UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
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.
It is proposed that this filing will become effective (check appropriate
box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursunt to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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.
<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 May 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>
<PAGE>
Evergreen Keystone
(logo) FUNDS (logo)
May 16, 1997
Dear Shareholder:
We are pleased to announce that the combination of the Evergreen Keystone
organization 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 lower overall expenses and greater operating
efficiencies.
The enclosed Prospectus/Proxy Statement contains a 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 reorganization has been structured as a tax-free transaction for
shareholders. We believe it will result in one combined fund with greater
efficiencies than two separate funds. This reorganization is not expected to
affect the total value of your investment.
SUMMARY OF BENEFITS
(Bullet) Potential for greater operating efficiencies
(Bullet) Eliminate redundancies in fund offerings
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 an important matter affecting your
investment.
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
1-800-343-2898.
Sincerely,
<TABLE>
<S> <C>
/s/ Albert H. Elfner, III /s/ George S. Bissell
Albert H. Elfner, III George S. Bissell
CHAIRMAN CHAIRMAN OF THE BOARD
Keystone Investment Management Company Keystone Funds
</TABLE>
<PAGE>
(This Page Left Blank Intentionally)
<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 the 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 certain identified 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
SECRETARY
May 16, 1997
<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:
<TABLE>
<CAPTION>
REGISTRATION VALID SIGNATURE
<S> <C>
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
u/t/d 12/28/78 Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA John B. Smith
(2) John B. Smith John B. Smith, Jr., Executor
</TABLE>
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED MAY 16, 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 the
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 certain identified 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 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
16, 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 1-800-343-2898.
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.
<PAGE>
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.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
COMPARISON OF FEES AND EXPENSES........................................................................................ 4
SUMMARY................................................................................................................ 6
Proposed Plan of Reorganization...................................................................................... 6
Tax Consequences..................................................................................................... 6
Investment Objectives and Policies of the Evergreen Foundation Fund and the Keystone Balanced Fund................... 7
Comparative Performance Information of Each Fund..................................................................... 7
Management of the Funds.............................................................................................. 7
Investment Advisers and Sub-adviser.................................................................................. 7
Portfolio Management................................................................................................. 8
Distribution of Shares............................................................................................... 8
Purchase and Redemption Procedures................................................................................... 9
Exchange Privileges.................................................................................................. 10
Dividend Policy...................................................................................................... 10
RISKS.................................................................................................................. 10
REASONS FOR THE REORGANIZATION......................................................................................... 11
Agreement and Plan of Reorganization................................................................................. 12
Federal Income Tax Consequences...................................................................................... 13
Pro-Forma Capitalization............................................................................................. 14
Shareholder Information.............................................................................................. 14
COMPARISON OF INVESTMENT OBJECTIVE AND POLICIES........................................................................ 16
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS........................................................................ 17
Form of Organization................................................................................................. 17
Capitalization....................................................................................................... 18
Shareholder Liability................................................................................................ 18
Shareholder Meetings and Voting Rights............................................................................... 18
Liquidation or Dissolution........................................................................................... 18
Liability and Indemnification of Trustees............................................................................ 18
Rights of Inspection................................................................................................. 19
ADDITIONAL INFORMATION................................................................................................. 19
VOTING INFORMATION CONCERNING THE MEETING.............................................................................. 19
FINANCIAL STATEMENTS AND EXPERTS....................................................................................... 21
LEGAL MATTERS.......................................................................................................... 21
OTHER BUSINESS......................................................................................................... 21
</TABLE>
3
<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.
COMPARISON OF CLASS A, CLASS B, AND CLASS C SHARES OF THE EVERGREEN FOUNDATION
FUND WITH
CORRESPONDING SHARES OF THE KEYSTONE BALANCED FUND
<TABLE>
<CAPTION>
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 Purchases... 4.75% None None 4.75% None None
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested
Dividends............................... None None None None None None
(as a percentage of offering price)
Contingent Deferred Sales Charge.......... None 5.00% in the 1.00% in the None 5.00% in the 1.00% in the
first year, first year first year, first year
(as a percentage of original purchase declining to and 0.00% declining to and 0.00%
price or redemption proceeds, whichever 1.00% in the thereafter 1.00% in the thereafter
is lower) sixth year sixth year
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)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Advisory Fees............................... 0.80% 0.80% 0.80% 0.65% 0.65% 0.65%
12b-1 Fees.................................. 0.25% (1) 1.00%(1) 1.00%(1) 0.25% 1.00% 1.00%
Other Expenses.............................. 0.19% 0.19% 0.19% 0.60% 0.60% 0.60%
Annual Fund Operating Expenses.............. 1.24% 1.99% 1.99% 1.50% (2) 2.25%(2) 2.25%(2)
</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.......................................... 4.75% None None
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested Dividends............................... None None None
(as a percentage of offering price)
Contingent Deferred Sales Charge................................................. None 5.00% in the
first year,
(as a percentage of original purchase price or redemption proceeds, declining to
whichever is lower) 1.00% in the 1.00% in the
sixth year first year
and 0.00% and 0.00%
thereafter thereafter
Exchange Fee..................................................................... None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees..................................................................... 0.80% 0.80% 0.80%
12b-1 Fees........................................................................ 0.25% (1) 1.00%(1) 1.00%(1)
Other Expenses.................................................................... 0.19% 0.19% 0.19%
Annual Fund Operating Expenses.................................................... 1.24% 1.99% 1.99%
</TABLE>
4
<PAGE>
(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 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:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Keystone Balanced Fund.................................................... 2.52% 3.27% 3.27%
</TABLE>
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>
KEYSTONE
EVERGREEN FOUNDATION FUND BALANCED 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
Assuming no redemption at end of period.................................... $ 20 $62 $ 107 $ 232 $23 $ 70
</TABLE>
<TABLE>
<CAPTION>
EVERGREEN FOUNDATION FUND
PRO-FORMA
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
Class A.................................................................................... $60 $85 $ 112 $ 190
Class B
Assuming redemption at end of period..................................................... $70 $92 $ 127 $ 203
Class B
Assuming no redemption at end of period.................................................. $20 $62 $ 107 $ 203
Class C
Assuming redemption at end of period..................................................... $30 $62 $ 107 $ 232
Class C
Assuming no redemption at end of period.................................................. $20 $62 $ 107 $ 232
</TABLE>
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%.
5
<PAGE>
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 certain identified 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 Trust 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 18, 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 certain identified liabilities of
the Keystone Balanced Fund.
6
<PAGE>
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 Prospectus and Statement 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 year 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 RETURNS
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE YEAR ENDED TO MARCH 31,
MARCH 31, 1997 1997 (1) INCEPTION DATE
<S> <C> <C> <C>
Evergreen Foundation Fund
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 (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
</TABLE>
(1) Not annualized.
(2) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the average annual
total return during the period would have been lower.
Important information about 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, Evergreen Asset and Keystone Investment
Management Company ("Keystone") manage the Evergreen Keystone 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
7
<PAGE>
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 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:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE NET ASSET VALUE OF
ANNUAL MANAGEMENT FEE THE SHARES OF THE FUND
<S> <C> <C>
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.
</TABLE>
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 BISYS Fund Services, 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.
8
<PAGE>
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
9
<PAGE>
$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, less any CDSC, 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 Prospectus and Statement 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 Prospectus 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
10
<PAGE>
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 certain identified 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 Trust 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.
11
<PAGE>
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 certain
identified liabilities of the Keystone Balanced Fund on or about July 18, 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 Evergreen Foundation Fund will provide the Trustees of the
Keystone Balanced Fund with certain indemnifications as set forth in the Plan.
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.
12
<PAGE>
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 certain identified 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 certain identified 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 certain identified 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.
13
<PAGE>
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
<TABLE>
<CAPTION>
EVERGREEN
EVERGREEN FOUNDATION
KEYSTONE FOUNDATION FUND AFTER
BALANCED FUND FUND REORGANIZATION
<S> <C> <C> <C>
Net Assets
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
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
</TABLE>
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:
<TABLE>
<CAPTION>
EVERGREEN KEYSTONE
CLASS OF SHARES FOUNDATION FUND BALANCED FUND
<S> <C> <C>
Class A..................................................................................... 13,664,055 167,978
Class B..................................................................................... 38,629,716 468,433
Class C..................................................................................... 1,722,656 57,567
Class Y..................................................................................... 49,735,226 0
All Classes................................................................................. 103,751,653 693,978
</TABLE>
14
<PAGE>
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:
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF TOTAL SHARES
NUMBER OF CLASS BEFORE OUTSTANDING AFTER
NAME AND ADDRESS CLASS SHARES REORGANIZATION REORGANIZATION
<S> <C> <C> <C> <C>
Leroy E. Sipe A 15,286.156 9.10% *
232 Calvary Church Rd.
Wrightsville, PA 17368-9518
Southwest Securities, Inc. B 29,748.675 6.35% *
FBO Kirby P. Walker, DDS
P.O. Box 509002
Dallas, TX 75250
MLPF&S for the sole benefit of its customers C 17,116.000 29.73% *
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
Irwin D. Kistler & I. Daniel Kistler Jt-Ten C 9,083.610 15.78% *
162 Woodbine
Shaverton, PA 18708
Technisonic Research Ttee C 5,611.448 9.75% *
Technisonic Rsrc in Pft Shrin
777 Commerce Drive
Fairfield, CT 06432
Ernst & Co. C 3,822.478 6.64% *
117-00059-10
Attn: Mutual Funds
1 Battery Park Plaza
New York, NY 10004-1405
MC Cloud Market Inc. C 3,235.497 5.62% *
Profit Sharing Plan
P.O. Box 1710
McCloud, CA 96057-1710
John Vranna C 3,000.000 5.21% *
Elaine Vranna Jt Wros
3985 Country Park Dr.
Roseville, CA 95661-5959
</TABLE>
* Less than 1.00%.
15
<PAGE>
As of the Record Date, the officers and Trustees of the Evergreen
Foundation Trust 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 OF TOTAL SHARES
NUMBER OF CLASS BEFORE OUTSTANDING AFTER
NAME AND ADDRESS CLASS SHARES REORGANIZATION REORGANIZATION
<S> <C> <C> <C> <C>
Charles Schwab & Co. Inc. A 1,009,279.881 7.38% 7.33%
Special Custody Account for the
Exclusive Benefit of Customers
Reinvest Account Mut Fds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
Charles Schwab & Co. Inc. Y 3,423,007.116 6.88% 6.88%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
First Union National Bank/EB/INT Y 4,705,837.008 9.46% 9.46%
Cash Account
Attn: Trust Operations Fund Group
401 S. Tryon Street
3rd Floor, CMG 1151
Charlotte, NC 28202-1911
First Union National Bank/EB/INT Y 16,133,805.771 32.44% 32.44%
Reinvest Account
Attn: Trust Operations Fund Group
401 S. Tryon Street
3rd Floor, CMG 1151
Charlotte, NC 28202-1911
Mac & Co. Y 6,574,921.304 13.22% 13.22%
Aetna Retirement Services
Central Valuation Unit
Attn: Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
Merrill Lynch C 380,958.000 22.11% 21.63%
Trade House Account-AID
Private Client Group
Attn: Book Entry
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville, FL 32246-6464
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by the
descriptions of the respective investment objectives, policies and restrictions
set forth in the respective Prospectus and Statement of Additional Information
of 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."
16
<PAGE>
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.
17
<PAGE>
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 Declaration of Trust under which each
Fund has been established permits 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 Declaration of Trust under which the
Funds were established disclaims 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 Foundation
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.
18
<PAGE>
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 1-800-343-2898.
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.
19
<PAGE>
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 16, 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.
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
20
<PAGE>
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), and the financial highlights for
the periods indicated therein, have been incorporated by reference into this
Prospectus/Proxy Statement. The financial statements as of June 30, 1996 and the
financial highlights for the periods indicated therein 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 16, 1997
21
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this 28th day of April, 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
certain identified 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 certain identified liabilities of the Selling Fund
by the Acquiring Fund on the terms and conditions hereinafter set forth are in
the best interests of the Acquiring Fund's shareholders 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 certain identified
liabilities for Acquiring Fund Shares and that the interests of the existing
shareholders of the Selling Fund will not be diluted as a result of the
transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth and
on the basis of the representations and warranties contained herein, the Selling
Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be acquired by
the Acquiring Fund shall consist of all property, including, without limitation,
all cash, securities, commodities, and 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
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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. Except
as specifically provided in this paragraph 1.3, the Acquiring Fund shall assume
only those liabilities, expenses, costs, charges and reserves reflected on a
Statement of Assets and Liabilities of the Selling Fund prepared on behalf of
the Selling Fund, as of the Valuation Date (as defined in paragraph 2.1), in
accordance with generally accepted accounting principles consistently applied
from the prior audited period. The Acquiring Fund shall assume only those
liabilities of the Selling Fund reflected in such Statement of Assets and
Liabilities and shall not, except as specifically provided in this paragraph
1.3, 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. The Acquiring Fund hereby agrees with the Selling Fund and each
Trustee of the Selling Fund: (i) to indemnify each Trustee of the Selling Fund
against all liabilities and expenses referred to in the indemnification
provisions of the Selling Fund's Declaration of Trust and By-Laws, to the extent
provided therein, incurred by any Trustee of the Selling Fund; and (ii) in
addition to the indemnification provided in (i) above, to indemnify each Trustee
of the Selling Fund against all liabilities and expenses and pay the same as
they arise and become due, without any exception, limitation or requirement of
approval by any person, and without any right to require repayment thereof by
any such Trustee (unless such Trustee has had the same repaid to him or her)
based upon any subsequent or final disposition or findings made in connection
therewith or otherwise, if such action, suit or other proceeding involves such
Trustee's participation in authorizing or permitting or acquiescing in, directly
or indirectly, by action or inaction, the making of any distribution in any
manner of all or any assets of the Selling Fund without making provision for the
payment of any liabilities of any kind, fixed or contingent, of the Selling
Fund, which liabilities were not actually and consciously personally known to
such Trustee to exist at the time of such Trustee's participation in so
authorizing or permitting or acquiescing in the making of any such distribution.
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.
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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 July 18,
1997 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,
Massachusetts 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
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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 the sole 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.
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(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
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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.
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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.
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(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) This 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
A-8
<PAGE>
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 certain identified liabilities of the Selling Fund followed by the
distribution of the Acquiring Fund Shares to the Selling Fund in
dissolution and liquidation of the Selling Fund will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code and
the Acquiring Fund and the Selling Fund will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund.
A-9
<PAGE>
(c) No gain or loss will be recognized by the Selling Fund upon the
transfer of the Selling Fund assets to the Acquiring Fund in exchange for
the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain identified 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), 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; and
(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 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), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the
Acquiring Fund; and
(c) on the basis of limited procedures agreed upon by the Selling Fund
(but not an examination in accordance with generally accepted auditing
standards), the data utilized in the calculations of the projected expense
ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with underlying accounting records of the Acquiring Fund or
to written estimates by each Fund's management and were found to be
mathematically correct.
A-10
<PAGE>
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.
A-11
<PAGE>
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.
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: /s/ John J. Pileggi
Name: John J. Pileggi
Title: President and Treasurer
KEYSTONE BALANCED FUND II
By: /s/ John J. Pileggi
Name: John J. Pileggi
Title: President and Treasurer
A-12
<PAGE>
EXHIBIT B
EVERGREEN FOUNDATION FUND --
CLASS A, B AND C SHARES
(Photo)
FINANCIAL HIGHLIGHTS
<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>
B-1
<PAGE>
EVERGREEN FOUNDATION FUND --
CLASS Y SHARES
(Photo)
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<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>
YEAR ENDED
DECEMBER 31, 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>
B-2
<PAGE>
EVERGREEN FOUNDATION FUND
(Photo)
A REPORT FROM YOUR
PORTFOLIO MANAGER
STEPHEN A. LIEBER
In 1996, Evergreen Foundation Fund provided an 11.5%* total (Photo of
return (Class Y, no-load shares). Since inception on January Stephen A.
2, 1990, through December 31, 1996, the Fund (Class Y shares) Lieber)
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.
B-3
<PAGE>
EVERGREEN FOUNDATION FUND
(Photo)
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.
B-4
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EVERGREEN FOUNDATION FUND
(Photo)
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.
B-5
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EVERGREEN FOUNDATION FUND
(Photo)
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.]
*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.
B-6
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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 May 16, 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 May 16, 1997.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
THE EVERGREEN KEYSTONE GROWTH AND INCOME AND BALANCED FUNDS
The Evergreen Funds
2500 Westchester Avenue, Purchase, New York 10577-2555
1-800-807-2940
The Keystone Funds
200 Berkeley Street, Boston, Massachusetts 02116-5034
1-800-343-2898
Growth and Income Funds
Evergreen Growth and Income Fund ("Growth and Income")
Evergreen Income and Growth Fund (formerly Evergreen Total Return Fund)
("Income and Growth")
Evergreen Small Cap Equity Income Fund ("Small Cap")
Evergreen Utility Fund ("Utility")
Evergreen Value Fund ("Value")
Keystone Fund for Total Return ("Total Return")
Balanced Funds
Evergreen Foundation Fund ("Foundation")
Evergreen Tax Strategic Foundation Fund ("Tax Strategic")
Evergreen American Retirement Fund ("American Retirement")
Evergreen Balanced Fund ("Balanced")
This Statement of Additional Information pertains to all classes of shares of
the Funds listed above. It is not a prospectus and should be read in conjunction
with the Prospectus dated May 1, 1997, for the Fund in which you are making or
contemplating an investment. The Evergreen Keystone Growth and Income and
Balanced Funds are offered through four separate prospectuses: one offering
Class A, Class B and Class C shares and a separate prospectus offering Class Y
shares of Growth and Income, Income and Growth, Small Cap, Utilty, Value and
Total Return; and one offering Class A, Class B and Class C shares and a
separate prospectus offering Class Y shares of Foundation, Tax Strategic,
American Retirement and Balanced.
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TABLE OF CONTENTS
Investment Objectives and Policies.................................2
Investment Restrictions............................................7
Non-Fundamental Operating Policies................................15
Certain Risk Considerations.......................................16
Management........................................................17
Investment Advisers...............................................29
Distribution Plans................................................34
Allocation of Brokerage...........................................38
Additional Tax Information........................................41
Net Asset Value...................................................43
Purchase of Shares................................................45
Performance Information...........................................59
Financial Statements..............................................64
Appendix A - Description of Bond, Municipal Note
and Commercial Paper Ratings.....................................64
INVESTMENT OBJECTIVES AND POLICIES
(See also "Description of the Funds - Investment Objectives
and Policies" in each Fund's Prospectus)
The investment objective of each Fund and a description of the securities
in which each Fund may invest is set forth under "Description of the Funds
"Investment Objectives and Policies" in the relevant Prospectus. The investment
objectives are fundamental and cannot be changed without the approval of
shareholders. The following expands upon the discussion in the Prospectus
regarding certain investments of each Fund.
U.S. Government Securities (All Funds)
The types of U.S. government securities in which the Funds may invest
generally include direct obligations of the U.S. Treasury such as U. S.
Treasury bills, notes and bonds and obligations issued or guaranteed by U.S.
government agencies or instrumentalities. These securities are backed by:
(i) the full faith and credit of the U.S. Treasury;
(ii) the issuer's right to borrow from the U.S. Treasury;
(iii) the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
(iv) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive
financial support from the U.S. government are:
(i) Farm Credit System, including the National Bank for Cooperatives,
Farm Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
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(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association
Restricted and Illiquid Securities (All Funds)
Each Fund may invest in restricted and illiquid securities. The ability
of the Board of Trustees ("Trustees") to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange Commission
("SEC") Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for sale under the
Rule. The Funds which invest in Rule 144A securities believe that the Staff of
the SEC has left the question of determining the liquidity of all restricted
securities (eligible for resale under the Rule) for determination by the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
(i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace trades.
Restricted securities would generally be acquired either from
institutional investors who originally acquired the securities in private
placements or directly from the issuers of the securities in private placements.
Restricted securities and securities that are not readily marketable may sell at
a discount from the price they would bring if freely marketable.
When-Issued and Delayed Delivery Securities
(Balanced, Tax Strategic, Utility, Value and Total Return)
Securities puchased on a when-issued or delayed delivery basis are made
to secure what is considered to be an advantageous price or yield for a Fund. No
fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of a Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the transaction has
been settled. Balanced, Utility and Value do not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of their assets and Tax
Strategic's commitment to purchase when-issued securities will not exceed 25% of
the Fund's total assets. Total Return does not intend to invest more than 5%
of its net assets in when-issued or delayed delivery transactions.
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Lending of Portfolio Securities (All Funds)
Each Fund may lend its portfolio securities to generate income and to
offset expenses. The collateral received when a Fund lends portfolio securities
must be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the lending Fund.
During the time portfolio securities are on loan, the borrower pays the Fund any
dividends or interest paid on such securities. Loans are subject to termination
at the option of the Fund or the borrower. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent collateral
to the borrower or placing broker. A Fund does not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote if
that were considered important with respect to the investment.
Reverse Repurchase Agreements
(Small Cap, Utility, Value, Tax Strategic, Balanced and Total Return)
Reverse repurchase agreements are similar to borrowing cash. In a reverse
repurchase agreement, a Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in
a dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
Options and Futures Transactions (All Funds)
Options which Balanced, Utility and Value trade must be listed on
national securities exchanges.
Purchasing Put and Call Options on Financial Futures Contracts
Balanced, Utility, Value and Total Return may purchase put and call
options on financial futures contracts (in the case of Utility and Value limited
to options on financial futures contracts for U.S. government securities).
Unlike entering directly into a futures contract, which requires the purchaser
to buy a financial instrument on a set date at an undetermined price, the
purchase of a put option on a futures contract entitles (but does not obligate)
its purchaser to decide on or before a future date whether to assume a short
position at the specified price.
A Fund may purchase put and call options on futures to protect portfolio
securities against decreases in value resulting from an anticipated increase in
market interest rates. Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures contracts will also
decrease in value and the put option will increase in value. In such an event,
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a Fund will normally close out its option by selling an identical put option. If
the hedge is successful, the proceeds received by the Fund upon the sale of the
put option plus the realized gain offsets the decrease in value of the hedged
securities.
Alternately, a Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an option,
the option will expire on the date provided in the option contract, and only the
premium paid for the contract will be lost.
Purchasing Options
Balanced, Utility, Value and Total Return may purchase both put and call
options on their portfolio securities. These options will be used as a hedge to
attempt to protect securities which a Fund holds or will be purchasing against
decreases or increases in value. A Fund may purchase call and put options for
the purpose of offsetting previously written call and put options of the same
series. If the Fund is unable to effect a closing purchase transaction with
respect to covered options it has written, the Fund will not be able to sell the
underlying securities or dispose of assets held in a segregated account until
the options expire or are exercised.
Balanced, Utility, Value and Total Return intend to purchase put and call
options on currency and other financial futures contracts for hedging purposes.
A put option purchased by a Fund would give it the right to assume a position as
the seller of a futures contract. A call option purchased by the Fund would give
it the right to assume a position as the purchaser of a futures contract. The
purchase of an option on a futures contract requires the Fund to pay a premium.
In exchange for the premium, the Fund becomes entitled to exercise the benefits,
if any, provided by the futures contract, but is not required to take any action
under the contract. If the option cannot be exercised profitably before it
expires, the Fund's loss will be limited to the amount of the premium and any
transaction costs.
Utility and Value currently do not intend to invest more than 5% of their
net assets in options transactions. Total Return will not purchase a put option
if as a result of such purchase, more than 10% of its total assets would be
invested in premiums for such option.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, a Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve the
borrowing of funds by a Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by the Fund but is
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instead settlement between the Fund and the broker of the amount one would owe
the other if the futures contract expired. In computing its daily net asset
value, a Fund will mark-to-market its open futures positions. The Fund is also
required to deposit and maintain margin when it writes call options on futures
contracts.
Balanced will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss on
those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, the Fund will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
Income and Growth and Growth and Income may write covered call options to
a limited extent on their portfolio securities ("covered options") in an attempt
to earn additional income. A Fund will write only covered call option contracts
and will receive premium income from the writing of such contracts. Income and
Growth and Growth and Income may purchase call options to close out a previously
written call option. In order to do so, the Fund will make a "closing purchase
transaction" -- the purchase of a call option on the same security with the same
exercise price and expiration date as the call option which it has previously
written. A Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. If an option is exercised, a Fund
realizes a long-term or short-term gain or loss from the sale of the underlying
security and the proceeds of the sale are increased by the premium originally
received.
Junk Bonds (Growth and Income and Total Return)
Consistent with its strategy of investing in "undervalued" securities,
Growth and Income may invest in lower medium and low-quality bonds also known as
"junk bonds" and may also purchase bonds in default if, in the opinion of the
Fund's investment adviser, there is significant potential for capital
appreciation. Growth and Income, however, will not invest more than 5% of its
total assets in debt securities which are rated below investment grade. These
bonds are regarded as speculative with respect to the issuer's continuing
ability to meet principal and interest payments. High yield bonds may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade bonds. A projection of an economic downturn, or
higher interest rates, for example, could cause a decline in high yield bond
prices because such events could lessen the ability of highly leveraged
companies to make principal and interest payments on their debt securities. In
addition, the secondary trading market for high yield bonds may be less liquid
than the market for higher grade bonds, which can adversely affect the ability
to dispose of such securities.
Variable and Floating Rate Securities (Foundation)
Foundation may invest no more than 5% of its total assets, at the time of
the investment in question, in variable and floating rate securities. The terms
of variable and floating rate instruments provide for the interest rate to be
adjusted according to a formula on certain predetermined dates. Variable and
floating rate instruments that are repayable on demand at a future date are
deemed to have a maturity equal to the time remaining until the principal will
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be received on the assumption that the demand feature is exercised on the
earliest possible date. For the purposes of evaluating the interest-rate
sensitivity of the Fund, variable and floating rate instruments are deemed to
have a maturity equal to the period remaining until the next interest-rate
readjustment. For the purposes of evaluating the credit risks of variable and
floating rate instruments, these instruments are deemed to have a maturity equal
to the time remaining until the earliest date the Fund is entitled to demand
repayment of principal.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
Except as noted, the investment restrictions set forth below are
fundamental and may not be changed with respect to each Fund without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
Where an asterisk (*) appears after a Fund's name, the relevant policy is
non-fundamental with respect to that Fund and may be changed by the Fund's
investment adviser without shareholder approval, subject to review and approval
by the Trustees. As used in this Statement of Additional Information and in the
Prospectus, "a majority of the outstanding voting securities of the Fund" means
the lesser of (1) the holders of more than 50% of the outstanding shares of
beneficial interest of the Fund or (2) 67% of the shares present if more than
50% of the shares are present at a meeting in person or by proxy.
1. Concentration of Assets in Any One Issuer
Neither Growth and Income nor Income and Growth may invest more than 5%
of their net assets, at the time of the investment in question, in the
securities of any one issuer other than the U.S. government and its agencies or
instrumentalities.
American Retirement may not invest more than 5% of its total assets, at
the time of the investment in question, in the securities of any one issuer
other than the U.S. government and its agencies or instrumentalities.
None of Balanced, Foundation, Small Cap, Utility, Value or Total Return
may invest more than 5% of its total assets, at the time of the investment in
question, in the securities of any one issuer other than the U.S. government and
its agencies or instrumentalities, except that up to 25% of the value of a
Fund's total assets may be invested without regard to such 5% limitation.
Tax Strategic may not invest more than 5% of its total assets, at the
time of the investment in question, in the securities of any one issuer other
than the U.S. government and its agencies or instrumentalities, except that up
to 25% of the value of the Fund's total assets may be invested without regard to
such 5% limitation. For this purpose each political subdivision, agency, or
instrumentality and each multi-state agency of which a state is a member, and
each public authority which issues industrial development bonds on behalf of a
private entity, will be regarded as a separate issuer for determining the
diversification of the Fund's portfolio.
2. Ten Percent Limitation on Securities of Any One Issuer
None of American Retirement, Foundation, Small Cap, Growth and Income or
Income and Growth may purchase more than 10% of any class of securities of any
one issuer other than the U.S. government and its agencies or instrumentalities.
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Neither Value nor Utility may purchase more than 10% of the outstanding
voting securities of any one issuer.
Neither Tax Strategic nor Total Return may not purchase more than 10% of
the voting securities of any one issuer other than the U.S. government and its
agencies or instrumentalities.
3. Investment for Purposes of Control or Management
None of American Retirement, Foundation, Growth and Income, Small Cap*,
Tax Strategic*, Income and Growth, Utility*, Value or Total Return may invest in
companies for the purpose of exercising control or management.
4. Purchase of Securities on Margin
None of American Retirement, Balanced, Foundation, Growth and Income,
Small Cap*, Tax Strategic*, Income and Growth, Utility, Value or Total Return
may purchase securities on margin, except that each Fund may obtain such
short-term credits as may be necessary for the clearance of transactions. A
deposit or payment by a Fund of initial or variation margin in connection with
financial futures contracts or related options transactions is not considered
the purchase of a security on margin.
5. Unseasoned Issuers
Neither American Retirement nor Foundation may invest in the securities
of unseasoned issuers that have been in continuous operation for less than three
years, including operating periods of their predecessors.
None of Income and Growth, Value*, Utility* or Total Return may invest
more than 5% of its total assets in securities of unseasoned issuers that have
been in continuous operation for less than three years, including operating
periods of their predecessors.
None of Growth and Income, Small Cap* and Tax Strategic* may invest more
than 15% of its total assets (10% of total net assets in the case of Growth and
Income) in securities of unseasoned issuers that have been in continuous
operation for less than three years, including operating periods of their
predecessors.
6. Underwriting
American Retirement, Foundation, Growth and Income, Small Cap, Tax
Strategic, Income and Growth, Balanced, Utility, Value and Total Return will not
underwrite any issue of securities except as they may be deemed an underwriter
under the Securities Act of 1933 in connection with the sale of securities in
accordance with their investment objectives, policies and limitations.
7. Interests in Oil, Gas or Other Mineral Exploration or Development
Programs.
None of American Retirement, Foundation, Growth and Income, Small Cap,
Tax Strategic or Income and Growth may purchase, sell or invest in interests in
oil, gas or other mineral exploration or development programs.
Neither Balanced* nor Utility* will purchase interests in oil, gas or
other mineral exploration or development programs or leases, although each Fund
may
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purchase the securities of other issuers which invest in or sponsor such
programs.
Value will not purchase interests in oil, gas or other mineral
exploration or development programs or leases, although it may purchase the
publicly traded securities of companies engaged in such activities.
8. Concentration in Any One Industry
Neither Growth and Income nor Income and Growth may concentrate its
investments in any one industry, except that each Fund may invest up to 25% of
its total net assets in any one industry.
None of American Retirement, Foundation, Small Cap and Tax Strategic may
invest 25% or more of its total assets in the securities of issuers conducting
their principal business activities in any one industry; provided, that this
limitation shall not apply (i) with respect to each Fund, to obligations issued
or guaranteed by the U.S. government or its agencies or instrumentalities, or
(ii) with respect to Tax Strategic, to municipal securities. For purposes of
this restriction, utility companies, gas, electric, water and telephone
companies will be considered separate industries.
Balanced and Value will not invest 25% or more of the value of their
total assets in any one industry except Balanced may invest more than 25% and
Value may invest 25% or more of its total assets in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
Utility will not invest more than 25% of its total assets (valued at the
time of investment) in securities of companies engaged principally in any one
industry other than the utilities industry, except that this restriction does
not apply to cash or cash items and securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
Total Return will not purchase any security (other than U.S. government
securities) of any issuer if as a result more than 25% of its total assets would
be invested in a single industry; except that (a) there is no restriction with
respect to obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities; (b) wholly-owned finance companies will be considered to
be in the industries of their parents if their activities are primarily related
to financing the activities of the parents; (c) the industry classification of
utilities will be determined according to their services (for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry); and (d) the industry classification of medically related industries
will be determined according to their services (for example, management,
hospital supply, medical equipment and pharmaceuticals will each be considered a
separate industry).
9. Warrants
None of American Retirement, Growth and Income, Income and Growth, Small
Cap*, Foundation or Tax Strategic* may invest more than 5% of its net assets in
warrants and, of this amount, no more than 2% of each Fund's net assets may be
invested in warrants that are listed on neither the New York nor the American
Stock Exchange.
Utility* and Value* will not invest more than 5% of their net assets in
warrants, including those acquired in units or attached to other securities.
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For purposes of this restriction, warrants acquired by the Funds in units or
attached to securities may be deemed to be without value.
10. Ownership by Trustees/Officers
None of American Retirement, Balanced*, Foundation, Growth and Income,
Small Cap*, Tax Strategic*, Income and Growth, Utility* or Value* may purchase
or retain the securities of any issuer if (i) one or more officers or Trustees
of a Fund or its investment adviser individually owns or would own, directly or
beneficially, more than 1/2 of 1% of the securities of such issuer, and (ii) in
the aggregate, such persons own or would own, directly or beneficially, more
than 5% of such securities.
Portfolio securities of any Fund may not be purchased from or sold or
loaned to its Adviser or any affiliate thereof, or any of their directors,
officers or employees.
11. Short Sales
Neither American Retirement nor Foundation may make short sales of
securities unless, at the time of each such sale and thereafter while a short
position exists, each Fund owns the securities sold or securities convertible
into or carrying rights to acquire such securities.
None of Growth and Income, Tax Strategic* and Income and Growth may make
short sales of securities unless, at the time of each such sale and thereafter
while a short position exists, each Fund owns an equal amount of securities of
the same issue or owns securities which, without payment by the Fund of any
consideration, are convertible into, or are exchangeable for, an equal amount of
securities of the same issue.
Small Cap,* may not make short sales of securities unless, at the time of
each such sale and thereafter while a short position exists, each Fund owns an
equal amount of securities of the same issue or owns securities which, without
payment by the Fund of any consideration, are convertible into, or are
exchangeable for, an equal amount of securities of the same issue (and provided
that transactions in futures contracts and options are not deemed to constitute
selling securities short).
Neither Balanced nor Total Return will make short sales of securities or
maintain a short position, unless at all times when a short position is open it
owns an equal amount of such securities or of securities which, without payment
of any further consideration are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short. With
respect to Balanced, the use of short sales will allow the Fund to retain
certain bonds in its portfolio longer than it would without such sales. To the
extent that the Fund receives the current income produced by such bonds for a
longer period than it might otherwise, the Fund's investment objective is
furthered.
Utility and Value will not sell any securities short.
12. Lending of Funds and Securities
Neither Small Cap nor Tax Strategic may lend its funds to other persons,
except through the purchase of a portion of an issue of debt securities publicly
distributed or the entering into of repurchase agreements.
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None of American Retirement, Foundation, Growth and Income and Income and
Growth may lend its funds to other persons, except through the purchase of a
portion of an issue of debt securities publicly distributed.
None of Foundation, Small Cap or Tax Strategic, may lend its portfolio
securities, unless the borrower is a broker, dealer or financial institution
that pledges and maintains collateral with the Fund consisting of cash or
securities issued or guaranteed by the U.S. government having a value at all
times not less than 100% of the current market value of the loaned securities,
including accrued interest, provided that the aggregate amount of such loans
shall not exceed 30% of the Fund's total assets.
Neither American Retirement or Growth and Income may lend its portfolio
securities, unless the borrower is a broker, dealer or financial institution
that pledges and maintains collateral with the Fund consisting of cash or
securities issued or guaranteed by the U.S. government having a value at all
times not less than 100% of the value of the loaned securities (100% of the
current market value for American Retirement), provided that the aggregate
amount of such loans shall not exceed 30% of the Fund's net assets.
Income and Growth may not lend its portfolio securities, unless the
borrower is a broker, dealer or financial institution that pledges and maintains
collateral with the Fund consisting of cash, letters of credit or securities
issued or guaranteed by the U.S. government having a value at all times not less
than 100% of the current market value of the loaned securities (100% of the
value of the loaned securities for Income and Growth), including accrued
interest, provided that the aggregate amount of such loans shall not exceed 30%
of the Fund's net assets.
Balanced will not lend any of its assets except portfolio securities in
accordance with its investment objective, policies and limitations.
Utility will not lend any of its assets, except portfolio securities up
to 15% of the value of its total assets. This does not prevent the Fund from
purchasing or holding corporate or government bonds, debentures, notes,
certificates of indebtedness or other debt securities of an issuer, repurchase
agreements, or other transactions which are permitted by the Fund's investment
objectives and policies or the Declaration of Trust governing the Fund.
Value will not lend any of its assets except that it may purchase or hold
corporate or government bonds, debentures, notes, certificates of indebtedness
or other debt securities of an issuer, repurchase agreements or other
transactions which are permitted by the Fund's investment objectives and
policies or the Declaration of Trust by which the Fund is governed or lend
portfolio securities valued at not more than 5% of its total assets to
broker-dealers.
Total Return will not make loans, except that the Fund may purchase or hold
debt securities consistent with its investment objective, lend portfolio
securities valued at not more than 15% of its total assets to broker-dealers and
enter into repurchase agreements.
13. Commodities
Tax Strategic may not purchase, sell or invest in commodities, commodity
contracts or financial futures contracts.
11
<PAGE>
Small Cap may not purchase, sell or invest in physical commodities unless
acquired as a result of ownership of securities or other instruments (but this
shall not prevent the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities).
None of American Retirement, Foundation, Growth and Income, Income and
Growth may purchase, sell or invest in commodities or commodity contracts.
None of Balanced, Utility, Value or Total Return will purchase or sell
commodities or commodity contracts; however, each Fund may enter into futures
contracts on financial instruments or currency and sell or buy options on such
contracts.
Total Return will not purchase or sell real estate, except that it may
purchase and sell securities secured by real estate and securities of companies
which invest in real estate.
14. Real Estate
Small Cap may not purchase or invest in real estate or interests in real
estate (but this shall not prevent the Fund from investing in marketable
securities issued by companies such as real estate investment trusts which deal
in real estate or interests therein).
None of American Retirement, Foundation, Growth and Income, Tax Strategic
or Income and Growth may purchase, sell or invest in real estate or interests in
real estate, except that (i) each Fund may purchase, sell or invest in
marketable securities of companies holding real estate or interests in real
estate, including real estate investment trusts, and (ii) Tax Strategic may
purchase, sell or invest in municipal securities or other debt securities
secured by real estate or interests therein.
None of Balanced, Utility or Value will buy or sell real estate although
each Fund may invest in securities of companies whose business involves the
purchase or sale of real estate or in securities which are secured by real
estate or interests in real estate. Neither Utility nor Value will invest in
limited partnership interests in real estate.
15. Borrowing, Senior Securities, Repurchase Agreements and Reverse
Repurchase Agreements
None of American Retirement, Foundation or Income and Growth may borrow
money except from banks as a temporary measure to facilitate redemption requests
which might otherwise require the untimely disposition of portfolio investments
and for extraordinary or emergency purposes (and, with respect to American
Retirement only, for leverage), provided that the aggregat amount of such
borrowings shall not exceed 5% of the value of the Fund's total net assets (5%
of total assets for American Retirement and Foundation) at the time of any such
borrowing, or mortgage, pledge or hypothecate its assets, except in an amount
sufficient to secure any such borrowing. Neither American Retirement nor
Foundation may issue senior securities, except as permitted by the Investment
Company Act of 1940. Neither Foundation nor American Retirement may enter into
repurchase agreements or reverse repurchase agreements.
Neither Small Cap nor Tax Strategic may borrow money, issue senior
securities or enter into reverse repurchase agreements, except for temporary or
12
<PAGE>
emergency purposes, and not for leveraging, and then in amounts not in excess of
10% of the value of each Fund's total assets at the time of such borrowing; or
mortgage, pledge or hypothecate any assets except in connection with any such
borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of each Fund's total assets at the time of such
borrowing, provided that each of Small Cap, Tax Strategic will not purchase any
securities at any time when borrowings, including reverse repurchase agreements,
exceed 5% of the value of its total assets. Neither Fund will enter into reverse
repurchase agreements exceeding 5% of the value of its total assets.
Growth and Income may not borrow money except from banks as a temporary
measure for extraordinary or emergency purposes, provided that the aggregate
amount of such borrowings shall not exceed 5% of the value of the Fund's total
assets at the time of such borrowing; or mortgage, pledge or hypothecate its
assets, except in an amount not exceeding 15% of its assets taken at cost to
secure such borrowing. Growth and Income may not issue senior securities, as
defined in the Investment Company Act of 1940, except that this restriction
shall not be deemed to prohibit the Fund from (i) making any permitted
borrowings, mortgages or pledges, (ii) lending its portfolio securities, or
(iii) entering into permitted repurchase transactions.
Balanced and Utility will not issue senior securities except that each
Fund may borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts borrowed
and except to the extent a Fund may enter into futures contracts. The Funds will
not borrow money or engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary or emergency measure to
facilitate management of their portfolios by enabling them to, for example, meet
redemption requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. Balanced will not purchase any securities while
any borrowings are outstanding. Utility will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding. Neither Balanced
nor Utility will mortgage, pledge or hypothecate any assets except to secure
permitted borrowings. In these cases, Balanced and Utility may pledge assets
having a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets at the time of borrowing. Margin deposits for
the purchase and sale of financial futures contracts and related options and
segregation or collateral arrangements made in connection with options
activities are not deemed to be a pledge.
Value will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements as a temporary measure
for extraordinary or emergency purposes and then only in amounts not in excess
of 10% of the value of its total assets; provided that while borrowings exceed
5% of the Fund's total assets, any such borrowings will be repaid before
additional investments are made. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of its total assets are outstanding. The
Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage purposes. The Fund will not mortgage, pledge or hypothecate
any assets except to secure permitted borrowings. In these cases, the Fund may
pledge assets having a market value not exceeding the lesser of the dollar
amounts borrowed or 10% of the value of total assets at the time of borrowing.
Margin deposits for the purchase and sale of financial futures contracts and
related options and segregation or collateral arrangements made in connection
with options activities are not deemed to be a pledge.
13
<PAGE>
Total Return will not borrow money or enter into reverse repurchase
agreements, except that the Fund may enter into reverse repurchase agreements or
borrow money from banks for temporary or emergency purposes in aggregate amounts
up to one-third of the value of the Fund's net assets; provided that while
borrowings from banks (not including reverse repurchase agreements) exceed 5% of
the Fund's net assets, any such borrowings will be repaid before additional
investments are made. The Fund will not pledge more than 15% of its net assets
to secure indebtedness; the purchase or sale of securities on a "when issued"
basis or collateral arrangement with respect to the writing of options on
securities are not deemed to be a pledge of assets. The Fund will not issue
senior securities; the purchase or sale of securities on a "when issued" basis
or collateral arrangement with respect to the writing of options on securities
are not deemed to be the issuance of a senior security. The Fund will not make
loans, except that the Fund may purchase or hold debt securities consistent with
its investment objective, lend portfolio securities valued at not more than 15%
of its total assets to broker-dealers and enter into repurchase agreements.
16. Joint Trading
None of American Retirement, Foundation, Growth and Income, Small Cap,*
Tax Strategic,* or Income and Growth may participate on a joint or joint and
several basis in any trading account in any securities. (The "bunching of orders
or the purchase or sale of portfolio securities with its investment adviser or
accounts under its management to reduce brokerage commissions, to average prices
among them or to facilitate such transactions is not considered a trading
account in securities for purposes of this restriction).
17. Options
Foundation and Tax Strategic* may not write, purchase or sell put or call
options, or combinations thereof.
Neither Growth and Income nor Income and Growth may write, purchase or
sell put or call options, or combinations thereof, except that each Fund is
authorized to write covered call options on portfolio securities and to purchase
call options in closing purchase transactions, provided that (i) such options
are listed on a national securities exchange, (ii) the aggregate market value of
the underlying securities does not exceed 25% of the Fund's net assets, taken at
current market value on the date of any such writing, and (iii) the Fund retains
the underlying securities for so long as call options written against them make
the shares subject to transfer upon the exercise of any options.
American Retirement may not write, purchase or sell put or call options,
or combinations thereof, except that the Fund is authorized (i) to write call
options traded on a national securities exchange against no more than 15% of the
value of the equity securities (including securities convertible into equity
securities) held in its portfolio, provided that the Fund owns the optioned
securities or securities convertible into or carrying rights to acquire the
optioned securities and (ii) to purchase call options in closing purchase
transactions.
Utility* will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of the Fund's
total assets would be invested in premiums on open put options. Utility* will
not write call options on securities unless securities are held in the Fund's
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<PAGE>
portfolio or unless the Fund is entitled to them in deliverable form without
further payment or after segregating cash in the amount of any further payment.
18. Investment in Equity Securities
American Retirement may not invest more than 75% of the value of its
total assets in equity securities (including securities convertible into equity
securities).
19. Investing in Securities of Other Investment Companies
Balanced*, Utility and Value will purchase securities of investment
companies only in open-market transactions involving customary broker's
commissions. However, these limitations are not applicable if the securities are
acquired in a merger, consolidation or acquisition of assets. It should be noted
that investment companies incur certain expenses such as management fees and
therefore any investment by a Fund in shares of another investment company would
be subject to such duplicate expenses.
Total Return may not purchase securities of other investment companies,
except as part of a merger, consolidation, purchase or assets or similar
transaction.
Each other Fund may purchase the securities of other investment
companies, except to the extent such purchases are not permitted by applicable
law.
20. Restricted Securities
Balanced and Value will not invest more than 10% of their net assets in
securities subject to restrictions on resale under the Securities Act of 1933
(except for, in the case of Balanced, certain restricted securities which meet
criteria for liquidity established by the Trustees).
Utility* will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of 1933,
except for commercial paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet the criteria for
liquidity as established by the Trustees.
NON FUNDAMENTAL OPERATING POLICIES
Certain Funds have adopted additional non-fundamental operating policies.
Operating policies may be changed by the Board of Trustees without a shareholder
vote.
1. Futures and Options Transactions
Small Cap will not: (i) sell futures contracts, purchase put options or
write call options if, as a result, more than 30% of the Fund's total assets
would be hedged with futures and options under normal conditions; (ii) purchase
futures contracts or write put options if, as a result, the Fund's total
obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 30% of its total assets; or (iii) purchase call
options if, as a result, the current value of option premiums for options
purchased by the Fund would exceed 5% of the Fund's total assets. These
limitations do not apply to options attached to, or acquired or traded together
15
<PAGE>
with their underlying securities, and do not apply to securities that
incorporate features similar to options.
2. Illiquid Securities.
None of American Retirement, Foundation, Growth and Income, Small Cap,
Tax Strategic or Income and Growth may invest more than 15% of its net assets in
illiquid securities and other securities which are not readily marketable,
including repurchase agreements which have a maturity of longer than seven days,
but excluding securities eligible for resale under Rule 144A of the Securities
Act of 1933, as amended, which the Trustees have determined to be liquid.
Balanced and Utility will not invest more than 10% (in the case of
Balanced) or 15% (in the case of Utility) of its net assets in illiquid
securities, including repurchase agreements providing for settlement in more
than seven days after notice and certain securities determined by the Trustees
not to be liquid and, in the case of Utility, in non-negotiable time deposits.
Except with respect to borrowing money (and with respect to Total Return,
including borrowing money), if a percentage limitation is adhered to at the time
of investment, a later increase or decrease in percentage resulting from any
change in value or net assets will not result in a violation of such
restriction.
CERTAIN RISK CONSIDERATIONS
There can be no assurance that a Fund will achieve its investment
objective and an investment in the Fund involves certain risks which are
described under "Description of the Funds - Investment Objectives and Policies"
in each Fund's Prospectus.
In addition, the ability of Tax Strategic to achieve its investment
objective is dependent on the continuing ability of the issuers of Municipal
Securities in which the Fund invests -- and of banks issuing letters of credit
backing such securities -- to meet their obligations with respect to the payment
of interest and principal when due. The ratings of Moody's Investors Service,
Inc., Standard & Poor's Ratings Service, a division of McGraw Hill Companies,
Inc. and other nationally recognized rating organizations represent their
opinions as to the quality of Municipal Securities which they undertake to rate.
Ratings are not absolute standards of quality; consequently, Municipal
Securities with the same maturity, coupon, and rating may have different yields.
There are variations in Municipal Securities, both within a particular
classification and between classifications, resulting from numerous factors.
Unlike other types of investments, Municipal Securities have
traditionally not been subject to regulation by, or registration with, the SEC,
although there have been proposals which would provide for regulation in the
future.
The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in the rights of
holders of their obligations. In addition, there have been lawsuits challenging
the issuance of pollution control revenue bonds or the validity of their
issuance under state or federal law which could ultimately
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<PAGE>
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
MANAGEMENT
The Evergreen Keystone Funds consist of seventy-three mutual funds. Each
mutual fund is, or is a series of, a registered, open-end management company.
The Trustees and executive officers of each mutual fund, their age, address
and principal occupations during the past five years are set forth below:
TRUSTEES
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC Chairman of the
Evergreen group of mutual funds, and Trustee. Retired Vice President of Lance
Inc. (food manufacturing); Chairman of the Distribution Comm. Foundation for the
Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park, Charlotte, NC
Trustee. Medical Director, U.S. Healthcare of the Charlotte, NC Carolinas since
1996; President, Primary Physician Care from 1990 to 1996.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street Suite 980, Charlotte, NC Trustee.
Attorney, Law Offices of Michael S. Scofield since 1969.
Messrs. Howell, Salton and Scofield are Trustees of all seventy-three investment
companies:
GERALD M. MCcDONNELL (57), 821 Regency Drive, Charlotte, NC Trustee. Sales
Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
THOMAS L. McVERRY (58), 4419 Parkview Drive, Charlotte, NC Trustee. Director of
Carolina Cooperative Federal Credit Union since 1990 and Rexham Corporation from
1988 to 1990; Vice President of Rexham Industries, Inc. (diversified
manufacturer) from 1989 to 1990; Vice President-Finance and Resources, Rexham
Corporation from 1979 to 1990.
WILLIAM WALT PETTIT*(41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC Trustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990.
Messrs. McDonnell, McVerry and Pettit are Trustees of forty-three of the
investment companies (excluded are those established within the Evergreen
Variable Trust).
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL Trustee. Real
estate developer and construction consultant since 1980; President of Centrum
Equities since 1987 and Centrum Properties, Inc. since 1980.
FOSTER BAM (70), Greenwich Plaza, Greenwich, CT Trustee. Partner in the law firm
of Cummings and Lockwood since 1968.
Messrs. Ashkin and Bam are Trustees of forty-two of the investment companies
(excluded are those established within the Evergreen Variable Trust and
Evergreen Investment Trust).
FREDERICK AMLING (69)
<PAGE>
Trustee. Professor, Finance Department, George Washington University;
President, Amling & Company (investment advice); Member, Board of Advisers,
Credito Emilano (banking); and former Economics and Financial Consultant,
Riggs National Bank.
CHARLES A. AUSTIN III (61)
Trustee. Investment Counselor to Appleton Partners, Inc.; former Managing
Director, Seaward Management Corporation (investment advice); and former
Director, Executive Vice President and Treasurer, State Street Research &
Management Company (investment advice).
GEORGE S. BISSELL* (67) Chairman of the Keystone group of mutual Funds, and
Trustee. Director of Keystone Investments Inc.; Chairman of the Board and
Trustee of Anatolia College; Trustee of University Hospital (and Chairman
of its Investment Committee); former Director and Chairman of the Board of
Hartwell Keystone; and former Chairman of the Board and Chief Executive
Officer of Keystone Investments.
EDWIN D. CAMPBELL (69) Trustee. Director and former Executive Vice
President, National Alliance of Business; former Vice President,
Educational Testing Services; former Dean, School of Business, Adelphi
University; and former Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN (67)
Trustee. Former Group Vice President, Textron Corp.; and former Director,
Peoples Bank (Charlotte, NC).
K. DUN GIFFORD (57)
Trustee. Chairman of the Board, Director, and Executive Vice President, The
London Harness Company; Managing Partner, Roscommon Capital Corp.; Trustee,
Cambridge College; Chairman Emeritus and Director, American Institute of
Food and Wine; Chief Executive Officer, Gifford Gifts of Fine Foods;
Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments Inc. and Keystone Investment Management
Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio
Fund, and The Phoenix Big Edge Series Fund; and former President,
Morehouse College.
F. RAY KEYSER, JR. (69)
Trustee and Advisor to the Boards of Trustees of the Evergreen Funds.
Counsel, Keyser, Crowley & Meub, P.C.; Member, Governor's (VT) Council of
Economic Advisers; Chairman of the Board and Director, Central Vermont
Public Service Corporation and Hitchcock Clinic; Director, Vermont Yankee
Nuclear Power Corporation, Vermont Electric Power Company, Inc., Grand Trunk
Corporation, Central Vermont Railway, Inc., S.K.I. Ltd., Sherburne
Corporation, Union Mutual Fire Insurance Company, New England Guaranty
Insurance Company, Inc., and the Investment Company Institute; former
Governor of Vermont.
DAVIDM. RICHARDSON (55) Trustee. Executive Vice President, DHR
International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
<PAGE>
RICHARD J. SHIMA (57)
Trustee and Advisor to the Boards of Trustees of the Evergreen Funds.
Chairman, Environmental Warranty, Inc., and Consultant, Drake Beam Morin,
Inc. (executive outplacement); Director of Connecticut Natural Gas
Corporation, Trust Company of Connecticut, Hartford Hospital, Old State
House Association, and Enhance Financial Services, Inc.; Chairman, Board of
Trustees, Hartford Graduate Center; Trustee, Kingswood- Oxford School and
Greater Hartford YMCA; former Director, Executive Vice President, and Vice
Chairman of The Travelers Corporation.
ANDREW J. SIMONS (57) Trustee. Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; former President, Nassau County Bar
Association; former Associate Dean and Professor of Law, St. John's
University School of Law.
Messrs. Amling, Austin, Bissell, Campbell, Chapin, Gifford, Keith, Keyser,
Richardson, Shima and Simons are Trustees or Directors of the thirty-one funds
in the Keystone group of mutual funds. Their address is 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
ROBERT J. JEFFRIES (74), 2118 New Bedford Drive, Sun City Center, FL
Trustee Emeritus. Corporate consultant since 1967.
Mr. Jeffries has been serving as a Trustee Emeritus of eleven of the investment
companies since January 1, 1996 (excluded are Evergreen Variable Trust,
Evergreen Investment Trust, as well as the Keystone Group of Funds).
EXECUTIVE OFFICERS
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY President
and Treasurer. Consultant to BISYS Fund Services since 1996. Senior
Managing Director, Furman Selz LLC since 1992, Managing Director from
1984 to 1992.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH Secretary. Senior
Vice President/Director of Administration and Regulatory Services,
BISYS Fund Services since April 1995. Vice President/Assistant General
Counsel, Alliance Capital Management from 1988 to 1995.
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* Messrs. Pettit and Bissell may both be deemed to be an
"interested person" within the meaning of the Investment Company Act of 1940, as
amended (the "1940 Act").
The officers of the Trusts are all officers and/or employees of The BISYS Group,
Inc.("BISYS") Services, except for Mr. Pileggi, who is a consultant to BISYS.
BISYS is an affiliate of Evergreen Keystone Distributor, Inc., the distributor
of each Class of shares of each Fund.
The Funds do not pay any direct remuneration to any officer or Trustee who is an
"affiliated person" of either First Union National Bank of North Carolina,
Evergreen Asset Management Corp. or Keystone Investment Management Company or
their affiliates. See "Investment Advisers". Currently, none of the Trustees is
an "affiliated person" as defined in the 1940 Act. The Trusts pay each Trustee
who is not an "affiliated person" an annual retainer and a fee per meeting
attended, plus expenses, as follows:
<PAGE>
Name of Trust/Fund Annual Retainer Meeting Fee
Income and Growth $ 5,500 $ 300
Growth and Income 500 100
The Evergreen American Retirement Trust 1,000
American Retirement 100
Small Cap 100
Evergreen Foundation Trust 500
Foundation 100
Tax Strategic 100
Evergreen Investment Trust* 15,000 2,000
Balanced
Utility
Value
Keystone Total Return** -0- -0-
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* The annual retainer and meeting fee paid by Evergreen Investment Trust to each
Trustee are allocated among its fourteen series based on assets.
** See Item No. 7 below.
In addition:
(1) The Chairman of the Board of the Evergreen group of mutual funds is paid an
annual retainer of $5,000, and the Chairman of the Audit Committee is paid an
annual retainer of $2,000. These retainers are allocated among all the funds in
the Evergreen group of mutual funds, based upon assets.
(2) Each member of the Audit Committee of the Evergreen group of mutual funds is
paid an annual retainer of $500.
(3) Each non-affiliated Trustee of the Evergreen group of mutual funds is paid a
fee of $500 for each special telephonic meeting in which he participates,
regardless of the number of Funds for which the meeting is called.
(4) Each non-affiliated Trustee of the Keystone group of mutual funds is paid a
fee of $300 for each special telephonic meeting in which he participates,
regardless of the number of Funds for which the meeting is called.
(5) Each non-affiliated Trustee of the Evergreen group of mutual funds is paid a
fee of $250 for each special Committee of the Board telephone conference call
meeting of one or more Funds in which he participates.
(6) The members of the Advisory Committee to the Boards of Trustees of the
Evergreen Funds are paid an annual retainer of $17,500 and a fee of $2,200 for
each meeting of the Boards of Directors or Trustees of the Evergreen Funds
attended.
<PAGE>
(7) Each non-affiliated Trustee of the Keystone group of mutual funds is paid an
annual retainer of $30,000, and a fee of $1,200 for each meeting attended, which
fees are charged to the Funds as follows:
Annual Meeting
Retainer Fee
Keystone Global Opportunities Fund $ 500 $ 20
Keystone Global Resources and Development Fund $2,000 $ 80
Keystone Omega Fund $2,000 $ 80
Keystone Small Company Growth Fund II $ 500 $ 20
Keystone Strategic Income Fund $2,000 $ 80
Keystone Tax Free Income Fund $ 500 $ 20
Keystone Quality Bond Fund (B-1) $2,000 $ 80
Keystone Diversified Bond Fund (B-2) $2,500 $ 100
Keystone High Income Bond Fund (B-4) $2,500 $ 100
Keystone Balanced Fund (K-1) $3,000 $ 120
Keystone Strategic Growth Fund (K-2) $2,000 $ 80
Keystone Growth and Income Fund (S-1) $ 500 $ 20
Keystone Mid-Cap Growth Fund (S-3) $ 500 $ 20
Keystone Small Company Growth Fund (S-4) $3,000 $ 120
Keystone International Fund Inc. $ 500 $ 20
Keystone Precious Metals Holdings, Inc. $ 500 $ 20
Keystone Tax Free Fund $5,500 $ 220
(8)Each non-affiliated Trustee of the Keystone group of mutual funds is paid a
fee of $600 for attendance at each Committee meeting held on the same day as a
regular meeting.
(9) Each non-affiliated Trustee of the Keystone group of mutual funds is paid a
fee of $1,200 for attendance at each Committee meeting held on a non-meeting
day.
(10) Any individual who has been appointed as a Trustee Emeritus of one or more
funds in the Evergreen group of mutual funds is paid one-half of the annual
retainer fees that are payable to regular Trustees, and one-half of the meeting
fees for each meeting attended.
<PAGE>
Set forth below for each of the Trustees is the aggregate compensation
(and expenses) paid to such Trustees by each Trust for the fiscal year ended
December 31, 1996 (fiscal year ended November 30, 1996 for Total Return and
January 31, 1997 for Income and Growth).
Aggregate Compensation From Each Trust
Evergreen Evergreen Evergreen Evergreen Evergreen Keystone
Income Growth American Foundation Investment Fund for
and Growth and Incmome Retirement Trust Trust Total
Name of Fund Fund Trust Return
Trustee
20
<PAGE>
L.B. Ashkin 7,249 1,121 2,020 1,861 0 0
F. Bam 6,949 1,021 1,820 1,661 0 0
J.S. Howell 7,410 1,187 2,031 2,055 26,007 0
G.M. McDonnell 6,834 966 1,811 1,496 22,355 0
T.L. McVerry 7,238 1,111 2,018 1,839 24,902 0
W.W. Pettit 7,071 1,029 2,005 1,597 23,504 0
R.A. Salton 7,071 1,029 2,005 1,597 23,804 0
M.S. Scofield 7,071 1,029 2,005 1,597 23,804 0
F.Amling 0 0 0 0 0 0
C.A. Austin 0 0 0 0 0 0
G.S. Bissell 0 0 0 0 0 0
E.D. Campbell 0 0 0 0 0 0
C.F. Chapin 0 0 0 0 0 0
K.D. Gifford 0 0 0 0 0 0
L. Keith 0 0 0 0 0 0
F.R. Keyser 0 0 0 0 0 0
D.M. Richardson 0 0 0 0 0 0
R.J. Shima 0 0 0 0 0 0
A.J. Simons 0 0 0 0 0 0
R.J. Jeffries 3,239 409 802 594 0 0
- -------------------------------------
Total
Compensation
From Trusts
and Fund
Complex Paid
To Trustees
L.B. Ashkin 33,000
F. Bam 30,300
J.S. Howell 66,000
G.M. McDonnell 53,300
T.L. McVerry 59,500
W.W. Pettit 57,000
R.A. Salton 61,000
M.S. Scofield 61,000
F.Amling 42,600
C.A. Austin 42,600
G.S. Bissell 0
E.D. Campbell 40,800
C.F. Chapin 40,800
K.D. Gifford 38,400
L. Keith 40,200
F.R. Keyser 42,600
D.M. Richardson 42,600
R.J. Shima 39,600
A.J. Simons 40,800
R.J. Jeffries 13,050
As of the date of this Statement of Additional Information, the officers
and Trustees of the Trusts owed as a group less than 10% of the outstanding
Class A, Class B, Class C or Class Y shares of any of the Funds.
Set forth below is information with respect to each person, who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of
each Fund's total outstanding shares and their aggregate ownership of the Fund's
total outstanding shares as of February 28, 1997.
Name of % of
Name and Address Fund/Class No. of Shares Class/Fund
- ---------------- ---------- ------------- ------------
Merrill Lynch Balanced/C 7,370 24.09%/.01%
Trade House Account - AID
Private Client Group
Attn Book Entry
301 S. Tryon Street
Charlotte, NC 28288-0001
21
<PAGE>
Fubs & Co. Febo Balanced/C 2,937 9.60%/0%
FUNB NC F B O Goldston S. Bldg.
Supply Loan Acct.
Attn: Frank Pierce *Loan Account*
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Balanced/C 2,179 7.12%/0%
First Union National Bank-FL F/B/O
Leroy Selby, Jr. *Loan Account*
Attn: Carol Moening
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank Balanced/Y 32,905,313 55.34%/46.29%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank Balanced/Y 26,468,493 44.51%/37.23%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
22
<PAGE>
Fubs & Co. Febo Income and Growth/C 5,161 11.39%/.01%
T. James Bell Jr.
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union Natl. Bank-FL C/F Income and Growth/C 2,397 5.29%/0%
Fred W. Cookson IRA
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Income and Growth/C 2,542 5.61%/0%
Last Stop Inc.
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Merrill Lynch Growth and Income/C 144,946 24.72%/.37%
Trade House Account - AID
Private Client Group
Attn: Book Entry
301 S. Tryon Street
Charlotte, NC 28288-0001
23
<PAGE>
First Union National Bank/EB/INT Growth and Income/Y 3,832,484 18.51%/9.67%
Cash Account
Attn. Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG 1151
Charlotte, NC 28202-1911
First Union National Bank/EB/INT Growth and Income/Y 11,135,655 53.80%/28.11%
Reinvest Account
Attn. Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG 1151
Charlotte, NC 28202-1911
24
<PAGE>
Fubs & Co. Febo American Retirement/C 15,584 12.70%/.18%
Adron G. Hollowell Trust
Robert E. Bryan JR. Trustee
U/A/D 9/23/63
C/O First Union National Bank
301 S Tryon Street
Charlotte, NC 28288-0001
Charles Schwab & Co. Inc. American Retirement/Y 510,226 18.77%/5.73%
Special Custody Account for the
Exclusive Benefit of Customers
Reinvest Account Mut Funds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
First Union National Bank/EB/INT American Retirement/Y 222,747 8.20%/2.50%
Reinvest Account
Attn. Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG 1151
Charlotte, NC 28202-1911
FUNB NC CUST for the IRA of Small Cap/A 2,768 8.49%/.17%
Charletta B. Phillips
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
FUNB NC CUST for the IRA of Small Cap/A 2,768 8.49%/.17%
NR Phillips
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
25
<PAGE>
BHC Securities, Inc. Small Cap/A 2,619 8.03%/.17%
FAO 35532803
ATTN: Mutual Funds
One Commerce Square
2005 Market Street Suite 1200
Philadelphia PA 19103-7042
BHC Securities, Inc. Small Cap/A 1,793 5.50%/.12%
FAO 35501632
ATTN: Mutual Funds Dept.
One Commerce Square
2005 Market Street Suite 1200
Philadelphia PA 19103-7042
First Union Natl.Bank GA C/F Small Cap/B 7,356 8.86%/.47%
Lawrence Pelowski-IRA Roll
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
26
<PAGE>
Merrill Lynch Small Cap/C 1,728 9.85%/.11%
Trade House Account AID
Private Client Group
Attn: Book Entry
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville FL 32246-6484
William B. Read University Small Cap/C 1,531 8.72%/.10%
William B. Read III Thomas W. Read &
Sally R. Rouston NKD Own
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Roland J. Dupuy Jr. SEP Prop Small Cap/C 1,495 8.52%/.10%
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Rhona B. Miller Small Cap/C 1,912 10.90%/.12%
C/O First Union National Bank
301 S Tryon Street
Charlotte, NC 28288-0001
Dupuy Dufour PSRP & Trust Small Cap/C 2,240 12.77%/1.14%
Don P Dufour & Harvey J. Dupuy
U/A/D 1/180
C/O First Union National Bank
301 S Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Small Cap/C 891 5.08%/.01%
John Ellis Gibson
C/O First Union National Bank
301 S Tryon Street
Charlotte, NC 28288-0001
Nola Maddox Falcone Small Cap/Y 133,937 9.42%/ 8.61%
C/O Lieber & Co.
2500 Westchester Avenue
Purchase, NY 10577
Stephen A. Lieber Small Cap/Y 122,609 8.62%/ 7.88%
C/O Lieber & Co.
2500 Westchester Avenue
Purchase, NY 10577
First Union National Bank/EB Small Cap/Y 617,153 43.40%/39.68%
Cash Account
Attn: Trust Operations Fund
401 S. Tryon Street
3rd Floor CMG 11
Charlotte, NC 28202-1911
First Union National Bank/EB Small Cap/Y 76,632 5.39%/ 4.93%
Reinvest Account
Attn: Trust Operations Fund
401 S. Tryon Street
3rd Floor CMG 11
Charlotte, NC 28202-1911
Citibank NA Small Capy/Y 185,518 13.05%/11.93%
Delta Airlines Master Trust
308235
c/o Lieber & Co.
2500 Westchester Ave.
Purchase, NY 10577
Charles Schwab & Co. Inc. Foundation/A 1,032,516 7.63%/1.02%
Special Custody Account For the
Exclusive Benefit of Customers
Reinvest Account MUT Funds Dept
27
<PAGE>
101 Montgomery St.
San Francisco, CA 94104-4122
Merrill Lynch Foundation/C 350,345 20.52%/.34%
Trade House Account AID
Private Client Group
Attn: Book Entry
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville FL 32246-6484
Charles Schwab & Co. Inc. Foundation/Y 3,482,596 7.03%/3.42%
Special Custody Account for
the Eclusive Benefit of Cusotmers
101 Montgomery Street
San Francisco, CA 94104-4122
First Union National Bank/EB Foundation/Y 4,592,905 9.27%/ 4.52%
Cash Account
Attn: Trust Operations Fund
401 S. Tryon Street
3rd Floor CMG 11
Charlotte, NC 28202-1911
First Union National Bank/EB/INT Foundation/Y 15,824,132 31.94%/15.56%
Reinvest Account
Attn: Trust Operations Fund
401 S. Tryon Street
3rd Floor CMG 11
Charlotte, NC 28202-1911
Mac & Co. Foundation/Y 6,620,154 13.36%/6.51%
Aetna Retirement Services
Central Valuation Unit
Attn: Mutual Funds Operations
P.O. Box 320
Pittsburgh, PA 15230-0320
Fubs & Co. Febo Tax Strategic /A 77,975 7.81%/1.27%
Ray D. Russenberger
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Merrill Lynch Tax Strategic /C 125,500 35.59%/2.05%
Trade House Account AID
Private Client Group
Attn: Book Entry
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville FL 32246-6484
Fubs & Co. Febo Tax Strategic /C 21,678 6.15%/.35%
Hossein Golabchi and
Margot R. Golabachi
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Tax Strategic /C 76,731 21.76%/1.25%
Brenda Dykgraaf
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Nola Maddox Falcone Tax Strategic /Y 102,130 9.29%/1.67%
C/O Lieber & Co.
2500 Westchester Avenue
Purchase, NY 10577
28
<PAGE>
Constance E. Lieber Tax Strategic /Y 59,814 5.44%/ .97%
C/O Lieber & Co.
2500 Westchester Avenue
Purchase, NY 10577
Stephen A. Lieber Tax Strategic/Y 518,372 47.13%/ 8.45%
C/O Lieber & Co.
2500 Westchester Avenue
Purchase, NY 10577
Fubs & Co. Febo Utility/C 6,268 18.42%/.05%
Elsie B. Strom
Lewis F. Strom
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Utility/C 3,692 10.85%/.03%
Laura Alyce Hulbert
Ronald F. Hulbert
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Utility/C 1,179 5.17%/.01%
Evelyn L. Smith
Creg Smith
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Utility/C 2,040 6.00%/.02%
Max Ray and
Jeralyne Ray
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Utility/C 2,140 6.29%/.01%
Thomas McKinney and
Lottie McKinney
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank Utility/Y 93,556 49.88%/.75%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank Utility/Y 79,811 42.55%/ .64%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
29
<PAGE>
First Union National Bank- Value/C 6,387 8.58%/0%
Clara Caudill
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank Value/Y 15,617,664 32.59%/21.10%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank Value/Y 31,793,001 66.34%/42.96%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Keystone Investments Keys Tot Return/A 228,248,118 9.12%
Savings & Investment Trust
NYL Benefits Services Co. Inc.
Attn: Defined Contributions Dept
846 University Ave.
Norwood, MA 02062-2641
MLPF&S for the sole benefit Key Tot Return/A 132,989,000 5.31%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for the sole benefit Key Tot Return/B 368,928,000 9.61%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
SSN/TIN: 866168037 Key Tot Return/C 134,654,925 21.50%
Lavedna Ellingson
Douglas Ellingson TTEES
Lavedna Ellingson Martial Trust
U/A DTD 5-1-86
8510 McClintock
Tempe, AZ 85284-2527
MLPF&S for the sole benefit Key Tot Return/C 120,950,000 19.31%
of its customers
Attn: Fund Admin
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
- - ---------------------------------
First Union National Bank of North Carolina and its affiliates act in
various capacities for numerous accounts. As a result of its ownership on
February 28, 1997, of 44.61% of the shares of Evergreen Small Cap Equity
Income Fund, 37.78% of Evergreen Growth and Income Fund, 83.52% of Evergreen
Balanced Fund and 64.06% of Evergreen Value Fund, First Union may be deemed
to "control" these Funds as that Term is defined in the 1940 Act.
30
<PAGE>
INVESTMENT ADVISERS
(See also "Management of the Fund" in each Fund's Prospectus)
The investment adviser of Income and Growth, Growth and Income,
American Retirement, Small Cap, Foundation and Tax Strategic is Evergreen Asset
Management Corp., a New York corporation, with offices at 2500 Westchester
Avenue, Purchase, New York or ("Evergreen Asset" or the "Adviser"). Evergreen
Asset is owned by First Union National Bank of North Carolina ("FUNB" or the
"Adviser") which, in turn, is a subsidiary of First Union Corporation ("First
Union"), a bank holding company headquartered in Charlotte, North Carolina.
The investment adviser of Balanced, Utility and Value is FUNB which
provides investment advisory services through its Capital Management Group.
The investment adviser of Total Return is Keystone Investment Management
Company ("Keystone" or the "Adviser"), a Delaware corporation, with offices at
200 Berkeley Street, Boston, Massachusetts. Keystone is an indirectly owned
subsidiary of FUNB.
The Directors of Evergreen Asset are Richard K. Wagoner and Barbara I.
Colvin. The executive officers of Evergreen Asset are Stephen A. Lieber,
Chairman and Co-Chief Executive Officer, Nola Maddox Falcone, President and
Co-Chief Executive Officer, and Theodore J. Israel, Jr., Executive Vice
President. The Directors of Keystone are Donald McMullen, William M. Ennis, II
and Barbara I. Colvin. The executive officers of Keystone are James R. McCall,
President, Edward F. Godfrey, Senior Vice President, Chief Financial Officer
and Treasurer, Philip M. Bryne, Senior Vice President, and Rosemary D. Van
Antwerp, Senior Vice President, General Counsel and Secretary.
On June 30, 1994, Evergreen Asset and Lieber & Company ("Lieber"), were
acquired by First Union through certain of its subsidiaries. Contemporaneously
with the acquisition, Income and Growth, Growth and Income, American Retirement,
Small Cap, Foundation and Tax Strategic entered into a new investment advisory
agreement with Evergreen Asset and into a distribution agreement with Evergreen
Keystone Distributor, Inc. (formerly known as Evergreen Funds Distributor,
(Inc.) (the "Distributor"), an affiliate of BISYS Fund Services. At that time,
Evergreen Asset also entered into a new sub-advisory agreement with Lieber
pursuant to which Lieber provides certain services to Evergreen Asset in
connection with its duties as investment adviser. The new advisory and
sub-advisory agreements were approved by the shareholders of Income and Growth,
Growth and Income, American Retirement, Small Cap, Foundation and Tax Strategic
at their meeting held on June 23, 1994, and became effective on June 30, 1994.
On September 6, 1996, First Union and FUNB entered into an Agreeement
and Plan of Acquisition and Merger (the "Merger") with Keystone Investments,
Inc. ("Keystone Investments"), the corporate parent of Keystone, which provided,
among other things, for the merger of Keystone Investments with and into a
31
<PAGE>
wholly-owned subsidiary of FUNB. The Merger was consummated on December 11,
1996. Keystone continues to provide investment advisory services to the Keystone
Investments Family of Funds. Contemporaneously with the Merger, Total Return
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with the Distributor.
Under the Investment Advisory Agreement with each Fund, each Adviser
has agreed to furnish reports, statistical and research services and
recommendations with respect to each Fund's portfolio of investments. In
addition, each Adviser provides office facilities to the Funds and performs a
variety of administrative services. Each Fund pays the cost of all of its other
expenses and liabilities, including expenses and liabilities incurred in
connection with maintaining their registration under the Securities Act of 1933,
as amended, and the 1940 Act, printing prospectuses (for existing shareholders)
as they are updated, state qualifications, mailings, brokerage, custodian and
stock transfer charges, printing, legal and auditing expenses, expenses of
shareholder meetings and reports to shareholders. Notwithstanding the foregoing,
each Adviser will pay the costs of printing and distributing prospectuses used
for prospective shareholders.
The method of computing the investment advisory fee for each Fund is
described in such Fund's Prospectus. The advisory fees paid by each Fund for the
three most recent fiscal periods reflected in its registration statement are set
forth below:
BALANCED Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $4,765,912 $4,870,748 $4,621,512
========== ========== ==========
INCOME AND GROWTH Year Ended Year Ended Year Ended
1/31/97 1/31/96 1/31/95
Advisory Fee $8,823,541 $9,343,195 $8,542,289
========== =========== ===========
Expense
Reimbursement $ 0 $ 53,576
FOUNDATION Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $11,140,780 $5,387,186 $2,551,768
========== ========== ========
Expense
Reimbursement $ 0 $ 11,064
SMALL CAP Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $63,333 $45,397 $29,075
Waiver ($63,333) ($45,397) ($29,075)
--------- -------- --------
Net Advisory Fee $ 0 $ 0 $ 0
========= ========= =========
Expense
Reimbursement $133,406 $164,584 $63,704
--------- ------- -------
32
<PAGE>
UTILITY Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $725,733 $456,021 $153,458
Waiver ($396,483) ($299,028) ($152,038)
--------- --------- ----------
Net Advisory Fee $ 329,300 $156,993 $ 1,420
========= ========= =========
Expense
Reinbursement 0 $ 51,894 $106,957
-------- -------- ---------
GROWTH AND INCOME Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $5,287,338 $1,332,685 $684,891
======== ======== ========
Expense
Reimbursement $(5,000) $ 38,106
--------- --------
AMERICAN Year Ended Year Ended Year Ended
RETIREMENT 12/31/96 12/31/95 12/31/94
Advisory Fee $549,949 $297,242 $292,628
======== ========
Waiver ($24,841)
Net Advisory Fee $525,108
========
Expense
Reimbursement ($3,400) $ 76,464
--------- --------
TAX STRATEGIC Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $354,958 $140,386 $ 65,915
Waiver ($90,551) ($96,975) ($65,915)
------- -------- --------
Net Advisory Fee $264,407 $ 43,411 $ 0
========== ========= =========
Expense
Reimbursement ($11,339) $ 85,543 $ 3,777
-------- ------ ------
VALUE Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Advisory Fee $6,950,730 $5,120,579 $3,850,673
TOTAL RETURN Year Ended Year Ended Year Ended
11/30/96 11/30/95 11/30/94
Advisory Fee $448,266 $300,290 $242,315
Utility commenced operations on January 4, 1994 and, therefore, the
first year's figures set forth in the table above reflect for Utility investment
advisory fees paid for the period from commencement of operations through
December 31, 1994.
Expense Limitations
33
<PAGE>
Evergreen Asset has voluntarily agreed to reimburse Small Cap to the
extent that any of the Fund's aggregate operating expenses (including the
Adviser's fee but excluding interest, taxes, brokerage commissions, Rule 12b-1
distribution fees and shareholder servicing fees and extraordinary expenses)
exceed 1.50% of its average net assets until such time as said Fund's net assets
reach $15 million.
Keystone has voluntarily agreed to limit Total Return's Class A expenses to
1.50% of the average daily net assets of Class A shares, such expense limitation
to be reevaluated on a calendar month basis and to be modified or eliminated in
the future at the discretion of Keystone.
The Investment Advisory Agreements are terminable, without the payment
of any penalty, on sixty days' written notice, by a vote of the holders of a
majority of each Fund's outstanding shares, or by a vote of a majority of each
Trust's Trustees or by the respective Adviser. The Investment Advisory
Agreements will automatically terminate in the event of their assignment. Each
Investment Advisory Agreement provides in substance that the Adviser shall not
be liable for any action or failure to act in accordance with its duties
thereunder in the absence of willful misfeasance, bad faith or gross negligence
on the part of the Adviser or of reckless disregard of its obligations
thereunder.
The Investment Advisory Agreements with respect to Income and Growth,
Growth and Income, American Retirement, Small Cap, Foundation and Tax Strategic
were approved by each Fund's shareholders on June 23, 1994, became effective on
June 30, 1994, and were last approved by the Trustees of each Trust on March
11, 1997
The Investment Advisory Agreement with respect to Balanced, Utility and
Value dated February 28, 1985, and amended from time to time thereafter, was
last approved by the Trustees of Evergreen Investment Trust on March 11, 1997.
The Investment Advisory Agreement with respect to Total Return was
approved by the Fund's shareholders on December 9, 1996, and became effective on
December 11, 1996.
Each Investment Advisory Agreement will continue in effect from year to
year provided that its continuance is approved annually by a vote of a majority
of the Trustees of each Trust including a majority of those Trustees who are not
parties thereto or "interested persons" (as defined in the 1940 Act) of any such
party (the "Independent Trustees"), cast in person at a meeting duly called for
the purpose of voting on such approval or a majority of the outstanding voting
shares of each Fund.
Certain other clients of each Adviser may have investment objectives
and policies similar to those of the Funds. Each Adviser (including the
sub-adviser) may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients simultaneously
with a Fund. If transactions on behalf of more than one client during the same
period increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price or quantity. It
is the policy of each Adviser to allocate advisory recommendations and the
placing of orders in a manner which is deemed equitable by the Adviser to the
accounts involved, including the Funds. When two or more of the clients of the
Adviser (including one or more of the Funds) are purchasing or selling the same
security on a given day from the same broker-dealer, such transactions may be
averaged as to price.
34
<PAGE>
Although the investment objectives of the Funds are not the same, and
their investment decisions are made independently of each other, they rely upon
the same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, each
Adviser attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to
permit purchase and sales transactions to be effected between each Fund and the
other registered investment companies for which Evergreen Asset, FUNB or
Keystone act as investment adviser or between the Fund and any advisory clients
of Evergreen Asset, FUNB, Keystone or Lieber. Each Fund may from time to time
engage in such transactions but only in accordance with these procedures and if
they are equitable to each participant and consistent with each participant's
investment objectives.
Prior to July 7, 1995, Federated Administrative Services, a subsidiary
of Federated Investors, provided legal, accounting and other administrative
personnel and support services to each of the portfolios of Evergreen Investment
Trust. The Trust paid a fee for such services at the following annual rate: .15%
on the first $250 million average daily net assets of the Trust; .125% on the
next $250 million; .10% on the next $250 million and .075% on assets in excess
of $250 million. For the period ended July 7, 1995, and the fiscal years ended
December 31, 1994 and 1993 Balanced incurred $392,991, $779,584 and $597,752,
respectively, in administrative service costs. For the period ended July 7,
1995, and the period from January 4, 1994 (commencement of operations) to
December 31, 1994, Utility incurred $10,384 and $16,382, respectively, in
administrative service costs, all of which were voluntarily waived. For the
period ended July 7,1995, and for the fiscal years ended December 31, 1994 and
1993, Value incurred $374,216, $649,487, and $526,836, respectively, in
administrative service costs.
Evergreen Asset has been providing administrative services to each of the
portfolios of Evergreen Investment Trust since July 8, 1995, for a fee based on
the average daily net assets of each fund administered by Evergreen Asset for
which Evergreen Asset or FUNB also serves as investment adviser, calculated
daily and payable monthly at the following annual rates: .050% on the first $7
billion; .035% on the next $3 billion; .030% on the next $5 billion; .020% on
the next $10 billion; .015% on the next $5 billion; and .010% on assets in
excess of $30 billion. For the period from July 8, 1995 through December 31,
1995, and the fiscal year ended December 31, 1996, Balanced, Utility and Value
incurred the following administration costs: Balanced $283,139 and $459,486,
respectively; Utility $39,330 and $70,215, respectively; and Value $323,050 and
$670,060, respectively. BISYS Fund Services, an affiliate of the Distributor,
serves as sub-administrator to Balanced, Utility and Value and is entitled to
receive a fee from each Fund calculated on the average daily net assets of each
Fund at a rate based on the total assets of the mutual funds administered by
Evergreen Asset for which FUNB or Evergreen Asset also serve as investment
adviser, calculated in accordance with the following schedule:
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.0100% of the first $7 billion; .0075% on the next $3 billion; .0050% on the
next $15 billion; and .0040% on assets in excess of $25 billion. The total
assets of the mutual funds administered by Evergreen Asset for which Evergreen
Asset, FUNB or Keystone serve as investment adviser were approximately $29.2
billion as of February 28, 1997.
DISTRIBUTION PLANS
Reference is made to "Management of the Funds - Distribution Plans and
Agreements" in the Prospectus of each Fund for additional disclosure regarding
the Funds' distribution arrangements. Distribution fees are accrued daily and
paid monthly on the Class A, Class B Class and Class C shares and are charged as
class expenses, as accrued. The distribution fees attributable to the Class B
shares and Class C shares are designed to permit an investor to purchase such
shares through broker-dealers without the assessment of a front-end sales
charge, and, in the case of Class C shares, without the assessment of a
contingent deferred sales charge after the first year following purchase, while
at the same time permitting the Distributor to compensate broker-dealers in
connection with the sale of such shares. In this regard the purpose and function
of the combined contingent deferred sales charge and distribution services fee
on the Class B shares and the Class C shares, are the same as those of the
front-end sales charge and distribution fee with respect to the Class A shares
in that in each case the sales charge and/or distribution fee provide for the
financing of the distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its Class A, Class B and Class C shares (each a
"Plan" and collectively, the "Plans"), the Treasurer of each Fund reports the
amounts expended under the Plan and the purposes for which such expenditures
were made to the Trustees of each Trust for their review on a quarterly basis.
Also, each Plan provides that the selection and nomination of the disinterested
Trustees are committed to the discretion of such disinterested Trustees then in
office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Growth and Income, Income and Growth, American Retirement, Small Cap,
Foundation and Tax Strategic commenced offering Class A, Class B or Class C
shares on January 3, 1995. Each Plan with respect to such Funds became effective
on December 30, 1994 and was initially approved by the sole shareholder of each
Class of shares of each Fund with respect to which a Plan was adopted on that
date and by the unanimous vote of the Trustees of each Trust, including the
disinterested Trustees voting separately, at a meeting called for that purpose
and held on December 13, 1994. The Distribution Agreements between each Fund and
the Distributor pursuant to which distribution fees are paid under the Plans by
each Fund with respect to its Class A, Class B and Class C shares were also
approved at the December 13, 1994 meeting by the unanimous vote of the Trustees,
including the disinterested Trustees voting separately.
Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of each Trust or by vote
of the holders of a majority of the outstanding voting securities of that
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Class and, in either case, by a majority of the Independent Trustees of the
Trust who have no direct or indirect financial interest in the operation
of the Plan or any agreement related thereto.
Prior to July 8, 1995, Federated Securities Corp., a subsidiary of
Federated Investors, served as the distributor for Balanced, Utility and Value
as well as other portfolios of Evergreen Investment Trust. The Distribution
Agreements between each Fund and the Distributor pursuant to which distribution
fees are paid under the Plans by each Fund with respect to its Class A, Class B
and Class C shares were approved on April 20, 1995 by the unanimous vote of the
Trustees including the Independent Trustees voting separately.
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to each Fund and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class A, Class B and Class C shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B and Class C shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class A, Class B and Class C shares.
In addition to the Plans, Balanced, Utility and Value have each adopted
a Shareholder Services Plan whereby shareholder servicing agents may receive
fees from the Fund for providing services which include, but are not limited to,
distributing prospectuses and other information, providing shareholder
assistance, and communicating or facilitating purchases and redemptions of Class
B and Class C shares of the Fund.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of a Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. With respect to Balanced,
Utility, and Value, amendments to the Shareholder Services Plan require a
majority vote of the disinterested Trustees but do not require a shareholders
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vote. Any Plan, Shareholder Services Plan or Distribution Agreement may be
terminated (a) by a Fund without penalty at any time by a majority vote of the
holders of the outstanding voting securities of the Fund, voting separately by
Class or by a majority vote of the disinterested Trustees, or (b) by the
Distributor. To terminate any Distribution Agreement, any party must give the
other parties 60 days' written notice; to terminate a Plan only, the Fund need
give no notice to the Distributor. Any Distribution Agreement will terminate
automatically in the event of its assignment.
Income and Growth, Growth and Income, American Retirement, Small Cap,
Foundation and Tax Strategic incurred the following Distribution Services Plans
and Shareholder Services Plan fees:
Distribution Services Fees:
INCOME AND GROWTH. For the fiscal period from January 3, 1995 (commencement of
class operations) through January 31, 1995, the fiscal years ended January 31,
1996 and 1997, $7, $4,915 and $18,106 on behalf of its Class A shares, $126,
$46,636 and $189,323, respectively on behalf of its Class B shares, and $7,
$1,516 and $6,382, respectively on behalf of its Class C shares.
GROWTH AND INCOME. For the fiscal period from January 3,1995 (commencement of
class operations) through December 31, 1995 and the fiscal year ended December
31, 1996, $22,055 and $122,222, respectively, on behalf of its Class A shares,
$159,114 and $934,314, respectively, on behalf of its Class B shares, and $6,902
and $36,055, respectively, on behalf of its Class C shares.
AMERICAN RETIREMENT. For the fiscal period from January 3,1995 (commencement of
class operations) through December 31, 1995 and the fiscal year ended December
31, 1996, $659 and $14,426, respectively, on behal of its Class A shares, $9,137
and $199,829, respectively, on behalf of its Class B shares, and $187 and
$5,713, respectively, on behalf of its Class C shares.
SMALL CAP. For the fiscal period from January 3, 1995 (commencement of class
operations) through December 31, 1995 and the fiscal year ended December 31,
1996, $340 and $618, respectively, on behalf of its Class A shares, $1,298 and
$3,199, respectively, on behalf of its Class B shares, and $111 and $267,
respecively, on behalf of its Class C shares.
FOUNDATION. For the fiscal period from January 3, 1995 (commencement of class
operations) through December 31, 1995 and the fiscal year ended December 31,
1996, $116,677 and $414,289, respectively on behalf of its Class A shares,
$972,541 and $3,487,899, respectively, on behalf of its Class B shares, and
$37,823 and $152,488, respectively, on behalf of its Class C shares.
TAX STRATEGIC. For the fiscal period from January 3, 1995 (commencement of class
operations) through December 31, 1995 and the fiscal year ended December 31,
1996, $2,582 and $16,426, respectively, on behalf of its Class A shares, $21,725
and $131,282, respectively, on behalf of its Class B shares, and $1,292 and
$16,493, respectively, on behalf of its Class C shares.
TOTAL RETURN. For the fiscal years ended November 30, 1994, 1995 and 1996,
$44,889, $101,222 and $195,178, respectively, on behalf of its Class B shares,
and $36,580, $60,201 and $84,812, respectively, on behalf of its Class C shares.
Shareholder Services Fees:
INCOME AND GROWTH. For the fiscal period from January 3, 1995 (commencement of
class operations) through January 31, 1995, the fiscal years ended January 31,
1996 and 1997, shareholder services fees on behalf of $42, $15,546 and
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$63,108, respectively, on behalf of its Class B shares, and $3, $505 and
$2,127, respectively, on behalf of its Class C shares.
GROWTH AND INCOME. For the fiscal period from January 3, 1995 (commencement of
class operations) through December 31, 1995 and the fiscal year ended December
31, 1996, shareholder services fees of $53,139 and $311,235 on behalf of its
Class B shares, and $2,301 and $12,018, respectively, on behalf of its Class C
shares.
AMERICAN RETIREMENT. For the fiscal period from January 3, 1995 (commencement of
class operations) through December 31, 1995 and the fiscal year ended December
31, 1996, $3,045 and $66,610, respectively, on behalf of its Class B shares, and
$62 and $1,904, respectively, on behalf of its Class C shares.
SMALL CAP. For the fiscal period from January 3, 1995 (commencement of class
operations) through December 31, 1995 and the fiscal year ended December 31,
1996, $433 and $1,066, respectively, on behalf of its Class B shares, and $37
and $89, respectively, on behalf of its Class C shares.
FOUNDATION. For the fiscal period from January 3, 1995 (commencement of class
operations) through December 31, 1995 and the fiscal year ended December 31,
1996, $324,180 and $1,162,633, respectively, on behalf of its Class B shares,
and $12,608 and $50,829, respectively, on behalf of its Class C shares.
TAX STRATEGIC. For the fiscal period from January 3, 1995 (commencement of class
operations) through December 31, 1995 and the fiscal year ended December 31,
1996, $7,242 and $43,761, respectively, on behalf of its Class B shares, and
$431 and $5,498, respectively, on behalf of its Class C shares.
TOTAL RETURN. For the fiscal years ended November 30, 1994, 1995 and 1996,
$61,955, $61,454 and $75,270, respectivley, on behalf of its Class A shares,
$14,587, $33,741, and $65,059, respectivley, on behalf of Class B shares, and
$20,893, $20,066, and $28,183, respectivley, on behalf of its Class C shares.
Balanced, Value and Utility incurred the following Distribution
Services Plans and Shareholder Services Plans fees:
Distribution Services Fees:
BALANCED. For the fiscal years ended December 31, 1994, 1995 and 1996, $102,621,
$102,400 and $107,023, respectively, on behalf of Class A shares, and $670,202,
$784,084 and $810,803, respectively, on behalf of Class B shares; for the
period from September 2, 1994 (commencement of operations) to December 31, 1994,
and the fiscal years ended December 31, 1995 and 1996, $310, $1,811 and $1,883,
respectively, on behalf of Class C shares.
VALUE. For the fiscal years ended December 31, 1994, 1995 and 1996, $473,347,
$603,896 and $767,254, respectively, on behalf of Class A shares, and $621,330,
$916,221 and $1,255,600, respectively, on behalf of Class B shares; for the
period from September 2, 1994 (commencement of operations) to December 31, 1994,
and the fiscal years ended December 31, 1995 and 1996, $716, $4,798 and $8,706,
respectively, on behalf of Class C shares.
UTILITY. For the fiscal years ended December 31, 1994, 1995 and 1996, $9,658,
$133,582 and $252,753, respectively, on behalf of Class A shares, and $169,007,
$234,357 and $283,875, respectively, on behalf of Class B shares; for the
period from September 2, 1994 (commencement of operations) to December 31, 1994,
and the fiscal years ended December 31, 1995 and 1996, $232, $1,271 and
$2,843, respectively, on behalf of Class C shares.
Shareholder Services Plans fees:
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BALANCED. For the fiscal years ended December 31, 1994, 1995 and 1996, $83,641,
$261,361 and $270,267, respectively, on behalf of Class B shares, and $103, $604
and $628, respectively, on behalf of Class C shares.
VALUE. For the fiscal years ended December 31, 1994, 1995 and 1996, $83,225,
$305,407 and $418,533, respectively, on behalf of Class B shares, and $239,
$1,599 and $2,902, respectively, on behalf of Class C shares.
UTILITY. For the fiscal years ended December 31, 1994, 1995 and 1996, $24,141,
$78,119 and $94,625, respectively, on behalf of Class B shares, and $77, $424
and $948, respectively, on behalf of Class C shares.
ALLOCATION OF BROKERAGE
Decisions regarding each Fund's portfolio are made by its Adviser,
subject to the supervision and control of the Trustees. Orders for the purchase
and sale of securities and other investments are placed by employees of each
Fund's Adviser. In general, the same individuals perform the same functions for
the other funds managed by each Adviser. A Fund will not effect any brokerage
transactions with any broker or dealer affiliated directly or indirectly with
the Adviser unless such transactions are fair and reasonable, under the
circumstances, to the Fund's shareholders. Circumstances that may indicate that
such transactions are fair or reasonable include the frequency of such
transactions, the selection process and the commissions payable in connection
with such transactions.
A substantial portion of the transactions in equity securities for each
Fund will occur on domestic stock exchanges. Transactions on stock exchanges
involve the payment of brokerage commissions. In transactions on stock exchanges
in the United States, these commissions are negotiated, whereas on many foreign
stock exchanges these commissions are fixed. In the case of securities traded in
the foreign and domestic over-the-counter markets, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup.
Over-the-counter transactions will generally be placed directly with a principal
market maker, although the Fund may place an over-the-counter order with a
broker-dealer if a better price (including commission) and execution are
available.
It is anticipated that most purchase and sale transactions involving
fixed income securities will be with the issuer or an underwriter or with major
dealers in such securities acting as principals. Such transactions are normally
on a net basis and generally do not involve payment of brokerage commissions.
However, the cost of securities purchased from an underwriter usually includes
commission paid by the issuer to the underwriter. Purchases or sales from
dealers will normally reflect the spread between bid and ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Fund shall be prompt execution at the most favorable
price. Each Adviser will also consider such factors as the price of the
securities and the size and difficulty of execution of the order. If these
objectives may be met with more than one firm, the Adviser will also consider
the availability of statistical and investment data and economic facts and
opinions helpful to the Fund. To the extent that receipt of these services for
which the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
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Under Section 11(a) of the Securities Exchange Act of 1934, as amended,
and the rules adopted thereunder by the SEC, Lieber may be compensated for
effecting transactions in portfolio securities for a fund on a national
securities exchange provided the conditions of the rules are met. Each Fund
advised by Evergreen Asset has entered into an agreement with Lieber authorizing
Lieber to retain compensation for brokerage services. In accordance with such
agreement, it is contemplated that Lieber, a member of the New York and American
Stock Exchanges, will, to the extent practicable, provide brokerage services to
Growth and Income, Income and Growth, American Retirement, Small Cap, Foundation
and Tax Strategic with respect to substantially all securities transactions
effected on the New York and American Stock Exchanges. In such transactions, the
Adviser will seek the best execution at the most favorable price while paying a
commission rate no higher than that offered to other clients of Lieber or that
which can be reasonably expected to be offered by an unaffiliated broker-dealer
having comparable execution capability in a similar transaction. However, no
Fund will engage in transactions in which Lieber would be a principal. While no
Fund advised by Evergreen Asset contemplates any ongoing arrangements with other
brokerage firms, brokerage business may be given from time to time to other
firms. In addition, the Trustees have adopted procedures pursuant to Rule 17e-1
under the 1940 Act to ensure that all brokerage transactions with Lieber, as an
affiliated broker-dealer, are fair and reasonable.
Neither Total Return 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. The Fund expects that purchases
and sales of securities will usually be effected through brokerage transactions
for which commissions are payable. Purchases from underwriters will include the
underwriting commission or concession, and purchases from dealers serving as
market makers will include a dealer's mark-up or reflect a dealer's mark-down.
Where transactions are made in the over-the-counter market, the Fund will deal
with primary market makers unless more favorable prices are otherwise
obtainable. Under its Investment 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.
Any profits from brokerage commissions accruing to Lieber as a result
of portfolio transactions for the Growth and Income, Income and Growth, American
Retirement, Small Cap, Foundation and Tax Strategic will accrue to FUNB and to
its ultimate parent, First Union. The Investment Advisory Agreements do not
provide for a reduction of the Adviser's fee with respect to any Fund by the
amount of any profits earned by Lieber from brokerage commissions generated by
portfolio transactions of the Fund.
The following chart shows: (1) the brokerage commissions paid by each
Fund advised by Evergreen Asset during their last three fiscal years; (2) the
amount and percentage thereof paid to Lieber; and (3) the percentage of the
total dollar mount of all portfolio transactions with respect to which
commissions have been paid which were effected by Lieber:
INCOME AND GROWTH Year Ended Year Ended Year Ended
1/31/97 1/31/96 1/31/95
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Total Brokerage $3,529,313 $3,255,068 $3,755,606
Commissions
Dollar Amount and % $2,835,293 $2,982,640 $3,465,900
paid to Lieber 80% 92% 92%
% of Transactions
Effected by Lieber 47% 90% 97%
FOUNDATION Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Total Brokerage $689,724 $393,121 $282,250
Commissions
Dollar Amount and % $680,252 $380,226 $ 276,985
paid to Lieber 99% 98% 98%
% of Transactions
Effected by Lieber 96% 97% 98%
SMALL CAP Year Ended Year Ended Period Ended
12/31/96 12/31/95 12/31/94
Total Brokerage $14,647 $5,968 $ 3,998
Commissions
Dollar Amount and % $13,246 $4,863 $ 3,618
paid to Lieber 90% 81% 90%
% of Transactions
Effected by Lieber 87% 77% 90%
GROWTH AND INCOME Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Total Brokerage $519,064 $210,923 $80,871
Commissions
Dollar Amount and % $429,888 $160,659 $71,721
paid to Lieber 83% 76% 89%
% of Transactions
Effected by Lieber 78% 74% 88%
AMERICAN RETIREMENT Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
Total Brokerage $55,581 $57,216 $203,922
Commissions
Dollar Amount and % $51,579 $53,276 $202,838
paid to Lieber 93% 93% 99%
% of Transactions
Effected by Lieber 89% 82% 99%
TAX STRATEGIC Year Ended Year Ended Period Ended
12/31/96 12/31/95 12/31/94
Total Brokerage $51,273 $37,374 $24,872
Commissions
Dollar Amount and % $50,033 $35,954 $24,072
paid to Lieber 98% 96% 97%
% of Transactions
Effected by Lieber 97% 94% 98%
Income and Growth changed its fiscal year end from March 31 to January
31 during the first period covered by the foregoing table. Accordingly, the
commissions reported in the foregoing table reflect for Income and Growth the
period from April 1, 1994 to January 31, 1995.
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Balanced, Value, Utility and Total Return did not pay any commissions
to Lieber. For the fiscal years ended December 31, 1996, 1995 and 1994, Balanced
paid $522,227, $615,041 and $450,569, respectively, in commissions on brokerage
transactions. For the fiscal year ended December 31, 1996 and 1995, and for the
period from January 4, 1994 (commencement of operations) to December 31, 1994,
Utility paid $323,978, $272,806 and $66,294, respectively, in commissions on
brokerage transactions. For the fiscal years ended December 31, 1996, 1995 and
1994, Value paid $3,164,292, $1,644,077 and $1,437,338, respectively, in
commissions on brokerage transactions. For the fiscal years ended November 30,
1996, 1995 and 1994, Total Return paid $227,013, $92,665 and $65,514,
respectively, in commissions on brokerage transactions.
ADDITIONAL TAX INFORMATION
(See also "Other Information - Dividends,
Distributions and Taxes" in each Fund's Prospectus)
Each Fund has qualified and intends to continue to qualify for and
elect the tax treatment applicable to regulated investment companies ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). (Such qualification does not involve supervision of management or
investment practices or policies by the Internal Revenue Service.) In order to
qualify as a regulated investment company, a Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to proceeds from securities loans, gains from the sale or other
disposition of securities or foreign currencies and other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in such securities; (b) derive less than 30% of its gross
income from the sale or other disposition of securities, options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the RIC's principal business of investing in securities (or
options and futures with respect thereto) held for less than three months; and
(c) diversify its holdings so that, at the end of each quarter of its taxable
year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash, U.S. government securities and other securities limited in
respect of any one issuer, to an amount not greater than 5% of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. government securities and securities of other
regulated investment companies). By so qualifying, a Fund is not subject to
Federal income tax if it timely distributes its investment company taxable
income and any net realized capital gains. A 4% nondeductible excise tax will be
imposed on a Fund to the extent it does not meet certain distribution
requirements by the end of each calendar year. Each Fund anticipates meeting
such distribution requirements.
Dividends paid by a Fund from investment company taxable income
generally will be taxed to the shareholders as ordinary income. Investment
company taxable income includes net investment income and net realized
short-term gains (if any). Any dividends received by a Fund from domestic
corporations will constitute a portion of the Fund's gross investment income. It
is anticipated that this portion of the dividends paid by a Fund (other than
distributions of securities profits) will qualify for the 70% dividends-received
deduction for corporations. Shareholders will be informed of the amounts of
dividends which so qualify.
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Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders (who are not exempt from
tax) as long-term capital gain, regardless of the length of time the shares of a
Fund have been held by such shareholders. Short-term capital gains distributions
are taxable to shareholders who are not exempt from tax as ordinary income. Such
distributions are not eligible for the dividends-received deduction. Any loss
recognized upon the sale of shares of a Fund held by a shareholder for six
months or less will be treated as a long-term capital loss to the extent that
the shareholder received a long-term capital gain distribution with respect to
such shares.
Distributions of investment company taxable income and any net
short-term capital gains will be taxable as ordinary income as described above
to shareholders (who are not exempt from tax), whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for Federal income tax purposes in each share so
received equal to the net asset value of a share of a Fund on the reinvestment
date.
Distributions by each Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would be taxable as
ordinary income or capital gain as described above to shareholders (who are not
exempt from tax), even though, from an investment standpoint, it may constitute
a return of capital. In particular, investors should be careful to consider the
tax implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive
what is in effect a return of capital upon the distribution which will
nevertheless be taxable to shareholders subject to taxes.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gains or loss
will be treated as a capital gain or loss if the shares are capital assets in
the investor's hands and will be a long-term capital gain or loss if the shares
have been held for more than one year. Generally, any loss realized on a sale or
exchange will be disallowed to the extent shares disposed of are replaced within
a period of sixty-one days beginning thirty days before and ending thirty days
after the shares are disposed of. Any loss realized by a shareholder on the sale
of shares of the Fund held by the shareholder for six months or less will be
disallowed to the extent of any exempt interest dividends received by the
shareholder with respect to such shares, and will be treated for tax purposes as
a long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her Federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% Federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these
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shareholders, whether taken in cash or reinvested in additional shares, and any
redemption proceeds will be reduced by the amounts required to be withheld.
Investors may wish to consult their own tax advisers about the applicability of
the backup withholding provisions.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e.,U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). It does not reflect
the special tax consequences to certain taxpayers (e.g., banks, insurance
companies, tax exempt organizations and foreign persons). Shareholders are
encouraged to consult their own tax advisers regarding specific questions
relating to Federal, state and local tax consequences of investing in shares of
a Fund. Each shareholder who is not a U.S. person should consult his or her tax
adviser regarding the U.S. and foreign tax consequences of ownership of shares
of a Fund, including the possibility that such a shareholder may be subject to a
U.S. withholding tax at a rate of 31% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
Special Tax Considerations for Tax Strategic
With respect to Tax Strategic, to the extent that the Fund distributes
exempt interest dividends to a shareholder, interest on indebtedness incurred or
continued by such shareholder to purchase or carry shares of the Fund is not
deductible. Furthermore, entities or persons who are "substantial users" (or
related persons) of facilities financed by "private activity" bonds (some of
which were formerly referred to as "industrial development" bonds) should
consult their tax advisers before purchasing shares of the Fund. "Substantial
user" is defined generally as including a "non-exempt person" who regularly uses
in its trade or business a part of a facility financed from the proceeds of
industrial development bonds.
The percentage of the total dividends paid by the Fund with respect to
any taxable year that qualifies as exempt interest dividends will be the same
for all shareholders of the Fund receiving dividends with respect to such year.
If a shareholder receives an exempt interest dividend with respect to any share
and such share has been held for six months or less, any loss on the sale or
exchange of such share will be disallowed to the extent of the exempt interest
dividend amount.
NET ASSET VALUE
The following information supplements that set forth in each Fund's
Prospectus under the subheading "How to Buy Shares - How the Funds Value Their
Shares" in the Section entitled "Purchase and Redemption of Shares".
The public offering price of shares of a Fund is its net asset value
plus, in the case of Class A shares, a sales charge which will vary depending
upon the purchase alternative chosen by the investor, as more fully described in
the Prospectus. See "Purchase of Shares - Class A Shares - Front-End Sales
Charge Alternative". On each Fund business day on which a purchase or redemption
order is received by a Fund and trading in the types of securities in which a
Fund invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Declaration of
Trust and By-Laws governing each Fund as of the next close of regular trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time)
by dividing the value of the Fund's total assets, less its
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liabilities, by the total number of its shares then outstanding. A Fund business
day is any weekday, exclusive of national holidays on which the Exchange is
closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic
or foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked prices and portfolio bonds are presently valued by
a recognized pricing service when such prices are believed to reflect the fair
value of the security. Over-the-counter securities not included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one or more brokers. If accurate quotations are not available,
securities will be valued at fair value determined in good faith by the Board of
Trustees.
The respective per share net asset values of the Class A, Class B, Class C
and Class Y shares are expected to be substantially the same. Under certain
circumstances, however, the per share net asset values of the Class B and Class
C shares may be lower than the per share net asset value of the Class A shares
(and, in turn, that of Class A shares may be lower than Class Y shares) as a
result of the greater daily expense accruals, relative to Class A and Class Y
shares, of Class B and Class C shares relating to distribution services fees
(and, with respect to Balanced, Utility and Value, Shareholder Service Plan fee)
and, to the extent applicable, transfer agency fees and the fact that Class Y
shares bear no additional distribution, shareholder service or transfer agency
related fees. While it is expected that, in the event each Class of shares of a
Fund realizes net investment income or does not realize a net operating loss for
a period, the per share net asset values of the four Classes will tend to
converge immediately after the payment of dividends, which dividends will differ
by approximately the amount of the expense accrual differential among the
Classes, there is no assurance that this will be the case. In the event one or
more Classes of a Fund experiences a net operating loss for any fiscal period,
the net asset value per share of such Class or Classes will remain lower than
that of Classes that incurred lower expenses for the period.
To the extent that any Fund invests in non-U.S. dollar denominated
securities, the value of all assets and liabilities will be translated into
United States dollars at the mean between the buying and selling rates of the
currency in which such a security is denominated against United States dollars
last quoted by any major bank. If such quotations are not available, the rate of
exchange will be determined in accordance with policies established by the Fund.
The Trustees will monitor, on an ongoing basis, a Fund's method of valuation.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York. In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York.
Furthermore, trading takes place in various foreign markets on days
which are not business days in New York and on which the Fund's net asset value
is not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the Exchange
will not be reflected in a Fund's calculation of net asset value unless the
Trustees deem that the particular event would materially affect net asset value,
in which case an adjustment will be made. Securities transactions
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are accounted for on the trade date, the date the order to buy or sell is
executed. Dividend income and other distributions are recorded on the
ex-dividend date, except certain dividends and distributions from foreign
securities which are recorded as soon as the Fund is informed after the
ex-dividend date.
PURCHASE OF SHARES
The following information supplements that set forth in each Fund's
Prospectus under the heading "Purchase and Redemption of Shares - How To Buy
Shares."
General
Shares of each Fund will be offered on a continuous basis at a price
equal to their net asset value plus an initial sales charge at the time of
purchase (the "front-end sales charge alternative"), with a contingent deferred
sales charge (the deferred sales charge alternative"), or without any front-end
sales charge, but with a contingent deferred sales charge imposed only during
the first year after purchase (the "level-load alternative"), as described
below. Class Y shares which, as described below, are not offered to the general
public, are offered without any front-end or contingent sales charges. Shares of
each Fund are offered on a continuous basis through (i) investment dealers that
are members of the National Association of Securities Dealers, Inc. and have
entered into selected dealer agreements with the Distributor ("selected
dealers"), (ii) depository institutions and other financial intermediaries or
their affiliates, that have entered into selected agent agreements with the
Distributor ("selected agents"), or (iii) the Distributor. The minimum for
initial investment is $1,000; there is no minimum for subsequent investments.
The subscriber may use the Share Purchase Application available from the
Distributor for his or her initial investment. Sales personnel of selected
dealers and agents distributing a Fund's shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Investors may purchase shares of a Fund in the United States either
through selected dealers or agents or directly through the Distributor. A Fund
reserves the right to suspend the sale of its shares to the public in response
to conditions in the securities markets or for other reasons.
Each Fund will accept unconditional orders for its shares to be
executed at the public offering price equal to the net asset value next
determined (plus for Class A shares, the applicable sales charges), as described
below. Orders received by the Distributor prior to the close of regular trading
on the Exchange on each day the Exchange is open for trading are priced at the
net asset value computed as of the close of regular trading on the Exchange on
that day (plus for Class A shares the sales charges). In the case of orders for
purchase of shares placed through selected dealers or agents, the applicable
public offering price will be the net asset value as so determined, but only if
the selected dealer or agent receives the order prior to the close of regular
trading on the Exchange and transmits it to the Distributor prior to its close
of business that same day (normally 5:00 p.m. Eastern time). The selected dealer
or agent is responsible for transmitting such orders by 5:00 p.m. If the
selected dealer or agent fails to do so, the investor's right to that day's
closing price must be settled between the investor and the selected dealer or
agent. If the selected dealer or agent receives the order after the close of
regular trading on the Exchange, the price will be based on the net asset value
determined as of the close of regular trading on the Exchange on the next day it
is open for trading.
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Following the initial purchase of shares of a Fund, a shareholder may
place orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Share Purchase Application. Payment for
shares purchased by telephone can be made only by Electronic Funds Transfer from
a bank account maintained by the shareholder at a bank that is a member of the
National Automated Clearing House Association ("ACH"). If a shareholder's
telephone purchase request is received before 3:00 p.m. Eastern time on a Fund
business day, the order to purchase shares is automatically placed the same Fund
business day for non-money market funds, and two days following the day the
order is received for money market funds, and the applicable public offering
price will be the public offering price determined as of the close of business
on such business day. Full and fractional shares are credited to a subscriber's
account in the amount of his or her subscription. As a convenience to the
subscriber, and to avoid unnecessary expense to a Fund, stock certificates
representing shares of a Fund are not issued. This facilitates later redemption
and relieves the shareholder of the responsibility for and inconvenience of lost
or stolen certificates.
Alternative Purchase Arrangements
Each Fund issues four classes of shares: (i) Class A shares, which are sold
to investors choosing the front-end sales charge alternative; (ii) Class B
shares, which are sold to investors choosing the deferred sales charge
alternative; (iii) Class C shares, which are sold to investors choosing the
level-load sales charge alternative; and (iv) Class Y shares, which are offered
only to (a) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (b) certain investment advisory clients
of the Advisers and their affiliates, and (c) institutional investors. The four
Classes of shares each represent an interest in the same portfolio of
investments of the Fund, have the same rights and are identical in all respects,
except that (I) only Class A, Class B and Class C shares are subject to a Rule
12b-1 distribution fee, (II) Class B and Class C shares of Balanced, Utility and
Value are subject to a Shareholder Service Plan fee, (III) Class A shares bear
the expense of the front-end sales charge and Class B and Class C shares bear
the expense of the deferred sales charge, (IV) Class B shares and Class C shares
each bear the expense of a higher Rule 12b-1 distribution services fee and
shareholder service fee than Class A shares and, in the case of Class B shares,
higher transfer agency costs, (V) with the exception of Class Y shares, each
Class of each Fund has exclusive voting rights with respect to provisions of the
Rule 12b-1 Plan pursuant to which its distribution services (and, to the extent
applicable, Shareholder Service Plan fee) is paid which relates to a specific
Class and other matters for which separate Class voting is appropriate under
applicable law, provided that, if the Fund submits to a simultaneous vote of
Class A, Class B and Class C shareholders an amendment to the Rule 12b-1 Plan
that would materially increase the amount to be paid thereunder with respect to
the Class A shares, the Class A shareholders and the Class B and Class C
shareholders will vote separately by Class, and (VI) only the Class B shares are
subject to a conversion feature. Each Class has different exchange privileges
and certain different shareholder service options available.
The alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the accumulated distribution services (and, to the
extent applicable, shareholder service) fee and contingent deferred sales
charges on Class B shares prior to conversion, or the accumulated distribution
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services (and, to the extent applicable, shareholder service) fee on Class C
shares, would be less than the front-end sales charge and accumulated
distribution services fee on Class A shares purchased at the same time, and to
what extent such differential would be offset by the higher return of Class A
shares. Class B and Class C shares will normally not be suitable for the
investor who qualifies to purchase Class A shares at the lowest applicable sales
charge. For this reason, the Distributor will reject any order (except orders
for Class B shares from certain retirement plans) for more than $250,000 for
Class B shares or $500,000 for Class C shares.
Class A shares are subject to a lower distribution services fee and no
Shareholder Service Plan fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares. However, because
front-end sales charges are deducted at the time of purchase, investors
purchasing Class A shares would not have all their funds invested initially and,
therefore, would initially own fewer shares. Investors not qualifying for
reduced front-end sales charges who expect to maintain their investment for an
extended period of time might consider purchasing Class A shares because the
accumulated continuing distribution (and, to the extent applicable, Shareholder
Service Plan) charges on Class B shares or Class C shares may exceed the
front-end sales charge on Class A shares during the life of the investment.
Again, however, such investors must weigh this consideration against the fact
that, because of such front-end sales charges, not all their funds will be
invested initially.
Other investors might determine, however, that it would be more
advantageous to purchase Class B shares or Class C shares in order to have all
their funds invested initially, although remaining subject to higher continuing
distribution services (and, to the extent applicable, Shareholder Service Plan)
fees and, in the case of Class B shares, being subject to a contingent deferred
sales charge for a six-year period. For example, based on current fees and
expenses, an investor subject to the 4.75% front-end sales charge imposed by
Evergreen Equity and Long-Term Bond Funds would have to hold his or her
investment approximately seven years for the Class B and Class C distribution
services (and, to the extent applicable, shareholders service) fees, to exceed
the front-end sales charge plus the accumulated distribution services fee of
Class A shares. In this example, an investor intending to maintain his or her
investment for a longer period might consider purchasing Class A shares. This
example does not take into account the time value of money, which further
reduces the impact of the Class B and Class C distribution services (and, to the
extent applicable, shareholder service) fees on the investment, fluctuations in
net asset value or the effect of different performance assumptions.
Those investors who prefer to have all of their funds invested
initially but may not wish to retain Fund shares for the six year period during
which Class B shares are subject to a contingent deferred sales charge may find
it more advantageous to purchase Class C shares.
With respect to each Fund, the Trustees have determined that currently
no conflict of interest exists between or among the Class A, Class B, Class C
and Class Y shares. On an ongoing basis, the Trustees, pursuant to their
fiduciary duties under the 1940 Act and state laws, will seek to ensure that no
such conflict arises.
Front-End Sales Charge Alternative--Class A Shares
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The public offering price of Class A shares for purchasers choosing the
front-end sales charge alternative is the net asset value plus a sales charge as
set forth in the Prospectus for each Fund.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are not subject to any sales charges.
The Fund receives the entire net asset value of its Class A shares sold to
investors. The Distributor's commission is the sales charge set forth in the
Prospectus for each Fund, less any applicable discount or commission "reallowed"
to selected dealers and agents. The Distributor will reallow discounts to
selected dealers and agents in the amounts indicated in the table in the
Prospectus. In this regard, the Distributor may elect to reallow the entire
sales charge to selected dealers and agents for all sales with respect to which
orders are placed with the Distributor.
Set forth below is an example of the method of computing the offering
price of the Class A shares of each Fund. The example assumes a purchase of
Class A shares of a Fund aggregating less than $100,000 subject to the schedule
of sales charges set forth in the Prospectus at a price based upon the net asset
value of Class A shares of each Fund at the end of each Fund's latest fiscal
year.
Net Per Share Offering
Asset Sales Price
Value Charge Date Per Share
Balanced $12.95 $0.65 12/31/96 $13.60
Growth and Income $22.53 $1.12 12/31/96 $23.65
Income and Growth $21.79 $1.09 1/31/97 $22.88
American Retirement $13.86 $0.69 12/31/96 $14.55
Small Cap $13.10 $0.65 12/31/96 $13.75
Foundation $16.13 $0.80 12/31/96 $16.93
Tax Strategic $13.50 $0.67 12/31/96 $14.17
Utility $10.57 $0.53 12/31/96 $11.10
Value $20.57 $1.03 12/31/96 $21.60
Total Return $17.33 $1.06 11/30/96 $18.39
Prior to January 3, 1995, shares of Growth and Income, Income and
Growth, American Retirement, Small Cap, Foundation and Tax Strategic were
offered exclusively on a no-load basis and, accordingly, no underwriting
commissions were paid in respect of sales of shares of these Funds or retained
by the Distributor. In addition, since Class B and Class C shares were not
offered by Growth and Income, Income and Growth, American Retirement, Small Cap,
Foundation or Tax Strategic prior to January 3, 1995, contingent deferred sales
charges have been paid to the distributor with respect to Class B or Class C
shares only since January 3, 1995.
With respect to Balanced, Utility and Value, the following commissions
were paid to and amounts were retained by Federated Securities Corp. through
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July 7, 1995, which until such date was the principal underwriter of portfolios
of Evergreen Investment Trust. For the period from July 8 through December 31,
1995, commissions were paid to and amounts were retained by the current
Distributor as noted below:
Year Ended Year Ended Period Ended
Year Ended
12/31/96 7/8/95 to 1/1/95 to 7/7/95
12/31/95
BALANCED
Commissions Received $77,026 $15,844 $11,841
Commissions Retained $ 9,150 $ 1,731 $ 1,303
VALUE
Commissions Received $522,573 $58,797 $56,058
Commissions Retained $ 56,609 $ 6,615 $ 6,001
UTILITY
Commissions Received $74,988 $15,692 $20,958
Commissions Retained $ 7,857 $ 1,727 $ 2,228
With respect to Income and Growth, Growth and Income, American
Retirement, Small Cap, Foundation and Tax Strategic, the following commissions
were paid to and amounts were retained by the Distributor for the periods
indicated:
Year Ended Year Ended Period from 1/3/95
INCOME AND GROWTH 1/31/97 1/31/96 to 1/31/95
Commissions Received $187,403 $ 98,890 $4,585
Commissions Retained $ 20,208 $ 10,733 ---
Year Ended Year Ended
GROWTH AND INCOME 12/31/96 12/31/95
Commissions Received $1,473,258 $ 326,249
Commissions Retained $ 158,858 $ 37,300
AMERICAN RETIREMENT
Commissions Received $ 317,718 $ 42,447
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Commissions Retained $ 20,024 $ 7,397
SMALL CAP
Commissions Received $ 3,568 $ 778
Commissions Retained $ 340 $ 284
FOUNDATION
Commissions Received $2,418,388 $1,604,275
Commissions Retained $ 57,736 $ 178,885
TAX STRATEGIC
Commissions Received $ 199,131 $ 28,976
Commissions Retained $ 25,078 $ 3,266
With respect to Total Return, the following commissions were paid to and
amounts were retained by Keystone Investment Distributors Comapany, which prior
to December 1, 1996, was the distributor for Total Return.
Year Ended Year Ended Year Ended
TOTAL RETURN 11/30/96 11/30/95 11/30/94
Commissions Received $355,043 $190,327 $106,144
Commissions Retained ($595,877) ($243,621) ($ 90,031)
Investors choosing the front-end sales charge alternative may under
certain circumstances be entitled to pay reduced sales charges. The
circumstances under which such investors may pay reduced sales charges are
described below.
Combined Purchase Privilege. Certain persons may qualify for the sales
charge reductions by combining purchases of shares of one or more Evergreen
Keystone Funds other than the money market funds into a single "purchase", if
the resulting "purchase" totals at least $100,000. The term "purchase" refers
to:(i) a single purchase by an individual, or to concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an individual,
his or her spouse and their children under the age of 21 years purchasing shares
for his, her or their own account(s); (ii) a single purchase by a trustee or
other fiduciary purchasing shares for a single trust, estate or single fiduciary
account although more than one beneficiary is involved; or (iii) a single
purchase for the employee benefit plans of a single employer. The term
"purchase" also includes purchases by any "company", as the term is defined in
the 1940 Act, but does not include purchases by any such company which has not
been in existence for at least six months or which has no purpose other than the
purchase of shares of a Fund or shares of other registered investment companies
at a discount. The term "purchase" does not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit card holders of a company, policy holders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
A "purchase" may also include shares, purchased at the same time through a
single selected dealer or agent, of any Evergreen Keystone Fund. Currently, the
Evergreen Keystone Funds include:
Evergreen Trust:
Evergreen Fund
Evergreen Aggressive Growth Fund
Evergreen Equity Trust:
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
The Evergreen Limited Market Fund, Inc.
Evergreen Growth and Income Fund
Evergreen Income and Growth Fund
The Evergreen American Retirement Trust:
The Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
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Evergreen Foundation Trust:
Evergreen Foundation Fund
Evergreen Tax Strategic Foundation Fund
Evergreen Municipal Trust:
Evergreen Short-Intermediate Municipal Fund
Evergreen Short-Intermediate Municipal Fund-CA
Evergreen Florida High Income Municipal Bond Fund
Evergreen Tax Exempt Money Market Fund
Evergreen Institutional Tax Exempt Money Market Fund
Evergreen Money Market Trust:
Evergreen Money Market Fund
Evergreen Institutional Money Market Fund
Evergreen Institutional Treasury Money Market Fund
Evergreen Investment Trust:
Evergreen Emerging Markets Growth Fund
Evergreen International Equity Fund
Evergreen Balanced Fund
Evergreen Value Fund
Evergreen Utility Fund
Evergreen Short Intermediate Bond Fund
Evergreen U.S. Government Fund
Evergreen Florida Municipal Bond Fund
Evergreen Georgia Municipal Bond Fund
Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund
Evergreen Virginia Municipal Bond Fund
Evergreen High Grade Tax Free Fund
Evergreen Treasury Money Market Fund
Evergreen Lexicon Fund:
Evergreen Intermediate Term Government Securities Fund
Evergreen Intermediate Term Bond Fund
Evergreen Tax Free Trust:
Evergreen Pennsylvania Tax Free Money Market Fund
Evergreen New Jersey Tax Free Income Fund
Evergreen Variable Trust:
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
Evergreen VA Global Leaders Fund
Evergreen VA Strategic Income Fund
Evergreen VA Aggressive Growth Fund
Keystone America Fund Family:
Keystone Fund for Total Return
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Balanced Fund II
Keystone Capital Preservation and Income Fund
Keystone Small Company Growth Fund II
Keystone Fund of the Americas
Keystone Global Opportunities Fund
Keystone Government Securities Fund
Keystone Intermediate Term Bond Fund
Keystone Omega Fund
Keystone Global Resources and Development Fund
Keystone Strategic Income Fund
Keystone State Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Tax Free Income Fund
Keystone World Bond Fund
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Prospectuses for the Evergreen Keystone Funds may be obtained without
charge by contacting the Distributor or the Advisers at the address or telephone
number shown on the front cover of this Statement of Additional Information.
Cumulative Quantity Discount (Right of Accumulation). An investor's
purchase of additional Class A shares of a Fund may qualify for a Cumulative
Quantity Discount. The applicable sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the
previous day) of (a) all Class A, Class B and Class C shares
of the Fund held by the investor and (b) all such shares of
any other Evergreen Keystone Fund held by the investor; and
(iii) the net asset value of all shares described in paragraph
(ii) owned by another shareholder eligible to combine his or
her purchase with that of the investor into a single
"purchase" (see above).
For example, if an investor owned Class A, B or C shares of an
Evergreen Keystone Fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of a Fund worth an additional
$100,000, the sales charge for the $100,000 purchase, in the case of any
Evergreen Equity or Long-Term Bond Fund, would be at the 2.50% rate applicable
to a single $300,000 purchase of shares of the Fund, rather than the 3.75% rate.
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through a selected dealer or agent,
the investor or selected dealer or agent must provide the Distributor with
sufficient information to verify that each purchase qualifies for the privilege
or discount.
Statement of Intention. Class A investors may also obtain the reduced sales
charges shown in the Prospectus by means of a written Statement of Intention,
which expresses the investor's intention to invest not less than $100,000 within
a period of 13 months in Class A shares (or Class A, Class B and/or Class C
shares) of the Fund or any other Evergreen Keystone Fund. Each purchase of
shares under a Statement of Intention will be made at the public offering price
or prices applicable at the time of such purchase to a single transaction of the
dollar amount indicated in the Statement of Intention. At the investor's option,
a Statement of Intention may include purchases of Class A, Class B or Class C
shares of the Fund or any other Evergreen Keystone Fund made not more than 90
days prior to the date that the investor signs a Statement of Intention;
however, the 13-month period during which the Statement of Intention is in
effect will begin on the date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege described
above may purchase shares of the Evergreen Keystone Funds under a single
Statement of ntention. For example, if at the time an investor signs a Statement
of Intention to invest at least $100,000 in Class A shares of the Fund, the
investor and the investor's spouse each purchase shares of the Fund worth
$20,000 (for a total of $40,000), it will only be necessary to invest a total of
$60,000 during the following 13 months in shares of the Fund or any other
Evergreen Keystone Fund, to qualify for the 3.75% sales charge applicable to
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puchases in any Evergreen Equity or Long-Term Bond Fund on the total amount
being invested (the sales charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Statement of Intention is 5% of such amount. Shares purchased with the
first 5% of such amount will be held in escrow (while remaining registered in
the name of the investor) to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased, and such escrowed shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. Dividends on escrowed shares, whether
paid in cash or reinvested in additional Fund shares, are not subject to escrow.
When the full amount indicated has been purchased, the escrow will be released.
To the extent that an investor purchases more than the dollar amount indicated
on the Statement of Intention and qualifies for a further reduced sales charge,
the sales charge will be adjusted for the entire amount purchased at the end of
the 13-month period. The difference in sales charge will be used to purchase
additional shares of the Fund subject to the rate of sales charge applicable to
the actual amount of the aggregate purchases.
Investors wishing to enter into a Statement of Intention in conjunction
with their initial investment in Class A shares of a Fund should complete the
appropriate portion of the Subscription Application found in the Prospectus
while current Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting a Fund at the address or telephone number
shown on the cover of this Statement of Additional Information.
Investments Through Employee Benefit and Savings Plans. Certain qualified
and non-qualified benefit and savings plans may make shares of the Evergreen
Keystone Funds available to their participants. Investments made by such
employee benefit plans may be exempt from any applicable front-end sales charges
if they meet the criteria set forth in the Prospectus under "Class A
Shares-Front End Sales Charge Alternative". The Advisers may provide
compensation to organizations providing administrative and recordkeeping
services to plans which make shares of the Evergreen Keystone Funds available to
their participants.
Reinstatement Privilege. A Class A shareholder who has caused any or
all of his or her shares of the Fund to be redeemed or repurchased may reinvest
all or any portion of the redemption or repurchase proceeds in Class A shares of
the Fund at net asset value without any sales charge, provided that such
reinvestment is made within 30 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net asset value next
determined as described above. A reinstatement pursuant to this privilege will
not cancel the redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for Federal income tax purposes except that no
loss will be recognized to the extent that the proceeds are reinvested in shares
of the Fund. The reinstatement privilege may be used by the shareholder only
once, irrespective of the number of shares redeemed or repurchased, except that
the privilege may be used without limit in connection with transactions whose
sole purpose is to transfer a shareholder's interest in the Fund to his or her
individual retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written request sent to
the Fund at the address shown on the cover of this Statement of Additional
Information.
Sales at Net Asset Value. In addition to the categories of investors
set forth in the Prospectus, each Fund may sell its Class A shares at net asset
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value, i.e., without any sales charge, to: (i) certain investment advisory
clients of the Advisers or their affiliates; (ii) officers and present or former
Trustees of the Trusts; present or former trustees of other investment companies
managed by the Advisers; officers, directors and present or retired full-time
employees of the Advisers, the Distributor, and their affiliates; officers,
directors and present and full-time employees of selected dealers or agents; or
the spouse, sibling, direct ancestor or direct descendant (collectively
"relatives") of any such person; or any trust, individual retirement account or
retirement plan account for the benefit of any such person or relative; or the
estate of any such person or relative, if such shares are purchased for
investment purposes (such shares may not be resold except to the Fund); (iii)
certain employee benefit plans for employees of the Advisers, the Distributor
and their affiliates; (iv) persons participating in a fee-based program,
sponsored and maintained by a registered broker-dealer and approved by the
Distributor, pursuant to which such persons pay an asset-based fee to such
broker-dealer, or its affiliate or agent, for service in the nature of
investment advisory or administrative services. These provisions are intended to
provide additional job-related incentives to persons who serve the Funds or work
for companies associated with the Funds and selected dealers and agents of the
Funds. Since these persons are in a position to have a basic understanding of
the nature of an investment company as well as a general familiarity with the
Fund, sales to these persons, as compared to sales in the normal channels of
distribution, require substantially less sales effort. Similarly, these
provisions extend the privilege of purchasing shares at net asset value to
certain classes of institutional investors who, because of their investment
sophistication, can be expected to require significantly less than normal sales
effort on the part of the Funds and the Distributor.
Deferred Sales Charge Alternative--Class B Shares
Investors choosing the deferred sales charge alternative purchase Class
B shares at the public offering price equal to the net asset value per share of
the Class B shares on the date of purchase without the imposition of a sales
charge at the time of purchase. The Class B shares are sold without a front-end
sales charge so that the full amount of the investor's purchase payment is
invested in the Fund initially.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used by the Distributor to defray the expenses of the
Distributor related to providing distribution-related services to the Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to selected dealers and agents for selling Class B shares. The
combination of the contingent deferred sales charge and the distribution
Services Plan fee (and, with respect to Balanced, Utility and Value, the
Shareholder Service Plan fee) enables the Fund to sell the Class B shares
without a sales charge being deducted at the time of purchase. The higher
distribution services fee (and, with respect to Balanced, Utility and Value, the
Shareholder Service Plan fee) incurred by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than those related to
Class A shares.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within six years of purchase will be subject to a contingent deferred sales
charge at the rates set forth in the Prospectus charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal to
the lesser of the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be imposed on
increases in net asset value above the initial purchase price. In addition, no
contingent deferred sales charge will be assessed on shares derived from
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reinvestment of dividends or capital gains distributions. The amount of the
contingent deferred sales charge, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares.
In determining the contingent deferred sales charge applicable to a
redemption, it will be assumed that the redemption is first of any Class A
shares or Class C shares in the shareholder's Fund account, second of Class B
shares held for over seven years or Class B shares acquired pursuant to
reinvestment of dividends or distributions and third of Class B shares held
longest during the seven-year period.
To illustrate, assume that an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the second year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional Class B shares upon dividend reinvestment. If at such
time the investor makes his or her first redemption of 50 Class B shares, 10
Class B shares will not be subject to charge because of dividend reinvestment.
With respect to the remaining 40 Class B shares, the charge is applied only to
the original cost of $10 per share and not to the increase in net asset value of
$2 per share. Therefore, of the $600 of the shares redeemed $400 of the
redemption proceeds (40 shares x $10 original purchase price) will be charged at
a rate of 4.0% (the applicable rate in the second year after purchase for a
contingent deferred sales charge of $16).
The contingent deferred sales charge is waived on redemptions of shares
(i) following the death or disability, as defined in the Code, of a shareholder,
or (ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Conversion Feature. At the end of the period ending seven years after the
end of the calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A shares and will
no longer be subject to a higher distribution services fee (and, with respect to
Balanced, Utility and Value, the Shareholder Service Plan fee) imposed on Class
B shares. Such conversion will be on the basis of the relative net asset values
of the two classes, without the imposition of any sales load, fee or other
charge. The purpose of the conversion feature is to reduce the distribution
services fee paid by holders of Class B shares that have been outstanding long
enough for the Distributor to have been compensated for the expenses associated
with the sale of such shares.
For purposes of conversion to Class A, Class B shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the sub-account) convert to Class A, an equal pro-rata portion of
the Class B shares in the sub-account will also convert to Class A.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee (and, with respect to
Balanced, Utility and Value, Shareholder Service Plan fee) and transfer agency
costs with respect to Class B shares does not result in the dividends or
distributions payable with respect to other Classes of a Fund's shares being
deemed "preferential dividends" under the Code, and (ii) the conversion of
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Class B shares to Class A shares does not constitute a taxable event under
Federal income tax law. The conversion of Class B shares to Class A shares may
be suspended if such an opinion is no longer available at the time such
conversion is to occur. In that event, no further conversions of Class B shares
would occur, and shares might continue to be subject to the higher distribution
services fee (and, with respect to Balanced, Utility and Value, the Shareholder
Service Plan fee) for an indefinite period which may extend beyond the period
ending seven years after the end of the calendar month in which the
shareholder's purchase order was accepted.
Level-Load Alternative--Class C Shares
Investors choosing the level load sales charge alternative purchase Class C
shares at the public offering price equal to the net asset value per share of
the Class C shares on the date of purchase without the imposition of a front-end
sales charge. However, you will pay a 1.0% contingent deferred sales charge if
you redeem shares during the first year after purchase. No charge is imposed in
connection with redemptions made more than one year from the date of purchase.
Class C shares are sold without a front-end sales charge so that the Fund will
receive the full amount of the investor's purchase payment and after the first
year without a contingent deferred sales charge so that the investor will
receive as proceeds upon redemption the entire net asset value of his or her
Class C shares. The Class C distribution services fee (and, with respect to
Balanced, Utility and Value, Shareholder Service Plan fee) enables the Fund to
sell Class C of shares without either a front-end or contingent deferred sales
charge. However, unlike Class B shares, Class C shares do not convert to any
other Class shares of the Fund. Class C shares incur higher distribution
services fees (and, with respect to Balanced, Utility and Value, Shareholder
Service Plan fee) than Class A shares, and will thus have a higher expense ratio
and pay correspondingly lower dividends than Class A shares.
Class Y Shares
Class Y shares are not offered to the general public and are available
only to (i) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (ii) certain investment advisory clients
of the Advisers and their affiliates, and (iii) institutional investors. Class Y
shares do not bear any Rule 12b-1 distribution expenses and are not subject to
any front-end or contingent deferred sales charges.
GENERAL INFORMATION ABOUT THE FUNDS (See also "Other
Information - General Information"
in each Fund's Prospectus)
Capitalization and Organization
Each of the Evergreen Growth and Income Fund and Evergreen Income and
Growth Fund is a Massachusetts business trust. Evergreen American Retirement
Fund and Evergreen Small Cap Equity Income Fund are each separate series of The
Evergreen American Retirement Trust, a Massachusetts business trust. The
Evergreen Foundation Fund and Evergreen Tax Strategic Foundation Fund are each
separate series of the Evergreen Foundation Trust, a Massachusetts business
trust. The Evergreen Balanced Fund, Evergreen Utility Fund and Evergreen Value
Fund, which prior to July 7, 1995 were known as the First Union Balanced
Portfolio, First Union Utility Portfolio and First Union Value Portfolio,
respectively, are each separate series of Evergreen Investment Trust, a
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Massachusetts business trust. Keystone Fund for Total Return (formerly Keystone
America Fund for Total Return) is a Massachusetts business trust. On July 7,
1995, First Union Funds changed its name to Evergreen Investment Trust. The
above-named Trusts are individually referred to in this Statement of Additional
Information as the "Trust" and collectively as the "Trusts." Each Trust is
governed by a board of trustees. Unless otherwise stated, references to the
"Board of Trustees" or "Trustees" in this Statement of Additional Information
refer to the Trustees of all the Trusts.
Income and Growth and Growth and Income may issue an unlimited number
of shares of beneficial interest with a $0.001 par value. American Retirement,
Small Cap, Foundation, Tax Strategic, Balanced, Value and Utility may issue an
unlimited number of shares of beneficial interest with a $0.0001 par value.
Total Return may issue an unlimited number of shares of beneficial interest with
a no par value. All shares of these Funds have equal rights and privileges.
Each share is entitled to one vote, to participate equally in dividends and
distributions declared by the Funds and on liquidation to their proportionate
share of the assets remaining after satisfaction of outstanding liabilities.
Shares of these Funds are fully paid, nonassessable and fully transferable when
issued and have no pre-emptive, conversion or exchange rights. Fractional shares
have proportionally the same rights, including voting rights, as are provided
for a full share.
Under each Trust's Declaration of Trust, each Trustee will continue in
office until the termination of the Trust or his or her earlier death,
incapacity, resignation or removal. Shareholders can remove a Trustee upon a
vote of two-thirds of the outstanding shares of beneficial interest of the
Trust. Vacancies will be filled by a majority of the remaining Trustees, subject
to the 1940 Act. As a result, normally no annual or regular meetings of
shareholders will be held, unless otherwise required by the Declaration of Trust
of each Trust or the 1940 Act.
Shares have noncumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of Trustees can elect
100% of the Trustees if they choose to do so and in such event the holders of
the remaining shares so voting will not be able to elect any Trustees.
The Trustees of each Trust are authorized to reclassify and issue any
unissued shares to any number of additional series without shareholder approval.
Accordingly, in the future, for reasons such as the desire to establish one or
more additional portfolios of a Trust with different investment objectives,
policies or restrictions, additional series of shares may be created by one or
more of the Trusts. Any issuance of shares of another series or class would be
governed by the 1940 Act and the law of the Commonwealth of Massachusetts. If
shares of another series of a Trust were issued in connection with the creation
of additional investment portfolios, each share of the newly created portfolio
would normally be entitled to one vote for all purposes. Generally, shares of
all portfolios would vote as a single series on matters, such as the election of
Trustees, that affected all portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of the Investment
Advisory Agreement and changes in investment policy, shares of each portfolio
would vote separately.
In addition any Fund may, in the future, create additional classes of
shares which represent an interest in the same investment portfolio. Except for
the different distribution related and other specific costs borne by such
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additional classes, they will have the same voting and other rights described
for the existing classes of each Fund.
Procedures for calling a shareholders' meeting for the removal of the
Trustees of each Trust, similar to those set forth in Section 16(c) of the 1940
Act will be available to shareholders of each Fund. The rights of the holders of
shares of a series of a Fund may not be modified except by the vote of a
majority of the outstanding shares of such series.
An order has been received from the SEC permitting the issuance and
sale of multiple classes of shares representing interests in each Fund. In the
event a Fund were to issue additional Classes of shares other than those
described herein, no further relief from the SEC would be required.
Distributor
Evergreen Keystone Distributor, Inc. (formerly known as Evergreen Funds
Distributor, Inc. (the "Distributor"), 120 Clove Road, Little Falls, NJ 07424
serves as each Fund's principal underwriter, and as such may solicit orders from
the public to purchase shares of any Fund. The Distributor is not obligated to
sell any specific amount of shares and will purchase shares for resale only
against orders for shares. Under the Distribution Agreement between the Fund and
the Distributor, the Fund has agreed to indemnify the Distributor, in the
absence of its willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended.
Counsel
Sullivan & Worcester LLP, Washington, D.C., serves as counsel to the
Funds.
Independent Auditors
Price Waterhouse LLP has been selected to be the independent auditors
of Income and Growth.
KPMG Peat Marwick LLP has been selected to be the independent auditors of
Growth and Income, American Retirement, Small Cap, Balanced, Utility, Value,
Total Return, Foundation and Tax Strategic.
PERFORMANCE INFORMATION
Total Return
From time to time a Fund may advertise its "total return." Computed
separately for each class, the Fund's "total return" is its average annual
compounded total return for recent one, five, and ten-year periods (or the
period since the Fund's inception). The Fund's total return for such a period is
computed by finding, through the use of a formula prescribed by the SEC the
average annual compounded rate of return over the period that would equate an
assumed initial amount invested to the value of such investment at the end of
the period. For purposes of computing total return, income dividends and capital
gains distributions paid on shares of the Fund are assumed to have been
reinvested when paid and the maximum sales charge applicable to purchases of
Fund shares is assumed to have been paid. The Fund will include performance
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data for Class A, Class B, Class C and Class Y shares in any advertisement or
information including performance data of the Fund.
With respect to Income and Growth, Growth and Income, American
Retirement, Small Cap, Foundation and Tax Strategic, the shares of each Fund
outstanding prior to January 3, 1995 have been reclassified as Class Y shares.
The average annual compounded total return for each Class of shares offered by
the Funds for the most recently completed one, five and ten year fiscal periods
is set forth in the table below.
INCOME AND GROWTH 1 Year 5 Years 10 Years
Ended Ended Ended
1/31/97 1/31/97 1/31/97
Class A 8.4% 9.5% 7.7%
Class B 8.0% 10.0% 8.1%
Class C 11.9% 10.3% 8.1%
Class Y 14.1% 10.7% 8.3%
GROWTH AND INCOME 1 Year 5 Years 10 Years
Ended Ended Ended
12/31/96 12/31/96 12/31/96
Class A 17.6% 15.6% 14.0%
Class B 17.6% 16.2% 14.4%
Class C 21.6% 16.5% 14.4%
Class Y 23.8% 16.9% 14.6%
From
AMERICAN 1 Year 5 Years 3/14/88
RETIREMENT Ended Ended (inception)
12/31/96 12/31/96 to 12/31/96
Class A 7.1% 10.6% 10.2%
Class B 6.5% 11.1% 10.6%
Class C 10.6% 11.4% 10.6%
Class Y 12.6% 11.6% 10.8%
From
SMALL CAP 1 Year 10/1/93
Ended (inception)
12/31/96 to 12/31/96
Class A 16.2% 13.8%
Class B 16.1% 14.3%
Class C 20.1% 15.0%
Class Y 22.4% 15.7%
FOUNDATION 1 Year 5 Years From 1/2/90
Ended Ended (inception)
12/31/96 12/31/96 to 12/31/96
Class A 6.0% 13.5% 15.5%
Class B 5.5% 14.0% 16.0%
Class C 9.4% 14.2% 16.0%
Class Y 11.5% 14.7% 16.3%
TAX STRATEGIC 1 Year From 11/02/93
Ended (inception) to
12/31/96 12/31/96
Class A 9.9% 13.5%
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Class B 9.7% 14.1%
Class C 13.5% 14.8%
Class Y 15.8% 15.5%
BALANCED 1 Year 5 Years
Ended Ended From inception*
12/31/96 12/31/96 to 12/31/96
Class A 6.1% 9.3% 10.4%
Class B 5.7% - 9.6%
Class C 9.3% - 13.1%
Class Y 11.7% 10.7% 11.9%
UTILITY 1 Year From inception**
Ended to 12/31/96
12/31/96
Class A -.6% 7.1%
Class B -1.3% 7.2%
Class C 2.5% 12.4%
Class Y 4.5% 11.2%
VALUE 1 Year 5 Years
Ended Ended From inception***
12/31/96 12/31/96 to 12/31/96
Class A 13.3% 12.4% 13.4%
Class B 13.1% -- 14.1%
Class C 17.1% -- 18.8%
Class Y 19.2% 13.8% 15.7%
1 Year 5 Years
Ended Ended From inception****
11/30/96 11/30/96 to 11/30/96
TOTAL RETURN
Class A 22.4% 13.8% 11.4%
Class B 24.7% __ 13.7%
Class C 28.7% __ 14.3%
Total Return commenced offering Class Y shares effective December 15, 1996.
* Inception date: Class A - June 10, 1991; Class B - January 26, 1993; Class C
- - - September 2, 1994; Class Y - April 1, 1991.
** Inception date: Class A - January 4, 1994; Class B - January 4, 1994; Class
C - - September 2, 1994; Class Y - February 28, 1994.
*** Inception date: Class A - April 12, 1985; Class B - January 25, 1993; Class
C - September 2, 1994; Class Y - December 31, 1990.
****Inception date: Class A-February 13, 1987; Class B and C-February 1, 1993.
The performance numbers for Income and Growth, Growth and Income,
American Retirement, Small Cap, Foundation and Tax Strategic for the Class A,
Class B and Class C shares are hypothetical numbers based on the performance for
Class Y shares as adjusted for any applicable front-end sales charge or
contingent deferred sales charge through January 3, 1995 (commencement of class
operations) and the actual performance of each class subsequent to January 3,
1995. The performance data calculated prior to January 3, 1995, does not reflect
any Rule 12b-1 fees. If such fees were reflected the returns would be lower.
A Fund's total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and quality of the
securities in a Fund's portfolio and its expenses. Total return information is
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useful in reviewing a Fund's performance but such information may not provide a
basis for comparison with bank deposits or other investments which pay a fixed
yield for a stated period of time. An investor's principal invested in a Fund is
not fixed and will fluctuate in response to prevailing market conditions.
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other communications to shareholders. Yield quotations are expressed
in annualized terms and may be quoted on a compounded basis. Yields are computed
by dividing the Fund's interest income (as defined in the SEC yield formula) for
a given 30-day or one month period, net of expenses, by the average number of
shares entitled to receive distributions during the period, dividing this figure
by the Fund's net asset value per share at the end of the period and annualizing
the result (assuming compounding of income) in order to arrive at an annual
percentage rate. The formula for calculating yield is as follows:
YIELD = 2[(a-b/cd)+ 1]
Where a = Interest earned during the period
b = Expenses accrued for the period (net of reimbursements) c = The
average daily number of shares outstanding during the period
that were entitled to receive dividends
d = The maximum offering price per share on the last day of the period
Income is calculated for purposes of yield quotations in accordance
with standardized methods applicable to all stock and bond funds. Gains and
losses generally are excluded from the calculation. Income calculated for
purposes of determining a Fund's yield differs from income as determined for
other accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yields quoted for
a Fund may differ from the rate of distributions a Fund paid over the same
period, or the net investment income reported in a Fund's financial statements.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Funds'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of the Fund's investments, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite can be expected to occur.
The yield of each Fund, except Total Return, for the thirty-day period
ended December 31, 1996
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(January 31, 1997 with respect to Income and Growth) for each
Class of shares offered by the Funds is set forth in the table below:
Income and Growth Tax Strategic
Class A 3.32% Class A 2.28%
Class B 2.76% Class B 1.64%
Class C 2.76% Class C 1.62%
Class Y 3.73% Class Y 2.64%
Growth and Income Balanced
Class A .54% Class A 3.75%
Class B -.17% Class B 3.12%
Class C -.17% Class C 3.15%
Class Y .81% Class Y 4.21%
American Retirement Utility
Class A 3.03% Class A 3.70%
Class B 2.46% Class B 3.13%
Class C 2.44% Class C 3.13%
Class Y 3.43% Class Y 4.14%
Small Cap Value
Class A 2.13% Class A 1.43%
Class B 1.50% Class B .66%
Class C 1.51% Class C .66%
Class Y 2.48% Class Y 1.78%
Foundation
Class A 2.83%
Class B 2.23%
Class C 2.24%
Class Y 3.22%
Non-Standardized Performance
In addition to the performance information described above, a Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
GENERAL
From time to time, a Fund may quote its performance in advertising and
other types of literature as compared to the performance of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average,
Russell 2000 Index, or any other commonly quoted index of common stock prices.
The Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average and the Russell 2000 Index are unmanaged indices of selected common
stock prices. A Fund's performance may also be compared to those of other mutual
funds having similar objectives. This comparative performance would be expressed
as a ranking prepared by Lipper Analytical Services, Inc. or similar independent
services monitoring mutual fund performance. A Fund's performance will be
calculated by assuming, to the extent applicable, reinvestment of all capital
gains distributions and income dividends paid. Any such comparisons may
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be useful to investors who wish to compare a Fund's past performance with that
of its competitors. Of course, past performance cannot be a guarantee of future
results.
Additional Information
Any shareholder inquiries may be directed to the shareholder's broker
or to each Adviser at the address or telephone number shown on the front cover
of this Statement of Additional Information. This Statement of Additional
Information does not contain all the information set forth in the Registration
Statements filed by the Trusts with the SEC under the Securities Act of 1933.
Copies of the Registration Statements may be obtained at a reasonable charge
from the SEC or may be examined, without charge, at the offices of the SEC in
Washington, D.C.
FINANCIAL STATEMENTS
Each Fund's financial statements appearing in their most current fiscal
year Annual Report to shareholders and the report thereon of the independent
auditors appearing therein, namely Price Waterhouse LLP (in the case of Income
and Growth) or KPMG Peat Marwick LLP (in the case of Growth and Income, American
Retirement, Small Cap, Balanced, Utility, Foundation, Tax Strategic, Value, and
Total Return) are incorporated by reference in this Statement of Additional
Information. The Annual Reports to Shareholders for each Fund, which contain the
referenced statements, are available upon request and without charge.
APPENDIX "A"
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Service. A Standard & Poor's corporate or
municipal bond rating is a current assessment of the credit worthiness of an
obligor with respect to a specific obligation. This assessment of credit
worthiness may take into consideration obligors such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
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3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or their arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay interest and
repay any principal.
AA - Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest and repay principal is very strong and in the majority
of instances they differ from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
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C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate and municipal issues. The ratings
measure the credit worthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's rating symbols and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
67
<PAGE>
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. NOTE:
Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Phoenix, Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible
risk factors; AA -- high credit quality, with strong protection factors and
modest risk, which may vary very slightly from time to time because of economic
conditions; A--average credit quality with adequate protection factors, but with
greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating categories.
Fitch Investors Service LLP: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high credit quality, with very strong ability to pay interest and repay
principal; A -- high credit quality, considered strong as regards principal and
interest protection, but may be more vulnerable to adverse changes in economic
conditions and circumstances. The indicators "+" and "-" to the AA, A and BBB
categories indicate the relative position of credit within those rating
categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less
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will likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.
o Amortization schedule (the larger the final maturity relative to
other maturities the more likely it will be treated as a note).
o Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.) Note rating
symbols are as follows:
o SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
o SP-2 Satisfactory capacity to pay principal and interest.
o SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for state and
municipal short-term obligations will be designated Moody's Investment Grade
(MIG). This distinction is in recognition of the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the borrower
are uppermost in importance in short-term borrowing, while various factors of
major importance in bond risk are of lesser importance over the short run.
Rating symbols and their meanings follow:
o MIG 1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
o MIG 2 - This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
o MIG 3 - This designation denotes favorable quality. All security
elements are accounted for but this is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
o MIG 4 - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.: Commercial paper rated "Prime" carries
the smallest degree of investment risk. The modifiers 1, 2, and 3 are used to
denote relative strength within this highest classification.
Standard & Poor's Ratings Service: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
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Phoenix, Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service LLP: F-1+ -- denotes exceptionally strong
credit quality given to issues regarded as having strongest degree of assurance
for timely payment; F-1 -- very strong, with only slightly less degree of
assurance for timely payment than F-1+; F-2 -- good credit quality, carrying a
satisfactory degree of assurance for timely payment.
<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
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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.
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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.
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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.
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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
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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
- --------------------------------------------------------------------------------
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
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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.(5)
(B) Form of Dealer Agreement for Class A, B and C shares used by
Evergreen Keystone Distributor, Inc.(5)
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 shares being issued.(5)
12 Tax opinion and consent of Sullivan & Worcester LLP.(3)
13 Not applicable.
14 Consent of KPMG Peat Marwick LLP.(3)
15 Not applicable.
16 Powers of Attorney.(5)(See signature page included therein.)
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) Incorporated by reference to the Registrant's Registration Statement
(No. 333-25055) on Form N-14 dated April 11, 1997.
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 16th day of May, 1997.
EVERGREEN FOUNDATION TRUST
By: /s/ John J. Pileggi
______________________
Name: John J. Pileggi
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities indicated as of the 16th
day of May, 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
*By: /s/ Terrence J. Cullen
_______________________
Terrence J. Cullen**
Attorney-in-fact
**Terrence J. Cullen, by signing his name hereto, does hereby sign this document
on behalf of each of the above-named individuals pursuant to powers of attorney
duly executed by such persons filed as part of the signature page to the
Registration Statement on Form N-14 of the Registrant on April 11, 1997.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO. Page
12 Tax Opinion and Consent of Sullivan & Worcester LLP
14 Consent of KPMG Peat Marwick LLP
17(a) Form of Proxy
- -------------------
May 16, 1997
The Evergreen Foundation Fund
2500 Westchester Avenue
Purchase, New York 10577
Keystone Balanced Fund II
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of Keystone Balanced Fund II
Ladies and Gentlemen:
You have asked for our opinion as to certain tax consequences of the
proposed acquisition of assets of Keystone Balanced Fund II ("Selling Fund"), a
Massachusetts business trust, by The Evergreen Foundation Fund ("Acquiring
Fund"), a portfolio of Evergreen Foundation Trust, a Massachusetts business
trust, in exchange for voting shares of Acquiring Fund (the "Reorganization").
In rendering our opinion, we have reviewed and relied upon the form of
Agreement and Plan of Reorganization (the "Reorganization Agreement") between
The Evergreen Foundation Trust on behalf of Acquiring Fund and Selling Fund
which is enclosed with the related Prospectus/Proxy Statement dated May 16,
1997. We have relied, without independent verification, upon the factual
statements made therein, and assume that there will be no change in material
facts disclosed therein between the date of this letter and the date of closing
of the Reorganization. We further assume that the Reorganization will be carried
out in accordance with the Reorganization Agreement. We have also relied upon
the following representations, each of which has been made to us by officers of
Evergreen Foundation Trust on behalf of Acquiring Fund or of Selling Fund:
<PAGE>
The Evergreen Foundation Fund
Keystone Balanced Fund II
May 16, 1997
Page 2
A. The Reorganization will be consummated substantially as described in
the Reorganization Agreement.
B. Acquiring Fund will acquire from Selling Fund at least 90% of the
fair market value of the net assets and at least 70% of the fair market value of
the gross assets held by Selling Fund immediately prior to the Reorganization.
For purposes of this representation, assets of Selling Fund used to pay
reorganization expenses, cash retained to pay liabilities, and redemptions and
distributions (except for regular and normal distributions) made by Selling Fund
immediately preceding the transfer which are part of the plan of reorganization,
will be considered as assets held by Selling Fund immediately prior to the
transfer.
C. To the best of the knowledge of management of Selling Fund, there is
no plan or intention on the part of the shareholders of Selling Fund to sell,
exchange, or otherwise dispose of a number of Acquiring Fund shares received in
the Reorganization that would reduce the former Selling Fund shareholders'
ownership of Acquiring Fund shares to a number of shares having a value, as of
the date of the Reorganization (the "Closing Date"), of less than 50 percent of
the value of all of the formerly outstanding shares of Selling Fund as of the
same date. For purposes of this representation, Selling Fund shares exchanged
for cash or other property will be treated as outstanding Selling Fund shares on
the Closing Date. There are no dissenters' rights in the Reorganization, and no
cash will be exchanged for Selling Fund shares in lieu of fractional shares of
Acquiring Fund. Moreover, shares of Selling Fund and shares of Acquiring Fund
held by Selling Fund shareholders and otherwise sold, redeemed, or disposed of
prior or subsequent to the Reorganization will be considered in making this
representation.
D. Selling Fund has not redeemed and will not redeem the shares of any
of its shareholders in connection with the Reorganization except to the extent
necessary to comply with its legal obligation to redeem its shares.
<PAGE>
The Evergreen Foundation Fund
Keystone Balanced Fund II
May 16, 1997
Page 3
E. The management of Acquiring Fund has no plan or intention to redeem
or reacquire any of the Acquiring Fund shares to be received by Selling Fund
shareholders in connection with the Reorganization, except to the extent
necessary to comply with its legal obligation to redeem its shares.
F. The management of Acquiring Fund has no plan or intention to sell or
dispose of any of the assets of Selling Fund which will be acquired by Acquiring
Fund in the Reorganization, except for dispositions made in the ordinary course
of business, and to the extent necessary to enable Acquiring Fund to comply with
its legal obligation to redeem its shares.
G. Following the Reorganization, Acquiring Fund will continue the
historic business of Selling Fund in a substantially unchanged manner as part of
the regulated investment company business of Acquiring Fund, or will use a
significant portion of Selling Fund's historic business assets in a business.
H. There is no intercorporate indebtedness between Acquiring Fund and
Selling Fund.
I. Acquiring Fund does not own, directly or indirectly, and has not
owned in the last five years, directly or indirectly, any shares of Selling
Fund. Acquiring Fund will not acquire any shares of Selling Fund prior to the
Closing Date.
J. Acquiring Fund will not make any payment of cash or of property
other than shares to Selling Fund or to any shareholder of Selling Fund in
connection with the Reorganization.
K. Pursuant to the Reorganization Agreement, the shareholders of
Selling Fund will receive solely Acquiring Fund voting shares in exchange for
their voting shares of Selling Fund.
L. The fair market value of the Acquiring Fund shares to be received by
the Selling Fund shareholders will be approximately equal to the fair market
value of the Selling Fund shares surrendered in exchange therefor.
<PAGE>
The Evergreen Foundation Fund
Keystone Balanced Fund II
May 16, 1997
Page 4
M. Subsequent to the transfer of Selling Fund's assets to Acquiring
Fund pursuant to the Reorganization Agreement, Selling Fund will distribute the
shares of Acquiring Fund, together with other assets it may have, in final
liquidation as expeditiously as possible.
N. Selling Fund is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of ss. 368(a)(3)(A) of the Internal Revenue
Code of 1986, as amended (the "Code").
O. Selling Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
P. Acquiring Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
Q. The sum of the liabilities of Selling Fund to be assumed by
Acquiring Fund and the expenses of the Reorganization does not exceed twenty
percent of the fair market value of the assets of Selling Fund.
<PAGE>
The Evergreen Foundation Fund
Keystone Balanced Fund II
May 16, 1997
Page 5
R. The foregoing representations are true on the date of this letter
and will be true on the date of closing of the Reorganization.
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, it is our opinion that for federal
income tax purposes:
1. The acquisition by Acquiring Fund of all of the assets of Selling
Fund solely in exchange for voting shares of Acquiring Fund and assumption of
certain identified liabilities of Selling Fund followed by the distribution by
Selling Fund of said Acquiring Fund shares to the shareholders of Selling Fund
in exchange for their Selling Fund shares will constitute a reorganization
within the meaning of ss. 368(a)(1)(C) of the Code, and Acquiring Fund and
Selling Fund will each be "a party to a reorganization" within the meaning of
ss. 368(b) of the Code.
2. No gain or loss will be recognized to Selling Fund upon the transfer
of all of its assets to Acquiring Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of certain identified liabilities
of Selling Fund, or upon the distribution of such Acquiring Fund voting shares
to the shareholders of Selling Fund in exchange for all of their Selling Fund
shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Selling Fund (including any cash retained initially by
Selling Fund to pay liabilities but later transferred) solely in exchange for
Acquiring Fund voting shares and assumption by Acquiring Fund of certain
identified liabilities of Selling Fund.
4. The basis of the assets of Selling Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Selling Fund
immediately prior to the transfer, and the holding period of the assets of
Selling Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Selling Fund.
5. The shareholders of Selling Fund will recognize no gain or loss upon
the exchange of all of their Selling Fund shares solely for Acquiring Fund
voting shares. Gain, if any, will be realized by Selling Fund shareholders who
in exchange for their Selling Fund
<PAGE>
The Evergreen Foundation Fund
Keystone Balanced Fund II
May 16, 1997
Page 6
shares receive other property or money in addition to Acquiring Fund shares, and
will be recognized, but not in excess of the amount of cash and the value of
such other property received. If the exchange has the effect of the distribution
of a dividend, then the amount of gain recognized that is not in excess of the
ratable share of undistributed earnings and profits of Selling Fund will be
treated as a dividend.
6. The basis of the Acquiring Fund voting shares to be received by the
Selling Fund shareholders will be the same as the basis of the Selling Fund
shares surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Selling Fund shareholders will include the period during which
the Selling Fund shares surrendered in exchange therefor were held, provided the
Selling Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in the
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
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
May 16, 1997
<PAGE>
- --------------------------------------------------------------------------------
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
Dorothy E. Bourassa, Terrence J. Cullen, and Martin J. Wolin 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 that the undersigned
is entitled to vote at the special meeting of shareholders of Keystone Balanced
Fund II 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 Keystone Balanced Fund II
in exchange for Shares of Evergreen Foundation Fund, and (ii) assume certain
stated liabilities of Keystone Balanced Fund II, substantially as described in
the accompanying Prospectus/Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE>
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF KEYSTONE BALANCED
FUND II.
THE BOARD OF TRUSTEES OF KEYSTONE BALANCED FUND II 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.
