prepaid organization 17,676
Other receivables 29,303
Due from Adviser 37,431
- -------------------------------------------------------------------------
Total assets 7,399,511
- -------------------------------------------------------------------------
Liabilities
Payable for:
Investments purchased 135,881
Other accrued expenses 706
- -------------------------------------------------------------------------
Total liabilities 136,587
- -------------------------------------------------------------------------
Net assets $7,262,924
- -------------------------------------------------------------------------
Net assets represented by (Note 1)
Paid-in-capital $6,699,417
Undistributed net investment income 2,550
Accumulated net realized gain on investments 127,401
Net unrealized appreciation on investments 433,556
- -------------------------------------------------------------------------
Total net assets $7,262,924
- -------------------------------------------------------------------------
Net asset value per share (Note 2)
Class A Shares
Net assets of $1,849,708 / 169,693 shares outstanding $10.90
Offering price per share ($10.90 / 0.9425)
(based on sales charge of 5.75% of the offering price
at December 31, 1996) (Note 1) $11.56
Class B Shares
Net assets of $5,224,441 / 478,969 shares outstanding $10.91
Class C Shares
Net assets of $188,775 / 17,314 shares outstanding $10.90
- -------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Period from September 3, 1996
(commencement of investment operations)
to December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------
Investment income (Note 1)
Dividends (net of foreign withholding taxes of $72) $ 30,775
Interest 67,982
- --------------------------------------------------------------------------
Total income 98,757
- --------------------------------------------------------------------------
Expenses (Notes 1, 4, 5 and 6)
Management fee $ 15,454
Registration fee 28,142
Shareholder services 5,234
Auditing 2,054
Custodian fees 6,623
Legal 3,081
Reimburseable accounting fees 4,108
Distribution Plan fees 12,510
Organizational fees 1,243
Printing fees 4,108
Miscellaneous fees 822
Reimbursement from investment adviser (37,431)
- --------------------------------------------------------------------------
Total expenses 45,948
Less: Expenses paid indirectly (2,326)
- --------------------------------------------------------------------------
Net Expenses 43,622
- --------------------------------------------------------------------------
Net investment income 55,135
- --------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency related transactions (Note 3)
Net realized gain on investments and foreign
currency related transactions 139,314
Net change in unrealized appreciation on
investments and foreign currency related
transactions 433,556
- --------------------------------------------------------------------------
Net realized and unrealized gain on investments
and foreign currency related transactions 572,870
- --------------------------------------------------------------------------
Net increase in net assets resulting from
operations $628,005
- --------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 14
- ------------------------------------------------------------------------------
Keystone Balanced Fund II
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Period from September 3, 1996
(commencement of investment
operations) to December 31, 1996
- ------------------------------------------------------------------------------
Operations
Net investment income $ 55,135
Net realized gain on investments and
foreign currency related transactions 139,314
Net change in unrealized appreciation on
investments and foreign currency
related transactions 433,556
- ------------------------------------------------------------------------------
Net increase in net assets resulting from operations 628,005
- ------------------------------------------------------------------------------
Distributions to shareholders from (Note 1)
Net investment income
Class A (31,626)
Class B (20,337)
Class C (621)
Net realized gain on investment transactions
Class A (6,325)
Class B (5,423)
Class C (166)
- ------------------------------------------------------------------------------
Total distributions to shareholders (64,498)
- ------------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 4,671,766
Class B Shares 5,348,708
Class C Shares 150,674
Payments for shares redeemed:
Class A Shares (3,214,492)
Class B Shares (386,633)
Class C Shares (60)
Net asset value of shares issued in
reinvestment of distributions:
Class A Shares 6,959
Class B Shares 22,020
Class C Shares 475
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from capital share transactions 6,599,417
- ------------------------------------------------------------------------------
Total increase in net assets 7,162,924
- ------------------------------------------------------------------------------
Net assets
Beginning of period 100,000
- ------------------------------------------------------------------------------
End of period (includes undistributed
net investment income of $2,550) (Note 1) $ 7,262,924
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 15
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Significant Accounting Policies
Keystone Balanced Fund II (the "Fund") is a Massachusetts business trust for
which Keystone Investment Management Company ("Keystone") is the Investment
Adviser. Keystone was formerly a wholly-owned subsidiary of Keystone
Investments, Inc. ("KII") and is currently a subsidiary of First Union Keystone,
Inc. First Union Keystone, Inc. is a wholly-owned subsidiary of First Union
National Bank of North Carolina which in turn is a wholly-owned subsidiary of
First Union Corporation ("First Union"). The Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified,
open-end investment company. The Fund offers several classes of shares. The
Fund's investment objective is to provide shareholders with current income and
capital appreciation consistent with the preservation of principal.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Valuation of Securities
Listed corporate bonds, other fixed income securities, mortgage and other
asset-backed securities, and other related securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Securities
for which valuations are not available from an independent pricing service
(including restricted securities) are valued at fair value as determined in good
faith according to procedures established by the Board of Trustees.
Investments are usually valued at the closing sales price, or in the absence
of sales and for over-the-counter securities, the mean of the bid and asked
prices.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other Keystone funds, may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are fully collateralized by U.S. Treasury and/or
Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets and liabilities at the daily rate
of exchange; purchases and sales of investments, income and expenses at the rate
of exchange prevailing on the respective dates of such
<PAGE>
PAGE 16
- ------------------------------------------------------------------------------
Keystone Balanced Fund II
transactions. Net unrealized foreign exchange gain (loss) resulting from changes
in foreign currency exchange rates is a component of net unrealized appreciation
(depreciation) on investments and foreign currency transactions. Net realized
foreign currency gains and losses resulting from changes in exchange rates
include foreign currency gains and losses between trade date and settlement date
on investment securities transactions, foreign currency transactions and the
difference between the amounts of interest and dividends recorded on the books
of the Fund and the amount actually received. The portion of foreign currency
gains and losses related to fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date is included in realized gain
(loss) on foreign currency transactions.
D. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of discounts and premiums. Dividend income is recorded on the
ex-dividend date.
E. Organization Expenses
The Fund's organization expenses are amortized to operations over a five-year
period on a straight-line basis. In the event any of the initial shares of the
Fund are redeemed by First Union during the five-year amortization period,
redemption proceeds will be reduced by any unamortized organization expenses in
the same proportion as the number of initial shares being redeemed bears to the
number of initial shares outstanding at the time of redemption.
F. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
G. Distributions
The Fund distributes net investment income quarterly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the close
of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. Distributions from taxable net investment income and net
capital gains can exceed book basis net investment income and net capital gains.
H. Class Allocations
As of December 31, 1996, Class A shares were offered at a public offering price
which included a maximum sales charge of 5.75% payable at the time of purchase.
Class B shares were sold subject to a contingent deferred sales charge that was
payable upon redemption and decreased depending on how long the shares had been
held. Class B shares purchased on or after June 1, 1995 that had been
outstanding for eight years automatically converted to Class A shares. Class B
shares purchased prior to June 1, 1995 that had
<PAGE>
PAGE 17
- ------------------------------------------------------------------------------
been outstanding for seven years automatically converted to Class A shares.
Class C shares were sold subject to a contingent deferred sales charge payable
on shares redeemed within one year of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
2. Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with no par value. Shares of beneficial
interest of the Fund are currently divided into Class A, Class B and Class C.
Transactions in shares of the Fund were as follows:
Period from September 3, 1996
(commencement of operations)
to December 31, 1996
- ------------------------------------------------------------------------------
Class A
Shares sold 458,332
Shares redeemed (293,305)
Shares issued in reinvestment of dividends and distributions 666
- ------------------------------------------------------------------------------
Net increase 165,693
- ------------------------------------------------------------------------------
Class B
Shares sold 509,919
Shares redeemed (36,055)
Shares issued in reinvestment of dividends and distributions 2,105
- ------------------------------------------------------------------------------
Net increase 475,969
- ------------------------------------------------------------------------------
Class C
Shares sold 14,275
Shares redeemed (6)
Shares issued in reinvestment of dividends and distributions 45
- ------------------------------------------------------------------------------
Net increase 14,314
- ------------------------------------------------------------------------------
3. Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the period ended December 31, 1996:
Cost of Proceeds
Purchases from Sales
- ------------------------------------------------------------------------------
Non-U.S. Government $5,574,287 $1,712,239
U.S. Government $5,663,306 $2,998,210
- ------------------------------------------------------------------------------
4. Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution Plans
adopted for its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, the Fund pays its principal underwriter
amounts which are calculated and paid monthly.
Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the Fund's principal underwriter. On December
11, 1996, the Fund entered into a principal underwriting agreement with
Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group Inc. At that time, EKD
replaced EKIS as the Fund's principal underwriter.
<PAGE>
PAGE 18
- ------------------------------------------------------------------------------
Keystone Balanced Fund II
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.25% annually of the average daily net assets of the Class A shares,
to pay expenses related to the distribution of Class A shares. During the period
ended December 31, 1996, the Fund paid $1,071 to EKIS under the Class A
Distribution Plan.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund pays a
distribution fee which may not exceed 1.00% annually of the average daily net
assets of Class B and Class C shares, respectively. Of that amount, 0.75% is
used to pay distribution expenses and 0.25% is used to pay service fees.
During the period ended December 31, 1996, under the Class B Distribution
Plans, the Fund paid or accrued $353 for Class B shares purchased before June 1,
1995 and subsequently exchanged into the Fund and $10,690 for Class B shares
purchased on or after June 1, 1995. The Fund paid $396 under the Class C
Distribution Plan.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of any Distribution
Plan, and subject to the discretion of the Independent Trustees, payments to
EKIS and/or EKD may continue as compensation for services which had been earned
while the Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
At December 31, 1996 total unpaid distribution costs were $4,859 for Class B
shares purchased before June 1, 1995 and subsequently exchanged into the Fund
and $291,384 for Class B shares purchased on or after June 1, 1995. Unpaid
distribution costs for Class C were $9,283.
Contingent deferred sales charges paid by redeeming shareholders are paid to
EKD or its predecessor.
5. Investment Management Agreement and Other Affiliated Transactions
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the Fund, Keystone provides investment management and
administrative services to the Fund. In return, Keystone is paid a management
fee that is computed and paid daily. The management fee is calculated by
applying percentage rates, which start at 0.55% and decline to 0.25% per annum
as net assets increase, to the average daily net asset value of the Fund.
Keystone has voluntarily limited the expenses of Class A shares to 1.50% of
its average daily net assets and has limited the expenses of Class B and C to
2.25% of the average daily net assets of each respective class. For the period
ended December 31, 1996, Keystone reimbursed the Fund $37,431.
During the period ended December 31, 1996, the Fund paid or accrued $4,108 to
Keystone for certain accounting services. The Fund paid or accrued $5,234 to
Evergreen Keystone Service Company (formerly, Keystone Investor Resource Center,
Inc.), a wholly-owned subsidiary of Keystone, for services rendered as the
Fund's transfer and dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
6. Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the period ended Decem-
<PAGE>
PAGE 19
- ------------------------------------------------------------------------------
ber 31, 1996, the Fund incurred total custody fees of $6,623 and received a
credit of $2,326 pursuant to this expense offset arrangement, resulting in a net
custody expense of $4,297. The assets deposited with the custodian under this
expense offset arrangement could have been invested in income-producing assets.
<PAGE>
EVERGREEN FOUNDATION TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability and
Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
Number Description
1(A) Declaration of Trust.(1)
(B) Amended Declaration of Trust.(1)
(C) Instrument providing for the Establishment and Designation of
Classes.(1)
2 By-laws.(1)
3 Not applicable.
4 Agreement and Plan of Reorganization (included as Exhibit A to the
Prospectus contained in Part A to this registration statement)
5 Declaration of Trust Articles II, V, VI, VIII, IX and By-Laws
Articles III and VIII.(1)
6(A) Investment Advisory Agreement between Evergreen Asset Management
Corp. and the Registrant.(1)
(B) Investment Sub-Advisory Agreement between Evergreen Asset Management
Corp. and Lieber & Company.(1)
7(A) Distribution Agreement between Evergreen Keystone Distributor, Inc.
(formerly Evergreen Funds Distributor, Inc.) and the Registrant.(3)
(B) Form of Dealer Agreement for Class A, B and C shares used by
Evergreen Keystone Distributor, Inc.(3)
8 Not applicable.
9 Custody Agreement between State Street Bank and Trust Company and
Registrant.(2)
10 Rule 12b-1 Distribution Plans.(1)
11 Opinion and consent of Sullivan & Worcester LLP as to the legality of
the legality of the shares being issued.(3)
12 Tax opinion and consent of Sullivan & Worcester LLP.(5)
13 Not applicable.
14 Consent of KPMG Peat Marwick LLP.(3)
15 Not applicable.
16 Powers of Attorney.(3)(See signature page included herewith.)
17(A) Form of Proxy Card.(3)
(B) Registrant's Rule 24f-2 Declaration.(4)
- -------------------
(1) Incorporated by reference to post-effective amendment no. 10 to
Registrant's registration statement (No. 33-31803) (the "Registration
Statement") dated July 6, 1995.
(2) Incorporated by reference to post-effective amendment no. 1 to the
Registration Statement dated June 29, 1990.
(3) Filed herewith.
(4) Incorporated by reference to the Registration Statement dated October 26,
1989.
(5) To be filed by amendment.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus that is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned registrant agrees to file, by post-effective amendment,
an opinion of counsel or a copy of an Internal Revenue Service ruling supporting
the tax consequences of the proposed reorganization within a reasonable time
after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of New York and State of
New York, on the 11th day of April, 1997.
EVERGREEN FOUNDATION TRUST
By: ______________________
Name: John J. Pileggi
Title: President
Know all men by these presents that each person whose signature appears
below hereby severally constitutes and appoints John J. Pileggi, James P.
Wallin, Dorothy E. Bourassa, Terrence J. Cullen and Martin J. Wolin, and each of
them singly, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution, for the undersigned and in the undersigned's name, place
and stead, in any and all capacities, to sign and affix the undersigned's name
to any and all amendments to this Registration Statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing necessary or incidental to the performance and execution of
the powers herein granted, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them or their substitutes, may lawfully
do or cause to be done by virtue hereof.
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities indicated as of the 11th
day of April, 1997.
Signatures Title
- ----------- -----
/s/ John J. Pileggi
- ----------------------- President and
John J. Pileggi Treasurer
/s/ Laurence B. Ashkin
- ----------------------- Trustee
Laurence B. Ashkin
/s/ Foster Bam
- ----------------------- Trustee
Foster Bam
/s/ James S. Howell
- ----------------------- Trustee
James S. Howell
/s/ Gerald M. McDonnell
- ----------------------- Trustee
Gerald M. McDonnell
/s/ Thomas L. McVerry
- ----------------------- Trustee
Thomas L. McVerry
/s/ William Walt Pettit
- ----------------------- Trustee
William Walt Pettit
/s/ Russell A. Salton, III, M.D.
- -------------------------------- Trustee
Russell A. Salton, III, M.D
/s/ Michael S. Scofield
- ----------------------- Trustee
Michael S. Scofield
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO. Page
7(a) Distribution Agreement between Evergreen Keystone Distributor, Inc.
and Registrant
(b) Form of Dealer Agreement by Evergreen Keystone Distributor, Inc.
11 Opinion and Consent of Sullivan & Worcester LLP
14 Consent of KPMG Peat Marwick LLP
17(a) Form of Proxy
- -------------------
DISTRIBUTION AGREEMENT
AGREEMENT, made as of the 1st day of January, 1997, by and between the
Evergreen Foundation Trust (the "Trust") and Evergreen Keystone Distributor,
Inc. ("EKD")
WHEREAS, The Trust, has adopted one or more Plans of Distribution with
respect to certain Classes of shares of its separate investment series (each a
"Plan", or collectively the "Plans") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act") which Plans authorize the Trust
on behalf of the Funds to enter into agreements regarding the distribution of
such Classes of shares (the "Shares") of the separate investment series of the
Trust (the "Funds") set forth on Exhibit A; and
WHEREAS, the Trust has agreed that Evergreen Keystone Distributor, Inc.
(the "Distributor"), a Delaware corporation, shall act as the distributor of the
Shares; and
WHEREAS, the Distributor agrees to act as distributor of the Shares for
the period of this Distribution Agreement (the "Agreement");
NOW, THEREFORE, in consideration of the agreements hereinafter
contained, it is agreed as follows:
1. SERVICES AS DISTRIBUTOR
1.1. The Distributor agrees to use appropriate efforts to promote each
Fund and to solicit orders for the purchase of Shares and will undertake such
advertising and promotion as it believes reasonable in connection with such
solicitation The services to be performed hereunder by the Distributor are
described in more detail in Section 7 hereof. . In the event that the Trust
establishes additional investment series with respect to which it desires to
retain Evergreen Funds Distributor, Inc. to act as distributor for one or more
Classes hereunder, it shall promptly notify the Distributor in writing. If the
Distributor is willing to render such services it shall notify the Trust in
writing whereupon such portfolio shall become a Fund and its designated Classes
of shares of beneficial interest shall become Shares hereunder.
1.2. All activities by the Distributor and its agents and employees as
the distributor of Shares shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations made or
adopted pursuant to the 1940 Act by the Securities and Exchange Commission (the
"Commission") or any securities association registered under the Securities
Exchange Act of 1934, as amended.
1.3 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all Federal and state
laws relating to the sale of such securities. Neither the Distributor, any
selected dealer or any other person is authorized by the Trust to give any
information or to make any representations, other than those contained in the
Trust's registration statement (the "Registration Statement") or related Fund
prospectus and statement of additional information ("Prospectus and Statement of
Additional Information") and any sales literature specifically approved by the
Trust.
1.4 The Distributor shall adopt and follow procedures, as approved by
the officers of the Trust, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
1.5. The Distributor will transmit any orders received by it for
purchase or redemption of Shares to the transfer agent and custodian for the
applicable Fund.
1.6 The Distributor shall provide persons acceptable to the Trust to
serve as officers of the Trust.
1.7. Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Trust's officers may decline to accept any orders for, or make any
sales of Shares until such time as those officers deem it advisable to accept
such orders and to make such sales.
1.8. The Distributor will act only on its own behalf as principal if it
chooses to enter into selling agreements with selected dealers or others. The
Distributor shall offer and sell Shares only to such selected dealers as are
members, in good standing, of the NASD.
1.9 The Distributor agrees to adopt compliance standards, in a form
satisfactory to the Trust, governing the operation of the multiple class
distribution system under which Shares are offered.
2. DUTIES OF THE TRUST.
2.1. The Trust agrees at its own expense to execute any and all
documents and to furnish, at its own expense, any and all information and
otherwise to take all actions that may be reasonably necessary in connection
with the qualification of Shares for sale in such states as the Trust and the
Distributor may designate.
2.2. The Trust shall furnish from time to time, for use in connection
with the sale of Shares such information with respect to the Funds and the
Shares as the Distributor may reasonably request; and the Trust warrants that
any such information shall be true and correct. Upon request, the Trust shall
also provide or cause to be provided to the Distributor: (a) unaudited
semi-annual statements of each Fund's books and accounts, (b) quarterly earnings
statements of each Fund, (c) a monthly itemized list of the securities in each
Fund, (d) monthly balance sheets as soon as practicable after the end of each
month, and (e) from time to time such additional. information regarding each
Fund's financial condition as the Distributor may reasonably request.
3. REPRESENTATIONS OF THE TRUST.
3.1. The Trust represents to the Distributor that it is registered
under the 1940 Act and that the Shares of each of the Funds have been registered
under the Securities Act of 1933, as amended (the "Securities Act"). The Trust
will file such amendments to its Registration Statement as may be required and
will use its best efforts to ensure that such Registration Statement remains
accurate.
4. INDEMNIFICATION.
4.1 The Trust shall indemnify and hold harmless the Distributor, ITS
OFFICERS AND DIRECTORS, and each person, if any, who controls the Distributor
within the meaning of Section 15 of the Securities Act against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damage or expense
and reasonable counsel fees incurred in connection therewith), which the
Distributor or such controlling person may incur under the Securities Act or
under common law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact contained in the
Registration Statement, as from time to time amended or supplemented, any
prospectus or annual or interim report to shareholders of the Trust, or arising
out of or based upon any omission, or alleged omission, to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, unless such statement or omission was made in reliance upon, and in
conformity with, information furnished to the Trust in connection therewith by
or on behalf of the Distributor, provided, however, that in no case (i) is the
indemnity of the Trust in favor of the Distributor, ITS OFFICER AND DIRECTORS,
or any such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of the reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling person, as the case maybe, shall have notified the Trust in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the other
first legal process giving information of the nature of the claim shall have
been served upon the Distributor or such controlling persons (or after the
Distributor or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Trust of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action it brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Trust will be entitled to participate
at its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Trust elects to
assume the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Distributor or such controlling person or persons, defendant
or defendants in the suit. In the event the Trust elects to assume the defense
of any such suit and retain such counsel, the Distributor or such controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the Trust does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses of any counsel retained by them.
The Trust shall promptly notify the Distributor of the commencement of any
litigation or proceeding against it or any of its officers or directors in
connection with the issuance or sale of any of the shares.
4.2 The Distributor shall indemnify and hold harmless the Trust and
each of its directors and officers and each person, if any, who controls the
Trust against any loss, liability, claim, damage or expense described in the
foregoing indemnity contained in paragraph 4.1, but only with respect to
statements or omissions made in reliance upon , and in conformity with,
information furnished to the Trust in writing by or on behalf of the Distributor
for uses in connection with the Registration Statement, as from time to time
amended, or the annual or interim reports to shareholders. In case any action
shall be brought against the Trust or any persons so indemnified, in respect of
which indemnity may be sought against the Distributor, the Distributor shall
have rights and duties given to the Trust, and the Trust and each person so
indemnified shall have the rights and duties given to the Distributor by the
provisions of paragraph 4.1.
5. OFFERING OF SHARES.
5.1. None of the Shares shall be offered by either the Distributor or
the Trust under any of the provisions of this Agreement, and no orders for the
purchase or sale of Shares hereunder shall be accepted by the Trust, if and so
long as the effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the Securities Act or if and so long as a current prospectus and statement of
additional information as required by Section 10(b) (2) of the Securities Act,
as amended, is not on file with the Commission; provided, however, that nothing
contained in this paragraph 5.1 shall in any way restrict or have any
application to or bearing upon the Trust's obligation to repurchase Shares from
any shareholder in accordance with the provisions of the prospectus of each Fund
or the Trust's prospectus or Declaration of Trust.
6. AMENDMENTS TO REGISTRATION STATEMENT AND OTHER MATERIAL EVENTS.
6.1. The Trust agrees to advise the Distributor as soon as reasonably
practical by a notice in writing delivered to the Distributor: (a) of any
request or action taken by the Commission which is material to the Distributor's
obligations hereunder or (b) any material fact of which the Trust becomes aware
which affects the Distributor's obligations hereunder.
For purposes of this section, informal requests by or acts of the Staff
of the Commission shall not be deemed actions of or requests by the Commission.
7. COMPENSATION OF DISTRIBUTOR.
7.1. (a) As promptly as possible after the first Business Day (as
defined in the Prospectus) of each month this Agreement is in effect, the Trust
shall compensate the Distributor for its distribution services rendered during
the previous month (but not prior to the Commencement Date); by making payment
to the Distributor in the amounts set forth on Exhibit A annexed hereto with
respect to each Class of Shares of each Fund to which this Agreement is
applicable. The compensation by the Trust of the Distributor is authorized
pursuant to the Plan or Plans adopted by the Trust pursuant to Rule 12b-l under
the 1940 Act.
(b) Under this Agreement, the Distributor shall: (i) make
payments to securities dealers and others engaged in the sale of Shares; (ii)
make payments of principal and interest in connection with the financing of
commission payments made by the Distributor in connection with the sale of
Shares (iii) incur the expense of obtaining such support services, telephone
facilities and shareholder services as may reasonably be required in connection
with its duties hereunder; (iv) formulate and implement marketing and
promotional activities, including, but not limited to, direct mail promotions
and television, radio, newspaper, magazine and other mass media advertising; (v)
prepare, print and distribute sales literature; (vi) prepare, print and
distribute Prospectuses of the Funds and reports for recipients other than
existing shareholders of the Funds; and (vii) provide to the Trust such
information, analyses and opinions with respect to marketing and promotional
activities as the Trust may, from time to time, reasonably request.
(c) The Distributor shall prepare and deliver reports to the
Treasurer of the Trust on a regular, at least monthly, basis, showing the
distribution expenditures incurred by the Distributor in connection with its
services rendered pursuant to this Agreement and the Plan and the purposes
therefor, as well as any supplemental reports as the Trustees, from time to
time, may reasonably request.
(d) The Distributor may retain as a sales charge the difference
between the current offering price of Shares, as set forth in the current
prospectus for each Fund, and net asset value, less any reallowance that is
payable in accordance with the sales charge schedule in effect at any given time
with respect to the Shares.
(e) The Distributor may retain any contingent deferred sales
charge ("CDSCs") payable with respect to the redemption of any Shares, provided
however, that any CDSCs received by the Distributor shall first be applied by
the Distributor or its assignee to any outstanding amounts payable or which may
in the future be payable by the Distributor or its assignee under financing
arrangements entered into in connection with the payment of commissions on the
sale of Shares.
(f) The Distributor may sell, assign, pledge or hypothecate its
rights to receive compensation hereunder. The Trust acknowledges that, in
connection with the financing of commission payments made by the Distributor in
connection with the sale of Shares, the Distributor may sell and assign, and/or
has sold and assigned, to Mutual Fund Funding 1994-1 the Distributor's interest
in certain items of compensation payable to the Distributor hereunder, and that
Mutual Fund Funding 1994-1 in turn may pledge or assign, and/or has assigned,
such interest to First Union Corporation as lender to secure such financing. It
is understood that an assignee may not further sell, assign, pledge, or
hypothecate its right to receive such reimbursement unless such sale,
assignment, pledge or hypothecation has been approved by the vote of the Board
of the Trust, including a majority of the Disinterested Trustees, cast in person
at a meeting called for the purpose of voting on such approval.
(g) In addition to the foregoing, and in respect of its services
hereunder and for similar services rendered to other investment companies for
which Evergreen Asset Management Corp. (the "Investment Adviser") serves as
investment adviser, the Investment Adviser may pay to the Distributor an
additional fee to be paid in such amount and manner as the Investment Adviser
and Distributor may agree from time to time.
8. CONFIDENTIALITY, NON-EXCLUSIVE AGENCY.
8.1. The Distributor agrees on behalf of itself and its employees to
treat confidentially and as proprietary information of the Trust all records and
other information relative to the Funds and its prior, present or potential
shareholders, and not to use such records and information for any purpose other
than performance of its responsibilities and to obtain approval in writing by
the Trust, which approval shall not be unreasonably withheld and may not be
withheld where the Distributor may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Trust.
8.2. Nothing contained in this Agreement shall prevent the Distributor,
or any affiliated person of the Distributor, from performing services similar to
those to be performed hereunder for any other person, firm, or corporation or
for its or their own accounts or for the accounts of others.
9. TERM.
9.1. This Agreement shall continue until June 30, 1998 and thereafter
for successive annual periods, provided such continuance is specifically
approved at least annually by (i) a vote of the majority of the Trustees of the
Trust and (ii) a vote of the majority of those Trustees of the Trust who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan, in this Agreement or any agreement
related to the Plan (the "Independent Trustees") by vote cast in person at a
meeting called for the purpose of voting on such approval. This Agreement is
terminable at any time, with respect to the Trust, without penalty, (a) on not
less than 60 days' written notice by vote of a majority of the Independent
Trustees, or by vote of the holders of a majority of the outstanding voting
securities of the Trust, or (b) upon not less than 60 days' written notice by
the Distributor. This Agreement may remain in effect with respect to a Fund even
if it has been terminated in accordance with this paragraph with respect to one
or more other Funds of the Trust. This Agreement will also terminate
automatically in the event of its assignment. (As used in this Agreement, the
terms "majority of the outstanding voting securities", "interested persons", and
"assignment" shall have the same meaning as such terms have in the 1940 Act.)
10. MISCELLANEOUS.
10.1. This Agreement shall be governed by the laws of the State of New
York.
10.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their constructions or effect.
10.3 The obligations of the Trust hereunder are not personally binding
upon, nor shall resort be had to the private property of, any of the Trustees,
shareholders, officers, employees or agents of the Trust and only the Trust's
property shall be bound.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below.
EVERGREEN KEYSTONE DISTRIBUTOR, INC. EVERGREEN FOUNDATION TRUST
By:_______________________________ By:______________________________
Title: , Vice President Title: John J. Pileggi, President
<PAGE>
EXHIBIT A
To Distribution Agreement between Evergreen Keystone Distributor, Inc.
and EVERGREEN FOUNDATION TRUST
FUNDS AND CLASSES COVERED BY THIS AGREEMENT:
Evergreen Foundation Fund
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS Y SHARES
Evergreen Tax Strategic Foundation Fund
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS Y SHARES
DISTRIBUTION FEES
1. During the term of this Agreement, the Trust will pay to the Distributor a
quarterly fee with respect to each of the Funds and Classes of Shares thereof
listed above. This fee will be computed at the annual rate of .25 of 1% of the
average net asset value on an annual basis of Class A Shares of each Fund; and
.75 of 1% of the average net asset value on an annual basis of Class B and Class
C Shares of each Fund.
2. For the quarterly period in which the Agreement becomes effective or
terminates, there shall be an appropriate proration of any fee payable on the
basis of the number of days that the Agreement is in effect during the quarter.
IN WITNESS WHEREOF, the parties hereto have caused this Exhibit A to
the Distribution Agreement between the parties dated as of January 1, 1997 to be
executed by their officers designated below.
EVERGREEN KEYSTONE DISTRIBUTOR, INC. EVERGREEN FOUNDATION TRUST
By:_______________________________ By:_______________________________
Title: , Vice President Title: John J. Pileggi, President
- ---------------------
EVERGREEN KEYSTONE
- ---------------------
[logo] FUNDS [logo]
- ---------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
230 PARK AVENUE
NEW YORK, NEW YORK 10169
December 12, 1996
Effective January 1, 1997
To Whom It May Concern:
You currently have a dealer agreement ("Agreement") with Evergreen
Keystone Distributor, Inc. ("Company"). Effective January 1, 1997 the
Agreement is amended and restated in its entirety as set forth below.
The Company, principal underwriter, invites you to participate in the
distribution of shares, including separate classes of shares, ("Shares") of
the Keystone Fund Family, the Keystone America Fund Family, the Evergreen Fund
Family and to the extent applicable their separate investment series
(collectively "Funds" and each individually a "Fund") designated by us which
are currently or hereafter underwritten by the Company, subject to the
following terms:
1. You will offer and sell Shares of the Funds at the public offering price
with respect to the applicable class described in the then current prospectus
and/or statement of additional information ("Prospectus") of the Fund whose
Shares you offer. You will offer Shares only on a forward pricing basis, i.e.
orders for the purchase, repurchase or exchange of Shares accepted by you
prior to the close of the New York Stock Exchange and placed with us the same
day prior to the close of our business day, 5:00 p.m. Eastern Time, shall be
confirmed at the closing price for that business day. You agree to place
orders for Shares only with us and at such closing price. In the event of a
difference between verbal and written price confirmation, the written
confirmations shall be considered final. Prices of a Fund's Shares are
computed by and are subject to withdrawal by each Fund in accordance with its
Prospectus. You agree to place orders with us only through your central order
department unless we accept your written Power of Attorney authorizing others
to place orders on your behalf. This Agreement on your part runs to us and the
respective Fund and is for the benefit and enforceable by each.
2. In the distribution and sale of Shares, you shall not have authority to act
as agent for the Fund, the Company or any other dealer in any respect in such
transactions. All orders are subject to acceptance by us and become effective
only upon confirmation by us. The Company reserves the unqualified right not
to accept any specific order for the purchase or exchange of Shares.
3. In addition to the distribution services provided by you with respect to a
Fund you may be asked to render administrative, account maintenance and other
services as necessary or desirable for shareholders of such Fund ("Shareholder
Services").
4. Notwithstanding anything else contained in this Agreement or in any other
agreement between us, the Company hereby acknowledges and agrees that any
information received from you concerning your customer in the course of this
arrangement is confidential. Except as requested by the customer or as
required by law and except for the respective Fund, its officers, directors,
employees, agents or service providers, the Company will not provide nor
permit access to such information by any person or entity, including any First
Union Corporation bank or First Union Brokerage Services, Inc.
5. So long as this Agreement remains in effect, we will pay you commissions on
sales of Shares of the Funds and service fees for Shareholder Services, in
accordance with the Schedule of Commissions and Service Fees ("Schedule")
attached hereto and made a part hereof, which Schedule may be modified from
time to time or rescinded by us, in either case without prior notice. You have
no vested right to receive any continuing service fees, other fees, or other
commissions which we may elect to pay to you from time to time on Shares
previously sold by you or by any person who is not a broker or dealer actually
engaged in the investment banking or securities business. You will receive
commissions in accordance with the attached Schedule on all purchase
transactions in shareholder accounts (excluding reinvestment of income
dividends and capital gains distributions) for which you are designated as
Dealer of Record except where we determine that any such purchase was made
with the proceeds of a redemption or repurchase of Shares of the same Fund or
another Fund, whether or not the transaction constitutes the exercise of the
exchange privilege. Commissions will be paid to you twice a month. You will
receive service fees for shareholder accounts for which you are designated
Dealer of Record as provided in the Schedule. You hereby represent that
receipt of such service fees by you will be disclosed to your customers.
You hereby authorize us to act as your agent in connection with all
transactions in shareholder accounts in which you are designated as Dealer of
Record. All designations of Dealer of Record and all authorizations of the
Company to act as your agent shall cease upon the termination of this
Agreement or upon the shareholder's instruction to transfer his or her account
to another Dealer of Record.
6. Payment for all Shares purchased from us shall be made to the Company and
shall be received by the Company within three business days after the
acceptance of your order or such shorter time as may be required by law. If
such payment is not received by us, we reserve the right, without prior
notice, forthwith to cancel the sale, or, at our option, to sell such Shares
back to the respective Fund in which case we may hold you responsible for any
loss, including loss of profit, suffered by us or by such Fund resulting from
your failure to make payment as aforesaid.
7. You agree to purchase Shares of the Funds only from us or from your
customers. If you purchase Shares from us, you agree that all such purchases
shall be made only to cover orders already received by you from your
customers, or for your own bonafide investment without a view to resale. If
you purchase Shares from your customers, you agree to pay such customers the
applicable net asset value per Share less any contingent deferred sales charge
("CDSC") that would be applicable under the Prospectus ("repurchase price").
8. You will sell Shares only (a) to your customers at the prices described in
paragraph 2 above; or (b) to us as agent for a Fund at the repurchase
price. In such a sale to us, you may act either as principal for your own
account or as agent for your customer. If you act as principal for your own
account in purchasing Shares for resale to us, you agree to pay your
customer not less nor more than the repurchase price which you receive from
us. If you act as agent for your customer in selling Shares to us, you
agree not to charge your customer more than a fair commission for handling
the transaction. You shall not withhold placing with us orders received
from your customers so as to profit yourself as a result of such
withholding.
10. We will not accept from you any conditional orders for Shares.
11. If any Shares sold to you under the terms of this Agreement are
repurchased by a Fund, or are tendered for redemption, within seven business
days after the date of our confirmation of the original purchase by you, it is
agreed that you shall forfeit your right to any commissions on such sales even
though the shareholder may be charged a CDSC by the Fund.
We will notify you of any such repurchase or redemption within the next
ten business days after the date on which the certificate or written request
for redemption is delivered to us or to the Fund, and you shall forthwith
refund to us the full amount of any commission you received on such sale. We
agree, in the event of any such repurchase or redemption, to refund to the
Fund any commission we retained on such sale and, upon receipt from you of the
commissions paid to you, to pay such commissions forthwith to the Fund.
12. Shares sold to you hereunder shall not be issued until payment has been
received by the Fund concerned. If transfer instructions are not received from
you within 15 days after our acceptance of your order, the Company reserves
the right to instruct the transfer agent for the Fund concerned to register
Shares sold to you in your name and notify you of such. You agree to hold
harmless and indemnify the Company, the Fund and its transfer agent for any
loss or expense resulting from such registration.
13. You agree to comply with any compliance standards that may be furnished to
you by us regarding when each class of Shares of a Fund may appropriately be
sold to particular customers.
14. No person is authorized to make any representations concerning Shares of a
Fund except those contained in the Prospectus and in sales literature issued
by us supplemental to such Prospectus. In purchasing Shares from us you shall
rely solely on the representations contained in the appropriate Prospectus and
in such sales literature. We will furnish additional copies of such
Prospectuses and sales literature and other releases and information issued by
us in reasonable quantities upon request. You agree that you will in all
respects duly conform with all laws and regulations applicable to the sales of
Shares of the Funds and will indemnify and hold harmless the Funds, their
directors and trustees and the Company from any damage or expenses on account
of any wrongful act by you, your representatives, agents or sub-agents in
connection with any orders or solicitation or orders of Shares of the Funds by
you, your representatives, agents or sub-agents.
15. Each party hereto represents that it is (1) a member of the National
Association of Securities Dealers, Inc., and agrees to notify the other should
it cease to be a member of such Association and agrees to the automatic
termination of this Agreement at that time or (2) excluded from the definition
of broker-dealer under the Securities Exchange Act of 1934. It is further
agreed that all rules or regulations of the Association now in effect or
hereafter adopted, including its Business Conduct Rule 2830(d), which are
binding upon underwriters and dealers in the distribution of the securities of
open-end investment companies, shall be deemed to be a part of this Agreement
to the same extent as if set forth in full herein.
16. You will not offer the Funds for sale in any State where they are not
qualified for sale under the blue sky laws and regulations of such State or
where you are not qualified to act as a dealer except for States in which they
are exempt from qualification.
17. This Agreement supersedes and cancels any prior agreement with respect to
the sales of Shares of any of the Funds underwritten by the Company. The
Agreement may be amended by us at any time upon written notice to you.
18. This amendment to the Agreement shall be effective on January 1, 1997 and
all sales hereunder are to be made, and title to Shares of the Funds shall
pass in The Commonwealth of Massachusetts. This Agreement shall be interpreted
in accordance with the laws of The Commonwealth of Massachusetts.
19. All communications to the Company should be sent to the above address. Any
notice to you shall be duly given if mailed or telegraphed to you at the
addressed specified by you.
20. Either part may terminate this Agreement at any time by written notice to
the other party.
- --------------------------- EVERGREEN KEYSTONE DISTRIBUTOR, INC.
Dealer or Broker Name
- --------------------------- /s/ Robert A. Hering
Address
ROBERT A. HERING, President
<PAGE>
- ---------------------
EVERGREEN KEYSTONE
- ---------------------
[logo] FUNDS [logo]
- ---------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC. ROBERT A. HERING
230 PARK AVENUE President
NEW YORK, NEW YORK 10169
December 12, 1996
Effective January 1, 1997
Dear Financial Professional:
This Schedule of Commissions and Service Fees ("Schedule") supersedes any
previous Schedules, is hereby made part of our dealer agreement ("Agreement")
with you effective January 1, 1997 and will remain in effect until modified or
rescinded by us. Capitalized terms used in this Schedule and not defined
herein have the same meaning as such terms have in the Agreement. All
commission rates and service fee rates set forth in this Schedule may be
modified by us from time to time without prior notice.
I. KEYSTONE FUNDS
KEYSTONE QUALITY BOND FUND (B-1) KEYSTONE MID-CAP GROWTH FUND (S-3)
KEYSTONE DIVERSIFIED BOND FUND (B-2) KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
KEYSTONE HIGH INCOME BOND FUND (B-4) KEYSTONE INTERNATIONAL FUND INC.
KEYSTONE BALANCED FUND (K-1) KEYSTONE PRECIOUS METALS HOLDINGS, INC.
KEYSTONE STRATEGIC GROWTH FUND (K-2) KEYSTONE TAX FREE FUND
KEYSTONE GROWTH AND INCOME FUND (S-1) (COLLECTIVELY "KEYSTONE FUNDS")
1. COMMISSIONS FOR THE KEYSTONE FUNDS (OTHER THAN KEYSTONE PRECIOUS METALS
HOLDINGS, INC.)
Except as otherwise provided in our Agreement, we will pay you commissions
on your sales of Shares of such Keystone Funds rtds d such er tv amrr
rdKeystone Fundat the rate of 4.0% of the aggregate public offering price of
such Shares as described in the Fund's Prospectus ("Offering Price") when sold
in an eligible sale.
2. COMMISSIONS FOR KEYSTONE PRECIOUS METALS HOLDINGS, INC.
Except as otherwise provided for in our Agreement, we will pay you
commissions on your sale of Shares of Keystone Precious Metals Holdings, Inc.
as the rate of the Offering Price when sold in an eligible sale as follows:
AMOUNT OF PURCHASE COMMISSION AMOUNT OF PURCHASE COMMISSION
Less than $100,000 4% $250,000-$499,999 1%
$100,000-$249,999 2% $500,000 and above 0.5%
3. SERVICE FEES
We will pay you service fees based on the aggregate net asset value of
Shares of the Keystone Funds (other than Keystone Precious Metals Holdings,
Inc.) you have sold on or after June 1, 1983 and of Keystone Precious Metals
Holdings, Inc. you have sold on or after November 19, 1984, which remain
issued and outstanding on the books of such Funds on the fifteenth day of the
third month of each calendar quarter (March 15, June 15, September 15 and
December 15, each hereinafter a "Service Fee Record Date") and which are
registered in the names of customers for whom you are dealer of record
("Eligible Shares"). Such service fees will be calculated quarterly at the
rate of 0.0625% per quarter of the aggregate net asset value of all such
Eligible Shares (approximately 0.25% annually) on the Service Fee Record Date;
provided, however, that in any calendar quarter in which service fees earned
by you on Eligible Shares of all Funds (except Keystone Liquid Trust Class A
Shares) are less than $50.00 in the aggregate, no service fees will be paid to
you nor will such amounts be carried over for payment in a future quarter.
Service fees will be payable within five business days after the Service Fee
Record Date. Service fees will only be paid by us to the extent that such
amounts have been paid to us by the Funds.
4. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of additional commissions to certain dealers. Such
incentives may, at our discretion, be limited to dealers who allow their
individual selling representatives to participate in such additional
commissions.
<TABLE>
<CAPTION>
II. KEYSTONE AMERICA FUNDS AND EVERGREEN FUNDS
KEYSTONE AMERICA FUNDS
<S> <C>
KEYSTONE GOVERNMENT SECURITIES FUND KEYSTONE OMEGA FUND
KEYSTONE STATE TAX FREE FUND KEYSTONE SMALL COMPANY GROWTH FUND - II
KEYSTONE STATE TAX FREE FUND - SERIES II KEYSTONE FUND FOR TOTAL RETURN
KEYSTONE STRATEGIC INCOME FUND KEYSTONE BALANCED FUND - II
KEYSTONE TAX FREE INCOME FUND (COLLECTIVELY "KEYSTONE EQUITY AND LONG TERM INCOME FUNDS")
KEYSTONE WORLD BOND FUND KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
KEYSTONE FUND OF THE AMERICAS KEYSTONE INTERMEDIATE TERM BOND FUND
KEYSTONE GLOBAL OPPORTUNITIES FUND (COLLECTIVELY "KEYSTONE INTERMEDIATE INCOME FUNDS")
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. KEYSTONE LIQUID TRUST
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND
EVERGREEN FUNDS
EVERGREEN U.S. GOVERNMENT FUND EVERGREEN AMERICAN RETIREMENT FUND
EVERGREEN HIGH GRADE TAX FREE FUND EVERGREEN FOUNDATION FUND
EVERGREEN FLORIDA MUNICIPAL BOND FUND EVERGREEN TAX STRATEGIC FOUNDATION FUND
EVERGREEN GEORGIA MUNICIPAL BOND FUND EVERGREEN UTILITY FUND
EVERGREEN NEW JERSEY MUNICIPAL BOND FUND EVERGREEN TOTAL RETURN FUND
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND EVERGREEN SMALL CAP EQUITY INCOME FUND
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND (COLLECTIVELY "EVERGREEN EQUITY AND LONG TERM INCOME FUNDS")
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
EVERGREEN FLORIDA HIGH INCOME MUNICIPAL BOND FUND EVERGREEN MONEY MARKET FUND
EVERGREEN FUND EVERGREEN TAX EXEMPT MONEY MARKET FUND
EVERGREEN U.S. REAL ESTATE EQUITY FUND EVERGREEN TREASURY MONEY MARKET FUND
EVERGREEN LIMITED MARKET FUND EVERGREEN PENNSYLVANIA TAX FREE MONEY MARKET FUND
EVERGREEN AGGRESSIVE GROWTH FUND (COLLECTIVELY "EVERGREEN MONEY MARKET FUNDS")
EVERGREEN INTERNATIONAL EQUITY FUND EVERGREEN SHORT-INTERMEDIATE BOND FUND
EVERGREEN GLOBAL LEADERS FUND EVERGREEN INTERMEDIATE-TERM BOND FUND
EVERGREEN EMERGING MARKETS FUND EVERGREEN INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
EVERGREEN GLOBAL REAL ESTATE EQUITY FUND EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND
EVERGREEN BALANCED FUND EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND -- CALIFORNIA
EVERGREEN GROWTH & INCOME FUND (COLLECTIVELY "EVERGREEN INTERMEDIATE INCOME AND
EVERGREEN VALUE FUND MONEY MARKET FUNDS")
</TABLE>
A. CLASS A SHARES
1. COMMISSIONS
Except as otherwise provided in our Agreement, in paragraph 2 below or in
connection with certain types of purchases at net asset value which are
described in the Prospectuses for the Keystone America Funds and the Evergreen
Funds, we will pay you commissions on your sales of Shares of such Funds in
accordance with the following sales charge schedules* on sales where we
receive a commission from the shareholder:
KEYSTONE AMERICA AND EVERGREEN EQUITY AND LONG TERM INCOME FUNDS
SALES CHARGE AS COMMISSION AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
PURCHASE OFFERING PRICE OFFERING PRICE
Less than $50,000 4.75% 4.25%
$50,000-$99,999 4.50% 4.25%
$100,000-$249,999 3.75% 3.25%
$250,000-$499,999 2.50% 2.00%
$500,000-$999,999 2.00% 1.75%
Over $1,000,000 None See paragraph 2
KEYSTONE AMERICA AND EVERGREEN INTERMEDIATE INCOME FUNDS
SALES CHARGE AS COMMISSION AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
PURCHASE OFFERING PRICE OFFERING PRICE
Less than $50,000 3.25% 2.75%
$50,000-$99,999 3.00% 2.75%
$100,000-$249,999 2.50% 2.25%
$250,000-$499,999 2.00% 1.75%
$500,000-$999,999 1.50% 1.25%
Over $1,000,000 None See paragraph 2
KEYSTONE LIQUID TRUST AND EVERGREEN MONEY MARKET FUNDS
No sales charge for any amount of purchase.
2. COMMISSIONS FOR CERTAIN TYPES OF PURCHASES
With respect to (a) purchases of Class A Shares in the amount of $1 million
or more and/or (b) purchases of Class A Shares made by a corporate or certain
other qualified retirement plan or a non-qualified deferred compensation plan
or a Title I tax sheltered annuity or TSA Plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan"), (each such
purchase a "NAV Purchase"), we will pay you commissions as follows:
<TABLE>
<CAPTION>
a. Purchases described in 2(a) above
AMOUNT OF COMMISSION AS A PERCENTAGE
PURCHASE OF OFFERING PRICE
<S> <C>
$1,000,000-$2,999,999 1.00% of the first $2,999,999, plus
$3,000,000-$4,999,999 0.50% of the next $2,000,000, plus
$5,000,000 0.25% of amounts equal to or over $5,000,000
b. Purchases described in 2(b) above .50% of amount of purchase (subject to recapture
upon early redemption)
</TABLE>
* These sales charge schedules apply to purchases made at one time or pursuant
to Rights of Accumulation or Letters of Intent. Any purchase which is made
pursuant to Rights of Accumulation or Letter of Intent is subject to the
terms described in the Prospectus(es) for the Fund(s) whose Shares are being
purchased.
3. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of up to the entire sales charge to certain
dealers. Such incentives may, at our discretion, be limited to dealers who
allow their individual selling representatives to participate in such
additional commissions.
4. SERVICE FEES FOR EVERGREEN FUNDS (OTHER THAN EVERGREEN MONEY MARKET FUNDS)
AND KEYSTONE AMERICA FUNDS (OTHER THAN KEYSTONE STATE TAX FREE FUND,
KEYSTONE STATE TAX FREE FUND - SERIES II, KEYSTONE CAPITAL PRESERVATION AND
INCOME FUND AND KEYSTONE LIQUID TRUST)
a. Keystone America Funds Only. Until March 31, 1997, we will pay you
service fees based on the aggregate net asset value of Shares of such Funds
you have sold which remain issued and outstanding on the books of such Funds
on the fifteenth day of the third month of each calendar quarter (March 15,
June 15, September 15 and December 15, each hereinafter a "Service Fee Record
Date") and which are registered in the names of customers for whom you are
dealer of record ("Eligible Shares"). Such service fees will be calculated
quarterly at the rate of 0.0625% per quarter of the aggregate net asset value
of all such Eligible Shares (approximately 0.25% annually) on the Service Fee
Record Date; provided, however, that in any calendar quarter in which total
service fees earned by you on Eligible Shares of all Keystone Funds (except
Keystone Liquid Trust Class A Shares) are less than $50.00 in the aggregate,
no service fees will be paid to you nor will such amounts be carried over for
payment in a future quarter. Service fees will be paid within five days after
the Service Fee Record Date. Service fees will only be paid by us to the
extent that such amounts have been paid to us by the Funds.
b. Evergreen Funds and Keystone America Funds (after March 31, 1997). We
will pay you service fees based on the average daily net asset value of Shares
of such Funds you have sold which are issued and outstanding on the books of
such Funds during each calendar quarter and which are registered in the names
of customers for whom you are dealer of record ("Eligible Shares"). Such
service fees will be calculated quarterly at the rate of 0.0625% per quarter
of the daily average net asset value of all such Eligible Shares
(approximately 0.25% annually) during such quarter; provided, however, that in
any calendar quarter in which total service fees earned by you on Eligible
Shares of all Funds (except Keystone Liquid Trust Class A Shares) are less
than $50.00 in the aggregate, no service fees will be paid to you nor will
such amounts be carried over for payment in a future quarter. Service fees
will be paid by the twentieth day of the month before the end of the
respective quarter. Service fees will only be paid by us to the extent that
such amounts have been paid to us by the Funds.
5. SERVICE FEES FOR KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE
FUND - SERIES II
a. Until March 31, 1997, we will pay you service fees based on the aggregate
net asset value of Shares of such Funds you have sold which remain issued and
outstanding on the books of the Funds on the fifteenth day of the third month
of each calendar quarter (March 15, June 15, September 15 and December 15,
each hereinafter a "Service Fee Record Date") and which are registered in the
names of customers for whom you are dealer of record ("Eligible Shares"). Such
service fees will be calculated quarterly at the rate of 0.0375% per quarter
of the aggregate net asset value of all such Eligible Shares (approximately
0.15% annually) on the Service Fee Record Date; provided, however, that in any
calendar quarter in which total service fees earned by you on Eligible Shares
of all Funds (except Keystone Liquid Trust Class A Shares) are less than
$50.00 in the aggregate, no service fees will be paid to you nor will such
amounts be carried over for payment in a future quarter. Service fees will be
paid within five days after the Service Fee Record Date. Service fees will
only be paid by us to the extent that such amounts have been paid to us by the
Funds.
b. After March 31, 1997 we will pay you service fees calculated as provided
in section II (A)(4)(b) except that the quarterly rate will be 0.0375%
(approximately 0.15% annually).
c. After June 30, 1997, we will pay you service fees calculated as provided
in section II (A)(4)(b) above on Shares sold on or after July 1, 1997.
6. SERVICE FEES FOR KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
a. Until March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(4)(a) except that for Eligible Shares sold after January 1,
1997 the quarterly rate will be 0.025% (approximately 0.10% annually).
b. After March 31, 1997 we will pay you service fees calculated as provided
in section II (A)(4)(b) except that for Eligible Shares sold after January 1,
1997 the quarterly rate will be 0.025% (approximately 0.10% annually).
7. SERVICE FEES FOR KEYSTONE LIQUID TRUST
We will pay you service fees based on the aggregate net asset value of all
Shares of such Fund you have sold which remain issued and outstanding on the
books on the Fund on the fifteenth day of the third month of each calendar
quarter (March 15, June 15, September 15 and December 15, each hereinafter a
"Service Fee Record Date") and which are registered in the names of customers
for whom you are dealer of record ("Eligible Shares"). Such service fees will
be calculated at the rates set forth below and based on the aggregate net
asset value of all such Eligible Shares on the Service Fee Record Date;
provided, however, that no such service fees will be paid to you for any
quarter if the aggregate net asset value of such Eligible Shares on the last
business day of the quarter is less than $2 million; and provided further,
however, that service fees will only be paid to us to the extent that such
amounts have been paid to us by the Fund. Service fees will be paid within 5
days after the Service Fee Record Date. The quarterly rates at which such
service fees are payable and the net asset value to which such rates will be
applied are set forth below:
ANNUAL QUARTERLY AGGREGATE NET ASSET
RATE PAYMENT RATE VALUE OF SHARES
0.00000% 0.00000% of the first $1,999,999, plus
0.15000% 0.03750% of the next $8,000,000, plus
0.20000% 0.05000% of the next $15,000,000, plus
0.25000% 0.06250% of the next $25,000,000, plus
0.30000% 0.07500% of amounts over $50,000,000
8. SERVICE FEES FOR EVERGREEN MONEY MARKET FUNDS
We will pay you service fees calculated as provided in section II (A)(4)(b)
except that the quarterly rate will be 0.075% (approximately 0.30% annually.)
<PAGE>
B. CLASS B SHARES
ALL KEYSTONE AMERICA AND EVERGREEN FUNDS
1. COMMISSIONS
Except as otherwise provided in our Agreement, we will pay you commissions
on your sales of Class B Shares of the Keystone America Funds and the
Evergreen Funds at the rate of 4.00% of the aggregate Offering Price of such
Shares, when sold in an eligible sale.
2. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of additional commissions, to certain dealers. Such
incentives may, at our discretion, be limited to dealers who allow their
individual selling representatives to participate in such additional
commissions.
3. SERVICE FEES FOR EVERGREEN FUNDS AND KEYSTONE AMERICA FUNDS (OTHER THAN
KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE FUND - SERIES II)
a. Keystone America Funds - Until March 31, 1997, we will pay you service
fees calculated as provided in section II (A)(4)(a) above.
b. Evergreen Funds and Keystone America Funds (after March 31. 1997). We
will pay you service fees calculated as provided in section II (A)(4)(b)
above.
4. SERVICE FEES FOR KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE
FUND - SERIES II
a. Until March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(a) above.
b. After March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(b) above.
c. After June 30, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(c) above.
C. CLASS C SHARES
ALL KEYSTONE AMERICA AND EVERGREEN FUNDS
1. COMMISSIONS
Except as provided in our Agreement, we will pay you initial commissions on
your sales of Class C Shares of the Keystone America and the Evergreen Funds
at the rate of 0.75% of the aggregate Offering Price of such Shares sold in
each eligible sale.
We will also pay you commissions based on the average daily net asset value
of Shares of such Funds you have sold which have been on the books of the
Funds for a minimum of 14 months from the date of purchase (plus any
reinvested distributions attributable to such Shares), which have been issued
and outstanding on the books of such Funds during the calendar quarter and
which are registered in the names of customers for whom you are dealer of
record ("Eligible Shares"). Such commissions will be calculated quarterly at
the rate of 0.1875% per quarter of the average daily net asset value of all
such Eligible Shares (approximately 0.75% annually) during such quarter. Such
commissions will be paid by the twentieth day of the month before the end of
the respective quarter. Such commissions will continue to be paid to you
quarterly so long as aggregate payments do not exceed applicable NASD
limitations and other governing regulations.
2. SERVICE FEES
We will pay you a full year's service fee in advance on your sales of Class
C Shares of such Funds at the rate of 0.25% of the aggregate net asset value
of such Shares.
We will pay you service fees based on the average daily net asset value of
Shares of such Funds you have sold which have been on the books of the Funds
for a minimum of 14 months from the date of purchase (plus any reinvested
distributions attributable to such Shares), which have been issued and
outstanding during the respective quarter and which are registered in the
names of customers for whom you are the dealer of record ("Eligible Shares").
Such service fees will be calculated quarterly at the rate of 0.0625% per
quarter of the average daily net asset value of all such Eligible Shares
(approximately 0.25% annually); provided, however, that in any calendar
quarter in which total service fees earned by you on Eligible Shares of Funds
(except Keystone Liquid Trust Class A Shares) are less than $50.00 in the
aggregate, no service fees will be paid to you nor will such amounts be
carried over for payment in a future quarter. Service fees will be paid by the
twentieth day of the month before the end of the respective quarter. Service
fees other than those paid in advance will only be paid by us to the extent
that such amounts have been paid to us by the Funds.
April 11, 1997
Evergreen Foundation Trust
2500 Westchester Avenue
Purchase, NY 10577
Ladies and Gentlemen:
We have been requested by the Evergreen Foundation Trust, a Massachusetts
business trust with transferable shares and currently consisting of two series
(the "Trust") established under a Declaration of Trust dated October 19, 1989 as
amended and restated on December 13, 1994 (the "Declaration"), for our opinion
with respect to certain matters relating to the Evergreen Foundation Fund (the
"Acquiring Fund"), a series of the Trust. We understand that the Trust is about
to file a Registration Statement on Form N-14 for the purpose of registering
shares of the Trust under the Securities Act of 1933, as amended (the "1933
Act"), in connection with the proposed acquisition by the Acquiring Fund of all
of the assets of the Keystone Balanced Fund II (the "Acquired Fund"), a
Massachusetts business trust with transferable shares, in exchange solely for
shares of the Acquiring Fund and the assumption by the Acquiring Fund of
liabilities of the Acquired Fund pursuant to an Agreement and Plan of
Reorganization the form of which is included in the Form N-14 Registration
Statement (the "Plan").
We have, as counsel, participated in various business and other proceedings
relating to the Trust. We have examined copies, either certified or otherwise
proved to be genuine to our satisfaction, of the Trust's Declaration and
By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
Based upon the foregoing, and assuming the approval by shareholders of the
Acquired Fund of certain matters scheduled for their consideration at a meeting
<PAGE>
Evergreen Foundation Trust
April 11, 1997
Page 2
presently anticipated to be held on June 30, 1997, it is our opinion that the
shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
With respect to the opinion stated in the paragraph above, we note that
shareholders of a Massachusetts business trust may under some circumstances be
subject to assessment at the instance of creditors to pay the obligations of
such trust in the event that its assets are insufficient for the purpose.
We hereby consent to the filing of this opinion with and as a part of the
Registration Statement on Form N-14 and to the reference to our firm under the
caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of the
Registration Statement. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ Sullivan & Worcester LLP
SULLIVAN & WORCESTER LLP
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Foundation Trust
We consent to the use of our reports incorporated herein by reference and
to the references to our firm under the caption "FINANCIAL STATEMENTS AND
EXPERTS" in the prospectus/proxy statement.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 11, 1997
KEYSTONE BALANCED FUND II
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 30, 1997
The undersigned, revoking all Proxies heretofore given, hereby appoints
[Name], [Name], and [Name] or any of them as Proxies of the undersigned, with
full power of substitution, to vote on behalf of the undersigned all shares of
Keystone Balanced Fund II (the "Keystone Balanced Fund") that the undersigned is
entitled to vote at the special meeting of shareholders of the Keystone Balanced
Fund to be held at 3:00 p.m. on Monday, June 30, 1997 at the offices of Keystone
Investment Management Company, 26th Floor, 200 Berkeley Street, Boston,
Massachusetts 02116 and at any adjournments thereof, as fully as the undersigned
would be entitled to vote if personally present, as follows:
To approve an Agreement and Plan of Reorganization whereby Evergreen
Foundation Fund will (I) acquire all of the assets of the Keystone Balanced Fund
in exchange for Shares of Evergreen Foundation Fund; and (ii) assume [_______
_________] liabilities of the Keystone Balanced Fund, as substantially described
in the accompanying Prospectus/Proxy Statement.
_______ FOR ________ AGAINST ________ ABSTAIN
19390
<PAGE>
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE KEYSTONE BALANCED
FUND.
THE BOARD OF TRUSTEES OF THE KEYSTONE BALANCED FUND RECOMMENDS A VOTE FOR THE
PROPOSAL.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR THE PROPOSAL IF
NO CHOICE IS INDICATED.
THE PROXIES ARE AUTHORIZED IN THEIR DISCRETION TO VOTE UPON SUCH
OTHER MATTERS AS MAY COME BEFORE THE MEETING OR ANY
ADJOURNMENTS THEREOF.
.
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: , 199_
Signature(s):
Signature (of joint owner,
if any):
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign full corporate name and
your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy. Please sign, date and return.
