1933 Act Registration No. 333-41249
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
EVERGREEN FIXED INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP 1025
Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ________ pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on ________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on ________ pursuant to paragraph (a)(2) of Rule 485
Pursuant to Rule 414 under the Securities Act of 1933, by this
amendment to Registration No. 333-41249 on Form N-14 of The Evergreen Lexicon
Fund, a Massachusetts business trust, the Registrant hereby adopts the
Registration Statement of such trust with respect to the Evergreen
Intermediate-Term Government
<PAGE>
Securities Fund series thereof under
the Securities Act of 1933.
<PAGE>
EVERGREEN FIXED INCOME TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary; Comparison
of Investment Objectives and
Policies; Risks
4. Information About the Summary; Reasons for the
Transaction Reorganization; Comparative
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
7. Voting Information
Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of
Evergreen
Intermediate-Term Government
Securities Fund dated
September 3, 1997, as amended
13. Additional Information Statement of Additional
about the Company Being Information of The Virtus
Acquired Funds - The U.S. Government
Securities Fund dated November
30, 1997
14. Financial Statements Financial Statements dated
June 30, 1997 of Evergreen
Intermediate-Term Government
Securities Fund; Financial
Statements of The
U.S. Government
Securities Fund dated
September 30, 1997; Pro Forma
Financial Statements
<PAGE>
Item of Part C of Form N-14 Incorporated by Reference to
Part A Caption - "Comparative
15. Indemnification Information on Shareholders'
Rights - Liability and
Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
THE VIRTUS FUNDS
THE U.S. GOVERNMENT SECURITIES FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January 5, 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of The U.S. Government Securities Fund (the
"Fund"), to inform you of a Special Shareholders' meeting to be held on February
20, 1998. Before that meeting, I would like your vote on the important issues
affecting your Fund as described in the attached Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes two proposals. The first proposal
requests that shareholders consider and act upon an Agreement and Plan of
Reorganization whereby all of the assets of the Fund would be acquired by
Evergreen Intermediate-Term Government Securities Fund in exchange for either
Class A or Class Y shares of Evergreen Intermediate-Term Government Securities
Fund and the assumption by Evergreen Intermediate-Term Government Securities
Fund of certain liabilities of the Fund. You will receive shares of Evergreen
Intermediate-Term Government Securities Fund having an aggregate net asset value
equal to the aggregate net asset value of your Fund shares. Details about
Evergreen Intermediate-Term Government Securities Fund's investment objective,
portfolio management team, performance, etc. are contained in the attached
Prospectus/Proxy Statement. The transaction is a non-taxable event for
shareholders.
The second proposal requests shareholder consideration of an Interim Investment
Advisory Agreement between the Fund and Virtus Capital
Management, Inc.
Information relating to the Interim Investment Advisory Agreement is contained
in the attached Prospectus/Proxy Statement.
The Board of Trustees has approved the proposals and recommends that you vote
FOR these proposals.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposals presented and sign and return your proxy card in the enclosed
postage paid envelope today.
If we do not receive your completed proxy card after several weeks, you may be
contacted by our proxy solicitor, Shareholder Communications Corporation, who
will remind you to vote your shares.
<PAGE>
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
The Virtus Funds
<PAGE>
THE VIRTUS FUNDS
THE U.S. GOVERNMENT SECURITIES FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of The U.S. Government Securities Fund, a series of The Virtus
Funds (the "Fund"), will be held at the offices of the Evergreen Funds, 200
Berkeley Street, 26th Floor, Boston, Massachusetts 02116 on February 20, 1998 at
2:00 p.m. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of November 26, 1997, providing for the acquisition of all
of the assets of the Fund by Evergreen Intermediate-Term Government Securities
Fund, a series of Evergreen Fixed Income Trust, ("Evergreen Government") in
exchange for shares of Evergreen Government and the assumption by Evergreen
Government of certain identified liabilities of the Fund. The Plan also provides
for distribution of such shares of Evergreen Government to shareholders of the
Fund in liquidation and subsequent termination of the Fund. A vote in favor of
the Plan is a vote in favor of the liquidation and dissolution of the Fund.
2. To consider and act upon the Interim Investment Advisory Agreement
between the Fund and Virtus Capital Management, Inc.
3. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of The Virtus Funds on behalf of the Fund have fixed the
close of business on December 26, 1997 as the record date for the determination
of shareholders of the Fund 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
John W. McGonigle
Secretary
January 5, 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it appears
in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual
signing the proxy card(s) should be indicated unless it is reflected
in the form of Registration. For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr. John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JANUARY 5, 1998
Acquisition of Assets of
THE U.S. GOVERNMENT SECURITIES FUND
a series of
The Virtus Funds
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
EVERGREEN INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
a series of
Evergreen Fixed Income Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
The U.S. Government Securities Fund ("Virtus Government") in connection with a
proposed Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Virtus Government for consideration at a Special Meeting of
Shareholders to be held on February 20, 1998 at 2:00 p.m. at the offices of the
Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts, 02116, and any
adjournments thereof (the "Meeting"). The Plan provides for all of the assets of
Virtus Government to be acquired by Evergreen Intermediate-Term Government
Securities Fund ("Evergreen Government") in exchange for shares of Evergreen
Government and the assumption by Evergreen Government of certain identified
liabilities of Virtus Government (hereinafter referred to as the
"Reorganization"). Evergreen Government and Virtus Government are sometimes
hereinafter referred to individually as the "Fund" and collectively as the
"Funds." Following the Reorganization, shares of Evergreen Government will be
distributed to shareholders of Virtus Government in liquidation of Virtus
Government and such Fund will be terminated. Holders of Investment shares of
Virtus Government will receive Class A shares of Evergreen Government and
holders of Trust shares of Virtus Government will receive Class Y shares of
Evergreen Government. Each such class of shares of Evergreen Government has the
same Rule 12b-1 distribution- related fees, if any, as the shares of the class
of Virtus Government held by them prior to the Reorganization. No initial sales
charge will be imposed in connection with Class A shares of Evergreen Government
received by holders of Investment shares of Virtus Government. As a result of
the proposed Reorganization, shareholders of Virtus Government will receive that
number of full and fractional shares of Evergreen Government having an aggregate
net asset value equal to the aggregate net asset value of such shareholder's
shares of Virtus Government. The Reorganization is
<PAGE>
being structured as a tax-free reorganization for federal income tax
purposes.
Evergreen Government is a separate series of Evergreen Fixed Income
Trust, an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The investment objective of
Evergreen Government is to seek to preserve principal value and maintain a high
degree of liquidity while providing current income. The investment objective of
Virtus Government is substantially identical -- to provide current income. Each
Fund invests primarily in U.S. government securities.
Shareholders of Virtus Government are also being asked to approve the
Interim Investment Advisory Agreement with Virtus Capital Management, Inc., a
subsidiary of First Union Corporation ("Virtus") (the "Interim Advisory
Agreement"), with the same terms and fees as the previous advisory agreement
between Virtus Government and Virtus. The Interim Advisory Agreement will be in
effect for the period of time between November 28, 1997, the date on which the
merger of Signet Banking Corporation with and into a wholly-owned subsidiary of
First Union Corporation was consummated, and the date of the Reorganization
(scheduled for on or about February 27, 1998).
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen Government that
shareholders of Virtus Government should know before voting on the
Reorganization. Certain relevant documents listed below, which have been filed
with the Securities and Exchange Commission ("SEC"), are incorporated in whole
or in part by reference. A Statement of Additional Information dated January 5,
1998, relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Evergreen Government dated June 30, 1997
and of Virtus Government dated September 30, 1997, has been filed with the SEC
and is incorporated by reference in its entirety into this Prospectus/Proxy
Statement. A copy of such Statement of Additional Information is available upon
request and without charge by writing to Evergreen Government at 200 Berkeley
Street, Boston, Massachusetts 02116 or by calling toll-free 1-800-343-2898.
The two Prospectuses of Evergreen Government dated September 3, 1997,
as amended, and its Annual Report for the fiscal year ended June 30, 1997 are
incorporated herein by reference in their entirety, insofar as they relate to
Evergreen Government only, and not to any other fund described therein. The
Prospectuses, which pertain (i) to Class A, Class B and Class C shares and (ii)
to Class Y shares, differ only insofar as they describe the separate
distribution and shareholder servicing arrangements applicable to the classes.
Shareholders of Virtus Government will receive, with this Prospectus/Proxy
Statement, copies of the Prospectus pertaining to the class of shares of
Evergreen Government that they will receive as a result of the consummation of
the Reorganization. Additional information about Evergreen Government is
contained in
<PAGE>
its Statement of Additional Information of the same date which has been filed
with the SEC and which is available upon request and without charge by writing
to or calling Evergreen Government at the address or telephone number listed in
the preceding paragraph.
The two Prospectuses of Virtus Government (which pertain (i) to Trust
shares and (ii) to Investment shares) dated November 30, 1997, insofar as they
relate to Virtus Government only, and not to any other funds described therein,
are incorporated herein in their entirety by reference. Copies of the
Prospectuses and related Statements of Additional Information dated the same
date, are available upon request without charge by writing to Virtus Government
at the address listed on the cover page of this Prospectus/Proxy Statement or by
calling toll-free 1-800-829-3863.
Included as Exhibits A and B to this Prospectus/Proxy Statement are a
copy of the Plan and the Interim Advisory Agreement, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk, including
possible loss of
capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES.............................................6
SUMMARY ..................................................................10
Proposed Plan of Reorganization ....10
Tax Consequences ....12
Investment Objectives and Policies of the Funds ....12
Comparative Performance Information for each Fund ....13
Management of the Funds ....14
Investment Advisers ....14
Administrators ....15
Portfolio Management ....15
Distribution of Shares ....15
Purchase and Redemption Procedures ....17
Exchange Privileges ....18
Dividend Policy ....18
Risks ....19
REASONS FOR THE REORGANIZATION.............................................21
Agreement and Plan of Reorganization ....23
Federal Income Tax Consequences ....25
Pro-forma Capitalization ....27
Shareholder Information ....29
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES...........................29
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS............................31
Forms of Organization ....31
Capitalization ....31
Shareholder Liability ....32
Shareholder Meetings and Voting Rights ....33
Liquidation or Dissolution ....
33
Liability and Indemnification of Trustees ....34
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT.......................35
Introduction ....35
Comparison of the Interim Advisory Agreement
and the
Previous Advisory Agreement................................................36
Information About Virtus Government's Investment
Adviser . 37
ADDITIONAL INFORMATION.....................................................38
VOTING INFORMATION CONCERNING THE MEETING..................................39
FINANCIAL STATEMENTS AND EXPERTS...........................................41
<PAGE>
LEGAL MATTERS..............................................................42
OTHER BUSINESS.............................................................42
APPENDIX A.................................................................43
EXHIBIT A
EXHIBIT B
EXHIBIT C
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class Y and Class A shares of Evergreen Government set
forth in the following tables and in the examples are based on the expenses of
Evergreen Government for the period ended June 30, 1997. The amounts for Trust
and Investment shares of Virtus Government set forth in the following tables and
in the examples are based on the expenses for Virtus Government for the fiscal
year ended September 30, 1997. The pro forma amounts for Class Y and Class A
shares of Evergreen Government are based on what the combined expenses would
have been for Evergreen Government for the fiscal year ending June 30, 1997. All
amounts are adjusted for voluntary expense waivers.
The following tables show for Evergreen Government, Virtus Government
and Evergreen Government pro forma, assuming consummation of the Reorganization,
the shareholder transaction expenses and annual fund operating expenses
associated with an investment in the Class Y, Class A, Trust and Investment
shares of each Fund, as applicable.
<PAGE>
<TABLE>
<CAPTION>
Comparison of Class Y and Class A Shares
of Evergreen Government With Trust and
Investment Shares of Virtus Government
Evergreen Virtus Government
Government
Class Y Class A Trust Investment
<S> <C> <C> <C> <C>
Shareholder Transaction
Expenses
Maximum Sales Load None 3.25% None None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Sales Load None None None None
Imposed on Reinvested
Dividends (as a
percentage of offering
price)
Contingent Deferred None None None 2.00%
Sales Charge (as a within five
percentage of original years of
purchase price or purchase
redemption proceeds, date and
whichever is lower) 0.00%
thereafter
Exchange Fee None None None None
Annual Fund Operating
Expenses (as a
percentage of average
daily net assets)
Management Fee (1) 0.60% 0.60% 0.73% 0.73%
12b-1 Fees (2) None 0.05% None 0.25%
Other Expenses 0.21% 0.21% 0.27% 0.27%
----- ----- ----- -----
Annual Fund Operating 0.81% 0.86% 1.00% 1.25%
===== ===== ===== =====
Expenses
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Evergreen Government Pro Forma
Shareholder Transaction Expenses
Class Y Class A
<S> <C> <C>
Maximum Sales Load Imposed on None 3.25%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on None None
Reinvested Dividends (as a
percentage of offering price)
Contingent Deferred Sales Charge None None
(as a percentage of original
purchase price or redemption
proceeds, whichever is lower)
Exchange Fee None None
Annual Fund Operating Expenses (as
a percentage of average daily net
assets)
Management Fee 0.60% 0.60%
12b-1 Fees(2) None 0.05%
Other Expenses 0.21% 0.21%
--------- ----------
Annual Fund Operating Expenses
0.81% 0.86%
====== =======
</TABLE>
- ---------------
(1) The management fee for Virtus Government has been reduced from 0.75% to
reflect the voluntary waiver by the investment adviser.
(2) Class A shares of Evergreen Government can pay up to 0.50% of average
daily net assets as a 12b-1 fee. For the foreseeable future, the Class
A 12b-1 fees will be limited to 0.05% of average daily net assets.
Examples. The following tables show for Evergreen Government and Virtus
Government, and for Evergreen Government 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 Investment shares, no redemption at the end of each period. In the case of
Evergreen Government pro forma, the examples do not reflect the imposition of
the 3.25% maximum sales load on purchases since Virtus Government shareholders
who receive Class A shares of Evergreen Government in the Reorganization or who
<PAGE>
purchase additional Class A shares subsequent to the Reorganization will not
incur any sales load.
<TABLE>
<CAPTION>
Evergreen Government
One Year Three Five Ten Years
Years Years
<S> <C> <C> <C> <C>
Class Y $8 $26 $45 $100
Class A $41 $59 $79 $135
</TABLE>
<TABLE>
<CAPTION>
Virtus Government
Three Five
One Year Years Years Ten Years
<S> <C> <C> <C> <C>
Trust $10 $32 $55 $122
Investment $33 $60 $69 $151
(Assuming
redemption at end
of period)
Investment $13 $40 $69 $151
(Assuming no
redemption at end
of period)
</TABLE>
<TABLE>
<CAPTION>
Evergreen Government Pro Forma
Three Five
One Year Years Years Ten Years
<S> <C> <C> <C> <C>
Class Y $8 $26 $45 $100
Class A $9 $27 $48 $106
</TABLE>
The purpose of the foregoing examples is to assist Virtus Government
shareholders in understanding the various costs and expenses that an investor in
Evergreen Government 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 Virtus Government. These examples should not be
considered a representation of past or future expenses or annual return. Actual
expenses may be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement,
and, to the extent not inconsistent with such additional
<PAGE>
information, the Prospectuses of Evergreen Government dated September 3, 1997,
as amended, and the Prospectuses of Virtus Government dated November 30, 1997,
(which are incorporated herein by reference), the Plan and the Interim Advisory
Agreement, the forms of which are attached to this Prospectus/Proxy Statement as
Exhibits A and B, respectively.
Proposed Plan of Reorganization
The Plan provides for the transfer of all of the assets of Virtus
Government in exchange for shares of Evergreen Government and the assumption by
Evergreen Government of certain identified liabilities of Virtus Government. The
identified liabilities consist only of those liabilities reflected on the Fund's
statement of assets and liabilities determined immediately preceding the
Reorganization. The Plan also calls for the distribution of shares of Evergreen
Government to Virtus Government shareholders in liquidation of Virtus Government
as part of the Reorganization. As a result of the Reorganization, the holders of
Investment and Trust shares of Virtus Government will become the owners of that
number of full and fractional Class A and Class Y shares, respectively, of
Evergreen Government having an aggregate net asset value equal to the aggregate
net asset value of the shareholders' shares of Virtus Government, as of the
close of business immediately prior to the date that Virtus Government's assets
are exchanged for shares of Evergreen Government. See "Reasons for the
Reorganization - Agreement and Plan of Reorganization."
The Trustees of The Virtus Funds, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of Virtus Government, and that the interests of the
shareholders of Virtus Government 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 Virtus Government's shareholders.
THE BOARD OF TRUSTEES OF THE VIRTUS FUNDS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF VIRTUS GOVERNMENT
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Fixed Income Trust have also approved the
Plan and, accordingly, Evergreen Government's participation in the
Reorganization.
Approval of the Reorganization on the part of Virtus Government will
require the affirmative vote of a majority of Virtus Government's shares voted
and entitled to vote, with all classes voting together as a single class at a
Meeting at which a quorum of the Fund's shares is present. A majority of the
outstanding shares entitled to vote, represented in person or by proxy, is
required to constitute a quorum at the Meeting. See "Voting Information
Concerning the Meeting."
<PAGE>
The merger (the "Merger") of Signet Banking Corporation ("Signet") with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
has been consummated and, as a result, by law the Merger terminated the
investment advisory agreement between Virtus and Virtus Government. Prior to
consummation of the Merger, Virtus Government received an order from the SEC
which permitted the implementation, without formal shareholder approval, of a
new investment advisory agreement between the Fund and Virtus for a period of
not more than 120 days beginning on the date of the closing of the Merger and
continuing through the date the Interim Advisory Agreement is approved by the
Fund's shareholders (but in no event later than April 30, 1998). The Interim
Advisory Agreement has the same terms and fees as the previous investment
advisory agreement between Virtus Government and Virtus. The Reorganization is
scheduled to take place on or about February 27, 1998.
Approval of the Interim Advisory Agreement requires the affirmative
vote of (i) 67% or more of the shares of Virtus Government present in person or
by proxy at the Meeting, if holders of more than 50% of the shares of Virtus
Government outstanding on the record date are present, in person or by proxy, or
(ii) more than 50% of the outstanding shares of Virtus Government, whichever is
less. See "Voting Information Concerning the Meeting."
If the shareholders of Virtus Government do not vote to approve the
Reorganization, the Trustees will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Virtus Government
will have received an opinion of Sullivan & Worcester LLP that the
Reorganization has been structured so that no gain or loss will be recognized by
the Fund or its shareholders for federal income tax purposes as a result of the
receipt of shares of Evergreen Government in the Reorganization. The holding
period and aggregate tax basis of shares of Evergreen Government that are
received by Virtus Government's shareholders will be the same as the holding
period and aggregate tax basis of shares of the Fund previously held by such
shareholders, provided that shares of the Fund are held as capital assets. In
addition, the holding period and tax basis of the assets of Virtus Government in
the hands of Evergreen Government as a result of the Reorganization will be the
same as in the hands of the Fund immediately prior to the Reorganization, and no
gain or loss will be recognized by Evergreen Government upon the receipt of the
assets of the Fund in exchange for shares of Evergreen Government and the
assumption by Evergreen Government of certain identified liabilities.
<PAGE>
Investment Objectives and Policies of the Funds
The investment objectives and policies of Evergreen Government and
Virtus Government are substantially identical.
The investment objective of Evergreen Government is to preserve
principal value and maintain a high degree of liquidity while providing current
income. The Fund invests exclusively in U.S. Treasury obligations, obligations
issued or guaranteed as to principal and interest by agencies and
instrumentalities of the U.S. government, receipts evidencing separately traded
principal and interest components of U.S. government obligations, obligations of
supranational entities and repurchase agreements involving any such obligations.
No more than 35% of the Fund's assets may be invested in receipts, obligations
of supranational entities and repurchase agreements involving such securities.
The investment objective of Virtus Government is to provide current income.
The Fund pursues its investment objective by investing primarily in securities
which are primary or direct obligations of the U.S. government, its agencies, or
instrumentalities or which are guaranteed by the U.S. government, its agencies,
or instrumentalities. See "Comparison of Investment Objectives and Policies"
below.
Comparative Performance Information for each Fund
Discussions of the manner of calculation of total return are contained
in the respective Prospectuses and Statements of Additional Information of the
Funds. The following tables set forth the total return of the Class Y and Class
A shares of Evergreen Government and of the Trust and Investment shares of
Virtus Government for the one and five year periods ended September 30, 1997 and
for the period from inception through September 30, 1997. 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.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return (1)
1 Year From
Ended 5 Years Inception
September Ended To
30, September September Inception
1997 30, 1997 30, 1997 Date
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Evergreen
Government
Class A 3.38% N/A 4.93% 5/2/95
shares
Class Y 6.96% 5.01% 5.99% 1/3/91
shares
Virtus
Government
Trust 7.16% 4.93% 7.27% 10/16/90
shares
Investment 4.75% 4.70% 7.10% 10/16/90
shares
</TABLE>
- --------------
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the average
annual total returns during the periods would have been lower.
Important information about Evergreen Government is also contained in
management's discussion of Evergreen Government's performance, attached hereto
as Exhibit C. This information also appears in Evergreen Government's most
recent Annual Report.
Management of the Funds
The overall management of Evergreen Government and of Virtus Government
is the responsibility of, and is supervised by, the Board of Trustees of
Evergreen Fixed Income Trust and The Virtus Funds, respectively.
Investment Advisers
The investment adviser to Evergreen Government is the Capital
Management Group of First Union National Bank ("FUNB"). FUNB is a subsidiary of
First Union, the sixth largest bank holding company in the United States based
on total assets as of September 30, 1997. The Capital Management Group of FUNB
and its affiliates manage the Evergreen family of mutual funds with assets of
approximately $40 billion as of November 30, 1997. For further information
regarding FUNB and First Union, see "Management of the
<PAGE>
Funds - Investment Advisers" in the Prospectuses of Evergreen
Government.
FUNB manages investments and supervises the daily business affairs of
Evergreen Government subject to the authority of the Trustees. FUNB is entitled
to receive from the Fund an annual fee equal to 0.60% of the Fund's average
daily net assets.
Virtus serves as the investment adviser for Virtus Government. As
investment adviser, Virtus continuously conducts investment research and
supervision on behalf of the Fund and is responsible for the purchase and sale
of portfolio securities. For its services as investment adviser, Virtus receives
a fee at an annual rate of 0.75% of the Fund's average daily net assets.
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Administrators
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
Evergreen Government. As administrator, EIS provides facilities, equipment and
personnel to Evergreen Government and is entitled to receive an administration
fee from the Fund based on the aggregate average daily net assets of all the
mutual funds advised by FUNB and its affiliates, calculated in accordance with
the following schedule: 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 and 0.010% on assets in excess of $30 billion.
Federated Administrative Services ("FAS") provides Virtus Government
with certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to receive a fee for such services at the
following annual rates: 0.15% on the first $250 million of average daily net
assets of the combined assets of the funds in the Blanchard/Virtus mutual fund
family, 0.125% on the next $250 million of such assets, 0.10% on the next $250
million of such assets, and 0.075% on assets in excess of $750 million.
Portfolio Management
Robert Cheshire has been portfolio manager of Evergreen Government
since its inception in 1991. Mr. Cheshire is a Vice President of FUNB and was
formerly a Vice President in the Institutional Asset Management Group of First
Fidelity, N.A.
Distribution of Shares
<PAGE>
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of Evergreen Government's shares. EDI distributes
the Fund's shares directly or through broker-dealers, banks (including FUNB), or
other financial intermediaries. Evergreen Government offers four classes of
shares: Class A, Class B, Class C and Class Y. Each class has separate
distribution arrangements. (See "Distribution- Related Expenses" below.) No
class bears the distribution expenses relating to the shares of any other class.
In the proposed Reorganization, shareholders of Virtus Government who
own Trust shares will receive Class Y shares of Evergreen Government, and
shareholders of Virtus Government who own Investment shares will receive Class A
shares of Evergreen Government. The Class Y and Class A shares of Evergreen
Government have substantially similar arrangements with respect to the
imposition of Rule 12b-1 distribution and service fees as the Trust and
Investment shares of Virtus Government. Because the Reorganization will be
effected at net asset value without the imposition of a sales charge, Evergreen
Government shares acquired by shareholders of Virtus Government pursuant to the
proposed Reorganization would not be subject to any initial sales charge or
contingent deferred sales charge ("CDSC") as a result of the Reorganization.
The following is a summary description of charges and fees for the
Class Y and Class A shares of Evergreen Government which will be received by
Virtus Government shareholders in the Reorganization. More detailed descriptions
of the distribution arrangements applicable to the classes of shares are
contained in the respective Evergreen Government Prospectuses and the Virtus
Government Prospectuses and in each Fund's respective Statements of Additional
Information.
Class Y Shares. Class Y shares are sold at net asset value without any
initial or deferred sales charge and are not subject to distribution-related
fees. Class Y shares are only available to (i) all shareholders of record in one
or more of the Evergreen family of funds for which Evergreen Asset Management
Corp. ("Evergreen Asset") serves as investment adviser as of December 30, 1994,
(ii) certain institutional investors and (iii) investment advisory clients of
FUNB, Evergreen Asset or their affiliates. Virtus Government shareholders who
receive Evergreen Government Class Y shares in the Reorganization who wish to
make subsequent purchases of Evergreen Government shares will be able to
purchase Class Y shares.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees. For a description of the initial sales charges
applicable to purchases of Class A shares, see "Purchase and Redemption of
Shares - How to Buy Shares" in the applicable Prospectus for Evergreen
Government. Holders of Investment shares of Virtus Government who receive Class
A shares of Evergreen Government in the Reorganization will be able to purchase
<PAGE>
additional Class A shares of Evergreen Government and of any other Evergreen
fund at net asset value. No initial sales charge will be imposed.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectuses and Statements of Additional
Information.
Distribution-Related Expenses. Evergreen Government has adopted a Rule
12b-1 plan with respect to its Class A shares under which the Class may pay for
distribution-related expenses at an annual rate which may not exceed 0.50% of
average daily net assets attributable to the Class. Payments with respect to
Class A shares are currently limited to 0.05% of average daily net assets
attributable to the Class, which amount may be increased to the full plan rate
for the Fund by the Trustees without shareholder approval.
Virtus Government has adopted a Rule 12b-1 plan with respect to its
Investment shares under which the Class may pay for distribution-related
expenses at an annual rate of 0.25% of average daily net assets attributable to
the Class. Virtus Government has not adopted a Rule 12b-1 plan with respect to
its Trust shares.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectuses and Statements of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related fees is provided above. Investments in the Funds are not
insured. The minimum initial purchase requirement for each Fund is $1,000
($10,000 for Trust shares of Virtus Government). Except for the minimum
investment requirement of $100 for Investment shares of Virtus Government, 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 applicable CDSC in the case of Virtus Government) 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 Prospectuses for each Fund. Each Fund may
involuntarily redeem shareholders' accounts that have less than $1,000 of
invested funds. All funds invested in each Fund are invested in full and
fractional shares. The Funds reserve the right to reject any purchase order.
<PAGE>
Exchange Privileges
Virtus Government currently permits holders of Investment shares to
exchange such shares for Investment shares of other funds managed by Virtus.
Exchanges of Trust shares are not permitted. Holders of shares of a class of
Evergreen Government generally may exchange their shares for shares of the same
class of any other Evergreen fund. Virtus Government shareholders will be
receiving Class Y and Class A shares of Evergreen Government in the
Reorganization and, accordingly, with respect to shares of Evergreen Government
received by Virtus Government shareholders in the Reorganization, the exchange
privilege is limited to the Class Y and Class A shares, as applicable, of other
Evergreen funds. Evergreen Government limits exchanges to five per calendar year
and three per calendar quarter. No sales charge is imposed on an exchange. An
exchange which represents an initial investment in another Evergreen fund must
amount to at least $1,000. The current exchange privileges, and the requirements
and limitations attendant thereto, are described in each Fund's respective
Prospectuses and Statements of Additional Information.
Dividend Policy
Each Fund declares dividends daily and distributes its income dividends
monthly. Distributions of any net realized gains of a Fund will be made at least
annually. Shareholders begin to earn dividends on the first business day after
shares are purchased unless shares were not paid for, in which case dividends
are not earned until the next business day after payment is received. Dividends
and distributions are reinvested in additional shares of the same class of the
respective Fund, or paid in cash, as a shareholder has elected. See the
respective Prospectuses of each Fund for further information concerning
dividends and distributions.
After the Reorganization, shareholders of Virtus Government who have
elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from Evergreen Government reinvested in
shares of Evergreen Government. Shareholders of Virtus Government who have
elected to receive dividends and/or distributions in cash will receive dividends
and/or distributions from Evergreen Government in cash after the Reorganization,
although they may, after the Reorganization, elect to have such dividends and/or
distributions reinvested in additional shares of Evergreen Government.
Each of Evergreen Government and Virtus Government has qualified and
intends to continue to qualify to be treated as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code"). While so
qualified, so long as each Fund distributes all of its net investment company
taxable income and any net realized gains to shareholders, it is expected that a
Fund will not be required to pay any federal income taxes on the amounts so
distributed. A 4% nondeductible excise tax will be imposed on amounts not
distributed if a Fund does not meet certain
<PAGE>
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. For a discussion of
each Fund's objectives and policies, see "Comparison of Investment Objectives
and Policies."
Bond prices move inversely to interest rates, i.e., as interest rates
decline the values of the bonds increase, and vice versa. The longer the
maturity of a bond, the greater the exposure to market price fluctuations. The
same market factors are reflected in the share price or net asset value of bond
funds which will vary with interest rates. In addition, certain of the
obligations in which each Fund may invest may be variable or floating rate
instruments, which may involve a conditional or unconditional demand feature,
and may include variable amount master demand notes. While these types of
instruments may, to a certain degree, offset the risk to principal associated
with rising interest rates, they would not be expected to appreciate in a
falling interest rate environment.
At June 30, 1997, the dollar-weighted average maturity of Evergreen
Government's portfolio securities was 3.88 years and the dollar-weighted average
maturity of Virtus Government's portfolio securities was 4.79 years. Prices of
longer-term bonds tend to be more volatile in periods of changes in interest
rates than prices of shorter-term securities.
Zero-Coupon and Stripped Securities. Evergreen Government, unlike
Virtus Government, may invest in zero-coupon and stripped securities.
Zero-coupon securities in which the Funds may invest are debt obligations which
are generally issued at a discount and payable in full at maturity, and which do
not provide for current payments of interest prior to maturity. Zero-coupon
securities usually trade at a deep discount from their face or par value and are
subject to greater market value fluctuations from changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest. As a result, the net asset value of shares of the Fund may fluctuate
over a greater range than shares of other mutual funds investing in securities
making current distributions of interest and having similar maturities.
Risk Characteristics of Asset-Backed Securities. Evergreen Government,
unlike Virtus Government, may invest in asset-backed securities. Asset-backed
securities are created by the grouping of certain governmental,
government-related and private loans, receivables and other lender assets into
pools. Interests in these pools are sold as individual securities. Payments from
the asset pools may be divided into several different tranches of debt
securities, with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular installments
of interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
<PAGE>
securities will bear different interest rates, which may be fixed or
floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities and mortgage backed securities are
generally subject to higher prepayment risks than most other types of debt
instruments. Prepayment risks on mortgage securities tend to increase during
periods of declining mortgage interest rates, because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Depending upon
market conditions, the yield that the Fund receives from the reinvestment of
such prepayments, or any scheduled principal payments, may be lower than the
yield on the original mortgage security. As a consequence, mortgage securities
may be a less effective means of "locking in" interest rates than other types of
debt securities having the same stated maturity and may also have less potential
for capital appreciation. For certain types of asset pools such as
collateralized mortgage obligations, prepayments may be allocated to one tranche
of securities ahead of other tranches, in order to reduce the risk of prepayment
for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that
the prepaid mortgage securities were purchased at a market premium over their
stated amount. Conversely, the prepayment of mortgage securities purchased at a
market discount from their stated principal amount will accelerate the
recognition of interest income by the Fund which would be taxed as ordinary
income when distributed to the shareholders. The credit characteristics of
asset-backed securities also differ in a number of respects from those of
traditional debt securities. The credit quality of most asset-backed securities
depends primarily upon the credit quality of the assets underlying such
securities, how well the entity issuing the securities is insulated from the
credit risk of the originator or any other affiliated entities, and the amount
and quality of any credit enhancement to such securities.
REASONS FOR THE REORGANIZATION
On July 18, 1997, First Union entered into an Agreement and Plan of
Merger with Signet, which provided, among other things, for the Merger of Signet
with and into a wholly-owned subsidiary of First Union. The Merger was
consummated on November 28, 1997. As a result of the Merger it is expected that
FUNB and its affiliates will succeed to the investment advisory and
administrative functions currently performed for Virtus Government by various
units of Signet and various unaffiliated parties. It is also expected that
Signet will no longer, upon completion of the Reorganization and similar
reorganizations of other funds in the Signet mutual fund family, provide
investment advisory or administrative services to investment companies.
At a meeting held on September 16, 1997, the Board of Trustees of The
Virtus Funds considered and approved the Reorganization as in the best interests
of shareholders of Virtus
<PAGE>
Government and determined that the interests of existing shareholders of Virtus
Government will not be diluted as a result of the transactions contemplated by
the Reorganization. In addition, the Trustees approved the Interim Advisory
Agreement with respect to Virtus Government.
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise The Virtus Funds. The Merger caused,
as a matter of law, termination of the investment advisory agreement between
each series of The Virtus Funds and Virtus with respect to the Fund. The Virtus
Funds have received an order from the SEC which permits Virtus to continue to
act as Virtus Government's investment adviser, without shareholder approval, for
a period of not more than 120 days from the date the Merger was consummated
(November 28, 1997) to the date of shareholder approval of a new investment
advisory agreement. Accordingly, the Trustees considered the recommendations of
Signet in approving the proposed Reorganization.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Evergreen Government and Virtus Government. Specifically, Evergreen
Government and Virtus Government 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
the combination of Virtus Government with Evergreen Government. As of September
30, 1997, Evergreen Government's net assets were approximately $73 million and
Virtus Government's net assets were approximately $157 million.
In addition, assuming that an alternative to the Reorganization would
be to propose that Virtus Government continue its existence and be separately
managed by FUNB or one of its affiliates, Virtus Government would be offered
through common distribution channels with the similar Evergreen Government.
Virtus Government would also have to bear the cost of maintaining its separate
existence. Signet and FUNB believe that the prospect of dividing the resources
of the Evergreen mutual fund organization between two similar funds could result
in each Fund being disadvantaged due to an inability to achieve optimum size,
performance levels and the greatest possible economies of scale. Accordingly,
for the reasons noted above and recognizing that there can be no assurance that
any economies of scale or other benefits will be realized, Signet and FUNB
believe that the proposed Reorganization would be in the best interests of each
Fund and its shareholders.
The Board of Trustees of The Virtus Funds met and considered the
recommendation of Signet and FUNB, and, in addition, considered among other
things, (i) the terms and conditions of the Reorganization; (ii) whether the
Reorganization would result in the
<PAGE>
dilution of shareholders' interests; (iii) expense ratios, fees and expenses of
Evergreen Government and Virtus Government; (iv) the comparative performance
records of each of the Funds; (v) compatibility of their investment objectives
and policies; (vi) the investment experience, expertise and resources of FUNB;
(vii) the service and distribution resources available to the Evergreen funds
and the broad array of investment alternatives available to shareholders of the
Evergreen funds; (viii) the personnel and financial resources of First Union and
its affiliates; (ix) the fact that FUNB will bear the expenses incurred by
Virtus Government in connection with the Reorganization; (x) the fact that
Evergreen Government will assume certain identified liabilities of Virtus
Government; and (xi) the expected federal income tax consequences of the
Reorganization.
The Trustees also considered the benefits to be derived by shareholders
of Virtus Government from the sale of its assets to Evergreen Government. In
this regard, the Trustees considered the potential benefits of being associated
with a larger entity and the economies of scale that could be realized by the
participation in such an entity by shareholders of Virtus Government.
In addition, the Trustees considered that there are alternatives
available to shareholders of Virtus Government, including the ability to redeem
their shares, as well as the option to vote against the Reorganization.
During their consideration of the Reorganization the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Fixed Income Trust also concluded at a
meeting on September 16, 1997 that the proposed Reorganization would be in the
best interests of shareholders of Evergreen Government and that the interests of
the shareholders of Evergreen Government would not be diluted as a result of the
transactions contemplated by the Reorganization.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF VIRTUS GOVERNMENT APPROVE
THE PROPOSED REORGANIZATION.
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the
Plan (Exhibit A hereto).
The Plan provides that Evergreen Government will acquire all of the
assets of Virtus Government in exchange for shares of Evergreen Government and
the assumption by Evergreen Government of certain identified liabilities of
Virtus Government on or about February 27, 1998 or such other date as may be
agreed upon by the parties (the "Closing Date"). Prior to the Closing Date,
Virtus Government will endeavor to discharge all of its known liabilities and
obligations. Evergreen Government will not assume any liabilities or obligations
of Virtus Government other than those reflected in an unaudited
<PAGE>
statement of assets and liabilities of Virtus Government prepared as of the
close of regular trading on the NYSE, currently 4:00 p.m. Eastern time, on the
business day immediately prior to the Closing Date. The number of full and
fractional shares of each class of Evergreen Government to be received by the
shareholders of Virtus Government will be determined by multiplying the
respective outstanding class of shares of Virtus Government by a factor which
shall be computed by dividing the net asset value per share of the respective
class of shares of Virtus Government by the net asset value per share of the
respective class of shares of Evergreen Government. Such computations will take
place as of the close of regular trading on the NYSE on the business day
immediately prior to the Closing Date. The net asset value per share of each
class will be determined by dividing assets, less liabilities, in each case
attributable to the respective class, by the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for Evergreen
Government, will compute the value of each Fund's respective portfolio
securities. The method of valuation employed will be consistent with the
procedures set forth in the Prospectuses and Statement of Additional Information
of Evergreen Government, 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, Virtus Government will have declared a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
the Fund's shareholders (in shares of the Fund, or in cash, as the shareholder
has previously elected) all of the Fund's net investment company taxable income
for the taxable period ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
As soon after the Closing Date as conveniently practicable, Virtus
Government will liquidate and distribute pro rata to shareholders of record as
of the close of business on the Closing Date the full and fractional shares of
Evergreen Government received by Virtus Government. Such liquidation and
distribution will be accomplished by the establishment of accounts in the names
of the Fund's shareholders on the share records of Evergreen Government's
transfer agent. Each account will represent the respective pro rata number of
full and fractional shares of Evergreen Government due to the Fund's
shareholders. All issued and outstanding shares of Virtus Government, including
those represented by certificates, will be canceled. The shares of Evergreen
Government to be issued will have no preemptive or conversion rights. After such
distributions and the winding up of its affairs, Virtus Government will be
terminated. In connection with such termination, The Virtus Funds will file with
the SEC an application for termination as a registered investment company.
<PAGE>
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Virtus Government'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 Virtus
Government's shareholders, the Plan may be terminated (a) by the mutual
agreement of Virtus Government and Evergreen Government; 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 Virtus Government in connection with the Reorganization
(including the cost of any proxy soliciting agent) will be borne by FUNB whether
or not the Reorganization is consummated. No portion of such expenses will be
borne directly or indirectly by Virtus Government or its shareholders. There are
not any liabilities or any expected reimbursements in connection with the 12b-1
Plan of Virtus Government. As a result, no 12b-1 liabilities will be assumed by
Evergreen Government following the Reorganization.
If the Reorganization is not approved by shareholders of Virtus
Government, the Board of Trustees of The Virtus Funds will consider other
possible courses of action in the best interests of shareholders.
Federal Income Tax Consequences
The Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Virtus Government will receive
an opinion of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued thereunder,
current administrative rules, pronouncements and court decisions, for federal
income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of Virtus Government solely in
exchange for shares of Evergreen Government and the assumption by Evergreen
Government of certain identified liabilities, followed by the distribution of
Evergreen Government's shares by Virtus Government in dissolution and
liquidation of Virtus Government, will constitute a "reorganization" within the
meaning of section 368(a)(1)(D) of the Code, and Evergreen Government and Virtus
Government 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 Virtus Government on the
transfer of all of its assets to Evergreen Government solely in
<PAGE>
exchange for Evergreen Government's shares and the assumption by Evergreen
Government of certain identified liabilities of Virtus Government or upon the
distribution of Evergreen Government's shares to Virtus Government's
shareholders in exchange for their shares of Virtus Government;
(3) The tax basis of the assets transferred will be the same to
Evergreen Government as the tax basis of such assets to Virtus Government
immediately prior to the Reorganization, and the holding period of such assets
in the hands of Evergreen Government will include the period during which the
assets were held by Virtus Government;
(4) No gain or loss will be recognized by Evergreen Government upon the
receipt of the assets from Virtus Government solely in exchange for the shares
of Evergreen Government and the assumption by Evergreen Government of certain
identified liabilities of Virtus Government;
(5) No gain or loss will be recognized by Virtus Government's
shareholders upon the issuance of the shares of Evergreen Government to them,
provided they receive solely such shares (including fractional shares) in
exchange for their shares of Virtus Government; and
(6) The aggregate tax basis of the shares of Evergreen Government,
including any fractional shares, received by each of the shareholders of Virtus
Government pursuant to the Reorganization will be the same as the aggregate tax
basis of the shares of Virtus Government held by such shareholder immediately
prior to the Reorganization, and the holding period of the shares of Evergreen
Government, including fractional shares, received by each such shareholder will
include the period during which the shares of Virtus Government exchanged
therefor were held by such shareholder (provided that the shares of Virtus
Government were held as a capital asset on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Virtus Government would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Fund shares and the fair market value of Evergreen
Government shares he or she received. Shareholders of Virtus Government should
consult their tax advisers regarding the effect, if any, of the proposed
Reorganization in light of their individual circumstances. It is not anticipated
that the securities of the combined portfolio will be sold in significant
amounts in order to comply with the policies and investment practices of
Evergreen Government. Since the foregoing discussion relates only to the federal
income tax consequences of the Reorganization, shareholders of Virtus Government
should also consult their tax advisers as to the state and local tax
consequences, if any, of the Reorganization.
<PAGE>
Capital loss carryforwards of Virtus Government will be available to
Evergreen Government to offset capital gains recognized after the
Reorganization, subject to limitations imposed by the Code. These limitations
provide generally that the amount of loss carryforward which may be used in any
year following the closing is an amount equal to the value of all of the
outstanding stock of Virtus Government immediately prior to the Reorganization,
multiplied by a long-term tax-exempt bond rate determined monthly by the
Internal Revenue Service. The rate for December, 1997 was 5.27%. A capital loss
carryforward may generally be used without any limit to offset gains recognized
on sale of assets transferred by Virtus Government to Evergreen Government
pursuant to the Reorganization, to the extent of the excess of the value of any
such asset on the closing date of the Reorganization over its tax basis.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen
Government and Virtus Government as of September 30, 1997, and the
capitalization of Evergreen Government 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 0.98 and 0.98 Class Y and
Class A shares, respectively, of Evergreen Government issued for each Trust and
Investment share, respectively, of Virtus Government.
<PAGE>
<TABLE>
<CAPTION>
Capitalization of Virtus Government,
Evergreen Government and Evergreen
Government (Pro Forma)
Evergreen
Government
(After
Virtus Evergreen Reorgani-
Government Government zation)
---------- ---------- ----------
<S> <C> <C> <C>
Net Assets
Trust.......................... $52,177,289 N/A N/A
Investment..................... $105,247,791 N/A N/A
Class A........................ N/A $588,578 $105,836,369
Class B........................ N/A $605,369 $605,369
Class C........................ N/A $121,323 $121,323
Class Y........................ N/A $71,670,053 $123,847,342
------------ ----------- ------------
Total Net Assets . $157,425,080 $72,985,323 $230,410,403
Net Asset Value Per
Share
Trust.......................... $9.95 N/A N/A
Investment..................... $9.95 N/A N/A
Class A........................ N/A $10.12 $10.12
Class B........................ N/A $10.12 $10.12
Class C........................ N/A $10.12 $10.12
Class Y........................ N/A $10.12 $10.12
Shares Outstanding
Trust.......................... 5,246,259 N/A N/A
Investment..................... 10,582,280 N/A N/A
Class A........................ N/A 58,180 10,462,694
Class B........................ N/A 59,846 59,846
Class C........................ N/A 11,994 11,994
Class Y........................ N/A 7,084,254 12,242,384
----------- --------- ----------
All Classes.................... 15,828,539 7,214,274 22,776,918
</TABLE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
<PAGE>
Shareholder Information
As of December 26, 1997 (the "Record Date"), the following number of
each Class of shares of beneficial interest of Virtus Government were
outstanding:
Class of Shares
- ---------------
Trust.......................................... 5,135,268
Investment..................................... 10,046,409
----------
All Classes.................................... 15,181,677
As of November 30, 1997, the officers and Trustees of The Virtus Funds
beneficially owned as a group less than 1% of the outstanding shares of Virtus
Government. To Virtus Government's knowledge, the following persons owned
beneficially or of record more than 5% of Virtus Government's total outstanding
shares as of November 30, 1997:
<TABLE>
<CAPTION>
Percentage Percentage of
of Shares Shares of
of Class Class After
Before Reorgani-
No. of Reorgani- zation
Name and Address Class Shares zation ---------
- ---------------- ----- ------ ---------
<S> <C> <C> <C> <C>
Trust 5,194,305 99.99% 42.80% Class Y
Bova & Co.
Signet Trust
Company
P.O. Box 26311
Richmond, VA
23260-6311
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectuses and Statements of
Additional Information of the Funds. The investment objective, policies and
restrictions of Evergreen Government can be found in the Prospectuses of
Evergreen Government under the caption "Investment Objectives and Policies."
Evergreen
<PAGE>
Government's Prospectuses also offer additional funds advised by FUNB or its
affiliates. These additional funds are not involved in the Reorganization, their
investment objectives and policies are not discussed in this Prospectus/Proxy
Statement and their shares are not offered hereby. The investment objective,
policies and restrictions of Virtus Government can be found in the respective
Prospectuses of the Fund under the caption "Investment Objective and Policies of
each Fund." Unlike the investment objective of Virtus Government, which is
fundamental, the investment objective of Evergreen Government is non-fundamental
and can be changed by the Board of Trustees without shareholder approval.
The investment objective of Evergreen Government is to preserve
principal value and maintain a high degree of liquidity while providing current
income. The Fund invests exclusively in U.S. Treasury obligations, obligations
issued or guaranteed as to principal and interest by agencies and
instrumentalities of the U.S. government, receipts evidencing separately traded
principal and interest components of U.S. government obligations, obligations of
supranational entities and repurchase agreements involving any such obligations.
No more than 35% of the Fund's assets may be invested in receipts or obligations
of supranational entities and repurchase agreements involving such securities.
The Fund will maintain an average weighted maturity of approximately three to
ten years, although under normal conditions the average weighted maturity will
be maintained at three to six years.
The investment objective of Virtus Government is to provide current income.
Virtus Government pursues its investment objective by investing at least 65% of
the value of its total assets in securities which are primary or direct
obligations of the U.S. government or its instrumentalities or which are
guaranteed by the U.S. government, its agencies, or instrumentalities. U.S.
government securities in which the Fund invests include U.S. Treasury bills,
notes and bonds, and notes, bonds and discount notes of U.S. government agencies
or instrumentalities including the FHLMC, FNMA and GNMA. The investment policies
of Virtus Government do not set forth any restrictions on the maturities of the
U.S. obligations the Fund may purchase. Since inception, Virtus Government has
maintained a dollar-weighted average maturity of one to five years.
Neither Evergreen Government nor Virtus Government engages in options
and futures transactions.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectuses and Statement of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectuses and Statements of Additional Information of
each Fund.
<PAGE>
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Fixed Income Trust and The Virtus Funds are open-end
management investment companies registered with the SEC under the 1940 Act,
which continuously offer shares to the public. Evergreen Fixed Income Trust is
organized as a Delaware business trust, and The Virtus Funds is organized as a
Massachusetts business trust. Each Trust is governed by a Declaration of Trust,
By-Laws and a Board of Trustees. Each Trust is also governed by applicable
Delaware, Massachusetts and federal law. Evergreen Government is a series of
Evergreen Fixed Income Trust, and Virtus Government is a series of The Virtus
Funds.
As set forth in the Supplement to Evergreen Government's Prospectuses,
effective December 22, 1997, Evergreen Intermediate-Term Government Securities
Fund, a series of The Evergreen Lexicon Fund, a Massachusetts business trust,
was reorganized (the "Delaware Reorganization") into a corresponding series
(Evergreen Government) of Evergreen Fixed Income Trust. In connection with the
Delaware Reorganization, the Fund's investment objectives were reclassified from
"fundamental" to "non-fundamental" and therefore may be changed without
shareholder approval; the Fund adopted certain standardized investment
restrictions; and the Fund eliminated or reclassified from fundamental to
non-fundamental certain of the Fund's other fundamental investment restrictions.
Capitalization
The beneficial interests in Evergreen Government are represented by an
unlimited number of transferable shares of beneficial interest, $.001 par value
per share. The beneficial interests in Virtus Government are represented by an
unlimited number of transferable shares of beneficial interest without par
value. The respective Declaration of Trust under which each Fund has been
established permits the Trustees to allocate shares into an unlimited number of
series, and classes thereof, with rights determined by the Trustees, all without
shareholder approval. Fractional shares may be issued. Each Fund's shares
represent equal proportionate interests in the assets belonging to the Funds.
Shareholders of each Fund are entitled to receive dividends and other amounts as
determined by the Trustees. Shareholders of each Fund vote separately, by class,
as to matters, such as approval of or amendments to Rule 12b-1 distribution
plans, that affect only their particular class and by series as to matters, such
as approval of or amendments to investment advisory agreements or proposed
reorganizations, that affect only their particular series.
<PAGE>
Shareholder Liability
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the Declaration of Trust under which Virtus Government
was established disclaims shareholder liability for acts or obligations of the
series and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Declaration of Trust of The Virtus Funds provides for indemnification out of
the series property for all losses and expenses of any shareholder held
personally liable for the obligations of the series. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered remote since it is limited to circumstances in which a disclaimer is
inoperative and the series or the Trust itself is unable to meet its
obligations.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Fixed Income Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of Evergreen Fixed Income Trust to
liability. To guard against this risk, the Declaration of Trust of Evergreen
Fixed Income Trust (a) provides that any written obligation of the Trust may
contain a statement that such obligation may only be enforced against the assets
of the Trust or the particular series in question and the obligation is not
binding upon the shareholders of the Trust; however, the omission of such a
disclaimer will not operate to create personal liability for any shareholder;
and (b) provides for indemnification out of Trust property of any shareholder
held personally liable for the obligations of the Trust. Accordingly, the risk
of a shareholder of Evergreen Fixed Income Trust incurring financial loss beyond
that shareholder's investment because of shareholder liability is limited to
circumstances in which: (i) the court refuses to apply Delaware law; (ii) no
contractual limitation of liability was in effect; and (iii) the Trust itself is
unable to meet its obligations. In light of Delaware law, the nature of the
Trust's business, and the nature of its assets, the risk of personal liability
to a shareholder of Evergreen Fixed Income Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Fixed Income Trust on behalf of Evergreen Government
nor The Virtus Funds on behalf of Virtus Government 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
<PAGE>
the holders of at least 10% of the outstanding shares of Evergreen Fixed Income
Trust or The Virtus Funds. In addition, each is required to call a meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of the Trustees then holding office were elected by shareholders. Each
Trust currently does not intend to hold regular shareholder meetings. Each Trust
does not permit cumulative voting. Except when a larger quorum is required by
applicable law, with respect to Evergreen Government, twenty-five percent (25%)
of the outstanding shares entitled to vote, and with respect to Virtus
Government, a majority of the outstanding shares entitled to vote constitutes a
quorum for consideration of such matter. For Evergreen Government and for Virtus
Government, a majority of the votes cast and entitled to vote is sufficient to
act on a matter (unless otherwise specifically required by the applicable
governing documents or other law, including the 1940 Act).
Under the Declaration of Trust of Evergreen Fixed Income Trust, each
share of Evergreen Government will be entitled to one vote for each dollar of
net asset value applicable to each share. Under the voting provisions governing
Virtus Government, each share is entitled to one vote. Over time, the net asset
values of the mutual funds which are each a series of The Virtus Funds have
changed in relation to one another and are expected to continue to do so in the
future. Because of the divergence in net asset values, a given dollar investment
in a fund with a lower net asset value will purchase more shares, and under the
Virtus Government's' voting provisions, have more votes, than the same
investment in a fund with a higher net asset value. Under the Declaration of
Trust of Evergreen Fixed Income Trust, voting power is related to the dollar
value of the shareholders' investment rather than to the number of shares held.
Liquidation or Dissolution
In the event of the liquidation of Evergreen Government and Virtus
Government, the shareholders are entitled to receive, when and as declared by
the Trustees, the excess of the assets belonging to such Fund or attributable to
the class over the liabilities belonging to the Fund or attributable to the
class. In either case, the assets so distributable to shareholders of the Fund
will be distributed among the shareholders in proportion to the number of shares
of a class of the Fund held by them and recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declaration of Trust of The Virtus Funds provides that a Trustee
shall be liable only for his own willful defaults, and that no Trustee shall be
protected against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
<PAGE>
The By-Laws of The Virtus Funds provide that a present or former
Trustee or officer is entitled to indemnification against liabilities and
expenses with respect to claims related to his or her position with the Trust,
provided that no indemnification shall be provided to a Trustee or officer
against any liability to the Trust or any series thereof or the shareholders of
any series by reasons of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen Fixed Income Trust, a
Trustee is liable to the Trust and its shareholders only for such Trustee's own
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of the office of Trustee or the discharge of such
Trustee's functions. As provided in the Declaration of Trust, each Trustee of
the Trust is entitled to be indemnified against all liabilities against him or
her, including the costs of litigation, unless it is determined that the Trustee
(i) did not act in good faith in the reasonable belief that such Trustee's
action was in or not opposed to the best interests of the Trust; (ii) had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
such Trustee's duties; and (iii) in a criminal proceeding, had reasonable cause
to believe that such Trustee's conduct was unlawful (collectively, "disabling
conduct"). A determination that the Trustee did not engage in disabling conduct
and is, therefore, entitled to indemnification may be based upon the outcome of
a court action or administrative proceeding or by (a) a vote of a majority of
those Trustees who are neither "interested persons" within the meaning of the
1940 Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. The Trust may also advance money for such litigation expenses
provided that the Trustee undertakes to repay the Trust if his or her conduct is
later determined to preclude indemnification and certain other conditions are
met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware and Massachusetts law
and is not a complete description of those documents or law. Shareholders should
refer to the provisions of such Declarations of Trust, By-Laws, Delaware and
Massachusetts law directly for more complete information.
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of The Virtus Funds recommends that shareholders of Virtus
Government approve the Interim Advisory Agreement. The Merger became effective
on November 28, 1997. Pursuant to an order received from the SEC all fees
payable under the Interim Advisory Agreement will be placed in escrow and paid
to Virtus if shareholders approve the contract
<PAGE>
within 120 days of its effective date. The Interim Advisory Agreement will
remain in effect until the earlier of the Closing Date for the Reorganization or
two years from its effective date. The terms of the Interim Advisory Agreement
are essentially the same as the Previous Advisory Agreement (as defined below).
The only difference between the Previous Advisory Agreement and the Interim
Advisory Agreement, if approved by shareholders, is the length of time each
Agreement is in effect. A description of the Interim Advisory Agreement pursuant
to which Virtus continues as investment adviser to Virtus Government, as well as
the services to be provided by Virtus pursuant thereto, is set forth below under
"Advisory Services." The description of the Interim Advisory Agreement in this
Prospectus/Proxy Statement is qualified in its entirety by reference to the
Interim Advisory Agreement, attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management (adviser to the Fund since 1990), is an
indirect wholly-owned subsidiary of First Union. Virtus' address is 707 East
Main Street, Suite 1300, Richmond, Virginia 23219. Virtus has served as
investment adviser pursuant to an Investment Advisory Contract dated March 1,
1995, as amended on October 21, 1996. As used herein, the Investment Advisory
Agreement, as amended, for Virtus Government is referred to as the "Previous
Advisory Agreement." At a meeting of the Board of Trustees of The Virtus Funds
held on September 16, 1997, the Trustees, including a majority of the
Independent Trustees, approved the Interim Advisory Agreement for Virtus
Government.
The Trustees have authorized The Virtus Funds, on behalf of Virtus
Government, to enter into the Interim Advisory Agreement with Virtus. Such
Agreement became effective on November 28, 1997. If the Interim Advisory
Agreement for Virtus Government is not approved by shareholders, the Trustees
will consider appropriate actions to be taken with respect to Virtus
Government's investment advisory arrangements at that time. The Previous
Advisory Agreement was last approved by the Trustees, including a majority of
the Independent Trustees, on February 24, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus manages Virtus
Government and continually conducts investment research and supervision for the
Fund and is responsible for the purchase and sale of portfolio securities.
FAS currently acts as administrator of Virtus Government. FAS will
continue during the term of the Interim Advisory Agreement as Virtus
Government's administrator for the same compensation as
<PAGE>
currently received . An affiliate of FAS currently performs transfer agency
services for Virtus Government's shareholders. Commencing February 9, 1998
Evergreen Service Company will provide such transfer agency services for the
same fees charged by Virtus Government's current transfer agent.
See "Summary - Administrators."
Fees and Expenses. The investment advisory fees and expense
limitations for Virtus Government under the Previous Advisory
Agreement and the Interim Advisory Agreement are identical. See
"Summary - Investment Advisers."
Expense Reimbursement. The Previous Advisory Agreement included a
provision which provides that Virtus may from time to time and for such periods
as it deems appropriate reduce its compensation to the extent that the Fund's
expenses exceed such lower expense limitation as Virtus may, by notice to The
Virtus Funds, voluntarily declare to be effective. Furthermore, Virtus may, if
it deems appropriate, assume expenses of the Fund or class to the extent that
the Fund's or classes' expenses exceed such lower expense limitation as Virtus
may, by notice to The Virtus Funds, voluntarily declare to be effective.
The Interim Advisory Agreement contains an identical provision.
Payment of Expenses and Transaction Charges. Under the Previous
Advisory Agreement, The Virtus Funds was required to pay or cause to be paid on
behalf of the Fund or each class, all of the Fund's or classes' expenses and the
Fund's or classes' allocable share of The Virtus Funds' expenses.
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to The Virtus Funds or to the Fund or to any shareholder
for any act or omission in the course of or connected in any way with rendering
services or for any losses that may be sustained in the purchase, holding or
sale of any security.
The Interim Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Advisory Agreement provides that it
may be terminated without penalty by vote of a majority of the outstanding
voting securities of Virtus Government (as defined in the 1940 Act) or by a vote
of a majority of The Virtus Funds' entire Board of Trustees on 60 days' written
notice to Virtus or by Virtus on 60 days' written notice to The Virtus Funds.
Also, the Interim Advisory Agreement will automatically terminate in the event
of its assignment (as defined in the 1940 Act). The
<PAGE>
Previous Advisory Agreement contained identical provisions as to termination and
assignment.
Information About Virtus Government's Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, other funds of The Virtus Funds, the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus is set forth in Appendix A to this Prospectus/Proxy
Statement.
During the fiscal years ended September 30, 1997, 1996 and 1995, Virtus
received from Virtus Government management fees of $1,325,841, $1,612,364 and
$1,581,364, respectively, of which $37,709, $276,121 and $589,885, respectively,
were voluntarily waived. Virtus is currently waiving a portion of its management
fee. See "Comparison of Fees and Expenses." Signet acts as custodian for Virtus
Government and received $46,191 for the fiscal year ended September 30, 1997.
Commencing on or about January 20, 1998, FUNB will act as Virtus Government's
custodian during the term of the Interim Advisory Agreement.
The Board of Trustees considered the Interim Advisory Agreement as part
of its overall approval of the Plan. The Board of Trustees considered, among
other things, the factors set forth above in "Reasons for the Reorganization."
The Board of Trustees also considered the fact that there were no material
differences between the terms of the Interim Advisory Agreement and the terms of
the Previous Advisory Agreement.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF VIRTUS GOVERNMENT
APPROVE THE INTERIM ADVISORY AGREEMENT
ADDITIONAL INFORMATION
Evergreen Government. Information concerning the operation and
management of Evergreen Government is incorporated herein by reference from the
Prospectuses dated September 3, 1997, as amended, copies of which are enclosed,
and Statement of Additional Information dated September 3, 1997, as amended. A
copy of such Statement of Additional Information is available upon request and
without charge by writing to Evergreen Government at the address listed on the
cover page of this Prospectus/Proxy Statement or by calling toll-free
1-800-343-2898.
Virtus Government. Information about the Fund is included in its
current Prospectuses dated November 30, 1997 and in the Statements 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 Prospectuses and Statements
of Additional Information are available upon request and without charge by
writing to Virtus Government at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-829-3863.
<PAGE>
Evergreen Government and Virtus Government are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information including
proxy material, and charter documents with the SEC. These items can be inspected
and copies obtained at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices located at Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York, New York
10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of The Virtus Funds to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116, and at any adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the meeting and a proxy card, is first being mailed to
shareholders of Virtus Government on or about January 5, 1998. Only shareholders
of record as of the close of business on the Record Date will be entitled to
notice of, and to vote at, the Meeting or any adjournment thereof. The holders
of a majority of the outstanding shares entitled to vote, at the close of
business on the Record Date, present in person or represented by proxy, will
constitute a quorum for the Meeting. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting, the proxies named
therein will vote the shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Reorganization, FOR the Interim Advisory Agreement and FOR any other matters
deemed appropriate. Proxies that reflect abstentions and "broker non- votes"
(i.e., shares held by brokers or nominees as to which (i) instructions have not
been received from the beneficial owners or the persons entitled to vote or (ii)
the broker or nominee does not have discretionary voting power on a particular
matter) will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum, but will not be counted as
shares voted and will have no effect on the vote regarding the Plan. However,
such "broker non-votes" will have the effect of being counted as votes against
the Interim Advisory Agreement which must be approved by a percentage of the
shares present at the Meeting or a majority of the outstanding voting
securities. A proxy may be revoked at any time on or before the Meeting by
written notice to the Secretary of The Virtus Funds, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. Unless revoked, all valid proxies will be
voted in accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby and FOR approval of the Interim Advisory Agreement.
Approval of the Plan will require the affirmative vote of a majority of
the shares voted and entitled to vote, with all classes
<PAGE>
voting together as a single class at the Meeting at which a quorum of the Fund's
shares is present. Approval of the Interim Advisory Agreement will require the
affirmative vote of (i) 67% or more of the outstanding voting securities if
holders of more than 50% of the outstanding voting securities are present, in
person or by proxy, at the Meeting, or (ii) more than 50% of the outstanding
voting securities, whichever is less, with all classes voting together as one
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 Signet, their affiliates or other
representatives of Virtus Government (who will not be paid for their soliciting
activities). Shareholder Communications Corporation has been engaged by Virtus
Government to assist in soliciting proxies.
If you wish to participate in the Meeting, you may submit the proxy
card included with this Prospectus/Proxy Statement or attend in person. Any
proxy given by you is revocable.
In the event that sufficient votes to approve the Reorganization are
not received by February 20, 1998, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of The
Virtus Funds to demand payment for, or an appraisal of, his or her shares.
However, shareholders should be aware that the Reorganization as proposed is not
expected to result in recognition of gain or loss to shareholders for federal
income tax purposes and that, if the Reorganization is consummated, shareholders
will be free to redeem the shares of Evergreen Government which they receive in
the transaction at their then-current net asset value. Shares of Virtus
Government may be redeemed at any time prior to the consummation of the
Reorganization. Shareholders of Virtus Government may wish to consult their tax
advisers as to any differing consequences of redeeming Fund shares prior to the
Reorganization or exchanging such shares in the Reorganization.
<PAGE>
Virtus Government 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 Virtus Funds
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
The votes of the shareholders of Evergreen Government 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 Virtus Government whether other persons are beneficial owners of
shares for which proxies are being solicited and, if so, the number of copies of
this Prospectus/Proxy Statement needed to supply copies to the beneficial owners
of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Evergreen Government as of June 30, 1997,
and the financial statements and financial highlights for the periods indicated
therein, have been incorporated by reference herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements and financial highlights of Virtus Government
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of The Virtus Funds for the year ended September 30, 1997 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Government will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
The Trustees of The Virtus Funds do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
<PAGE>
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND APPROVAL OF THE PLAN AND THE
INTERIM ADVISORY AGREEMENT, AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE
CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN AND THE INTERIM ADVISORY
AGREEMENT.
January 5, 1998
<PAGE>
APPENDIX A
The names and addresses of the principal executive officers and
directors of Virtus Capital Management, Inc. are as follows:
OFFICERS:
Name Address
- ---- -------
David C. Francis, Chief First Union National Bank
Investment Officer 201 South College Street
Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Virtus Capital Management, Inc.
Clemons Rosson, Vice 707 East Main Street
President, Assistant Suite 1300
Secretary Richmond, Virginia 23219
First Union National Bank
L. 201 South College
Robert Cheshire, Vice Street
President
Charlotte, North Carolina 28288-
1195
John First Union National Bank
E. Gray, 201 South College
Vice President Street
Charlotte, North
Carolina 28288-1195
Dillon S. Harris, Jr., Vice First Union National Bank
President
201 South College
Street
Charlotte, North
Carolina 28288-1195
<PAGE>
Name Address
- ---- -------
J. Kellie Allen, Vice First Union National Bank
President 201
South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
DIRECTORS:
Name Address
- ---- -------
David C. Francis First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
Donald A. McMullen First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William M. Ennis First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 26th day of November, 1997, by and between the Evergreen Fixed Income
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its
Evergreen Intermediate Term Government Securities Fund series (the "Acquiring
Fund"), and The Virtus Funds, a Massachusetts business trust, with its principal
place of business at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779 ("Virtus Funds"), with respect to its The U.S. Government Securities
Fund series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(D) 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 and Class Y shares
of beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Virtus Funds have determined that the Selling
Fund should exchange all of its assets and certain identified liabilities for
Acquiring Fund Shares and that the interests of the existing shareholders of the
Selling Fund will not be diluted as a result of the transactions contemplated
herein;
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth and
on the basis of the representations and warranties contained herein, the Selling
Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable period of time prior to
the Closing Date, furnish the Acquiring Fund with a list of its portfolio
securities and other investments. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund, if requested
by the Acquiring Fund, will
<PAGE>
dispose of such securities prior to the Closing Date. In addition, if it is
determined that the Selling Fund and the Acquiring Fund portfolios, when
aggregated, would contain investments exceeding certain percentage limitations
imposed upon the Acquiring Fund with respect to such investments, the Selling
Fund if requested by the Acquiring Fund will dispose of a sufficient amount of
such investments as may be necessary to avoid violating such limitations as of
the Closing Date. Notwithstanding the foregoing, nothing herein will require the
Selling Fund to dispose of any investments or securities if, in the reasonable
judgment of the Selling Fund, such disposition would adversely affect the
tax-free nature of the Reorganization or would violate the Selling Fund's
fiduciary duty to its shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap of the Selling Fund
immediately prior to the Reorganization, in each case calculated in accordance
with such Rule 2830.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The
<PAGE>
Acquiring Fund shall not issue certificates representing the Acquiring Fund
Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
<PAGE>
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectuses 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 Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of
Investment shares and Trust shares of the Selling Fund will receive Class A and
Class Y shares, respectively, of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
<PAGE>
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. Signet Trust Company, as custodian for the
Selling Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Selling Fund's portfolio securities,
cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Closing Date; and (b) all necessary taxes including all
applicable federal and state stock transfer stamps, if any, shall have been
paid, or provision for payment shall have been made, in conjunction with the
delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date, shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Virtus Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
ARTICLE IV
<PAGE>
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectuses 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 violation of any provision of Virtus Funds' Declaration of Trust or By-Laws
or of any material agreement, indenture, instrument, contract, lease, or other
undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date except for liabilities, if any, to be discharged
or reflected on the Statement of Assets and Liabilities as provided in paragraph
1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects
<PAGE>
its business or its ability to consummate the transactions herein
contemplated.
(g) The financial statements of the Selling Fund at September
30, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since September 30, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such
<PAGE>
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.
4.2.1 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring
Fund represents and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
<PAGE>
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
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 June 30,
1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly reflect the financial condition of the Acquiring
Fund as of such date, and there are no known contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
(g) Since June 30, 1997, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
<PAGE>
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
(n) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Evergreen
Intermediate-Term Government Securities Fund (the "Predecessor Fund"), a series
of The Evergreen Lexicon Fund, a Massachusetts business trust, as of the date
hereof. The Acquiring Fund shall deliver to the Selling Fund a certificate of
the Predecessor Fund of even date making the representations set forth in
Section 4.2.1 with respect to the
<PAGE>
Predecessor Fund to the extent applicable to the Predecessor Fund as of the date
hereof.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. Virtus Funds will call a meeting of the
Selling Fund Shareholders to consider and act upon this Agreement and to take
all other action necessary to obtain approval of the transactions contemplated
herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by KPMG Peat
Marwick LLP and certified by Virtus Funds' President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund
will provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund
<PAGE>
Shareholders to consider approval of this Agreement and the transactions
contemplated herein.
5.8 CAPITAL LOSS CARRYFORWARDS. AS promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause KPMG Peat Marwick LLP to issue a letter addressed to
the Acquiring Fund and the Selling Fund, in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
<PAGE>
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which the Acquiring Fund is
a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the
<PAGE>
Acquiring Fund or any of its properties or assets and the Acquiring Fund is not
a party to or subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its business,
other than as previously disclosed in the Registration Statement.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus and Proxy Statement and related matters
were discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus and Proxy Statement (except to the extent indicated
in paragraph (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the Trust's officers
and other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus and Proxy Statement as
of its date, as of the date of the Selling Fund Shareholders' meeting, and as of
the Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquiring Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquiring Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus and Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of Virtus Funds and the Selling Fund. Such opinion shall contain such
other assumptions and limitations as shall be in the opinion of Sullivan &
Worcester LLP appropriate to render the opinions expressed therein.
In this paragraph 6.2, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
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:
<PAGE>
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 Virtus Funds'
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Virtus Funds.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not,
and the consummation of the transactions contemplated hereby will
<PAGE>
not, result in a violation of Virtus Funds' Declaration of Trust or By-laws, or
any provision of any material agreement, indenture, instrument, contract, lease
or other undertaking (in each case known to such counsel) to which the Selling
Fund is a party or by which it or any of its properties may be bound or, to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which the
Selling Fund is a party or by which it is bound.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
Regarding the Interim Advisory Agreement," and the description of voting
requirements applicable to approval of the Interim Advisory Agreement, as set
forth under the caption "Voting Information Concerning the Meeting," insofar as
the latter constitutes a summary of applicable voting requirements under the
Investment Company Act of 1940, as amended, are, in each case, accurate and
fairly present the information required to be shown by the applicable
requirements of Form N-14.
(g) Such counsel does not know of any legal or governmental
proceedings, insofar as they relate to the Selling Fund existing on or before
the date of mailing of the Prospectus and Proxy Statement and the Closing Date,
required to be described in the Prospectus and Proxy Statement or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and the Selling Fund is neither a
party to nor subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its business
other than as previously disclosed in the Prospectus and Proxy Statement.
7.3.2 The Acquiring Fund shall have received on the Closing
Date an opinion of C. Grant Anderson, Esq., Assistant Secretary of Virtus Funds,
in form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof has been
paid, and assuming that such shares were issued in accordance with the terms of
the Selling Fund's registration statement, or any amendment thereto, in effect
at the time of such issuance, all issued and outstanding shares of the Selling
Fund are legally issued and fully paid and non-assessable (except that, under
Massachusetts law, Selling Fund Shareholders could under certain circumstances
be held personally liable for obligations of the Selling Fund).
Mr. Anderson shall also state that he has reviewed and is
familiar with the contents of the Prospectus and Proxy Statement
<PAGE>
and, although he is not passing upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Prospectus and Proxy Statement, on the basis of the foregoing, no facts have
come to his attention that lead him to believe that the Prospectus and Proxy
Statement as of its date, as of the date of the Selling Fund Shareholders'
meeting, and as of the Closing Date, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein regarding
the Selling Fund or necessary, in the light of the circumstances under which
they were made, to make the statements therein regarding the Selling Fund not
misleading. Such opinion may state that he does not express any opinion or
belief as to the financial statements or any financial or statistical data, or
as to the information relating to the Acquiring Fund, contained in the
Prospectus and Proxy Statement or Registration Statement.
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Massachusetts law, that as Dickstein Shapiro Morin &
Oshinsky LLP and C. Grant Anderson are not admitted to the bar of Massachusetts,
such opinions are based either upon the review of published statutes, cases and
rules and regulations of the Commonwealth of Massachusetts or upon an opinion of
Massachusetts counsel.
In this paragraph 7.3, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
7.4 The merger between First Union Corporation and Signet Banking
corporation shall be completed prior to the Closing Date.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Virtus Funds' Declaration
of Trust and By-Laws and certified copies of the resolutions evidencing such
approval shall
<PAGE>
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 net investment
company taxable income for all taxable periods ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on or prior to the
Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section
<PAGE>
368(a)(1)(D) of the Code and the Acquiring Fund and the Selling Fund will each
be a "party to a reorganization" within the meaning of Section 368(b) of the
Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
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
<PAGE>
Prospectus and Proxy Statement has been obtained from and is consistent with the
accounting records of the Selling Fund;
(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 ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), 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 written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union
<PAGE>
National Bank. Such expenses include, without limitation, (a) expenses incurred
in connection with the entering into and the carrying out of the provisions of
this Agreement; (b) expenses associated with the preparation and filing of the
Registration Statement under the 1933 Act covering the Acquiring Fund Shares to
be issued pursuant to the provisions of this Agreement; (c) registration or
qualification fees and expenses of preparing and filing such forms as are
necessary under applicable state securities laws to qualify the Acquiring Fund
Shares to be issued in connection herewith in each state in which the Selling
Fund Shareholders are resident as of the date of the mailing of the Prospectus
and Proxy Statement to such shareholders; (d) postage; (e) printing; (f)
accounting fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Virtus Funds, the respective
Trustees or officers, to the other party or its Trustees or officers.
ARTICLE XII
<PAGE>
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of The Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
and the Acquiring Fund hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents, or employees of Virtus Funds or the
Trust personally, but shall bind only the trust property of the Selling Fund and
the Acquiring Fund, as provided in the Declarations of Trust of Virtus Funds and
the Trust. The execution and delivery of this Agreement have been authorized by
the Trustees of Virtus Funds on behalf of the Selling Fund and the Trust on
behalf of the Acquiring Fund and signed by authorized officers of Virtus Funds
and the Trust, acting as such,
<PAGE>
and neither such authorization by such Trustees nor such execution and delivery
by such officers shall be deemed to have been made by any of them individually
or to impose any liability on any of them personally, but shall bind only the
trust property of the Selling Fund and the Acquiring Fund as provided in the
Declarations of Trust of Virtus Funds and the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
EVERGREEN FIXED
INCOME TRUST ON
BEHALF OF
EVERGREEN
INTERMEDIATE TERM
GOVERNMENT
SECURITIES FUND
By:
Name:
Title:
THE VIRTUS FUNDS
ON BEHALF OF THE U.S.
GOVERNMENT SECURITIES FUND
By:
Name:
Title:
<PAGE>
EXHIBIT B
THE VIRTUS FUNDS
INTERIM INVESTMENT ADVISORY AGREEMENT
This Agreement is made between Virtus Capital Management, Inc., a
Maryland corporation having its principal place of business in Richmond,
Virginia (the "Adviser"), and The Virtus Funds, a Massachusetts business trust
having its principal place of business
in Pittsburgh, Pennsylvania (the "Trust").
WHEREAS, the Trust is an open-end management investment company as that
term is defined in the Investment Company Act of 1940 (the "Act") and
is registered as such with the Securities and Exchange Commission; and
WHEREAS, the Adviser is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:
1. The Trust hereby appoints Adviser as Investment Adviser for each of
the portfolios ("Funds") of the Trust, which may be offered in one or more
classes of shares ("Classes"), on whose behalf the Trust executes an exhibit to
this Agreement, and Adviser, by its execution of each such exhibit, accepts the
appointments. Subject to the direction of the Trustees of the Trust, Adviser
shall provide investment research and supervision of the investments of each of
the Funds and conduct a continuous program of investment evaluation and of
appropriate sale or other disposition and reinvestment of each Fund's assets.
2. Adviser, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's fundamental investment policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statement and exhibits as may be
on file with the Securities and Exchange Commission.
3. The Trust shall pay or cause to be paid on behalf of each Fund or
Class, all of the Fund's or Classes' expenses and the Fund's or Classes'
allocable share of Trust expenses.
4. The Trust, on behalf of each of the Funds shall pay to Adviser for
all services rendered to such Fund by Adviser hereunder the fees set forth in
the exhibits attached hereto.
5. The Adviser may from time to time and for such periods as it deems
appropriate reduce its compensation to the extent that any Fund's expenses
exceed such lower expense limitation as the Adviser may, by notice to the Trust,
voluntarily declare to be effective.
<PAGE>
Furthermore, the Adviser may, if it deems appropriate, assume expenses of one or
more Fund or Class to the extent that any Fund's or Classes' expenses exceed
such lower expense limitation as the Adviser may, by notice to the Trust,
voluntarily declare to be effective.
6. This Agreement shall begin for each Fund on the date that the Trust
executes an exhibit to this Contract relating to such Fund. This Agreement shall
remain in effect for each Fund until the earlier of the Closing Date defined in
the Agreement and Plan of Reorganization to be dated as of November 26, 1997
with respect to each Fund or for two years from the date of its execution and
from year to year thereafter, subject to the provisions for termination and all
of the other terms and conditions hereof if: (a) such continuation shall be
specifically approved at least annually by the vote of a majority of the
Trustees of the Trust, including a majority of the Trustees who are not parties
to this Agreement or interested persons of any such party (other than as
Trustees of the Trust) cast in person at a meeting called for that purpose; and
(b) Adviser shall not have notified the Trust in writing at least sixty (60)
days prior to the anniversary date of this Agreement in any year thereafter that
it does not desire such continuation with respect to that Fund.
7. Notwithstanding any provision in this Agreement, it may be
terminated at any time with respect to any Fund, without the payment of any
penalty, by the Trustees of the Trust or by a vote of a majority of the
outstanding voting securities of that Fund, as defined in Section 2(a)(42) of
the Act on sixty (60) days' written notice to Adviser.
8. This Agreement may not be assigned by Adviser and shall
automatically terminate in the event of any assignment. Adviser may employ or
contract with such other person, persons, corporation or corporations at its own
cost and expense as it shall determine in order to assist it in carrying out
this Agreement.
9. In the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of obligations or duties under this Agreement on the part
of Adviser, Adviser shall not be liable to the Trust or to any of the Funds or
to any shareholder for any act or omission in the course of or connected in any
way with rendering services or for any losses that may be sustained in the
purchase, holding or sale of any security.
10. This Agreement may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by vote of a majority
of the Trustees of the Trust, including a majority of the Trustees who are not
parties to this Agreement or interested persons of any such party to this
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for that purpose, and on behalf of a Fund by a majority of the
outstanding voting securities of such Fund as defined in Section 2(a)(42) of the
Act.
<PAGE>
11. Adviser is hereby expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees that
the obligations pursuant to this Agreement of a particular Fund and of the Trust
with respect to that particular Fund be limited solely to the assets of that
particular Fund, and Adviser shall not seek satisfaction of any such obligation
from the assets of any other Fund, the shareholders of any Fund, the Trustees,
officers, employees or agents of the Trust, or any of them.
12. This Agreement shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
13. This Agreement will become binding on the parties hereto upon their
execution of the attached exhibits to this Agreement.
<PAGE>
EXHIBIT A
THE U.S. GOVERNMENT SECURITIES FUND
THE VIRGINIA MUNICIPAL BOND FUND
THE MARYLAND MUNICIPAL BOND FUND
THE TREASURY MONEY MARKET FUND
THE MONEY MARKET FUND
THE TAX-FREE MONEY MARKET FUND
THE STYLE MANAGER FUND
THE STYLE MANAGER: LARGE CAP FUND
Name of Fund Percentage of Net Assets
- ------------ ------------------------
The Treasury Money Market Fund .50 of 1%
The Money Market Fund .50 of 1%
The Tax-Free Money Market Fund .50 of 1%
The U.S. Government Securities Fund .75 of 1%
The Virginia Municipal Bond Fund .75 of 1%
The Maryland Municipal Bond Fund .75 of 1%
The Style Manager: Large Cap Fund .75 of 1%
The Style Manager Fund 1.25 of 1%
For all services rendered by Adviser hereunder, the Trust shall pay to
Adviser and Adviser agrees to accept as full compensation for all services
rendered hereunder, an annual investment advisory fee equal to the following
percentage (the "applicable percentage") of the average daily net assets of each
Fund.
The fee shall be accrued daily at the rate of 1/365th of the applicable
percentage applied to the daily net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this 28th day of November, 1997.
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
By:
Assistant Secretary President
Attest: THE VIRTUS FUNDS
By:
Assistant Secretary Vice President
C. Grant Anderson
<PAGE>
EXHIBIT C
EVERGREEN
(logo and photo of George Washington)
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 2.55 % 0.03 % 4.03 % 6.08 %
One year w/o sales
charge 6.00 % 5.03 % 5.03 % 6.08 %
One year dividends per
share 55.4(cents) 46.3(cents) 46.3(cents) 56.2 (cents)
30-day SEC Yield
(as of 6/30/97) 5.25 % 4.44 % 4.17 % 5.49 %
<CAPTION>
AVERAGE ANNUAL
RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 6.19 %
Five years N/A N/A N/A 5.38 %
Since Inception* 4.38 % -0.66 % 4.85 % 5.82 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 19.76 %
Five years N/A N/A N/A 29.94 %
Since Inception* 9.74 % -0.92 % 5.97 % 37.82 %
</TABLE>
* CLASS A BEGAN 5/2/95; CLASS B BEGAN 2/9/96; CLASS C BEGAN 4/10/96;
CLASS Y BEGAN 11/1/91
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C> <C> <C>
Total Net Assets (all classes) $72.9 million
Average Credit Quality AAA
Average Maturity 3.88 years
Duration 2.93 years
</TABLE>
PORTFOLIO COMPOSITION JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See tables below for plot points.)
U.S. Treasuries 71%
Mortgage-backed securities 18%
U.S. Govt. Agencies 10%
Short-term securities 1%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen Intermediate-Term Government Securities Fund seeks to maximize total
return and preserve principal while providing current income.
STRATEGY
The Fund invests primarily in securities issued by the U.S. Government and its
agencies. These securities typically have an average maturity of three to six
years, with a maximum maturity of ten years. The Fund seeks its objective over
full interest rate cycles, which typically last three to five years.
PORTFOLIO MANAGER
(photo of L. L. Robert Cheshire, a Vice President and Senior Portfolio
Robert Cheshire) Manager of First Union Capital Management Group, is Portfolio
Manager of Evergreen Intermediate-Term Government Securities
Fund. Mr. Cheshire also is in charge of the Newark Taxable
Fixed Income Unit of First Union. Prior to joining First
Union, Mr. Cheshire was a Vice President at Shearson Lehman
Hutton for 11 years in the Asset Management and Institutional
Government Securities Division. He was also a Vice President
of Government Securities for Charles E. Quincey and an
Assistant Vice President in the Municipal Securities
Department with Bankers Trust Co. in New York. Mr. Cheshire is
a graduate of Rutgers University and holds an M.B.A. from
Fairleigh Dickinson University.
8
<PAGE>
EVERGREEN (logo and
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND photo of
George Washington)
MANAGEMENT REPORT
August 1997
Dear Shareholders:
We are pleased to report on Evergreen Intermediate-Term Government Securities
Fund for the 12-month fiscal year that ended on June 30, 1997.
PERFORMANCE
During the year, the Fund delivered satisfactory returns, consistent with its
objective to seek total return while preserving principal. For the first nine
months of the fiscal year, as interest rates rose, the Fund's slightly long
duration caused some underperformance against industry benchmarks. However, the
Fund outperformed its benchmark during the final three months of the year as
interest rates fell.
ENVIRONMENT
During the 12-month fiscal period, the U.S. economy experienced a pattern best
described as a series of "mini-cycles," with bonds trading within a relatively
narrow range of interest rates. Economic growth surged during the fourth quarter
of 1996 into the first quarter of 1997, subsequently causing concern over
inflationary pressure. Against this backdrop, bond market participants reviewed
each new economic report for any signs of inflation that could prompt the
Federal Reserve Board to increase interest rates. These market concerns resulted
in rising interest rates throughout the first quarter of 1997, culminating in
the March 25 decision by the Federal Reserve Board to raise the Federal Funds
rate by 0.25%. Conversely, investors' fears of inflation receded during the
second quarter of 1997 amid reports of slowing economic growth. As a result,
interest rates fell.
STRATEGY
The Fund's duration, or sensitivity to interest rate changes, was consistent
with that of the benchmark Lehman Brothers Intermediate Government Index during
the fiscal year. In implementing duration strategy, your Fund's investment
manager uses a disciplined process focusing on longer-term trends in the
economic environment. The Fund's duration was modestly shortened following the
Federal Reserve Board's decision to raise the Federal Funds rate in late March.
In response to the declining interest rate environment in the second quarter,
portfolio duration was brought back to neutral. To capture additional yield, the
Fund's emphasis on mortgage-backed securities was also increased, ending the
fiscal year at more than 18% of net assets.
Consistent with the Fund's concentration on government securities, average
credit quality was maintained at AAA.
MATURITY AS OF JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
0-1 Year 4%
1-5 Years 45%
5-10 Years 51%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
We are continuing to monitor closely new economic reports, vigilant for any
indications of a resurgence of inflationary pressure that could cause the
Federal Reserve Board to raise the Federal Funds rate during the second half of
1997. The overall bond market continues to be characterized by near-term
interest rate fluctuations, without any over-riding trend. This environment
dictates a very cautious approach in the coming quarters, with portfolio
duration adjusted consistent with a changing market environment.
We anticipate that your Fund's relatively neutral duration and conservative
style should protect the fund from any significant fluctuations in the market.
In addition, we will continue to seek attractive opportunities by increasing the
Fund's yield through the addition of mortgage-backed securities and other
relatively higher yielding instruments.
Thank you for your investment in Evergreen Intermediate-Term Government
Securities Fund.
Sincerely,
/s/RICHARD K. WAGONER
RICHARD K. WAGONER
EXECUTIVE VICE PRESIDENT
CHIEF INVESTMENT OFFICER
First Union Capital Management Group
/s/ L. ROBERT CHESHIRE
L. ROBERT CHESHIRE
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
9
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
THE U.S. GOVERNMENT SECURITIES FUND
a Series of
THE VIRTUS FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
EVERGREEN INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
a Series of
EVERGREEN FIXED INCOME TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of The U.S. Government
Securities Fund ("Virtus Government"), a series of The Virtus Funds, to
Evergreen Intermediate Term Government Securities Fund ("Evergreen Government"),
a series of the Evergreen Fixed Income Trust, in exchange for Class A shares (to
be issued to holders of Investment shares of Virtus Government) and Class Y
shares (to be issued to holders of Trust shares of Virtus Government) of
beneficial interest, $.001 par value per share, of Evergreen Government,
consists of this cover page and the following described documents, each of which
is attached hereto and incorporated by reference herein:
(1) The Statement of Additional Information of Evergreen
Government dated September 3, 1997 , as amended;
(2) The Statement of Additional Information of Virtus Government
dated November 30, 1997;
(3) Annual Report of Virtus Government for the year ended
September 30, 1997;
(4) Annual Report of Evergreen Government for the year ended June 30,
1997; and
(5) Pro-Forma Combining Financial Statements (unaudited) dated
June 30, 1997.
<PAGE>
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Government and Virtus Government dated January 5, 1998. A
copy of the Prospectus/Proxy Statement may be obtained without charge by calling
or writing to Evergreen Government or Virtus Government at the telephone numbers
or addresses set forth above.
The date of this Statement of Additional Information is January 5,
1998.
STATEMENT OF ADDITIONAL INFORMATION
September 3, 1997
EVERGREEN KEYSTONE SHORT AND INTERMEDIATE TERM BOND FUNDS
200 Berkeley Street, Boston, Massachusetts 02116
800-343-2898
Evergreen Short-Intermediate Bond Fund ("Short-Intermediate")
Evergreen Intermediate-Term Bond Fund ("Evergreen Intermediate")
Evergreen Intermediate-Term
Government Securities Fund ("Intermediate Government")
Keystone Capital Preservation and Income Fund ("Capital Preservation")
Keystone Intermediate Term Bond Fund ("Keystone Intermediate")
This Statement of Additional Information pertains to all classes of
shares of the Funds listed above. It is not a prospectus and should be read in
conjunction with the Prospectus dated September 3, 1997, as supplemented from
time to time, for the Fund in which you are making or contemplating an
investment. The Evergreen Keystone Short and Intermediate Term Bond Funds are
offered through two separate Prospectuses: one offering Class A, Class B and
Class C shares of Short-Intermediate, Evergreen Intermediate, Intermediate
Government, Capital Preservation and Keystone Intermediate, and a separate
prospectus offering Class Y shares of Short-Intermediate, Evergreen Intermediate
and Intermediate Government. Copies of each Prospectus may be obtained without
charge by calling the number listed above.
TABLE OF CONTENTS
Investment Objectives and Policies...............................3
Investment Restrictions.........................................15
Certain Risk Considerations.....................................20
Management......................................................20
Investment Advisers.............................................29
Distribution Plans..............................................33
Allocation of Brokerage.........................................35
Additional Tax Information......................................37
Net Asset Value.................................................39
Purchase of Shares..............................................40
General Information about the Funds.............................51
Performance Information.........................................53
Financial Statements............................................57
Appendix A......................................................59
21467
1
<PAGE>
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 of each Fund are fundamental and cannot be changed without the
approval of shareholders. The following expands the discussion in the Prospectus
regarding certain investments of each Fund.
Types of Investments
United States ("U.S.") Government Obligations (All Funds)
The types of U.S. government obligations in which the Funds may invest
generally include obligations issued or guaranteed by U.S. government agencies
or instrumentalities.
These securities are backed by:
(1)the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
(2)the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive
financial support from the U.S. government are:
(i)Farm Credit System, including the National Bank for Cooperatives,
Farm Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association;
(vi) Government National Mortgage Association; and
vii) Student Loan Marketing Association
GNMA Securities. The Funds may invest in securities issued by the Government
National Mortgage Association ("GNMA"), a wholly-owned U.S. government
corporation, which guarantees the timely payment of principal and interest, but
not premiums paid to purchase these instruments. The market value and interest
yield of these instruments can vary due to market interest rate fluctuations and
early prepayments of underlying mortgages. These securities represent ownership
in a pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to
accurately predict the average maturity of a particular GNMA pool. The scheduled
monthly interest and principal payments relating to mortgages in the pool will
be "passed through" to investors. GNMA securities differ from conventional bonds
in that principal is paid back to the certificate holders over the life of the
loan rather than at maturity. As a result, there will be monthly scheduled
payments of principal and interest. In addition, there may be unscheduled
principal payments representing prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available from
other types of U.S. government securities, GNMA certificates may be less
effective than other types of securities as a means of "locking in" attractive
long-term rates because of the prepayment feature. For instance, when interest
rates decline, the value of a GNMA certificate likely will not rise as much as
comparable debt securities due to the prepayment feature. In addition, these
prepayments can cause the price of a GNMA certificate originally purchased at a
premium to decline in price to its par value, which may result in a loss.
Mortgage-Backed or Asset-Backed Securities. Short-Intermediate, Evergreen
Intermediate, and Keystone Intermediate may invest in mortgage-backed securities
and asset-backed securities. Capital Preservation may invest in mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Two principal types of mortgage-backed securities are
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"). CMOs are securities collateralized by mortgages, mortgage
pass-throughs, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or
are credited with their pro rata portion of the scheduled payments of interest
and principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be supported
by various types of insurance, and some CMOs may be backed by GNMA certificates
or other mortgage pass-throughs issued or guaranteed by U.S. government agencies
or instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities.
In addition to mortgage-backed securities, the Funds may invest in
securities secured by other assets including company receivables, truck and auto
loans, leases, and credit card receivables. These issues may be traded
over-the-counter and typically have a short-intermediate maturity structure
depending on the paydown characteristics of the underlying financial assets
which are passed through to the security holder.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by automobile receivables permit the servicers of
such receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
rated asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, each Fund's Adviser (as
hereinafter defined) considers the financial strength of the guarantor or other
provider of credit support, the type and extent of credit enhancement provided
as well as the documentation and structure of the issue itself and the credit
support.
Restricted and Illiquid Securities (All Funds)
The ability of the Board of Trustees of Evergreen Investment Trust, in
the case of Short-Intermediate, The Evergreen Lexicon Trust, in the case of
Evergreen Intermediate and Intermediate Government, Capital Preservation and
Keystone Intermediate ("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.
Variable or Floating Rate Instruments
Certain of the investments of Evergreen Intermediate, Intermediate
Government, Capital Preservation and Keystone Intermediate may include variable
or floating rate instruments which may involve a demand feature and may include
variable amount master demand notes which may or may not be backed by bank
letters of credit. Variable or floating rate instruments bear interest at a rate
which varies with changes in market rates. The holder of an instrument with a
demand feature may tender the instrument back to the issuer at par prior to
maturity. A variable amount master demand note is issued pursuant to a written
agreement between the issuer and the holder, its amount may be increased by the
holder or decreased by the holder or issuer, it is payable on demand, and the
rate of interest varies based upon an agreed formula. The quality of the
underlying credit must, in the opinion of each Fund's Adviser, be equivalent to
the long-term bond or commercial paper ratings applicable to permitted
investments for each Fund. The Adviser will monitor, on an ongoing basis, the
earning power, cash flow, and liquidity ratios of the issuers of such
instruments and will similarly monitor the ability of an issuer of a demand
instrument to pay principal and interest on demand.
When-Issued and Delayed Delivery Securities (All Funds)
The Funds may enter into securities transactions on a when-issued
basis. These transactions involve the purchase of debt obligations on a
when-issued basis, in which case delivery and payment normally take place within
45 days after the date of commitment to purchase. The Funds will only make
commitments to purchase obligations on a when-issued basis with the intention of
actually acquiring the securities, but may sell them before the settlement date.
The when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case
there could be an unrealized loss at the time of delivery. Capital Preservation
and Keystone Intermediate do not intend to invest more than 5% of their assets
in when issued or delayed delivery transactions.
Segregated accounts will be established with the custodian, and Short-
Intermediate, Evergreen Intermediate and Intermediate Government will maintain
liquid assets in an amount at least equal in value to a Fund's commitments to
purchase when-issued securities. If the value of these assets declines, a Fund
will place additional liquid assets in the account on a daily basis so that the
value of the assets in the account is equal to the amount of such commitments.
The Funds do not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause segregation of more than 20%, of the
total value of their assets.
Lending of Portfolio Securities (All Funds)
The Funds may lend securities pursuant to agreements requiring that the loans be
continuously secured by cash, securities of the U.S. government or its agencies,
or any combination of cash and such securities, as collateral equal at all times
to 100% of the market value of the securities lent. The collateral received when
a Fund lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the lending Fund. During the time portfolio securities are on
loan, the borrower pays the Fund any dividends or interest paid on such
securities. Loans are subject to termination at the option of the Fund or the
borrower. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or equivalent collateral to the borrower or placing broker. A Fund
does not have the right to vote securities on loan, but would terminate the loan
and regain the right to vote if that were considered important with respect to
the investment. Any loan may be terminated by either party upon reasonable
notice to the other party. There may be risks of delay in receiving additional
collateral or risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans are made only to borrowers deemed by the Adviser to be of good
standing and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risk.
Such loans will not be made if, as a result, the aggregate amount of all
outstanding securities loans for Evergreen Intermediate and Intermediate
Government exceed one-third of the value of a Fund's total assets taken at fair
market value. Loans of securities by Short-Intermediate, Capital Preservation
and Keystone Intermediate are limited to 15% of each Fund's total assets.
Reverse Repurchase Agreements
Short-Intermediate, Capital Preservation and Keystone Intermediate may
also enter into reverse repurchase agreements. These transactions are similar to
borrowing cash. In a reverse repurchase agreement, a Fund transfers possession
of a portfolio instrument to another person, such as a financial institution,
broker, or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated 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
Options in which Short-Intermediate trades must be listed on national
securities exchanges.
Purchasing Put and Call Options on Financial Futures Contracts
Short-Intermediate may purchase listed put and call options on
financial futures contracts for U.S. Government securities. Keystone
Intermediate may enter into currency and other financial futures contracts and
related options transactions for hedging purposes and not for speculation.
Unlike entering directly into a futures contract, which requires the purchaser
to buy a financial instrument on a set date at an undetermined price, the
purchase of a put option on a futures contract entitles (but does not obligate)
its purchaser to decide on or before a future date whether to assume a short
position at the specified price.
A Fund may purchase put and call options on futures to protect
portfolio securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related futures contracts
will also decrease in value and the put option will increase in value. In such
an event, a Fund will normally close out its option by selling an identical put
option. If the hedge is successful, the proceeds received by the Fund upon the
sale of the put option plus the realized decrease in value of the hedged
securities.
Alternately, a Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an option,
the option will expire on the date provided in the option contract, and the
premium paid for the contract will be lost.
Purchasing Options
Short-Intermediate may purchase both put and call options on its
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.
Keystone Intermediate may purchase call and put options to close out
existing positions.
Short-Intermediate intends to purchase put and call options on currency
and other financial futures contracts for hedging purposes. A put option
purchased by the 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.
Short-Intermediate currently does not intend to invest more than 5% of
its net assets in options transactions.
Short-Intermediate may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for related
options would exceed 5% of the market value of the Fund's total assets. When the
Fund purchases futures contracts, an amount of cash and cash equivalents, equal
to the underlying commodity value of the futures contracts (less any related
margin deposits), will be deposited in a segregated account with the Fund's
custodian (or the broker, if legally permitted) to collateralize the position
and thereby insure that the purchase of such futures contracts is unleveraged.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, a Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve the
borrowing of funds by a Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, a Fund
will mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
Derivatives - Keystone Intermediate Only
The Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be used
to earn income or protect against risk, or both. For example, one party with
unwanted risk may agree to pass that risk to another party who is willing to
accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Fund is permitted to use derivatives for one
or more of these purposes. Each of these uses entails greater risk than if
derivatives were used solely for hedging purposes. The Fund uses futures
contracts and related options for hedging purposes. Derivatives are a valuable
tool which, when used properly, can provide significant benefit to Fund
shareholders. Keystone Investment Management Company ("Keystone") is not an
aggressive user of derivatives with respect to the Fund. However, the Fund may
take positions in those derivatives that are within its investment policies if,
in Keystone's judgement, this represents an effective response to current or
anticipated market conditions. Keystone's use of derivatives is subject to
continuous risk assessment and control from the standpoint of the Fund's
investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options,
futures, forwards and swaps -- from which virtually any type of derivative
transaction can be created.
Debt instruments that incorporate one or more of these building blocks for
the purpose of determining the principal amount of and/or rate of interest
payable on the debt instruments are often referred to as "structured
securities." An example of this type of structured security is indexed
commercial paper. The term is also used to describe certain securities issued in
connection with the restructuring of certain foreign obligations. The term
"derivative" is also sometimes used to describe securities involving rights to a
portion of the cash flows from an underlying pool of mortgages or other assets
from which payments are passed through to the owner of, or that collateralize,
the securities.
While the judicious use of derivatives by experienced investment managers
such as Keystone can be beneficial, derivatives also involve risks different
from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in the Fund.
o Market Risk -- This is the general risk attendant to all investments
that the value of a particular investment will decline or otherwise
change in a way detrimental to the Fund's interest.
o Management Risk -- Derivative products are highly specialized
instruments that require investment techniques and risk analyses
different from those associated with stocks and bonds. The use of a
derivative requires an understanding not only of the underlying
instrument, but also of the derivative itself, without the benefit of
observing the performance of the derivative under all possible market
conditions. In particular, the use and complexity of derivatives
require the maintenance of adequate controls to monitor the
transactions entered into, the ability to assess
the risk that a derivative adds to the Fund's portfolio and the ability
to forecast price, interest rate or currency exchange rate movements
correctly.
o Credit Risk -- This is the risk that a loss may be sustained by the
Fund as a result of the failure of another party to a derivative
(usually referred to as a "counterparty") to comply with the terms of
the derivative contract. The credit risk for exchange traded
derivatives is generally less than for privately negotiated
derivatives, since the clearing house, which is the issuer or
counterparty to each exchange-traded derivative, provides a guarantee
of performance. This guarantee is supported by a daily payment system
(i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there
is no similar clearing agency guarantee. Therefore, the Fund considers
the creditworthiness of each counterparty to a privately negotiated
derivative in evaluating potential credit risk.
o Liquidity Risk -- Liquidity risk exists when a particular instrument
is difficult to purchase or sell. If a derivative transaction is
particularly large or if the relevant market is illiquid (as is the
case with many privately negotiated derivatives), it may not be
possible to initiate a transaction or liquidate a position at an
advantageous price.
o Leverage Risk -- Since many derivatives have a leverage component,
adverse changes in the value or level of the underlying asset, rate or
index can result in a loss substantially greater than the amount
invested in the derivative itself. In the case of swaps, the risk of
loss generally is related to a notional principal amount, even if the
parties have not made any initial investment. Certain derivatives have
the potential for unlimited loss, regardless of the size of the initial
investment.
o Other Risks -- Other risks in using derivatives include the risk of
mispricing or improper valuation and the inability of derivatives to
correlate perfectly with underlying assets, rates and indices. Many
derivatives, in particular privately negotiated derivatives, are
complex and often valued subjectively. Improper valuations can result
in increased cash payment requirements to counter parties or a loss of
value to a Fund. Derivatives do not always perfectly or even highly
correlate or track the value of the assets, rates or indices they are
designed to closely track. Consequently, the Fund's use of derivatives
may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Fund's investment objective.
Writing Put and Call Options - Short-Intermediate and Keystone Intermediate Only
A Fund may write (i.e., sell) covered call and put options. By writing
a call option, the Fund becomes obligated during the term of the option to
deliver the securities underlying the option upon payment of the exercise price.
By writing a put option, the Fund becomes obligated during the term of the
option to purchase the securities underlying the option at the exercise price if
the option is exercised. Short-Intermediate also may write straddles
(combinations of covered puts and calls on the same underlying security).
The Funds may only write "covered" options. This means that so long as a
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
the Fund has written options against all of its securities which are available
for writing options, the Fund may 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. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. However, each Fund does not expect that this will occur.
Each Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid assets
having a value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through
a receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, a Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
Section 4(2) Commercial Paper
Short-Intermediate may invest in commercial paper issued in reliance on
the exemption from registration afforded by Section 4(2)of the Securities Act of
1933. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Fund, who agrees that it is purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2)commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's Adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. In addition, because Section 4(2)
commercial paper is liquid, the Fund does not intend to subject such paper to
the limitation applicable to restricted securities.
Repurchase Agreements (All Funds)
Certain of the investments of the Funds may include agreements which
are agreements by which a person (e.g., a Fund) obtains a security and
simultaneously commits to return the security to the seller (a member bank of
the Federal Reserve System or recognized securities dealer) at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days (usually not more than seven) from the date of purchase. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or maturity of the underlying security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price, which obligation is in effect secured by the value of the underlying
security.
A Fund or its custodian will take possession of the securities subject
to repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Foreign Securities
Short-Intermediate may invest up to 20% of its assets in foreign
securities or U.S. securities traded in foreign markets and Evergreen
Intermediate may invest in U.S. dollar denominated obligations or securities of
foreign issuers. Keystone Intermediate may invest in foreign securities and in
securities denominated in foreign currencies. Permissible investments may
consist of obligations of foreign branches of U.S. banks and of foreign banks,
including European certificates of deposit, European time deposits, Canadian
time deposits and Yankee certificates of deposit, and investments in Canadian
commercial paper, foreign securities and Europaper. These instruments may
subject the Fund to investment risks that differ in some respects from those
related to investments in obligations of U.S. domestic issuers. Such risks
include future adverse political and economic developments, the possible
imposition of withholding taxes on interest or other income, possible seizure,
nationalization, or expropriation of foreign deposits, the possible
establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Such investments may also entail
higher custodial fees and sales commissions than domestic investments. Foreign
issuers of securities or obligations are often subject to accounting treatment
and engage in business practices different from those respecting domestic
issuers of similar securities or obligations. Foreign branches of U.S. banks and
foreign banks may be subject to less stringent reserve requirements than those
applicable to domestic branches of U.S. banks.
Foreign Currency Transactions
As one way of managing exchange rate risk, Short-Intermediate and
Keystone Intermediate may enter into forward currency exchange contracts
(agreements to purchase or sell currencies at a specified price and date). The
exchange rate for the transaction (the amount of currency the Fund will deliver
and receive when the contract is completed) is fixed when a Fund enters into the
contract. A Fund usually will enter into these contracts to stabilize the U.S.
dollar value of a security it has agreed to buy or sell. A Fund intends to use
these contracts to hedge the U.S. dollar value of a security it already owns,
particularly if the Fund expects a decrease in the value of the currency in
which the foreign security is denominated. Although the Fund will attempt to
benefit from using forward contracts, the success of its hedging strategy will
depend on the Adviser's ability to predict accurately the future exchange rates
between foreign currencies and the U.S. dollar. The value of a Fund's
investments denominated in foreign currencies will depend on the relative
strengths of those currencies and the U.S. dollar, and the Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the U.S. dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by a Fund. A Fund
may also purchase and sell options related to foreign currencies in connection
with hedging strategies.
Short-Intermediate will not enter into forward contracts for hedging
purposes in a particular currency in an amount in excess of the Fund's assets
denominated in that currency, but as consistent with its other investment
policies, is not otherwise limited in its ability to use this strategy.
Interest Rate Transactions - Swaps, Caps and Floors
Capital Preservation and Keystone Intermediate
If a Fund enters into interest rate swap, cap or floor transactions, it
expects to do so primarily for hedging purposes, which may include preserving a
return or spread on a particular investment or portion of its portfolio or
protecting against an increase in the price of securities the Fund anticipates
purchasing at a later date. The Fund does not intend to use these transactions
in a speculative manner.
Interest rate swaps involve the exchange by the Fund with another party
of their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments). Interest rate caps and floors
are similar to options in that the purchase of an interest rate cap or floor
entitles the purchaser, to the extent that a specified index exceeds (in the
case of a cap) or falls below (in the case of a floor) a predetermined interest
rate, to receive payments of interest on a contractually-based principal
("notional") amount from the party selling the interest rate cap or floor. The
Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending upon whether it is hedging its
assets or liabilities, and will usually enter into interest rate swaps on a net
basis (i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments).
The swap market has grown substantially in recent years, with a large
number of banks and investment banking firms acting as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become more established and relatively liquid. Caps and floors are less liquid
than swaps. These transactions also involve the delivery of securities or other
underlying assets and principal. Accordingly, the risk of loss to a Fund from
interest rate transactions is limited to the net amount of interest payments
that the Fund is contractually obligated to make.
Other Investments
The Funds are not prohibited from investing in obligations of banks
which are clients of the Distributor (as herein after defined). However, the
purchase of shares of the Funds by such banks or by their customers will not be
a consideration in determining which bank obligations the Funds will purchase.
The Funds will not purchase obligations of its Adviser or its affiliates.
INVESTMENT RESTRICTIONS
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 each Fund's
Adviser without shareholder approval, subject to review and approval by the
Trustees. As used in this Statement of Additional Information and in the
Prospectus, "a majority of the outstanding voting securities of the Fund" means
the lesser of (1) the holders of more than 50% of the outstanding shares of
beneficial interest of the Fund or (2) 67% of the shares present if more than
50% of the shares are present at a meeting in person or by proxy.
1.....Concentration of Assets in Any One Issuer
Diversification of Investments
With respect to 75% of the value of its assets, a Fund will not purchase
securities of any one issuer (other than cash, cash items or securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities) if as a
result more than 5% of the value of its total assets would be invested in the
securities of the issuer. Evergreen Intermediate and Intermediate Government
will not acquire more than 10% of the outstanding voting securities of any one
issuer.
2.....Purchase of Securities on Margin
......No Fund will 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.
3.....Unseasoned Issuers
......Neither Short-Intermediate*, Capital Preservation or Keystone Intermediate
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.
4.....Underwriting
......Short-Intermediate, Evergreen Intermediate and Intermediate Government
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.
......Capital Preservation and Keystone Intermediate will not underwrite
securities of other issuers, except that each Fund may purchase securities from
the issuer or others and dispose of such securities in a manner consistent with
its investment objective.
5.....Interests in Oil, Gas or Other Mineral Exploration or Development
Programs.
Short-Intermediate*, Evergreen Intermediate and Intermediate Government
will not purchase interests in oil, gas or other mineral exploration or
development programs or eases, although each Fund may purchase the securities of
other issuers which invest in or sponsor such programs.
6.....Concentration in Any One Industry
......Short-Intermediate will not invest more than 25% of the value of its total
assets in any one industry except the Fund may invest more than 25% of its total
assets in securities issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
......Keystone Intermediate may 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).
7.....Warrants
......Short-Intermediate*, Evergreen Intermediate* and Intermediate Government*
will not invest more than 5% of their assets in warrants, including those
acquired in units or attached to other securities. For purposes of this
restriction, warrants acquired by the Funds in units or attached to securities
may be deemed to be without value.
8.....Ownership by Trustees/Officers
None of Short-Intermediate*, Evergreen Intermediate or Intermediate
Government 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.
9.....Short Sales
......Short-Intermediate, Capital Preservation and Keystone Intermediate will
not 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.
The use of short sales will allow a 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.
......Evergreen Intermediate and Intermediate Government will not sell any
securities short.
10....Lending of Funds and Securities
......Short-Intermediate will not lend portfolio securities valued at more than
15% of its total assets to broker-dealers.
......Capital Preservation and Keystone Intermediate may not make loans, except
that a Fund may (a) purchase or hold debt securities consistent with its
investment objective, (b) lend portfolio securities valued at not more than 15%
of its total assets to broker-dealers and (c) enter into repurchase agreements.
......Evergreen Intermediate and Intermediate Government may not make loans,
except that (a) a Fund may purchase or hold debt instruments in accordance with
its investment objective and policies; (b) a Fund may enter into repurchase
agreements, and (c) the Funds may engage in securities lending as described in
the Prospectus and in this Statement of Additional Information.
11....Commodities
......Short-Intermediate will not purchase or sell commodities or commodity
contracts; however, the Fund may enter into futures contracts on financial
instruments or currency and sell or buy options on such contracts. Evergreen
Intermediate and Intermediate Government may not purchase commodities or
commodities contracts. However, subject to their permitted investments, any Fund
may invest in companies which invest in commodities and commodities contracts.
......Capital Preservation and Keystone Intermediate may not purchase or sell
commodities or commodity contracts.
12....Real Estate
......Short-Intermediate may not buy or sell real estate although the Fund may
invest in securities of companies whose business involves the purchase or sale
of real estate or in securities which are secured by real estate or interests in
real estate.
......Evergreen Intermediate and Intermediate Government may not purchase or
sell real estate, real estate limited partnership interests, and interests in a
pool of securities that are secured by interests in real estate. However,
subject to their permitted investments, any Fund may invest in companies which
invest in real estate.
......Capital Preservation and Keystone Intermediate may not purchase or sell
real estate, except that each Fund may purchase and sell securities secured by
real estate and securities of companies which invest in real estate, and may
engage in financial futures contracts and related options transactions.
13....Borrowing, Senior Securities, Reverse Repurchase Agreements
......Evergreen Intermediate and Intermediate Government will not borrow money
except as a temporary measure for extraordinary or emergency purposes in an
amount up to one-third of the value of total assets, including the amounts
borrowed. Any borrowing will be done from a bank and to the extent such
borrowing exceeds 5% of the value of a Fund's total assets, asset coverage of at
least 300% is required. In the event that such asset coverage shall at any time
fall below 300%, the Fund shall within three days thereafter or such longer
period as the Securities and Exchange Commission (the "SEC") may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. This
borrowing provision is included solely to facilitate the orderly sale of
portfolio securities to accommodate heavy redemption requests if they should
occur and is not for investment purposes. All borrowings will be repaid before
making additional investments and any interest paid on such borrowings will
reduce income.
Short-Intermediate may borrow only in amounts not in excess of 5% of
the value of its total assets in order to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The entry by Short-Intermediate into futures contracts shall be
deemed a borrowing. Any such borrowings need not be collateralized.
Short-Intermediate will not purchase any securities while borrowings in excess
of 5% of the value of their total assets are outstanding.
......Capital Preservation and Keystone Intermediate will not borrow money or
enter into reverse repurchase agreements, except that each Fund may enter into
reverse repurchase agreements or borrow money from banks for temporary or
emergency purposes in aggregate amounts of up to one-third of the value of each
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
excess borrowings will be repaid before additional investments are made.
......Capital Preservation and Keystone Intermediate may 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.
14....Pledging Assets
......No Fund will mortgage, pledge or hypothecate any assets except to secure
permitted borrowings. In these cases, Short-Intermediate 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 and Evergreen
Intermediate and Intermediate Government may do so in amounts up to 10% of their
total assets. 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.
......Capital Preservation and Keystone Intermediate may not pledge more than
15% of each Fund's 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.
15....Investing in Securities of Other Investment Companies
......Short-Intermediate will purchase securities of investment companies only
in open-market transactions involving customary broker's commissions. Evergreen
Intermediate and Intermediate Government may only purchase securities of other
investment companies which are money market funds and CMOs and REMICs deemed to
be investment companies.
In each case the Funds will only make such purchases to the extent
permitted by the Investment Company Act of 1940 (the "1940 Act") and the rules
and regulations thereunder. However, these limitations are not applicable if the
securities are acquired in a merger, consolidation or acquisition of assets. It
should be noted that investment companies incur certain expenses such as
management fees and therefore any investment by a Fund in shares of another
investment company would be subject to such duplicate expenses.
It is the position of the SEC's Staff that certain nongovernmental issuers
of CMOs and REMICs constitute investment companies pursuant to the 1940 Act and
either (a) investments in such instruments are subject to the limitations set
forth above or (b) the issuers of such instruments have received orders from the
SEC exempting such instruments from the definition of investment company.
......Capital Preservation and Keystone Intermediate may not purchase securities
of other investment companies, except as part of a merger, consolidation,
purchase of assets or similar transaction.
16....Restricted Securities
......Short-Intermediate will not invest more than 10% of its net assets in
securities subject to restrictions on resale under the Securities Act of 1933.
17....Illiquid Securities
......Short-Intermediate, Evergreen Intermediate* and Intermediate Government*
will not invest more than 10% of their 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.
18....Options
......Evergreen Intermediate and Intermediate Government may not write or
purchase puts, calls, options or combinations thereof.
19....Control
......Evergreen Intermediate and Intermediate Government may not invest in
companies for the purpose of exercising control.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Funds did not borrow money, sell securities short, invest in
reverse repurchase agreements in excess of 5% of the value of their net assets,
or invest more than 5% of their net assets in the securities of other investment
companies in the last fiscal year, and have no present intent to do so during
the coming year.
For purposes of their policies and limitations, the Funds consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings and loan association, having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment, to be
"cash items".
CERTAIN RISK CONSIDERATIONS
There can be no assurance that a Fund will achieve its investment
objectives and an investment in the Fund involves certain risks which are
described under "Description of the Funds - Investment Objectives and Policies"
in the Prospectus.
MANAGEMENT
The Evergreen Keystone funds consist of sixty-six mutual funds. Each
mutual fund is, or is a series of, a registered, open-end management company.
Trustees and executive officers of each mutual fund, their ages, and
their principal occupations during the last five years are shown below.
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of the
Evergreen group of mutual funds and Trustee. Retired Vice President of Lance
Inc. (food manufacturing); Chairman of the Distribution Comm. Foundation for the
Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park, Charlotte, NC
- -Trustee. Medical Director, U.S. Healthcare of Charlotte, North Carolina since
1996; President, Primary Physician Care from 1990 to 1996.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street Suite 980, Charlotte, NC-Trustee.
Attorney, Law Offices of Michael S. Scofield since 1969.
Messrs. Howell, Salton and Scofield are Trustees of all Evergreen Keystone
mutual funds.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC -Trustee. Sales
Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
THOMAS L. McVERRY (58), 4419 Parkview Drive, Charlotte, NC-Trustee. Director of
Carolina Cooperative Federal Credit Union since 1990 and Rexham Corporation from
1988 to 1990; Vice President of Rexham Industries, Inc. (diversified
manufacturer) from 1989 to 1990; Vice President-Finance and Resources, Rexham
Corporation from 1979 to 1990.
WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC- Trustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990.
Messrs. McDonnell, McVerry and Pettit are Trustees of all Evergreen Keystone
mutual funds, except those established within the Evergreen Variable Trust.
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL- Trustee. Real
estate developer and construction consultant since 1980; President of Centrum
Equities since 1987 and Centrum Properties, Inc. since 1980.
FOSTER BAM (70), Greenwich Plaza, Greenwich, CT- Trustee. Partner in the law
firm of Cummings and Lockwood since 1968.
Messrs. Ashkin and Bam are Trustees of all Evergreen Keystone mutual funds,
except those established within the Evergreen Variable Trust and Evergreen
Investment Trust.
FREDERICK AMLING (69) Trustee. Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member, Board of
Advisers, Credito Emilano (banking); and former Economics and Financial
Consultant, Riggs National Bank.
CHARLES A. AUSTIN III (61) Trustee. Investment Counselor to Appleton
Partners, Inc.; former Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment advice).
GEORGE S. BISSELL* (67) Chairman of the Keystone group of mutual funds, and
Trustee. Chairman of the Board and Trustee of Anatolia College; Trustee of
University Hospital (and Chairman of its Investment Committee); former Director
and Chairman of the Board of Hartwell Keystone; and former Chairman of the Board
and Chief Executive Officer of Keystone Investments, Inc..
EDWIN D. CAMPBELL (69) Trustee. Director and former Executive Vice President,
National Alliance of Business; former Vice President, Educational Testing
Services; former Dean, School of Business, Adelphi University; and former
Executive Director, Coalition of Essential Schools, Brown University.
CHARLES F. CHAPIN (67) Trustee. Former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and Executive Vice
President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund, and
The Phoenix Big Edge Series Fund; and former President, Morehouse College.
F. RAY KEYSER, JR. (69) Trustee and Advisor to the Boards of Trustees of the
Evergreen group of mutual funds. Counsel, Keyser, Crowley & Meub, P.C.; Member,
Governor's (VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and Hitchcock Clinic;
Director, Vermont Yankee Nuclear Power Corporation, Vermont Electric Power
Company, Inc., Grand Trunk Corporation, Central Vermont Railway, Inc., S.K.I.
Ltd., Sherburne Corporation, Union Mutual Fire Insurance Company, New England
Guaranty Insurance Company, Inc., and the Investment Company Institute; former
Governor of Vermont.
DAVID M. RICHARDSON (55) Trustee. Executive Vice President, DHR International,
Inc. (executive recruitment); former Senior Vice President, Boyden International
Inc. (executive recruitment); and Director, Commerce and Industry Association of
New Jersey, 411 International, Inc., and J&M Cumming Paper Co.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of the
Evergreen group of mutual funds. Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Trust Company of Connecticut, Hartford
Hospital, Old State House Association, and Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-
Oxford School and Greater Hartford YMCA; former Director, Executive Vice
President, and Vice Chairman of The Travelers Corporation.
ANDREW J. SIMONS (57) Trustee. Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; former President, Nassau County Bar Association;
former Associate Dean and Professor of Law, St. John's University School of Law.
Messrs. Amling, Austin, Bissell, Campbell, Chapin, Gifford, Keith, Keyser,
Richardson, Shima and Simons are Trustees or Directors of the twenty-five funds
in the Keystone group of mutual funds. Their addresses are 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
ROBERT J. JEFFRIES (74), 2118 New Bedford Drive, Sun City Center, Fl Trustee
Emeritus. Corporate consultant since 1967.
Mr. Jeffries has been serving as a Trustee Emeritus of eleven Evergreen Keystone
Mutual Funds since January 1, 1996 (excluded are Evergreen Variable Trust,
Evergreen Investment Trust, as well as the Keystone group of mutual funds).
EXECUTIVE OFFICERS
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY- President and
Treasurer. Consultant to BISYS Fund Services since 1996. Senior Managing
Director, Furman Selz LLC since 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.
* This Trustee may be considered an "interested person" of the Funds within the
meaning of the 1940 Act.
For the fiscal period ended June 30, 1997, Trustees of the Funds
received $9,451 and $175,376 in retainers and fees from The Evergreen Lexicon
Fund and Evergreen Investment Trust, respectively. For the year ending June 30,
1997, fees paid to Independent Trustees on a fund complex wide basis were
approximately $1,110,975.
The officers of the Trusts are all officers and/or employees of The BISYS Group,
Inc. ("BISYS Group"), except for Mr. Pileggi, who is a consultant to The BISYS
Group. The BISYS Group is an affiliate of Evergreen Keystone Distributor, Inc.
("EKD"), the distributor of each Class of shares of each Fund.
No officer or Trustee of the Trusts owned more than 1.0% of any Class
of shares of any of the Funds as of August 31, 1997.
Set forth below for each of the Trustees receiving in excess of $60,000
for the fiscal period of July 1, 1996 through June 30, 1997 is the aggregate
compensation paid to such Trustee by the Evergreen Keystone funds:
Total Compensation
From Fund Complex
Name Paid To Trustee
James S. Howell $93,800
Gerald M. McDonnell 80,000
Thomas L. McVerry 85,000
William Walt Pettit 82,500
Russell A Salton, III M.D. 87,000
Michael S. Scofield 88,200
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 Augsut 31, 1997.
<TABLE>
<S> <C> <C> <C>
Name of % of
Name and Address Fund/Class No. of Shares Class
- ---------------- ---------- ------------- ----------
FUBS & Co. FEBO Short-Intermediate/A 104,641 5.77%
Ronald L. Spector
D/B/A River Walk
1800 Second Street, Suite 808
Sarasota, FL 34236-5904
FUBS & Co. FEBO Short-Intermediate/C 11,335 10.90%
Dreamland Skating Rink Inc
PO Drawer 13207
Pensacola, FL 32591-3207
MLPF&S for sole benefit Short-Intermediate/C 10,680 10.27%
of its customersAttn: Fund Administration
4800 Deer Lake Dr. E 3rd Fl.
Jacksonville, FL 32246-6484
Florida Osteopathic Short-Intermediate/C 10,373 9.98%
Medical Assoc.
2007 Apalachee Pky
Tallahassee, FL 32301-4847
FUBS & Co. FEBO Short-Intermediate/C 6,963 6.70%
Rachel W. Fort and Edward C Fort
2737 Stockton St.
Winston Salem, NC 27127
FUBS & Co. FEBO Short-Intermediate/C 5,573 5.36%
Victor Wozniak and
Vermell Wozniak Dreamland Trst
PO Drawer 13207
Pensacola, FL 32591-3207
FUBS & Co. FEBO Short-Intermediate/C 5,402 5.20%
Emmaus Lutheran Church
2500 So. Volusia Ave.
Orange City, FL 32763-9124
PaineWebber for the Short-Intermediate/C 5,199 5.00%
benefit of Robert Bowen &
Mona Carpenter-Bowen
Jt Ten Wros
1686 Massachusetts Ave.
Lunenburg, MA 01462-1843
First Union National Bank Short-Intermediate/Y 18,345,872 49.60%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
First Union National Bank Short-Intermediate/Y 18,249,273 49.33%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
FUBS & Co. FEBO Evergreen Intermediate/B 9,843 8.56%
Veronica B. Birdsong
1255 B Road
Loxahatchee, FL 33470-4248
First Union Natl Bank-FL Evergreen Intermediate/B 15,110 13.15%
C/F Lurene N. Roser IRA
5200 N. Ocean Dr. Apt. 17D
Singer Island, FL 33404-2618
FUBS & Co. FEBO Evergreen Intermediate/B 9,745 8.48%
Frances E. Clyma Rev Trust
Frances E. Clyma and
Robert L. Mastin Co-Tttees
U/A/D 01/25/96
Palm Beach Garde, FL 33410
FUBS & Co. FEBO Evergreen Intermediate/B 7,907 6.88%
Mary Louise Chatman
Flora Louise Chatman Wages POA
9532 Ft. Foote Road
Ft. Washington, MD 20744-5753
Margaret S. Collins Evergreen Intermediate/C 2,106 73.72%
1106 Lothian Drive
Tallahassee, FL 32312-2836
Peter M. Kopp and Evergreen Intermediate/C 495 17.33%
Mary Jean Kopp JtWros
C/O OC International
5801 North Union Blvd.
Colorado Springs, CO 80918
FUBS & Co. FEBO Evergreen Intermeidate/C 246 8.60%
Chris J. Thigpen
4497 Pineland Dr.
Evans, GA 30809-3233
First Union National Bank Evergreen Intermediate/Y 10,131,742 64.61%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S Tryon St.
Charlotte, NC 28288-0002
First Union National Bank Evergreen Intermediate/Y 5,508,432 35.13%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
First Union Bank-CT C/F Inc Intermediate Government/A 8,663 15.09%
F/B/O Zeno Chicarilli PSP
Attn: Zeno Chicarilli
2 Cobblefield Lane
Guilford, CT 06437-2384
FUBS & Co. FEBO Intermediate Government/A 7,023 12.24%
Upper Saucon Volunteer Fire
Department #1
C/O Joseph Hoffstetter
4888 Lanark Rd.
Center Valley, PA 18034-8605
NJ State Fireman's Assoc. Intermediate Government/A 5,258 9.20%
Of Morris Township
11 Catalpa Rd.
Morristown, NJ 07960-6132
Ignaz Keglovits & Intermediate Government/A 4,755 8.28%
Mary Keglovits Jtten
15 North 9th Street
Coplay, PA 18037-1527
Doris Mack Intermediate Government/A 4,412 7.69%
8 Mountain View Dr.
Chester, NJ 07930-3104
FUBS & Co. FEBO Intermediate Government/A 3,051 5.32%
Alice T. Brophy
30 Rosedale Ave.
Madison, NJ 07940-2146
FUBS & Co. FEBO Intermediate Government/B 10,160 17.29%
Joseph Kacsur
7040 Woodside Oak Circle
Sarasota, FL 34231-5565
FUBS & Co. FEBO Intermediate Government/B 9,921 16.88%
Carmela M. Woodruff
1 College Lane Apt 86
Brevard, NC 28712
FUBS & Co. FEBO Intermediate Government/B 9,833 16.73%
Frances E. Clyma Rev Trust
Frances E. Clyma and
Robert L Mastin Co-Ttees
U/A/D 01/25/96
Palm Beach Garde, FL 33410
FUBS & Co. FEBO Intermediate Government/B 3,444 5.86%
First Union Natl Bank/TN F/B/O
Geri McNamara Loan Account
Attn: Tracy Brown
600 S. Main St.
Goodlettsville, TN 37072-1701
First Union Natl Bank-TN C/F Intermediate Government/B 3,392 5.77%
William E. Bass Sr. IRA
102 Grace Drive
Goodlettsville, TN 37072-3537
FUBS & Co. FEBO Intermediate Government/B 3,193 5.43%
Loretta Bukowski and
Helen Bukowski
8860 Taft Street
Pembroke Pines, FL 33024-4635
FUBS & Co. FEBO Intermediate Government/B 3,182 5.47%
Howard J. Carroll
4019 N. Chesterbrook Road
Arlington, VA 22207-4635
Donaldson Lufkin Jenrette Intermediate Government/C 10,753 89.85%
Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-2052
MLPF&S for sole benefit Intermediate Government/C 1,185 9.90%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484
First Union National Bank Intermediate Government/Y 6,111,264 85.32%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S Tryon St.
Charlotte, NC 28288-0002
First Union National Bank Intermediate Government/Y 1,018,405 14.22%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S Tryon St.
Charlotte, NC 28288-0002
Smith Barney Inc. Capital Preservation/A 243,272 14.78%
00154924733
388 Greenwich Street
New York, NY 10013
MLPF&S for the sole benefit Capital Preservation/A 287,313 16.24%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484
Gary W. Grant & Capital Preservation/A 112,183 6.81%
Eva Grant Jt/Wros
10906 Wickline
Houston, TX 77024
MLPF&S for the sole benefit Capital Preservation/B 420,391 13.24%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for sole benefit Capital Preservation/C 80,684 19.86%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484
St. Ann's Catholic Church Capital Preservation/C 20,673 5.09%
Attn: Fr Peter McKenna
PO Box 256
La Vernia, TX 78121-0256
MLPF&S for the sole benefit Keystone Intermediate/A 251,460 22.38%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484
Donaldson Lufkin Jenrette Keystone Intermediate/A 64,213 5.71%
Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-2052
MLPF&S for the sole benefit Keystone Intermediate/B 167,500 13.80%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484
MLPF&S for sole benefit Keystone Intermediate/C 206,121 28.80%
of its customers
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484
NFSC FEBO #BNG-522228 Keystone Intermediate/C 36,285 5.07%
Ctr for the Advancement of HLT
Rena Convissor
k2000 Florida Ave. NW
Suite 210
Washington, DC 20009-1231
</TABLE>
INVESTMENT ADVISERS
(See also "Management of the Funds" in each Fund's Prospectus) The
investment adviser of Short-Intermediate, Evergreen Intermediate and
Intermediate Government is First Union National Bank ("FUNB"), located at 201
South College Street, Charlotte, North Carolina 28288 which, in turn, is a
subsidiary of First Union Corporation ("First Union"), a bank holding company
headquartered in Charlotte, North Carolina. FUNB provides investment advisory
services to the Funds through its Capital Management Group ("CMG"). Keystone
Investment Management Company ("Keystone"), a subsidiary of FUNB located at 200
Berkeley Street, Boston, Massachusetts 02116, is investment adviser to Capital
Preservation and Keystone Intermediate.
Under their respective Investment Advisory Agreements with each Fund, CMG
and Keystone (each an "Adviser" and, collectively, the "Advisers") have 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, the 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. Prior to December 11, 1997, Keystone Management Inc., ("Keystone
Management") provided investment management services to Keystone Intermediate.
Keystone, the Fund's investment adviser, was entitled to a certain percentage of
the fee paid by the Fund to Keystone Management, and was paid by Keystone
Management. Total dollar amounts paid by the Fund to Keystone Management, the
Fund's former investment manager, for investment management and administrative
services rendered, are inclusive of the amounts paid to by Keystone Management
to Keystone for investment advisory services are shown:
<TABLE>
<S> <C> <C> <C>
Six Months
SHORT-INTERMEDIATE Year Ended Year Ended Ended
06/30/97 6/30/96 6/30/95
--------- -------- --------
Advisory Fee $1,998,063 $1,951,949 $961,697
========= ========= =========
Ten Months
EVERGREEN Year Ended Ended Year Ended
INTERMEDIATE 06/30/97 6/30/96 8/31/95
---------- ---------- ---------
Advisory Fee $987,044 $600,081 $544,577
Waiver ( 0) ( 64,983) (128,003)
-------- -------- --------
Net Advisory Fee $987,044 $535,098 $416,574
========= ========= =========
Ten Months
INTERMEDIATE Year Ended Ended Year Ended
GOVERNMENT 06/30/97 06/30/96 8/31/95
---------- -------- --------
Advisory Fee $546,941 $506,065 $634,185
Waiver ( 73,557) (61,160) (144,507)
--------- --------- --------
Net Advisory Fee $473,384 $444,905 $489,678
========= ========= =========
Nine Months
CAPITAL Ended Year Ended Year Ended
PRESERVATION 06/30/97 09/30/96 09/30/95
---------- -------- --------
Advisory Fee $284,977 $493,147 $605,247
Waiver/Reimb. (245,255) (341,016) (503,005)
---------- -------- --------
Net Advisory Fee $ 39,722 $152,131 $102,242
========== ========= =========
Eleven Months
KEYSTONE Ended Year Ended Year Ended
INTERMEDIATE 06/30/97 07/31/96 07/31/95
Advisory Fee $202,102 $273,644 $291,834
Waiver/Reimb. (145,636) (191,096) (207,571)
-------- -------- --------
Net Advisory Fee $ 56,466 $ 82,548 $ 84,263
======== ========= ========
</TABLE>
Expense Limitations
Keystone voluntarily limits the annual expenses, excluding indirectly
paid expenses, of Class A, Class B and Class C shares to 0.90%, 1.65% and 1.65%
of average net class assets, respectively, for Capital Preservation and to
1.10%, 1.85% and 1.85% of average net class assets, respectively, for Keystone
Intermediate. Keystone intends to continue the foregoing expense limitations on
a calendar month-by-month basis. Keystone will periodically evaluate the
foregoing expense limitations and may modify or terminate them in the future.
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 the
Trust's Trustees or by the 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 wilful misfeasance, bad faith or gross negligence on the part of the
Adviser or of reckless disregard of its obligations thereunder. Each Investment
Advisory Agreement continues for two years from its effective date and will
continue from year to year with respect to each Fund provided that such
continuance is approved annually by a vote of a majority of the Trustees
including a majority of those Trustees who are not parties thereto or
"interested persons" of any such party cast in person at a meeting duly called
for the purpose of voting on such approval or by a vote of a majority of the
outstanding voting securities of each Fund.
Certain other clients of the Adviser may have investment objectives and
policies similar to those of the Funds. An 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 the Advisers to allocate advisory
recommendations and the placing of orders in a manner which is deemed equitable
by each Adviser to the accounts involved, including the Funds. When two or more
clients of an 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.
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, the 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 Management
Corp., a subsidiary of FUNB ("Evergreen Asset"), Keystone or FUNB act as
investment adviser or between the Fund and any advisory clients of Evergreen
Asset, Keystone, FUNB or their affiliates. 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 1, 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.
Prior to January 19, 1996, SEI Financial Management Company acted as
administrator for Evergreen Intermediate and Intermediate Government. For the
ten months ended June 30, 1996, and the fiscal year ended August 31, 1995
Evergreen Intermediate incurred $97,364 and $154,291, respectively, in
administrative service costs. For ten months ended June 30, 1996 and the fiscal
year ended August 31, 1995 Government incurred $91,283 and $179,686,
respectively, in administrative service costs.
Commencing July 8, 1995, in the case of Evergreen Investment Trust, and on
January 19, 1996, in the case of The Evergreen Lexicon Fund, Evergreen Asset
began providing administrative services to each of the portfolios of the Trusts
for a fee based on the average daily net assets of each Fund administered by
Evergreen Asset for which FUNB affiliates also served as investment adviser,
calculated daily and payable monthly at the following annual rates: .050% on the
first $7 billion; .035% on the next $3 billion; .030% on the next $5 billion;
.020% on the next $10 billion; .015% on the next $5 billion; and .010% on assets
in excess of $30 billion.
At present, Evergreen Keystone Investment Services ("EKIS") serves as
administrator to Short-Intermediate, Evergreen Intermediate and Intermediate
Government subject to the supervision and control of the Trustees of each Trust.
As administrator, EKIS provides facilities, equipment and personnel to the Funds
and is entitled to receive a fee based on the average daily net assets of all
mutual funds for which CMG, Keystone or Evergeen Asset serve as investment
adviser, calculated in accordance with the following schedule:.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.
EKIS also provides administrative services to Capital Preservation and
Keystone Intermediate on behalf of their investment adviser.
Prior to January 1, 1997, Furman Selz LLC, an affiliate of Evergreen
Keystone Distributor, Inc. (formerly Evergreen Funds Distributor, Inc.,
distributor for the Evergreen Keystone funds (the "Distributor"), served as
sub-administrator to Short-Intermediate, Evergreen Intermediate and Intermediate
Government and was 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 affiliates also
served as investment adviser, calculated in accordance with the following
schedule: .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.
BISYS Fund Services ("BISYS"), an affiliate of EKD, now serves as
sub-administrator to each Fund and is entitled to receive a fee from each Fund
calculated daily and payable monthly at an annual rate based on the aggregate
average daily net assets of the mutual funds for which FUNB, Evergreen Asset,
Keystone or any affiliate of First Union serves as investment adviser,
calculated in accordance with the following schedule: .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 mutual funds for
which Evergreen Asset, FUNB or Keystone serve as investment adviser as of June
30, 1997 were approximately $30.5 billion.
For the fiscal years ended June 30, 1997 and 1996, and the fiscal
period ended June 30, 1995, Short-Intermediate incurred $167,636, $205,938 and
$159,002, respectively, in administrative service costs.
For the fiscal year ended June 30, 1997, the fiscal period ended June
30, 1996 and the fiscal year ended August 31, 1995, Evergreen Intermediate
incurred $69,536, $97,364 and $154,291, respectively, in administrative service
costs.
For the fiscal year ended June 30, 1997, the fiscal period ended June
30, 1996 and the fiscal year ended August 31, 1995, Intermediate Government
incurred $38,083, $91,283 and $179,686, respectively, in administrative service
costs.
For the fiscal period ended June 30, 1997, and the fiscal years ended
September 30, 1996 and 1995, Capital Preservation incurred $34,481, $24,176 and
$17,744 in administrative service costs.
For the fiscal period ended June 30, 1997, and the fiscal years ended
July 31, 1996 and 1995, Keystone Intermediate incurred $11,267, $23,963 and
$17,790 in administrative service costs.
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 and Class C shares and are charged as class
expenses, as accrued. The distribution fees attributable to the Class B shares
and Class C shares are designed to permit an investor to purchase such shares
through broker-dealers without the assessment of a front-end sales charge, and,
in the case of Class C shares, without the assessment of a contingent deferred
sales charge after the first year following the month of purchase, while at the
same time permitting the Distributor to compensate broker-dealers in connection
with the sale of such shares. In this regard, the purpose and function of the
combined contingent deferred sales charge and distribution services fee on the
Class B shares and the Class C shares are the same as those of the front-end
sales charge and distribution fee with respect to the Class A shares in that in
each case the sales charge and/or distribution fee provide for the financing of
the distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its Class A, Class B and Class C shares (each
a "Plan" and collectively, the "Plans"), the Treasurer of each Fund reports the
amounts expended under the Plans and the purposes for which such expenditures
were made to the Trustees of each Trust for their review on a quarterly basis.
Also, each Plan provides that the selection and nomination of the Independent
Trustees are committed to the discretion of such disinterested Trustees then in
office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of each Trust or by vote
of the holders of a majority of the outstanding voting securities of that Class
and, in either case, by a majority of the Independent Trustees of the Trust who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related thereto.
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to each Fund and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class A, Class B and Class C shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B and Class C shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class A, Class B and Class C shares.
In addition to the Plans, Short-Intermediate, Evergreen Intermediate
and Intermediate Government have adopted Shareholder Services Plans whereby
shareholder servicing agents may receive fees from each 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 a Fund.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of a Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the Independent Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class. Any Plan, Shareholder Service Plan or
Distribution Agreement may be terminated (i) by a Fund without penalty at any
time by a majority vote of the holders of the outstanding voting securities of
the Fund, voting separately by Class or by a majority vote of the Independent
Trustees, or (ii) by the Distributor. To terminate any Distribution Agreement,
any party must give the other parties 60 days' written notice; to terminate a
Plan only, the Fund need give no notice to the Distributor. Any Distribution
Agreement will terminate automatically in the event of its assignment.
The Funds incurred the following Distribution Plan and, where
applicable, Shareholder Services Plan fees:
Distribution Fees:
Short-Intermediate. For the fiscal year ended June 30, 1997 $18,961, $222,264
and $10,470 on behalf of Class A, Class B and Class C shares.
Evergreen Intermediate. For the fiscal year ended June 30, 1997 $6,972, $7,180
and $255 on behalf of Class A, Class B and Class C shares.
Intermediate Government. For the fiscal year ended June 30, 1997 $2,047, $6,442
and $242 on behalf of Class A, Class B and Class C shares.
Capital Preservation. For the fiscal period ended June 30, 1997 $28,581,
$285,293 and $32,267 on behalf of Class A, Class B and Class C shares.
Keystone Intermediate. For the fiscal period ended June 30, 1997 $24,268,
$129,648 and $74,834 on behalf of Class A, Class B and Class C shares.
Shareholder Services Fees:
Short-Intermediate. For the fiscal years ended June 30, 1997 and 1996, $55,566
and $47,700, respectively, on behalf of Class B shares; and $2,618 and $2,221,
respectively, on behalf on 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 the
Adviser. In general, the same individuals perform the same functions for the
other funds managed by the 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 portion of any 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 of each Fund's purchase and sale transactions
involving fixed income securities will be with the issuer or an underwriter or
with major dealers in such securities acting as principals. Such transactions
are normally on a net basis and generally do not involve payment of brokerage
commissions. However, the cost of securities purchased from an underwriter
usually includes a commission paid by the issuer to the underwriter. Purchases
or sales from dealers will normally reflect the spread between bid and ask
prices.
In selecting firms to effect securities transactions, the primary
consideration of each Fund shall be prompt execution at the most favorable
price. A Fund 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 Fund will also consider the availability of
statistical and investment data and economic facts and opinions helpful to the
Fund. The extent of receipt of such services would tend to reduce the expenses
of the Adviser or its affiliates.
For the fiscal period ending June 30, 1997, none of the Funds paid
commissions to affiliated brokers.
None of the Funds, with the exception of Keystone Intermediate, paid
brokerage commissions for each of their three most recent fiscal periods.
Keystone Intermediate paid no brokerage commissions for the fiscal periods ended
June 30, 1997 and July 31, 1996. For the fiscal year ended July 31, 1995, the
Fund paid $34,700 in brokerage commissions.
ADDITIONAL TAX INFORMATION
(See also "Other Information - Dividends, Distributions,
and Taxes" in the 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 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 this provision is repealed; 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.
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 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 gain 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. Long term capital gains on assets held
for more than 18 months are taxable at a maximum rate of 28%; such gains on
assets held for more than 18 months are taxable at a maximum rate of 20%.
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 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. 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. Each shareholder should
consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% Federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisers about the applicability of the backup withholding provisions.
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.
NET ASSET VALUE
The following information supplements that set forth in each 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 on
the purchase alternative chosen by the investor, as more fully described in the
Prospectus. See "Purchase of Shares - Class A Shares - Front-End Sales Charge
"Alternative". On each Fund business day on which a purchase or redemption order
is received by a Fund and trading in the types of securities in which a Fund
invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Declaration of
Trust and By-Laws governing each Fund as of the next close of regular trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time)
by dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any weekday,
exclusive of national holidays on which the Exchange is closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic
or foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked price 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 Band
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 Short-Intermediate, Evergreen Intermediate and
Intermediate Government) 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 are accounted for on
the trade date, the date the order to buy or sell is executed. Dividend income
and other distributions are recorded on the ex-dividend date, except certain
dividends and distributions from foreign securities which are recorded as soon
as the Fund is informed after the ex-dividend date.
PURCHASE OF SHARES
The following information supplements that set forth in each Fund's
Prospectus under the heading "Purchase and Redemption of Shares - How To Buy
Shares."
General
Shares of each Fund will be offered on a continuous basis at a price
equal to their net asset value plus an initial sales charge at the time of
purchase (the "front-end sales charge alternative"), with a contingent deferred
sales charge (the "deferred sales charge alternative"), or without any front-end
sales charge, but with a contingent deferred sales charge imposed only during
the first year after the month of purchase (the "level-load alternative"), as
described below. Class Y shares which, as described below, are not offered to
the general public, are offered without any front-end or contingent sales
charges. Shares of each Fund are offered on a continuous basis through (i)
investment dealers that are members of the National Association of Securities
Dealers, Inc. and have entered into selected dealer agreements with the
Distributor ("selected dealers"), (ii) depository institutions and other
financial intermediaries or their affiliates, that have entered into selected
agent agreements with the Distributor ("selected agents"), or (iii) the
Distributor. The minimum for initial investment is $1,000; there is no minimum
for subsequent investments. The subscriber may use the Application available
from the Distributor for his or her initial investment. Sales personnel of
selected dealers and agents distributing a Fund's shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Investors may purchase shares of a Fund in the United States either
through selected dealers or agents or directly through the Distributor. A Fund
reserves the right to suspend the sale of its shares to the public in response
to conditions in the securities markets or for other reasons.
Each Fund will accept unconditional orders for its shares to be executed
at the public offering price equal to the net asset value next determined (plus
for Class A shares, the applicable sales charges), as described below. Orders
received by the Distributor prior to the close of regular trading on the
Exchange on each day the Exchange is open for trading are priced at the net
asset value computed as of the close of regular trading on the Exchange on that
day (plus for Class A shares the sales charges). In the case of orders for
purchase of shares placed through selected dealers or agents, the applicable
public offering price will be the net asset value as so determined, but only if
the selected dealer or agent receives the order prior to the close of regular
trading on the Exchange and transmits it to the Distributor prior to its close
of business that same day (normally 5:00 p.m. Eastern time). The selected dealer
or agent is responsible for transmitting such orders by 5:00 p.m Eastern time.
If the selected dealer or agent fails to do so, the investor's right to that
day's closing price must be settled between the investor and the selected dealer
or agent. If the selected dealer or agent receives the order after the close of
regular trading on the Exchange, the price will be based on the net asset value
determined as of the close of regular trading on the Exchange on the next day it
is open for trading.
Following the initial purchase of shares of a Fund, a shareholder may
place orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Application. Payment for shares
purchased by telephone can be made only by Electronic Funds Transfer from a bank
account maintained by the shareholder at a bank that is a member of the National
Automated Clearing House Association ("ACH"). If a shareholder's telephone
purchase request is received before 3:00 p.m. Eastern time on a Fund business
day, the order to purchase shares is automatically placed the same Fund business
day for non-money market funds, and two days following the day the order is
received for money market funds, and the applicable public offering price will
be the public offering price determined as of the close of business on such
business day. Full and fractional shares are credited to a subscriber's account
in the amount of his or her subscription. As a convenience to the subscriber,
and to avoid unnecessary expense to a Fund, stock certificates representing
shares of a Fund are not issued. This facilitates later redemption and relieves
the shareholder of the responsibility for and inconvenience of lost or stolen
certificates.
Alternative Purchase Arrangements
Short-Intermediate, Evergreen Intermediate and Intermediate Government
issue 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. Capital Preservation and
Keystone Intermediate offer Class A, Class B and Class C shares. Each class 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 Short- Intermediate,
Evergreen Intermediate and Intermediate Government are subject to a Shareholder
Service Plan fee, (iii) Class A shares bear the expense of the front-end sales
charge and Class B and Class C shares bear the expense of the deferred sales
charge, (iv) Class B shares and Class C shares each bear the expense of a higher
Rule 12b-1 distribution services fee and, where applicable, Shareholder Service
Plan fee than Class A shares and, in the case of Class B shares, higher transfer
agency costs, (v) with the exception of Class Y shares, each Class of each Fund
has exclusive voting rights with respect to provisions of the Rule 12b-1 Plan
pursuant to which its distribution services (and, to the extent applicable,
Shareholder Service Plan fee) is paid which relates to a specific Class and
other matters for which separate Class voting is appropriate under applicable
law, provided that, if the Fund submits to a simultaneous vote of Class A, Class
B and Class C shareholders an amendment to the Rule 12b-1 Plan that would
materially increase the amount to be paid thereunder with respect to the Class A
shares, the Class A shareholders and the Class B and Class C shareholders will
vote separately by Class, and (vi) only the Class B shares are subject to a
conversion feature. Each Class has different exchange privileges and certain
different shareholder service options available.
The alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the accumulated distribution services (and, to the
extent applicable, Shareholder Service Plan) fee and contingent deferred sales
charges on Class B shares prior to conversion, or the accumulated distribution
services (and, to the extent applicable, Shareholder Service Plan) fee on Class
C shares, would be less than the front-end sales charge and accumulated
distribution services fee on Class A shares purchased at the same time, and to
what extent such differential would be offset by the higher return of Class A
shares. Class B and Class C shares will normally not be suitable for the
investor who qualifies to purchase Class A shares at the lowest applicable sales
charge. For this reason, the Distributor will reject any order (except orders
for Class B shares from certain retirement plans) for more than $2,500,000 for
Class B or Class C shares.
Class A shares are subject to a lower distribution services fee and no
Shareholder Service Plan fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares or Class C shares. However, because
front-end sales charges are deducted at the time of purchase, investors
purchasing Class A shares would not have all their funds invested initially and,
therefore, would initially own fewer shares. Investors not qualifying for
reduced front-end sales charges who expect to maintain their investment for an
extended period of time might consider purchasing Class A shares because the
accumulated continuing distribution (and, to the extent applicable, Shareholder
Service Plan) charges on Class B shares or Class C shares may exceed the
front-end sales charge on Class A shares during the life of the investment.
Again, however, such investors must weigh this consideration against the fact
that, because of such front-end sales charges, not all their funds will be
invested initially.
Other investors might determine, however, that it would be more
advantageous to purchase Class B shares or Class C shares in order to have all
their funds invested initially, although remaining subject to higher continuing
distribution services (and, to the extent applicable, Shareholder Service Plan)
fees and, in the case of Class B shares, being subject to a contingent deferred
sales charge for a six-year period. For example, based on current fees and
expenses, an investor subject to the 4.75% front-end sales charge imposed on
Class A shares of the Funds would have to hold his or her investment
approximately seven years for the Class B and Class C distribution services
(and, to the extent applicable, Shareholder Service Plan) fees, to exceed the
front-end sales charge plus the accumulated distribution services fee of Class A
shares. In this example, an investor intending to maintain his or her investment
for a longer period might consider purchasing Class A shares. This example does
not take into account the time value of money, which further reduces the impact
of the Class B and Class C distribution services (and, to the extent applicable,
Shareholder Service Plan) fees on the investment, fluctuations in net asset
value or the effect of different performance assumptions.
Those investors who prefer to have all of their funds invested
initially but may not wish to retain Fund shares for the six year period during
which Class B shares are subject to a contingent deferred sales charge may find
it more advantageous to purchase Class C shares if available through their
broker-dealers.
With respect to each Fund, the Trustees have determined that currently
no conflict of interest exists between or among the Class A, Class B, Class C
and Class Y shares. On an ongoing basis, the Trustees, pursuant to their
fiduciary duties under the 1940 Act and state laws, will seek to ensure that no
such conflict arises.
Front-End Sales Charge Alternative--Class A Shares
The public offering price of Class A shares for purchasers choosing the
front-end sales charge alternative is the net asset value plus a sales charge as
set forth in the Prospectus for each Fund.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are not subject to any sales charges.
The Fund receives the entire net asset value of its Class A shares sold to
investors. The Distributor's commission is the sales charge set forth in the
Prospectus for each Fund, less any applicable discount or commission
"re-allowed" to selected dealers and agents. The Distributor will reallow
discounts to selected dealers and agents in the amounts indicated in the table
in the Prospectus. In this regard, the Distributor may elect to reallow the
entire sales charge to selected dealers and agents for all sales with respect to
which orders are placed with the Distributor.
Set forth below is an example of the method of computing the offering
price of the Class A shares of each Fund. The example assumes a purchase of
Class A shares of a Fund aggregating less than $100,00 subject to the schedule
of sales charges set forth in the Prospectus at a price based upon the net asset
value of Class A shares of each Fund for at the end of each Fund's latest fiscal
period.
<TABLE>
<S> <C> <C> <C> <C>
Date Net Asset Per Share Offering
Value Sales Price
Charge Per Share
Short- 6/30/97 9.83 0.33 10.16
Intermediate
Evergreen 6/30/97 10.17 0.34 10.51
Intermediate
Intermediate 6/30/97 10.02 0.34 10.36
Government
Capital 6/30/97 9.80 0.33 10.13
Preservation
Keystone 6/30/97 8.93 0.30 9.23
Intermediate
</TABLE>
With respect to Short-Intermediate, the following commissions were paid
to and amounts were retained by Federated Securities Corp. through July 7, 1995
which until such date was the principal underwriter of portfolios of Evergreen
Investment Trust. For the period from July 8, 1995 through June 30, 1997,
commissions were paid to and amounts were retained by the current Distributor as
noted below:
Six Months
SHORT- Year Ended Year Ended Ended
INTERMEDIATE 06/30/97 06/30/96 06/3/95
Commissions
Received 52,484 $74,999 $39,906
Commissions 6,833 9,560 1,334
Retained
With respect to Evergreen Intermediate and Intermediate Government, the
following commissions were paid to and amounts were retained by Federated
Securities Corp. through July 7, 1995 which until such date was the principal
underwriter of portfolios of The Evergreen Lexicon Fund. For the period from
July 8, 1995 through June 30, 1997, commissions were paid to and amounts were
retained by the current Distributor as noted below:
Six Months
Year Ended Year Ended Ended
06/30/97 06/30/96 06/3/95
EVERGREEN
INTERMEDIATE
Commissions 3,201 --- ---
Received
Commissions 504 --- ---
Retained
Six Months
INTERMEDIATE Year Ended Year Ended Ended
GOVERNMENT 06/30/97 06/30/96 06/3/95
Commissions 522 --- ---
Received
Commissions 77 --- ---
Retained
With respect to Capital Preservation and Keystone Intermediate, the
following commissions were paid to and amounts were retained by EKIS which prior
to December 1, 1996, was the distributor for Capital Preservation and Keystone
Intermediate. Since that date, commissions have been paid to and amounts
retained by the current Distributor as noted below:
Period
CAPITAL Ended Year Ended Year Ended
PRESERVATION 06/30/97 09/30/96 09/30/95
Commissions $305,542 $490,274 $750,634
Received
Commissions 244,211 397,085 630,122
Retained
Period
KEYSTONE Ended Year Ended Year Ended
INTERMEDIATE 06/30/97 07/31/96 07/31/95
Commissions $236,373 $300,084 $330,026
Received
Commissions 166,717 86,191 131,149
Retained
Investors choosing the front-end sales charge alternative may under
certain circumstances be entitled to pay reduced sales charges. The
circumstances under which such investors may pay reduced sales charges are
described below.
Combined Purchase Privilege. Certain persons may qualify for the sales
charge reductions by combining purchases of shares of one or more Evergreen
Keystone funds (other than the money market funds) into a single "purchase," if
the resulting "purchase" totals at least $100,000. The term "purchase" refers
to: (i) a single purchase by an individual, or to concurrent purchases, which in
the aggregate are at least equal to the prescribed amounts, by an individual,
his or her spouse and their children under the age of 21 years purchasing shares
for his, her or their own account(s); (ii) a single purchase by a trustee or
other fiduciary purchasing shares for a single trust, estate or single fiduciary
account although more than one beneficiary is involved; or (iii) a single
purchase by an organization exempt from federal income tax under Section 501
(c)(3) or (13) of the Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Code. The term "purchase"
also includes purchases by any "company," as the term is defined in the 1940
Act, but does not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other than the
purchase of shares of a Fund or shares of other registered investment companies
at a discount. The term "purchase" does not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit card holders of a company, policy holders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
A "purchase" may also include shares, purchased at the same time through a
single selected dealer or agent, of any Evergreen Keystone Fund.
Cumulative Quantity Discount (Right of Accumulation). An investor's
purchase of additional Class A shares of a Fund may qualify for a Cumulative
Quantity Discount. The applicable sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the previous
day) of (a) all Class A shares of the Fund held by the
investor and(b) all such shares of any other Evergreen
Keystone fund held by the investor; and
(iii) the net asset value of all shares described in paragraph; and
(iv) shares owned by another shareholder eligible to combine his or
her purchase with that of the investor into a single
"purchase" (see above).
For example, if an investor owned Class A, B or C shares of an
Evergreen Keystone fund worth $200,000 at their then current net asset value
and, subsequently, purchased Class A shares of a Fund worth an additional
$100,000, the sales charge for the $100,000 purchase, in the case of the Funds,
would be at the 2.50% rate applicable to a single $300,000 purchase of shares of
the Fund, rather than the 3.75% rate.
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through a selected dealer or agent,
the investor or selected dealer or agent must provide the Distributor with
sufficient information to verify that each purchase qualifies for the privilege
or discount.
Letter of Intent. Class A investors may also obtain the reduced sales
charges shown in the Prospectus by means of a written Letter of Intent, which
expresses the investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares of the Fund or any other Evergreen
Keystone fund. Each purchase of shares under a Letter of Intent will be made at
the public offering price or prices applicable at the time of such purchase to a
single transaction of the dollar amount indicated in the Letter of Intent. At
the investor's option, a Letter of Intent may include purchases of Class A
shares of the Fund or any other Evergreen Keystone fund made not more than 90
days prior to the date that the investor signs a Statement of Intention;
however, the 13-month period during which the Letter of Intent is in effect will
begin on the date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege described
above may purchase shares of the Evergreen Keystone funds under a single Letter
of Intent. For example, if at the time an investor signs a Letter of Intent to
invest at least $100,000 in Class A shares of the Fund, the investor and the
investor's spouse each purchase shares of the Fund worth $20,000 (for a total of
$40,000), it will only be necessary to invest a total of $60,000 during the
following 13 months in Class A shares of the Fund or any other Evergreen
Keystone fund, to qualify for the 3.75% sales charge applicable to purchases in
any Evergreen Keystone Equity or Long-Term Bond Fund on the total amount being
invested (the sales charge applicable to an investment of $100,000).
The Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge applicable to the
shares actually purchased if the full amount indicated is not purchased, and
such escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow. When the full
amount indicated has been purchased, the escrow will be released. To the extent
that an investor purchases more than the dollar amount indicated on the Letter
of Intent and qualifies for a further reduced sales charge, the sales charge
will be adjusted for the entire amount purchased at the end of the 13-month
period. The difference in sales charge will be used to purchase additional
shares of the Fund subject to the rate of sales charge applicable to the actual
amount of the aggregate purchases.
Investors wishing to enter into a Letter of Intent in conjunction with
their initial investment in Class A shares of a Fund should complete the
appropriate portion of the Application while current Class A shareholders
desiring to do so can obtain a form of Letter of Intent by contacting a Fund at
the address or telephone number shown on the cover of this Statement of
Additional Information.
Investments Through Employee Benefit and Savings Plans. Certain
qualified and non-qualified benefit and savings plans may make shares of the
Evergreen Keystone funds available to their participants. Investments made by
such employee benefit plans may be exempt from any applicable front-end sales
charges if they meet the criteria set forth in the Prospectus under "Class A
Shares-Front End Sales Charge Alternative." The Advisers may provide
compensation to organizations providing administrative and record keeping
services to plans which make shares of the Evergreen Keystone Funds available to
their participants.
Reinstatement Privilege. A Class A shareholder who has caused any or
all of his or her shares of the Fund to be redeemed or repurchased may reinvest
all or any portion of the redemption or repurchase proceeds in Class A shares of
the Fund at net asset value without any sales charge, provided that such
reinvestment is made within 30 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net asset value next
determined as described above. A reinstatement pursuant to this privilege will
not cancel the redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for federal income tax purposes except that no
loss will be recognized to the extent that the proceeds are reinvested in shares
of the Fund. The reinstatement privilege may be used by the shareholder only
once, irrespective of the number of shares redeemed or repurchased, except that
the privilege may be used without limit in connection with transactions whose
sole purpose is to transfer a shareholder's interest in the Fund to his or her
individual retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written request sent to
the Fund at the address shown on the cover of this Statement of Additional
Information.
Sales at Net Asset Value. In addition to the categories of investors
set forth in the Prospectus, each Fund may sell its Class A shares at net asset
value, i.e., without any sales charge, to: (i) certain investment advisory
clients of the Advisers or their affiliates; (ii) officers and present or former
Trustees of the Trusts; present or former trustees of other investment companies
managed by the Advisers; officers, directors and present or retired full-time
employees of the Advisers, the Distributor, and their affiliates; officers,
directors and present and full-time employees of selected dealers or agents; or
the spouse, sibling, direct ancestor or direct descendant (collectively
"relatives") of any such person; or any trust, individual retirement account or
retirement plan account for the benefit of any such person or relative; or the
estate of any such person or relative, if such shares are purchased for
investment purposes (such shares may not be resold except to the Fund); (iii)
certain employee benefit plans for employees of the Advisers, the Distributor
and their affiliates; (iv) persons participating in a fee-based program,
sponsored and maintained by a registered broker-dealer and approved by the
Distributor, pursuant to which such persons pay an asset-based fee to such
broker-dealer, or its affiliate or agent, for service in the nature of
investment advisory or administrative services. These provisions are intended to
provide additional job-related incentives to persons who serve the Funds or work
for companies associated with the Funds and selected dealers and agents of the
Funds. Since these persons are in a position to have a basic understanding of
the nature of an investment company as well as a general familiarity with the
Fund, sales to these persons, as compared to sales in the normal channels of
distribution, require substantially less sales effort. Similarly, these
provisions extend the privilege of purchasing shares at net asset value to
certain classes of institutional investors who, because of their investment
sophistication, can be expected to require significantly less than normal sales
effort on the part of the Funds and the Distributor.
Deferred Sales Charge Alternatives--Class B and Class C Shares
Investors choosing the deferred sales charge alternative purchase Class
B shares at the public offering price equal to the net asset value per share of
the Class B shares on the date of purchase without the imposition of a sales
charge at the time of purchase. The Class B shares are sold without a front-end
sales charge so that the full amount of the investor's purchase payment is
invested in the Fund initially.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used by the Distributor to defray the expenses of the
Distributor related to providing distribution-related services to the Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to selected dealers and agents for selling Class B shares. The
combination of the contingent deferred sales charge and the distribution
services fee (and, with respect to Short-Intermediate, Evergreen Intermediate
and Intermediate Government, the Shareholder Service Plan fee) enables the Fund
to sell the Class B shares without a sales charge being deducted at the time of
purchase. The higher distribution services fee (and, as applicable, the
Shareholder Service Plan fee) incurred by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than those related to
Class A shares.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within six years of purchase will be subject to a contingent deferred sales
charge at the rates set forth in the Prospectus charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal to
the lesser of the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be imposed on
increases in net asset value above the initial purchase price. In addition, no
contingent deferred sales charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The amount of the
contingent deferred sales charge, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares.
In determining the contingent deferred sales charge applicable to a
redemption, it will be assumed that the redemption is first of any Class A
shares or Class C shares in the shareholder's Fund account, second of Class B
shares held for over six years or Class B shares acquired pursuant to
reinvestment of dividends or distributions and third of Class B shares held
longest during the six-year period.
To illustrate, assume that an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the second year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional Class B shares upon dividend reinvestment. If at such
time the investor makes his or her first redemption of 50 Class B shares, 10
Class B shares will not be subject to charge because of dividend reinvestment.
With respect to the remaining 40 Class B shares, the charge is applied only to
the original cost of $10 per share and not to the increase in net asset value of
$2 per share. Therefore, of the $600 of the shares redeemed $400 of the
redemption proceeds (40 shares x $10 original purchase price) will be charged at
a rate of 4.0% (the applicable rate in the second year after purchase for a
contingent deferred sales charge of $16).
The contingent deferred sales charge is waived on redemptions of shares
(i) following the death or disability, as defined in the Code, of a shareholder,
or (ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Conversion Feature. At the end of the period ending seven years after
the end of the calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A shares and will
no longer be subject to a higher distribution services fee (and, with respect to
Short-Intermediate, Evergreen Intermediate and Intermediate Government, the
Shareholder Service Plan fee) imposed on Class B shares. Such conversion will be
on the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose of the conversion
feature is to reduce the distribution services fee paid by holders of Class B
shares that have been outstanding long enough for the Distributor to have been
compensated for the expenses associated with the sale of such shares.
For purposes of conversion to Class A, Class B shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the sub-account) convert to Class A, an equal pro-rata portion of
the Class B shares in the sub-account will also convert to Class A.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee (and, with respect to
Short-Intermediate, Evergreen Intermediate and Intermediate Government,
Shareholder Service Plan fee) and transfer agency costs with respect to Class B
shares does not result in the dividends or distributions payable with respect to
other Classes of a Fund's shares being deemed "preferential dividends" under the
Code, and (ii) the conversion of Class B shares to Class A shares does not
constitute a taxable event under federal income tax law. The conversion of Class
B shares to Class A shares may be suspended if such an opinion is no longer
available at the time such conversion is to occur. In that event, no further
conversions of Class B shares would occur, and shares might continue to be
subject to the higher distribution services fee (and, as applicable, 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 the month of purchase.
No charge is imposed in connection with redemptions made more than one year
after the month of purchase. Class C shares are sold without a front-end sales
charge so that the Fund will receive the full amount of the investor's purchase
payment and after the first year without a contingent deferred sales charge so
that the investor will receive as proceeds upon redemption the entire net asset
value of his or her Class C shares. The Class C distribution services fee (and,
with respect to Short-Intermediate, Evergreen Intermediate and Intermediate
Government, Shareholder Service Plan fee) enables the Fund to sell Class C
shares without either a front-end or contingent deferred sales charge. However,
unlike Class B shares, Class C shares do not convert to any other Class shares
of the Fund. Class C shares incur higher distribution services fees (and, with
respect to Short-Intermediate, Evergreen Intermediate and Intermediate
Government, Shareholder Service Plan fee) than Class A shares, and will thus
have a higher expense ratio and pay correspondingly lower dividends than Class A
shares.
Class Y Shares
Class Y shares are not offered to the general public and are available
only to (i) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (ii) certain investment advisory clients
of the Advisers and their affiliates, and (iii) institutional investors. Class Y
shares do not bear any Rule 12b-1 distribution expenses and are not subject to
any front-end or contingent deferred sales charges.
GENERAL INFORMATION ABOUT THE FUNDS
(See also "Other Information - General Information" in each Fund's Prospectus)
Capitalization and Organization
Short-Intermediate is a separate series of Evergreen Investment Trust, a
Massachusetts business trust. Evergreen Intermediate and Intermediate Government
are each separate series of The Evergreen Lexicon Fund, a Massachusetts business
trust. Capital Preservation and Keystone Intermediate are each a Massachusetts
business trust. The Trusts are governed by separate Boards of Trustees.
Short-Intermediate, Evergreen Intermediate and Intermediate Government may
issue an unlimited number of shares of beneficial interest with a $0.0001 par
value. Capital Preservation and Keystone Intermediate may issue an unlimited
number of shares with no par value. All shares of the 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 Funds. 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 the Trust were issued in connection with the creation of
additional investment portfolios, each share of the newly created portfolio
would normally be entitled to one vote for all purposes. Generally, shares of
all portfolios would vote as a single series on matters, such as the election of
Trustees, that affected all portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of the Investment
Advisory Agreement and changes in investment policy, shares of each portfolio
would vote separately.
In addition any Fund may, in the future, create additional classes of
shares which represent an interest in the same investment portfolio. Except for
the different distribution related and other specific costs borne by such
additional classes, they will have the same voting and other rights described
for the existing classes of each Fund.
Procedures for calling a shareholders meeting for the removal of the
Trustees of each Trust, similar to those set forth in Section 16(c) of the 1940
Act will be available to shareholders of each Fund. The rights of the holders of
shares of a series of a Fund may not be modified except by the vote of a
majority of the outstanding shares of such series.
Distributor
EKD (the "Distributor"), 125 W. 55th Street, New York, New York 10019,
serves as each Fund's principal underwriter, and as such may solicit orders from
the public to purchase shares of any Fund. The Distributor is not obligated to
sell any specific amount of shares and will purchase shares for resale only
against orders for shares. Under the 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.
EKD replaces EKIS as Distributor of Capital Preservation and Keystone
Intermediate. EKIS may no longer act as principal underwriter of such Funds 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 Funds as discussed above, EKIS may continue to
receive compensation from Capital Preservation and Keystone Intermediate or EKD
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 EKD for the provision of certain marketing support services to
EKD at an annual rate of up to 0.75% of the average daily net assets of a Fund,
subject to certain restrictions.
Counsel
Sullivan & Worcester LLP, Washington, D.C., serves as counsel to the
Funds.
Independent Auditors
KPMG Peat Marwick LLP has been selected to be the independent auditors of
the Funds.
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 Securities
and Exchange Commission, the average annual compounded rate of return over the
period that would equate an assumed initial amount invested to the value of such
investment at the end of the period. For purposes of computing total return,
income dividends and capital gains distributions paid on shares of the Fund are
assumed to have been reinvested when paid and the maximum sales charge
applicable to purchases of Fund shares is assumed to have been paid. The Fund
will include performance data for Class A, Class B, Class C and Class Y shares
in any advertisement or information including performance data of the Fund.
With respect to Evergreen Intermediate and Intermediate Government,
Class B and Class C shares were not being offered as of August 31, 1995. 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years From
Ended Ended Ended Ended Inception*
6/30/97 6/30/97 6/30/97 6/30/97 to 6/30/97
SHORT-INTERMEDIATE
Class A 3.30% 5.62% 5.05% N/A 7.14%
Class B 0.78% 4.98% N/A N/A 4.17%
Class C 4.77% N/A N/A N/A 5.73%
Class Y 6.88% 6.92% 5.92% N/A 7.01%
EVERGREEN
INTERMEDIATE
Class A 3.41% N/A N/A N/A 5.24%
Class B 0.91% N/A N/A N/A (1.15%)
Class C 4.91% N/A N/A N/A 5.31%
Class Y 6.97% 7.18% 6.60% N/A 7.13%
INTERMEDIATE
GOVERNMENT
Class A 2.55% N/A N/A N/A 4.38%
Class B 0.03% N/A N/A N/A (0.66%)
Class C 4.03% N/A N/A N/A 4.85%
Class Y 6.08% 6.19% 5.38% N/A 5.82%
CAPITAL
PRESERVATION
Class A 3.26% N/A N/A N/A 5.84%
Class B 1.04% 4.59% 3.80% N/A 4.51%
Class C 5.05% 5.54% N/A N/A 4.55%
KEYSTONE
INTERMEDIATE
Class A 5.30% 6.34% 5.89% 6.56% N/A
Class B 3.17% 5.82% N/A N/A 4.61%
Class C 7.06% 6.67% N/A N/A 4.96%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* INCEPTION DATE
SHORT-INTERMEDIATE Class A January 3, 1989
Class B January 25, 1993
Class C September 6, 1994
Class Y January 4, 1991
EVERGREEN INTERMEDIATE Class A May 2, 1995
Class B January 30, 1996
Class C April 29, 1996
Class Y November 1, 1991
INTERMEDIATE GOVERNMENT Class A May 2, 1995
Class B February 9, 1996
Class C April 10, 1996
Class Y November 1, 1991
CAPITAL PRESERVATION Class A December 30, 1994
Class B July 1, 1991
Class C February 1, 1993
KEYSTONE INTERMEDIATE Class A February 13, 1987
Class B February 1, 1993
Class C February 1, 1993
A Fund's total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and quality of the
securities in a Fund's portfolio and its expenses. Total return information is
useful in reviewing a Fund's performance but such information may not provide a
basis for comparison with bank deposits or other investments which pay a fixed
yield for a stated period of time. An investor's principal 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 Securities and
Exchange Commission's 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+1)6-1]
-------------------
cd
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 for the thirty-day period ended June 30, 1997
for each Class of shares offered by the Funds is set forth in the table below:
SHORT-INTERMEDIATE EVERGREEN INTERMEDIATE
Class A - 5.99% Class A - 5.57%
Class B - 5.29% Class B - 4.81%
Class C - 5.28% Class C - 4.83%
Class Y - 6.30% Class Y - 5.82%
INTERMEDIATE GOVERNMENT CAPITAL PRESERVATION
Class A - 5.25% Class A - 5.81%
Class B - 4.44% Class B - 5.22%
Class C - 4.17% Class C - 5.25%
Class Y - 5.49%
KEYSTONE INTERMEDIATE
Class A - 5.82%
Class B - 5.25%
Class C - 5.26%
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, Lehman
Brothers Intermediate Government Bond Index, or any other commonly quoted index
of common stock and bond prices. The Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average and the Lehman Brothers Intermediate
Government Bond Index are unmanaged indices of selected common stock and bond
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 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
Statement filed by the Trusts with the SEC under the Securities Act of 1933.
Copies of the Registration Statement 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 for the fiscal period ended June 30, 1997
and the report thereon of KPMG Peat Marwick LLP, are incorporated by reference
herein from the Funds' Annual Report, as filed with the SEC pursuant to Section
30(d) of the 1940 Act and Rule 30d-1 thereunder.
You may obtain a copy of the Funds' Annual Report without charge by
writing to EKSC, P.O. Box 2121, Boston, Massachusetts 02106-2121, or by calling
EKSC toll free at 1-800-343-2898.
<PAGE>
APPENDIX A
DESCRIPTION OF BOND, MUNICIPAL NOTE AND COMMERCIAL
PAPER RATINGS
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 obligers such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or their arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay interest and
repay any principal.
AA - Debt rated AA also qualifies as high quality debt
obligations. Capacity to pay interest and repay principal is very strong and in
the majority of instances they differ from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate and municipal issues. The ratings
measure the credit worthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service. A brief description of the applicable rating
symbols Moody's Investors Service, Inc. 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 elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds
and issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible
risk factors; AA -- high credit quality, with strong protection factors and
modest risk, which may vary very slightly from time to time because of economic
conditions; A-- average credit quality with adequate protection factors, but
with greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating categories.
Fitch Investors Service L.P.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high credit quality, with very strong ability to pay interest and repay
principal; A -- high credit quality, considered strong as regards principal and
interest protection, but may be more vulnerable to adverse changes in economic
conditions and circumstances. The indicators "+" and "-" to the AA, A and BBB
categories indicate the relative position of credit within those rating
categories.
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 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: Commercial paper rated "Prime" carries the
smallest degree of investment risk. The modifiers 1, 2, and 3 are used to denote
relative strength within this highest classification.
Standard & Poor's Ratings Service: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service L.P.: F-1+ -- denotes exceptionally strong
credit quality given to issues regarded as having strongest degree of assurance
for timely payment; F-1 -- very strong, with only slightly less degree of
assurance for timely payment than F-1+; F-2 -- good credit quality, carrying a
satisfactory degree of assurance for timely payment.
<PAGE>
THE VIRTUS FUNDS
INVESTMENT SHARES
CONSISTS OF EIGHT PORTFOLIOS:
THE U.S. GOVERNMENT SECURITIES FUND;
THE STYLE MANAGER: LARGE CAP FUND;
THE STYLE MANAGER FUND;
THE VIRGINIA MUNICIPAL BOND FUND;
THE MARYLAND MUNICIPAL BOND FUND;
THE TREASURY MONEY MARKET FUND;
THE MONEY MARKET FUND; AND
THE TAX-FREE MONEY MARKET FUND.
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the Prospectus for
the Investment Shares ("Investment Shares") of The Virtus Funds (the "Trust"),
dated November 30, 1997. This Statement is not a prospectus itself. You may
request a copy of a prospectus or a paper copy of this Statement of Additional
Information, if you have received it electronically, free of charge by writing
to the Trust or calling toll-free 1-800-723-9512.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 30, 1997
[GRAPHIC OMITTED]
CUSIP 927913202 CUSIP 927913848 CUSIP 927913400 CUSIP 927913871 CUSIP
927913509 CUSIP 927913889 CUSIP 927913707 CUSIP 927913806 2102608B-R
(11/97)
<PAGE>
Table of Contents
- -------------------------------------------------------------------------------
I
General Information About the Trust 1
- -------------------------------------------------------------------------------
Investment Objective and Policies of the Funds 1
- -------------------------------------------------------------------------------
The U.S. Government Securities Fund 1
- -------------------------------------------------------------------------------
Types of Investments 1
The Style Manager: Large Cap Fund and The Style Manager Fund 2
- -------------------------------------------------------------------------------
Commercial Paper 4
Bank Instruments 4
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund 5
- -------------------------------------------------------------------------------
Acceptable Investments 5
Types of Acceptable Investments 5
The Treasury Money Market Fund 5
- -------------------------------------------------------------------------------
Types of Investments 5
The Money Market Fund 6
- -------------------------------------------------------------------------------
Types of Investments 6
The Tax-Free Money Market Fund 6
- -------------------------------------------------------------------------------
Portfolio Investments and Strategies 6
- -------------------------------------------------------------------------------
Repurchase Agreements 6
Reverse Repurchase Agreements 6
When-Issued and Delayed Delivery Transactions 6
Lending of Portfolio Securities 7
Restricted and Illiquid Securities 7
Participation Interests 7
Variable Rate Municipal Securities 8
Municipal Leases 8
Temporary Investments 8
Adjustable Rate Mortgage Securities 8
Portfolio Turnover 9
Investment Limitations 9
- -------------------------------------------------------------------------------
Virtus Funds Management 12
- -------------------------------------------------------------------------------
Fund Ownership 16
Officers and Trustees Compensation 17
Trustee Liability 17
Investment Advisory Services 17
- -------------------------------------------------------------------------------
Adviser to the Trust 17
Advisory Fees 18
Sub-Adviser to The Style Manager: Large Cap Fund
and The Style Manager Fund 18
Sub-Advisory Fees 18
Other Services 18
- --------------------------------------------------------------------------------
Administrative Services 18
Custodian 19
Transfer Agent 19
Independent Auditors 19
Brokerage Transactions 19
- --------------------------------------------------------------------------------
Purchasing Shares 20
- --------------------------------------------------------------------------------
Distribution Plan 20
Conversion to Federal Funds 20
Determining Net Asset Value 21
- --------------------------------------------------------------------------------
Determining Market Value of Securities 21
Use of the Amortized Cost Method 21
Valuing Municipal Securities 22
Use of Amortized Cost 23
Redeeming Shares 23
- --------------------------------------------------------------------------------
Redemption in Kind 23
Massachusetts Partnership Law 23
- --------------------------------------------------------------------------------
Tax Status 23
- --------------------------------------------------------------------------------
The Funds' Tax Status 23
Shareholders' Tax Status 24
Total Return 24
- --------------------------------------------------------------------------------
Yield 25
- --------------------------------------------------------------------------------
Effective Yield 26
Tax-Equivalent Yield 26
Performance Comparisons 29
- --------------------------------------------------------------------------------
The U.S. Government Securities Fund 30
The Style Manager: Large Cap Fund and The Style Manager Fund 31
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund 31
The Treasury Money Market Fund 31
The Money Market Fund 31
The Tax-Free Money Market Fund 32
Financial Statements 32
- -------------------------------------------------------------------------------
Appendix 33
<PAGE>
- -------------------------------------------------------------------------------
24
General Information About the Trust
- -------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated June 20, 1990. As of the date of this Statement, the Trust
consists of eight separate portfolios of securities (collectively, the "Funds",
individually, a "Fund") which are as follows: The U. S. Government Securities
Fund, The Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund. On October 1,
1992, the name of the Trust was changed from "The SBK Select Series" to "Signet
Select Funds." On August 15, 1994, the name of the Trust was changed from
"Signet Select Funds" to "The Medalist Funds." On February 15, 1995, the name of
the Trust was changed from "The Medalist Funds" to "The Virtus Funds."
With the exception of The Tax-Free Money Market Fund and The Style Manager Fund,
which offer a single class of shares, the Funds are offered in two classes,
Investment Shares and Trust Shares. This Combined Statement of Additional
Information relates only to the Investment Shares of those Funds offering
classes and to shares of The Tax-Free Money Market Fund and The Style Manager
Fund.
Investment Objective and Policies of the Funds
- --------------------------------------------------------------------------------
The prospectus discusses the objective of each Fund and the policies it employs
to achieve those objectives. The following discussion supplements the
description of the Funds' investment policies in the combined prospectus.
The Funds' respective investment objectives cannot be changed without approval
of shareholders. The investment policies described below may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below appear in the
prospectus section "Portfolio Investments and Strategies."
The U.S. Government Securities Fund
- --------------------------------------------------------------------------------
Types of Investments
The Fund invests primarily in securities which are guaranteed as to payment of
principal and interest by the U.S. government or its instrumentalities.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund 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: the full faith and credit of the U.S. Treasury; the issuer's
right to borrow from the U.S. Treasury; the discretionary authority of
the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality
issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are: the Farm Credit System;
Federal Home Loan Banks; Farmers Home Administration; and Federal
National Mortgage Association.
Collateralized Mortgage Obligations (CMOs)
Privately issued CMOs generally represent an ownership interest in
federal agency mortgage pass-through securities such as those issued by
the Government National Mortgage Association. The terms and
characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools.
The market for such CMOs has expanded considerably since its inception.
The size of the primary issuance market and the active participation in
the secondary market by securities dealers and other investors make
government-related pools highly liquid.
<PAGE>
The Style Manager: Large Cap Fund and The Style Manager Fund
- --------------------------------------------------------------------------------
The Funds invest primarily in corporate securities, including common stocks,
preferred stocks, corporate bonds, notes, warrants and convertible securities.
Convertible Securities
Convertible securities are fixed income securities which may be
exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified
time period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of
"usable" bonds and warrants or a combination of the features of several
of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be
employed for different investment objectives.
A Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in
which, in the investment adviser's opinion, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment objectives. Otherwise, the Fund may hold or
trade convertible securities. In selecting convertible securities for a
Fund, the Fund's adviser evaluates the investment characteristics of
the convertible security as a fixed income instrument, and the
investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, a Fund's adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants
of the issuer's profits, and the issuer's management capability and
practices.
Warrants
Warrants are basically options to purchase common stock at a specific
price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time. Warrants
may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which
they are worthless. In addition, if the market price of the common
stock does not exceed the warrant's exercise price during the life of
the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or
decrease in the market price of the warrant may tend to be greater than
the percentage increase or decrease in the market price of the optioned
common stock.
Futures And Options Transactions
As a means of reducing fluctuations in the net asset value of shares of
a Fund, the Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put options
on portfolio securities and listed put options on futures contracts,
and writing call options on futures contracts. A Fund may also write
covered call options on portfolio securities to attempt to increase its
current income. The Fund will maintain its positions in securities,
option rights, and segregated cash subject to puts and calls until the
options are exercised, closed, or have expired. An option position on
financial futures contracts may be closed out only on an exchange which
provides a secondary market from options of the same series.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer, who agrees to take delivery
of the security ("going long") at a certain time in the future.
Financial futures contracts call for the delivery of shares of common
stocks represented in a particular index.
Put Options on Financial Futures Contracts
A Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
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.
<PAGE>
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 option will increase in value. In such an event, a
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by a Fund upon the
sale of the second option will be large enough to offset both the
premium paid by the Fund for the original option plus the decrease in
value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would
then deliver the futures contract in return for payment of the strike
price. 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.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, a Fund may write
listed call options on futures contracts to hedge its portfolio. When a
Fund writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall, causing the
prices of futures to go down, the Fund's obligation under a call option
on a future (to sell a futures contract) costs less to fulfill, causing
the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option. This
premium can substantially offset the drop in value of the Fund's fixed
income or indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by a Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option.
The net premium income of the Fund will then substantially offset the
decrease in value of the hedged securities.
A Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss 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.
"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,
the 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 the Fund to finance the transactions. Initial margin is in the
nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract,
assuming all contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the 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.
Purchasing Put Options on Portfolio Securities
A Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A
put option gives the Fund, in return for a premium, the right to sell
the underlying security to the writer (seller) at a specified price
during the term of the option.
<PAGE>
Writing Covered Call Options On Portfolio Securities
A Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of
the option during the option period to deliver the underlying security
upon payment of the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities which it
has the right to obtain without payment of further consideration (or
has segregated cash in the amount of any additional consideration).
Over-the-Counter Options
A Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options for those options on portfolio securities held by the Fund and
not traded on an exchange.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded
options are third party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while
over-the-counter options may not.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
are those set forth under "The U.S. Government Securities Fund-U.S.
Government Obligations."
Commercial Paper
A Fund may invest in commercial paper rated at least A-1 by Standard & Poor's
Ratings Group ("S&P"), Prime-1 by Moody's Investors Service, Inc. ("Moody's"),
or F-1 by Fitch Investors Service ("Fitch") and money market instruments
(including commercial paper) which are unrated but of comparable quality,
including Canadian Commercial Paper ("CCPs") and Europaper. In the case where
commercial paper, CCPs or Europaper have received different ratings from
different rating services, such commercial paper, CCPs or Europaper is an
acceptable investment so long as at least one rating is one of the preceding
high quality ratings and provided the investment adviser has determined that
such investment presents minimal credit risks.
Bank Instruments
A Fund may invest in the instruments of banks and savings associations whose
deposits are insured by the Bank Insurance Fund ("BIF"), which is administered
by the Federal Deposit Insurance Corporation ("FDIC"), or the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC, such as
certificates of deposit, demand and time deposits, savings shares, and bankers'
acceptances. These instruments are not necessarily guaranteed by those
organizations.
In addition to domestic bank obligations such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances, the Fund may invest
in:
o Eurodollar Certificates of Deposit ("ECDs") issued by foreign
branches of U.S. or foreign banks;
o Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
o Yankee Certificates of Deposit ("Yankee CDs"), which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches
of foreign banks and held in the United States.
<PAGE>
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
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Acceptable Investments
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund pursue
their investment objectives by investing in professionally managed portfolios of
securities at least 65% of which are comprised of Virginia (in the case of The
Virginia Municipal Bond Fund) or Maryland (in the case of The Maryland Municipal
Bond Fund) municipal securities. The Funds will invest their assets so that,
under normal circumstances, at least 80% of their annual interest income is
exempt from federal regular and Virginia (in the case of The Virginia Municipal
Bond Fund) or Maryland (in the case of The Maryland Municipal Bond Fund) state
income taxes or that at least 80% of their total assets are invested in
obligations, the interest income from which is exempt from federal regular and
Virginia (in the case of The Virginia Municipal Bond Fund) or Maryland (in the
case of The Maryland Municipal Bond Fund) state income taxes.
Characteristics
The municipal securities in which the Funds invest have the
characteristics set forth in the prospectus. An unrated municipal
security will be determined by a Fund's adviser to meet the quality
standards established by the Fund's Board of Trustees if it is of
comparable quality to the rated municipal securities which the Fund
purchases. The Trustees consider the creditworthiness of the issuer of
a municipal security, the issuer of a participation interest if the
Fund has the right to demand payment from the issuer of the interest or
the guarantor of payment by either of those issuers.
If Moody's or S&P's ratings change because of changes in those
organizations or in their rating systems, a Fund will try to use
comparable ratings as standards in accordance with the investment
policies described in the Fund's prospectus.
Types of Acceptable Investments
Examples of Virginia and Maryland municipal securities are:
o municipal notes and tax-exempt commercial paper;
o serial bonds sold with a series of maturity dates;
o tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
o bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
o revenue anticipation notes sold in expectation of receipt of federal
income available under the Federal Revenue Sharing Program;
o prerefunded municipal bonds refundable at a later date (payment of
principal and interest on prerefunded bonds is assured through the
first call date by the deposit in escrow of U.S. government
securities); or
o general obligation bonds secured by a municipality's pledge of
taxation.
The Treasury Money Market Fund
- --------------------------------------------------------------------------------
Types of Investments
The Fund invests only in short-term U.S. Treasury obligations. Short-term U.S.
Treasury obligations as used herein refers to evidences of indebtedness issued
by the United States, or issued by an agency or instrumentality thereof, and
fully guaranteed as to principal and interest by the United States, maturing in
397 days or less from the date of acquisition unless they are purchased under a
repurchase agreement that provides for repurchase by the seller within one year
from the date of acquisition.
The Fund may also retain Fund assets in cash.
<PAGE>
The Money Market Fund
- --------------------------------------------------------------------------------
Types of Investments
The Fund invests primarily in money market instruments maturing in 397 days or
less and which include, but are not limited to, commercial paper and demand
master notes, domestic and foreign bank instruments, U.S. government
obligations, and corporate debt obligations.
Bank Instruments
The types of bank instruments in which the Fund invests are those set
forth under "The Style Manager: Large Cap Fund-Bank Instruments."
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
are those set forth under "The U.S. Government Securities Fund-U.S.
Government Obligations."
The Tax-Free Money Market Fund
- --------------------------------------------------------------------------------
The Fund invests in a portfolio of municipal securities maturing in 13 months or
less. As a matter of investment policy, which cannot be changed without
shareholder approval, at least 80% of the Fund's annual interest income will be
exempt from federal income tax (including alternative minimum tax). The average
maturity of the securities in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less.
Portfolio Investments and Strategies
- --------------------------------------------------------------------------------
Repurchase Agreements
The Funds or their custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. In
the event that a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by a Fund might be delayed pending court action.
The Funds believe that under the regular procedures normally in effect for
custody of a Fund's portfolio securities subject to repurchase agreements, a
court of competent jurisdiction would rule in favor of a Fund and allow
retention or disposition of such securities. The Funds will only enter into
repurchase agreements with banks and other recognized financial institutions
such as broker/dealers which are deemed by the adviser to be creditworthy
pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement a Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated 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 a 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 are maintained until the transaction is settled.
When-Issued and Delayed Delivery Transactions
These transactions 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 a Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Funds may engage in these
transactions to an extent that would cause the segregation of an amount up to
20% of the total value of their assets. The Funds 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 respective assets.
<PAGE>
Lending of Portfolio Securities
The collateral received when The U.S. Government Securities Fund, The Style
Manager: Large Cap Fund, The Style Manager Fund, and The Money Market Fund lend
portfolio securities must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the particular Fund. During the time portfolio securities are on loan, the
borrower pays a Fund any dividends or interest paid on such securities. Loans
are subject to termination at the option of a 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. The U.S. Government Securities
Fund and The Style Manager: Large Cap Fund do 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.
Restricted and Illiquid Securities
The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on resale under
federal securities law. However, The U.S. Government Securities Fund, The Style
Manager: Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond
Fund and The Maryland Municipal Bond Fund will limit investments in illiquid
securities, including certain restricted securities determined by the Trustees
not to be liquid, and repurchase agreements providing for settlement in more
than seven days after notice, to 15% of its net assets. In the case of The
Virginia Municpal Bond Fund and The Maryland Municipal Bond Fund, illiquid
securities will include participation interests and variable rate municipal
securities without a demand feature or with a demand feature of longer than
seven days and which the adviser believes cannot be sold within seven days. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money Market
Fund will limit investments in illiquid securities, including certain securities
determined by the Trustees not to be liquid, and repurchase agreements providing
for settlement in more than seven days after notice, and in the case of The
Money Market Fund, specifically including non-negotiable fixed income time
deposits with maturities over seven days, to 10% of their net assets.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, The
Style Manager Fund, and The Money Market Fund may invest in commercial paper
issued in reliance on the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to institutional
investors, such as the Fund, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors like the Fund through or with
the assistance of the issuer or investment dealers who make a market in Section
4(2) commercial paper, thus providing liquidity. The Funds believe that Section
4(2) commercial paper and possibly certain other restricted securities which
meet the criteria for liquidity established by the Board of Trustees are quite
liquid. The Funds intend, therefore, to treat the restricted securities which
meet the criteria for liquidity established by the Trustees, including Section
4(2) commercial paper, as determined by a Fund's investment adviser, as liquid
and not subject to the investment limitation applicable to illiquid securities.
In addition, because Section 4(2) commercial paper is liquid, the Funds intend
to not subject such paper to the limitation applicable to restricted securities.
Participation Interests
The financial institutions from which The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money Market Fund purchase
participation interests frequently provide or secure from other financial
institutions irrevocable letters of credit or guarantees and give a Fund the
right to demand payment on specified notice (normally within thirty days for The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund and seven days
for The Tax-Free Money Market Fund) from the issuer of the letter of credit or
guarantee. These financial institutions may charge certain fees in connection
with their repurchase commitments, including a fee equal to the excess of the
interest paid on the municipal securities over the negotiated yield at which the
participation interests were purchased by a Fund. By purchasing participation
interests, a Fund is buying a security meeting the maturity and quality
requirements of a Fund and is also receiving the tax-free benefits of the
underlying securities.
In the acquisition of participation interests, a Fund's investment adviser will
consider the following quality factors:
o the quality of the underlying municipal security (of which a Fund
takes possession);
o the quality of the issuer of the participation interest; and
o a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
<PAGE>
Variable Rate Municipal Securities
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund invest in variable municipal securities. Variable
interest rates generally reduce changes in the market value of municipal
securities from their original purchase prices. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation or depreciation is
less for variable rate municipal securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the The
Tax-Free Money Market Fund are subject to repayment of principal (usually within
seven days) on the The Tax-Free Money Market Fund's demand. For purposes of
determining the Fund's average maturity, the maturities of these variable rate
demand municipal securities (including participation interests) are the longer
of the periods remaining until the next readjustment of their interest rates or
the periods remaining until their principal amounts can be recovered by
exercising the right to demand payment. The terms of these variable rate demand
instruments require payment of principal and accrued interest from the issuer of
the municipal obligations, the issuer of the participation interests or a
guarantor of either issuer.
Municipal Leases
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund may purchase municipal securities in the form of
participation interests which represent undivided proportional interests in
lease payments by a governmental or nonprofit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations may
be subject to periodic appropriation. If the entity does not appropriate funds
for future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they became due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the adviser, under
the authority delegated by the Board of Trustees, will base its determination on
the following factors: (a) whether the lease can be terminated by the lessee;
(b) the potential recovery, if any, from a sale of the leased property upon
termination of the lease; (c) the lessee's general credit strength (e.g., its
debts, administrative, economic and financial characteristics, and prospects);
(d) the likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of nonappropriation"); and (e) any
credit enhancement of legal recourse provided upon an event of nonappropriation
or other termination of the lease.
Temporary Investments
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund and The
Tax-Free Money Market Fund may also invest in temporary investments during times
of unusual market conditions for defensive purposes and to maintain liquidity.
From time to time, such as when suitable securities are not available to the
respective Fund, a Fund may invest a portion of its assets in cash. Any portion
of a Fund's assets maintained in cash will reduce the amount of assets in
securities held in the respective Fund, and could thereby reduce a Fund's yield.
Adjustable Rate Mortgage Securities
The U.S. Government Securities Fund invests in adjustable rate mortgage
securities ("ARMS"). Not unlike other U.S. government securities, the market
value of ARMS will generally vary inversely with changes in market interest
rates. Thus, the market value of ARMS generally declines when interest rates
rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g. investments with comparable maturities) because
as interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures
and unscheduled principal payment may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
<PAGE>
Portfolio Turnover
The Funds will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
a Fund's investment objective. The Style Manager: Large Cap Fund and The Style
Manager Fund may experience greater portfolio turnover than would be expected
with a portfolio of higher-rated securities. A high portfolio turnover will
result in increased transaction costs to the Fund. For the fiscal years ended
September 30, 1997 and 1996, the portfolio turnover rates were 80% and 118%,
respectively, for The U.S. Government Securities Fund; 56% and 151%,
respectively, for The Style Manager: Large Cap Fund; 19% and 129%, respectively,
for The Virginia Municipal Bond Fund; 13% and 138%, respectively, for The
Maryland Municipal Bond Fund; and 94% and 112%, respectively, for The Style
Manager Fund.
Investment Limitations
- --------------------------------------------------------------------------------
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities except that a Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its net assets, including the
amount borrowed. The Funds will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling a Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. A Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. With respect to The U.S. Government Securities Fund, The
Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury
Money Market Fund, and The Money Market Fund, during the period any
reverse repurchase agreements are outstanding, the Funds will restrict
the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements, but only to the extent necessary to assure completion of
the reverse repurchase agreements.
Selling Short and Buying on Margin
The Funds will not purchase any securities on margin but they may
obtain such short-term credits as may be necessary for clearance of
transactions. With respect to The U.S. Government Securities Fund, The
Style Manager: Large Cap Fund, and The Style Manager Fund, the deposit
or payment by the Fund of initial or variation margin in connection
with financial futures contracts or related options transactions is not
considered the purchase of a security on margin. The Virginia Municipal
Bond Fund, The Maryland Municipal Bond Fund, The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund may not
sell any securities short.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In these cases the Funds, except The
Tax-Free Money Market Fund, may pledge assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15% of the value
of total assets of a Fund at the time of the pledge. Margin deposits
for the purchase and sale of financial futures contracts and related
options are not deemed to be a pledge.
Lending Cash or Securities
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund, The Treasury Money Market Fund and The Money
Market Fund, will not lend any of their assets, except portfolio
securities up to one-third of the value of their total assets. This
shall not prevent a Fund from purchasing or holding bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering
into repurchase agreements, or engaging in other transactions where
permitted by a Fund's investment objective, policies, and limitations
or the Trust's Declaration of Trust.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
will not lend any of their assets, except that they may acquire
publicly or nonpublicly issued municipal securities or temporary
investments or enter into repurchase agreements as permitted by a
Fund's investment objective, policies, limitations and Declaration of
Trust.
The Tax-Free Money Market Fund will not lend any of its assets except
that it may purchase or hold portfolio securities permitted by its
investment objective, policies and limitations, or Declaration of
Trust.
<PAGE>
Investing in Restricted Securities
Except for The Tax-Free Money Market Fund, the Funds will not invest
more than 10% of their net assets in securities subject to restrictions
on resale under the Securities Act of 1933 (except certain restricted
securities which meet the criteria for liquidity as established by the
Board of Trustees. With respect to The U.S. Government Securities Fund,
The Style Manager: Large Cap Fund, The Style Manager Fund and The Money
Market Fund, this exception specifically extends to 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 Board of Trustees).
The Tax-Free Money Market Fund will not invest more than 10% of its
total assets in securities subject to restrictions on resale under
federal securities law, except for restricted securities determined to
be liquid under criteria established by the Trustees.
Investing in Commodities
The Funds will not purchase or sell commodities, commodity contracts or
commodity futures contracts except for financial futures contracts in
the case of The Style Manager: Large Cap Fund and The Style Manager
Fund.
Investing in Real Estate
The Funds will not purchase or sell real estate, including limited
partnership interests with respect to The Style Manager Fund, although
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund
and The Style Manager Fund may invest in securities secured by real
estate or interests in real estate or issued by companies, including
real estate investment trusts, which invest in real estate or interests
therein. The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, The Money Market Fund, and The Tax-Free Money Market Fund may
invest in securities of issuers whose business involves the purchase or
sale of real estate or in securities which are secured by real estate
or interests in real estate.
Diversification of Investments
With respect to 75% of the value of its total assets, The U.S.
Government Securities Fund, The Style Manager: Large Cap Fund, The
Style Manager Fund and The Money Market Fund will not purchase
securities issued by any one issuer (other than cash, cash items or
securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements
collateralized by such securities), if as a result more than 5% of the
value of its total assets would be invested in the securities of that
issuer. The U.S. Government Fund and The Style Manager: Large Cap Fund
will not acquire more than 10% of the outstanding voting securities of
any one issuer.
Concentration of Investments
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund and The Money Market Fund will not invest 25% or
more of the value of their total assets in any one industry. With
respect to The Money Market Fund, investing in bank instruments (such
as time and demand deposits and certificates of deposit), U.S.
government obligations, or instruments secured by these money market
instruments, such as repurchase agreements for U.S. government
obligations, shall not be considered investments in any one industry.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
will not purchase securities if, as a result of such purchase, 25% or
more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest on which is paid from revenues of similar types of projects.
However, these Funds may invest as temporary investments more than 25%
of the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities,
or instruments secured by these money market instruments, such as
repurchase agreements.
The Tax-Free Money Market Fund will not invest 25% or more of the value
of its total assets in any one industry, except that it may invest more
than 25% of its total assets in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities and industrial
development bonds as long as they are not from the same facility or
similar types of facilities. The Tax-Free Money Market Fund does not
intend to purchase securities that would increase the percentage of its
assets invested in the securities of governmental subdivisions located
in any one state, territory, or U.S. possession to 25% or more.
<PAGE>
Underwriting
The Funds will not underwrite any issue of securities, except as a Fund
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
The above limitations cannot be changed with respect to a Fund without approval
of a majority of that Fund's Shares. The following limitations may be changed by
the Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
Investing in Illiquid Securities
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund, The Virginia Municipal Bond Fund, and The
Maryland Municipal Bond Fund will not invest more than 15% of the value
of their net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days after
notice, and certain restricted securities determined by the Trustees
not to be liquid; and, in the case of The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund, specifically including
participation interests and variable rate municipal securities without
a demand feature or with a demand feature of longer than seven days and
which the adviser believes cannot be sold within seven days. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free
Money Market Fund will not invest more than 10% of the value of their
net assets in illiquid securities, including repurchase agreements
providing for settlement more than seven days after notice and certain
securities determined by the Trustees not to be liquid; and, in the
case of The Money Market Fund, specifically including non-negotiable
fixed income time deposits with maturities over seven days.
Investing in Securities of Other Investment Companies
The Funds will limit their respective investment in other investment
companies to no more than 3% of the total outstanding voting stock of
any investment company, invest no more than 5% of total assets in any
one investment company, or invest more than 10% of total assets in
investment companies in general , unless permitted to do so by order of
the SEC. The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Treasury Money Market Fund and
The Money Market Fund will purchase securities of closed-end investment
companies only in open market transactions involving only customary
broker's commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation, reorganization,
or acquisition of assets. With respect to The Treasury Money Market
Fund and The Money Market Fund, the Funds will limit their investments
and the securities of other investment companies to those of The Money
Market Funds having investment objectives and policies similar to their
own. The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund will invest in other investment companies primarily for the
purposes of investing short-term cash which has not yet been invested
in other portfolio instruments. The adviser will waive its investment
advisory fee on assets invested in securities of open-end investment
companies.
Purchasing Securities to Exercise Control
A Fund will not purchase securities of a company for the purpose of
exercising control or management.
Selling Short
Neither The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, nor The Style Manager Fund will sell securities short unless
(1) it owns, or has a right to acquire, an equal amount of such
securities, or (2) it has segregated an amount of its other assets
equal to the lesser of the market value of the securities sold short or
the amount required to acquire such securities. The segregated amount
will not exceed 10% of The U.S. Government Securities Fund's nor The
Style Manager: Large Cap Fund's net assets.
With respect to The Style Manager Fund, the segregated amount will not
exceed 5% of the Fund's net assets. The dollar amount of short sales at
any one time shall not exceed 5% of the Fund's net assets and the value
of securities of any one issuer in which the Fund is short may not
exceed the lesser of 2% of the value of the Fund's net assets or 2% of
the securities of any class of any issuer.
While in a short position, the Fund will retain the securities, rights
or segregated assets.
<PAGE>
Except with respect to the Funds' policy of borrowing money, if a percentage
limitation is adhered to at the time of investment, a later increase or decrease
in percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund and The
Style Manager Fund have no present intent to borrow money, pledge securities,
sell securities short, or invest in restricted or illiquid securities in excess
of 5% of the value of their respective net assets in the coming fiscal year.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund have no
present intent to issue senior securities or borrow money, pledge securities,
invest in restricted or illiquid securities, sell securities short, or engage in
when-issued and delayed delivery transactions in excess of 5% of the value of
its net assets during the fiscal period.
The Treasury Money Market Fund and The Money Market Fund do not expect to issue
senior securities or borrow money, pledge securities, sell securities short,
engage in when-issued and delayed delivery transactions or reverse repurchase
agreements, for The Money Market Fund only, in excess of 5% of the value of
their net assets during the coming fiscal year.
The Tax-Free Money Market Fund does not intend to borrow money, sell securities
short, or pledge securities in excess of 5% of the value of its net assets
during the coming fiscal year.
Virtus Funds Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with Virtus Funds, and principal occupations.
- --------------------------------------------------------------------------------
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President of the Company.
- --------------------------------------------------------------------------------
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly, President, Naples Property Management,
Inc. and Northgate Village Development Corporation; Director or Trustee of the
Funds.
- --------------------------------------------------------------------------------
<PAGE>
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
<PAGE>
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning; Director or Trustee of the Funds
- --------------------------------------------------------------------------------
<PAGE>
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Trustee of the Company.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board between
meetings of the Board.
<PAGE>
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the outstanding shares of each Fund.
As of October 31, 1997, the following shareholders of record owned 5% or more of
the outstanding shares of the Funds: Stephens Inc., Little Rock, AR, for the
exclusive benefit of their customers owned approximately 4,204,370 (40.26%) of
the Investment Shares of U.S. Government Securities Fund; 1,208,630 (24.63%) of
the Investment Shares of The Style Manager: Large Cap Fund; 1,742,805 (34.81%)
of the Shares of The Style Manager Fund; 1,758,994 (33.10%) of the Investment
Shares of The Virginia Municipal Bond Fund; 629,671 (25.07%) of the Investment
Shares of The Maryland Municipal Bond Fund; 18,064,663 (15.34%) of the
Investment Shares of Treasury Money Market Fund; 21,024,493 (27.80%) of the
Investment Shares of Money Market Fund; and 3,716,118 (6.60%) of the Shares of
The Tax-Free Money Market Fund. As of October 31, 1997, Bova & Co., Richmond,
VA, acting in various capacities for numerous accounts, owned approximately
5,165,113 (100%) of the Trust Shares of The U.S. Government Securities Fund;
1,613,118 (99%) of the Trust Shares of The Style Manager: Large Cap Fund;
1,693,162 (33.82%) of the Shares of The Style Manager Fund; 1,802,105 (99.78%)
of the Trust Shares of The Virginia Municipal Bond Fund; 434,681 (100%) of the
Trust Shares of The Maryland Municipal Bond Fund; 206,814,801 (99.92%) of the
Trust Shares of Treasury Money Market Fund; 177,645,283 (96.43%) of the Trust
Shares of The Money Market Fund; and 42,583,759 (75.60%) of the Shares of The
Tax-Free Money Market Fund.
<PAGE>
Officers and Trustees Compensation
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
NAME , AGGREGATE TOTAL COMPENSATION
POSITION WITH COMPENSATION FROM PAID TO TRUSTEES FROM
TRUST TRUST+ TRUST AND FUND COMPLEX
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $0 $-0- for the Trust and
Chairman and Trustee 2 investment companies
Thomas G. Bigley $2,001 $3,217 for the Trust and
Trustee 2 investment companies
John T. Conroy, Jr., $2,198 $3,538 for the Trust and
Trustee 2 investment companies
William J. Copeland, $2,198 $3,538 for the Trust and
Trustee 2 investment companies
James E. Dowd $2,198 $3,538 for the Trust and
Trustee 2 investment companies
Lawrence D. Ellis, M.D., $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Edward L. Flaherty, Jr., $2,198 $3,538 for the Trust and
Trustee 2 investment companies
Edward C. Gonzales, $0 $-0- for the Trust and
President, Treasurer and Trustee 2 investment companies
Peter E. Madden, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Wesley W. Posvar, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Marjorie P. Smuts, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
</TABLE>
+The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Investment Advisory Services
- --------------------------------------------------------------------------------
Adviser to the Trust
The Trust's investment adviser is Virtus Capital Management, Inc., a
wholly-owned subsidiary of Signet Banking Corporation. Because of the internal
controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.
The adviser shall not be liable to the Trust, a Fund, or any shareholder of any
of the Funds for any losses that may be sustained in the purchase, holding, or
sale of any security or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Trust.
<PAGE>
Advisory Fees
For its advisory services, Virtus Capital Management, Inc. receives an annual
investment advisory fee as described in the prospectus. During the fiscal years
ended September 30, 1997, 1996, and 1995, the adviser earned fees from: The U.S.
Government Securities Fund of $1,325,841, $1,612,364, and $1,581,364,
respectively, of which $37,709, $276,121, and $589,885, respectively, were
voluntarily waived; The Style Manager: Large Cap Fund of $749,609, $704,007, and
$678,512, respectively, of which $0, $0, and $189,983, respectively, were
voluntarily waived; The Virginia Municipal Bond Fund of $650,276, $762,051, and
$775,247, respectively, of which $0, $20,993, and $227,301, respectively, were
voluntarily waived; The Maryland Municipal Bond Fund of $273,851, $315,941, and
$316,194, respectively, of which $0, $106,102, and $187,476, respectively, were
voluntarily waived; The Treasury Money Market Fund of $1,897,464, $1,721,497,
and $2,347,424, respectively, of which $46,840, $209,248, and $469,485,
respectively, were voluntarily waived; The Money Market Fund of $1,250,019,
$1,249,811, and $868,490, respectively, of which $57,472, $299,129, and
$336,697, respectively, were voluntarily waived; and The Tax Free Money Market
Fund of $302,027, $462,900 and $262,792, respectively, of which $94,455,
$184,473, and $262,792, respectively, were voluntarily waived. During the fiscal
years ended September 30, 1997, 1996 and for the period from March 7, 1995 (date
of initial public investment) to September 30, 1996, the adviser earned fees
from The Style Manager Fund of $830,673, $657,611 and $374,393, respectively, of
which $326,846, $290,966 and $374,393, respectively, were voluntarily waived.
Sub-Adviser to The Style Manager: Large Cap Fund and The Style Manager Fund
Trend Capital Management, Inc. is the sub-adviser to The Style Manager: Large
Cap Fund and The Style Manager Fund.
Sub-Advisory Fees
For its sub-advisory services, the Sub-Adviser receives an annual sub-advisory
fee as described in the prospectus. For the fiscal years ended September 30,
1997, 1996, and 1995, the sub-adviser earned fees from The Style Manager; Large
Cap Fund of $144,886, $0, and $0, respectively, of which $0, $0, and $0,
respectively, were voluntarily waived. For the fiscal years ended September 30,
1997, 1996, and for the period from March 7, 1995 (date of initial public
investment) to September 30, 1995, the sub-adviser earned fees from The Style
Manager Fund of $74,119, $0, and $0, respectively, of which $0, $0, and $0,
respectively, were voluntarily waived.
Other Services
- --------------------------------------------------------------------------------
Administrative Services
Federated Administrative Services, which is a subsidiary of Federated Investors,
provides administrative personnel and services to the Funds for the fees set
forth in the prospectus. For the fiscal years ended September 30, 1997, 1996,
and 1995, the Funds incurred administrative services fees as follows: The U.S.
Government Securities Fund incurred $172,113, $211,649, and $226,246,
respectively, none of which was voluntarily waived; The Style Manager: Large Cap
Fund incurred $97,360, $92,298, and $97,229, respectively, none of which was
voluntarily waived; The Virginia Municipal Bond Fund incurred $84,421, $100,059,
and $110,908, respectively, none of which was voluntarily waived; The Maryland
Municipal Bond Fund incurred $75,000, $67,667, and $45,246, respectively, none
of which was voluntarily waived; The Treasury Money Market Fund incurred
$369,581, $336,951, and $500,283, respectively, none of which was voluntarily
waived; The Money Market Fund incurred $243,450, $254,134, and $185,586,
respectively, none of which was voluntarily waived; and The Tax-Free Money
Market Fund incurred $75,171, $95,363, and $58,355, respectively, none of which
was voluntarily waived. For the fiscal years ended September 30, 1997, 1996 and
for the period from March 7, 1995 (date of initial public investment) to
September 30, 1995, The Style Manager Fund incurred $75,125, $93,863 and
$85,069, respectively, in administrative services fees, none of which was
voluntarily waived.
<PAGE>
Custodian
Signet Trust Company, Richmond, Virginia, is custodian for the securities and
cash of the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties.
Transfer Agent
Federated Shareholder Services Company, Boston, Massachusetts, is transfer agent
for the Shares of the Funds and dividend disbursing agent for the Funds.
Independent Auditors
The independent auditors for the Funds are Deloitte & Touche LLP, Pittsburgh,
Pennsylvania.
Brokerage Transactions
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Board of Trustees.
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser in advising the
Funds and other accounts. To the extent that receipt of these services may
supplant services for which the adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
For the fiscal years ended September 30, 1997, 1996 and 1995, The Style Manager:
Large Cap Fund paid $140,842, $403,888 and $562,493, respectively, in
commissions on brokerage transactions. For the fiscal years ended September 30,
1997, 1996 and for the period from March 7, 1995 (date of initial public
investment) to September 30, 1995, The Style Manager Fund paid $215,622,
$311,323, and $0, respectively, in commissions on brokerage transactions.
<PAGE>
Purchasing Shares
- --------------------------------------------------------------------------------
Shares of the Funds are sold at their net asset value without a sales charge on
days the New York Stock Exchange is open for business. The procedure for
purchasing Shares of the Funds is explained in the prospectus under "Investing
in Shares."
Distribution Plan
The Trust has adopted a Plan for Investment Shares of the The U.S. Government
Securities Fund, The Style Manager: Large Cap Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The Treasury Money Market Fund and The
Money Market Fund and Shares of The Style Manager Fund and The Tax-Free Money
Market Fund pursuant to Rule 12b-1 which was promulgated by the Securities and
Exchange Commission pursuant to the Investment Company Act of 1940. The Plan
provides that the Funds' distributor, Federated Securities Corp., shall act as
the distributor of Shares, and it permits the payment of fees to brokers and
dealers for distribution and administrative services and to administrators for
administrative services. The Plan is designed to (i) stimulate brokers and
dealers to provide distribution and administrative support services to the Funds
and their holders of Shares and (ii) stimulate administrators to render
administrative support services to the Funds and their holders of Shares. These
services are to be provided by a representative who has knowledge of the holder
of Shares' particular circumstances and goals, and include, but are not limited
to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
Other benefits which the Funds hope to achieve through the Plan include, but are
not limited to the following: (1) an efficient and effective administrative
system; (2) a more efficient use of assets of holders of Shares by having them
rapidly invested in the Funds with a minimum of delay and administrative detail;
and (3) an efficient and reliable records system for holders of Shares and
prompt responses to shareholder requests and inquiries concerning their
accounts.
By adopting the Plan, the Board of Trustees expects that the Funds will be able
to achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and assist
the Funds in seeking to achieve their respective investment objectives. By
identifying potential investors in Shares whose needs are served by a particular
Fund's objective, and properly servicing these accounts, the Funds may be able
to curb sharp fluctuations in rates of redemptions and sales.
For the fiscal years ended September 30, 1997, 1996, and 1995, the Funds paid
fees to brokers and administrators (financial institutions) pursuant to the Plan
as follows: The U.S. Government Securities Fund $279,386, $297,511, and
$268,621, respectively; The Style Manager: Large Cap Fund $175,775, $128,090,
and $80,046, respectively; The Virginia Municipal Bond Fund, $158,225, $174,114,
and $174,523, respectively; The Maryland Municipal Bond Fund, $73,620, $82,278,
and $80,136, respectively; The Treasury Money Market Fund, $331,053, $270,001,
and $80,097, respectively; and The Money Market Fund, $206,038, $198,913, and
$79,316, respectively. For the fiscal years ended September 30, 1997, 1996 and
1995, the Tax-Free Money Market Fund paid no fees pursuant to the Plan. For the
fiscal years ended September 30, 1997, 1996 and for the period from March 7,
1995 (date of initial public investment) to September 30, 1995, The Style
Manager Fund paid no fees pursuant to the Plan.
Conversion to Federal Funds
It is the policy of The Treasury Money Market Fund, The Money Market Fund, and
The Tax-Free Money Market Fund to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders must
be in federal funds or be converted into federal funds. Federated Services
Company acts as the shareholder's agent in depositing checks and converting them
to federal funds.
<PAGE>
Determining Net Asset Value
- --------------------------------------------------------------------------------
Net asset values of The U.S. Government Securities Fund, The Style Manager:
Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund generally change each day. The Treasury Money
Market Fund, The Money Market Fund, and The Tax-Free Money Market Fund attempt
to stabilize the value of their Shares at $1.00. The days on which the net asset
value is calculated by these Funds are described in the prospectus.
Determining Market Value of Securities
The market value of The U.S. Government Securities Fund's portfolio securities
is determined as follows:
o according to the mean between the over-the-counter bid and asked
prices provided by an independent pricing service, if available, or
at fair value as determined in good faith by the Fund's Board of
Trustees; or
o for short-term obligations with remaining maturities of 60 days or
less at the time of purchase at amortized cost unless the Board of
Trustees determines that particular circumstances of the security
indicate otherwise.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The market value of portfolio securities of The Style Manager: Large Cap Fund
and The Style Manager Fund is determined as follows:
o for equity securities, according to the last sale price on a
national securities exchange, if available;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or for
short-term obligations with remaining maturities of 60 days or less
at the time of purchase at amortized cost; or
o for all other securities, at fair value as determined in good faith
by the Board of Trustees.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, and The
Style Manager Fund will value futures contracts, options, and put options on
futures and at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in good
faith that another method of valuing option positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and the asked prices.
Use of the Amortized Cost Method
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, the Trustees have decided that the best method for
determining the value of portfolio instruments is amortized cost. Under this
method, portfolio instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value.
A Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per Share, taking into account
current market conditions and a Fund's investment objective.
<PAGE>
Under the Rule, a Fund is permitted to purchase instruments which are subject to
demand features or standby commitments. As defined by the Rule, a demand feature
entitles a Fund to receive the principal amount of the instrument from the
issuer or a third party on (1) no more than 30 days' notice or (2) at specified
intervals not exceeding one year on no more than 30 days' notice. A standby
commitment entitles a Fund to achieve same day settlement and to receive an
exercise price equal to the amortized cost of the underlying instrument plus
accrued interest at the time of exercise.
The Funds acquire instruments subject to demand features and standby commitments
to enhance the instrument's liquidity. The Funds treat demand features and
standby commitments as a part of the underlying instruments, because the Funds
do not acquire them for speculative purposes and cannot transfer them separately
from the underlying instruments. Therefore, although the Rule defines demand
features and standby commitments as "puts", the Fund does not consider them to
be separate investments for purposes of its investment policies.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship between
the amortized cost value per share and the net asset value per share
based upon available indications of market value. The Trustees will
decide what, if any, steps should be taken if there is a difference of
more than .50% between the two. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
Investment Restrictions
The Rule requires that a Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally
recognized statistical rating organizations. If the instruments are not
rated, the Trustees must determine that they are of comparable quality.
The Rule also requires a Fund to maintain a dollar-weighted average
portfolio maturity (not more than 90 days) appropriate to the objective
of maintaining a stable net asset value of $1.00 per Share. In
addition, no instrument with a remaining maturity of more than 397 days
can be purchased by a Fund.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, a Fund
will invest its available cash to reduce the average maturity to 90
days or less as soon as possible.
A Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. Under the amortized cost method of
valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on Shares,
computed by dividing the annualized daily income on a Fund's portfolio by the
net asset value computed as above, may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates.
In periods of rising interest rates, the indicated daily yield on Shares
computed the same way may tend to be lower than a similar computation made by
using a method of calculation based upon market prices and estimates.
Valuing Municipal Securities
With respect to The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, and The Tax-Free Money Market Fund, the Board of Trustees uses an
independent pricing service to value municipal securities. The independent
pricing service takes into consideration: yield; stability; risk; quality;
coupon rate; maturity; type of issue; trading characteristics; special
circumstances of a security or trading market; and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities and does not rely exclusively on quoted
prices.
<PAGE>
Use of Amortized Cost
With respect to The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund, the Board of Trustees has decided that the fair value of debt securities
purchased by a Fund with remaining maturities of 60 days or less at the time of
purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Trustees.
Redeeming Shares
- --------------------------------------------------------------------------------
Each Fund redeems Shares at the next computed net asset value after a Fund
receives the redemption request, less a contingent deferred sales charge, if
applicable. Redemption procedures are explained in the prospectus under
"Redeeming Investment Shares."
Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from a Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the Board
of Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which a Fund is obligated to redeem Shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of any class' net asset value
during any 90-day period. Although a Fund reserves the right to redeem Shares in
kind, it will activate this right only after providing 60 days' notice to
shareholders.
Massachusetts Partnership Law
- --------------------------------------------------------------------------------
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for obligations of
the Trust, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Funds' Tax Status
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
<PAGE>
Shareholders' Tax Status
With respect to The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Treasury Money Market Fund and The Money
Market Fund, shareholders are subject to federal income tax on dividends
received as cash or additional shares. No portion of any income dividend paid by
a Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
With respect to The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, and The Tax-Free Money Market Fund, no portion of any income dividend paid
by a Fund is eligible for the dividends received deduction available to
corporations.
Capital Gains
Capital gains experienced by The Treasury Money Market Fund and The
Money Market Fund could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If, for some
extraordinary reason, these Funds realize net long-term capital gains,
such net long-term capital gains will be distributed at least once
every 12 months.
With respect to The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund and The Style Manager Fund, long-term capital gains distributed to
shareholders will be treated as long-term capital gains regardless of how long
shareholders have held Shares.
With respect to The Maryland Municipal Bond Fund, The Virginia Municipal Bond
Fund, and The Tax-Free Money Market Fund, capital gains or losses may be
realized by a Fund on the sale of portfolio securities and as a result of
discounts from par value on securities held to maturity. Sales would generally
be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
Total Return
- --------------------------------------------------------------------------------
The average annual total returns for Investment Shares and Trust Shares of The
U.S. Government Securities Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 4.75%, 4.70%, 7.10% and 7.16%,
4.93%, 7.27%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Style Manager: Large Cap Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 37.02%, 13.84%, 14.03% and 37.37%,
14.09%, 14.21%, respectively.
The average annual total returns for The Style Manager Fund for the one-year
period ended September 30, 1997 and for the period from March 7, 1995 (date of
initial public investment) to September 30, 1997 were 41.85% and 28.04%,
respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Virginia Municipal Bond Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 7.74%, 5.73%, 6.45% and 8.00%,
5.96%, 6.62%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Maryland Municipal Bond Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 6.92%, 5.33%, 6.01% and 7.19%,
5.56%, 6.18%, respectively.
<PAGE>
The average annual total returns for Investment Shares and Trust Shares of The
Treasury Money Market Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 4.58%, 3.93%, 4.18% and 4.84%,
4.15%, 4.34%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Money Market Fund for the one-year and five-year periods ended September 30,
1997 and for the period from October 16, 1990 (date of initial public
investment) to September 30, 1997 were 4.67%, 4.11%, 4.36% and 4.93%, 4.31%,
4.50%, respectively.
The average annual total returns for The Tax-Free Money Market Fund for the
one-year period ended September 30, 1997 and for the period from July 27, 1994
(date of initial public investment) to September 30, 1997 were 2.83% and 3.09%,
respectively.
The average annual total return for Shares of each Fund is the average
compounded rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the net asset value per share at the end of the period. The
number if shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, adjusted over the period
by any additional shares, assuming the monthly/quarterly reinvestment of all
dividends and distributions.
Yield
- --------------------------------------------------------------------------------
The yield for the seven-day period ended September 30, 1997 for The Treasury
Money Market Fund and The Money Market Fund were 4.54% and 4.59%, respectively,
for Investment Shares and 4.79% and 4.84%, respectively, for Trust Shares. The
yield for the seven-day period ended September 30, 1997 for The Tax-Free Money
Market Fund was 3.06%.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund's yield for
the thirty-day period ended September 30, 1997 was 5.27%, 0.36%, 3.72% and 3.10%
for Investment Shares and 5.52%, 0.61%, 3.97% and 3.35% for Trust Shares. The
yield for the thirty-day period ended September 30, 1997 for The Style Manager
Fund was 0.23%.
The Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money
Market Fund calculate yield daily, based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned from
the original one share and all dividends declared on the original
and any purchased Shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by 365/7.
The yield for Shares of The U.S. Government Securities Fund, The Style Manager:
Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by the
class of shares over a thirty-day period by the maximum offering price per share
of the class of shares on the last day of the period. The yield of the
Investment Shares of the Fund is determined each day by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by the class of shares over a thirty-day period by the
maximum offering price per share of the class of shares on the last day of the
period. This value is then annualized using semiannual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a 12-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by the
Fund because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
<PAGE>
With respect to The U.S. Government Securities Fund and The Style Manager: Large
Cap Fund, the yield will be calculated separately for Investment Shares and
Trust Shares. Because Investment Shares are subject to a 12b-1 fee, the net
yield for Trust Shares for the same period will exceed that of Investment
Shares.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.
Effective Yield
- --------------------------------------------------------------------------------
The effective yields for the seven-day period ended September 30, 1997 for The
Treasury Money Market Fund and The Money Market Fund were 4.64% and 4.70%,
respectively, for Investment Shares and 4.90% and 4.96%, respectively, for Trust
Shares. The effective yield for the period ended September 30, 1997 for The
Tax-Free Money Market Fund was 3.11%.
The effective yield of The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund is computed by compounding the unannualized
base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
Tax-Equivalent Yield
- --------------------------------------------------------------------------------
The tax-equivalent yield for both classes of shares for The Virginia Municipal
Bond Fund and The Maryland Municipal Bond Fund, and for The Tax-Free Money
Market Fund is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that either class would have had to earn to equal its actual
yield, assuming a 28% tax rate and also assuming that income earned by the Fund
is 100% tax-exempt.
The tax-equivalent yield for the Investment Shares for the thirty-day period
ended September 30, 1997, was 5.17% for The Virginia Municipal Bond Fund and
4.31% for The Maryland Municipal Bond Fund. The tax-equivalent yield for the
Trust Shares was 5.51% for The Virginia Municipal Bond Fund and 4.65% for The
Maryland Municipal Bond Fund for the same period. The tax-equivalent yield for
The Tax-Free Money Market Fund for the seven-day period ended September 30,
1997, was 4.25%.
<PAGE>
Tax-Equivalency Tables
Both classes of shares may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal
bonds in the Fund's portfolio generally remains free from federal
regular income tax, and is often free from state and local taxes as
well. As the tables below indicate, a "tax-free" investment is an
attractive choice for investors, particularly in times of narrow
spreads between tax-free and taxable yields.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
MULTISTATE MUNICIPAL FUNDS
- ---------------------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------------------
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an
indicator of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
<PAGE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF VIRGINIA
- ---------------------------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
20.75% 33.75% 36.75% 41.75% 45.35%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------------------
1.50% 1.89% 2.26% 2.37% 2.58% 2.74%
2.00% 2.52% 3.02% 3.16% 3.43% 3.66%
2.50% 3.15% 3.77% 3.95% 4.29% 4.57%
3.00% 3.79% 4.53% 4.74% 5.15% 5.49%
3.50% 4.42% 5.28% 5.53% 6.01% 6.40%
4.00% 5.05% 6.04% 6.32% 6.87% 7.32%
4.50% 5.68% 6.79% 7.11% 7.73% 8.23%
5.00% 6.31% 7.55% 7.91% 8.58% 9.15%
5.50% 6.94% 8.30% 8.70% 9.44% 10.06%
6.00% 7.57% 9.06% 9.49% 10.30% 10.98%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
<PAGE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF MARYLAND
INCLUDING LOCAL INCOME TAX
- ---------------------------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL, STATE, AND COUNTY INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
22.50% 35.50% 38.50% 43.50% 47.10%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN: 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN: 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
- ---------------------------------------------------------------------------------------------------------------------------------
2.00% 2.58% 3.10% 3.25% 3.54% 3.78%
2.50% 3.23% 3.88% 4.07% 4.42% 4.73%
3.00% 3.87% 4.65% 4.88% 5.31% 5.67%
3.50% 4.52% 5.43% 5.69% 6.19% 6.62%
4.00% 5.16% 6.20% 6.50% 7.08% 7.56%
4.50% 5.81% 6.98% 7.32% 7.96% 8.51%
5.00% 6.45% 7.75% 8.13% 8.85% 9.45%
5.50% 7.10% 8.53% 8.94% 9.73% 10.40%
6.00% 7.74% 9.30% 9.76% 10.62% 11.34%
6.50% 8.39% 10.08% 10.57% 11.50% 12.29%
NOTE: THE MAXIMUM MARGINAL TAX RATE FOR EACH BRACKET WAS USED IN
CALCULATING THE TAXABLE YIELD EQUIVALENT. FURTHERMORE, ADDITIONAL STATE
AND LOCAL TAXES PAID ON COMPARABLE TAXABLE INVESTMENTS WERE NOT USED TO
INCREASE FEDERAL DEDUCTIONS. THE LOCAL INCOME TAX RATE IS ASSUMED TO BE
50% OF THE STATE RATE FOR ALL COUNTIES EXCLUDING ALLEGANY, BALITMORE,
MONTGOMERY, PRINCE GEORGE'S, QUEEN ANNE'S, ST. MARY'S, SOMERSET,
TALBOT, WICOMICO, AND WORCESTER.
Performance Comparisons
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each Fund's performance of both classes of shares depends upon such variables
as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments, in the case
of The Treasury Money Market Fund and The Money Market Fund, or
changes in interest rates and market value of portfolio securities
in the case of U.S. Government Income Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund
and Maryland Municipal Bond Fund;
o changes in each Fund's or each class of Shares' expenses;
o the relative amount of The Treasury Money Market Fund's and The
Money Market Fund's cash flow; and
o various other factors.
<PAGE>
In the case of The U.S. Government Securities Fund, The Style Manager: Large Cap
Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund, either class of shares' performance fluctuates on a daily
basis largely because net earnings and offering price per Share fluctuate daily.
Both net earnings and offering price per Share are factors in the computation of
yield and total return. The Style Manager Fund and The Style Manger: Large Cap
Fund may also from time to time provide information on, or use quotations from,
studies of investment analysts dealing with the management of equity portfolios
on the basis of "style" selection (i.e., value vs. growth) and stock "size"
(i.e., large cap vs. small cap) and may also use historical data demonstrating
the performance records of the value, growth, large cap and small cap components
of the equity market, and combinations thereof.
From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications such as The Wall Street Journal, Money Magazine, Forbes, Barron's,
USA Today and Mutual Fund Investors. We may also compare the historical returns
on various investments, performance indexes of those investments or economic
indicators. In addition, the Funds may reprint articles about the Funds and
provide them to prospective shareholders. The Broker/Dealer may also make
available economic, financial and investment reports to shareholders and
prospective shareholders. In order to describe these reports, the Funds may
include descriptive information on the reports in advertising literature sent to
the public prior to the mailing of a prospectus. Performance information may be
quoted numerically or may be represented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and comparison
may be made with funds which may have different investment restrictions,
objectives, policies or techniques than the Funds, and that such other funds or
market indicators may be comprised of securities that differ significantly from
the Funds' investments.
The financial publications and/or indices which the Funds use in advertising may
include, but are not limited to:
The U.S. Government Securities Fund
o MERRILL LYNCH COMPOSITE 1-5 YEAR TREASURY INDEX is comprised of
approximately 66 issues of U.S. Treasury securities maturing between
1 and 4.99 years, with coupon rates of 4.25% or more. These total
return figures are calculated for one, three, six, and twelve month
periods and year-to-date and include the value of the bond plus
income and any price appreciation or depreciation.
o SALOMON BROTHERS 3-5 YEARS GOVERNMENT INDEX quotes total returns for
U.S. Treasury issues (excluding flower bonds) which have maturities
of three to five years. These total returns are year-to-date figures
which are calculated each month following January 1.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes income into account any
change in net asset value over a specific period of time. From time
to time, the Trust will quote its Lipper ranking in the U.S.
Government funds category in advertising and sales literature.
o MERRILL LYNCH 3-5 YEAR TREASURY INDEX is comprised of approximately
24 issues of intermediate-term U.S. government and U.S. Treasury
securities with maturities between 3 and 4.99 years and coupon rates
above 4.25%. Index returns are calculated as total returns for
periods of one, three, six and twelve months as well as
year-to-date.
o MERRILL LYNCH 3-YEAR TREASURY YIELD CURVE INDEX is an unmanaged
index comprised of the most recently issued 3-year U.S. Treasury
notes. Index returns are calculated as total returns for periods of
one, three, six, and twelve months as well as year-to-date.
o LEHMAN BROTHERS GOVERNMENT INTERMEDIATE INDEX is an unmanaged index
comprised of all publicly issued, non-convertible domestic debt of
the U.S. government, or any agency thereof, or any quasi-federal
corporation and of corporate debt guaranteed by the U.S. government.
Only notes and bonds with a minimum outstanding principal of $1
million and maturities of 1-10 years.
o 3 YEAR TREASURY NOTES Source: Wall Street Journal, Bloomberg
Financial Markets, and Telerate.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
<PAGE>
The Style Manager: Large Cap Fund and The Style Manager Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the "growth and
income funds" category in advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of
selected blue-chip industrial corporations as well as public utility
and transportation companies. The DJIA indicates daily changes in
the average price of stocks in any of its categories. It also
reports total sales for each group of industries. Because it
represents the top corporations of America, the DJIA index is a
leading economic indicator for the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, compares total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's index assumes reinvestment of all
dividends paid by stocks listed on the index. Taxes due on any of
these distributions are not included, nor are brokerage or other
fees calculated in the Standard & Poor's figures.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the "general
municipal bond funds" category in advertising and sales literature.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two
weeks.
The Treasury Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "short-term U.S. government
funds" category in advertising and sales literature.
o SALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
The Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "money market instruments fund"
category in advertising and sales literature.
o BANK RATE MONITOR NATIONAL INDEX, Miami, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading
bank and thrift institution money market deposit accounts. The rates
published in the index are an average of the personal account rates
offered on the Wednesday prior to the date of publication by ten of
the largest banks and thrifts in each of the five largest Standard
<PAGE>
Metropolitan Statistical Areas. Account minimums range upward from
$2,500 in each institution and compounding methods vary. If more
than one rate is offered, the lowest rate is used. Rates are subject
to change at any time specified by the institution. Investors may
use such indices or reporting services in addition to either class
of shares' prospectus to obtain a more complete view of the Share's
performance before investing. Of course, when comparing performance
of either class of shares to any index, factors such as portfolio
composition and prevailing market conditions should be considered in
assessing the significance of such comparisons.
The Tax-Free Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "Tax-Free Money Market Funds"
category in advertising and sales literature.
o IBC/DONOGHUE'S MONEY FUND REPORT publishes annualized yields of
hundreds of money market funds on a weekly basis, and through its
Money Market Insight publication, reports monthly and
12-month-to-date investment results for the same money funds.
o MONEY, A MONTHLY MAGAZINE, regularly ranks money market funds in
various categories based on the latest available seven-day compound
effective yield. From time to time, the Fund will quote its Money
ranking in advertising and sales literature.
o SALOMON BROTHERS SIX-MONTH PRIME MUNI NOTES is an index of selected
municipal notes, maturing in six months, whose yields are chosen as
representative of this market. Calculations are made weekly and
monthly.
o SALOMON BROTHERS ONE-MONTH TAX-EXEMPT COMMERCIAL PAPER is an index
of selected tax-exempt commercial paper issues, maturing in one
month, whose yields are chosen as representative of this particular
market. It is a weekly quote of the most representative yields for
selected securities, issued by the U.S. Treasury, maturing in 30
days. Calculations are made weekly and monthly. Ehrlich-Bober & Co.,
Inc. also tracks this Salomon Brothers Index.
Advertisements and other sales literature for both classes of shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
either class of shares based on monthly reinvestment of dividends over a
specified period of time.
Economic and Market Information
Advertising and sales literature for the Trust may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by the Trust's portfolio managers and their views and analysis on
how such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion t the more than 6,000 funds available.
Financial Statements
- --------------------------------------------------------------------------------
The financial statements for the fiscal period ended September 30, 1997, are
incorporated herein by reference from the Funds' Annual Report dated September
30, 1997. A copy of the Annual Report for a Fund may be obtained without charge
by contacting Signet Trust Company at the address located on the back cover of
the combined prospectus or by calling 804-771-7470.
<PAGE>
Appendix
- --------------------------------------------------------------------------------
Standard and Poor's Ratings Group Municipal Bond Rating Definitions
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
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.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effect 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 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.
BB, B, CCC, CC Debt rated BB, B, CCC and CC 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 CC the highest degree of
speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties of major risk exposures to adverse
conditions.
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Moody's Investors Service, Inc. Municipal Bond Rating Definitions
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 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.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time 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. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are 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.
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.
<PAGE>
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 issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
NR NR indicates that Fitch does not the specific issue.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in AAA category.
Standard & Poor's Corporation, Municipal Note Ratings
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.
SP-2 Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Short-Term Loan Ratings
MIG1/VMIG1 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.
MIG2/VMIG2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
COMBINED
ANNUAL REPORT
SHAREHOLDERS
September 30, 1997
. The U.S. Government Securities Fund
. The Style Manager: Large Cap Fund
. The Style Manager Fund
. The Virginia Municipal Bond Fund
. The Maryland Municipal Bond Fund
. The Treasury Money Market Fund
. The Money Market Fund
. The Tax-Free Money Market Fund
Funds Managed by
[LOGO] VIRTUS
CAPITAL MANAGEMENT, INC.
The Investment Adviser to The Virtus Funds is Virtus Capital Management, Inc., a
subsidiary of Signet Banking corporation. The Virtus Funds are administered by
subsidiaries of Federated Investors, independent of Signet.
Investment products are not deposits, obligations of, or guaranteed by any bank.
They are not insured by FDIC. They involve risk, including the possible loss of
principal invested.
Virtus Capital Management, Inc. is the investment adviser for The Virtus
Funds. Federated Securities Corp. is the distributor of The Funds.
Federated Securities Corp., Distributor, is independent of Signet Bank.
[LOGO] VIRTUS
FUNDS
MESSAGE TO SHAREHOLDERS
- -------------------------------------------------------------------------------
Dear Investor:
Here is your Annual Report for The Virtus Funds, which covers the 12-month
period from October 1, 1996 through September 30, 1997.
On the following pages, you will find complete financial information for every
fund in the Virtus family. The sections for The U.S. Government Securities Fund,
The Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund and The Maryland Municipal Bond Fund begin with a management
discussion and analysis by the portfolio manager, followed by a long-term
performance graph. Each fund also contains a complete list of holdings, and the
financial statements.
As the following fund-by-fund summary indicates, the reporting period was very
strong for stocks and improved for bonds:
. THE U.S. GOVERNMENT SECURITIES FUND paid a dividend stream totaling $0.60 per
share for Investment Shares ($0.63 for Trust Shares). These dividends helped
the fund produce a total return of 6.89% for Investment Shares (7.16% for
Trust Shares) in an improved bond market.* The net asset value of both share
classes increased slightly from $9.89 on the first day of the period to $9.95
on the last day of the period. At the end of the reporting period, net assets
amounted to more than $157 million.
. THE STYLE MANAGER: LARGE CAP FUND produced a strong total return of 37.02% for
Investment Shares (37.37% for Trust Shares) in a highly favorable environment
for stocks.* The fund's high-quality stock portfolio paid dividends of $0.14
per share and capital gains of $1.83 per share for Investment Shares (and
dividends of $0.18 per share and capital gains of $1.83 per share for Trust
Shares). The net asset value of each share class rose 19% from the first day
of the period to the last day of the period. At the end of the reporting
period, net assets amounted to more than $106 million.
. THE STYLE MANAGER FUND produced an extremely strong total return of 44.01%*
through dividends totaling $0.24 per share and capital gains totaling $0.63
per share. In a highly favorable stock market environment, the fund's net
asset value soared from $11.47 on the first day of the period to $15.37 on the
last day. Net assets exceeded $76 million on the last day of the reporting
period.
. THE VIRGINIA MUNICIPAL BOND FUND paid double-tax-free dividends** of $0.42 per
share for Investment Shares ($0.45 for Trust Shares) through a portfolio that
included 29 Virginia municipal bonds. This income stream helped the fund
produce a total return of 7.74% for Investment Shares (8.00% for Trust Shares)
in a difficult bond market.* The net asset value for both share classes
increased from $10.68 on the first day of the period to $11.07 on the last day
of the period. Net assets totaled more than $78 million on the last day of the
reporting period.
. THE MARYLAND MUNICIPAL BOND FUND paid double-tax-free dividends** totaling
$0.37 per share for Investment Shares ($0.40 for Trust Shares). This income
stream helped the fund produce a total return of 6.92% for Investment Shares
(7.19% for Trust Shares) in a difficult bond market.* The net asset value for
both share classes increased from $10.56 on the first day of the period to
$10.91 on the last day of the period. At the end of the reporting period, net
assets totaled more than $33 million.
. THE TREASURY MONEY MARKET FUND, a portfolio of U.S. Treasury money market
securities, paid dividends totaling $0.05 per share for both Trust Shares
and Investment Shares. Assets totaled more than $317 million on the last day
of the reporting period.+
. THE MONEY MARKET FUND paid dividends totaling $0.05 per share for both Trust
Shares and Investment Shares through its portfolio of high-quality money
market securities. The fund ended the reporting period with more than $241
million in net assets.+
. THE TAX-FREE MONEY MARKET FUND, a portfolio of municipal money market
securities, paid tax-free dividends totaling $0.03 per share.++ At the end of
the reporting period, net assets reached more than $57 million.+
Thank you for pursuing your financial goals through The Virtus Funds. We hope
you are pleased with your progress.
Sincerely,
/s/ John S. Hall
John S. Hall
Chief Investment Officer
Virtus Capital Management, Inc.
Investment Adviser to The Virtus Funds
November 15, 1997
- --------
* Performance quoted reflects past performance and is not indicative of
future results. Investment return and principal value will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Reflecting the fund's contingent deferred sales
charge, the total returns of The Virtus Funds were as follows: The U.S.
Government Securities Fund (Investment Shares): 4.75%; The Style Manager
Fund: 41.85%; The Style Manager: Large Cap Fund (Investment Shares):
34.75%; The Virginia Municipal Bond Fund (Investment Shares): 5.70%; and
The Maryland Municipal Bond Fund (Investment Shares): 4.87%.
**Income may be subject to the federal alternative minimum tax.
+Although money market funds seek to maintain a stable net asset value of
$1.00 a share, there is no guarantee that they will be able to do so. An
investment in the fund is neither insured nor guaranteed by the U.S.
government.
++Income may be subject to the federal alternative minimum tax and state and
local taxes.
THE U.S. GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
Overall, during the last year, we have experienced a relatively calm U.S. fixed
income market. While interest rates on maturities longer than two years declined
by roughly .50% during the year, that was reasonably mild compared to yield
changes observed over the last 20 years. Even the extreme yields observed on
five-year Treasuries remained in a fairly narrow range by historical standards.
The five-year Treasury saw a low yield of about 5.80% and a high yield of about
6.80% during the 12-month period ended September 30, 1997. One recent study
indicated that a year in which interest rates moved by less than 2.00% is
reasonably uncommon.
Our overall average maturity position has remained neutral since November 1996.
We felt that interest rates would not move by large amounts, and shifted our
investment focus from direct Treasuries to mortgage-backed securities and a few
callable agencies, which seek to provide a better total return through a higher
income component during periods when interest rates are reasonably quiet. Thus,
we were able to provide a good total return despite not actively making changes
to the average maturity of the portfolio in anticipation of changes in interest
rates. For the fiscal year ended September 30, 1997, the fund produced average
annual total returns of 6.89% and 7.16% for Investment Shares and Trust Shares,
respectively.*
Most of the additional mortgage-backed securities were purchased in the
earlier part of the year. After the first quarter of 1997, the yield advantage
of buying mortgage-backed securities fell to near historical lows and
subsequent additional investments have been postponed. Only recently have
yields become slightly more attractive on mortgage-backed securities. For the
time being, the fund will maintain an average maturity similar to that of the
Lehman Brothers Intermediate Government Bond Index**, and will consider buying
additional mortgage-backed securities to help improve the income and total
return characteristics when we believe the additional yield received will
compensate us for the additional risk of pre-payments associated with
mortgage-backed securities.
- --------
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
** Lehman Brothers Intermediate Government Bond Index is comprised of all
publicly issued, non-convertible domestic debt of the U.S. government or
any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. This index is unmanaged and investments
cannot be made in an index.
THE U.S. GOVERNMENT SECURITIES FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE U.S. GOVERNMENT SECURITIES FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
U.S. Government Securities Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers Intermediate
Government Bond Index ("LBIGB").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX A
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 4.75%
5 Year 4.70%
Start of Performance (10/16/90) 7.10%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBIGB is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBIGB has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE U.S. GOVERNMENT SECURITIES FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE U.S. GOVERNMENT SECURITIES FUND--TRUST
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
U.S. Government Securities Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers Intermediate
Government Bond Index ("LBIGB").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX B
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 7.16%
5 Year 4.93%
Start of Performance (10/16/90) 7.27%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBIGB is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBIGB has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
LONG-TERM INVESTMENTS--98.9%
---------------------------------------------------------------
U.S. TREASURY BONDS--12.9%
---------------------------------------------------
$ 4,500,000 United States Treasury Bond, 11.75%, 11/15/2014 $ 6,534,225
---------------------------------------------------
13,000,000 United States Treasury Bond, 7.50%, 5/15/2002 13,785,590
--------------------------------------------------- ------------
Total U.S. Treasury Bonds 20,319,815
--------------------------------------------------- ------------
U.S. TREASURY NOTES--30.3%
---------------------------------------------------
22,000,000 United States Treasury Note, 7.125%, 2/29/2000 22,623,920
---------------------------------------------------
2,000,000 United States Treasury Note, 7.50%, 11/15/2001 2,109,080
---------------------------------------------------
22,000,000 United States Treasury Note, 8.875%, 2/15/1999 22,902,220
--------------------------------------------------- ------------
Total U.S. Treasury Notes 47,635,220
--------------------------------------------------- ------------
GOVERNMENT OBLIGATIONS--55.7%
---------------------------------------------------
993,000 Federal Agricultural Mortgage Association, 7.37%,
8/1/2006 1,036,771
---------------------------------------------------
11,350,428 Federal Home Loan Bank, 6.50%, 9/1/2008 11,330,667
---------------------------------------------------
7,801,431 Federal Home Loan Bank, 6.50%, 11/1/2009 7,818,516
---------------------------------------------------
81,255 Federal Home Loan Bank, 7.968%, 8/1/2019 85,404
---------------------------------------------------
29,676 Federal Home Loan Bank, 8.342%, 12/1/2020 30,979
---------------------------------------------------
8,500,000 Federal Home Loan Mortgage Corp., 7.36%, 6/5/2007 8,825,525
---------------------------------------------------
541,561 Federal Home Loan Mortgage Corp., REMIC, 7.80%,
5/15/2012 542,514
---------------------------------------------------
5,000,000 Federal Home Loan Mortgage Corp., 7.974%, 4/20/2005 5,062,750
---------------------------------------------------
4,480,000 Federal National Mortgage Association, 6.16%,
4/3/2001 4,496,486
---------------------------------------------------
4,500,547 Federal National Mortgage Association, 7.00%,
12/1/1999 4,543,933
---------------------------------------------------
3,705,860 Federal National Mortgage Association, 7.00%,
8/1/2001 3,756,816
---------------------------------------------------
15,418,905 Federal National Mortgage Association, 7.00%,
4/1/2011 15,597,148
---------------------------------------------------
23,204,872 Federal National Mortgage Association, 7.50%,
8/1/2026 23,618,151
---------------------------------------------------
341,912 Federal National Mortgage Association, 8.50%,
12/1/2001 354,200
---------------------------------------------------
64,350 Federal National Mortgage Association, 8.83%,
6/1/2019 66,987
---------------------------------------------------
167,619 Government National Mortgage Association, 8.00%,
3/15/2017 175,948
---------------------------------------------------
320,648 Government National Mortgage Association, 9.00%,
9/15/2021 345,196
--------------------------------------------------- ------------
Total Government Obligations 87,687,991
--------------------------------------------------- ------------
TOTAL LONG-TERM INVESTMENTS (IDENTIFIED COST
$154,447,718) 155,643,026
--------------------------------------------------- ------------
</TABLE>
THE U.S. GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- -------------------------------------------------- ------------
<C> <S> <C>
(A) REPURCHASE AGREEMENT--0.3%
--------------------------------------------------------------
$ 460,430 CS First Boston Corp., 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) $ 460,430
-------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST
$154,908,148)(B) $156,103,456
-------------------------------------------------- ------------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) The cost of investments for federal tax purposes amounts to $154,908,148.
The net unrealized appreciation of investments on a federal tax basis
amounts to $1,195,308 which is comprised of $1,747,639 appreciation and
$552,331 depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($157,425,080) at September 30, 1997.
The following acronym is used throughout this portfolio:
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER: LARGE CAP FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
While small cap value stocks had a very successful year relative to small cap
growth stocks*, large cap growth and value stocks remained neck and neck. In
August 1997, we transitioned the fund to a more neutral position and now are
roughly 50% value and 50% growth oriented.
Virtus Capital Management, Inc. continues to implement the "Style" approach to
managing the fund. We seek to capture the predominant investment style to take
greater advantage of market trends. This involves opportunistic positioning
defined by investment style. "Style" refers to two widely accepted
descriptions of stocks known as growth and value. Growth stocks are those
companies with above-average earnings expectations. Value stocks are those
companies selling at a low price relative to the actual value of their
underlying assets. During the 12-month period ended September 30, 1997, the
Standard & Poor's ("S&P") 500 Value Index+ produced a total return of 39.22%,
and the S&P 500 Growth Index+ returned 41.48%, again neck and neck performance
in a very strong year. During the same period, S&P 500 Index+ returned 40.7%.
For the 12-month period ended September 30, 1997, the fund produced average
annual total returns of 37.02% and 37.37% for Investment Shares and Trust
Shares, respectively.++
- --------
* Small cap stocks have historically experienced greater volatility than
average.
+ The S&P 500 is an unmanaged index comprised of common stocks in industry,
transportation and financial and public utility companies. The S&P 500 Value
Index and the S&P 500 Growth Index are sub-indices of the S&P 500 Index.
Investments cannot be made in an index.
++ Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
THE STYLE MANAGER: LARGE CAP FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER: LARGE CAP FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager: Large Cap Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Standard & Poor's 500 Index
("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX C
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 34.75%
5 Year 13.84%
Start of Performance (10/16/90) 14.03%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P 500
has been adjusted to reflect reinvestment of dividends on securities in the
index. This index is unmanaged.
THE STYLE MANAGER: LARGE CAP FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER: LARGE CAP FUND--TRUST SHARES
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager: Large Cap Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Standard & Poor's 500 Index
("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX D
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 37.37%
5 Year 14.09%
Start of Performance (10/16/90) 14.21%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE STYLE MANAGER: LARGE CAP FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ---------------------------- ------------
<C> <S> <C>
COMMON STOCKS--97.6%
--------------------------------------
AEROSPACE & DEFENSE--1.7%
----------------------------
25,600 Boeing Co. $ 1,393,600
----------------------------
3,600 Lockheed Martin Corp. 383,850
---------------------------- ------------
Total 1,777,450
---------------------------- ------------
AIRLINES--0.4%
----------------------------
1,500 (a)AMR Corp. 166,031
----------------------------
2,400 Delta Air Lines, Inc. 226,050
---------------------------- ------------
Total 392,081
---------------------------- ------------
ALUMINUM--0.5%
----------------------------
17,000 Alcan Aluminum, Ltd. 590,750
---------------------------- ------------
AUTO PARTS & EQUIPMENT--0.5%
----------------------------
5,200 Goodyear Tire & Rubber Co. 357,500
----------------------------
3,100 TRW, Inc. 170,113
---------------------------- ------------
Total 527,613
---------------------------- ------------
AUTOMOBILES--1.8%
----------------------------
22,600 Chrysler Corp. 831,962
----------------------------
23,400 Ford Motor Co. 1,058,850
---------------------------- ------------
Total 1,890,812
---------------------------- ------------
BANKS MAJOR REGIONAL--7.0%
----------------------------
16,400 Banc One Corp. 915,325
----------------------------
18,100 Bank of New York Co., Inc. 868,800
----------------------------
8,300 Barnett Banks, Inc. 587,225
----------------------------
19,800 First Union Corp. 991,237
----------------------------
4,100 Fleet Financial Group, Inc. 268,806
----------------------------
4,300 KeyCorp 273,588
----------------------------
10,600 Mellon Bank Corp. 580,350
----------------------------
5,500 National City Corp. 338,594
----------------------------
16,200 NationsBank Corp. 1,002,375
----------------------------
10,900 Norwest Corp. 667,625
----------------------------
12,600 PNC Financial Corp. 615,038
----------------------------
5,200 SunTrust Banks, Inc. 353,275
---------------------------- ------------
Total 7,462,238
---------------------------- ------------
BANKS-MONEY CENTER--2.3%
----------------------------
15,600 BankAmerica Corp. 1,143,675
----------------------------
6,600 Citicorp 883,987
----------------------------
6,000 First Chicago NBD Corp. 451,500
---------------------------- ------------
Total 2,479,162
---------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------
BEVERAGE-ALCOHOLIC--0.5%
-------------------------------------
15,000 Seagram Co. Ltd. $ 528,750
------------------------------------- ------------
BEVERAGE-SOFT DRINK--2.2%
-------------------------------------
38,700 Coca-Cola Co. 2,358,281
------------------------------------- ------------
BIOTECHNOLOGY--0.1%
-------------------------------------
2,900 (a)Amgen, Inc. 139,019
------------------------------------- ------------
BROADCAST MEDIA--1.1%
-------------------------------------
27,900 (a)Tele-Communications, Inc., Class A 571,950
-------------------------------------
28,900 (a)U.S. West Media Group 644,831
------------------------------------- ------------
Total 1,216,781
------------------------------------- ------------
BUILDING MATERIALS--0.4%
-------------------------------------
9,500 Masco Corp. 435,219
------------------------------------- ------------
BUILDING SUPPLIES--0.5%
-------------------------------------
4,400 Home Depot, Inc. 229,350
-------------------------------------
10,800 Sherwin-Williams Co. 317,925
------------------------------------- ------------
Total 547,275
------------------------------------- ------------
CHEMICALS--1.6%
-------------------------------------
7,200 Air Products & Chemicals, Inc. 597,150
-------------------------------------
7,600 Dow Chemical Co. 689,225
-------------------------------------
8,700 Union Carbide Corp. 423,581
------------------------------------- ------------
Total 1,709,956
------------------------------------- ------------
CHEMICALS-DIVERSE--0.6%
-------------------------------------
6,100 Du Pont (E.I.) de Nemours & Co. 375,531
-------------------------------------
8,600 Morton International, Inc. 305,300
------------------------------------- ------------
Total 680,831
------------------------------------- ------------
CHEMICALS-SPECIALTY--0.7%
-------------------------------------
5,900 Grace (W.R.) & Co. 434,388
-------------------------------------
7,000 Great Lakes Chemical Corp. 345,188
------------------------------------- ------------
Total 779,576
------------------------------------- ------------
COMMUNICATION EQUIPMENT--0.3%
-------------------------------------
6,400 Harris Corp. 292,800
------------------------------------- ------------
COMPUTER HARDWARE--4.7%
-------------------------------------
11,900 (a)Compaq Computer Corp. 889,525
-------------------------------------
6,700 (a)Dell Computer Corp. 649,062
-------------------------------------
9,800 (a)Digital Equipment Corp. 424,462
-------------------------------------
3,700 (a)EMC Corp. Mass 215,987
-------------------------------------
22,700 International Business Machines Corp. 2,404,781
-------------------------------------
4,700 (a)Seagate Technology, Inc. 169,788
-------------------------------------
11,300 (a)Silicon Graphics, Inc. 296,625
------------------------------------- ------------
Total 5,050,230
------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- --------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------
COMPUTER SERVICES--2.3%
---------------------------------------
5,300 (a)3Com Corp. $ 271,625
---------------------------------------
12,200 (a)Cisco Systems, Inc. 891,362
---------------------------------------
8,800 Computer Associates International, Inc. 631,950
---------------------------------------
18,600 (a)Oracle Corp. 677,738
--------------------------------------- ------------
Total 2,472,675
--------------------------------------- ------------
COMPUTER SOFTWARE--0.2%
---------------------------------------
4,300 (a)Parametric Technology Corp. 189,738
--------------------------------------- ------------
CONTAINERS & PACKAGING--0.1%
---------------------------------------
1,700 Union Camp Corp. 104,869
--------------------------------------- ------------
COSMETICS & TOILETRIES--2.5%
---------------------------------------
1,800 Colgate-Palmolive Co. 125,437
---------------------------------------
9,100 Gillette Co. 785,444
---------------------------------------
24,800 Procter & Gamble Co. 1,712,750
--------------------------------------- ------------
Total 2,623,631
--------------------------------------- ------------
ELECTRIC COMPANIES--3.6%
---------------------------------------
6,800 Carolina Power & Light Co. 244,375
---------------------------------------
10,800 Consolidated Edison Co. 367,200
---------------------------------------
11,600 Duke Power Co. 573,475
---------------------------------------
29,700 Edison International 749,925
---------------------------------------
13,600 Entergy Corp. 354,450
---------------------------------------
28,400 P G & E Corp. 658,525
---------------------------------------
15,500 Peco Energy Co. 363,281
---------------------------------------
24,200 Southern Co. 546,013
--------------------------------------- ------------
Total 3,857,244
--------------------------------------- ------------
ELECTRICAL EQUIPMENT--3.3%
---------------------------------------
13,100 AMP, Inc. 701,669
---------------------------------------
41,400 General Electric Co. 2,817,788
--------------------------------------- ------------
Total 3,519,457
--------------------------------------- ------------
ELECTRONICS-DEFENSE--0.4%
---------------------------------------
7,000 Raytheon Co. 413,875
--------------------------------------- ------------
ELECTRONICS-DISTRIBUTORS--0.3%
---------------------------------------
3,900 (W.W.) Grainger Inc. 347,100
--------------------------------------- ------------
ELECTRONICS-SEMICONDUCTORS--3.5%
---------------------------------------
3,400 (a)Applied Materials, Inc. 323,850
---------------------------------------
26,200 Intel Corp. 2,418,588
---------------------------------------
10,200 (a)LSI Logic Corp. 327,675
---------------------------------------
4,900 Micron Technology, Inc. 169,969
---------------------------------------
3,800 Texas Instruments, Inc. 513,475
--------------------------------------- ------------
Total 3,753,557
--------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------------
ENTERTAINMENT--1.3%
-------------------------------------------
17,200 (a)Viacom, Inc., Class B $ 543,950
-------------------------------------------
10,200 Disney (Walt) Co. 822,375
------------------------------------------- ------------
Total 1,366,325
------------------------------------------- ------------
FINANCIAL--3.7%
-------------------------------------------
5,500 American Express Co. 450,312
-------------------------------------------
13,100 American General Corp. 679,562
-------------------------------------------
30,200 Federal Home Loan Mortgage Corp. 1,064,550
-------------------------------------------
21,200 Morgan Stanley, Dean Witter, Discover & Co. 1,146,125
-------------------------------------------
9,300 Washington Mutual, Inc. 648,675
------------------------------------------- ------------
Total 3,989,224
------------------------------------------- ------------
FOODS--0.2%
-------------------------------------------
4,400 Kellogg Co. 185,350
------------------------------------------- ------------
GOLD & PRECIOUS METAL MINES--0.4%
-------------------------------------------
15,100 Barrick Gold Corp. 373,725
------------------------------------------- ------------
HEALTHCARE--2.7%
-------------------------------------------
10,000 Abbott Laboratories 639,375
-------------------------------------------
10,600 American Home Products Corp. 773,800
-------------------------------------------
18,000 Bristol-Myers Squibb Co. 1,489,500
------------------------------------------- ------------
Total 2,902,675
------------------------------------------- ------------
HEALTHCARE-DRUGS MAJOR--3.9%
-------------------------------------------
12,900 Eli Lilly & Co. 1,553,644
-------------------------------------------
21,100 Pfizer, Inc. 1,267,319
-------------------------------------------
19,500 Pharmacia & Upjohn, Inc. 711,750
-------------------------------------------
11,400 Schering Plough Corp. 587,100
------------------------------------------- ------------
Total 4,119,813
------------------------------------------- ------------
HEALTHCARE-HOSPITAL MANAGEMENT--0.7%
-------------------------------------------
27,700 Columbia/HCA Healthcare Corp. 796,375
------------------------------------------- ------------
HEALTHCARE-MEDICAL PRODUCTS & SUPPLY--2.5%
-------------------------------------------
14,400 Baxter International, Inc. 752,400
-------------------------------------------
3,800 (a)Boston Scientific Corp. 209,712
-------------------------------------------
2,800 Guidant Corp. 156,800
-------------------------------------------
18,200 Johnson & Johnson 1,048,775
-------------------------------------------
10,600 Medtronic, Inc. 498,200
------------------------------------------- ------------
Total 2,665,887
------------------------------------------- ------------
HOUSEHOLD FURNITURE & APPLIANCES--0.1%
-------------------------------------------
2,100 Whirlpool Corp. 139,256
------------------------------------------- ------------
INSURANCE-BROKERS--0.5%
-------------------------------------------
9,300 AON Corp. 491,737
------------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------ ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
----------------------------------------------
INSURANCE-LIFE/HEALTH--0.9%
------------------------------------
3,900 Aetna Services, Inc. $ 317,606
------------------------------------
8,200 Conseco, Inc. 400,262
------------------------------------
3,000 Jefferson-Pilot Corp. 237,000
------------------------------------ ------------
Total 954,868
------------------------------------ ------------
INSURANCE-MULTILINE--2.1%
------------------------------------
6,200 American International Group, Inc. 639,762
------------------------------------
2,600 Lincoln National Corp. 181,025
------------------------------------
20,100 Travelers Group, Inc. 1,371,825
------------------------------------ ------------
Total 2,192,612
------------------------------------ ------------
INSURANCE-PROPERTY--0.9%
------------------------------------
8,000 Chubb Corp. 568,500
------------------------------------
7,800 SAFECO Corp. 413,400
------------------------------------ ------------
Total 981,900
------------------------------------ ------------
INVESTMENT BANK-BROKERAGE--0.7%
------------------------------------
10,600 Merrill Lynch & Co., Inc. 786,388
------------------------------------ ------------
IRON & STEEL--0.1%
------------------------------------
3,000 USX-U.S. Steel Group, Inc. 104,250
------------------------------------ ------------
LODGING-HOTELS--0.4%
------------------------------------
5,600 (a)ITT Corp. 379,400
------------------------------------ ------------
MACHINERY--1.0%
------------------------------------
9,800 Cooper Industries, Inc. 529,812
------------------------------------
11,700 Ingersoll-Rand Co. 503,831
------------------------------------ ------------
Total 1,033,643
------------------------------------ ------------
MANUFACTURER-SPECIAL--0.4%
------------------------------------
9,600 Parker-Hannifin Corp. 432,000
------------------------------------ ------------
MANUFACTURING-DIVERSE--2.1%
------------------------------------
7,800 Allied-Signal, Inc. 331,500
------------------------------------
2,000 Minnesota Mining & Manufacturing Co. 185,000
------------------------------------
8,000 Tenneco, Inc. 383,000
------------------------------------
4,200 Textron, Inc. 273,000
------------------------------------
3,300 Unilever N.V., ADR 701,663
------------------------------------
4,600 United Technologies Corp. 372,600
------------------------------------ ------------
Total 2,246,763
------------------------------------ ------------
METALS & MINING--0.3%
------------------------------------
11,900 Inco Ltd. 298,244
------------------------------------ ------------
NATURAL GAS--0.3%
------------------------------------
6,900 Williams Cos., Inc. (The) 323,006
------------------------------------ ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------ ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
----------------------------------------------
OIL & GAS-DRILL & EQUIPMENT--0.7%
------------------------------------
8,800 Baker Hughes, Inc. $ 385,000
------------------------------------
3,800 Schlumberger Ltd. 319,913
------------------------------------ ------------
Total 704,913
------------------------------------ ------------
OIL-DOMESTIC--1.1%
------------------------------------
8,900 Phillips Petroleum Co. 459,463
------------------------------------
19,200 USX Corp. 714,000
------------------------------------ ------------
Total 1,173,463
------------------------------------ ------------
OIL-INTERNATIONAL--7.4%
------------------------------------
6,300 Amoco Corp. 607,162
------------------------------------
9,900 Chevron Corp. 823,556
------------------------------------
46,700 Exxon Corp. 2,991,719
------------------------------------
12,600 Mobil Corp. 932,400
------------------------------------
45,700 Royal Dutch Petroleum Co., ADR 2,536,350
------------------------------------ ------------
Total 7,891,187
------------------------------------ ------------
PAPER & FOREST PRODUCTS--1.3%
------------------------------------
3,300 Champion International Corp. 201,094
------------------------------------
13,100 International Paper Co. 721,319
------------------------------------
8,600 Weyerhaeuser Co. 510,625
------------------------------------ ------------
Total 1,433,038
------------------------------------ ------------
PHOTOGRAPH/IMAGING--0.9%
------------------------------------
11,600 Xerox Corp. 976,575
------------------------------------ ------------
RAILROADS--1.1%
------------------------------------
2,800 Burlington Northern Santa Fe 270,550
------------------------------------
7,900 CSX Corp. 462,150
------------------------------------
1,100 Norfolk Southern Corp. 113,575
------------------------------------
5,500 Union Pacific Corp. 344,438
------------------------------------ ------------
Total 1,190,713
------------------------------------ ------------
RETAIL-DEPARTMENT STORES--2.2%
------------------------------------
13,600 (a)Federated Department Stores, Inc. 586,500
------------------------------------
11,200 May Department Stores Co. 610,400
------------------------------------
7,700 Nordstrom, Inc. 490,875
------------------------------------
11,400 J.C. Penney Co., Inc. 664,050
------------------------------------ ------------
Total 2,351,825
------------------------------------ ------------
RETAIL-DRUG STORES--0.5%
------------------------------------
9,500 CVS Corp. 540,312
------------------------------------ ------------
RETAIL-GENERAL MERCHANDISE--1.6%
------------------------------------
10,100 (a)Costco Cos., Inc. 380,012
------------------------------------
16,800 Sears, Roebuck & Co. 956,550
------------------------------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------
RETAIL-GENERAL MERCHANDISE--CONTINUED
--------------------------------------
8,800 Wal-Mart Stores, Inc. $ 322,300
-------------------------------------- ------------
Total 1,658,862
-------------------------------------- ------------
RETAIL-SPECIALTY--0.5%
--------------------------------------
15,100 (a)Toys 'R' Us, Inc. 536,050
-------------------------------------- ------------
SERVICES-COMMERCIAL & CONSUMER--0.4%
--------------------------------------
12,800 Service Corp. International 412,000
-------------------------------------- ------------
SERVICES-DATA PROCESSING--0.3%
--------------------------------------
8,120 First Data Corp., Class 305,007
-------------------------------------- ------------
SPECIALTY PRINTING--0.4%
--------------------------------------
10,900 Donnelley (R.R.) & Sons Co. 388,994
-------------------------------------- ------------
TELECOMMUNICATIONS-CELLULAR--0.7%
--------------------------------------
20,900 (a)Airtouch Communications, Inc. 740,644
-------------------------------------- ------------
TELECOMMUNICATIONS-EQUIPMENT--1.3%
--------------------------------------
10,600 Lucent Technologies, Inc. 862,575
--------------------------------------
3,500 Northern Telecom Ltd. 363,781
--------------------------------------
3,000 (a)Tellabs, Inc. 154,500
-------------------------------------- ------------
Total 1,380,856
-------------------------------------- ------------
TELECOMMUNICATIONS-LONG DISTANCE--3.3%
--------------------------------------
40,800 AT&T Corp. 1,807,950
--------------------------------------
25,500 MCI Communications Corp. 749,063
--------------------------------------
13,700 Sprint Corp. 685,000
--------------------------------------
7,000 (a)WorldCom, Inc. 247,625
-------------------------------------- ------------
Total 3,489,638
-------------------------------------- ------------
TELEPHONE--2.8%
--------------------------------------
10,398 Bell Atlantic Corp. 836,421
--------------------------------------
30,300 BellSouth Corp. 1,401,375
--------------------------------------
20,200 U.S. West, Inc. 777,700
-------------------------------------- ------------
Total 3,015,496
-------------------------------------- ------------
TEXTILES-APPAREL--0.4%
--------------------------------------
5,100 V.F. Corp. 472,388
-------------------------------------- ------------
TOBACCO--1.4%
--------------------------------------
9,200 Fortune Brands, Inc. 309,925
--------------------------------------
9,200 (a)Gallaher Group PLC, ADR 176,525
--------------------------------------
23,600 Philip Morris Cos., Inc. 980,875
-------------------------------------- ------------
Total 1,467,325
-------------------------------------- ------------
TRUCKS & PARTS--0.1%
--------------------------------------
1,900 Cummins Engine Co., Inc. 148,319
-------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
---------- --------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
--------------------------------------------------------------
WASTE MANAGEMENT--0.9%
---------------------------------------------------
24,300 Browning-Ferris Industries, Inc. $ 924,919
--------------------------------------------------- ------------
TOTAL COMMON STOCKS (IDENTIFIED COST $83,618,762) 104,106,935
--------------------------------------------------- ------------
(B) REPURCHASE AGREEMENT--2.4%
--------------------------------------------------------------
$2,576,249 Credit Suisse First Boston, 6.05%, dated 9/30/1997,
due 10/1/1997 (AT AMORTIZED COST) 2,576,249
--------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $86,195,011)(C) $106,683,184
--------------------------------------------------- ------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $86,195,011. The
net unrealized appreciation of investments on a federal tax basis amounts to
$20,488,173 which is comprised of $22,202,146 appreciation and $1,713,973
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($106,684,527) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
PLC--Public Limited Company
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
The 12-month period ended September 30, 1997 was highlighted by significant
growth in small cap stocks*. Feeling that small cap growth stocks were
particularly overvalued, the fund focused on small cap value stocks for the
majority of 1997. During the 12-month period ended September 30, 1997, small cap
value stocks recorded a total return of 48.9% as measured by the S&P 600 Value
Index**, whereas small cap growth stocks returned only 25.2% as measured by the
S&P 600 Growth Index**. The S&P 600 Index** recorded a total return 37.0% and
the S&P 500 Index returned 40.7% for the 12-month period ended September 30,
1997. During the 12-month period ended September 30, 1997, the fund produced an
average annual total return of 44.01%.***
We continue to focus on small cap value stocks which have demonstrated greater
stability in an investment environment characterized by excessive risk
measures. In general, we believe that small cap value stocks will remain less
volatile than small cap growth stocks over time. Due to our value orientation,
the fund remains positioned in a defensive mode.
- --------
* Small capitalization stocks have historically experienced greater volatility
than average.
** The S&P 600 Index is an unmanaged capitalization weighted index representing
all major industries in the mid-range of the U.S. stock market. The S&P 600
Growth Index and the S&P 600 Value Index are sub- indices of the S&P 600
Index. Investments cannot be made in an index.
*** Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER FUND.
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager Fund (the "Fund") from March 7, 1995 (start of performance) to
September 30, 1997, compared to the Standard & Poor's 500 Index ("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX E
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 41.85%
Start of Performance (3/7/95) 28.04
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 3/7/95 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 2.00% contingent deferred sales charge on any
redemption less than five years from the purchase date. The Fund's performance
assumes the reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P 500
has been adjusted to reflect reinvestment of dividends on securities in the
index. The index is unmanaged.
THE STYLE MANAGER FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ----------------------------- -----------
<C> <S> <C>
COMMON STOCKS--98.2%
----------------------------------------
AEROSPACE & DEFENSE--1.2%
-----------------------------
22,200 Orbital Sciences Corp. $ 543,900
-----------------------------
20,100 Trimble Navigation Ltd. 394,463
----------------------------- -----------
Total 938,363
----------------------------- -----------
AIR FREIGHT--0.5%
-----------------------------
27,500 Fritz Companies, Inc. 405,625
----------------------------- -----------
APPAREL--0.7%
-----------------------------
15,500 Kellwood Co. 549,281
----------------------------- -----------
AUTO PARTS & EQUIPMENT--1.3%
-----------------------------
6,700 SPX Corp. 392,788
-----------------------------
15,400 Smith (A.O.) Corp. 610,225
----------------------------- -----------
Total 1,003,013
----------------------------- -----------
BANKING-MAJOR REGIONAL--13.3%
-----------------------------
7,920 Associated Banc Corp. 356,895
-----------------------------
10,043 Bankers Trust New York Corp. 1,230,267
-----------------------------
6,400 CCB Financial Corp. 516,000
-----------------------------
11,900 Central Fidelity Banks, Inc. 526,575
-----------------------------
14,300 Centura Banks, Inc. 787,394
-----------------------------
9,812 Commerce Bancorp, Inc. 381,441
-----------------------------
9,600 Commercial Federal Corp. 452,400
-----------------------------
10,600 Cullen Frost Bankers, Inc. 502,175
-----------------------------
27,200 Deposit Guaranty Corp. 906,100
-----------------------------
11,100 First Commercial Corp. 532,800
-----------------------------
15,500 First Michigan Bank Corp. 641,312
-----------------------------
23,600 Firstmerit Corp. 637,200
-----------------------------
22,650 Keystone Financial, Inc. 855,038
-----------------------------
13,200 Magna Group, Inc. 520,575
-----------------------------
15,400 Riggs National Corp. 362,863
-----------------------------
15,975 Summit Bancorp 709,889
-----------------------------
11,100 Susquehanna Bankshares, Inc. 341,325
----------------------------- -----------
Total 10,260,249
----------------------------- -----------
BUILDING MATERIALS--1.5%
-----------------------------
14,700 Lone Star Industries, Inc. 793,800
-----------------------------
13,400 TJ International, Inc. 342,538
----------------------------- -----------
Total 1,136,338
----------------------------- -----------
CHEMICALS--2.2%
-----------------------------
10,000 Cambrex Corp. 466,250
-----------------------------
12,800 ChemFirst, Inc. 321,600
-----------------------------
14,600 Dexter Corp. 584,912
-----------------------------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------------------------------ -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------
CHEMICALS--CONTINUED
------------------------------------
15,400 Mississippi Chemical Corp. $ 300,300
------------------------------------ -----------
Total 1,673,062
------------------------------------ -----------
COMMERCIAL SERVICES--0.4%
------------------------------------
9,300 Primark Corp. 274,931
------------------------------------ -----------
COMMUNICATION EQUIPMENT--0.7%
------------------------------------
18,800 Allen Telecom, Inc. 535,800
------------------------------------ -----------
COMPUTER SOFTWARE--1.0%
------------------------------------
34,700 Platinum Technology, Inc. 746,050
------------------------------------ -----------
COMPUTERS-PERIPHERAL--1.4%
------------------------------------
31,000 Komag, Inc. 631,625
------------------------------------
17,700 Telxon Corp. 433,650
------------------------------------ -----------
Total 1,065,275
------------------------------------ -----------
COMPUTERS-NETWORKING--0.7%
------------------------------------
28,700 Network Equipment Technologies, Inc. 500,456
------------------------------------ -----------
DEPARTMENT STORES--2.4%
------------------------------------
14,000 Carson Pirie Scott & Co. 552,125
------------------------------------
13,400 Proffitts, Inc. 793,950
------------------------------------
20,400 Shopko Stores, Inc. 530,400
------------------------------------ -----------
Total 1,876,475
------------------------------------ -----------
DISTRIBUTORS-FOOD & HEALTH--0.7%
------------------------------------
20,100 Rykoff Sexton, Inc. 520,088
------------------------------------ -----------
DRUG STORES--0.8%
------------------------------------
22,600 Longs Drug Stores Corp. 603,138
------------------------------------ -----------
ELECTRIC COMPANIES--2.8%
------------------------------------
33,500 Atlantic Energy, Inc. NJ 600,906
------------------------------------
37,179 MidAmerican Energy Holdings Co. 641,338
------------------------------------
13,500 United Illuminating Co. 491,906
------------------------------------
20,500 United Water Resources, Inc. 381,813
------------------------------------ -----------
Total 2,115,963
------------------------------------ -----------
ELECTRICAL EQUIPMENT--0.7%
------------------------------------
29,700 Anixter International, Inc. 510,469
------------------------------------ -----------
ELECTRONICS-DISTRIBUTORS--1.9%
------------------------------------
23,100 Kent Electronics Corp. 912,450
------------------------------------
13,900 Marshall Industries 538,625
------------------------------------ -----------
Total 1,451,075
------------------------------------ -----------
ELECTRONICS-INSTRUMENTS--0.5%
------------------------------------
7,600 John Fluke Manufacturing, Co. 410,400
------------------------------------ -----------
ELECTRONICS-SEMICONDUCTORS--3.0%
------------------------------------
17,500 Cyrix Corp. 586,250
------------------------------------
14,500 Dallas Semiconductor Corp. 648,875
------------------------------------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
------------------------------------------------
ELECTRONICS-SEMICONDUCTORS--CONTINUED
-------------------------------------
11,300 Photronic Labs, Inc. $ 684,356
-------------------------------------
16,700 Zilog, Inc. 364,269
------------------------------------- -----------
Total 2,283,750
------------------------------------- -----------
ENTERTAINMENT--0.9%
-------------------------------------
9,900 Carmike Cinemas, Inc., Class A 297,000
-------------------------------------
9,800 GC Cos., Inc. 421,400
------------------------------------- -----------
Total 718,400
------------------------------------- -----------
FOOD CHAINS--0.6%
-------------------------------------
26,400 Ruddick Corp. 425,700
------------------------------------- -----------
FOODS--1.3%
-------------------------------------
33,400 Chiquita Brands International 538,575
-------------------------------------
16,400 Smithfield Foods, Inc. 492,000
------------------------------------- -----------
Total 1,030,575
------------------------------------- -----------
FOOTWEAR--0.8%
-------------------------------------
8,200 Timberland Co., Class A 653,950
------------------------------------- -----------
GAMING & LOTTERY--1.0%
-------------------------------------
28,100 Grand Casinos, Inc. 430,281
-------------------------------------
16,800 Showboat, Inc. 342,300
------------------------------------- -----------
Total 772,581
------------------------------------- -----------
GOLD & PRECIOUS METAL MINES--1.1%
-------------------------------------
32,100 Coeur d'Alene Mines Corp. 523,631
-------------------------------------
16,300 Stillwater Mining Co. 347,394
------------------------------------- -----------
Total 871,025
------------------------------------- -----------
HARDWARE & TOOLS--0.5%
-------------------------------------
9,800 Toro Co. 388,325
------------------------------------- -----------
HEALTHCARE-DIVERSIFIED--0.6%
-------------------------------------
12,700 Sierra Health Services, Inc. 465,138
------------------------------------- -----------
HEALTHCARE-LONG TERM CARE--2.7%
-------------------------------------
18,800 Genesis Health Ventures, Inc. 732,025
-------------------------------------
14,200 Integrated Health Services, Inc. 474,812
-------------------------------------
13,600 Living Centers of America, Inc. 554,200
-------------------------------------
20,700 Mariner Health Group, Inc. 326,025
------------------------------------- -----------
Total 2,087,062
------------------------------------- -----------
HEALTHCARE-MANAGED CARE--0.4%
-------------------------------------
19,500 Coventry Corp. 321,750
------------------------------------- -----------
HOMEBUILDING--1.4%
-------------------------------------
15,093 Fleetwood Enterprises, Inc. 506,559
-------------------------------------
14,800 U.S. Home Corp. 571,650
------------------------------------- -----------
Total 1,078,209
------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ---------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
---------------------------------------------------
HOMEFURNISHINGS--1.4%
----------------------------------------
18,800 Fieldcrest Cannon, Inc. $ 648,600
----------------------------------------
8,300 Springs Industries, Inc., Class A 435,750
---------------------------------------- -----------
Total 1,084,350
---------------------------------------- -----------
HOSPITAL MANAGEMENT--1.0%
----------------------------------------
17,000 Universal Health Services, Inc., Class B 735,250
---------------------------------------- -----------
HOTELS--1.4%
----------------------------------------
22,700 Prime Hospitality Corp. 512,169
----------------------------------------
19,300 Marcus Corp. 562,113
---------------------------------------- -----------
Total 1,074,282
---------------------------------------- -----------
HOUSEHOLD FURNITURE & APPLIANCES--1.9%
----------------------------------------
12,900 Bassett Furniture Industries, Inc. 367,650
----------------------------------------
21,400 Ethan Allen Interiors, Inc. 663,400
----------------------------------------
11,100 Kimball International, Inc., Class B 466,200
---------------------------------------- -----------
Total 1,497,250
---------------------------------------- -----------
INSURANCE-LIFE/HEALTH--1.4%
----------------------------------------
9,100 Life Re Corp. 480,025
----------------------------------------
12,500 Protective Life Corp. 631,250
---------------------------------------- -----------
Total 1,111,275
---------------------------------------- -----------
INSURANCE-MULTILINE--0.8%
----------------------------------------
17,800 American Bankers Insurance Group, Inc. 649,700
---------------------------------------- -----------
INSURANCE-PROPERTY--3.9%
----------------------------------------
9,000 Allied Group, Inc. 457,312
----------------------------------------
7,900 Capital Re Corp. 481,900
----------------------------------------
9,200 Enhance Financial Services Group, Inc. 503,700
----------------------------------------
9,500 First American Financial Corp. 570,000
----------------------------------------
13,400 Frontier Insurance Group, Inc. 509,200
----------------------------------------
10,000 Orion Capital Corp. 453,125
---------------------------------------- -----------
Total 2,975,237
---------------------------------------- -----------
INVESTMENT BANKING/BROKERAGE--3.6%
----------------------------------------
7,100 Interra Financial, Inc. 426,444
----------------------------------------
13,467 Legg Mason, Inc. 710,367
----------------------------------------
14,100 Piper Jaffray Cos., Inc. 430,931
----------------------------------------
17,300 Quick & Reilly Group, Inc. 647,669
----------------------------------------
14,800 Raymond James Financial, Inc. 532,800
---------------------------------------- -----------
Total 2,748,211
---------------------------------------- -----------
IRON & STEEL--0.6%
----------------------------------------
12,500 Quanex Corp. 438,281
---------------------------------------- -----------
LEISURE TIME--0.5%
----------------------------------------
14,700 K2, Inc. 369,337
---------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
------------------------------------------------------
MACHINERY & EQUIPMENT--0.4%
--------------------------------------------
16,700 Global Industrial Technologies, Inc. $ 345,481
-------------------------------------------- -----------
MANUFACTURING-DIVERSIFIED--1.6%
--------------------------------------------
21,000 Figgie International Holdings, Inc., Class A 309,750
--------------------------------------------
28,200 Premark International, Inc. 902,400
-------------------------------------------- -----------
Total 1,212,150
-------------------------------------------- -----------
MANUFACTURING-SPECIALIZED--3.9%
--------------------------------------------
11,100 Aptargroup, Inc. 620,906
--------------------------------------------
11,218 Flowserve Corp. 335,138
--------------------------------------------
13,000 Greenfield Industries, Inc. 373,750
--------------------------------------------
14,600 Halter Marine Group, Inc. 706,275
--------------------------------------------
12,300 Ionics, Inc. 545,044
--------------------------------------------
13,300 Regal Beloit Corp. 408,975
-------------------------------------------- -----------
Total 2,990,088
-------------------------------------------- -----------
NATURAL GAS--2.7%
--------------------------------------------
9,800 Eastern Enterprises 365,662
--------------------------------------------
17,300 K N Energy, Inc. 791,475
--------------------------------------------
16,400 Northwest Natural Gas Co. 422,300
--------------------------------------------
18,300 Piedmont Natural Gas, Inc. 532,988
-------------------------------------------- -----------
Total 2,112,425
-------------------------------------------- -----------
OFFICE EQUIPMENT & SUPPLIES--0.5%
--------------------------------------------
11,300 Standard Register 376,431
-------------------------------------------- -----------
OIL & GAS--2.8%
--------------------------------------------
22,300 Camco International, Inc. 1,555,425
--------------------------------------------
25,400 Snyder Oil Corp. 576,263
-------------------------------------------- -----------
Total 2,131,688
-------------------------------------------- -----------
PAPER & FOREST PRODUCTS--1.4%
--------------------------------------------
28,600 Longview Fibre Co. 568,425
--------------------------------------------
10,700 Rayonier, Inc. 517,613
-------------------------------------------- -----------
Total 1,086,038
-------------------------------------------- -----------
PHARMACEUTICALS--0.5%
--------------------------------------------
16,900 Alpharma, Inc., Class A 378,137
--------------------------------------------
2,817 Alpharma, Inc., Rights 15,844
-------------------------------------------- -----------
Total 393,981
-------------------------------------------- -----------
PRINTING & PUBLISHING--0.5%
--------------------------------------------
11,700 Bowne & Co., Inc. 410,962
-------------------------------------------- -----------
PROPERTY--1.7%
--------------------------------------------
10,600 Fremont General Corp. 506,150
--------------------------------------------
9,100 Selective Insurance Group, Inc. 468,650
--------------------------------------------
11,300 Zenith National Insurance Corp. 322,756
-------------------------------------------- -----------
Total 1,297,556
-------------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------------------
RESTAURANTS--2.2%
--------------------------------------------------
11,900 IHOP Corp. $ 425,425
--------------------------------------------------
20,300 Landrys Seafood Restaurants, Inc. 596,313
--------------------------------------------------
13,800 Ruby Tuesday, Inc. 351,900
--------------------------------------------------
13,300 ShowBiz Pizza Time, Inc. 305,900
-------------------------------------------------- -----------
Total 1,679,538
-------------------------------------------------- -----------
RETAIL--0.9%
--------------------------------------------------
13,100 Fabri-Centers of America, Class A 302,937
--------------------------------------------------
12,750 Hughes Supply, Inc. 384,891
-------------------------------------------------- -----------
Total 687,828
-------------------------------------------------- -----------
RETAIL-SPECIALTY--2.4%
--------------------------------------------------
14,600 Michaels Stores, Inc. 446,213
--------------------------------------------------
22,200 O'Reilly Automotive, Inc. 505,050
--------------------------------------------------
31,050 Pier 1 Imports, Inc. 556,959
--------------------------------------------------
17,000 Sports Authority, Inc. 316,625
-------------------------------------------------- -----------
Total 1,824,847
-------------------------------------------------- -----------
SAVINGS & LOAN--5.6%
--------------------------------------------------
15,600 Astoria Financial Corp. 784,875
--------------------------------------------------
18,100 Charter One Financial, Inc. 1,070,162
--------------------------------------------------
18,600 Downey Financial Corp. 453,375
--------------------------------------------------
15,100 JSB Financial, Inc. 738,956
--------------------------------------------------
10,900 RCSB Financial, Inc. 594,050
--------------------------------------------------
27,900 St. Paul Bancorp, Inc. 697,500
-------------------------------------------------- -----------
Total 4,338,918
-------------------------------------------------- -----------
SERVICES-COMMERCIAL & CONSUMER--1.7%
--------------------------------------------------
21,700 Cerner Corp. 519,444
--------------------------------------------------
17,000 Franklin Covey Co. 474,937
--------------------------------------------------
14,247 Ogden Corp. 336,585
-------------------------------------------------- -----------
Total 1,330,966
-------------------------------------------------- -----------
SERVICES-COMPUTER SYSTEMS--0.5%
--------------------------------------------------
13,600 BancTec, Inc. 362,100
-------------------------------------------------- -----------
TRUCKERS--2.8%
--------------------------------------------------
22,900 Alexander and Baldwin, Inc. 592,537
--------------------------------------------------
18,100 American Freightways Corp. 343,900
--------------------------------------------------
16,700 Werner Enterprises, Inc. 404,975
--------------------------------------------------
24,000 Yellow Corp. 781,500
-------------------------------------------------- -----------
Total 2,122,912
-------------------------------------------------- -----------
TRUCKS & PARTS--0.6%
--------------------------------------------------
15,600 Wabash National Corp. 451,425
-------------------------------------------------- -----------
TOTAL COMMON STOCKS (IDENTIFIED COST $60,491,069) 75,511,023
-------------------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- --------------------------------------------------- -----------
<C> <S> <C>
(A) REPURCHASE AGREEMENT--1.6%
--------------------------------------------------------------
$1,219,266 C.S. First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) $ 1,219,266
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $61,710,335)(B) $76,730,289
--------------------------------------------------- -----------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) The cost of investments for federal tax purposes amounts to $61,750,880. The
net unrealized appreciation of investments on a federal tax basis amounts to
$14,979,409 which is comprised of $15,597,054 appreciation and $617,645
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($76,873,948) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE VIRGINIA MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
During the last year, interest rates have been relatively calm, but the year
ended with lower yields than were seen at the beginning of the year. Municipal
bonds, in general, outperformed Treasuries during the same period as a lack of
supply and a quieting of tax reform allowed the municipal bond market to gain
strength.
Towards the end of the year, yields on municipal bonds were at their most
attractive level relative to Treasuries at any time in the last three months.
This shift created a buying opportunity especially in the 10 to 15 year maturity
range desirable for this fund. We expect that the supply of municipal bonds will
remain relatively weak through the end of this calendar year and we would expect
municipal bonds to continue to outperform Treasuries during the same period.
Going forward, we expect overall interest rates to remain relatively calm with a
gradual bias toward lower interest rates. We will continue to maintain an
average maturity of about 15 years in an attempt to maximize yield while keeping
risk to changes in interest rates somewhat lower than the average fund.
THE VIRGINIA MUNICIPAL BOND FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE VIRGINIA MUNICIPAL BOND FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Virginia Municipal Bond Fund (the "Fund") from October 24, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPEDIX F
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 5.70%
5 Year 5.73%
Start of Performance (10/24/90) 6.45%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/24/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE VIRGINIA MUNICIPAL BOND FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE VIRGINIA MUNICIPAL BOND FUND--TRUST SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Virginia Municipal Bond Fund (the "Fund") from October 24, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX G
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 8.00%
5 Year 5.96%
Start of Performance (10/24/90) 6.62%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/24/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE VIRGINIA MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--95.6%
--------------------------------------------------------
VIRGINIA--95.6%
---------------------------------------------
$1,000,000 Albemarle County, VA IDA, Hospital Revenue
Refunding Bonds, 5.75% (Martha Jefferson
Hospital), 10/1/2008 A $ 1,056,730
---------------------------------------------
1,000,000 Arlington County, VA, GO UT Bonds, 5.30%
(Original Issue Yield: 5.40%), 6/1/2011 AAA 1,030,440
---------------------------------------------
3,175,000 Big Stone Gap, VA Redevelopment & Housing
Authority, Correctional Facility Lease
Revenue Bonds, 6.00% (Wallens Ridge
Development Project), 9/1/2007 AA 3,500,247
---------------------------------------------
2,890,000 Chesapeake Bay Bridge & Tunnel District, VA,
Revenue Bonds, 5.875% (FGIC INS)/(Original
Issue Yield: 5.95%), 7/1/2010 AAA 3,116,605
---------------------------------------------
3,500,000 Chesapeake, VA, GO UT Bonds, 5.375% (Commonwealth of Virginia
GTD)/(Original
Issue Yield: 5.45%), 5/1/2010 AA 3,635,870
---------------------------------------------
2,980,000 Chesterfield County, VA, GO UT Bonds, 5.25%,
3/1/2010 AA+ 3,051,550
---------------------------------------------
2,860,000 Commonwealth of Virginia, GO UT Bonds,
5.375%, 6/1/2009 AAA 2,993,905
---------------------------------------------
4,000,000 Commonwealth of Virginia, GO UT Public
Facilities Bonds (Series A), 5.70% (Original
Issue Yield: 5.75%), 6/1/2008 AAA 4,289,720
---------------------------------------------
2,545,000 Danville, VA IDA, Hospital Refunding Revenue Bonds, 6.20% (Danville
Regional Medical Center)/(FGIC INS)/(Original Issue Yield:
6.30%), 10/1/2009 AAA 2,779,395
---------------------------------------------
2,605,000 Fairfax County, VA Sewer Revenue, Revenue
Bonds, 5.625%, 7/15/2011 AA 2,748,197
---------------------------------------------
1,140,000 Fairfax County, VA Sewer Revenue, Sewer
Refunding Revenue Bonds, 5.30% (AMBAC INS),
11/15/2006 AAA 1,197,467
---------------------------------------------
1,505,000 Fairfax County, VA Sewer Revenue, Sewer
Refunding Revenue Bonds, 5.40% (AMBAC INS),
11/15/2007 AAA 1,583,681
---------------------------------------------
Fairfax County, VA Water Authority, 6.00%,
2,000,000 4/1/2022 AA 2,167,290
---------------------------------------------
1,000,000 Fairfax County, VA Water Authority, Revenue
Refunding Bonds, 4.65% (Original Issue Yield:
4.85%), 4/1/2010 AA 977,750
---------------------------------------------
3,500,000 Fairfax County, VA, (Series A), 5.25% (State Aid Withholding
LOC)/(Original Issue Yield:
5.35%), 6/1/2009 AAA 3,627,960
---------------------------------------------
2,000,000 Henrico County, VA IDA, Refunding Revenue Bonds, 5.60% (Bon Secours
Health System)/(MBIA INS)/(Original Issue Yield:
5.65%), 8/15/2010 AAA 2,090,720
---------------------------------------------
600,000 Loudoun County, VA IDA, Lease Revenue Bonds,
5.50% (Northern Virginia Criminal
Justice)/(Original Issue Yield: 5.829%),
6/1/2008 AA- 623,910
---------------------------------------------
1,000,000 Loudoun County, VA, GO UT Refunding Bonds
(Series A), 5.50% (Commonwealth of Virginia
GTD)/(Original Issue Yield: 5.649%),
10/1/2007 AA- 1,061,750
---------------------------------------------
4,440,000 Newport News, VA, GO UT, 5.75%, 1/15/2017 AA- 4,607,743
---------------------------------------------
3,000,000 Norfolk, VA, GO UT Bonds, 5.25% (Commonwealth of Virginia
GTD)/(Original Issue Yield:
5.55%), 6/1/2011 AA 3,052,140
---------------------------------------------
</TABLE>
THE VIRGINIA MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CREDIT
OR SHARES RATING* VALUE
---------- -------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
-------------------------------------------------------
$2,000,000 Norfolk, VA, GO UT Bonds, 5.70% (MBIA INS), AAA
6/1/2008 $ 2,152,380
--------------------------------------------
2,535,000 Portsmouth, VA, GO UT Bonds, 5.00% (FGIC
INS), 8/1/2011 AAA 2,532,313
--------------------------------------------
3,375,000 Riverside, VA Regional Jail Authority, Jail
Facility Revenue Bonds, 5.625% (MBIA
INS)/(Original Issue Yield: 5.75%), 7/1/2007 AAA 3,638,655
--------------------------------------------
1,185,000 Roanoke, VA IDA, Hospital Revenue Refunding
Bonds (Series B), 6.00% (Roanoke Memorial
Hospital)/(Original Issue Yield: 6.10%),
7/1/2007 AA- 1,260,212
--------------------------------------------
3,510,000 Virginia College Building Authority, Revenue
Bonds, 5.40% (21ST Century College Program),
8/1/2015 AA 3,555,700
--------------------------------------------
7,255,000 Virginia State Public Building Authority,
Revenue Bonds, 5.20% (Original Issue Yield:
5.40%), 8/1/2010 AA 7,366,146
--------------------------------------------
2,030,000 Virginia State Transportation Board, Revenue
Bonds, 6.00% (Northern Virginia
Transportation District)/(Original Issue
Yield: 6.10%), 5/15/2008 AA 2,198,348
--------------------------------------------
1,000,000 Virginia State Transportation Board,
Transportation Contract Revenue Refunding
Bonds, 5.375% (U.S. Route 58 Corridor
PG-A), 5/15/2007 AA 1,048,000
--------------------------------------------
2,325,000 Virginia State University-Virginia
Commonwealth, Revenue Bonds, 5.75% (Original
Issue Yield: 5.827%), 5/1/2021 AA- 2,386,055
-------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $72,293,301) 75,330,879
-------------------------------------------- -----------
MUTUAL FUND ISSUES--3.5%
-------------------------------------------------------
928,302 Goldman Sachs & Co. ILA Tax Exempt 928,302
--------------------------------------------
1,793,570 Municipal Fund for Temporary Investment 1,793,570
-------------------------------------------- -----------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET
VALUE) 2,721,872
-------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST
$75,015,173)(A) $78,052,751
-------------------------------------------- -----------
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $75,015,173. The
net unrealized appreciation of investments on a federal tax basis amounts to
$3,037,578 which is comprised of $3,041,196 appreciation and $3,618
depreciation at September 30, 1997.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($78,772,564) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company GO--General Obligation GTD--Guaranty IDA--Industrial
Development Authority INS--Insured LOC--Letter of Credit MBIA--Municipal Bond
Investors Assurance UT--Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
THE MARYLAND MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
During the last year, interest rates have been relatively calm, but the year
ended with lower yields than were seen at the beginning of the year. Municipal
bonds, in general, outperformed Treasuries during the same period as a lack of
supply and a quieting of tax reform allowed the municipal bond market to gain
strength.
Towards the end of the year, yields on municipal bonds were at their most
attractive level relative to Treasuries at any time in the last three months.
This shift created a buying opportunity especially in the 10 to 15 year maturity
range desirable for this fund. We expect that the supply of municipal bonds will
remain relatively weak through the end of this calendar year and we would expect
municipal bonds to continue to outperform Treasuries during the same period.
Bonds for the Maryland area continue to enjoy good demand, and typically yield 5
to 10 basis points less than similar bonds nationwide.
Going forward, we expect overall interest rates to remain relatively calm with a
gradual bias toward lower interest rates. We will continue to maintain an
average maturity of about 15 years in an attempt to maximize yield while keeping
risk to changes in interest rates somewhat lower than the average fund.
THE MARYLAND MUNICIPAL BOND FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE MARYLAND MUNICIPAL BOND FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Maryland Municipal Bond Fund (the "Fund") from October 30, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX H
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 4.87%
5 Year 5.33%
Start of Performance (10/30/90) 6.01%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/30/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE MARYLAND MUNICIPAL BOND FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE MARYLAND MUNICIPAL BOND FUND--TRUST SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Maryland Municipal Bond Fund (the "Fund") from October 30, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX I
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 7.19%
5 Year 5.56%
Start of Performance (10/30/90) 6.18%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/30/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE MARYLAND MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--91.0%
--------------------------------------------------------
MARYLAND--91.0%
---------------------------------------------
$1,000,000 Baltimore County, MD Revenue Authority,
Revenue Refunding Bonds, 5.25% (Original
Issue Yield: 5.40%), 7/1/2008 A $ 1,038,610
---------------------------------------------
1,000,000 Baltimore, MD, GO UT Bonds (Series A), 5.375%
(AMBAC INS), 10/15/2008 AAA 1,035,650
---------------------------------------------
1,500,000 Calvert County, MD, Pollution Control Revenue
Bonds, 5.55% (Baltimore Gas & Electric
Co.)/(Original Issue Yield: 5.601%),
7/15/2014 A 1,528,065
---------------------------------------------
1,400,000 Carroll County, MD, GO UT, 5.35%, 12/1/2016 AA 1,411,144
---------------------------------------------
1,000,000 Harford County, MD, GO UT, 4.65%, 12/1/2006 AA- 1,012,150
---------------------------------------------
1,430,000 Howard County, MD, GO Refunding Bonds (Series
A), 5.25% (Original Issue Yield: 5.60%),
8/15/2011 AA+ 1,460,416
---------------------------------------------
1,000,000 Maryland Health & Higher Educational Facilities Authority, Refunding
Revenue Bonds, 5.30% (Francis Scott Key Medical Center)/(FGIC
INS)/(Original Issue Yield:
5.40%), 7/1/2008 AAA 1,037,220
---------------------------------------------
1,500,000 Maryland Health & Higher Educational
Facilities Authority, Revenue Bonds, 5.20%
(Frederick Memorial Hospital)/(FGIC
INS)/(Original Issue Yield: 5.30%), 7/1/2008 AAA 1,565,205
---------------------------------------------
1,740,000 Maryland National Capital Park & Planning
Commission, GO UT Bonds, 5.125% (Park
Aquisition & Development-S-2)/
(Original Issue Yield: 5.25%), 7/1/2010 AA 1,773,982
---------------------------------------------
1,470,000 Maryland State Community Development
Administration, Revenue Bonds (Single Family
Program-Fifth Series), 5.40%, 4/1/2008 Aa 1,508,279
---------------------------------------------
1,800,000 Maryland State Stadium Authority, Revenue
Bonds, 5.875% (AMBAC INS), 12/15/2011 AAA 1,927,980
---------------------------------------------
850,000 Maryland State Transportation Authority,
Refunding Revenue Bonds, 5.80% (Original
Issue Yield: 5.90%), 7/1/2006 A+ 927,223
---------------------------------------------
1,000,000 Maryland State, GO UT Bonds, 5.25%, 6/15/2007 AAA 1,054,210
---------------------------------------------
2,500,000 Maryland State, GO UT Bonds, 5.70% (Original
Issue Yield: 5.75%), 3/15/2010 AAA 2,682,875
---------------------------------------------
820,000 Montgomery County, MD, GO UT Refunding Bonds (Series A), 5.75%
(Original Issue Yield:
5.85%), 7/1/2006 AAA 897,146
---------------------------------------------
1,000,000 Ocean City, MD, GO UT Refunding Bonds, 5.50%
(MBIA Insurance Corporation INS), 3/15/2009 AAA 1,046,760
---------------------------------------------
500,000 Prince Georges County, MD, GO UT Bonds, 5.50% (Stormwater
Management)/(Original Issue
Yield: 5.55%), 3/15/2008 AA 524,910
---------------------------------------------
1,435,000 Prince Georges County, MD IDA, Lease Revenue
Bonds, 6.00% (Hyattsville District Court
Facility)/(Original Issue Yield: 6.10%),
7/1/2009 AA 1,590,941
---------------------------------------------
1,425,000 Rockville, MD, GO UT Revenue Refunding Bonds,
4.90% (Original Issue Yield: 5.00%),
4/15/2007 AA+ 1,449,995
---------------------------------------------
</TABLE>
THE MARYLAND MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR CREDIT
SHARES RATING* VALUE
---------- -------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
-------------------------------------------------------
$1,500,000 University of Maryland, System Auxiliary
Facilities & Tuition Revenue Bonds (Series
A), 5.40% (Original Issue Yield: 5.45%),
4/1/2009 AA+ $ 1,573,170
--------------------------------------------
1,600,000 Washington Suburban Sanitation District, MD,
GO UT Bonds, 5.375%, 6/1/2011 AA 1,627,520
--------------------------------------------
1,700,000 Washington Suburban Sanitation District, MD,
GO UT Bonds, 5.50%, 6/1/2010 AA 1,768,781
-------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $29,252,821) 30,442,232
-------------------------------------------- -----------
MUTUAL FUND ISSUES--8.0%
-------------------------------------------------------
1,430,264 Goldman Sachs & Co. 1,430,264
--------------------------------------------
1,243,349 Municipal Fund for Temporary Investment 1,243,349
-------------------------------------------- -----------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET 2,673,613
VALUE) -----------
--------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST $33,115,845
$31,926,434)(A) -----------
--------------------------------------------
</TABLE>
At September 30, 1997, 4.7% of the total investments at market value were
subject to alternative minimum tax.
(a) The cost of investments for federal tax purposes amounts to $31,926,434. The
unrealized appreciation of investments on a federal tax basis amounts to
$1,189,411 at September 30, 1997.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($33,468,781) at September 30, 1997.
The following acronym(s) are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Financial Guaranty Insurance Company
GO--General Obligation
IDA--Industrial Development Authority
INS--Insured
MBIA--Municipal Bond Investors Assurance
UT--Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
THE TREASURY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------------ ------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS--52.6%
------------------------------------------------------------
U.S. TREASURY BILL--15.7%
------------------------------------------------
$50,000,000 10/16/1997 $ 49,906,604
------------------------------------------------
------------
------------
U.S. TREASURY NOTES--36.9%
------------------------------------------------
12,000,000 5/125%, 4/30/1998 11,935,655
------------------------------------------------
31,000,000 5.625% - 5.750%, 10/31/1997 31,002,067
------------------------------------------------
15,000,000 6.125%, 5/15/1998 15,031,852
------------------------------------------------
8,000,000 6.125%, 8/31/1998 8,024,535
------------------------------------------------
3,000,000 6.250%, 7/31/1998 3,014,931
------------------------------------------------
27,000,000 7.875%, 1/15/1998 27,168,155
------------------------------------------------
7,000,000 8.250%, 7/15/1998 7,135,850
------------------------------------------------
14,000,000 8.750%, 10/15/1997 14,016,352
------------------------------------------------
------------
Total 117,329,397
------------------------------------------------
------------
TOTAL U.S. TREASURY OBLIGATIONS 167,236,001
------------------------------------------------ ------------
(A) REPURCHASE AGREEMENTS--47.0%
------------------------------------------------------------
40,000,000 CS First Boston, 6.050%, dated 9/30/1997, due
10/1/1997 40,000,000
------------------------------------------------
40,000,000 Merrill Lynch, Pierce, Fenner and Smith, 6.050%,
dated
9/30/1997, due 10/1/1997 40,000,000
------------------------------------------------
29,310,947 Prudential Securities, Inc., 6.050%, dated
9/30/1997, due 10/1/1997 29,310,947
------------------------------------------------
40,000,000 Smith Barney, Inc., 6.000%, dated 9/30/1997, due
10/1/1997 40,000,000
------------------------------------------------
------------
TOTAL REPURCHASE AGREEMENTS 149,310,947
------------------------------------------------ ------------
------------
TOTAL INVESTMENTS (AT AMORTIZED COST)(B) $316,546,948
------------------------------------------------ ------------
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. Treasury and/or
agency obligations based on market prices at the date of the portfolio.
(b) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($317,749,268) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
(A) COMMERCIAL PAPER--55.0%
---------------------------------------------------------------
ASSET BACKED--12.7%
---------------------------------------------------
$ 7,000,000 Ascot Capital Corp., 5.621%, 12/5/1997 $ 6,929,981
---------------------------------------------------
10,000,000 Centre Square Funding, 5.574%, 10/20/1997 9,970,708
---------------------------------------------------
Fleet Funding Corp., 5.557%-5.578%, 10/6/1997-
6,000,000 10/10/1997 5,994,168
---------------------------------------------------
8,000,000 Sigma Finance, 5.697%-5.716%, 2/2/1998-2/27/1998 7,827,485
--------------------------------------------------- ------------
Total 30,722,342
--------------------------------------------------- ------------
BANKING-FINANCE--2.5%
---------------------------------------------------
3,000,000 Banc One Funding Corp., 5.605%, 12/12/1997 2,966,820
---------------------------------------------------
3,000,000 Credit Suisse First Boston, 5.691%, 1/16/1998 2,950,691
--------------------------------------------------- ------------
Total 5,917,511
--------------------------------------------------- ------------
COMMERCIAL SERVICES--1.5%
---------------------------------------------------
3,600,000 McGraw-Hill Cos., Inc., 5.565%, 10/7/1997 3,596,700
--------------------------------------------------- ------------
CONSUMER NON-DURABLES--2.9%
---------------------------------------------------
Campbell Soup Co., 5.476%-5.688%, 11/18/1997-
7,000,000 4/17/1998 6,904,653
--------------------------------------------------- ------------
FINANCE-AUTOMOTIVE--1.2%
---------------------------------------------------
Ford Motor Credit Corp., 5.725%-5.857%, 10/27/1997-
3,000,000 4/13/1998 2,962,196
--------------------------------------------------- ------------
FINANCE-RETAIL--2.9%
---------------------------------------------------
7,000,000 Xerox Credit Corp., 5.493%-5.495%, 11/5/1997 6,964,067
--------------------------------------------------- ------------
FINANCE-LEASING--3.3%
---------------------------------------------------
Pitney Bowes Credit Corp., 5.679%-5.837%,
8,000,000 10/2/1997-1/9/1998 7,922,860
--------------------------------------------------- ------------
FINANCIAL SERVICES--14.8%
---------------------------------------------------
2,000,000 American General Finance Corp., 5.780%, 6/9/1998 1,922,748
---------------------------------------------------
General Electric Capital Corp., 5.761%-5.813%,
8,000,000 5/6/1998-6/9/1998 7,700,036
---------------------------------------------------
2,000,000 Marsh & McLennan Cos., Inc., 5.597%, 12/18/1997 1,976,167
---------------------------------------------------
Merrill Lynch & Co., Inc., 5.741%-5.981%, 1/5/1998-
11,640,000 4/13/1998 11,379,917
---------------------------------------------------
5,000,000 Republic New York Corp., 5.654%, 3/27/1998 4,864,792
---------------------------------------------------
Smith Barney, Inc., 5.560%-5.564%, 10/10/1997-
8,000,000 11/17/1997 7,960,030
--------------------------------------------------- ------------
Total 35,803,690
--------------------------------------------------- ------------
HEALTH SERVICES--4.1%
---------------------------------------------------
10,000,000 Schering Corp., 5.813%-5.822%, 10/7/1997-12/2/1997 9,946,639
--------------------------------------------------- ------------
PROCESS INDUSTRIES--2.5%
---------------------------------------------------
Du Pont (E.I.) de Nemours & Co., 5.847%-5.890%,
6,000,000 10/28/1997 5,974,350
--------------------------------------------------- ------------
PRODUCER MANUFACTURING--1.2%
---------------------------------------------------
3,000,000 Xerox Corp., 5.579%, 10/15/1997 2,993,583
--------------------------------------------------- ------------
</TABLE>
THE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
(A) COMMERCIAL PAPER--CONTINUED
---------------------------------------------------------------
UTILITIES--5.4%
---------------------------------------------------
Southern California Edison Co., 5.604%-5.665%,
$ 8,000,000 10/17/1997-11/14/1997 $ 7,967,456
---------------------------------------------------
5,000,000 Virginia Electric Power Co., 9.375%, 6/1/1998 5,105,256
--------------------------------------------------- ------------
Total 13,072,712
--------------------------------------------------- ------------
TOTAL COMMERCIAL PAPER 132,781,303
--------------------------------------------------- ------------
CORPORATE BONDS--12.2%
---------------------------------------------------------------
BANKING-FINANCE--4.5%
---------------------------------------------------
Associates Corp. of North America, 8.375%,
4,000,000 1/15/1998 4,026,490
---------------------------------------------------
900,000 CIT Group Holdings, Inc., 6.750%, 4/30/1998 901,848
---------------------------------------------------
4,000,000 NationsBank Corp., 6.625%, 1/15/1998 4,007,304
---------------------------------------------------
2,000,000 Norwest Financial, Inc., 8.500%, 8/15/1998 2,042,512
--------------------------------------------------- ------------
Total 10,978,154
--------------------------------------------------- ------------
FINANCE-LEASING--3.2%
---------------------------------------------------
3,000,000 International Lease Finance Corp., 5.609%, 1/5/1998 2,956,160
---------------------------------------------------
International Lease Finance Corp., 8.125%,
4,760,000 1/15/1998 4,789,290
--------------------------------------------------- ------------
Total 7,745,450
--------------------------------------------------- ------------
FINANCIAL SERVICES--2.1%
---------------------------------------------------
5,000,000 American General Finance Corp., 8.250%, 1/15/1998 5,032,656
--------------------------------------------------- ------------
OIL/GAS--0.2%
---------------------------------------------------
500,000 Texaco Capital, Inc., 9.000%, 11/15/1997 501,886
--------------------------------------------------- ------------
PROCESS INDUSTRIES--0.8%
---------------------------------------------------
1,925,000 Du Pont (E.I.) de Nemours & Co., 8.650%, 12/1/1997 1,933,167
--------------------------------------------------- ------------
RESTAURANT/FOOD SERVICE--1.4%
---------------------------------------------------
3,238,000 PepsiCo, Inc., 6.125%, 1/15/1998 3,241,451
--------------------------------------------------- ------------
TOTAL CORPORATE BONDS 29,432,764
--------------------------------------------------- ------------
CORPORATE NOTES--2.2%
---------------------------------------------------------------
BANKING-FINANCE--1.3%
---------------------------------------------------
3,000,000 CIT Group Holdings, Inc., 6.500%, 7/13/1998 3,016,257
--------------------------------------------------- ------------
ELECTRONIC TECHNOLOGY--0.9%
---------------------------------------------------
2,250,000 Rockwell International Corp., 7.625%, 2/17/1998 2,264,006
--------------------------------------------------- ------------
TOTAL CORPORATE NOTES 5,280,263
--------------------------------------------------- ------------
GOVERNMENT AGENCIES--23.7%
---------------------------------------------------------------
(b)Federal National Mortgage Association, 5.360%,
2,000,000 12/14/1998 2,000,382
---------------------------------------------------
55,250,000 (b)Student Loan Marketing Association, 5.220%-
5.410%, 10/30/1997-3/7/2001 55,262,286
--------------------------------------------------- ------------
TOTAL GOVERNMENT AGENCIES 57,262,668
--------------------------------------------------- ------------
</TABLE>
THE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------ ------------
<C> <S> <C>
(C) REPURCHASE AGREEMENT--6.8%
------------------------------------------------------
Prudential Securities, Inc., 6.050%, dated
$16,490,289 9/30/1997, due 10/1/1997 $ 16,490,289
------------------------------------------ ------------
TOTAL INVESTMENTS (AT AMORTIZED COST)(D) $241,247,287
------------------------------------------ ------------
</TABLE>
(a) Each issue shows the rate of discount at the time of purchase for discount
issues, or the coupon for interest bearing issues.
(b) Current rate and next reset date shown.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(d) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($241,510,750) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--99.2%
--------------------------------------------------------
ALABAMA--4.4%
---------------------------------------------
$2,500,000 Columbia, AL IDB , PCR (Series C) Daily VRDNs
(Alabama Power Co.) A $ 2,500,000
--------------------------------------------- -----------
ALASKA--5.2%
---------------------------------------------
3,000,000 Alaska State Housing Finance Corp., Revenue
Bonds (Series 1991C) Weekly VRDNs (Swiss Bank
Capital Markets SPA) AAA 3,000,000
--------------------------------------------- -----------
ARIZONA--3.5%
---------------------------------------------
2,000,000 Arizona Health Facilities Authority, Pooled
Loan Program Revenue Bonds (Series 1985B)
Weekly VRDNs (FGIC INS)/(Chase Manhattan Bank
N.A., New York LIQ) AAA 2,000,000
--------------------------------------------- -----------
FLORIDA--5.7%
---------------------------------------------
3,290,000 Putnam County, FL Development Authority, PCR Bonds (Series 1984H)
Weekly VRDNs (Seminole Electric Cooperative, Inc (FL))/(National
Rural Utilities Cooperative Finance Corp.
LOC) AA- 3,290,000
--------------------------------------------- -----------
GEORGIA--12.6%
---------------------------------------------
2,000,000 Burke County, GA Development Authority, PCR
Bonds Daily VRDNs (Georgia Power Company
Plant Vogtle) A+ 2,000,000
---------------------------------------------
2,700,000 Gwinnett County, GA School District, GO UT
Refunding Bonds, 4.40% Bonds, 2/1/1998 AA+ 2,707,489
---------------------------------------------
1,500,000 Monroe County, GA Development Authority IDRB,
PCR Refunding Bonds (Series 2) Daily VRDNs
(Gulf Power Co.) A+ 1,500,000
---------------------------------------------
1,000,000 Putnam County, GA Development Authority Daily
VRDNs (Georgia Power Co.) A+ 1,000,000
--------------------------------------------- -----------
Total 7,207,489
--------------------------------------------- -----------
MARYLAND--8.3%
---------------------------------------------
1,000,000 Anne Arundel County, MD, GO UT, 4.00% Bonds,
4/1/1998 AA+ 1,001,229
---------------------------------------------
1,750,000 Baltimore County, MD Metropolitan District,
GO UT (65th Series), 5.00% Bonds, 6/1/1998 AAA 1,764,110
---------------------------------------------
2,000,000 Maryland Health & Higher Educational
Facilities Authority, Revenue Bonds Weekly
VRDNs (Greater Baltimore Medical
Center)/(First National Bank of Maryland,
Baltimore LOC) A1 2,000,000
--------------------------------------------- -----------
Total 4,765,339
--------------------------------------------- -----------
MASSACHUSETTS--4.4%
---------------------------------------------
2,500,000 Massachusetts IFA, (Series 1992A) Weekly
VRDNs (Ogden Haverhill)/(Union Bank of
Switzerland, Zurich LOC) AA+ 2,500,000
--------------------------------------------- -----------
MINNESOTA--0.7%
---------------------------------------------
400,000 Beltrami County, MN, Environmental Control
Authority Daily VRDNs (Northwood Panelboard
Co.)/(Union Bank of Switzerland, Zurich LOC) AA+ 400,000
--------------------------------------------- -----------
</TABLE>
THE TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
--------------------------------------------------------
NEW YORK--10.3%
---------------------------------------------
$1,000,000 New York City Municipal Water Finance
Authority, Water and Sewer System Revenue
Bonds (Series 1995 A) Daily VRDNs (FGIC
INS)/(FGIC Securities Purchase, Inc. LIQ) AAA $ 1,000,000
---------------------------------------------
1,000,000 New York City, NY Daily VRDNs (AMBAC INS) AAA 1,000,000
---------------------------------------------
900,000 New York City, NY Daily VRDNs (Morgan
Guaranty Trust Co., New York LOC) AAA 900,000
---------------------------------------------
100,000 New York City, NY, (Subseries B-4) Daily
VRDNs AA+ 100,000
---------------------------------------------
400,000 New York City, NY, GO Bonds Series-B Daily
VRDNs (FGIC INS)/(FGIC Securities Purchase,
Inc. LIQ) AAA 400,000
---------------------------------------------
500,000 New York City, NY, Series B Daily VRDNs (FGIC
INS)/(FGIC Securities Purchase, Inc. LIQ) AAA 500,000
---------------------------------------------
2,000,000 New York City, NY, Subseries A-10 Daily VRDNs AAA 2,000,000
--------------------------------------------- -----------
Total 5,900,000
--------------------------------------------- -----------
OHIO--6.8%
---------------------------------------------
1,900,000 Clermont County, OH , Revenue Bonds (Series
B) Weekly VRDNs (Mercy Health Systems) AA- 1,900,000
---------------------------------------------
2,000,000 Ohio State Air Quality Development Authority, Revenue Bonds (Series
B) Daily VRDNs (Cincinnati Gas and Electric Co.)/(J.P.
Morgan Delaware, Wilmington LOC) AAA 2,000,000
--------------------------------------------- -----------
Total 3,900,000
--------------------------------------------- -----------
PENNSYLVANIA--3.5%
---------------------------------------------
2,000,000 Allegheny County, PA HDA, (Series 1990 A)
Daily VRDNs (Presbyterian University
Hospital)/(MBIA Insurance Corporation
INS)/(PNC Bank, N.A. LIQ) AAA 2,000,000
--------------------------------------------- -----------
TEXAS--6.1%
---------------------------------------------
1,500,000 Lower Neches Valley, TX, Refunding Revenue Bonds, 3.75% TOBs
(Chevron U.S.A., Inc.)
2/16/1998 AA 1,500,000
---------------------------------------------
2,000,000 Sabine River Authority, TX , PCR Bonds
(Series B) Daily VRDNs (Texas Utilities
Electric Co.)/(Union Bank of Switzerland,
Zurich LOC) AA+ 2,000,000
--------------------------------------------- -----------
Total 3,500,000
--------------------------------------------- -----------
VIRGINIA--26.0%
---------------------------------------------
2,200,000 Fairfax County, VA IDA, Refunding Revenue
Bonds (Series A) Weekly VRDNs (Fairfax
Hospital System) AA 2,200,000
---------------------------------------------
2,000,000 Fairfax County, VA, GO UT (Series A), 5.50%
Bonds, 6/1/1998 AAA 2,022,729
---------------------------------------------
2,215,000 Loudoun County, VA, GO UT (Series A), 4.375%
Bonds, 8/1/1998 AA- 2,226,345
---------------------------------------------
965,000 Richmond, VA Public Utility, Series A, 8.00%
Bonds (United States Treasury PRF), 1/15/1998
(@102) AAA 996,204
---------------------------------------------
1,400,000 Virginia College Building Authority Weekly
VRDNs (University of Richmond)/(Crestar Bank
of Virginia, Richmond SA) Aa2 1,400,000
---------------------------------------------
</TABLE>
THE TAX-FREE MONEY MARKET FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CREDIT
OR SHARES RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
--------------------------------------------------------
$2,000,000 Virginia State Housing Development Authority,
(Series C), 3.80% TOBs, Mandatory Tender
6/10/1998 AA+ $ 1,999,173
---------------------------------------------
500,000 Virginia State Public Building Authority,
(Series A), 3.90% Bonds, 8/1/1998 AA 500,192
---------------------------------------------
1,500,000 Virginia State Public School Authority,
Series A, 6.00% Bonds, 1/1/1998 AA 1,508,956
---------------------------------------------
2,000,000 Virginia State Transportation Board, 7.70%
Bonds (Route 28 Project)/(United States
Treasury PRF), 3/1/1998 (@102) AAA 2,072,480
--------------------------------------------- -----------
Total 14,926,079
--------------------------------------------- -----------
WYOMING--1.7%
---------------------------------------------
1,000,000 Lincoln County, WY, Revenue Bonds Daily VRDNs
(Exxon Corp.) AA 1,000,000
--------------------------------------------- -----------
TOTAL SHORT-TERM MUNICIPAL SECURITIES 56,888,907
--------------------------------------------- -----------
MUTUAL FUND ISSUES--0.4%
--------------------------------------------------------
247,772 Goldman Sachs & Co. (AT NET ASSET VALUE) 247,772
--------------------------------------------- -----------
TOTAL INVESTMENTS (AT AMORTIZED COST AND NET
ASSET VALUE)(A) $57,136,679
--------------------------------------------- -----------
</TABLE>
(a) Also represents cost for federal tax purposes.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($57,369,580) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company GO--General Obligation HDA--Hospital Development Authority
IDA--Industrial Development Authority IDB--Industrial Development Bond
IDRB--Industrial Development Revenue Bond IFA--Industrial Finance Authority
INS--Insured LIQ--Liquidity Agreement LOC--Letter of Credit MBIA--Municipal Bond
Investors Assurance PCR--Pollution Control Revenue PRF--Prerefunded SA--Support
Agreement SPA--Standby Purchase Agreement TOBs--Tender Option Bonds
UT--Unlimited Tax VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. THE STYLE THE THE
GOVERNMENT MANAGER: THE STYLE VIRGINIA MARYLAND
SECURITIES LARGE CAP MANAGER MUNICIPAL MUNICIPAL
FUND FUND FUND BOND FUND BOND FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in
repurchase agreements $ 460,430 $ 2,576,249 $ 1,219,266 $ -- $ --
Investments in
securities 155,643,026 104,106,935 75,511,023 78,052,751 33,115,845
- ------------------------------------------------------------------------------------------
Total investments in
securities, at value $156,103,456 $106,683,184 $76,730,289 $78,052,751 $33,115,845
- ------------------------------------------------------------------------------------------
Cash -- 446 -- -- --
Income receivable 1,935,302 128,141 96,421 1,121,169 438,320
Receivable for shares
sold 117,229 57,067 275,041 37,019 200
Deferred expenses -- -- 9,103 -- --
- ------------------------------------------------------------------------------------------
Total assets 158,155,987 106,868,838 77,110,854 79,210,939 33,554,365
- ------------------------------------------------------------------------------------------
LIABILITIES:
Payable for shares
redeemed 249,193 87,484 187,792 238,933 13,519
Income distribution
payable 362,543 -- -- 105,709 33,929
Payable to Bank 3,989 -- -- -- --
Accrued expenses 115,182 96,827 49,114 93,733 38,136
- ------------------------------------------------------------------------------------------
Total liabilities 730,907 184,311 236,906 438,375 85,584
- ------------------------------------------------------------------------------------------
TOTAL NET ASSETS $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $174,339,274 $ 69,922,418 $48,156,564 $75,912,084 $32,631,102
Net unrealized
appreciation of
investments 1,195,308 20,488,173 15,019,954 3,037,578 1,189,411
Accumulated net realized
gain (loss) on
investments (18,155,068) 16,158,724 13,635,635 (177,098) (351,732)
Accumulated
undistributed net
investment income 45,566 115,212 61,795 -- --
- ------------------------------------------------------------------------------------------
TOTAL NET ASSETS $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSETS:
Trust Shares $ 52,177,289 $ 26,611,481 $ -- $19,891,348 $ 5,682,750
Investment Shares 105,247,791 80,073,046 76,873,948 58,881,216 27,786,031
- ------------------------------------------------------------------------------------------
Total $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AND
OFFERING PRICE PER SHARE
Trust Shares $9.95 $16.31 -- $11.07 $10.91
Investment Shares $9.95 $16.31 $15.37 $11.07 $10.91
- ------------------------------------------------------------------------------------------
REDEMPTION PROCEEDS PER
SHARE*
Trust Shares $9.95 $16.31 -- $11.07 $10.91
Investment Shares** $9.75 $15.98 $15.06 $10.85 $10.69
- ------------------------------------------------------------------------------------------
SHARES OUTSTANDING
Trust Shares 5,246,259 1,632,012 -- 1,797,148 521,087
Investment Shares 10,582,280 4,910,713 5,002,112 5,319,803 2,547,851
- ------------------------------------------------------------------------------------------
Total Shares Outstanding 15,828,539 6,542,725 5,002,112 7,116,951 3,068,938
- ------------------------------------------------------------------------------------------
Investments, at
identified cost $154,908,148 $ 86,195,011 $61,710,335 $75,015,173 $31,926,434
- ------------------------------------------------------------------------------------------
Investments, at tax cost $154,908,148 $ 86,195,011 $61,750,880 $75,015,173 $31,926,434
- ------------------------------------------------------------------------------------------
</TABLE>
*See "Redeeming Shares" in the Prospectus.
**Computation of redemption proceeds per share: 98/100 of net asset value.
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TREASURY THE TAX-FREE
MONEY THE MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments in repurchase agreements $149,310,947 $ 16,490,289 $ --
Investments in securities 167,236,001 224,756,998 57,136,679
- -------------------------------------------------------------------------------
Total investments in securities, at
value 316,546,948 241,247,287 57,136,679
- -------------------------------------------------------------------------------
Income receivable 2,578,221 1,133,016 371,750
Receivable for shares sold 3,106 11,582 69,301
Deferred expenses -- -- 4,692
- -------------------------------------------------------------------------------
Total assets 319,128,275 242,391,885 57,582,422
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for shares redeemed 206,703 66,719 6,000
Income distribution payable 930,196 602,201 135,472
Payable to Bank -- 67,897 --
Accrued expenses 242,108 144,318 71,370
- -------------------------------------------------------------------------------
Total liabilities 1,379,007 881,135 212,842
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $317,749,268 $241,510,750 $57,369,580
- -------------------------------------------------------------------------------
NET ASSETS:
Trust Shares $196,450,150 $164,290,280 $ --
Investment Shares 121,299,118 77,220,470 57,369,580
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $317,749,268 $241,510,750 $57,369,580
- -------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PROCEEDS
PER SHARE
Trust Shares $1.00 $1.00 --
Investment Shares $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------
SHARES OUTSTANDING
Trust Shares 196,450,150 164,290,280 --
Investment Shares 121,466,050 77,220,470 57,369,580
- -------------------------------------------------------------------------------
Total Shares Outstanding 317,916,200 241,510,750 57,369,580
- -------------------------------------------------------------------------------
Investments, at amortized cost and net
asset value $316,546,948 $241,247,287 $57,136,679
- -------------------------------------------------------------------------------
Investments, at tax cost $316,546,948 $241,247,287 $57,136,679
- -------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. THE STYLE THE
GOVERNMENT MANAGER: THE STYLE THE VIRGINIA MARYLAND
SECURITIES LARGE CAP MANAGER MUNICIPAL MUNICIPAL
FUND FUND FUND BOND FUND BOND FUND
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ -- $ 2,280,851 $ 1,853,994 $ -- $ --
Interest 12,930,324 109,465 110,776 4,537,516 1,875,016
- --------------------------------------------------------------------------------------
Total income 12,930,324 2,390,316 1,964,770 4,537,516 1,875,016
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 1,325,841 749,609 830,673 650,276 273,851
Administrative personnel
and services fee 172,113 97,360 75,125 84,421 75,000
Custodian fees 46,191 47,362 31,329 28,448 12,079
Transfer and dividend
disbursing agent fees
and expenses 132,824 198,044 64,733 80,614 60,084
Directors'/Trustees'
fees 3,071 3,593 2,496 2,754 2,202
Auditing fees 15,412 18,571 12,506 14,195 14,018
Legal fees 2,633 12,728 1,920 2,436 19
Portfolio accounting
fees 58,744 59,472 38,520 62,576 55,277
Distribution services
fee--
Investment Shares 279,386 175,775 -- 158,225 73,620
Share registration costs 15,210 26,705 11,764 15,011 9,626
Printing and postage 14,918 15,397 26,489 12,992 20,995
Insurance premiums 4,006 6,951 2,903 2,092 2,368
Miscellaneous 5,441 7,121 11,563 3,681 14
- --------------------------------------------------------------------------------------
Total expenses 2,075,790 1,418,688 1,110,021 1,117,721 599,153
Waivers--
Waiver of investment
advisory fee 37,709 -- 326,846 -- --
- --------------------------------------------------------------------------------------
Net expenses 2,038,081 1,418,688 783,175 1,117,721 599,153
- --------------------------------------------------------------------------------------
Net investment income 10,892,243 971,628 1,181,595 3,419,795 1,275,863
- --------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)
on investments (3,831,048) 16,227,730 13,831,352 579,805 163,436
Change in unrealized
appreciation
of investments 4,711,022 14,347,096 9,985,998 2,442,760 982,703
- --------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments 879,974 30,574,826 23,817,350 3,022,565 1,146,139
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
operations $11,772,217 $31,546,454 $24,998,945 $ 6,442,360 $2,422,002
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TAX-
THE TREASURY FREE
MONEY THE MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $20,757,671 $13,828,345 $2,158,617
- ------------------------------------------------------------------------------
Total income 20,757,671 13,828,345 2,158,617
- ------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 1,897,464 1,250,019 302,027
Administrative personnel and services
fee 369,581 243,450 75,171
Custodian fees 120,115 74,934 34,273
Transfer and dividend disbursing agent
fees and expenses 240,905 123,295 44,277
Directors'/Trustees' fees 5,057 3,656 3,408
Auditing fees 20,051 16,000 16,613
Legal fees 412 4,687 2,434
Portfolio accounting fees 109,149 75,599 46,105
Distribution services fee--Investment
Shares 331,053 206,038 --
Share registration costs 18,320 24,568 12,242
Printing and postage 26,923 28,499 23,513
Insurance premiums 4,988 6,662 2,870
Miscellaneous 2,993 8,156 6,815
- ------------------------------------------------------------------------------
Total expenses 3,147,011 2,065,563 569,748
Waivers and Reimbursements--
Waiver of investment advisory fee (46,840) (57,472) (94,455)
Reimbursements of other operating
expenses (4,897) -- --
- ------------------------------------------------------------------------------
Total waivers and reimbursements (51,737) (57,472) (94,455)
- ------------------------------------------------------------------------------
Net expenses 3,095,274 2,008,091 475,293
- ------------------------------------------------------------------------------
Net investment income 17,662,397 11,820,254 1,683,324
- ------------------------------------------------------------------------------
Change in net assets resulting
from operations $17,662,397 $11,820,254 $1,683,324
- ------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. GOVERNMENT THE STYLE MANAGER:
SECURITIES FUND LARGE CAP FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 10,892,243 $ 13,381,466 $ 971,628 $ 1,995,250
Net realized gain (loss)
on investments (3,831,048) (3,219,621) 16,227,730 12,982,465
Net change in unrealized
appreciation
(depreciation) of
investments 4,711,022 (2,011,452) 14,347,096 (2,926,184)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from operations 11,772,217 8,150,393 31,546,454 12,051,531
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS-- Distributions from net investment income:
Trust Shares (4,109,350) (6,107,288) (350,276) (926,390)
Investment Shares (6,782,893) (7,274,178) (656,481) (1,026,148)
Distributions from net realized gains:
Trust Shares -- -- (4,272,531) (3,898,915)
Investment Shares -- -- (7,971,845) (3,989,082)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (10,892,243) (13,381,466) (13,251,133) (9,840,535)
- -------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 22,960,997 46,455,480 17,201,667 18,263,662
Shares issued in
connection with the
acquisition -- -- 1,509,197 9,245,450
Net asset value of
shares issued to
shareholders in payment
of
distributions declared 5,396,173 6,142,681 9,353,220 5,478,249
Cost of shares redeemed (67,228,310) (68,163,717) (33,248,877) (31,477,651)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from share
transactions (38,871,140) (15,565,556) (5,184,793) 1,509,710
- -------------------------------------------------------------------------------------
Change in net assets (37,991,166) (20,796,629) 13,110,528 3,720,706
NET ASSETS:
Beginning of period 195,416,246 216,212,875 93,573,999 89,853,293
- -------------------------------------------------------------------------------------
End of period $157,425,080 $195,416,246 $106,684,527 $ 93,573,999
- -------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ 45,566 $ 45,566 $ 115,212 $ 150,341
- -------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE VIRGINIA MUNICIPAL
THE STYLE MANAGER FUND BOND FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 1,181,595 $ 1,728,218 $ 3,419,795 $ 3,919,914
Net realized gain (loss)
on investments 13,831,352 4,542,510 579,805 780,289
Net change in unrealized
appreciation
(depreciation) of
investments 9,985,998 (119,759) 2,442,760 (2,101,082)
- -------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 24,998,945 6,150,969 6,442,360 2,599,121
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS-- Distributions from net investment income:
Trust Shares -- -- (965,706) (1,287,834)
Investment Shares (1,233,260) (1,638,472) (2,454,089) (2,632,080)
Distributions from net realized gains:
Trust Shares -- -- -- --
Investment Shares (3,328,990) (8,143,290) -- --
- -------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (4,562,250) (9,781,762) (3,419,795) (3,919,914)
- -------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 40,136,505 16,506,045 6,840,095 16,125,700
Net asset value of
shares issued to
shareholders in payment
of
distributions declared 4,503,897 9,243,789 1,888,518 1,997,026
Cost of shares redeemed (50,985,728) (37,724,499) (26,788,539) (27,234,673)
- -------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (6,345,326) (11,974,665) (18,059,926) (9,111,947)
- -------------------------------------------------------------------------------------
Change in net assets 14,091,369 (15,605,458) (15,037,361) (10,432,740)
NET ASSETS:
Beginning of period 62,782,579 78,388,037 93,809,925 104,242,665
- -------------------------------------------------------------------------------------
End of period $ 76,873,948 $ 62,782,579 $ 78,772,564 $ 93,809,925
- -------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ 61,795 $ 113,460 $ -- $ --
- -------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE MARYLAND MUNICIPAL THE TREASURY
BOND FUND MONEY MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 1,275,863 $ 1,527,863 $ 17,662,397 $ 16,209,478
Net realized gain
(loss) on investments 163,436 186,173 -- --
Net change in
unrealized
appreciation
(depreciation) of
investments 982,703 (739,639) -- --
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 2,422,002 974,397 17,662,397 16,209,478
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS--
Distributions from net investment income:
Trust Shares (261,815) (352,284) (11,714,695) (11,356,506)
Investment Shares (1,015,074) (1,175,552) (5,947,702) (4,852,972)
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (1,276,889) (1,527,836) (17,662,397) (16,209,478)
- --------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 2,708,043 8,364,014 723,861,521 659,743,838
Shares issued in
connection with the
acquisition -- -- -- 122,108,127
Net asset value of
shares issued to
shareholders in
payment of
distributions declared 770,265 989,879 5,621,031 4,898,441
Cost of shares redeemed (11,327,459) (10,247,633) (784,872,329) (661,630,604)
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (7,849,151) (893,740) (55,389,777) 125,119,802
- --------------------------------------------------------------------------------------
Change in net assets (6,704,038) (1,447,179) (55,389,777) 125,119,802
NET ASSETS:
Beginning of period 40,172,819 41,619,998 373,139,045 248,019,243
- --------------------------------------------------------------------------------------
End of period $ 33,468,781 $ 40,172,819 $ 317,749,268 $ 373,139,045
- --------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ -- $ 1,026 $ -- $ --
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TAX-FREE MONEY
THE MONEY MARKET FUND MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 11,820,254 $ 12,191,680 $ 1,683,324 $ 2,734,120
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 11,820,254 12,191,680 1,683,324 2,734,120
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS--
Distributions from net investment income:
Trust Shares (8,056,642) (8,395,610) -- --
Investment Shares (3,763,612) (3,796,070) (1,683,324) (2,734,120)
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (11,820,254) (12,191,680) (1,683,324) (2,734,120)
- --------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 618,631,500 576,928,235 315,423,874 389,800,080
Net asset value of
shares issued to
shareholders in
payment of
distributions declared 3,617,170 3,626,658 417,624 459,305
Cost of shares redeemed (624,937,753) (551,929,373) (310,970,825) (419,737,938)
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (2,689,083) 28,625,520 4,870,673 (29,478,553)
- --------------------------------------------------------------------------------------
Change in net assets (2,689,083) 28,625,520 4,870,673 (29,478,553)
NET ASSETS:
Beginning of period 244,199,833 215,574,313 52,498,907 81,977,460
- --------------------------------------------------------------------------------------
End of period $ 241,510,750 $ 244,199,833 $ 57,369,580 $ 52,498,907
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE U.S. GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.89 $10.13 $ 9.83 $10.90 $10.95
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.60 0.62 0.64 0.61 0.66
Net realized and
unrealized gain (loss) on
investments 0.06 (0.24) 0.30 (0.94) 0.03
- -------------------------------------------------------------------------------
Total from investment
operations 0.66 0.38 0.94 (0.33) 0.69
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.60) (0.62) (0.64) (0.61) (0.66)
Distributions from net
realized gain on
investments -- -- -- -- (0.08)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.13) --
- -------------------------------------------------------------------------------
Total distributions (0.60) (0.62) (0.64) (0.74) (0.74)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.95 $ 9.89 $10.13 $ 9.83 $10.90
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 6.89% 3.79% 9.84% (3.36)% 6.82%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.25% 1.14% 1.01% 0.99% 0.77%
Net investment income 6.07% 6.11% 6.41% 5.94% 5.91%
Expense
waiver/reimbursement (c) 0.02% 0.13% 0.28% 0.32% 0.43%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $105,248 $116,418 $114,803 $112,439 $119,187
Portfolio turnover 80% 118% 82% 227% 154%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.89 $10.13 $ 9.83 $10.90 $10.95
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.63 0.64 0.66 0.63 0.67
Net realized and
unrealized gain (loss) on
investments 0.06 (0.24) 0.30 (0.94) 0.03
- -------------------------------------------------------------------------------
Total from investment
operations 0.69 0.40 0.96 (0.31) 0.70
- -------------------------------------------------------------------------------
Less distributions
Distributions from net
investment income (0.63) (0.64) (0.66) (0.63) (0.67)
Distributions from net
realized gain on
investments -- -- -- -- (0.08)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.13) --
- -------------------------------------------------------------------------------
Total distributions (0.63) (0.64) (0.66) (0.76) (0.75)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.95 $ 9.89 $10.13 $ 9.83 $10.90
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 7.16% 4.05% 10.11% (3.12)% 6.94%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.00% 0.89% 0.76% 0.74% 0.63%
Net investment income 6.32% 6.36% 6.66% 6.19% 6.17%
Expense
waiver/reimbursement (c) 0.02% 0.13% 0.28% 0.32% 0.43%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $52,177 $78,998 $101,410 $107,103 $112,334
Portfolio turnover 80% 118% 82% 227% 154%
- -------------------------------------------------------------------------------
</TABLE>
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER: LARGE CAP FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1997(C) 1996 1995(C) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $13.68 $13.70 $11.80 $12.39 $12.02
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.13 0.27 0.09 0.17 0.24
Net realized and unrealized
gain (loss) on investments 4.47 1.18 2.20 (0.39) 0.54
- -------------------------------------------------------------------------------
Total from investment operations 4.60 1.45 2.29 (0.22) 0.78
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.14) (0.27) (0.09) (0.17) (0.25)
Distributions from net realized
gain on investments (1.83) (1.20) (0.30) (0.20) (0.16)
- -------------------------------------------------------------------------------
Total distributions (1.97) (1.47) (0.39) (0.37) (0.41)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.31 $13.68 $13.70 $11.80 $12.39
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 37.02% 11.28% 20.02% (1.72%) 6.31%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.49% 1.36% 1.21% 1.20% 0.87%
Net investment income 0.88% 2.01% 0.67% 1.40% 1.81%
Expense waiver/reimbursement
(b) -- -- 0.21% 0.23% 0.55%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $80,073 $59,891 $44,509 $26,739 $18,691
Average commission rate paid
(d) $0.0783 $0.0616 -- -- --
Portfolio turnover 56% 151% 208% 205% 67%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1997(C) 1996 1995(C) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $13.68 $13.70 $11.80 $12.39 $12.02
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.18 0.33 0.12 0.20 0.28
Net realized and unrealized
gain (loss) on investments 4.46 1.15 2.20 (0.40) 0.51
- -------------------------------------------------------------------------------
Total from investment operations 4.64 1.48 2.32 (0.20) 0.79
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.18) (0.30) (0.12) (0.19) (0.26)
Distributions from net realized
gain on investments (1.83) (1.20) (0.30) (0.20) (0.16)
- -------------------------------------------------------------------------------
Total distributions (2.01) (1.50) (0.42) (0.39) (0.42)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.31 $13.68 $13.70 $11.80 $12.39
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 37.37% 11.55% 20.33% (1.50%) 6.42%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.24% 1.11% 0.96% 0.95% 0.66%
Net investment income 1.17% 2.26% 0.92% 1.68% 2.09%
Expense waiver/reimbursement
(b) -- -- 0.21% 0.23% 0.55%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $26,611 $33,683 $45,345 $70,374 $65,841
Average commission rate paid
(d) $0.0783 $0.0616 -- -- --
Portfolio turnover 56% 151% 208% 205% 67%
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Per share information presented is based on the monthly number of shares
outstanding due to large fluctuations in the number of shares outstanding
during the period.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
SEPTEMBER 30, ENDED
---------------- SEPTEMBER 30,
INVESTMENT SHARES 1997 1996 1995(A)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.47 $12.03 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.23 0.31 0.03
Net realized and unrealized gain on
investments 4.54 0.77 2.03
- --------------------------------------------------------------------------
Total from investment operations 4.77 1.08 2.06
- --------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net investment income (0.24) (0.29) (0.03)
Distributions from net realized gain on
investments (0.63) (1.35) --
- --------------------------------------------------------------------------
Total distributions (0.87) (1.64) (0.03)
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.37 $11.47 $12.03
- --------------------------------------------------------------------------
TOTAL RETURN (B) 44.01% 10.19% 20.59%
- --------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 0.99% 0.44%*
Net investment income 1.76% 2.63% 0.46%*
Expense waiver/reimbursement (c) 0.50% 0.44% 1.03%*
- --------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $76,874 $62,783 $78,388
Average commission rate paid (d) $0.0789 $0.0514 --
Portfolio turnover 94% 112% 92%
- --------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 7, 1995 (date of initial
public investment) to September 30, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
THE VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.68 $10.81 $10.26 $11.26 $10.46
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.42 0.41 0.45 0.45 0.51
Net realized and unrealized
gain (loss) on investments 0.39 (0.13) 0.55 (0.92) 0.89
- -------------------------------------------------------------------------------
Total from investment
operations 0.81 0.28 1.00 (0.47) 1.40
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.42) (0.41) (0.45) (0.45)(e) (0.51)
Distributions from net
realized gain on
investments -- -- -- (0.06) (0.09)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.02) --
- -------------------------------------------------------------------------------
Total distributions (0.42) (0.41) (0.45) (0.53) (0.60)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.07 $10.68 $10.81 $10.26 $11.26
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 7.74% 2.60% 10.00% (4.25)% 13.49%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.36% 1.32% 1.17% 1.15% 0.90%
Net investment income 3.87% 3.78% 4.32% 4.22% 4.68%
Expense waiver/reimbursement
(c) -- 0.02% 0.22% 0.27% 0.50%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $58,881 $65,700 $70,572 $74,706 $63,492
Portfolio turnover 19% 129% 26% 29% 17%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.68 $10.81 $10.26 $11.26 $10.46
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.45 0.44 0.48 0.48 0.53
Net realized and unrealized
gain (loss) on investments 0.39 (0.13) 0.55 (0.92) 0.89
- -------------------------------------------------------------------------------
Total from investment
operations 0.84 0.31 1.03 (0.44) 1.42
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.45) (0.44) (0.48) (0.48)(d) (0.53)
Distributions from net
realized gain on
investments -- -- -- (0.06) (0.09)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.02) --
- -------------------------------------------------------------------------------
Total distributions (0.45) (0.44) (0.48) (0.56) (0.62)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.07 $10.68 $10.81 $10.26 $11.26
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 8.00% 2.86% 10.27% (4.01%) 13.62%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11% 1.06% 0.92% 0.90% 0.75%
Net investment income 4.12% 4.03% 4.57% 4.47% 4.85%
Expense waiver/reimbursement
(c) -- 0.02% 0.22% 0.27% 0.50%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $19,891 $28,110 $33,670 $34,165 $41,204
Portfolio turnover 19% 129% 26% 29% 17%
- -------------------------------------------------------------------------------
</TABLE>
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Amount includes distributions to shareholders in excess of net investment
income of $0.0002 per share.
(e) Amount includes distributions to shareholders in excess of net investment
income of $0.0001 per share.
(See Notes which are an integral part of the Financial Statements)
THE MARYLAND MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.56 $10.69 $10.17 $11.24 $10.39
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.37 0.38 0.40 0.45 0.49
Net realized and unrealized
gain (loss) on investments 0.35 (0.13) 0.54 (0.97) 0.85
- -------------------------------------------------------------------------------
Total from investment operations 0.72 0.25 0.94 (0.52) 1.34
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.37) (0.38) (0.40) (0.45) (0.49)
Distributions from net realized
gain on investments -- -- (0.02) (0.10) --
- -------------------------------------------------------------------------------
Total distributions (0.37) (0.38) (0.42) (0.55) (0.49)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.91 $10.56 $10.69 $10.17 $11.24
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 6.92% 2.36% 9.81% (4.74%) 13.24%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.69% 1.43% 1.24% 1.17% 1.00%
Net investment income 3.45% 3.57% 4.24% 4.22% 4.50%
Expense waiver/reimbursement
(b) -- 0.25% 0.44% 0.51% 0.77%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $27,786 $31,284 $32,172 $34,580 $33,907
Portfolio turnover 13% 138% 21% 27% 23%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.56 $10.69 $10.17 $11.24 $10.39
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.40 0.41 0.42 0.48 0.50
Net realized and unrealized
gain (loss)
on investments 0.35 (0.13) 0.54 (0.97) 0.85
- -------------------------------------------------------------------------------
Total from investment operations 0.75 0.28 0.96 (0.49) 1.35
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.40) (0.41) (0.42) (0.48) (0.50)
Distributions from net realized
gain on investments -- -- (0.02) (0.10) --
- -------------------------------------------------------------------------------
Total distributions (0.40) (0.41) (0.44) (0.58) (0.50)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.91 $10.56 $10.69 $10.17 $11.24
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 7.19% 2.61% 10.09% (4.50%) 13.37%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.44% 1.18% 0.99% 0.92% 0.86%
Net investment income 3.70% 3.82% 4.49% 4.46% 4.64%
Expense waiver/reimbursement
(b) -- 0.25% 0.44% 0.51% 0.77%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $5,683 $8,889 $9,447 $11,301 $12,014
Portfolio turnover 13% 138% 21% 27% 23%
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.02
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.02)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.58% 4.67% 4.98% 2.90% 2.52%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.98% 0.90% 0.85% 0.84% 0.70%
Net investment income 4.49% 4.49% 4.92% 3.05% 2.47%
Expense
waiver/reimbursement (b) 0.01% 0.09% 0.10% 0.18% 0.20%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $121,299 $146,161 $39,363 $21,883 $20,382
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.84% 4.89% 5.24% 3.16% 2.64%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.73% 0.65% 0.60% 0.59% 0.58%
Net investment income 4.74% 4.81% 5.17% 3.30% 2.60%
Expense
waiver/reimbursement (b) 0.01% 0.06% 0.10% 0.18% 0.20%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $196,450 $226,978 $208,656 $304,285 $152,921
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.67% 4.91% 5.11% 3.10% 2.77%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.97% 0.73% 0.80% 0.80% 0.64%
Net investment income 4.57% 4.77% 5.04% 3.07% 2.68%
Expense
waiver/reimbursement (b) 0.02% 0.23% 0.21% 0.25% 0.30%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $77,220 $83,525 $41,813 $15,236 $9,905
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.93% 5.04% 5.36% 3.35% 2.89%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.72% 0.60% 0.57% 0.55% 0.50%
Net investment income 4.81% 4.93% 5.27% 3.25% 2.83%
Expense
waiver/reimbursement (b) 0.02% 0.12% 0.19% 0.25% 0.30%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $164,290 $160,675 $173,761 $132,445 $134,397
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE TAX-FREE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
INVESTMENT SHARES 1997 1996 1995 1994(A)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03 0.03 0.03 0.01
- ----------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.03) (0.03) (0.03) (0.01)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
TOTAL RETURN (B) 2.83% 3.01% 3.53% 0.45%
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79% 0.56% 0.39% 0.36%(c)
Net investment income 2.79% 2.95% 3.55% 2.65%(c)
Expense waiver/reimbursement (d) 0.16% 0.20% 0.56% 0.70%(c)
- ----------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $57,370 $52,499 $81,977 $21,967
- ----------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from July 27, 1994 (date of initial
public investment) to September 30, 1994.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
(1) ORGANIZATION
The Virtus Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end management investment company. The
Trust consists of eight portfolios (individually referred to as the "Fund", or
collectively as the "Funds"). All Funds, except The Style Manager Fund and The
Tax-Free Money Market Fund are offered in two classes of shares: Trust Shares
and Investment Shares. The Style Manager Fund and The Tax-Free Money Market Fund
are presented as Investment Shares for financial statement purposes. The
following portfolios comprise the Trust:
<TABLE>
<CAPTION>
PORTFOLIO NAME INVESTMENT OBJECTIVE
- ------------------------------------------------------------------------------------------
<C> <S>
The U.S. Government Securities Fund Current Income
("Government Securities Fund") (d)
- ------------------------------------------------------------------------------------------
The Style Manager: Large Cap Fund Growth of capital and income
(" Large Cap Fund") (d)
- ------------------------------------------------------------------------------------------
The Style Manager Fund ("Style Manager Growth of capital
Fund") (d)
- ------------------------------------------------------------------------------------------
The Virginia Municipal Bond Fund Current income exempt from federal regular
("Virginia Municipal Bond Fund") (n) income tax and the personal income tax
imposed
by the Commonwealth of Virginia
- ------------------------------------------------------------------------------------------
The Maryland Municipal Bond Fund Current income exempt from federal regular
("Maryland Municipal Bond Fund") (n) income tax and the personal income tax
imposed
by the State of Maryland
- ------------------------------------------------------------------------------------------
The Treasury Money Market Fund Current income consistent with stability of
("Treasury Money Market Fund") (d) principal
- ------------------------------------------------------------------------------------------
The Money Market Fund Current income consistent with stability of
("Money Market Fund") (d) principal
- ------------------------------------------------------------------------------------------
The Tax-Free Money Market Fund Current income exempt from federal income tax
("Tax-Free Money Market Fund") (d) consistent with stability of principal
</TABLE>
(d) Diversified
(n) Non-diversified
The assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held.
On June 24, 1996, the Large Cap Fund acquired all the net assets of the
Blanchard American Equity Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition was
accomplished by a tax-free exchange of 695,476 shares of the Large Cap Fund
(valued at $9,245,652) for the 845,351 shares of the Acquired Fund outstanding
on June 21, 1996. The Acquired Fund's net assets of $9,245,652, which consisted
of $7,444,690 of Paid in Capital and $2,066,228 of unrealized appreciation, were
combined at that date with those of the Large Cap Fund. The aggregate net assets
of the Large Cap Fund and the Acquired Fund immediately before the acquisition
were $92,855,251 and $9,245,652, respectively.
On April 21, 1997, the Large Cap Fund acquired all the net assets of the
Blanchard Capital Growth Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition was
accomplished by a tax-free exchange of 113,473 shares of the Large Cap Fund
(valued at $1,509,197) for the 202,789 shares of the Acquired Fund outstanding
on April 18, 1997. The Acquired Fund's net assets of $1,509,197, which consisted
of $1,319,703 of Paid in Capital and $271,223 of unrealized appreciation, were
combined at that date with those of the Large Cap Fund. The aggregate net assets
of the Large Cap Fund and the Acquired Fund immediately before the acquisition
were $91,970,866 and $1,509,197, respectively.
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, and unlisted
securities and private placement securities are generally valued at the mean
of the latest bid and asked price as furnished by an independent pricing
service. Listed equity securities are valued at the last sale price reported
on a national securities exchange. The Funds use the amortized cost method to
value portfolio securities in accordance with Rule 2a-7 under the Act. For
fluctuating net asset value Funds within the Trust, short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities purchased with remaining maturities of sixty days or
less may be valued at amortized cost, which approximates fair market value.
Investments in other open-end investment companies are valued at net asset
value.
REPURCHASE AGREEMENTS--It is the policy of the Funds to require a custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Funds to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Funds' adviser to be creditworthy pursuant to guidelines and/or standards
reviewed or established by the Board of Trustees (the "Trustees"). Risks may
arise from the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Funds could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code").
FEDERAL TAXES--It is the Funds' policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
At September 30, 1997, Government Securities Fund, Virginia Municipal Bond
Fund, and Maryland Municipal Bond Fund, for federal tax purposes, each had a
capital loss carryforward, as noted below. These capital loss carryforwards
will reduce the Fund's taxable income arising from future net realized gain on
investments, if any, to the extent permitted by the Code, and thus will reduce
the amount of the distributions to shareholders which would otherwise be
necessary to relieve the Funds of any liability for federal tax.
<TABLE>
<CAPTION>
FUNDS TOTAL TAX LOSS CARRYFORWARD
---------------------------
<S> <C>
Government Securities Fund $14,431,018
Virginia Municipal Bond Fund $ 178,797
Maryland Municipal Bond Fund $ 351,799
</TABLE>
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
Pursuant to the Code, such capital loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND VIRGINIA MUNICIPAL BOND FUND
------------------------------------- ------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT EXPIRATION YEAR EXPIRATION AMOUNT
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
2003 9,742,636 2004 178,797
2004 1,378,030
2005 3,310,352
</TABLE>
<TABLE>
<CAPTION>
MARYLAND MUNICIPAL BOND FUND
----------------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C>
2004 351,799
</TABLE>
Additionally, net capital losses, as noted below, attributable to security
transactions incurred after September 30, 1996 are treated as arising on
October 1, 1997 the first day of the Funds' next taxable year.
<TABLE>
<CAPTION>
FUND TOTAL TAX LOSS PUSHFORWARD
-------------------------- --------------------------
<S> <C>
Government Securities Fund $3,736,134
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
DEFERRED EXPENSES--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
over a period not to exceed five years from each Fund's commencement date.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At
September 30, 1997, Treasury Money Market Fund, Money Market Fund, and Tax-Free
Money Market Fund, capital paid-in aggregated $317,749,268, $241,510,750, and
$57,369,580, respectively. Transactions in shares were as follows:
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES FUND LARGE CAP FUND
------------------------ ------------------------
FOR THE YEAR ENDED
SEPTEMBER 30, 1997: SHARES DOLLARS SHARES DOLLARS
- -------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- --------------------------
Shares sold 1,348,256 $ 13,371,271 878,296 $ 12,745,846
- --------------------------
Shares issued in
connection with the
acquisition -- -- 113,473 1,509,197
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 544,149 5,396,169 640,836 8,496,790
- --------------------------
Shares redeemed (3,077,778) (30,479,752) (1,098,303) (16,038,717)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Investment Share
transactions (1,185,373) $(11,712,312) 534,302 $ 6,713,116
- -------------------------- ---------- ------------ ---------- ------------
TRUST SHARES:
- --------------------------
Shares sold 966,507 $ 9,589,726 64,549 $ 4,455,821
- --------------------------
Shares issued to
shareholders in payment of
distributions declared -- 4 324,411 856,430
- --------------------------
Shares redeemed (3,705,430) (36,748,558) (1,219,486) (17,210,160)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Trust Share transactions (2,738,923) (27,158,828) (830,526) (11,897,909)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Fund Share transactions (3,924,296) $(38,871,140) (296,224) $ (5,184,793)
- -------------------------- ---------- ------------ ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES FUND LARGE CAP FUND
------------------------ ------------------------
FOR THE YEAR ENDED
SEPTEMBER 30, 1996: SHARES DOLLARS SHARES DOLLARS
- -------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- --------------------------
Shares sold 2,763,200 $ 27,838,858 965,024 $ 12,986,255
- --------------------------
Shares issued in
connection with the
acquisition -- -- 695,147 9,245,450
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 611,870 6,142,678 379,876 4,969,161
- --------------------------
Shares redeemed (2,935,461) (29,411,819) (913,112) (13,464,743)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Investment Share
transactions 439,609 $ 4,569,717 1,126,935 $ 13,736,123
- -------------------------- ---------- ------------ ---------- ------------
TRUST SHARES:
- --------------------------
Shares sold 1,853,668 $ 18,616,622 395,754 $ 5,277,407
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 1 3 38,987 509,088
- --------------------------
Shares redeemed (3,875,084) (38,751,898) (1,282,606) (18,012,908)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Trust Share transactions (2,021,415) (20,135,273) (847,865) (12,226,413)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Fund Share transactions (1,581,806) $(15,565,556) 279,070 $ (1,509,710)
- -------------------------- ---------- ------------ ---------- ------------
</TABLE>
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STYLE MANAGER FUND
------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1997: SHARES DOLLARS
- ------------------------------------------------- ---------- ------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 3,251,568 $ 40,136,505
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 383,514 4,503,897
- -------------------------------------------------
Shares redeemed (4,107,368) (50,985,728)
- ------------------------------------------------- ---------- ------------
Net change resulting from Fund Share transactions (472,286) $ (6,345,326)
- ------------------------------------------------- ---------- ------------
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1996: SHARES DOLLARS
- ------------------------------------------------- ---------- ------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 1,489,971 $16,506,045
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 863,431 9,243,789
- -------------------------------------------------
Shares redeemed (3,397,734) (37,724,499)
- ------------------------------------------------- ---------- ------------
Net change resulting from Fund Share transactions (1,044,332) $(11,974,665)
- ------------------------------------------------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
VIRGINIA MUNICIPAL MARYLAND MUNICIPAL
BOND FUND BOND FUND
------------------------ ---------------------
FOR THE YEAR ENDED SEPTEMBER SHARES DOLLARS SHARES DOLLARS
30, 1997: ---------- ------------ -------- -----------
- -----------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------------
Shares sold 509,188 $ 5,533,656 192,865 $ 2,067,713
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared 173,844 1,888,518 71,862 770,265
- -----------------------------
Shares redeemed (1,515,555) (16,472,000) (679,110) (7,269,728)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Investment Share transactions (832,523) $ (9,049,826) (414,383) $(4,431,750)
- ----------------------------- ---------- ------------ -------- -----------
TRUST SHARES:
- -----------------------------
Shares sold 120,060 $ 1,306,439 59,419 $ 640,330
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared -- -- -- --
- -----------------------------
Shares redeemed (955,166) (10,316,539) (380,036) (4,057,731)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Trust Share transactions (835,106) (9,010,100) (320,617) (3,417,401)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Fund Share transactions (1,667,629) $(18,059,926) (735,000) $(7,849,151)
- ----------------------------- ---------- ------------ -------- -----------
</TABLE>
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VIRGINIA MUNICIPAL MARYLAND MUNICIPAL
BOND FUND BOND FUND
------------------------ ---------------------
FOR THE YEAR ENDED SHARES DOLLARS SHARES DOLLARS
SEPTEMBER 30, 1996: ---------- ------------ -------- -----------
- -----------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------------
Shares sold 1,022,563 $ 11,073,171 574,103 $ 6,142,806
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared 184,796 1,997,026 92,527 989,879
- -----------------------------
Shares redeemed (1,580,634) (17,022,733) (712,478) (7,557,624)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Investment Share transactions (373,275) $ (3,952,536) (45,848) $(424,939)
- ----------------------------- ---------- ------------ -------- -----------
TRUST SHARES:
- -----------------------------
Shares sold 468,285 $ 5,052,529 209,103 $ 2,221,208
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared -- -- -- --
- -----------------------------
Shares redeemed (950,703) (10,211,940) (252,990) (2,690,009)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Trust Share transactions (482,418) (5,159,411) (43,887) (468,801)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Fund Share transactions (855,693) $ (9,111,947) (89,735) $ (893,740)
- ----------------------------- ---------- ------------ -------- -----------
</TABLE>
<TABLE>
<CAPTION>
TREASURY MONEY
MARKET FUND MONEY MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------
Shares sold 67,174,914 92,237,108 92,778,441 144,072,045
- -----------------------
Shares issued in
connection with the
Acquisition -- 122,108,127 -- --
- -----------------------
Shares issued to
shareholders in payment
of distributions
declared 5,621,028 4,898,438 3,617,167 3,626,655
- -----------------------
Shares redeemed (97,657,884) (112,278,779) (102,699,797) (105,987,535)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Investment Share
transactions (24,861,942) 106,964,894 (6,304,189) 41,711,165
- ----------------------- ------------ ------------ ------------ ------------
TRUST SHARES:
- -----------------------
Shares sold 656,686,607 567,506,731 525,853,059 432,856,190
- -----------------------
Shares issued to
shareholders in payment
of distributions
declared 3 3 3 3
- -----------------------
Shares redeemed (687,214,445) (549,184,891) (522,237,956) (445,941,838)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Trust Share
transactions (30,527,835) 18,321,843 3,615,106 (13,085,645)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Fund Share
transactions (55,389,777) 125,286,737 (2,689,083) 28,625,520
- ----------------------- ------------ ------------ ------------ ------------
</TABLE>
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET FUND
----------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 315,423,874 389,800,080
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 417,624 459,305
- -------------------------------------------------
Shares redeemed (310,970,825) (419,737,938)
- ------------------------------------------------- ------------ ------------
Net change resulting from Fund Share transactions 4,870,673 (29,478,553)
- ------------------------------------------------- ------------ ------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Virtus Capital Management, Inc., the Trust's investment
adviser (the "Adviser"), receives for its services an annual investment advisory
fee based on a percentage of each Fund's average daily net assets (see below).
<TABLE>
<CAPTION>
FUND ANNUAL RATE
---------------------------- -----------
<C> <S>
Government Securities Fund 0.75%
Large Cap Fund 0.75%
Style Manager Fund 1.25%
Virginia Municipal Bond Fund 0.75%
Maryland Municipal Bond Fund 0.75%
Treasury Money Market Fund 0.50%
Money Market Fund 0.50%
Tax-Free Money Market Fund 0.50%
</TABLE>
The Adviser may voluntarily choose to waive a portion of its fee. The Adviser
can modify or terminate this voluntary waiver at any time at its sole
discretion.
Effective October 22, 1996 the Adviser increased its annual fee to 1.25% on the
Style Manager Fund.
Effective October 22, 1996 the Adviser entered into a sub-advisory agreement
with Trend Capital Management ("Trend") on behalf of the Style Manager Fund and
Large Cap Fund. Under the terms of a sub-advisory agreement between the Adviser
and Trend, with respect to the Style Manager Fund, the Adviser will pay Trend an
annual fee as follows: (a) an amount equal to .10% of the first $60 million of
the Fund's average daily net assets; and (b) with respect to average daily net
assets of the Fund in excess of $60 million, an amount equal to (i) one-third of
the Adviser's advisory fee to the extent that such advisory fee is less than or
equals 1% of the Fund's average daily net assets (but not to exceed .25% of the
Fund's average daily net assets); plus (ii) to the extent that the annual
advisory fee exceeds 1% of the Fund's average daily net assets, an additional
amount equal to two-thirds of such excess. With respect to the Large Cap Fund,
the Adviser will pay Trend an amount equal to .15% of the first $100 million of
the Fund's average daily net assets; and .33 1/3% of the Fund's average daily
net assets in excess of $100 million. Trend may voluntarily choose to reduce its
compensation. Trend can modify of terminate this voluntary reduction at any time
at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Funds with administrative
personnel and services. The fee paid to FAS is based on the level of average
aggregate daily net assets of the Trust, the Blanchard Precious Metals Fund,
Inc., and the Blanchard Funds, all of which are advised by the Adviser. The
administrative fee received during any fiscal year shall be at least $50,000 per
Fund. With respect to the Style Manager Fund and the Tax-Free Money Market Fund,
the fee shall be at least $75,000.
DISTRIBUTION SERVICES FEE--The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, each
Fund will reimburse Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Funds to finance activities intended to
result in the sale of the Funds' Investment Shares. The Plan provides that the
Funds may incur distribution expenses up to 0.25 % of the average daily net
assets of the Investment Shares, annually, to reimburse FSC. The Tax-Free Money
Market Fund and the Style Manager Fund will not accrue or pay any distribution
expenses pursuant to the Plan until a second class of shares has been created
for certain institutional investors.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Funds.
The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Funds' accounting records
for which it receives a fee. The fee is based on the level of each Fund's
average net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Signet Trust Company is the Funds' custodian for which it
receives a fee. The fee is based on the level of each Fund's average net assets
for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses were borne initially by FAS.
The Funds have agreed to reimburse FAS for the organizational expenses during
the five year period following each Fund's effective date. For the year ended
September 30, 1997, the following amounts were paid pursuant to this agreement:
<TABLE>
<CAPTION>
AMOUNT REIMBURSED
TO FAS FOR THE
EXPENSES OF YEAR ENDED
FUND ORGANIZING THE FUND SEPTEMBER 30, 1997
-------------------------- ------------------- ------------------
<S> <C> <C>
Style Manager Fund $28,773 $4,620
Tax-Free Money Market Fund $17,883 $2,933
</TABLE>
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended September 30, 1997, were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
------------ ------------
<S> <C> <C>
Government Securities Fund $138,698,434 $175,501,963
Large Cap Fund 55,144,492 73,658,378
Style Manager Fund 61,085,310 70,071,792
Virginia Municipal Bond Fund 15,978,372 33,799,963
Maryland Municipal Bond Fund 4,638,966 13,686,700
</TABLE>
(6) CONCENTRATION OF CREDIT RISK
Since Virginia Municipal Bond Fund and Maryland Municipal Bond Fund invest a
substantial portion of their assets in issuers located in one state, they will
be more susceptible to factors adversely affecting issuers of those states than
would be a comparable general tax-exempt mutual fund. In order to reduce the
credit risk associated with such factors, at September 30, 1997, 39% of the
securities in Virginia Municipal Bond Fund's portfolio of investments were
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit from any one institution or agency
did not exceed 11% of total investments. At September 30, 1997, 20% of the
securities in Maryland Municipal Bond Fund's portfolio of investments were
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit from any one institution or agency
did not exceed 9% of total investments.
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
(7) PROPOSED FUND MERGER
On July 18, 1997, Signet Banking Corporation ("Signet") entered into a
definitive Agreement and Plan of Reorganization whereby Signet was acquired by
First Union Corporation ("First Union"). It is anticipated that the merger will
be consummated on or about November 28, 1997.
As a result of this merger, First Union will succeed to the investment advisory
and functions formerly performed for the funds by various units of Signet and
various unaffiliated parties.
The Board of Trustees of the Trust has approved an Agreement and Plan of
Reorganization pursuant to which, on or about February 27, 1998, all of the
assets, and certain liabilities of the Funds would be acquired in exchange for
shares of a similarly managed fund (the "Acquiring Fund") that is advised by
affiliates of First Union. The reorganizations would result in the liquidation
and termination of the Funds. Pursuant to the reorganizations, shareholders of
the Funds will receive, tax-free, the number of shares of the acquiring fund
having a value equal to the value of their shares immediately prior to the
reorganizations. Consummation of the reorganizations is subject to approval of
the shareholders of the Funds.
THE VIRTUS FUNDS
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of
The Virtus Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Virtus Funds (comprising the following
portfolios: The U.S. Government Securities Fund, The Style Manager: Large Cap
Fund, The Style Manager Fund, The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, The Treasury Money Market Fund, The Money Market Fund, and
The Tax-Free Money Market Fund) as of September 30, 1997, and the related
statements of operations for the year then ended, the statements of changes in
net assets for the years ended September 30, 1997 and 1996, and the financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
September 30, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Virtus Funds as
of September 30, 1997, the results of its operations, the changes in its net
assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
As more fully described in Note 7, in November, 1997 the Funds are expected to
enter into an Agreement and Plan of Reorganization, pursuant to which (subject
to Fund shareholder approval) on or about February 27, 1998, all of the assets,
and certain liabilities of the Funds would be acquired in exchange for shares of
similarly managed funds that are advised by affiliates of First Union
Corporation. The reorganization would result in the liquidation and termination
of the Funds.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
November 7, 1997
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
William J. Copeland President and Treasurer
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. John W. McGonigle
Edward C. Gonzales Executive Vice President and
Peter E. Madden Secretary
John E. Murray, Jr. Joseph S. Machi
Wesley W. Posvar Vice President and Assistant
Marjorie P. Smuts Treasurer
Richard B. Fisher
Vice President
C. Grant Anderson
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Funds' prospectus which contains facts concerning
their objective and policies, management fees, expenses and other information.
Cusip 927913608 Cusip 927913855 Cusip 927913400
Cusip 927913707 Cusip 927913848 Cusip 927913301
Cusip 927913863 Cusip 927913830 Cusip 927913889
Cusip 927913871 Cusip 927913509 Cusip 927913103
Cusip 927913806 Cusip 927913202
G00716-01 (11/97)
THE VIRTUS FUNDS APPENDIX
A. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The U.S. Government Securities Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers
Intermediate Government Bond Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and The Lehman Brothers Intermediate
Government Bond Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 10/16/90
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to The Lehman Brothers Intermediate
Government Bond Index; the ending values are $16,120 and $16,983, respectively.
B. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The U.S. Government Securities Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers
Intermediate Government Bond Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and The Lehman Brothers Intermediate
Government Bond Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 10/16/90
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to The Lehman Brothers Intermediate
Government Bond Index; the ending values are $16,301 and $16,983, respectively.
C. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager: Large Cap Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Standard & Poor's 500
Index is represented by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in the
Fund and The Standard & Poor's 500 Index. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's start of
performance, 10/16/90 through 9/30/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to the Standard &
Poor's 500 Index; the ending values are $24,937 and $37,387, respectively.
D. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager: Large Cap Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Standard & Poor's 500
Index is represented by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in the
Fund and The Standard & Poor's 500 Index. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's start of
performance, 10/16/90 through 9/30/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to the Standard &
Poor's 500 Index; the ending values are $25,208 and $37,387, respectively.
E. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager Fund (the "Fund"). The
corresponding components of the line graph are listed underneath. The Fund is
represented by a broken line. The Standard & Poor's 500 Index is represented by
a solid line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund and The Standard
& Poor's 500 Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 3/7/95
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Standard & Poor's 500 Index; the
ending values are $18,536 and $20,576, respectively.
F. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Virginia Municipal Bond Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/24/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,433 and $17,493, respectively.
G. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Virginia Municipal Bond Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/24/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,605 and $17,493, respectively.
H. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Maryland Municipal Bond Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/30/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $14,974 and $17,493, respectively.
I. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Maryland Municipal Bond Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/30/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,142 and $17,493, respectively.
Evergreen Keystone
Short & Intermediate
Term Bond Funds
(photo of Grand Canyon)
1997 Annual Report
Evergreen Keystone
(logo) FUNDS (SM) (logo)
<PAGE>
EVERGREEN KEYSTONE
(logo
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders............................... 1
Keystone Capital Preservation and Income Fund
Fund at a Glance................................... 2
Management Report.................................. 3
</TABLE>
Evergreen Intermediate-Term Bond Fund
<TABLE>
<S> <C>
Fund at a Glance................................... 4
Management Report.................................. 5
Keystone Intermediate Term Bond Fund
Fund at a Glance................................... 6
Management Report.................................. 7
Evergreen Intermediate-Term Government Securities
Fund
Fund at a Glance................................... 8
Management Report.................................. 9
Evergreen Short-Intermediate Bond Fund
Fund at a Glance................................... 10
Management Report.................................. 11
Growth of Investments................................ 12
Financial Highlights
Keystone Capital Preservation and Income Fund...... 14
Evergreen Intermediate-Term Bond Fund.............. 16
Keystone Intermediate Term Bond Fund............... 18
Evergreen Intermediate-Term Government Securities
Fund............................................ 20
Evergreen Short-Intermediate Bond Fund............. 22
Schedule of Investments
Keystone Capital Preservation and Income Fund...... 25
Evergreen Intermediate-Term Bond Fund.............. 27
Keystone Intermediate Term Bond Fund............... 29
Evergreen Intermediate-Term Government Securities
Fund............................................ 31
Evergreen Short-Intermediate Bond Fund............. 32
Statements of Assets and Liabilities................. 34
Statements of Operations............................. 35
Statements of Changes in Net Assets.................. 37
Combined Notes to Financial Statements............... 40
Independent Auditors' Report-- KPMG Peat Marwick
LLP................................................ 49
</TABLE>
ABOUT EVERGREEN KEYSTONE
Since 1971, the Evergreen Funds have been providing investors with a proven,
value-driven approach to equity investment management. For over 60 years of
changing economic conditions, Keystone has taken pride in helping investors meet
their financial goals through a broad range of financial products and services.
Combined, Evergreen Keystone offers over 70 funds designed to meet a broad range
of objectives, including fixed-income, balanced, growth and income, and
aggressive growth. Assets under management total more than $30 billion.
<PAGE>
EVERGREEN KEYSTONE (logo)
LETTER TO SHAREHOLDERS
August 1997
(photo of William M. Ennis)
WILLIAM M. ENNIS
Dear Shareholders:
Investors in fixed income funds may sometimes feel as if they are watching all
the fun from the sidelines. Certainly, during the past year, investors in many
equity-oriented mutual funds enjoyed another year in which many funds returned
20% or more.
At times such as this, however, it is important to remind ourselves that seeking
equity-like returns is not what some funds are supposed to be doing. The five
mutual funds discussed in this annual report all have similar objectives-- to
provide regular income and to conserve principal.
We believe each of these funds did a very good job of meeting that objective
during a year which was challenging for fixed income investors. While interest
rates finished the 12-month period at about the same point at which they
started, the point-to-point comparison masked a great deal of rate fluctuations
during the year, with longer-term rates falling and then rising by almost a full
percentage point. In this environment, the short-to-intermediate term strategies
employed by each of the funds worked very well, delivering regular income and
protecting principal. By the end of the 12-month period, each of the funds
provided handsome real returns, especially when measured against the low rate of
inflation we have been enjoying. And they provided these returns without taking
the significant credit risks of high yield bonds or the market risks of
longer-maturity bonds.
These conservative investment strategies make sense for investors who are
interested in regular income, but who want to limit the risks they take with
their investment dollars. However, after the stock market's sharp ascent this
spring and summer, these strategies also make sense for growth-oriented
investors who want to reduce their overall portfolio risks by putting at least
part of their investments in conservative fixed income funds. Diversification
always is prudent, but it is especially prudent when one asset class (in this
case common stocks) has risen dramatically in relative price after a prolonged
period of above-average returns.
At Evergreen Keystone, we encourage all shareholders to consult regularly with
their financial advisers to help determine whether their mix of investments
continues to be appropriate, given current needs, tolerance for risk, and market
conditions.
I am delighted to inform you that Evergreen Keystone has successfully integrated
all service functions of Evergreen and Keystone Funds. This means that you now
have full exchange privileges among all Evergreen and Keystone America funds. In
addition, you will be receiving the top-flight service that earned Evergreen
Keystone the 1996 Dalbar Quality Tested Service Seal, the highest award for
mutual fund service presented by Dalbar, an independent mutual fund survey and
rating firm.
In the following pages, Evergreen Keystone investment professionals will give
you more detailed information about the investment environment and the
strategies employed in managing your funds. You will notice that this annual
report is a departure from past reports in format. It represents the effort of
Evergreen Keystone Funds to provide thoughtful reports and to present them in a
format that is attractive and makes information easily accessible. We are very
interested in hearing your thoughts on this new format, and we welcome your
suggestions.
Sincerely,
/s/WILLIAM M. ENNIS
WILLIAM M. ENNIS
MANAGING DIRECTOR
1
<PAGE>
KEYSTONE
(Logo and picture) CAPITAL PRESERVATION AND INCOME FUND
of capital)
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
One year with sales charge 3.26 % 1.04 % 5.05 %
One year w/o sales charge 6.73 % 6.04 % 6.05 %
One year dividends per share 57.1(cents) 49.4(cents) 49.4 (cents)
30-day SEC Yield
(as of 6/30/97) 5.81 % 5.22 % 5.25 %
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Three years N/A 4.59 % 5.54 %
Five years N/A 3.80 % N/A
Since Inception* 5.84 % 4.51 % 4.55 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Nine months w/o sales charge 5.12 % 4.53 % 4.53 %
Three years N/A 14.41 % 17.55 %
Five years N/A 20.50 % N/A
Since Inception* 15.26 % 30.35 % 21.70 %
</TABLE>
* CLASS A BEGAN 12/30/94; CLASS B BEGAN 7/1/91;
CLASS C BEGAN 2/1/93.
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C> <C> <C>
Total Net Assets (all classes) $52.8 million
Average Credit Quality AAA
Average Maturity 4.92 years
Average Duration 0.75 years
</TABLE>
PORTFOLIO ALLOCATIONS JUNE 30, 1997
(AS A PERCENTAGE OF NET ASSETS)
(A PIE GRAPH APPEARS HERE. SEE TABLE BELOW FOR PLOT POINTS.)
U.S. Treasuries 3.7%
Fixed rate mortgages 2.2%
Repurchase agreements & other net assets 2.8%
Adjustable-rate mortgages 91.3%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Keystone Capital Preservation and Income Fund seeks high current income
consistent with low volatility of principal by investing in adjustable-rate
mortgage-backed securities and loan pools. The Fund may be appropriate for
investors seeking monthly dividends, an investment in a fund composed 100% of
government securities and therefore of the highest credit quality, and the
potential for less share price fluctuation than intermediate and longer-term
bond funds.
STRATEGY
The Fund invests primarily in adjustable-rate mortgage securities issued by the
U.S. Government, its agencies or instrumentalities. Adjustable-rate mortgage
securities (ARMS) are pools of residential mortgage loans on which the interest
rate is periodically adjusted to reflect the current interest rate environment.
By investing in ARMS, the Fund seeks to minimize fluctuations in its share price
relative to other bond funds. However, unlike money market funds, the Fund does
not seek to maintain a completely stable share price.
PORTFOLIO MANAGER
(picture of
Gary Pzegeo) Gary Pzegeo, a Vice President and Portfolio Manager in the
Fixed Income Group of Keystone Investment Management Company,
is Portfolio Manager of Keystone Capital Preservation and
Income Fund. An investment professional with seven years'
experience, Mr. Pzegeo also is manager of Keystone
Institutional Adjustable Rate Fund. Mr. Pzegeo joined Keystone
in 1990. He has several years' experience in analysis of
mortgage-backed securities. A Chartered Financial Analyst, Mr.
Pzegeo is a member of the Boston Securities Analysts Society,
the Government Bond Club of New England, and the Association
of Investment Management and Research. He holds a B.A. in
business administration from the University of Massachusetts.
2
<PAGE>
KEYSTONE (logo and picture
CAPITAL PRESERVATION AND INCOME FUND of capital)
MANAGEMENT REPORT
August 1997
Dear Shareholder:
We are pleased to report to you on the Keystone Capital Preservation and Income
Fund for the fiscal period that ended on June 30, 1997. This report is an annual
report, reflecting the new fiscal year ending date of June 30, replacing the
former fiscal year ending each September 30.
PERFORMANCE
Your Fund performed well during the past year, as the relatively high
concentration of adjustable-rate mortgage securities helped the Fund be
responsive to changes in interest rates. In addition to providing a yield
premium over money market funds, the Fund was able to protect principal by
maintaining a relatively stable net asset value. The Fund concentrated its
investments in relatively low-risk, geographically diverse adjustable-rate
securities. As an example of the Fund's price stability during the past year,
the net asset value of Class A Shares began the fiscal period at $9.74 per share
on September 30, 1996. The net asset value was $9.76 on December 31, 1996 and
$9.80 on June 30, 1997.
ENVIRONMENT
In late 1996 and the first half of 1997, the investment environment was marked
by changing attitudes about the pace of economic growth in the United States. In
the latter part of 1996 and early this year, the economy appeared to be
accelerating, primarily driven by consumer demand. Slowing retail sales and
stable housing sales began to be evident late in the first quarter, however,
signaling a slowdown in consumer activity.
In the bond market, after long-term interest rates hit a low point in November
1996, they started rising because of reports of strong growth late in 1996 and
in expectation that the Federal Reserve Board might increase short-term rates.
In fact, the Federal Reserve Board did increase short-term rates by one-quarter
of one percent in late March.
Interest rates appeared to peak in late March before gradually moving back down.
For example, the interest rate of a two-year Treasury declined from 6.41% on
March 31 to 6.06% on June 30.
STRATEGY
Starting in the second half of 1996, following reports of strong economic growth
and in anticipation of increases in interest rates, your Fund's management team
began increasing the emphasis on adjustable-rate mortgages, both as a defensive
measure to protect the net asset value and to gain the benefit of additional
interest income from higher rates. This increased emphasis continued into 1997.
Adjustable-rate mortgages, whose interest payments reset at regular intervals as
interest rates rise and fall, increased from about 85% of net assets on
September 30, 1996 to 96% by March 31, 1997. By the close of the fiscal year,
the percentage was about 91%.
Within the fixed-rate portion of the portfolio, maturities were extended
somewhat as the threat of higher rates subsided.
The overriding strategy of the Fund has been to seek a yield advantage over
other short-term investments, while providing capital protection. In pursuing
this strategy, the portfolio management team has purchased adjustable-rate
mortgages that are mature, with an average age of seven years. Mortgages of this
age historically have tended not to be refinanced as frequently as younger
mortgages. The geographical sources of these mortgages also has been
diversified, to reduce the risk that events in any one section of the country
could have a disproportionate impact on the Fund. The reset dates of the
adjustable-rate mortgages also are diversified to reduce the risk that market
interest rates at any one point could have a disproportionate impact on the
Fund.
All mortgages are backed by the U.S. government or government agencies. The
average credit rating remains AAA.
OUTLOOK
Going forward, we believe the economy may increase its growth rate in the third
quarter of 1997 after the apparent slowdown of the second, with gross domestic
product growing at an anticipated 2 1/2-to-3% during the second half of the
year. At the same time, we believe inflation can be contained within the present
2 1/2-to-3% range, and that interest rates will remain stable. We expect to
continue to manage the Fund conservatively, with a relatively high concentration
of adjustable-rate mortgages.
Thank you for your support of Keystone Capital Preservation and Income Fund.
Sincerely,
/s/ ALBERT H. ELFNER, III
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
/s/GARY E. PZEGEO
GARY E. PZEGEO
VICE PRESIDENT
PORTFOLIO MANAGER
3
<PAGE>
EVERGREEN
(logo and picture INTERMEDIATE-TERM BOND FUND
of a star)
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR
PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 3.41 % 0.91 % 4.91 % 6.97 %
One year w/o sales
charge 6.88 % 5.91 % 5.91 % 6.97 %
One year dividends per
share 60.6(cents) 51.3(cents) 51.3(cent) 61.5(cents)
30-day SEC Yield
(as of 6/30/97) 5.57 % 4.81 % 4.83 % 5.82 %
<CAPTION>
AVERAGE ANNUAL
RETURNS**
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 7.18 %
Five years N/A N/A N/A 6.60 %
Since Inception* 5.24 % -1.15 % 5.31 % 7.13 %
<CAPTION>
CUMULATIVE
RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 23.14 %
Five years N/A N/A N/A 37.67 %
Since Inception* 11.71 % -1.62 % 6.26 % 47.77 %
</TABLE>
* CLASS A BEGAN 5/2/95; CLASS B BEGAN 1/30/96; CLASS C BEGAN 4/29/96; CLASS Y
BEGAN 11/1/91.
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
Total Net Assets (all classes) $160.4 million
Average Credit Quality AAA
Average Maturity 8.89 years
Duration 4.61 years
</TABLE>
CREDIT QUALITY JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
AA 6%
A 21%
AAA 73%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen Intermediate-Term Bond Fund seeks to preserve principal while
maximizing current yield.
STRATEGY
The Fund invests primarily in U.S. Government obligations, mortgage-backed
securities and corporate bonds and debentures. These securities typically have
average maturities of five to 10 years.
PORTFOLIO MANAGER
(photo of Bruce J. Besecker, C.F.A., a Vice President and Senior
Bruce J. Portfolio Manager of First Union Capital Management Group, is
Besecker) Portfolio Manager of Evergreen Intermediate-Term Bond Fund.
Mr. Besecker, who has more than 16 years' professional
investment experience, is manager of the Philadelphia Taxable
Fixed Income Unit of First Union Capital Management. Prior to
joining First Union, Mr. Besecker was an Assistant Vice
President in Institutional Sales at Merrill Lynch in New York,
and a Senior Trust Officer and Portfolio Manager at First
Fidelity Bank. He also has served as a Research Assistant in
the Economics Department at the Federal Reserve Bank in
Philadelphia. Mr. Besecker, a Chartered Financial Analyst, is
a member of the Philadelphia Financial Analysts Society. He is
a graduate of the University of Pennsylvania and holds an
M.B.A. from The Wharton School.
4
<PAGE>
EVERGREEN (logo and picture
INTERMEDIATE-TERM BOND FUND of a star)
MANAGEMENT REPORT
August 1997
Dear Shareholders:
We are pleased to report to you on the Evergreen Intermediate-Term Bond Fund for
the 12-month fiscal year that ended on June 30, 1997.
PERFORMANCE
Your Fund performed very well during the past fiscal year, buoyed by the
addition of higher yielding securities that increased yield and total return,
and by the decision to maintain a fully invested position.
ENVIRONMENT
During the 12-month fiscal year, the U.S. economy grew at an exceptional pace.
As this growth persisted, often in defiance of predictions of an economic
slowdown, bond market participants became increasingly concerned that the
strength of the economy could provoke an increase in inflation. In response to
these concerns, interest rates rose dramatically during the early months of
1997. Conversely, during the second quarter of 1997, investors' fears receded as
economic data indicated slower economic growth and little inflationary pressure.
This resulted in a steady decline in interest rates, reversing most of the first
quarter's increase. However, the financial markets are keeping a wary eye on
each new economic report, searching for any signs of inflationary pressure that
could prompt the Federal Reserve Board to raise the Federal Funds rate beyond
the 0.25% increase of March 25.
STRATEGY
The fluctuating interest rate environment and seemingly trendless market over
the past 12 months have made portfolio management increasingly challenging.
During this period, duration was maintained in a range of 90% to 110% of the
Fund's benchmark, the Lehman Brothers Intermediate Government Corporate Bond
Index. As of June 30, the duration was at the lower end of this range. We
anticipate maintaining our shorter relative duration as we believe rates may
modestly rise in the coming months. At the end of the fiscal year, duration was
4.61 years and average maturity was 8.89 years.
In addition, your Fund's Treasury position has been reduced and the allocations
to both corporate bonds and mortgage-backed securities have been increased both
to increase yield and to improve total return opportunities. We also adjusted
the maturity structure of the portfolio by underweighting the intermediate
position and overweighting both short-term and longer-term securities. This
strategy is being pursued to enhance returns as yield spreads narrow between
short-term and long-term maturities.
MATURITY AS OF JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
0-1 Year 21%
1-3 Years 10%
3-5 Years 15%
5-10 Years 8%
10-20 Years 25%
20+ Years 21%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
We enter the second half of 1997 with a degree of caution. The principal concern
in the bond market remains the inflation "wildcard," as investors try to
determine whether interest rates can continue their bullish run in this economic
environment. According to traditional analysis, this cannot continue. Our
primary concern is that strong economic growth ultimately brings inflationary
pressures, which in turn would push the Federal Reserve Board to raise interest
rates. With this uncertainty in the market, we plan to keep portfolio structure
and duration relatively neutral. We also will continue to look for opportunities
to increase yield through the addition of attractive mortgage-backed securities
and other higher yielding instruments.
Thank you for your investment in Evergreen Intermediate-Term Bond Fund.
Sincerely,
/s/RICHARD K. WAGONER
RICHARD K. WAGONER
EXECUTIVE VICE PRESIDENT
CHIEF INVESTMENT OFFICER
First Union Capital Management Group
/s/BRUCE J. BESECKER
BRUCE J. BESECKER
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
5
<PAGE>
KEYSTONE
INTERMEDIATE TERM BOND FUND
(logo and picture of stars)
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
One year with sales charge 5.30 % 3.17 % 7.06 %
One year w/o sales charge 8.83 % 8.17 % 8.06 %
One year dividends per share 52.0 (cents) 46.3(cents) 46.3 (cents)
30-day SEC Yield
(as of 6/30/97) 5.82 % 5.25 % 5.26 %
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Three years 6.34 % 5.82 % 6.67 %
Five years 5.89 % N/A N/A
Ten years 6.56 % N/A N/A
Since Inception* N/A 4.61 % 4.96 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Eleven months w/o sales charge 8.40 % 7.81 % 7.70 %
Three years 20.24 % 18.51 % 21.38 %
Five years 33.11 % N/A N/A
Ten years 88.72 % N/A N/A
Since Inception* N/A 22.01 % 23.80 %
</TABLE>
* CLASSES B AND C BEGAN 2/1/93.
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE. FOR CLASSES WITH
MORE THAN A 10-YEAR HISTORY, THE 10-YEAR HISTORY IS PRESENTED.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
Total Net Assets (all classes) $29.0 million
Average Credit Quality AA-
Average Maturity 6.3 years
Duration 4.6 years
</TABLE>
PORTFOLIO QUALITY JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
BBB 18%
A 32%
AAA 38%
AA 12%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Keystone Intermediate Term Bond Fund seeks current income and, secondarily,
capital preservation from investments in investment grade and high quality
bonds.
STRATEGY
The Fund is designed to balance the benefits of short-and long-term bonds, by
providing more income than short-term bonds and greater price stability than
long-term bonds. The Fund invests primarily in government and corporate bonds
and mortgage-backed securities with maturities of less than 10 years.
PORTFOLIO MANAGER
(photo of Christopher P. Conkey, Senior Vice President and Chief
Christopher Investment Officer, Fixed Income, of Keystone Investment
P. Conkey) Management Company, is Portfolio Manager of Keystone
Intermediate Term Bond Fund. An investment professional with
more than 14 years' experience, Mr. Conkey also is Portfolio
Manager of Keystone Diversified Bond Fund (B-2). Mr. Conkey
joined Keystone in 1988 from Constitution Capital, where he
was a Vice President. A Chartered Financial Analyst, Mr.
Conkey is a member of the Government Bond Club of New England
and the Bond Analysts Society of Boston. He is a graduate of
Clark University and received his M.B.A. from Boston
University.
6
<PAGE>
KEYSTONE
INTERMEDIATE TERM BOND FUND (logo and picture
of stars)
MANAGEMENT REPORT
August 1997
Dear Shareholder:
We are pleased to report to you on the Keystone Intermediate Term Bond Fund for
the fiscal period that ended on June 30, 1997. This report is an annual report,
reflecting the new fiscal year ending date of June 30, replacing the former
fiscal year ending each July 31.
PERFORMANCE
Your Fund performed very well during the past year. In an environment of
moderate economic growth, modest inflation, and relatively stable interest
rates, your Fund was able to take advantage of opportunities among better
quality corporate bonds and mortgage-backed securities to provide generous
income consistent with limited price fluctuation.
ENVIRONMENT
During the past year, the U.S. economy enjoyed healthy economic growth and low
inflation. If one were to look at interest rates at the beginning and end of the
year, despite some near-term volatility one would see remarkable stability in
rates. For example, the yield on a 30-year Treasury bond was 6.78% on June 30,
just slightly below the 6.97% of July 31, 1996. This was an environment in which
corporate bonds tended to do very well, as credit risk was low because of the
overall strength of the economy.
STRATEGY
In the relatively stable interest rate environment of the past year, your Fund
did not try to manage the portfolio maturities significantly in an effort to
anticipate the direction of interest rate movements. Rather, the portfolio
management team has searched for relative value among the various sectors in
which the Fund invests.
Your Fund took advantage of the strong economy to increase its emphasis on high
grade and investment grade corporate bonds and mortgage-backed securities, while
de-emphasizing U.S. Treasuries. Between December 31, 1996 and June 30, 1997, for
example, the allocation to U.S. government bonds in the portfolio was reduced
from 21% to 9% of net assets, while the allocation to industrial bonds was
increased from 13% to 16% and the allocation to collateralized mortgage
obligations was increased from 21% to 28%.
The Fund also has increased its allocation to foreign securities from 9% on
December 31, 1996 to approximately 24% at the end of the fiscal year. The
foreign emphasis was increased to take advantage of the yield advantage of
foreign bonds and to give the portfolio greater diversification. The Fund, which
has hedged all foreign securities back into the U.S. dollar to protect against
currency fluctuations, has invested in government bonds issued in Canada,
Denmark and Germany. All three countries are enjoying low inflation and
benefiting from sound fiscal policies.
PORTFOLIO COMPOSITION JUNE 30, 1997
(AS A PERCENTAGE OF NET ASSETS)
(A pie graph appears here. See table below for plot points)
Repurchase agreements and other net assets 2.2%
U.S Government 8.8%
Financial Corp. 15.3%
Industrial Corp. 15.9%
International/U.S.$ 15.4%
International/non-U.S.$* 8.8%
Mortgage-backed 27.5%
Asset-backed 6.1%
* NON-U.S.-DOLLAR-DENOMINATED BONDS WERE FULLY HEDGED BACK INTO U.S. CURRENCY.
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
We believe the economy may increase its growth rate in the third quarter of 1997
after the apparent slowdown of the second, with gross domestic product growing
at an anticipated annualized rate of 2 1/2-to-3% during the second half of the
year. At the same time, we believe inflation can be contained within the present
2 1/2-to-3% range, and that interest rates will remain stable. We will continue,
however, to monitor wage costs very closely to watch for early signs of
inflation. With this favorable outlook, we anticipate a continued emphasis on
corporate and mortgage-backed securities for at least the next several months.
Thank you for your support of Keystone Intermediate Term Bond Fund.
Sincerely,
/s/ALBERT H. ELFNER, III
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
/s/CHRISTOPHER P. CONKEY
CHRISTOPHER P. CONKEY
SENIOR VICE PRESIDENT
CHIEF INVESTMENT OFFICER, FIXED INCOME
7
<PAGE>
EVERGREEN
(logo and photo of George Washington)
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 2.55 % 0.03 % 4.03 % 6.08 %
One year w/o sales
charge 6.00 % 5.03 % 5.03 % 6.08 %
One year dividends per
share 55.4(cents) 46.3(cents) 46.3(cents) 56.2 (cents)
30-day SEC Yield
(as of 6/30/97) 5.25 % 4.44 % 4.17 % 5.49 %
<CAPTION>
AVERAGE ANNUAL
RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 6.19 %
Five years N/A N/A N/A 5.38 %
Since Inception* 4.38 % -0.66 % 4.85 % 5.82 %
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years N/A N/A N/A 19.76 %
Five years N/A N/A N/A 29.94 %
Since Inception* 9.74 % -0.92 % 5.97 % 37.82 %
</TABLE>
* CLASS A BEGAN 5/2/95; CLASS B BEGAN 2/9/96; CLASS C BEGAN 4/10/96;
CLASS Y BEGAN 11/1/91
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C> <C> <C>
Total Net Assets (all classes) $72.9 million
Average Credit Quality AAA
Average Maturity 3.88 years
Duration 2.93 years
</TABLE>
PORTFOLIO COMPOSITION JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See tables below for plot points.)
U.S. Treasuries 71%
Mortgage-backed securities 18%
U.S. Govt. Agencies 10%
Short-term securities 1%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen Intermediate-Term Government Securities Fund seeks to maximize total
return and preserve principal while providing current income.
STRATEGY
The Fund invests primarily in securities issued by the U.S. Government and its
agencies. These securities typically have an average maturity of three to six
years, with a maximum maturity of ten years. The Fund seeks its objective over
full interest rate cycles, which typically last three to five years.
PORTFOLIO MANAGER
(photo of L. L. Robert Cheshire, a Vice President and Senior Portfolio
Robert Cheshire) Manager of First Union Capital Management Group, is Portfolio
Manager of Evergreen Intermediate-Term Government Securities
Fund. Mr. Cheshire also is in charge of the Newark Taxable
Fixed Income Unit of First Union. Prior to joining First
Union, Mr. Cheshire was a Vice President at Shearson Lehman
Hutton for 11 years in the Asset Management and Institutional
Government Securities Division. He was also a Vice President
of Government Securities for Charles E. Quincey and an
Assistant Vice President in the Municipal Securities
Department with Bankers Trust Co. in New York. Mr. Cheshire is
a graduate of Rutgers University and holds an M.B.A. from
Fairleigh Dickinson University.
8
<PAGE>
EVERGREEN (logo and
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND photo of
George Washington)
MANAGEMENT REPORT
August 1997
Dear Shareholders:
We are pleased to report on Evergreen Intermediate-Term Government Securities
Fund for the 12-month fiscal year that ended on June 30, 1997.
PERFORMANCE
During the year, the Fund delivered satisfactory returns, consistent with its
objective to seek total return while preserving principal. For the first nine
months of the fiscal year, as interest rates rose, the Fund's slightly long
duration caused some underperformance against industry benchmarks. However, the
Fund outperformed its benchmark during the final three months of the year as
interest rates fell.
ENVIRONMENT
During the 12-month fiscal period, the U.S. economy experienced a pattern best
described as a series of "mini-cycles," with bonds trading within a relatively
narrow range of interest rates. Economic growth surged during the fourth quarter
of 1996 into the first quarter of 1997, subsequently causing concern over
inflationary pressure. Against this backdrop, bond market participants reviewed
each new economic report for any signs of inflation that could prompt the
Federal Reserve Board to increase interest rates. These market concerns resulted
in rising interest rates throughout the first quarter of 1997, culminating in
the March 25 decision by the Federal Reserve Board to raise the Federal Funds
rate by 0.25%. Conversely, investors' fears of inflation receded during the
second quarter of 1997 amid reports of slowing economic growth. As a result,
interest rates fell.
STRATEGY
The Fund's duration, or sensitivity to interest rate changes, was consistent
with that of the benchmark Lehman Brothers Intermediate Government Index during
the fiscal year. In implementing duration strategy, your Fund's investment
manager uses a disciplined process focusing on longer-term trends in the
economic environment. The Fund's duration was modestly shortened following the
Federal Reserve Board's decision to raise the Federal Funds rate in late March.
In response to the declining interest rate environment in the second quarter,
portfolio duration was brought back to neutral. To capture additional yield, the
Fund's emphasis on mortgage-backed securities was also increased, ending the
fiscal year at more than 18% of net assets.
Consistent with the Fund's concentration on government securities, average
credit quality was maintained at AAA.
MATURITY AS OF JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
0-1 Year 4%
1-5 Years 45%
5-10 Years 51%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
We are continuing to monitor closely new economic reports, vigilant for any
indications of a resurgence of inflationary pressure that could cause the
Federal Reserve Board to raise the Federal Funds rate during the second half of
1997. The overall bond market continues to be characterized by near-term
interest rate fluctuations, without any over-riding trend. This environment
dictates a very cautious approach in the coming quarters, with portfolio
duration adjusted consistent with a changing market environment.
We anticipate that your Fund's relatively neutral duration and conservative
style should protect the fund from any significant fluctuations in the market.
In addition, we will continue to seek attractive opportunities by increasing the
Fund's yield through the addition of mortgage-backed securities and other
relatively higher yielding instruments.
Thank you for your investment in Evergreen Intermediate-Term Government
Securities Fund.
Sincerely,
/s/RICHARD K. WAGONER
RICHARD K. WAGONER
EXECUTIVE VICE PRESIDENT
CHIEF INVESTMENT OFFICER
First Union Capital Management Group
/s/ L. ROBERT CHESHIRE
L. ROBERT CHESHIRE
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
9
<PAGE>
EVERGREEN
(logo and photo of flag) SHORT-INTERMEDIATE BOND FUND
FUND-AT-A-GLANCE
As of June 30, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
One year with sales
charge 3.30 % 0.78 % 4.77 % 6.88 %
One year w/o sales
charge 6.77 % 5.78 % 5.77 % 6.88 %
One year dividends per
share 63.5(cents) 54.5(cents) 54.5(cents) 64.6(cents)
30-day SEC Yield
(as of 6/30/97) 5.99 % 5.29 % 5.28 % 6.30 %
<CAPTION>
AVERAGE ANNUAL
RETURNS**
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years 5.62 % 4.98 % N/A 6.92 %
Five years 5.05 % N/A N/A 5.92 %
Since Inception* 7.14 % 4.17 % 5.73 % 7.01 %
<CAPTION>
CUMULATIVE
RETURNS** CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Three years 17.84 % 15.68 % N/A 22.23 %
Five years 27.92 % N/A N/A 33.29 %
Since Inception* 78.78 % 19.87 % 16.99 % 55.28 %
</TABLE>
* CLASS A BEGAN 1/3/89; CLASS B BEGAN 1/25/93; CLASS C BEGAN 9/6/94; CLASS Y
BEGAN 1/4/91.
** ALL RETURNS INCLUDE THE MAXIMUM APPLICABLE SALES CHARGE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C> <C> <C>
Total Net Assets (all classes) $398.7 million
Average Credit Quality AA+
Average Maturity 4.06 years
Duration 2.96 years
</TABLE>
CREDIT QUALITY JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
A 26%
AA 3%
AAA 67%
BBB 4%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen Short-Intermediate Bond Fund seeks to provide a high level of current
income with the potential for some capital appreciation.
STRATEGY
The Fund seeks to attain its objective by investing in a broad range of higher
quality and investment-grade debt securities. The Fund normally will invest at
least 80% of its assets in debt securities. The Fund also intends to maintain an
average maturity of five years or less to control price fluctuations.
PORTFOLIO MANAGER
(photo of Thomas L. Ellis, a Vice President and Senior Portfolio Manager
Thomas L. Ellis) of First Union Capital Management Group, is Portfolio Manager
of Evergreen Short-Intermediate Bond Fund. At First Union, Mr.
Ellis is responsible for managing more than $1 billion in
fixed income portfolios, including the Fixed Income Fund, a
common trust fund. Prior to joining First Union, Mr. Ellis
served in the Bond Department of First Tennessee Bank. He is a
graduate of the University of Baltimore and holds an M.B.A.
from Morgan State University.
10
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE BOND FUND (logo and a photo
of flag)
MANAGEMENT REPORT
August 1997
Dear Shareholders:
We are pleased to report to you on the Evergreen Short-Intermediate Bond Fund
for the 12-month fiscal year that ended on June 30, 1997.
PERFORMANCE
During the fiscal year, concentrations in corporate bonds and mortgage-backed
securities helped the Fund deliver strong performance, consistent with its
objective. At the same time, the Fund's relatively short duration gave the Fund
a relative advantage over the first nine months of the year, although it held
back performance during the final three months when interest rates declined.
ENVIRONMENT
Throughout the fiscal year, the U.S. economy experienced strong growth
accompanied by relatively low levels of inflation. During this period, the bond
market was characterized by near-term interest rate volatility. For example, the
yield on the 10-year U.S. Treasury fell from 6.80% to 6.10% during the final six
months of 1996, only to rise back to 7.0% by April 1997, then to fall again to
6.5% by June of 1997. We believe this volatility mirrors changes in the
underlying economy. While Gross Domestic Product (GDP) grew at a 2.5% rate in
1996, real GDP surged by a 5.9% annualized rate during the first quarter 1997.
This led the Federal Reserve Board to increase the Federal Funds rate by 0.25%
in March, with many observers anticipating that further rate increases would
follow. However, growth slowed during the second quarter to an annualized rate
of 2.0%. This, coupled with surprisingly low inflation, led the bond market to
rally amid optimistic expectations.
STRATEGY
As a result of our belief that interest rates may rise during the remainder of
1997, at this writing we are maintaining a portfolio duration of 2.9 years,
slightly less than the short-intermediate benchmark.
We will continue to slightly overweight the Fund's focus on corporate bonds and
mortgage-backed securities. Although the "spread," or yield differential, that
corporates and mortgages enjoy over U.S. Treasuries has narrowed, we have a
positive fundamental outlook for both these sectors and expect to maintain an
emphasis on them to increase the Fund's yield.
The Fund's portfolio maintains an average credit quality of AA+.
MATURITY JUNE 30, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie graph appears here. See table below for plot points.)
0-1 Year 22%
1-3 Years 44%
3-5 Years 18%
5-10 Years 16%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OUTLOOK
For the final half of 1997, we anticipate that economic growth, spurred by
increased consumer spending, may increase to an annualized rate of about 3.0%.
We believe that with unemployment rates approaching 25-year lows, tight labor
markets could eventually be reflected in upward pressure on prices. This
potential for increased inflation, combined with the possibility of a fall-off
in optimism in the bond market, could lead to rising interest rates during the
second half of 1997. In response to the possibility of increased inflationary
pressure, we expect that the Federal Reserve Board may again tighten monetary
policy, increasing the Federal Funds rate by 0.25% to 0.50% before the end of
the year.
Thank you for your investment in Evergreen Short-Intermediate Bond Fund.
Sincerely,
/s/RICHARD K. WAGONER
RICHARD K. WAGONER
EXECUTIVE VICE PRESIDENT
CHIEF INVESTMENT OFFICER
First Union Capital Management Corp.
/s/THOMAS L. ELLIS
THOMAS L. ELLIS
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
11
<PAGE>
EVERGREEN KEYSTONE
(logo)
GROWTH OF INVESTMENTS
<TABLE>
<S> <C>
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
Comparison of a $10,000 investment in Keystone Capital Preservation and Income
Fund, Class B sharess, versus a similar investment in a 6-Month Treasury Bill
and the Consumer Price Index (CPI).
In Thousands
7/91 6/92 6/93 6/94 6/95 6/96 6/97
Class B Shares (CUSTOMER: PLEASE FILL IN) $13,124
CPI $13,034
6-Month T-Bill $11,786
</TABLE>
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 3.26% N/A 5.84%
Class B 1.04% 3.80% 4.51%
Class C 5.05% N/A 4.55%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The 6-Month Treasuty Bill is an unmanaged market
index. The index does not include transaction costs assciated with buying and
selling securities nor any management fees. The Consumer Price Index, a measure
of inflation, is through June 30, 1997.
EVERGREEN INTERMEDIATE-TERM BOND FUND
Comparison of a $10,000 investment in Evergreen Intermediate-Term Bond Fund,
Class A shares, versus a similar investment in the Lehman Brothers Intermediate
Government/Corporate Bond Index and the Consumer Price Index (CPI).
In Thousands
5/95 6/96 12/95 6/96 12/96 6/97
CPI (CUSTOMER: PLEASE FILL IN) $11,171
LBIGCBI $10,554
Class A Shares $11,817
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 3.41% N/A 5.24%
Class B 0.91% N/A -1.15%
Class C 4.91% N/A 5.31%
Class Y 6.97% 6.60% 7.13%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Intermediate
Government/Corporate Bond Index is an unmanaged market index. The index does not
include transaction costs assciated with buying and selling securities nor any
management fees. The Consumer Price Index, a measure of inflation, is through
June 30, 1997.
KEYSTONE INTERMEDIATE TERM BOND FUND
Comparison of a $10,000 investment in Keystone Intermediate Term Bond Fund,
Class A shares, versus a similar investment in the Lehman Brothers Intermediate
Government/Corporate Bond Index and the Consumer Price Index (CPI).
In Thousands
6/87 6/88 6/89 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97
CPI (CUSTOMER: PLEASE FILL IN) $18,870
LBIGCBI $14,118
Class A Shares $22,184
Average Annual Total Returns
1 Year 5 Year 10 Year Life of Class
Class A 5.30% 5.89% 6.56% N/A
Class B 3.17% N/A N/A 4.61%
Class C 7.06% N/A N/A 4.96%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Intermediate
Government/Corporate Bond Index is an unmanaged market index. The index does not
include transaction costs assciated with buying and selling securities nor any
management fees. The Consumer Price Index, a measure of inflation, is through
June 30, 1997.
EVERGREEN INTERMEDIATE-TERM
GOVERNMENT SECURITIES FUND
Comparison of a $10,000 investment in Evergreen Intermediate-Term Government
Securities Fund, Class A shares, versus a similar investment in the
Lehman Brothers Intermediate Government Bond Index and the Consumer Price Index
(CPI).
5/95 6/95 12/95 6/96 12/96 6/97
CPI (CUSTOMER: PLEASE FILL IN) $10,974
LBIGBI $10,554
Class A Shares $11,661
In Thousands
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 2.55% N/A 4.38%
Class B 0.03% N/A -0.66%
Class C 4.03% N/A 4.85%
Class Y 6.08% 5.28% 5.82%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Intermediate Government Bond
Index is an unmanaged market index. The index does not include transaction costs
assciated with buying and selling securities nor any management fees. The
Consumer Price Index, a measure of inflation, is through June 30, 1997.
12
<PAGE>
EVERGREEN KEYSTONE
(logo)
GROWTH OF INVESTMENTS (CONTINUED)
EVERGREEN SHORT-INTERMEDIATE BOND FUND
Comparison of a $10,000 investment in Evergreen Short-Intermediate Bond Fund,
Class A shares, versus a similar investment in the Lehman Brothers Intermediate
Government/Corporate Bond Index and the Consumer Price Index (CPI).
1/89 6/89 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97
CPI (CUSTOMER: PLEASE FILL IN) $17,879
LBIGCBI $13,235
Class A Shares $19,937
In Thousands
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 3.30% 5.05% 7.14%
Class B 0.78% N/A 4.17%
Class C 4.77% N/A 5.73%
Class Y 6.88% 5.92% 7.01%
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Intermediate
Government/Corporate Bond Index is an unmanaged market index. The index does not
include transaction costs assciated with buying and selling securities nor any
management fees. The Consumer Price Index, a measure of inflation, is through
June 30, 1997.
13
<PAGE>
(logo and a photo KEYSTONE
of capital) CAPITAL PRESERVATION AND INCOME FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
DECEMBER 30, 1994
YEAR ENDED (COMMENCEMENT OF
NINE MONTHS ENDED SEPTEMBER 30, CLASS OPERATIONS) TO
JUNE 30, 1997 (D) 1996 (C) SEPTEMBER 30, 1995
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 9.74 $ 9.68 $ 9.51
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.46 0.61 0.46
Net realized and unrealized gain on investments..................... 0.03 0.01 0.14
Total from investment operations.................................... 0.49 0.62 0.60
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.42) (0.53) (0.42)
In excess of net investment income.................................. (0.01) 0 (0.01)
Tax basis return of capital......................................... 0 (0.03) 0
Total distributions................................................. (0.43) (0.56) (0.43)
NET ASSET VALUE END OF PERIOD....................................... $ 9.80 $ 9.74 $ 9.68
Total return (b).................................................... 5.12% 6.56% 6.36%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 0.92%(a) 0.91% 0.86%(a)
Total expenses excluding indirectly paid expenses................. 0.90%(a) 0.90% 0.82%(a)
Total expenses excluding waivers and reimbursements............... 1.47%(a) 1.33% 1.27%(a)
Net investment income............................................. 6.24%(a) 6.31% 6.37%(a)
Portfolio turnover rate............................................. 52% 74% 67%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $15,751 $22,684 $ 19,293
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30,
JUNE 30, 1997 (D) 1996 (C) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF
PERIOD........................ $ 9.75 $ 9.68 $ 9.62 $ 9.91 $ 9.88 $ 10.06
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........... 0.39 0.55 0.52 0.47 0.45 0.58
Net realized and unrealized gain
(loss) on investments......... 0.04 0.01 0.03 (0.41) (0.05) (0.21)
Total from investment
operations.................... 0.43 0.56 0.55 0.06 0.40 0.37
LESS DISTRIBUTIONS FROM:
Net investment income........... (0.36) (0.46) (0.48) (0.34) (0.37) (0.55)
In excess of net investment
income........................ (0.01) 0 (0.01) (0.01) 0 0
Tax basis return of capital..... 0 (0.03) 0 0 0 0
Total distributions............. (0.37) (0.49) (0.49) (0.35) (0.37) (0.55)
NET ASSET VALUE END OF PERIOD... $ 9.81 $ 9.75 $ 9.68 $ 9.62 $ 9.91 $ 9.88
Total return (b)................ 4.53% 5.90% 5.81% 0.58% 4.16% 3.71%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................ 1.67%(a) 1.63% 1.53% 1.50% 1.50% 1.36%
Total expenses excluding
indirectly paid expenses.... 1.65%(a) 1.62% 1.50% -- -- --
Total expenses excluding
waivers and
reimbursements.............. 2.23%(a) 2.09% 2.09% 1.93% 1.94% 2.03%
Net investment income......... 5.52%(a) 5.63% 5.46% 4.05% 4.44% 5.50%
Portfolio turnover rate......... 52% 74% 67% 34% 60% 41%
NET ASSETS END OF PERIOD
(THOUSANDS)................... $32,964 $ 44,096 $62,998 $95,761 $144,725 $186,742
<CAPTION>
JULY 1, 1991
(COMMENCEMENT OF
CLASS OPERATIONS) TO
SEPTEMBER 30, 1991
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF
PERIOD........................ $ 10.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........... 0.18
Net realized and unrealized gain
(loss) on investments......... 0.06
Total from investment
operations.................... 0.24
LESS DISTRIBUTIONS FROM:
Net investment income........... (0.18)
In excess of net investment
income........................ 0
Tax basis return of capital..... 0
Total distributions............. (0.18)
NET ASSET VALUE END OF PERIOD... $ 10.06
Total return (b)................ 2.43%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................ 1.19%(a)
Total expenses excluding
indirectly paid expenses.... --
Total expenses excluding
waivers and
reimbursements.............. 3.19%(a)
Net investment income......... 6.42%(a)
Portfolio turnover rate......... 2%
NET ASSETS END OF PERIOD
(THOUSANDS)................... $ 25,769
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) The Fund changed its fiscal year end from September 30 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
KEYSTONE (logo and photo of
CAPITAL PRESERVATION AND INCOME FUND capital)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED (COMMENCEMENT OF
NINE MONTHS ENDED SEPTEMBER 30, CLASS OPERATIONS) TO
JUNE 30, 1997 (D) 1996 (C) 1995 1994 SEPTEMBER 30, 1993
<S> <C> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD..................... $ 9.74 $ 9.67 $ 9.60 $ 9.90 $ 9.82
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.40 0.54 0.52 0.40 0.23
Net realized and unrealized gain (loss) on
investments........................................... 0.03 0.02 0.04 (0.35) 0.09
Total from investment operations........................ 0.43 0.56 0.56 0.05 0.32
LESS DISTRIBUTIONS FROM:
Net investment income................................... (0.36) (0.46) (0.48) (0.34) (0.24)
In excess of net investment income...................... (0.01) 0 (0.01) (0.01) 0
Tax basis return of capital............................. 0 (0.03) 0 0 0
Total distributions..................................... (0.37) (0.49) (0.49) (0.35) (0.24)
NET ASSET VALUE END OF PERIOD........................... $ 9.80 $ 9.74 $ 9.67 $ 9.60 $ 9.90
Total return (b)........................................ 4.53% 5.91% 5.93% 0.48% 3.28%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................................ 1.67%(a) 1.64% 1.53% 1.50% 1.50%(a)
Total expenses excluding indirectly paid expenses..... 1.65%(a) 1.62% 1.50% -- --
Total expenses excluding waivers and reimbursements... 2.23%(a) 2.09% 2.08% 1.94% 1.67%(a)
Net investment income................................. 5.53%(a) 5.60% 5.51% 4.08% 2.91%(a)
Portfolio turnover rate................................. 52% 74% 67% 34% 60%
NET ASSETS END OF PERIOD (THOUSANDS).................... $ 4,105 $4,152 $2,755 $2,874 $2,077
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) The Fund changed its fiscal year end from September 30 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
EVERGREEN
INTERMEDIATE-TERM BOND FUND
(logo and photo of a star)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 (C)
<S> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................... $ 10.10 $10.30
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................. 0.60 0.48
Net realized and unrealized gain (loss) on investments................. 0.08 (0.20)
Total from investment operations....................................... 0.68 0.28
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (0.59) (0.48)
Tax basis return of capital............................................ (0.02) 0
Total distributions.................................................... (0.61) (0.48)
NET ASSET VALUE END OF PERIOD.......................................... $ 10.17 $10.10
Total return (b)....................................................... 6.88% 2.72%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................................................... 0.85% 0.82%(a)
Total expenses excluding indirectly paid expenses.................... 0.85% --
Total expenses excluding waivers and reimbursements.................. 1.04% 1.10%(a)
Net investment income................................................ 5.92% 6.30%(a)
Portfolio turnover rate................................................ 86% 52%
NET ASSETS END OF PERIOD (THOUSANDS)................................... $ 3,038 $2,943
<CAPTION>
MAY 2, 1995 (COMMENCEMENT OF CLASS OPERATIONS)
THROUGH
AUGUST 31, 1995
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................... $ 9.98
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................. 0.18
Net realized and unrealized gain (loss) on investments................. 0.33
Total from investment operations....................................... 0.51
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (0.19)
Tax basis return of capital............................................ 0
Total distributions.................................................... (0.19)
NET ASSET VALUE END OF PERIOD.......................................... $10.30
Total return (b)....................................................... 5.17%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................................................... 0.80%(a)
Total expenses excluding indirectly paid expenses.................... --
Total expenses excluding waivers and reimbursements.................. 1.38%(a)
Net investment income................................................ 5.53%(a)
Portfolio turnover rate................................................ 73%
NET ASSETS END OF PERIOD (THOUSANDS)................................... $160
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from August 31 to June 30.
<TABLE>
<CAPTION>
JANUARY 30, 1996
(COMMENCEMENT
OF CLASS OPERATIONS)
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD....................................................... $ 10.10 $10.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................................................... 0.50 0.20
Net realized and unrealized gain (loss) on investments.................................... 0.08 (0.58)
Total from investment operations.......................................................... 0.58 (0.38)
LESS DISTRIBUTIONS FROM:
Net investment income..................................................................... (0.49) (0.20)
Tax basis return of capital............................................................... (0.02) 0
Total distributions....................................................................... (0.51) (0.20)
NET ASSET VALUE END OF PERIOD............................................................. $ 10.17 $10.10
Total return (b).......................................................................... 5.91% (3.52%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................................................... 1.81% 1.80%(a)
Total expenses excluding indirectly paid expenses....................................... 1.81% --
Total expenses excluding waivers and reimbursements..................................... 1.81% 1.89%(a)
Net investment income................................................................... 5.00% 5.18%(a)
Portfolio turnover rate................................................................... 86% 52%
NET ASSETS END OF PERIOD (THOUSANDS)...................................................... $ 1,013 $402
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
EVERGREEN (logo and photo of a star)
INTERMEDIATE-TERM BOND FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
APRIL 29, 1996
(COMMENCEMENT
OF CLASS OPERATIONS)
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD....................................................... $ 10.10 $10.15
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................................................... 0.51 0.08
Net realized and unrealized gain (loss) on investments.................................... 0.07 (0.05)
Total from investment operations.......................................................... 0.58 0.03
LESS DISTRIBUTIONS FROM:
Net investment income..................................................................... (0.49) (0.08)
Tax basis return of capital............................................................... (0.02) 0
Total distributions....................................................................... (0.51) (0.08)
NET ASSET VALUE END OF PERIOD............................................................. $ 10.17 $10.10
Total return (b).......................................................................... 5.91% 0.33%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................................................... 1.80% 1.80%(a)
Total expenses excluding indirectly paid expenses....................................... 1.80% --
Total expenses excluding waivers and reimbursements..................................... 1.80% 1.88%(a)
Net investment income................................................................... 4.97% 5.30%(a)
Portfolio turnover rate................................................................... 86% 52%
NET ASSETS END OF PERIOD (THOUSANDS)...................................................... $29 $25
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED AUGUST 31,
JUNE 30, 1997 JUNE 30, 1996 (b) 1995 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD...... $ 10.10 $ 10.29 $ 9.93 $ 10.99 $ 10.56
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 0.61 0.48 0.56 0.55 0.63
Net realized and unrealized gain (loss)
on investments......................... 0.08 (0.19) 0.40 (0.86) 0.66
Total from investment operations......... 0.69 0.29 0.96 (0.31) 1.29
LESS DISTRIBUTIONS FROM:
Net investment income.................... (0.60) (0.48) (0.56) (0.55) (0.64)
Net realized gains on investments........ 0 0 (0.04) (0.20) (0.22)
Tax basis return of capital.............. (0.02) 0 0 0 0
Total distributions...................... (0.62) (0.48) (0.60) (0.75) (0.86)
NET ASSET VALUE END OF PERIOD............ $ 10.17 $ 10.10 $ 10.29 $ 9.93 $ 10.99
Total return............................. 6.97% 2.82% 10.13% (2.91%) 12.90%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................... 0.81% 0.80%(a) 0.69% 0.55% 0.55%
Total expenses excluding indirectly
paid expenses........................ 0.81% -- -- -- --
Total expenses excluding waivers and
reimbursements....................... 0.81% 0.87%(a) 0.83% 0.83% 0.83%
Net investment income.................. 5.97% 5.75%(a) 5.63% 5.32% 5.93%
Portfolio turnover rate.................. 86% 52% 73% 69% 49%
NET ASSETS END OF PERIOD (THOUSANDS)..... $ 156,346 $ 157,814 $95,961 $91,724 $86,892
<CAPTION>
NOVEMBER 1, 1991
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
AUGUST 31, 1992
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD...... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 0.55
Net realized and unrealized gain (loss)
on investments......................... 0.55
Total from investment operations......... 1.10
LESS DISTRIBUTIONS FROM:
Net investment income.................... (0.54)
Net realized gains on investments........ 0
Tax basis return of capital.............. 0
Total distributions...................... (0.54)
NET ASSET VALUE END OF PERIOD............ $ 10.56
Total return............................. 11.29%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................... 0.55%(a)
Total expenses excluding indirectly
paid expenses........................ --
Total expenses excluding waivers and
reimbursements....................... 0.86%(a)
Net investment income.................. 6.49%(a)
Portfolio turnover rate.................. 65%
NET ASSETS END OF PERIOD (THOUSANDS)..... $ 66,695
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year from August 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
(logo and picture KEYSTONE
of stars) INTERMEDIATE TERM BOND FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED JULY 31,
JUNE 30, 1997 (e) 1996 1995 1994 (c)
<S> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 8.73 $ 8.88 $ 8.84 $ 9.46
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.54 0.59 0.63 0.57
Net realized and unrealized gain (loss) on investments, closed
futures contracts and foreign currency related transactions....... 0.18 (0.16) 0.02 (0.59 )
Total from investment operations.................................... 0.72 0.43 0.65 (0.02 )
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.52) (0.58) (0.57) (0.57 )
In excess of net investment income.................................. 0 0 (0.04) (0.02 )
Tax basis return of capital......................................... 0 0 0 (0.01 )
Total distributions................................................. (0.52) (0.58) (0.61) (0.60 )
NET ASSET VALUE END OF PERIOD....................................... $ 8.93 $ 8.73 $ 8.88 $ 8.84
Total return (b).................................................... 8.40% 4.95% 7.76% (0.29%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.12%(a) 1.10% 1.00% 1.00%
Total expenses excluding indirectly paid expenses................. 1.10%(a) 1.08% -- --
Total expenses excluding waivers and reimbursements............... 1.58%(a) 1.54% 1.48% 1.80%
Net investment income............................................. 6.43%(a) 6.57% 7.13% 6.81%
Portfolio turnover rate............................................. 179% 231% 149% 280%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $10,341 $12,958 $14,558 $16,036
<CAPTION>
1993
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 9.23
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.70
Net realized and unrealized gain (loss) on investments, closed
futures contracts and foreign currency related transactions....... 0.18
Total from investment operations.................................... 0.88
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.65)
In excess of net investment income.................................. 0
Tax basis return of capital......................................... 0
Total distributions................................................. (0.65)
NET ASSET VALUE END OF PERIOD....................................... $ 9.46
Total return (b).................................................... 9.88%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.52%
Total expenses excluding indirectly paid expenses................. --
Total expenses excluding waivers and reimbursements............... 1.99%
Net investment income............................................. 7.48%
Portfolio turnover rate............................................. 160%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $18,032
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD....................... $ 8.64 $ 8.60 $ 9.11 $ 9.05 $ 9.61
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... 0.71 0.72 0.67 0.69 0.72
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions............................................ 0.60 0.05 (0.45) 0.10 (0.45)
Total from investment operations.......................... 1.31 0.77 0.22 0.79 0.27
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.71) (0.72) (0.70) (0.73) (0.83)
In excess of net investment income........................ (0.01) (0.01) (0.03) 0 0
Total distributions....................................... (0.72) (0.73) (0.73) (0.73) (0.83)
NET ASSET VALUE END OF PERIOD............................. $ 9.23 $ 8.64 $ 8.60 $ 9.11 $ 9.05
Total return (b).......................................... 15.65% 9.42% 2.71% 9.13% 2.95%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................... 1.88% 2.00% 2.00% 1.92% 1.30%
Total expenses excluding indirectly paid expenses....... -- -- -- -- --
Total expenses excluding waivers and reimbursements..... 1.88% 2.06% 2.33% 2.19% 2.65%
Net investment income................................... 7.85% 8.42% 7.90% 7.88% 7.48%
Portfolio turnover rate................................... 90% 76% 107% 148% 208%
NET ASSETS END OF PERIOD (THOUSANDS)...................... $19,288 $20,227 $23,694 $30,337 $38,615
<CAPTION>
FEBRUARY 13, 1987
(COMMENCEMENT
OF OPERATIONS)
THROUGH
JULY 31, 1987
<S> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD....................... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... 0.17
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions............................................ (0.42)
Total from investment operations.......................... (0.25)
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.14)
In excess of net investment income........................ 0
Total distributions....................................... (0.14)
NET ASSET VALUE END OF PERIOD............................. $ 9.61
Total return (b).......................................... (2.50%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................... 1.00%(d)
Total expenses excluding indirectly paid expenses....... --
Total expenses excluding waivers and reimbursements..... 12.47%(d)
Net investment income................................... 6.86%(d)
Portfolio turnover rate................................... 14%
NET ASSETS END OF PERIOD (THOUSANDS)...................... $ 1,679
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
(e) The Fund changed its fiscal year end from July 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
KEYSTONE (logo and picture
INTERMEDIATE TERM BOND FUND of stars)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED JULY 31,
JUNE 30, 1997 (d) 1996 1995 1994 (c)
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 8.74 $ 8.89 $ 8.85 $ 9.47
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.47 0.52 0.56 0.49
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions.............................................. 0.20 (0.16) 0.02 (0.58)
Total from investment operations............................ 0.67 0.36 0.58 (0.09)
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.46) (0.51) (0.51) (0.49)
In excess of net investment income.......................... 0 0 (0.03) (0.03)
Tax basis return of capital................................. 0 0 0 (0.01)
Total distributions......................................... (0.46) (0.51) (0.54) (0.53)
NET ASSET VALUE END OF PERIOD............................... $ 8.95 $ 8.74 $ 8.89 $ 8.85
Total return (b)............................................ 7.81% 4.10% 6.87% (1.05%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.87%(a) 1.85% 1.75% 1.75%
Total expenses excluding indirectly paid expenses......... 1.85%(a) 1.83% -- --
Total expenses excluding waivers and reimbursements....... 2.35%(a) 2.32% 2.21% 2.36%
Net investment income..................................... 5.68%(a) 5.82% 6.38% 5.48%
Portfolio turnover rate..................................... 179% 231% 149% 280%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $11,368 $16,034 $17,985 $ 17,819
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING)
THROUGH
JULY 31, 1993
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 9.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.29
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions.............................................. 0.12
Total from investment operations............................ 0.41
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.29)
In excess of net investment income.......................... 0
Tax basis return of capital................................. 0
Total distributions......................................... (0.29)
NET ASSET VALUE END OF PERIOD............................... $ 9.47
Total return (b)............................................ 4.42%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.76%(a)
Total expenses excluding indirectly paid expenses......... --
Total expenses excluding waivers and reimbursements....... 2.71%(a)
Net investment income..................................... 5.67%(a)
Portfolio turnover rate..................................... 160%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $8,159
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) The Fund changed its fiscal year end from July 31 to June 30.
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED JULY 31,
JUNE 30, 1997 (d) 1996 1995 1994 (c)
<S> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD.......................... $ 8.74 $ 8.89 $ 8.85 $ 9.46
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................ 0.46 0.52 0.55 0.49
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions............................................... 0.20 (0.16) 0.03 (0.57)
Total from investment operations............................. 0.66 0.36 0.58 (0.08)
LESS DISTRIBUTIONS FROM:
Net investment income........................................ (0.46) (0.51) (0.51) (0.49)
In excess of net investment income........................... 0 0 (0.03) (0.03)
Tax basis return of capital.................................. 0 0 0 (0.01)
Total distributions.......................................... (0.46) (0.51) (0.54) (0.53)
NET ASSET VALUE END OF PERIOD................................ $ 8.94 $ 8.74 $ 8.89 $ 8.85
Total return (b)............................................. 7.70% 4.10% 6.87% (0.95%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................. 1.87%(a) 1.85% 1.75% 1.75%
Total expenses excluding indirectly paid expenses.......... 1.85%(a) 1.83% -- --
Total expenses excluding waivers and reimbursements........ 2.35%(a) 2.31% 2.23% 2.37%
Net investment income...................................... 5.68%(a) 5.82% 6.37% 5.44%
Portfolio turnover rate...................................... 179% 231% 149% 280%
NET ASSETS END OF PERIOD (THOUSANDS)......................... $ 7,259 $9,084 $10,185 $ 13,086
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING)
THROUGH
JULY 31, 1993
<S> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD.......................... $ 9.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................ 0.29
Net realized and unrealized gain (loss) on investments,
closed futures contracts and foreign currency related
transactions............................................... 0.11
Total from investment operations............................. 0.40
LESS DISTRIBUTIONS FROM:
Net investment income........................................ (0.29)
In excess of net investment income........................... 0
Tax basis return of capital.................................. 0
Total distributions.......................................... (0.29)
NET ASSET VALUE END OF PERIOD................................ $ 9.46
Total return (b)............................................. 4.31%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................. 1.77%(a)
Total expenses excluding indirectly paid expenses.......... --
Total expenses excluding waivers and reimbursements........ 2.61%(a)
Net investment income...................................... 5.61%(a)
Portfolio turnover rate...................................... 160%
NET ASSETS END OF PERIOD (THOUSANDS)......................... $7,522
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) The Fund changed its fiscal year end from July 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
(logo and picture EVERGREEN
of president) INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MAY 2, 1995
(COMMENCEMENT
TEN MONTHS OF CLASS OPERATIONS)
YEAR ENDED ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996 (c) AUGUST 31, 1995
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................... $ 9.99 $ 10.15 $ 9.95
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................. 0.55 0.46 0.19
Net realized and unrealized gain (loss) on investments................. 0.03 (0.16) 0.20
Total from investment operations....................................... 0.58 0.30 0.39
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (0.55) (0.46) (0.19)
Total distributions.................................................... (0.55) (0.46) (0.19)
NET ASSET VALUE END OF PERIOD.......................................... $ 10.02 $ 9.99 $10.15
Total return (b)....................................................... 6.00% 3.00% 3.90%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................................................... 0.86% 0.81%(a) 0.80%(a)
Total expenses excluding indirectly paid expenses.................... 0.86% -- --
Total expenses excluding waivers and reimbursements.................. 0.94% 1.06%(a) 1.34%(a)
Net investment income................................................ 5.47% 5.49%(a) 5.42%(a)
Portfolio turnover rate................................................ 68% 28% 45%
NET ASSETS END OF PERIOD (THOUSANDS)................................... $ 571 $ 497 $ 9
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from August 31 to June 30.
<TABLE>
<CAPTION>
FEBRUARY 9, 1996
(COMMENCEMENT
OF CLASS OPERATIONS)
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD....................................................... $ 9.99 $10.38
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................................................... 0.45 0.18
Net realized and unrealized gain (loss) on investments.................................... 0.04 (0.39)
Total from investment operations.......................................................... 0.49 (0.21)
LESS DISTRIBUTIONS FROM:
Net investment income..................................................................... (0.46) (0.18)
Total distributions....................................................................... (0.46) (0.18)
NET ASSET VALUE END OF PERIOD............................................................. $ 10.02 $ 9.99
Total return (b).......................................................................... 5.03% (1.99)%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................................................... 1.81% 1.80%(a)
Total expenses excluding indirectly paid expenses....................................... 1.81% --
Total expenses excluding waivers and reimbursements..................................... 1.89% 1.91%(a)
Net investment income................................................................... 4.53% 4.62%(a)
Portfolio turnover rate................................................................... 68% 28%
NET ASSETS END OF PERIOD (THOUSANDS)...................................................... $ 742 $ 359
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
EVERGREEN
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
(logo and picture of
FINANCIAL HIGHLIGHTS (CONTINUED) George
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) Washington)
<TABLE>
<CAPTION>
APRIL 10, 1996
(COMMENCEMENT
OF CLASS OPERATIONS)
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD....................................................... $ 9.99 $10.01
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................................................... 0.40 0.11
Net realized and unrealized gain (loss) on investments.................................... 0.09 (0.02)
Total from investment operations.......................................................... 0.49 0.09
LESS DISTRIBUTIONS FROM:
Net investment income..................................................................... (0.46) (0.11)
Total distributions....................................................................... (0.46) (0.11)
NET ASSET VALUE END OF PERIOD............................................................. $ 10.02 $ 9.99
Total return (b).......................................................................... 5.03% 0.89%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.......................................................................... 1.81% 1.80%(a)
Total expenses excluding indirectly paid expenses....................................... 1.81% --
Total expenses excluding waivers and reimbursements..................................... 1.90% 1.91%(a)
Net investment income................................................................... 4.53% 4.47%(a)
Portfolio turnover rate................................................................... 68% 28%
NET ASSETS END OF PERIOD (THOUSANDS)...................................................... $ 12 $ 32
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED AUGUST 31,
JUNE 30, 1997 JUNE 30, 1996 (b) 1995 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 9.99 $ 10.15 $ 9.92 $ 10.61 $ 10.41
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.56 0.46 0.55 0.54 0.57
Net realized and unrealized gain
(loss) on investments............... 0.03 (0.16) 0.23 (0.64) 0.24
Total from investment operations...... 0.59 0.30 0.78 (0.10) 0.81
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.56) (0.46) (0.55) (0.54) (0.58)
Net realized gains on investments..... 0 0 0 (0.05) (0.03)
Total distributions................... (0.56) (0.46) (0.55) (0.59) (0.61)
NET ASSET VALUE END OF PERIOD......... $ 10.02 $ 9.99 $ 10.15 $ 9.92 $ 10.61
Total return.......................... 6.08% 3.00% 8.16% (0.99%) 8.03%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.81% 0.80%(a) 0.70% 0.55% 0.55%
Total expenses excluding indirectly
paid expenses..................... 0.81% -- -- -- --
Total expenses excluding waivers and
reimbursements.................... 0.89% 0.87%(a) 0.84% 0.82% 0.83%
Net investment income............... 5.52% 5.47%(a) 5.54% 5.22% 5.48%
Portfolio turnover rate............... 68% 28% 45% 45% 31%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $71,588 $87,004 $106,066 $106,448 $119,172
<CAPTION>
NOVEMBER 1, 1991
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
AUGUST 31, 1992
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.48
Net realized and unrealized gain
(loss) on investments............... 0.40
Total from investment operations...... 0.88
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.47)
Net realized gains on investments..... 0
Total distributions................... (0.47)
NET ASSET VALUE END OF PERIOD......... $ 10.41
Total return.......................... 9.04%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.55%(a)
Total expenses excluding indirectly
paid expenses..................... --
Total expenses excluding waivers and
reimbursements.................... 0.86%(a)
Net investment income............... 5.68%(a)
Portfolio turnover rate............... 47%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 87,648
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year end from August 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
(logo and picture of EVERGREEN
flag) SHORT-INTERMEDIATE BOND FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, ENDED DECEMBER 31,
1997 1996 JUNE 30, 1995 (c) 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 9.82 $ 10.02 $ 9.52 $ 10.42 $ 10.41
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.63 0.63 0.32 0.65 0.65
Net realized and unrealized gain (loss) on investments.............. 0.02 (0.19) 0.50 (0.91) 0.19
Total from investment operations.................................... 0.65 0.44 0.82 (0.26) 0.84
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.64) (0.64) (0.32) (0.64) (0.65)
In excess of net investment income.................................. 0 0 0 0 0
Net realized gains on investments................................... 0 0 0 0 (0.18)
Total distributions................................................. (0.64) (0.64) (0.32) (0.64) (0.83)
NET ASSET VALUE END OF PERIOD....................................... $ 9.83 $ 9.82 $ 10.02 $ 9.52 $ 10.42
Total return (b).................................................... 6.77% 4.45% 8.77% (2.57%) 8.29%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 0.72% 0.79% 0.77%(a) 0.75% 0.93%
Total expenses excluding indirectly paid expenses................. 0.72% -- -- -- --
Total expenses excluding waivers and reimbursements............... -- -- -- -- --
Net investment income............................................. 6.37% 6.35% 6.58%(a) 6.46% 6.15%
Portfolio turnover rate............................................. 45% 76% 34% 48% 73%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $17,703 $18,630 $18,898 $19,127 $22,865
</TABLE>
<TABLE>
<CAPTION>
JANUARY 28, 1989
(COMMENCEMENT OF
CLASS
YEAR ENDED NINE MONTHS OPERATIONS)
DECEMBER 31, ENDED YEAR ENDED THROUGH
1992 1991 DECEMBER 31, 1990 (d) MARCH 31, 1990 MARCH 31, 1989
<S> <C> <C> <C> <C> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD.......... $ 10.54 $ 9.99 $ 9.72 $ 9.50 $ 9.70
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................ 0.71 0.73 0.55 0.79 0.10
Net realized and unrealized gain (loss) on
investments................................ (0.06) 0.60 0.24 0.20 (0.14)
Total from investment operations............. 0.65 1.33 0.79 0.99 (0.04)
LESS DISTRIBUTIONS FROM:
Net investment income........................ (0.67) (0.70) (0.52) (0.77) (0.16)
In excess of net investment income........... 0 (0.01) 0 0 0
Net realized gains on investments............ (0.11) (0.07) 0 0 0
Total distributions.......................... (0.78) (0.78) (0.52) (0.77) (0.16)
NET ASSET VALUE END OF PERIOD................ $ 10.41 $ 10.54 $ 9.99 $ 9.72 $ 9.50
Total return (b)............................. 6.39% 13.74% 8.31% 10.51% (0.31%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................. 0.90% 0.80% 1.01%(a) 1.00% 1.78%(a)
Total expenses excluding indirectly paid
expenses................................. -- -- -- -- --
Total expenses excluding waivers and
reimbursements........................... -- 0.89% 1.82%(a) 1.50% --
Net investment income...................... 6.79% 7.30% 7.53%(a) 7.57% 6.10%(a)
Portfolio turnover rate...................... 66% 53% 27% 32% 18%
NET ASSETS END OF PERIOD (THOUSANDS)......... $21,488 $17,680 $11,765 $6,496 $ 11,580
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
(d) The Fund changed its fiscal year end from March 31 to December 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE BOND FUND
(logo and picture
FINANCIAL HIGHLIGHTS (CONTINUED) of flag)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, ENDED DECEMBER 31,
1997 1996 JUNE 30, 1995 (c) 1994
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD............ $ 9.84 $ 10.04 $ 9.54 $ 10.44
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................... 0.54 0.55 0.28 0.58
Net realized and unrealized gain (loss) on
investments.................................. 0.01 (0.19) 0.50 (0.92)
Total from investment operations............... 0.55 0.36 0.78 (0.34)
LESS DISTRIBUTIONS FROM:
Net investment income.......................... (0.54) (0.56) (0.28) (0.56)
Net realized gains on investments.............. 0 0 0 0
Total distributions............................ (0.54) (0.56) (0.28) (0.56)
NET ASSET VALUE END OF PERIOD.................. $ 9.85 $ 9.84 $ 10.04 $ 9.54
Total return (b)............................... 5.78% 3.62% 8.31% (3.33%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................... 1.62% 1.69% 1.67%(a) 1.50%
Total expenses excluding indirectly paid
expenses................................... 1.62% -- -- --
Net investment income........................ 5.48% 5.45% 5.68%(a) 5.75%
Portfolio turnover rate........................ 45% 76% 34% 48%
NET ASSETS END OF PERIOD (THOUSANDS)........... $22,237 $21,006 $17,366 $17,625
<CAPTION>
JANUARY 25, 1993
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1993
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD............ $10.57
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................... 0.58
Net realized and unrealized gain (loss) on
investments.................................. 0.05
Total from investment operations............... 0.63
LESS DISTRIBUTIONS FROM:
Net investment income.......................... (0.58)
Net realized gains on investments.............. (0.18)
Total distributions............................ (0.76)
NET ASSET VALUE END OF PERIOD.................. $10.44
Total return (b)............................... 6.08%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................... 1.57%(a)
Total expenses excluding indirectly paid
expenses................................... --
Net investment income........................ 5.42%(a)
Portfolio turnover rate........................ 73%
NET ASSETS END OF PERIOD (THOUSANDS)........... $8,876
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JUNE 30, ENDED
1997 1996 JUNE 30, 1995 (c)
<S> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................. $ 9.84 $10.05 $ 9.55
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ 0.54 0.55 0.26
Net realized and unrealized gain (loss) on investments............... 0.01 (0.20) 0.50
Total from investment operations..................................... 0.55 0.35 0.76
LESS DISTRIBUTIONS FROM:
Net investment income................................................ (0.54) (0.56) (0.26)
Total distributions.................................................. (0.54) (0.56) (0.26)
NET ASSET VALUE END OF PERIOD........................................ $ 9.85 $ 9.84 $ 10.05
Total return (b)..................................................... 5.77% 3.51% 8.23%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................... 1.62% 1.69% 1.67%(a)
Total expenses excluding indirectly paid expenses.................. 1.62% -- --
Net investment income.............................................. 5.47% 5.46% 5.69%(a)
Portfolio turnover rate............................................ 45% 76% 34%
NET ASSETS END OF PERIOD (THOUSANDS)................................. $1,029 $1,155 $ 527
<CAPTION>
SEPTEMBER 6, 1994 (COMMENCEMENT OF CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1994
<S> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD.................................. $ 9.85
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ 0.18
Net realized and unrealized gain (loss) on investments............... (0.30)
Total from investment operations..................................... (0.12)
LESS DISTRIBUTIONS FROM:
Net investment income................................................ (0.18)
Total distributions.................................................. (0.18)
NET ASSET VALUE END OF PERIOD........................................ $ 9.55
Total return (b)..................................................... (1.27%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................... 1.65%(a)
Total expenses excluding indirectly paid expenses.................. --
Net investment income.............................................. 5.87%(a)
Portfolio turnover rate............................................ 48%
NET ASSETS END OF PERIOD (THOUSANDS)................................. $ 512
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The Fund changed its fiscal year end from December 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
EVERGREEN
(logo and a picture SHORT-INTERMEDIATE BOND FUND
of flag)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JUNE 30, ENDED YEAR ENDED DECEMBER 31,
1997 1996 JUNE 30, 1995 (b) 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 9.82 $ 10.02 $ 9.52 $ 10.43 $ 10.41 $ 10.54
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.64 0.64 0.33 0.65 0.69 0.70
Net realized and unrealized gain
(loss) on investments............... 0.02 (0.19) 0.49 (0.91) 0.19 (0.02)
Total from investment operations...... 0.66 0.45 0.82 (0.26) 0.88 0.68
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.65) (0.65) (0.32) (0.65) (0.68) (0.70)
In excess of net investment income.... 0 0 0 0 0 0
Net realized gains on investments..... 0 0 0 0 (0.18) (0.11)
Total distributions................... (0.65) (0.65) (0.32) (0.65) (0.86) (0.81)
NET ASSET VALUE END OF PERIOD......... $ 9.83 $ 9.82 $ 10.02 $ 9.52 $ 10.43 $ 10.41
Total return.......................... 6.88% 4.63% 8.80% (2.55%) 8.67% 6.64%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.62% 0.69% 0.67%(a) 0.65% 0.66% 0.69%
Total expenses excluding indirectly
paid expenses..................... 0.62% -- -- -- -- --
Net investment income............... 6.48% 6.45% 6.68%(a) 6.56% 6.41% 6.67%
Portfolio turnover rate............... 45% 76% 34% 48% 73% 66%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $357,706 $352,095 $ 347,050 $345,025 $376,445 $324,068
<CAPTION>
JANUARY 4, 1991
(COMMENCEMENT OF
CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1991
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.06
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.71
Net realized and unrealized gain
(loss) on investments............... 0.56
Total from investment operations...... 1.27
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.71)
In excess of net investment income.... (0.01)
Net realized gains on investments..... (0.07)
Total distributions................... (0.79)
NET ASSET VALUE END OF PERIOD......... $ 10.54
Total return.......................... 13.80%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.69%(a)
Total expenses excluding indirectly
paid expenses..................... --
Net investment income............... 7.12%(a)
Portfolio turnover rate............... 53%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 256,254
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year end from December 31 to June 30.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
KEYSTONE
CAPITAL PRESERVATION AND INCOME FUND (logo and picture
of capital)
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE-RATE MORTGAGE SECURITIES-- 91.3%
<C> <S> <C>
FHLMC-- 44.4%
$1,291,156 FHLMC Pool #846163, Cap 13.08%,
Margin 1.99% + WTAL, Resets
Annually
7.66%, 7/1/30...................... $ 1,349,465
1,507,099 FHLMC Pool #605386, Cap 12.89%,
Margin 2.12% + CMT, Resets Annually
7.95%, 9/1/17...................... 1,582,212
1,637,125 FHLMC Pool #605343, Cap 13.60%,
Margin 2.13% + CMT, Resets Annually
7.83%, 3/1/19...................... 1,692,341
141,104 FHLMC Pool #645062, Cap 14.11%,
Margin 2.31% + CMT, Resets Annually
8.10%, 5/1/19...................... 146,461
145,638 FHLMC Pool #785114, Cap 13.23%,
Margin 2.13% + CMT, Resets Annually
7.81%, 7/1/19...................... 153,147
587,551 FHLMC Pool #865220, Cap 15.05%,
Margin 2.35% + WTAL, Resets
Triennially
8.37%, 4/1/20...................... 606,741
69,528 FHLMC Pool #785147, Cap 12.79%,
Margin 2.02% + CMT, Resets Annually
7.68%, 5/1/20...................... 72,069
725,921 FHLMC Pool #606541, Cap 13.56%,
Margin 2.04% + CMT, Resets Annually
7.71%, 3/1/21...................... 761,084
2,257,810 FHLMC Pool #845039, Cap 12.50%,
Margin 2.09% + CMT, Resets Annually
7.82%, 10/1/21..................... 2,338,245
1,369,007 FHLMC Pool #606679, Cap 12.07%,
Margin 2.16% + CMT, Resets Annually
7.97%, 10/1/21..................... 1,437,882
1,916,889 FHLMC Pool #845063, Cap 12.05%,
Margin 2.18% + CMT, Resets Annually
7.91%, 11/1/21..................... 1,991,168
2,263,629 FHLMC Pool #845070, Cap 11.84%,
Margin 2.12% + CMT, Resets Annually
7.80%, 1/1/22...................... 2,359,834
<CAPTION>
PRINCIPAL
AMOUNT VALUE
ADJUSTABLE-RATE MORTGAGE SECURITIES-- CONTINUED
<C> <S> <C>
FHLMC-- CONTINUED
$1,088,728 FHLMC Pool #845082, Cap 12.34%,
Margin 1.98% + CMT, Resets Annually
7.58%, 3/1/22...................... $ 1,122,071
4,051,462 FHLMC Pool #607352, Cap 13.62%,
Margin 2.17% + CMT, Resets Annually
7.84%, 4/1/22...................... 4,267,972
3,452,568 FHLMC Pool #846298, Cap 13.04%,
Margin 1.85% + CMT, Resets Annually
7.44%, 8/1/22...................... 3,589,048
TOTAL FHLMC.......................... 23,469,740
FNMA-- 46.9%
1,402,664 FNMA Pool #124497, Cap 12.97%,
Margin 2.80% + CMT, Resets Annually
7.78%, 9/1/22...................... 1,477,188
1,040,611 FNMA Pool #094564, Cap 15.86%,
Margin 1.98% + CMT, Resets Annually
7.70%, 1/1/16...................... 1,088,094
448,069 FNMA Pool #092086, Cap 15.47%,
Margin 2.08% + CMT, Resets Annually
7.85%, 10/1/16..................... 466,691
739,969 FNMA Pool #070033, Cap 14.35%,
Margin 1.75% + CMT, Resets Annually
7.50%, 10/1/17..................... 768,872
3,318,250 FNMA Pool #070119, Cap 12.01%,
Margin 2.00% + CMT, Resets Annually
7.68%, 11/1/17..................... 3,450,980
302,549 FNMA Pool #062610, Cap 12.75%,
Margin 2.13% + CMT, Resets Annually
7.75%, 6/1/18...................... 316,826
2,589,728 FNMA Pool #090678, Cap 13.14%,
Margin 2.18% + CMT, Resets Annually
7.91%, 9/1/18...................... 2,732,163
1,059,213 FNMA Pool #124015, Cap 13.24%,
Margin 2.57% + CMT, Resets Annually
7.57%, 11/1/18..................... 1,100,925
</TABLE>
(CONTINUED)
25
<PAGE>
KEYSTONE
CAPITAL PRESERVATION AND INCOME FUND
(logo and picture
of capital) SCHEDULE OF INVESTMENTS (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE-RATE MORTGAGE SECURITIES-- CONTINUED
FNMA-- CONTINUED
$ 311,452 FNMA Pool #114714, Cap
12.62%,
Margin 1.75% + CMT, Resets
Annually
7.47%, 3/1/19.............$ 323,814
307,339 FNMA Pool #105007, Cap
13.13%,
Margin 2.03% + CMT, Resets
Annually
7.85%, 7/1/19............. 318,240
1,274,325 FNMA Pool #095405, Cap
13.70%,
Margin 2.08% + CMT, Resets
Annually
7.83%, 12/1/19............ 1,321,316
162,598 FNMA Pool #391290, Cap
12.68%,
Margin 2.72% + CMT, Resets
Annually
7.74%, 2/1/17............. 167,096
539,539 FNMA Pool #102905, Cap
13.08%,
Margin 2.00% + CMT, Resets
Annually
7.74%, 7/1/20............. 567,358
481,731 FNMA Pool #142963, Cap
11.03%,
Margin 2.63% + CMT, Resets
Annually
7.45%, 1/1/22............. 498,591
6,564,994 FNMA Pool #124289, Cap
13.44%,
Margin 2.01% + CMT, Resets
Annually
7.70%, 9/1/21............. 6,889,171
990,524 FNMA Pool #124204, Cap
13.60%,
Margin 2.01% + CMT, Resets
Annually
7.72%, 1/1/22............. 1,038,970
252,868 FNMA Pool #070327, Cap
12.95%,
Margin 2.75% + CMT, Resets
Annually
7.60%, 6/1/19............. 262,510
<CAPTION>
PRINCIPAL
AMOUNT VALUE
ADJUSTABLE-RATE MORTGAGE SECURITIES-- CONTINUED
FNMA-- CONTINUED
$1,865,470 FNMA Pool #124945, Cap
12.73%,
Margin 2.11% + CMT, Resets
Annually
7.81%, 1/1/31.............$ 1,966,914
TOTAL FNMA.................. 24,755,719
TOTAL ADJUSTABLE-RATE
MORTGAGE SECURITIES
(COST-- $47,698,037)...... 48,225,459
FIXED RATE MORTGAGE SECURITIES-- 2.2%
FHLMC-- 0.1%
24,914 FHLMC CMO, Series 11 Class 11C,
(Est. Mat. 1998) (b)
9.50%, 4/15/19............
25,771
FNMA-- 2.1%
355,662 FNMA Pool #100051
9.50%, 4/1/05............. 371,778
462,692 FNMA Pool #002497
11.00%, 1/1/16............ 510,798
230,612 FNMA Pool #058442
11.00%, 1/1/18............ 254,462
TOTAL FNMA.................. 1,137,038
TOTAL FIXED RATE MORTGAGE
SECURITIES
(COST-- $1,158,066)....... 1,162,809
U.S. TREASURY NOTES-- 3.7%
(COST-- $1,958,136)
1,950,000 U.S. Treasury Notes
6.63%, 4/30/02............ 1,967,979
REPURCHASE AGREEMENT-- 1.4% (COST-- $742,000)
742,000 Keystone Joint Repurchase
Agreement (Investments in
repurchase agreements, in
a joint trading account,
6.04% dated 6/30/97, due
7/1/97, maturity value
$742,125 (a))............. 742,000
TOTAL INVESTMENTS
(COST-- $51,556,239)...... 98.6% 52,098,247
<C> <S> <C> <C>
OTHER ASSETS AND
LIABILITIES-- NET......... 1.4 721,440
NET ASSETS--................ 100.0% $52,819,687
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at June 30, 1997.
(b) The estimated maturity of a Collateralized Motgage Obligation (CMO) is based
on current and projected prepayment rates. Changes in interest rates can
cause the estimated maturity to differ from the listed dates.
LEGEND OF PORTFOLIO ABBREVIATIONS
CMT-- 1, 3, or 5 year Constant Maturity Treasury Index
FHLMC-- Federal Home Loan Mortgage Corporation
FNMA-- Federal National Mortgage Association
WTAL-- 1 or 3 year Weekly Treasury Average Lookback Index
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
EVERGREEN (logo and picture
INTERMEDIATE-TERM BOND FUND of star)
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
CORPORATE BONDS-- 19.2%
<C> <S> <C>
BANKS-- 5.0%
$ 500,000 Cenfed Financial Corp., Senior
Debenture (a),
11.17%, 12/15/01................. $ 533,750
800,000 Harris Bancorp.,
9.38%, 6/1/01.................... 868,088
2,000,000 NationsBank Corp.,
8.13%, 6/15/02................... 2,108,780
4,000,000 NBD Bank N.A.,
Subordinated Note,
8.25%, 11/1/24................... 4,461,932
7,972,550
FINANCE & INSURANCE-- 7.8%
6,500,000 Associates Corporation North
America, Note,
5.96%, 5/15/37................... 6,514,196
2,500,000 General Electric Capital Corp.,
6.29%, 12/15/07.................. 2,473,247
1,000,000 Goldman Sachs Group L.P. (a),
6.38%, 6/15/00................... 990,333
1,500,000 Grand Metropolitan Investment
Corp.,
6.50%, 9/15/99................... 1,504,614
1,000,000 KFW International Finance,
Guaranteed Note,
8.85%, 6/15/99................... 1,046,610
12,529,000
INDUSTRIAL SPECIALTY PRODUCTS & SERVICES-- 3.2%
2,000,000 Baxter International, Inc.,
9.25%, 12/15/99.................. 2,125,250
600,000 Deere & Co.,
8.95%, 6/15/19................... 673,289
2,000,000 Jet Equipment Trust, (a)
9.41%, 6/15/10................... 2,292,488
5,091,027
UTILITIES-- 3.2%
3,100,000 ALLTEL Corp.,
6.50%, 11/1/13................... 2,857,199
2,000,000 Carolina Power & Light Co.,
8.63%, 9/15/21................... 2,272,160
5,129,359
TOTAL CORPORATE BONDS
(COST $30,200,050)............... 30,721,936
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
MORTGAGE-BACKED SECURITIES-- 20.7%
Federal Home Loan Mortgage Corp.,
$ 2,521,993 6.55%, 9/1/26...................... $ 2,593,539
2,027,061 7.50%, 5/1/09...................... 2,058,734
1,210,345 8.00%, 10/1/25..................... 1,241,776
1,293,208 Federal National Mortgage
Association,
6.69%, 12/1/25................... 1,328,618
Government National Mortgage
Association,
1,400,389 6.00%, 6/20/26..................... 1,406,241
8,356,714 6.50%, 10/15/23-- 10/20/26......... 8,362,955
3,922,487 7.00%, 9/20/25-- 3/15/26........... 3,919,730
3,087,455 7.13%, 7/20/25..................... 3,182,360
3,599,131 7.50%, 9/15/23-- 3/15/26........... 3,616,198
3,144,302 8.00%, 10/15/24.................... 3,216,030
1,209,660 9.00%, 4/15/20-- 8/15/21........... 1,278,837
563,266 9.50%, 2/15/21..................... 607,799
414,383 Paine Webber Trust P-3,
9.00%, 10/1/12................... 417,549
TOTAL MORTGAGE-BACKED SECURITIES
(COST $33,064,340)............... 33,230,366
U. S. AGENCY OBLIGATIONS-- 3.7%
2,500,000 Farm Credit Systems Financial
Assistance Co.,
8.80%, 6/10/05................... 2,814,268
3,000,000 Federal Home Loan Bank,
Consolidated Bond,
7.70%, 9/20/04................... 3,174,930
TOTAL U. S. AGENCY OBLIGATIONS
(COST $5,651,434)................ 5,989,198
<CAPTION>
U. S. TREASURY OBLIGATIONS-- 28.0%
<C> <S> <C>
U.S. Treasury Bonds:
11,450,000 6.88%, 8/15/25..................... 11,489,354
4,500,000 7.50%, 11/15/16.................... 4,810,779
1,400,000 8.75%, 5/15/17..................... 1,684,812
3,950,000 8.88%, 8/15/17..................... 4,810,357
U.S. Treasury Notes:
1,400,000 5.13%, 12/31/98.................... 1,383,812
12,900,000 5.63%, 8/31/97..................... 12,904,024
6,100,000 6.38%, 1/15/99..................... 6,138,125
1,600,000 8.25%, 7/15/98..................... 1,639,000
TOTAL U.S. TREASURY OBLIGATIONS
(COST $44,311,257)............... 44,860,263
</TABLE>
(CONTINUED)
27
<PAGE>
EVERGREEN
INTERMEDIATE-TERM BOND FUND
(logo and picture of
star) SCHEDULE OF INVESTMENTS (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
YANKEE OBLIGATIONS-- 14.5%
<S> <C>
Bayerische Landesbank Girozen
New York,
Tranche Sr 00001,
$2,500,000 6.38%, 8/31/00............ $2,492,183
Tranche Trust 00007,
2,000,000 6.20%, 2/9/06............. 1,907,344
3,000,000 Hydro-Quebec,
8.00%, 2/1/13........... 3,160,257
3,500,000 Japan Finance Corp. Municipal
Enterprises, Guaranteed Bond,
6.85%, 4/15/06.......... 3,504,071
2,000,000 Manitoba Province (Canada),
8.00%, 4/15/02.......... 2,109,140
800,000 Petro Canada Ltd.,
8.60%, 1/15/10.......... 907,463
5,300,000 Philips Electers N V,
Debenture,
7.13%, 5/15/25.......... 5,282,685
Svenska Handelsbanken,
2,000,000 8.13%, 8/15/07............ 2,123,682
1,000,000 8.35%, 7/15/04............ 1,075,661
700,000 Westpac Banking,
Subordinated Debenture,
9.13%, 8/15/01.......... 758,563
TOTAL YANKEE OBLIGATIONS
(COST $22,612,971)...... 23,321,049
PRINCIPAL
AMOUNT VALUE
<C> <C> <C>
REPURCHASE AGREEMENT-- 12.8%
$20,495,557 Donaldson, Lufkin &
Jenrette Securities
Corp, 5.90% dated
6/30/97, due 7/1/97,
maturity value
$20,498,916
(collateralized by
$20,553,000 U.S.
Treasury Notes, 5.00%,
due 1/31/98; value,
including accrued
interest $20,905,756)
(cost $20,495,557)...... $ 20,495,557
TOTAL INVESTMENTS--
(COST $156,335,609)..... 98.9% 158,618,369
OTHER ASSETS AND
LIABILITIES-- NET....... 1.1 1,807,246
NET ASSETS--.............. 100.0% $160,425,615
</TABLE>
(a) Securities that may be sold to qualified institutional buyers under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
KEYSTONE (logo and picture
INTERMEDIATE TERM BOND FUND of stars)
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES-- 6.1%
<C> <S> <C>
$1,000,000 Southern Pacific Secured Assets
Corporation, Series 1996-3 Class
A4,
7.60%, 10/25/27.................... $ 1,001,875
750,000 U.S. Home Equity Loan Asset Backed,
Series 1991-2 Class B,
9.13%, 4/15/21..................... 752,812
TOTAL ASSET-BACKED SECURITIES
(COST $1,748,125).................. 1,754,687
<CAPTION>
CORPORATE BONDS-- 31.2%
<C> <S> <C>
DIVERSIFIED-- 1.7%
500,000 Belo (A. H.) Corporation,
Senior Note,
7.13%, 6/1/07...................... 495,723
FINANCE & BANKING-- 15.3%
1,000,000 Amsouth Bancorporation,
Sub Debentures Puttable 2005,
6.75%, 11/1/25..................... 977,750
1,250,000 Chase Manhattan Corporation,
Subordinated Notes,
9.38%, 7/1/01...................... 1,358,712
1,000,000 CIT Group Holdings Incorporated,
Medium Term Note, Tranche Trust
00001,
9.25%, 3/15/01..................... 1,083,480
500,000 General Mtrs Acceptance Corporation,
Note,
7.13%, 5/1/01...................... 506,015
500,000 Prudential Insurance, Note (b),
7.13%, 7/1/07...................... 499,000
4,424,957
INDUSTRIALS-- 12.5%
700,000 Ford Motor Co., Debenture,
9.00%, 9/15/01..................... 756,252
800,000 Occidental Petroleum Corporation,
Medium Term Note, Tranche Trust
00134,
8.50%, 11/9/01..................... 847,336
1,000,000 Philip Morris Cos Inc., Senior Note,
7.20%, 2/1/07...................... 986,760
1,000,000 Transocean Offshore Inc, Note,
7.45%, 4/15/27..................... 1,028,740
3,619,088
TRANSPORTATION-- 1.7%
500,000 Norfolk Southern Corporation, Note,
7.05%, 5/1/37...................... 507,470
TOTAL CORPORATE BONDS
(COST $9,126,551).................. 9,047,238
<CAPTION>
PRINCIPAL
AMOUNT VALUE
COLLATERALIZED MORTGAGE OBLIGATIONS-- 27.5%
<C> <S> <C>
$ 500,000 Chase Commercial Mortgage Security
Corporation (a),
7.37%, 6/19/29..................... $ 508,281
478,831 Chase Mortgage Finance Corporation
(a)(b),
7.87%, 11/25/25.................... 468,207
443,548 Criimi Mae Financial Corporation (a),
7.00%, 1/1/33...................... 433,984
1,000,000 Federal National Mortgage Association
Guaranteed (a)(d),
3.26%, 8/25/23..................... 758,125
653,517 GE Capital Mortgage Services
Incorporated (a),
6.50%, 3/25/24..................... 626,355
500,000 Merrill Lynch Trust (a),
8.45%, 11/1/18..................... 525,000
700,000 Morgan Stanley Capital I
Incorporated,
1997 C1 Class B (a),
7.69%, 1/15/07..................... 724,719
953,300 Paine Webber Mortgage Acceptance
Corporation (a),
7.50%, 5/25/23..................... 951,214
1,250,000 Resolution Trust Corp. (a),
7.50%, 10/25/28.................... 1,256,055
698,466 Ryland Acceptance Corporation Four
(a),
7.95%, 1/1/19...................... 709,159
996,752 Independent National Mortgage Corp. (a)(b),
7.84%, 12/26/26...................... 1,000,413
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS
(COST $7,870,825).................. 7,961,512
<CAPTION>
U.S. AGENCY OBLIGATIONS-- 2.6% (COST $749,062)
<C> <S> <C>
750,000 Federal Home Loan Mortgage Corp,
Global Note,
6.70%, 1/5/07...................... 745,080
<CAPTION>
U.S. TREASURY OBLIGATIONS-- 6.2% (COST $1,796,303)
<C> <S> <C>
1,810,000 U.S. Treasury Notes,
6.50%, 10/15/06.................... 1,802,362
<CAPTION>
FOREIGN BONDS-- (US DOLLAR DENOMINATED)-- 15.4%
<C> <S> <C>
500,000 Export Import Bank Korea, Note,
7.10%, 3/15/07..................... 504,570
1,250,000 Fomento Economico Mexico,
Euro-Dollars,
9.50%, 7/22/97..................... 1,250,000
500,000 Korea Electric Power Corp, Debenture,
7.00%, 2/1/27...................... 490,205
</TABLE>
(CONTINUED)
29
<PAGE>
KEYSTONE
INTERMEDIATE TERM BOND FUND
(logo and picture
of stars) SCHEDULE OF INVESTMENTS (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
FOREIGN BONDS-- (US DOLLAR DENOMINATED)--
CONTINUED
<C> <S> <C>
$1,000,000 Southern Peru Limited,
Secured Export Note (b),
7.90%, 5/30/07.............$1,019,400
1,200,000 Telebras,
10.38%, 9/9/97............. 1,210,500
TOTAL FOREIGN BONDS--
(US DOLLAR DENOMINATED)
(COST $4,453,359).......... 4,474,675
FOREIGN BONDS-- (NON-US DOLLAR DENOMINATED)-- 8.8%
1,150,000 Canada Government,
CAD Canadian Series A79,
8.75%, 12/1/05............. 967,917
3,698,000 Denmark Kingdom,
DKK 7.00%, 11/15/07..............585,061
<CAPTION>
PRINCIPAL
AMOUNT VALUE
FOREIGN BONDS-- (NON-US DOLLAR DENOMINATED)--
CONTINUED
1,575,000 Germany Federal Republic,
DEM 6.88%, 5/12/05............... 986,125
18,000 Nykredit,
DKK 6.00%, 10/1/26............... 2,463
TOTAL FOREIGN BONDS--
(NON-US DOLLAR DENOMINATED)
(COST $2,689,307).......... 2,541,566
REPURCHASE AGREEMENT-- 0.8%
$ 243,000 Keystone Joint Repurchase
Agreement, (Investments in
repurchase agreements, in a
joint trading account,
6.04% dated 6/30/97, due
7/1/97, maturity value
$243,043(c))
(cost $243,000)............ 243,000
TOTAL INVESTMENTS--
(COST $28,676,532)......... 98.6% 28,570,120
OTHER ASSETS AND
LIABILITIES-- NET.......... 1.4 397,464
NET ASSETS--................. 100.0% $28,967,584
</TABLE>
(a) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected prepayment rates. Changes in interest rates
can cause the estimated maturity to differ from the listed date.
(b) Securities that may be sold to qualified institutional buyers under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
(c) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at June 30, 1997.
(d) Inverse floater, resets monthly.
LEGEND OF PORTFOLIO ABBREVIATIONS
CAD-- Canadian Dollar
DKK-- Danish Kroner
DEM-- German Deutschemark
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
NET UNREALIZED
EXCHANGE U.S. $ VALUE AT IN EXCHANGE APPRECIATION/
DATE JUNE 30, 1997 FOR U.S. $ (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to
Buy:
Contracts to Receive
8/12/97 1,150,000 Deutsche Marks $ 661,452 679,790 $(18,338)
Forward Foreign Currency Exchange Contracts to
Sell:
Contracts to Deliver
8/27/97 1,324,225 Canadian Dollars 962,359 970,947 8,588
8/12/97 2,860,000 Deutsche Marks 1,645,000 1,675,255 30,255
8/20/97 4,041,900 Danish Krone 610,524 627,098 16,574
$ 55,417
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
EVERGREEN (logo and picture
INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND of George
Washington)
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES-- 19.4%
<C> <S> <C>
$5,000,000 Federal Home Loan Mortgage Corp.,
5.60%, 2/15/13..................... $ 4,975,120
4,250,909 Federal Home Loan Mortgage Corp.
Gold,
9.00%, 1/1/17...................... 4,552,550
3,688,718 Federal National Mortgage Assn.,
7.00%, 3/1/24...................... 3,639,285
1,000,000 U.S. Department of Veteran Affairs,
7.00%, 5/15/12..................... 1,002,350
TOTAL MORTGAGE-BACKED SECURITIES
(COST $14,039,691)................. 14,169,305
<CAPTION>
U.S. AGENCY OBLIGATIONS-- 10.4%
<C> <S> <C>
1,300,000 Federal Home Loan Bank,
8.60%, 1/25/00..................... 1,370,776
Federal National Mortgage Assn.,
2,000,000 7.50%, 2/11/02....................... 2,077,826
2,000,000 7.875%, 2/24/05...................... 2,137,652
2,000,000 Tennessee Valley Authority,
6.375%, 6/15/05.................... 1,960,340
TOTAL U.S. AGENCY OBLIGATIONS
(COST $7,352,820).................. 7,546,594
<CAPTION>
U.S. TREASURY OBLIGATIONS-- 77.9%
<C> <S> <C>
U.S. Treasury Notes:
4,500,000 5.50%, 2/28/99....................... 4,463,437
6,800,000 5.88%, 1/31/99....................... 6,787,250
500,000 6.00%, 11/30/97...................... 500,937
3,400,000 6.00%, 9/30/98....................... 3,404,250
3,500,000 6.13%, 12/31/01...................... 3,467,188
4,000,000 6.25%, 7/31/98....................... 4,018,748
4,000,000 6.38%, 7/15/99....................... 4,023,748
<CAPTION>
PRINCIPAL
AMOUNT VALUE
U.S. TREASURY OBLIGATIONS-- CONTINUED
<C> <S> <C>
U.S. Treasury Notes-- continued
$3,000,000 6.50%, 4/30/99....................... $ 3,023,436
3,000,000 6.63%, 6/30/01....................... 3,030,936
1,000,000 6.75%, 4/30/00....................... 1,013,437
4,300,000 7.00%, 7/15/06....................... 4,424,967
4,000,000 7.50%, 10/31/99...................... 4,115,000
2,000,000 7.50%, 11/15/01...................... 2,085,000
2,000,000 7.50%, 5/15/02....................... 2,093,124
3,250,000 7.50%, 2/15/05....................... 3,439,920
1,700,000 7.88%, 4/15/98....................... 1,728,155
3,500,000 7.88%, 11/15/04...................... 3,776,717
1,300,000 8.50%, 11/15/00...................... 1,386,531
TOTAL U. S. TREASURY OBLIGATIONS
(COST $56,635,374)................. 56,782,781
<CAPTION>
REPURCHASE AGREEMENT-- 1.4%
<C> <S> <C>
1,039,957 Donaldson, Lufkin & Jenrette
Securities Corp., 5.90% dated
6/30/97, due 7/1/97, maturity value
$1,040,127 (collateralized by
$347,000 U.S. Treasury Bonds,
11.25%, due 2/15/15; $540,000 U.S.
Treasury Bills, due 7/3/97; value,
including accrued interest
$1,061,419)
(cost $1,039,957).................. 1,039,957
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $79,067,842)......... 109.1% 79,538,637
OTHER ASSETS AND
LIABILITIES-- NET.......... (9.1) (6,625,429)
NET ASSETS--................. 100.0% $72,913,208
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
(logo and picture of EVERGREEN
a flag) SHORT-INTERMEDIATE BOND FUND
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES-- 12.2%
<C> <S> <C>
$ 4,334,324 Advanta Home Equity Loan Trust,
7.20%, 11/25/08.................. $ 4,379,662
541,975 Bank of West Trust,
9.50%, 2/15/05................... 547,075
1,750,000 Case Equipment Loan Trust,
6.45%, 9/15/02................... 1,719,865
2,000,000 EQCC Home Equity Loan Trust,
5.82%, 9/15/09................... 1,983,940
3,309,037 FCC Grantor Trust,
9.00%, 7/15/97................... 3,306,489
2,020,649 First Bank Auto Receivable,
8.30%, 1/15/00................... 2,051,646
3,082,064 First Security Auto Grantor Trust,
6.25%, 1/15/01................... 3,099,016
483,220 Fleet Financial Home Equity Trust,
6.70%, 1/16/06-- 10/15/06........ 485,893
6,439,643 Fleetwood Credit Grantor Trust,
4.95%, 8/15/08................... 6,334,483
7,500,000 Household Affinity Credit Card
Master Trust,
7.20%, 12/15/99.................. 7,567,650
1,259,186 SCFC Recreational Vehicle Loan
Trust,
7.25%, 9/15/06................... 1,267,887
Western Financial Grantor Trust:
4,828,859 5.88%, 3/1/02...................... 4,819,684
2,179,177 6.20%, 2/1/02...................... 2,188,155
9,000,000 Xerox Rental Equipment Trust (a),
6.20%, 12/26/05.................. 8,956,406
TOTAL ASSET-BACKED SECURITIES
(COST $48,706,732)............... 48,707,851
<CAPTION>
CORPORATE BONDS-- 24.8%
<C> <S> <C>
BANKS-- 7.5%
3,400,000 Abbey National Plc,
6.69%, 10/17/05.................. 3,330,909
3,350,000 Amsouth Bancorporation,
6.75%, 11/1/25................... 3,287,057
3,000,000 Cenfed Financial Corp. (a),
11.17%, 12/15/01................. 3,202,500
2,000,000 Chase Manhattan Corporation,
8.00%, 5/15/04................... 2,046,792
First Chicago Corp.:
4,000,000 9.00%, 6/15/99..................... 4,187,408
2,000,000 9.20%, 12/17/01.................... 2,180,510
5,000,000 First Security Corp.,
6.40%, 2/10/03................... 4,854,390
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS-- CONTINUED
<C> <S> <C>
BANKS-- CONTINUED
$ 6,000,000 National Bank of Canada,
8.13%, 8/15/04................... $ 6,316,668
500,000 Security Pacific Corp.,
10.45%, 5/8/01................... 559,918
29,966,152
ENERGY-- 0.5%
2,000,000 Ras Laffan Liquefied Natural Gas
(a),
7.63%, 9/15/06................... 2,033,704
FINANCE & INSURANCE-- 13.4%
2,000,000 American Express Credit Corp.,
6.25%, 8/10/05................... 1,981,028
3,000,000 Associated P&C Holdings, Inc. (a),
6.75%, 7/15/03................... 2,893,680
3,000,000 Bear Stearns Co., Inc.,
7.63%, 4/15/00................... 3,075,390
1,000,000 Horace Mann Educators Corp.,
6.63%, 1/15/06................... 963,587
Lehman Brothers Holdings, Inc.:
5,000,000 6.63%, 11/15/00.................... 4,979,145
2,500,000 6.84%, 10/7/99..................... 2,510,392
5,000,000 8.88%, 3/1/02...................... 5,357,505
Metropolitan Life Insurance Co.
(a):
5,000,000 6.30%, 11/1/03..................... 4,800,750
5,000,000 7.00%, 11/1/05..................... 4,934,405
5,000,000 Money Store, Inc.,
7.88%, 9/15/00................... 5,090,000
6,000,000 Progressive Corp., Ohio,
6.60%, 1/15/04................... 5,870,634
7,000,000 Salomon Incorporated,
7.20%, 2/1/04.................... 6,978,097
4,000,000 Traveler's Group, Inc.,
6.88%, 6/1/25.................... 3,991,232
53,425,845
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 2.7%
5,000,000 Boral Limited Australia Co.,
7.90%, 11/19/99.................. 5,151,045
5,000,000 GTE Corp.,
10.25%, 11/1/20.................. 5,720,350
10,871,395
TRANSPORTATION-- 0.7%
2,500,000 Continental Airlines, Inc. (a),
7.46%, 4/1/13.................... 2,523,495
TOTAL CORPORATE BONDS
(COST $98,853,357)............... 98,820,591
</TABLE>
(CONTINUED)
32
<PAGE>
EVERGREEN (logo and picture of
SHORT-INTERMEDIATE BOND FUND flag)
SCHEDULE OF INVESTMENTS (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
</TABLE>
MORTGAGE-BACKED SECURITIES-- 39.5%
AFC Home Equity Loan Trust:
$ 275,254 6.60%, 10/26/26.................... $ 274,973
153,907 8.05%, 4/27/26..................... 155,624
3,150,000 Chase Commercial Mortgage Security Corp.,
6.90%, 11/19/28.................... 3,075,455
3,139,786 CMC Securities Corp.,
10.00%, 7/25/23.................. 3,322,688
2,500,000 DLJ Mortgage Acceptance Corp.,
7.95%, 5/25/23................... 2,587,109
Federal Home Loan Mortgage Corp.:
1,126,515 6.75%, 2/15/04..................... 1,129,703
4,000,000 6.80%, 10/15/05.................... 4,023,880
2,000,000 6.97%, 6/16/05..................... 1,995,910
2,945,000 7.30%, 7/30/01..................... 2,946,832
9,833,952 7.40%, 10/15/05.................... 9,938,340
2,200,000 7.99%, 3/23/05..................... 2,217,195
391,210 10.50%, 9/1/15..................... 430,820
Federal Housing Administration-
Puttable Project Loans:
GMAC 56,
4,017,498 7.43%, 11/1/22..................... 4,057,299
Merrill Lynch 199,
4,672,669 8.43%, 12/31/99.................... 4,859,356
Reilly 18,
2,939,118 6.88%, 4/1/15...................... 2,924,422
Reilly 55,
1,571,878 7.43%, 3/1/24...................... 1,589,591
Reilly 64,
10,310,265 7.43%, 1/1/24...................... 10,421,616
USGI,
5,331,922 7.43%, 7/1/22...................... 5,394,380
Federal National Mortgage Assn.:
1,500,000 5.30%, 8/25/98..................... 1,490,037
500,000 6.00%, 12/15/00.................... 491,826
2,766,670 6.23%, 12/25/25.................... 2,772,987
12,000,000 6.60%, 2/14/02..................... 11,981,244
7,500,000 6.64%, 6/19/00..................... 7,502,768
5,000,000 7.11%, 8/7/01...................... 4,995,665
2,500,000 7.65%, 5/4/05...................... 2,515,170
2,100,000 8.00%, 11/25/06.................... 2,176,257
9,000,000 8.10%, 4/25/25..................... 9,343,260
9,518,330 11.00%, 1/1/99..................... 10,749,764
38,645 14.00%, 6/1/11..................... 44,743
5,000,000 Federal National Mortgage Assn.,
Medium Term Note,
6.02%, 4/14/00................... 4,997,500
1,521,066 GCC Second Mortgage Trust,
10.00%, 7/15/05.................. 1,551,275
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
MORTGAGE-BACKED SECURITIES-- CONTINUED
$ 5,547,633 Government National
Mortgage Assn.,
7.50%, 11/20/08..........$5,621,389
4,000,000 Kidder Peabody Acceptance
Corp.,
6.65%, 2/1/06............ 3,987,612
Potomac Gurnee Finance
Corp. (a):
2,483,287 6.89%, 12/21/26.......... 2,455,573
2,500,000 7.00%, 12/21/26.......... 2,474,625
Prudential Home Mortgage
Securities:
5,419,711 6.30%, 5/25/99............. 5,417,705
4,788,537 6.50%, 10/25/08............ 4,649,286
4,302,927 Prudential Securities
Secured Financing Corp.,
8.12%, 2/17/25........... 4,427,548
6,305,826 Saxon Mortgage Securities
Corp.,
7.38%, 9/25/23........... 6,348,265
TOTAL MORTGAGE-BACKED
SECURITIES
(COST $156,702,480) 157,339,692
U.S. GOVERNMENT AGENCY OBLIGATIONS-- 3.7%
(cost $15,000,000)
15,000,000 Federal Farm Credit Bank
Consolidated Disc. Note,
6.82%, 6/15/01........... 14,919,195
U.S. TREASURY NOTES-- 19.3%
U.S. Treasury Notes:
35,000,000 5.13%, 2/28/98.............34,868,785
9,980,000 7.00%, 7/15/06.............10,270,039
2,000,000 7.13%, 9/30/99.............2,041,874
11,000,000 7.75%, 11/30/99............11,385,000
17,400,000 8.88%, 2/15/99.............18,161,250
TOTAL U. S. TREASURY NOTES
(COST $79,099,261).......76,726,948
REPURCHASE AGREEMENT-- 0.0%
143,985 Donaldson, Lufkin &
Jenrette Securities
Corp., 5.90% dated
6/30/97, due 7/1/97,
maturity value $144,009
(Collateralized by
$98,000 U.S. Treasury
Bonds, 11.25%, due
02/15/15; value,
including accrued
interest $147,318)
(cost $143,985).......... 143,985
TOTAL INVESTMENTS--
(COST $398,505,815)...... 99.5% 396,658,262
<S> <C> <C>
OTHER ASSETS AND
LIABILITIES-- NET........ 0.5 2,017,390
NET ASSETS--............... 100.0% $398,675,652
</TABLE>
(a) Securities that may be sold to qualified institutional buyers under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 1997
<TABLE>
<CAPTION> (picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
CAPITAL EVERGREEN KEYSTONE INTERMEDIATE
PRESERVATION INTERMEDIATE INTERMEDIATE GOVERNMENT
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
ASSETS
Investments at market value (identified
cost-- $51,556,239, $156,335,609, $28,676,532,
$79,067,842 and $398,505,815, respectively)........ $52,098,247 $158,618,369 $28,570,120 $79,538,637
Cash................................................. 16,515 283 1,758 20
Interest receivable.................................. 476,566 2,037,735 500,852 1,240,062
Receivable for investments sold...................... 135,662 0 1,388,640 0
Principal paydown receivable......................... 134,735 0 0 0
Receivable for Fund shares sold...................... 135,285 11,761 1,596 2,720
Unrealized appreciation on forward foreign currency
contracts.......................................... 0 0 55,417 0
Due from investment adviser.......................... 11,877 0 16,749 0
Prepaid expenses and other assets.................... 25,636 14,435 20,302 15,257
Total assets..................................... 53,034,523 160,682,583 30,555,434 80,796,696
LIABILITIES
Payable for investments purchased.................... 0 0 1,357,677 0
Payable for Fund shares redeemed..................... 80,751 75,274 99,777 7,807,242
Dividends payable.................................... 96,575 0 69,273 0
Distribution fee payable............................. 6,513 891 7,736 759
Due to related parties............................... 1,060 136,213 762 45,121
Unrealized depreciation on forward foreign currency
contracts.......................................... 0 0 18,338 0
Accrued expenses and other liabilities............... 29,937 44,590 34,287 30,366
Total liabilities................................ 214,836 256,968 1,587,850 7,883,488
NET ASSETS............................................. $52,819,687 $160,425,615 $28,967,584 $72,913,208
NET ASSETS REPRESENTED BY
Paid-in capital...................................... $59,369,842 $162,631,066 $32,844,616 $74,620,343
Undistributed net investment income (accumulated
distributions in excess of net investment
income)............................................ (95,813) (5,106) 242,787 (5,097)
Accumulated net realized loss on investments and
foreign currency related transactions.............. (6,996,350) (4,483,105) (4,050,016) (2,172,833)
Net unrealized appreciation (depreciation) on
investments and foreign currency related
transactions....................................... 542,008 2,282,760 (69,803) 470,795
Total net assets................................. $52,819,687 $160,425,615 $28,967,584 $72,913,208
NET ASSETS CONSIST OF
Class A.............................................. $15,751,098 $ 3,037,664 $10,340,563 $ 571,508
Class B.............................................. 32,963,820 1,012,650 11,368,453 741,650
Class C.............................................. 4,104,769 28,812 7,258,568 12,097
Class Y.............................................. -- 156,346,489 -- 71,587,953
$52,819,687 $160,425,615 $28,967,584 $72,913,208
SHARES OUTSTANDING
Class A.............................................. 1,607,197 298,775 1,157,517 57,029
Class B.............................................. 3,360,676 99,621 1,270,826 74,011
Class C.............................................. 418,845 2,834 811,659 1,207
Class Y.............................................. -- 15,380,764 -- 7,142,890
NET ASSET VALUE PER SHARE
Class A.............................................. $ 9.80 $ 10.17 $ 8.93 $ 10.02
Class A-- Offering price (based on sales charge of
3.25%)............................................. $ 10.13 $ 10.51 $ 9.23 $ 10.36
Class B.............................................. $ 9.81 $ 10.17 $ 8.95 $ 10.02
Class C.............................................. $ 9.80 $ 10.17 $ 8.94 $ 10.02
Class Y.............................................. -- $ 10.17 -- $ 10.02
<CAPTION> (picture of
flag)
SHORT-
INTERMEDIATE
FUND
<S> <C>
ASSETS
Investments at market value (identified
cost-- $51,556,239, $156,335,609, $28,676,532,
$79,067,842 and $398,505,815, respectively)........ $396,658,262
Cash................................................. 997
Interest receivable.................................. 5,731,695
Receivable for investments sold...................... 0
Principal paydown receivable......................... 0
Receivable for Fund shares sold...................... 271,580
Unrealized appreciation on forward foreign currency
contracts.......................................... 0
Due from investment adviser.......................... 0
Prepaid expenses and other assets.................... 56,168
Total assets..................................... 402,718,702
LIABILITIES
Payable for investments purchased.................... 0
Payable for Fund shares redeemed..................... 3,803,972
Dividends payable.................................... 0
Distribution fee payable............................. 16,078
Due to related parties............................... 186,244
Unrealized depreciation on forward foreign currency
contracts.......................................... 0
Accrued expenses and other liabilities............... 36,756
Total liabilities................................ 4,043,050
NET ASSETS............................................. $398,675,652
NET ASSETS REPRESENTED BY
Paid-in capital...................................... $416,539,149
Undistributed net investment income (accumulated
distributions in excess of net investment
income)............................................ (16,203)
Accumulated net realized loss on investments and
foreign currency related transactions.............. (15,999,741)
Net unrealized appreciation (depreciation) on
investments and foreign currency related
transactions....................................... (1,847,553)
Total net assets................................. $398,675,652
NET ASSETS CONSIST OF
Class A.............................................. $ 17,703,034
Class B.............................................. 22,237,190
Class C.............................................. 1,029,416
Class Y.............................................. 357,706,012
$398,675,652
SHARES OUTSTANDING
Class A.............................................. 1,800,182
Class B.............................................. 2,257,458
Class C.............................................. 104,492
Class Y.............................................. 36,392,215
NET ASSET VALUE PER SHARE
Class A.............................................. $ 9.83
Class A-- Offering price (based on sales charge of
3.25%)............................................. $ 10.16
Class B.............................................. $ 9.85
Class C.............................................. $ 9.85
Class Y.............................................. $ 9.83
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF OPERATIONS
Period Ended June 30, 1997
<TABLE>
<CAPTION>
(picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
CAPITAL EVERGREEN KEYSTONE INTERMEDIATE
PRESERVATION INTERMEDIATE INTERMEDIATE GOVERNMENT
FUND* FUND*** FUND** FUND***
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest (net of foreign withholding taxes of $0,
$3,364, $0, $0, $0, respectively)................... $3,173,485 $11,145,047 $2,343,240 $5,768,839
<CAPTION>
<S> <C> <C> <C> <C>
EXPENSES
Management fee........................................ 284,977 987,044 202,102 546,941
Distribution Plan expenses............................ 346,141 14,407 228,750 8,731
Transfer agent fees................................... 83,571 66,508 83,025 35,360
Custodian fees........................................ 51,296 82,597 39,350 51,941
Administrative services fees.......................... 34,481 69,536 11,267 38,083
Professional fees..................................... 23,622 17,269 26,033 16,910
Registration and filing fees.......................... 42,963 53,298 25,890 90,281
Trustees' fees and expenses........................... 0 4,106 0 4,047
Organization expenses................................. 0 986 0 1,035
Other................................................. 25,905 44,367 32,197 26,280
Fee waivers and/or expense reimbursement by
affiliates.......................................... (245,255) (5,480) (145,636) (73,557)
Total expenses...................................... 647,701 1,334,638 502,978 746,052
Less: Indirectly paid expenses........................ (11,507) (640) (6,039) (641)
Net expenses........................................ 636,194 1,333,998 496,939 745,411
NET INVESTMENT INCOME................................. 2,537,291 9,811,049 1,846,301 5,023,428
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY RELATED TRANSACTIONS
Net realized gain (loss) on:
Investments......................................... (101,173) (1,614,828) (207,489) (16,049)
Foreign currency related transactions............... 0 0 311,507 0
Net realized gain on investments and foreign currency
related transactions................................ (101,173) (1,614,828) 104,018 (16,049)
Net change in unrealized appreciation on:
Investments......................................... 279,120 2,782,704 589,966 219,766
Foreign currency related transactions............... 0 0 79,789 0
Net change in unrealized appreciation on investments
and foreign currency related transactions........... 279,120 2,782,704 669,755 219,766
Net realized and unrealized gain on investments and
foreign currency related transactions............... 177,947 1,167,876 773,773 203,717
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.......................................... $2,715,238 $10,978,925 $2,620,074 $5,227,145
<CAPTION>
(picture of
flag)
SHORT-
INTERMEDIATE
FUND***
<S> <C>
INVESTMENT INCOME
Interest (net of foreign withholding taxes of $0,
$3,364, $0, $0, $0, respectively)................... $28,349,460
EXPENSES
Management fee........................................ 1,998,063
Distribution Plan expenses............................ 251,695
Transfer agent fees................................... 96,271
Custodian fees........................................ 78,107
Administrative services fees.......................... 167,636
Professional fees..................................... 19,246
Registration and filing fees.......................... 57,771
Trustees' fees and expenses........................... 9,310
Organization expenses................................. 0
Other................................................. 47,316
Fee waivers and/or expense reimbursement by
affiliates.......................................... 0
Total expenses...................................... 2,725,415
Less: Indirectly paid expenses........................ (2,308)
Net expenses........................................ 2,723,107
NET INVESTMENT INCOME................................. 25,626,353
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY RELATED TRANSACTIONS
Net realized gain (loss) on:
Investments......................................... (2,101,788)
Foreign currency related transactions............... 0
Net realized gain on investments and foreign currency
related transactions................................ (2,101,788)
Net change in unrealized appreciation on:
Investments......................................... 2,666,233
Foreign currency related transactions............... 0
Net change in unrealized appreciation on investments
and foreign currency related transactions........... 2,666,233
Net realized and unrealized gain on investments and
foreign currency related transactions............... 564,445
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.......................................... $26,190,798
</TABLE>
* Nine months ended June 30, 1997. During the period, the Fund changed its
fiscal year end from September 30 to June 30.
** Eleven months ended June 30, 1997. During the period, the Fund changed its
fiscal year end from July 31 to June 30.
*** Year ended June 30, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF OPERATIONS
Prior Periods
<TABLE>
<CAPTION> (picture of (picture of
capital) stars)
CAPITAL KEYSTONE
PRESERVATION INTERMEDIATE
FUND* FUND**
<S> <C> <C>
INVESTMENT INCOME
Interest................................................................................... $5,536,633 $3,205,120
EXPENSES
Management fee............................................................................. 493,147 273,644
Distribution Plan expenses................................................................. 610,933 312,408
Transfer agent fees........................................................................ 139,248 106,796
Custodian fees............................................................................. 57,386 46,630
Administrative services fees............................................................... 24,176 23,963
Professional fees.......................................................................... 37,958 29,575
Registration and filing fees............................................................... 45,925 41,731
Organization expenses...................................................................... 3,896 0
Other...................................................................................... 34,903 27,827
Fee waivers and/or expense reimbursement by affiliates..................................... (341,016) (191,096)
Total expenses........................................................................... 1,106,556 671,478
Less: Indirectly paid expenses............................................................. (12,182) (6,981)
Net expenses............................................................................. 1,094,374 664,497
NET INVESTMENT INCOME...................................................................... 4,442,259 2,540,623
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS
Net realized gain (loss) on:
Investments.............................................................................. (549,777) (35,859)
Foreign currency related transactions.................................................... 0 62,463
Net realized gain (loss) on investments and foreign currency related transactions.......... (549,777) 26,604
Net change in unrealized appreciation (depreciation) on:
Investments.............................................................................. 648,310 (687,165)
Foreign currency related transactions.................................................... 0 (43,181)
Net change in unrealized appreciation (depreciation) on investments and foreign currency
related transactions..................................................................... 648,310 (730,346)
Net realized and unrealized gain (loss) on investments and foreign currency related
transactions............................................................................. 98,533 (703,742)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $4,540,792 $1,836,881
</TABLE>
* Year ended September 30, 1996.
** Year ended July 31, 1996.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Period Ended June 30, 1997
<TABLE>
<CAPTION> (picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
CAPITAL EVERGREEN KEYSTONE INTERMEDIATE
PRESERVATION INTERMEDIATE INTERMEDIATE GOVERNMENT
FUND* FUND*** FUND** FUND***
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income................................ $ 2,537,291 $ 9,811,049 $ 1,846,301 $ 5,023,428
Net realized gain (loss) on investments and foreign
currency related transactions...................... (101,173) (1,614,828) 104,018 (16,049)
Net change in unrealized appreciation (depreciation)
on investments and foreign currency related
transactions....................................... 279,120 2,782,704 669,755 219,766
<CAPTION>
Net increase in net assets resulting from
operations....................................... 2,715,238 10,978,925 2,620,074 5,227,145
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................ (710,409) (179,161) (666,667) (31,632)
Class B............................................ (1,412,040) (36,467) (719,674) (29,748)
Class C............................................ (160,768) (1,275) (417,078) (1,189)
Class Y............................................ 0 (9,653,448) 0 (4,959,781)
In excess of net investment income:
Class A............................................ (20,595) 0 0 (97)
Class B............................................ (40,936) 0 0 (91)
Class C............................................ (4,661) 0 0 (4)
Class Y............................................ 0 0 0 (15,207)
Tax basis return of capital
Class A............................................ 0 (1,220) 0 0
Class B............................................ 0 (248) 0 0
Class C............................................ 0 (9) 0 0
Class Y............................................ 0 (65,758) 0 0
Total distributions to shareholders................ (2,349,409) (9,937,586) (1,803,419) (5,037,749)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................ 8,631,265 50,138,853 3,559,906 35,487,793
Proceeds from reinvestment of distributions.......... 1,854,608 6,780,391 1,095,398 3,993,534
Payment for shares redeemed.......................... (28,964,306) (58,718,452) (14,580,292) (54,650,906)
Net increase (decrease) in net assets resulting
from capital share transactions.................. (18,478,433) (1,799,208) (9,924,988) (15,169,579)
Total increase (decrease) in net assets.......... (18,112,604) (757,869) (9,108,333) (14,980,183)
NET ASSETS
Beginning of period.................................. 70,932,291 161,183,484 38,075,917 87,893,391
END OF PERIOD........................................ $52,819,687 $160,425,615 $28,967,584 $72,913,208
Undistributed net investment income (accumulated
distributions in excess of net investment income).... $ (95,813) $ (5,106) $ 242,787 $ (5,097)
<CAPTION>
(picture of
flag)
SHORT-
INTERMEDIATE
FUND***
<S> <C>
OPERATIONS
Net investment income................................ $ 25,626,353
Net realized gain (loss) on investments and foreign
currency related transactions...................... (2,101,788)
Net change in unrealized appreciation (depreciation)
on investments and foreign currency related
transactions....................................... 2,666,233
Net increase in net assets resulting from
operations....................................... 26,190,798
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................ (1,217,283)
Class B............................................ (1,225,460)
Class C............................................ (58,085)
Class Y............................................ (23,369,583)
In excess of net investment income:
Class A............................................ 0
Class B............................................ 0
Class C............................................ 0
Class Y............................................ 0
Tax basis return of capital
Class A............................................ 0
Class B............................................ 0
Class C............................................ 0
Class Y............................................ 0
Total distributions to shareholders................ (25,870,411)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................ 122,641,025
Proceeds from reinvestment of distributions.......... 15,137,626
Payment for shares redeemed.......................... (132,309,835)
Net increase (decrease) in net assets resulting
from capital share transactions.................. 5,468,816
Total increase (decrease) in net assets.......... 5,789,203
NET ASSETS
Beginning of period.................................. 392,886,449
END OF PERIOD........................................ $398,675,652
Undistributed net investment income (accumulated
distributions in excess of net investment income).... $ (16,203)
</TABLE>
* Nine months ended June 30, 1997. During the period, the Fund changed its
fiscal year end from September 30 to June 30.
** Eleven months ended June 30, 1997. During the period, the Fund changed its
fiscal year end from July 31 to June 30.
*** Year ended June 30, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
37
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Fiscal Periods Ended 1996
<TABLE>
<CAPTION>
(picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
CAPITAL EVERGREEN KEYSTONE INTERMEDIATE
PRESERVATION INTERMEDIATE INTERMEDIATE GOVERNMENT
FUND* FUND** FUND*** FUND**
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income................................ $ 4,442,259 $ 5,797,073 $ 2,540,623 $ 4,606,598
Net realized gain (loss) on investments and foreign
currency related transactions...................... (549,777) 314,598 26,604 11,468
Net change in unrealized appreciation (depreciation)
on investments and foreign currency related
transactions....................................... 648,310 (3,327,986) (730,346) (1,507,190)
Net increase in net assets resulting from
operations....................................... 4,540,792 2,783,685 1,836,881 3,110,876
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................ (1,089,444) (35,386) (898,299) (23,774)
Class B............................................ (2,568,398) (2,841) (1,028,103) (2,363)
Class C............................................ (147,748) (169) (576,335) (255)
Class Y............................................ 0 (5,670,902) 0 (4,562,840)
Tax basis return of capital:
Class A............................................ (52,292) 0 0 0
Class B............................................ (123,279) 0 0 0
Class C............................................ (7,092) 0 0 0
Total distributions to shareholders................ (3,988,253) (5,709,298) (2,502,737) (4,589,232)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................ 12,691,883 38,531,458 10,120,565 13,828,502
Proceeds from shares issued in the acquisition of
Evergreen Managed Bond Fund........................ 0 79,773,557 0 0
Proceeds from reinvestment of distributions.......... 2,823,494 4,544,198 1,417,473 4,095,518
Payment for shares redeemed.......................... (30,181,809) (54,860,961) (15,524,524) (34,626,524)
Net increase (decrease) in net assets resulting
from capital share transactions.................. (14,666,432) 67,988,252 (3,986,486) (16,702,504)
Total increase (decrease) in net assets.......... (14,113,893) 65,062,639 (4,652,342) (18,180,860)
NET ASSETS
Beginning of period.................................. 85,046,184 96,120,845 42,728,259 106,074,251
END OF PERIOD........................................ $70,932,291 $161,183,484 $38,075,917 $87,893,391
Undistributed net investment income (accumulated
distributions in excess of net investment income).... $ (305,808) $ 87,592 $ (21,199) $ 17,332
<CAPTION>
(picture of
flag)
SHORT-
INTERMEDIATE
FUND****
<S> <C>
OPERATIONS
Net investment income................................ $ 24,943,586
Net realized gain (loss) on investments and foreign
currency related transactions...................... (4,715,061)
Net change in unrealized appreciation (depreciation)
on investments and foreign currency related
transactions....................................... (2,841,758)
Net increase in net assets resulting from
operations....................................... 17,386,767
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................ (1,165,625)
Class B............................................ (1,059,184)
Class C............................................ (49,329)
Class Y............................................ (23,005,091)
Tax basis return of capital:
Class A............................................ 0
Class B............................................ 0
Class C............................................ 0
Total distributions to shareholders................ (25,279,229)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................ 170,338,605
Proceeds from shares issued in the acquisition of
Evergreen Managed Bond Fund........................ 0
Proceeds from reinvestment of distributions.......... 18,879,027
Payment for shares redeemed.......................... (172,279,164)
Net increase (decrease) in net assets resulting
from capital share transactions.................. 16,938,468
Total increase (decrease) in net assets.......... 9,046,006
NET ASSETS
Beginning of period.................................. 383,840,443
END OF PERIOD........................................ $392,886,449
Undistributed net investment income (accumulated
distributions in excess of net investment income).... $ 98,373
</TABLE>
* Year ended September 30, 1996.
** Ten months ended June 30, 1996. The Fund changed its fiscal year end from
August 31 to June 30.
*** Year ended July 31, 1996.
**** Year ended June 30, 1996.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
38
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Prior Periods
<TABLE>
<CAPTION> picture of (picture of (picture of (picture of
capital) star) stars) George
Washington)
EVERGREEN KEYSTONE
CAPITAL INTERMEDIATE INTERMEDIATE INTERMEDIATE
PRESERVATION FUND FUND FUND GOVERNMENT FUND
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 AUGUST 31, 1995 JULY 31, 1995 AUGUST 31, 1995
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income................................. $ 5,308,068 $ 5,110,145 $ 2,911,914 $ 5,851,118
Net realized gain (loss) on investments and foreign
currency related transactions....................... (1,162,200) (741,577) (583,642) (1,236,390)
Net change in unrealized appreciation (depreciation)
on investments and futures contracts................ 1,169,382 4,454,061 628,176 3,611,699
Net increase in net assets resulting from
operations........................................ 5,315,250 8,822,629 2,956,448 8,226,427
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................. (909,585) (2,134) (1,002,996) (10,951)
Class B............................................. (3,706,229) 0 (1,010,554) 0
Class C............................................. (143,406) 0 (654,159) 0
Class Y............................................. 0 (5,105,153) 0 (5,850,108)
In excess of net investment income:
Class A............................................. (26,148) 0 (61,783) 0
Class B............................................. (106,543) 0 (62,249) 0
Class C............................................. (4,122) 0 (40,296) 0
Net realized gain on investments:
Class Y............................................. 0 (401,810) 0 0
Total distributions to shareholders................. (4,896,033) (5,509,097) (2,832,037) (5,861,059)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................. 28,808,789 16,277,483 8,978,216 19,842,837
Proceeds from shares issued in the acquisition of
Keystone America Capital Preservation and Income
Fund-- Class A...................................... 23,825,980 0 0 0
Proceeds from reinvestment of distributions........... 3,281,799 4,957,099 1,575,164 5,214,391
Payment for shares redeemed........................... (69,924,430) (20,151,849) (14,890,499) (27,796,468)
Net increase (decrease) in net assets resulting from
capital share transactions........................ (14,007,862) 1,082,733 (4,337,119) (2,739,240)
Total increase (decrease) in net assets........... (13,588,645) 4,396,265 (4,212,708) (373,872)
NET ASSETS
Beginning of period................................... 98,634,829 91,724,580 46,940,967 106,448,123
END OF PERIOD......................................... $ 85,046,184 $96,120,845 $42,728,259 $ 106,074,251
Accumulated distributions in excess of net investment
income................................................ $ (415,117) $ (183) $ (94,328) $ (34)
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Evergreen Keystone Short and Intermediate Term Bond Funds consist of
Keystone Capital Preservation and Income Fund ("Capital Preservation Fund"),
Evergreen Intermediate-Term Bond Fund ("Evergreen Intermediate Fund"), Keystone
Intermediate Term Bond Fund ("Keystone Intermediate Fund"), Evergreen
Intermediate-Term Government Securities Fund ("Intermediate Government Fund")
and Evergreen Short-Intermediate Bond Fund ("Short-Intermediate Fund"),
(collectively, the "Funds"), all of which are registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as diversified, open-end
management investment companies. The Evergreen Intermediate Fund and the
Intermediate Government Fund are separate series of The Evergreen Lexicon Fund
and Short-Intermediate Fund is a separate series of the Evergreen Investment
Trust.
The Funds offer Class A, Class B, Class C and/or Class Y shares. Class A shares
are sold with a maximum front-end sales charge of 3.25%. Class B and Class C
shares are sold without a front-end sales charge, but pay a higher ongoing
distribution fee than Class A. Class B shares are sold subject to a contingent
deferred sales charge that is payable upon redemption and decreases depending on
how long the shares have been held. Class C shares are sold subject to a
contingent deferred sales charge payable on shares redeemed within one year
after the month of purchase. Class B shares purchased after January 1, 1997 will
automatically convert to Class A shares after seven years. Class B shares
purchased prior to January 1, 1997 retain their existing conversion rights.
Class Y shares are sold at net asset value and are not subject to contingent
deferred sales charges or distribution fees. Class Y shares are sold 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 following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
U.S. government obligations held by the Funds are valued at the mean between the
over-the-counter bid and asked prices. Corporate bonds, other fixed-income
securities, and mortgage and other asset-backed securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and analysis of various
relationships between similar 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.
Short-term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held by the custodian on the Fund's behalf. Each
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, including
accrued interest. Each Fund will only enter into repurchase agreements with
banks and other financial institutions which are deemed by the investment
advisor to be creditworthy pursuant to guidelines established by the Board of
Trustees.
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Capital Preservation and Keystone Intermediate Funds, along with certain
other funds managed by Keystone, may transfer uninvested cash balances into a
joint trading account. These balances are invested in one or more repurchase
agreements that are fully collateralized by U.S. Treasury and/or federal agency
obligations.
C. REVERSE REPURCHASE AGREEMENTS
To obtain short-term financing, Capital Preservation and Keystone Intermediate
Fund may enter into reverse repurchase agreements with qualified third-party
broker-dealers. Interest on the value of reverse repurchase agreements is based
upon competitive market rates at the time of issuance. At the time the Fund
enters into a reverse repurchase agreement, it will establish and maintain a
segregated account with the custodian containing qualifying assets having a
value not less than the repurchase price, including accrued interest. If the
counterparty to the transaction is rendered insolvent, the ultimate realization
of the securities to be repurchased by the Fund may be delayed or limited.
D. FOREIGN CURRENCY
The books and records of the Funds are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related 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 and foreign currency related transactions and
is included in realized gain (loss) on foreign currency related transactions.
Foreign currency transactions related to the difference between the amounts of
interest and dividends recorded on the books of the Fund and the amount actually
received is included in gross investment income. 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 investments.
40
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. 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 accretion
of discounts and amortization of premium.
F. DISTRIBUTIONS
Distributions from net investment income for the Capital Preservation and
Keystone Intermediate Funds are declared daily and paid monthly. Distributions
from net investment income are declared and paid monthly for the Evergreen
Intermediate, Intermediate Government and Short-Intermediate Funds.
Distributions from net realized capital gains, if any, are paid at least
annually. Distributions to shareholders are recorded at the close of business on
the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment for mortgage
paydown gains (losses) and foreign securities transactions, if any.
G. CLASS ALLOCATIONS
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.
H. ORGANIZATION EXPENSES
For the Evergreen Intermediate and Intermediate Government Funds, organization
expenses were amortized to operations over a five-year period on a straight-line
basis. During the year ended June 30, 1997, organization costs were fully
amortized for the Evergreen Intermediate and Intermediate Government Funds.
I. FEDERAL INCOME TAXES
The Funds have qualified and intend to continue to qualify as regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Funds will not incur any federal income tax liability since
they are expected to distribute all of their net investment company taxable
income, net tax-exempt income and net capital gains, if any, to their
shareholders. The Funds also intend to avoid any excise tax liability by making
the required distributions under the Code. Accordingly, no provision for federal
income taxes is required. 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.
2. CAPITAL SHARE TRANSACTIONS
The Capital Preservation Fund and Keystone Intermediate Fund have unlimited
number of shares of beneficial interest with no par value authorized. The
Evergreen Intermediate Fund, Intermediate Government Fund and Short-Intermediate
Fund each have unlimited number of shares of beneficial interest with a par
value of $0.0001 authorized. Shares of beneficial interest of the Funds are
currently divided into Class A, Class B, Class C and/or Class Y. Transactions in
shares of the Funds were as follows:
CAPITAL PRESERVATION FUND
<TABLE>
<CAPTION>
DECEMBER 30, 1994
(COMMENCEMENT OF
NINE MONTHS ENDED YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 534,956 $ 5,229,171 808,295 $ 7,859,112 72,460 $ 699,481
Share issued in acquisition of Keystone America
Capital Preservation Income Fund.............. 0 0 0 0 2,506,041 23,825,980
Shares issued in reinvestment of
distributions................................. 61,902 604,810 89,475 865,840 71,420 689,075
Shares redeemed................................. (1,318,046) (12,878,080) (563,085) (5,471,951) (656,221) (6,023,682)
Net increase (decrease)......................... (721,188) $ (7,044,099) 334,685 $ 3,253,001 1,993,700 $ 19,190,854
</TABLE>
41
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CAPITAL PRESERVATION FUND-- continued
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS B
Shares sold..................................... 182,841 $ 1,788,928 282,004 $ 2,742,007 2,758,618 $ 26,668,622
Shares issued in reinvestment of
distributions................................. 114,536 1,119,992 187,040 1,829,883 257,649 2,480,740
Shares redeemed................................. (1,459,187) (14,270,487) (2,455,640) (23,865,587) (6,464,191) (62,204,625)
Net decrease.................................... (1,161,810) $(11,361,567) (1,986,596) $(19,293,697) (3,447,924) $(33,055,263)
CLASS C
Shares sold..................................... 164,962 $ 1,613,166 215,390 $ 2,090,764 150,700 $ 1,440,686
Shares issued in reinvestment of
distributions................................. 13,283 129,806 12,718 127,771 11,638 111,984
Shares redeemed................................. (185,566) (1,815,739) (86,982) (844,271) (176,498) (1,696,123)
Net increase (decrease)......................... (7,321) $ (72,767) 141,126 $ 1,374,264 (14,160) $ (143,453)
</TABLE>
EVERGREEN INTERMEDIATE FUND
<TABLE>
<CAPTION>
MAY 2, 1995
(COMMENCEMENT OF
YEAR ENDED TEN MONTHS ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 52,051 $ 529,465 292,734 $ 2,962,857 24,799 $ 255,892
Shares issued in reinvestment of
distributions................................. 17,590 178,344 3,368 34,080 209 2,134
Shares redeemed................................. (62,211) (632,271) (20,323) (206,789) (9,442) (96,968)
Net increase.................................... 7,430 $ 75,538 275,779 $ 2,790,148 15,566 $ 161,058
</TABLE>
<TABLE>
<CAPTION>
JANUARY 30, 1996
(COMMENCEMENT OF
YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS B
Shares sold..................................... 62,610 $ 633,834 40,844 $ 415,640
Shares issued in reinvestment of
distributions................................. 2,120 21,504 228 2,296
Shares redeemed................................. (4,937) (50,000) (1,244) (12,553)
Net increase.................................... 59,793 $ 605,338 39,828 $ 405,383
</TABLE>
<TABLE>
<CAPTION>
APRIL 29, 1996
(COMMENCEMENT OF
YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS C
Shares sold..................................... 490 $ 5,000 2,450 $ 24,797
Shares issued in reinvestment of
distributions................................. 126 1,282 16 167
Shares redeemed................................. (249) (2,514) 0 0
Net increase.................................... 367 $ 3,768 2,466 $ 24,964
</TABLE>
42
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EVERGREEN INTERMEDIATE FUND-- continued
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS Y
Shares sold..................................... 4,825,919 $ 48,970,554 3,399,442 $ 35,128,164 1,606,066 $ 16,021,590
Shares issued in acquisition of Evergreen
Managed Bond Fund............................. 0 0 7,674,423 79,773,557 0 0
Shares issued in reinvestment of
distributions................................. 649,188 6,579,261 438,427 4,507,655 498,736 4,954,965
Shares redeemed................................. (5,719,188) (58,033,667) (5,208,789) (54,641,619) (2,018,177) (20,054,880)
Net increase (decrease)......................... (244,081) $ (2,483,852) 6,303,503 $ 64,767,757 86,625 $ 921,675
</TABLE>
KEYSTONE INTERMEDIATE FUND
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JULY 31, 1996 JULY 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold........................................ 175,221 $ 1,566,271 258,497 $ 2,283,194 214,382 $ 1,875,188
Shares issued in reinvestment of distributions..... 45,592 404,429 52,934 469,775 61,155 533,202
Shares redeemed.................................... (547,872) (4,863,536) (465,961) (4,141,580) (449,814) (3,937,486)
Net decrease....................................... (327,059) $(2,892,836) (154,530) $(1,388,611) (174,277) $(1,529,096)
CLASS B
Shares sold........................................ 170,620 $ 1,528,256 555,555 $ 4,965,806 566,892 $ 4,978,695
Shares issued in reinvestment of distributions..... 46,270 411,336 63,537 565,232 66,016 576,332
Shares redeemed.................................... (779,593) (6,943,044) (808,199) (7,205,208) (624,636) (5,447,096)
Net increase (decrease)............................ (562,703) $(5,003,452) (189,107) $(1,674,170) 8,272 $ 107,931
CLASS C
Shares sold........................................ 52,022 $ 465,379 318,799 $ 2,871,565 243,954 $ 2,124,333
Shares issued in reinvestment of distributions..... 31,491 279,633 42,997 382,466 53,388 465,630
Shares redeemed.................................... (311,128) (2,773,712) (468,122) (4,177,736) (630,936) (5,505,917)
Net decrease....................................... (227,615) $(2,028,700) (106,326) $ (923,705) (333,594) $(2,915,954)
</TABLE>
INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
MAY 2, 1995
TEN MONTHS (COMMENCEMENT OF
YEAR ENDED ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 10,763 $ 107,284 64,791 $ 663,129 879 $ 8,925
Shares issued in reinvestment of
distributions................................. 2,429 24,330 1,503 15,239 0 0
Shares redeemed................................. (5,953) (59,462) (17,382) (175,816) 0 0
Net increase.................................... 7,239 $ 72,152 48,912 $ 502,552 879 $ 8,925
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 9, 1996
(COMMENCEMENT OF
YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS B
Shares sold..................................... 49,960 $ 500,124 35,925 $ 359,696
Shares issued in reinvestment of
distributions................................. 1,735 17,379 67 666
Shares redeemed................................. (13,674) (136,147) (2) (23)
Net increase.................................... 38,021 $ 381,356 35,990 $ 360,339
</TABLE>
43
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND-- continued
APRIL 10, 1996
(COMMENCEMENT OF
YEAR ENDED CLASS OPERATIONS) TO
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS C
Shares sold..................................... 2,288 $ 22,910 3,551 $ 35,538
Shares issued in reinvestment of
distributions................................. 85 967 26 254
Shares redeemed................................. (4,419) (44,414) (324) (3,205)
Net increase (decrease)......................... (2,046) $ (20,537) 3,253 $ 32,587
</TABLE>
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 AUGUST 31, 1995
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS Y
Shares sold..................................... 3,476,575 $ 34,857,475 1,257,974 $ 12,770,139 1,999,05 $ 19,833,912
Shares issued in reinvestment of
distributions................................. 394,427 3,950,858 402,054 4,079,359 526,254 5,214,391
Shares redeemed................................. (5,437,776) (54,410,883) (3,404,763) (34,447,480) (2,799,781) (27,796,468)
Net increase (decrease)......................... (1,566,774) $(15,602,550) 1,744,735 $ 17,597,982 (274,476) $ (2,748,165)
</TABLE>
SHORT-INTERMEDIATE FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold........................................................... 584,893 $ 5,786,371 417,422 $ 4,161,754
Shares issued in reinvestment of distributions........................ 93,998 924,863 91,045 906,558
Shares redeemed....................................................... (775,720) (7,650,833) (498,266) (4,979,754)
Net increase (decrease)............................................... (96,829) $ (939,599) 10,201 $ 88,558
CLASS B
Shares sold........................................................... 520,912 $ 5,138,212 844,991 $ 8,456,439
Shares issued in reinvestment of distributions........................ 87,527 862,791 74,101 739,247
Shares redeemed....................................................... (486,579) (4,795,124) (512,788) (5,128,366)
Net increase.......................................................... 121,860 $ 1,205,879 406,304 $ 4,067,320
CLASS C
Shares sold........................................................... 35,729 $ 354,646 94,089 $ 944,432
Shares issued in reinvestment of distributions........................ 4,508 44,442 3,083 30,731
Shares redeemed....................................................... (53,064) (524,077) (32,296) (321,263)
Net increase (decrease)............................................... (12,827) $ (124,989) 64,876 $ 653,900
CLASS Y
Shares sold........................................................... 11,302,391 $111,361,796 15,667,603 $156,775,980
Shares issued in reinvestment of distributions........................ 1,353,407 13,305,530 1,726,865 17,202,491
Shares redeemed....................................................... (12,121,462) (119,339,801) (16,165,702) (161,849,781)
Net increase.......................................................... 534,336 $ 5,327,525 1,228,766 $ 12,128,690
</TABLE>
44
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the year ended June 30, 1997:
<TABLE>
<CAPTION>
COST OF PURCHASES PROCEEDS FROM SALES
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
<CAPTION>
<S> <C> <C> <C> <C>
Capital Preservation Fund*............ $ 30,413,800 $ 0 $ 42,505,286 $ 0
Evergreen Intermediate Fund........... 108,340,939 24,077,086 138,666,138 6,840,920
Keystone Intermediate Fund**.......... 28,261,905 30,738,558 31,902,091 36,582,139
Intermediate Government Fund.......... 59,320,521 0 65,407,081 0
Short-Intermediate Fund............... 103,309,243 113,815,506 71,256,326 99,358,914
</TABLE>
* For the nine months ended June 30, 1997
** For the eleven months ended June 30, 1997
The average daily balance of reverse repurchase agreements outstanding for the
Capital Preservation Fund and the Keystone Intermediate Fund during the period
ended June 30, 1997 was approximately $988,000 and $1,102,000, respectively, at
a weighted average interest rate of 5.40% and 5.58%, respectively. The maximum
amount outstanding under reverse repurchase agreements during the period ended
June 30, 1997 for the Capital Preservation Fund was $4,066,236 (including
accrued interest) and $2,017,983 (including accrued interest) for Keystone
Intermediate Fund. There were no reverse repurchase agreements outstanding at
June 30, 1997 for either Fund.
On June 30, 1997, the composition of gross unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal tax purposes was as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET UNREALIZED
TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
<S> <C> <C> <C> <C>
Capital Preservation Fund.................. $ 51,559,754 $ 541,790 $ (3,297) $ 538,493
Evergreen Intermediate Fund................ 156,347,538 3,200,532 (929,701) 2,270,831
Keystone Intermediate Fund................. 28,676,532 258,959 (365,371) (106,412)
Intermediate Government Fund............... 79,147,737 712,159 (321,259) 390,900
Short-Intermediate Fund.................... 398,505,815 3,176,863 (5,024,416) (1,847,553)
</TABLE>
As of June 30, 1997, the Funds had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
EXPIRATION
<S> <C> <C> <C> <C> <C> <C>
1999 2001 2002 2003 2004 2005
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Capital Preservation Fund.......... -- $5,900,000 $ 197,000 $642,000 $ 254,000 $ --
Evergreen Intermediate Fund........ -- 1,440,000 -- 907,000 211,000 1,200,000
Keystone Intermediate Fund......... $970,000 -- 2,688,000 94,000 -- 147,000
Intermediate Government Fund....... -- -- -- 642,000 1,140,000 --
Short-Intermediate Fund............ -- -- 6,021,000 -- 4,049,000 4,374,000
</TABLE>
4. DISTRIBUTION PLANS
Since December 11, 1996, Evergreen Keystone Distributor, Inc. (formerly,
Evergreen Funds Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of The
BISYS Group Inc. ("BISYS") has served as principal underwriter to the Capital
Preservation Fund and the Keystone Intermediate Fund. Prior to December 11,
1996, Evergreen Keystone Investment Services, Inc. ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the principal underwriter. EKD also serves as
the principal underwriter for the Evergreen Intermediate, Intermediate
Government and Short-Intermediate Funds.
Each Fund has adopted Distribution Plans for each class of shares as allowed by
Rule 12b-1 of the 1940 Act. Distribution plans permit each Fund to reimburse its
principal underwriter for costs related to selling shares of the Fund and for
various other services. These costs, which consist primarily of commissions and
service fees to broker-dealers who sell shares of the Fund, are paid by
shareholders through expenses called "Distribution Plan expenses". Each class,
except Class Y, currently pays a service fee equal to 0.25% of the average daily
net assets of the class. The service fee for Class A shares of
Short-Intermediate is currently limited to 0.10% of average daily net assets.
Class B and Class C also presently pay distribution fees equal to 0.75% of the
average daily net assets of each respective class. Distribution Plan expenses
are calculated daily and paid monthly.
With respect to Class B and Class C shares of the Capital Preservation Fund and
the Keystone Intermediate Fund, the principal underwriter may incur costs
greater than the allowable annual amounts the Fund is permitted to pay. The Fund
may reimburse the principal underwriter for such excess amounts in later years
with annual interest at the prime rate plus 1.00%.
45
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the year ended June 30, 1997, amounts accrued or paid to EKD and/or EKIS
pursuant to each Fund's Class A, Class B and Class C Distribution Plans were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Capital Preservation Fund*............................................ $28,581 $285,293 $32,267
Evergreen Intermediate Fund........................................... 6,972 7,180 255
Keystone Intermediate Fund**.......................................... 24,268 129,648 74,834
Intermediate Government Fund.......................................... 2,047 6,442 242
Short-Intermediate Fund............................................... 18,961 222,264 10,470
</TABLE>
* For the nine months ended June 30, 1997
** For the eleven months ended June 30, 1997
For the year ended June 30, 1997, EKD voluntarily waived Class A distribution
fees for the Evergreen Intermediate and Intermediate Government Funds in the
amounts of $5,480 and $1,763, respectively.
Each of the Distribution Plans for the Capital Preservation and the Keystone
Intermediate Funds 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.
EKD and/or its predecessor has advised the Funds that it has retained front-end
sales charges resulting from the sales of Class A shares during the period ended
June 30, 1997 as follows:
<TABLE>
<S> <C>
Capital Preservation Fund....................................................... $ 9,851
Evergreen Intermediate Fund..................................................... 504
Keystone Intermediate Fund...................................................... 11,043
Intermediate Government Fund.................................................... 77
Short-Intermediate Fund......................................................... 6,833
</TABLE>
Contingent deferred sales charges paid by redeeming shareholders are paid to EKD
or its predecessor.
5. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Keystone Investment Management Company ("Keystone"), a subsidiary of First Union
Corporation ("First Union"), is the investment adviser for the Capital
Preservation Fund and the Keystone Intermediate Fund. In return for providing
investment management and administrative services, each Fund pays Keystone a
management fee that is calculated daily and paid monthly. The management fee is
computed at an annual rate of 2.00% of the each respective Fund's gross
investment income plus an amount determined by applying percentage rates
starting at 0.50% and declining to 0.25% per annum as net assets increase, to
the average daily net asset value of the Fund. Prior to December 11, 1996,
Keystone Management, Inc. ("KMI"), a wholly-owned subsidiary of Keystone, served
as investment manager to the Keystone Intermediate Fund and provided investment
management and administrative services. Under an investment advisory agreement
between KMI and Keystone, Keystone served as the investment adviser and provided
investment advisory and management services to the Keystone Intermediate Fund.
In return for its services, Keystone received an annual fee equal to 85% of the
management fee received by KMI.
Effective January 1, 1997, BISYS became the sub-administrator to the Capital
Preservation and Keystone Intermediate Funds and is paid by Keystone.
First Union serves as the investment adviser to the Evergreen Intermediate Fund,
Intermediate Government Fund and Short-Intermediate Fund and is paid a
management fee that is computed daily and paid monthly. For the Evergreen
Intermediate Fund and the Intermediate Government Fund, First Union is entitled
to a fee at an annual rate of 0.60% of each Fund's respective average daily net
assets. For the Short-Intermediate Fund, First Union is entitled to a fee at an
annual rate of 0.50% of the Fund's average daily net assets.
For Evergreen Intermediate Fund, Intermediate Government Fund and
Short-Intermediate Fund, Evergreen Keystone Investment Services, Inc. ("EKIS"),
a subsidiary of First Union, is the administrator. Prior to March 11, 1997,
Evergreen Asset Management Corp. ("Evergreen Asset"), a wholly-owned subsidiary
of First Union, was the administrator. Furman Selz LLC ("Furman Selz") was the
sub-administrator through December 31, 1996. Effective January 1, 1997, BISYS
acquired Furman Selz' mutual fund unit and accordingly BISYS became
sub-administrator. The administrator and sub-administrator for each Fund is
entitled to an annual fee based on the average daily net assets of the funds
administered by EKIS for which First Union or its investment advisory
subsidiaries are also the investment advisors. The administration fee is
calculated by applying percentage rates, which start at 0.05% and decline to
0.01% per annum as net assets increase, to the average daily net asset value of
the
46
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund. The sub-administration fee is calculated by applying percentage rates,
which start at 0.01% and decline to .004% as net assets increase, to the average
daily net asset value of the Fund.
For the Capital Preservation and Keystone Intermediate Funds, Keystone has
voluntarily limited the expenses, excluding indirectly paid expenses, to the
following rates based on the average daily net assets of each respective class:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Capital Preservation Fund............................................... 0.90% 1.65% 1.65%
Keystone Intermediate Fund.............................................. 1.10% 1.85% 1.85%
</TABLE>
For the period ended June 30, 1997, the Funds waived management fees as follows:
<TABLE>
<S> <C>
Capital Preservation Fund.................................................................. $245,255
Keystone Intermediate Fund................................................................. 145,636
Intermediate Government Fund............................................................... 71,794
</TABLE>
During the period ended June 30, 1997, the Funds paid or accrued to EKIS the
following amounts for certain administrative services:
<TABLE>
<S> <C>
Capital Preservation Fund................................................................... $34,481
Evergreen Intermediate Fund................................................................. 57,505
Keystone Intermediate Fund.................................................................. 11,267
Intermediate Government Fund................................................................ 31,665
Short-Intermediate Fund..................................................................... 139,440
</TABLE>
Evergreen Keystone Service Company ("EKSC"), a wholly-owned subsidiary of
Keystone, serves as the transfer and dividend disbursing agent for the Capital
Preservation and Keystone Intermediate Funds. Effective May 5, 1997, EKSC also
began providing transfer and dividend disbursing agent services for the
Evergreen Intermediate Fund, Intermediate Government Fund and Short-Intermediate
Fund that were formerly provided by State Street Bank and Trust Company ("State
Street"). For certain accounts, State Street had and subsequent to May 5, 1997,
EKSC has sub-contracted First Union to maintain shareholder sub-account records,
take fund purchase and redemption orders and answer inquiries. For each account
of the Evergreen Intermediate Fund, Intermediate Government Fund and
Short-Intermediate Fund, First Union earned a fee which in aggregate totaled
$23,547, $24 and $103,428, respectively for the year ended June 30, 1997.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds. Currently the Independent Trustees of the Capital Preservation
and the Keystone Intermediate Funds receive no compensation for their services.
As sub-administrator, BISYS provides the officers of the Funds.
6. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an expense offset arrangement with their custodian.
The assets deposited with the custodian under this expense offset arrangement
could have been invested in income-producing assets.
7. DEFERRED TRUSTEES' FEES
Each Independent Trustee of the Evergreen Intermediate Fund, Intermediate
Government Fund and Short-Intermediate Fund may defer any or all compensation
related to performance of duties as a Trustee. Each Trustee's deferred balances
are allocated to deferral accounts which are included in the accrued expenses
for the Fund. The investment performance of the deferral accounts are based on
the investment performance of certain Evergreen Keystone Funds. Any gains earned
or losses incurred in the deferral accounts are reported in each Fund's
Trustees' fees and expenses. Trustees will be paid either in one lump sum or in
quarterly installments for up to ten years at their election, not earlier than
either the year in which the Trustee ceases to be a member of the Board of
Trustees or January 1, 2000. As of June 30, 1997, the value of the Trustees'
deferral accounts for the Evergreen Intermediate Fund, Intermediate Government
Fund and Short-Intermediate Fund were $5,106, $5,097 and $16,203, respectively.
8. FINANCING AGREEMENT
On October 31, 1996, a financing agreement between all of the Evergreen Funds
and State Street, Societe Generale and ABN Amro Bank N.V. (collectively, the
"Banks") became effective. Under this agreement, the Banks provide an unsecured
credit facility in the aggregate amount of $225 million ($112.5 million
committed and $112.5 million uncommitted) allocated evenly between the Banks.
Borrowings under this facility bear interest at 0.75% per annum above the
Federal Funds rate. A commitment fee of 0.10% per annum will be incurred on the
unused portion of the committed facility which will be allocated to all
participating funds. State Street acts as agent for the Banks, and as agent is
entitled to a fee of $15,000 which is allocated to all of the Evergreen Funds.
During the period ended June 30, 1997, the Funds had no borrowings under this
agreement.
47
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS
On December 30, 1994, the Capital Preservation Fund acquired the net assets of
Keystone America Capital Preservation and Income Fund ("Preservation and Income
Fund") in exchange for Class A shares and on February 29, 1996 the Evergreen
Intermediate Fund acquired the net assets of Evergreen Managed Bond Fund
("Managed Bond Fund") in exchange for Class Y shares. Both acquisitions were
accomplished by a tax-free exhange of the respective shares of each respective
fund. The value of assets acquired, number of shares issued, unrealized
appreciation acquired and aggregate net assets of each fund immediately after
the acquisition are as follows:
<TABLE>
<CAPTION>
UNREALIZED
VALUE OF NET NUMBER OF APPRECIATION
ACQUIRING FUND ACQUIRED FUND ASSETS ACQUIRED SHARES ISSUED (DEPRECIATION)
<S> <C> <C> <C> <C>
Capital Preservation Fund Preservation and Income Fund $23,825,980 2,506,041 $ (301,751)
Evergreen Intermediate Fund Managed Bond Fund 79,773,557 7,674,423 1,789,417
<CAPTION>
NET ASSETS
AFTER
ACQUISITION
<C>
$115,746,857
158,097,520
</TABLE>
48
<PAGE>
EVERGREEN KEYSTONE
(logo)
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Capital Preservation and Income Fund
The Evergreen Lexicon Fund
Keystone Intermediate Term Bond Fund
Evergreen Investment Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of the Evergreen Keystone Short and Intermediate
Term Bond Funds listed below as of June 30, 1997, and the related statements of
operations, statements of changes in net assets, and financial highlights for
each of the years or periods listed below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND-- statements of operations for
the nine months ended June 30, 1997 and the year ended September 30, 1996,
statements of changes in net assets for the nine months ended June 30, 1997
and each of the years in the two-year period ended September 30, 1996, and
financial highlights for the periods presented on pages 14 and 15.
EVERGREEN INTERMEDIATE-TERM BOND FUND (ONE OF THE PORTFOLIOS CONSTITUTING
THE EVERGREEN LEXICON FUND)-- statement of operations for the year ended
June 30, 1997, statements of changes in net assets for the year ended June
30, 1997 and the ten months ended June 30, 1996, and the financial
highlights for the periods presented on pages 16 and 17, except for the
periods prior to June 30, 1996. The financial highlights for the periods
prior to June 30, 1996 and the statements of changes in net assets for the
year ended August 31, 1995 were audited by other auditors whose report dated
October 6, 1995 expressed an unqualified opinion thereon.
KEYSTONE INTERMEDIATE TERM BOND FUND-- statements of operations for the
eleven months ended June 30, 1997 and the year ended July 31, 1996,
statements of changes in net assets for the eleven months ended June 30,
1997 and each of the years in the two-year period ended July 31, 1996, and
the financial highlights for the periods presented on pages 18 and 19.
EVERGREEN INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND (ONE OF THE
PORTFOLIOS CONSTITUTING THE EVERGREEN LEXICON FUND)-- statement of
operations for the year ended June 30, 1997, statements of changes in net
assets for the year ended June 30, 1997 and the ten months ended June 30,
1996, and the financial highlights for the periods presented on pages 20 and
21, except for the periods ended prior to June 30, 1996. The financial
highlights for the periods prior to June 30, 1996 and the statements of
changes in net assets for the year ended August 31, 1995 were audited by
other auditors whose report dated October 6, 1995 expressed an unqualified
opinion thereon.
EVERGREEN SHORT-INTERMEDIATE BOND FUND (ONE OF THE PORTFOLIOS CONSTITUTING
EVERGREEN INVESTMENT TRUST)-- statement of operations for the year ended
June 30, 1997, statements of changes in net assets for each of the years in
the two-year period ended June 30, 1997, and the financial highlights for
the periods presented on pages 22-24.
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. These standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Capital Preservation and Income Fund, Evergreen Intermediate-Term Bond
Fund, Keystone Intermediate Term Bond Fund, Evergreen Intermediate-Term
Government Securities Fund and Evergreen Short-Intermediate Bond Fund as of June
30, 1997, the results of their operations for the years or periods then ended,
and the changes in their net assets and financial highlights for each of the
years or periods specified in the first paragraph above in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
August 8, 1997
49
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
This brochure must be preceded or accompanied by a prospectus of an
Evergreen fund contained herein. The prospectus contains more complete
information, including fees and expenses, and should be read carefully
before investing or sending money.
NOT May lose value
FDIC No bank guarantee
INSURED
Evergreen Keystone Distributor, Inc.
60922 Form #541496
8/97
<PAGE>
EVERGREEN KEYSTONE FUNDS
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
200 Berkeley Street
Boston, MA 02116-5034
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, D.C.
Attn: File Room
Re: THE EVERGREEN KEYSTONE SHORT/INTERMEDIATE-TERM BOND FUNDS:
Keystone Capital Preservation and Income Fund
File No. 811-6278
CCC # md#bzdw6
CIK # 0000872324
Keystone Intermediate Term Bond Fund
File No. 811-4952
CCC # azz*ud8s
CIK # 0000808333
Evergreen Investment Trust
Evergreen Short-Intermediate Bond Fund
File No. 811-4154
CCC # 4apyfsr*
CIK # 0000757440
Evergreen Lexicon Trust
Evergreen Intermediate-Term Government Securities Fund
Evergreen Intermediate Term Bond Fund
File No. 811-6368
CCC # 3@hcmfcw
CIK # 0000877698
Commissioners:
Please be advised that the 6/30/97 Annual Report for the above referenced
Trust(s)/Fund(s) were submitted to your office on August 29, 1997, via
electronic transmission (EDGAR).
Any questions or comments about this document should be directed to the
undersigned at (617) 210-3258.
Very Truly Yours,
/s/ Laura Yong
Laura Yong
Assistant Vice President
<PAGE>
Evergreen Intermediate-Term Government Securities Fund
PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
SCHEDULE OF INVESTMENTS (000's)
June 30, 1997
<TABLE>
<CAPTION>
Evergreen
Intermediate-Term
Government
Securities Fund
-------------------------
Maturity Market
Coupon Date Principal Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities - 36.0%
Federal Home Loan Mortgage Corp. 5.60% 2/15/13 $ 5,000 $ 4,975
Federal Home Loan Mortgage Corp. 6.50 9/1/08 - 11/1/09
Federal Home Loan Mortgage Corp. 7.64 7/1/97
Federal Home Loan Mortgage Corp. 8.44 7/1/97
Federal Home Loan Mortgage Corp. Gold 9.00 1/1/17 4,251 4,553
Federal Home Loan Mortgage PC Guaranteed 7.80 5/15/12
Federal National Mortgage Assn. 7.00 3/1/24 3,689 3,639
Federal National Mortgage Assn. 7.00 12/1/99 - 4/1/11
Federal National Mortgage Assn. 7.50 8/1/26
Federal National Mortgage Assn. 8.50 12/1/01
Federal National Mortgage Assn. 8.78 7/1/97
Government National Mortgage Association 8.00 3/15/17
Government National Mortgage Association 9.00 9/15/21
U.S. Department of Veteran Affairs 7.00 5/15/12 1,000 1,002
------------
Total Mortgage-Backed Securities (Cost $84,628) 14,169
U. S. Agency Obligations - 9.4%
Federal Agricultural Mortgage Corp. 7.37 8/1/06
Federal Home Loan Bank 8.60 1/25/00 1,300 1,371
Federal Home Loan Mortgage Corp. 7.36 6/5/07
Federal Home Loan Mortgage Corp. 7.97 4/20/05
Federal National Mortgage Assn. 7.50 2/11/02 2,000 2,078
Federal National Mortgage Assn. 7.88 2/24/05 2,000 2,138
Tennessee Valley Authority 6.38 6/15/05 2,000 1,960
------------
Total U. S. Agency Obligations (Cost $21,845) 7,547
U. S. Treasury Notes - 55.1%
U.S. Treasury Notes 5.55 2/28/99 4,500 4,463
U.S. Treasury Notes 5.88 1/31/99 6,800 6,788
U.S. Treasury Notes 6.00 11/30/97 - 9/30/98 3,900 3,905
U.S. Treasury Notes 6.13 12/31/01 3,500 3,467
U.S. Treasury Notes 6.25 7/31/98 4,000 4,019
U.S. Treasury Notes 6.38 7/15/99 4,000 4,024
U.S. Treasury Notes 6.50 4/30/99 3,000 3,023
U.S. Treasury Notes 6.63 6/30/01 3,000 3,031
U.S. Treasury Notes 6.75 4/30/00 1,000 1,013
U.S. Treasury Notes 7.00 7/15/06 4,300 4,425
U.S. Treasury Notes 7.13 2/29/00
U.S. Treasury Notes 7.50 10/31/99 4,000 4,115
U.S. Treasury Notes 7.50 11/15/01 2,000 2,085
U.S. Treasury Notes 7.50 5/15/02 2,000 2,093
U.S. Treasury Notes 7.50 2/15/05 3,250 3,440
U.S. Treasury Notes 7.88 4/15/98 1,700 1,728
U.S. Treasury Notes 7.88 11/15/04 3,500 3,777
U.S. Treasury Notes 8.25 7/15/98
U.S. Treasury Notes 8.50 11/15/00 1,300 1,387
U.S. Treasury Notes 8.88 2/15/99
------------
Total U. S. Treasury Notes (Cost $131,323) 56,783
Maturity
Repurchase Agreements - 1.7% Date
Donaldson, Lufkin & Jenrette Securities Corp., 5.90 7/1/97 1,040 1,040
(collateralized by $347 U.S. Treasury Bonds,
11.25% , due 2/15/15: $540 U.S. Treasury Bills, due
7/3/97; value including accrued interest $1,061)
Nikko Securities Co. International, Inc. (a) 5.95 7/1/97
------------
Total Repurchase Agreements (Cost $4,140) 1,040
Total Investments (Cost $241,936) 102.2% 79,539
Other Assets and Liabilities (net) (2.2) (6,626)
---------------------- ------------
Net Assets 100.0% $72,913
====================== ============
<CAPTION>
Virtus
U.S. Government Pro Forma
Securities Fund Combined
----------------------- --------------------------
Market Market
Principal Value Adjustments Principal Value
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage-Backed Securities - 36.0%
Federal Home Loan Mortgage Corp. $5,000 $4,975
Federal Home Loan Mortgage Corp. $19,908 $19,686 19,908 19,687
Federal Home Loan Mortgage Corp. 82 86 82 86
Federal Home Loan Mortgage Corp. 30 31 30 31
Federal Home Loan Mortgage Corp. Gold 4,251 4,553
Federal Home Loan Mortgage PC Guaranteed 840 843 840 843
Federal National Mortgage Assn. 3,689 3,639
Federal National Mortgage Assn. 24,677 24,736 24,677 24,737
Federal National Mortgage Assn. 24,152 24,250 24,152 24,250
Federal National Mortgage Assn. 381 393 381 393
Federal National Mortgage Assn. 71 74 71 74
Government National Mortgage Association 169 175 169 175
Government National Mortgage Association 327 350 327 350
U.S. Department of Veteran Affairs 1,000 1,002
------------ -------------
Total Mortgage-Backed Securities (Cost $84,628) 70,624 84,795
U. S. Agency Obligations - 9.4%
Federal Agricultural Mortgage Corp. 993 1,027 993 1,027
Federal Home Loan Bank 1,300 1,371
Federal Home Loan Mortgage Corp. 8,500 8,632 8,500 8,632
Federal Home Loan Mortgage Corp. 5,000 5,061 5,000 5,061
Federal National Mortgage Assn. 2,000 2,078
Federal National Mortgage Assn. 2,000 2,138
Tennessee Valley Authority 2,000 1,960
------------ -------------
Total U. S. Agency Obligations (Cost $21,845) 14,720 22,267
U. S. Treasury Notes - 55.1%
U.S. Treasury Notes 4,500 4,463
U.S. Treasury Notes 6,800 6,787
U.S. Treasury Notes 3,900 3,905
U.S. Treasury Notes 3,500 3,467
U.S. Treasury Notes 4,000 4,019
U.S. Treasury Notes 4,000 4,024
U.S. Treasury Notes 3,000 3,023
U.S. Treasury Notes 3,000 3,031
U.S. Treasury Notes 1,000 1,013
U.S. Treasury Notes 4,300 4,425
U.S. Treasury Notes 22,000 22,493 22,000 22,492
U.S. Treasury Notes 4,000 4,115
U.S. Treasury Notes 2,000 2,085 4,000 4,170
U.S. Treasury Notes 13,000 13,609 15,000 15,702
U.S. Treasury Notes 3,250 3,440
U.S. Treasury Notes 5,000 5,083 6,700 6,812
U.S. Treasury Notes 3,500 3,777
U.S. Treasury Notes 6,000 6,146 6,000 6,146
U.S. Treasury Notes 1,300 1,387
U.S. Treasury Notes 23,000 24,012 23,000 24,012
------------ -------------
Total U. S. Treasury Notes (Cost $131,323) 73,428 130,211
Repurchase Agreements - 1.7%
Donaldson, Lufkin & Jenrette Securities Corp., 1,040 1,040
(collateralized by $347 U.S. Treasury Bonds,
11.25% , due 2/15/15: $540 U.S. Treasury Bills, due
7/3/97; value including accrued interest $1,061)
Nikko Securities Co. International, Inc. (a) 3,100 3,100 3,100 3,100
------------ -------------
Total Repurchase Agreements (Cost $4,140) 3,100 4,140
Total Investments (Cost $241,936) 161,872 241,411
Other Assets and Liabilities (net) 1,474 (5,152)
------------ -------------
Net Assets $163,346 $236,259
============ =============
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
See Notes to Pro Forma Combined Financial Statements.
<PAGE>
Evergreen Intermediate Term Government Securities Fund
Pro Forma Combining Financial Statements (unaudited)
Statement of Assets and Liabilities
June 30, 1997
<TABLE>
<CAPTION>
Evergreen
Intermediate-Term Virtus U.S
Government Government Pro Forma
Securities Fund Securities Fund Adjustments Combined
------------------------------------------------------- -----------
<S> <C> <C> <C> <C>
Assets
Investments at value (cost $241,936) $ 79,539 $ 161,872 $ 241,411
Interest receivable 1,240 2,316 3,556
Receivable for Fund shares sold 2 67 69
Due from investment adviser 0 59 59
Prepaid expenses and other assets 15 0 15
------------------------------------------------------- -----------
Total Assets 80,796 164,314 245,110
Liabilities
Dividends payable 0 795 795
Payable for Fund shares redeemed 7,807 8 7,815
Distribution fee payable 1 26 27
Due to related parties 45 138 183
Accrued expenses and other liabilities 30 1 31
---------------------------------------------------------------------
Total Liabilities 7,883 968 8,851
---------------------------------------------------------------------
Net Assets $ 72,913 $ 163,346 $ 236,259
=====================================================================
Net assets are comprised of:
Paid-in capital $ 74,620 $ 181,459 $ 256,079
Undistributed net investment income (accumulated
distributions in excess of investment income) (5) 0 (5)
Accumulated net realized loss on investments (2,173) (17,117) (19,290)
Net unrealized appreciation (depreciation) on investments 471 (996) (525)
---------------------------------------------------------------------
Net Assets $ 72,913 $ 163,346 $ 236,259
=====================================================================
Class A Shares (Note 2)
Net Assets $ 572 $ 106,929 $ 107,501
Shares of Beneficial Interest Outstanding 57 10,831 (162) 10,726
Net Asset Value $ 10.02 $ 9.87 $10.02
Maximum Offering Price (4.75%) $ 10.36 $10.36
Class B Shares
Net Assets $ 742 $ 742
Shares of Beneficial Interest Outstanding 74 74
Net Asset Value $ 10.02 $ 10.02
Class C Shares
Net Assets $12 $12
Shares of Beneficial Interest Outstanding 1 1
Net Asset Value $ 10.02 $ 10.02
Class Y Shares (Note 2)
Net Assets $ 71,588 $ 56,417 $ 128,005
Shares of Beneficial Interest Outstanding 7,143 5,714 (86) 12,771
Net Asset Value $ 10.02 $ 9.87 $ 10.02
</TABLE>
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Evergreen Intermediate Term Government Securities Fund
Pro Forma Combining Financial Statements (unaudited)
Statement of Operations
Year ended June 30, 1997
<TABLE>
<CAPTION>
Evergreen
Intermediate-Term Virtus U.S
Government Government Pro Forma
Securities Fund Securities Fund Adjustments Combined
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest income $5,768 $13,726 $19,494
Expenses:
Advisory fee 547 1,399 (280) a 1,666
Administrative services fees 38 181 (103) b 116
Distribution fee 9 286 (229) a 66
Transfer agent fee 35 192 (67) c 160
Custodian fee 52 62 44 b 158
Reports and notices to shareholders 13 (1) 27 b 39
Registration and filing fees 90 9 (9) c 90
Professional fees 17 89 (85) c 21
Trustees' fees and expenses 4 4 4 b 12
Insurance expenses 0 5 (5) c 0
Organization expense 1 0 1
Other 14 1 27 b 42
Less: Fee waivers and/or reimbursements (74) (126) 159 (41)
------------------------------------------------------------------------
Total Expenses 746 2,101 (517) 2,330
Less: Indirectly paid expense (1) 0 0 (1)
------------------------------------------------------------------------
Net expenses 745 2,101 (517) 2,329
------------------------------------------------------------------------
Net investment income 5,023 11,625 517 17,165
Net realized and unrealized gain (loss) on investments:
Net realized loss on investments (16) (3,800) (3,816)
Net change in unrealized appreciation
(depreciation) on investments 220 1,324 1,544
------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 204 (2,476) (2,272)
------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,227 9,149 517 $14,893
========================================================================
</TABLE>
a Reflects decrease based on fee schedule of the surviving fund.
b Reflects increase (decrease) based on the assets of the combined fund.
c Reflects expected cost savings from combining the two funds.
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Evergreen Intermediate-Term Government Securities Fund
Notes to Pro Forma Combining Financial Statements (Unaudited)
June 30, 1997
1. Basis of Combination - The Pro Forma Combining Statement of Assets and
Liabilities, including the Pro Forma Schedule of Investments, and the related
Pro Forma Combining Statement of Operations ("Pro Forma Statements") reflect the
accounts of Evergreen Intermediate-Term Government Securities Fund ("Evergreen")
and Virtus U.S. Government Securities Fund ("Virtus") at June 30, 1997 and for
the year then ended.
The Pro Forma Statements give effect to the proposed Agreement and Plan of
Reorganization (the "Reorganization") to be submitted to shareholders of Virtus.
The Reorganization provides for the acquisition of all assets and liabilities of
Virtus by Evergreen, in exchange for shares of Evergreen. Thereafter, there will
be a distribution of such shares of Evergreen to shareholders of Virtus in
liquidation and subsequent termination thereof. As a result of the
Reorganization, the shareholders of Virtus will become the owners of that number
of full and fractional shares of Evergreen having an aggregate net asset value
equal to the aggregate net asset value of their shares of Virtus as of the close
of business immediately prior to the date that Virtus assets are exchanged for
shares of Evergreen.
The Pro Forma Statements reflect the expenses of each Fund in carrying out its
obligations under the Reorganization as though the merger occurred at the
beginning of the period presented.
The information contained herein is based on the experience of each Fund for the
year ended June 30, 1997 and is designed to permit shareholders of the
consolidating mutual funds to evaluate the financial effect of the proposed
Reorganization. The expenses of Virtus in connection with the Reorganization
(including the cost of any proxy soliciting agents) will be borne by First Union
National Bank of North Carolina.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of each Fund incorporated by reference in the Statement of
Additional Information.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assume the issuance of shares of Evergreen Class A and Class Y which would have
been issued at June 30, 1997 in connection with the proposed Reorganization.
Shareholders of Virtus Investment Shares and Trust Shares would receive shares
of Evergreen Class A and Class Y, respectively, based on a conversion ratio
determined on June 30, 1997. The conversion ratio is calculated by dividing the
net asset value of Virtus Investment Shares and Trust Shares by the net asset
value per share of the shares of Evergreen Class A and Class Y, respectively.
3. Pro Forma Operations - The Pro Forma Combining Statement of Operations
assumes similar rates of gross investment income for the investments of each
Fund. Accordingly, the combined gross investment income is equal to the sum of
the Funds' gross investment income. Pro Forma operating expenses include the
actual expenses of the Funds adjusted to reflect the expected expenses of the
combined entity. The investment advisory and distribution fees have been
charged to the combined Fund based on the fee schedule in effect for Evergreen
at the combined level of average net assets for the year ended June 30, 1997
<PAGE>
EVERGREEN FIXED INCOME TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust. Incorporated by reference to
Evergreen Fixed Income Trust's Registration Statement on Form N-1A
filed on October 8, 1997 - Registration No. 333-37433 ("Form N-1A
Registration Statement")
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit A to Prospectus contained in
Part A of this Registration Statement.
5. Declaration of Evergreen Fixed Income Trust Articles II., III.6(c), IV.(3),
IV.(8), V., VI., VII., and VIII and By-Laws Articles II., III. and VIII.
6(a). Form of Investment Advisory Agreement between First Union National Bank
and Evergreen Fixed Income Trust. Incorporated by reference to the Form N-1A
Registration Statement.
6(b). Form of Interim Investment Advisory Agreement. Exhibit B
to Prospectus contained in Part A of this Registration Statement.
7(a). Distribution Agreement between Evergreen Distributor, Inc.
and Evergreen Fixed Income Trust. Incorporated by reference to the
Form N-1A Registration Statement.
7(b). Form of Dealer Agreement for Class A, Class B and Class C shares used by
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
8. Deferred Compensation Plan. Incorporated by reference to the Form N-1A
Registration Statement.
<PAGE>
9. Custody Agreement between State Street Bank and Trust Company and Evergreen
Fixed Income Trust. Incorporated by reference to Form N-1A Registration
Statement.
10. Rule 12b-1 Distribution Plan. Incorporated by reference to the Form N-1A
Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. Filed herewith.
13. Not applicable.
14(a). Consent of KPMG Peat Marwick LLP. Filed herewith.
14(b). Consent of Deloitte & Touche LLP. Filed herewith.
15. Not applicable.
16. Powers of Attorney. Previously filed.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in 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.
<PAGE>
(3) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post-Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of Columbus and State of Ohio, on the 30th day of
December, 1997.
EVERGREEN FIXED INCOME TRUST
By: /s/ William J. Tomko
-----------------------
Name: William J. Tomko
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Post-Effective Amendment No. 1 to the Registration Statement in the
capacities indicated on the 30th day of December, 1997.
Signatures Title
- ---------- -----
/s/William J. Tomko President and
- ------------------- Treasurer
William J. Tomko
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
<PAGE>
Gerald M. McDonnell
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
12 Tax Opinion and Consent of Sullivan & Worcester LLP
14(a) Consent of KPMG Peat Marwick LLP
14(b) Consent of Deloitte & Touche LLP
17 Form of Proxy
- --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
December 30, 1997
Evergreen Fixed Income Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Fixed Income Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 17, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Evergreen Intermediate-Term Government Securities Fund (the "Acquiring Fund"), a
series of the Trust. We understand that the Trust is about to file
Post-Effective Amendment No. 1 to its Registration Statement on Form N-14
(Registration No. 333-41249) for the purpose of registering shares of the Trust
under the Securities Act of 1933, as amended (the "1933 Act"), in connection
with the proposed acquisition by the Acquiring Fund of all of the assets of The
Money Market Fund (the "Acquired Fund"), a series of a Massachusetts business
trust with transferable shares, in exchange solely for shares of the Acquiring
Fund and the assumption by the Acquiring Fund of certain identified liabilities
of the Acquired Fund pursuant to an Agreement and Plan of Reorganization, the
form of which is included in the Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and
the District of Columbia and generally do not purport to be familiar with the
laws of the State of Delaware.
<PAGE>
To the extent that the conclusions based on the laws of the State of Delaware
are involved in the opinion set forth herein below, we have relied, in rendering
such opinions, upon our examination of Chapter 38 of Title 12 of the Delaware
Code Annotated, as amended, entitled "Treatment of Delaware Business Trusts"
(the "Delaware business trust law") and on our knowlege of interpretation of
analogous common law of The Commonwealth of Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on February 20, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
December 30, 1997
The U.S. Government Securities Fund
Evergreen Intermediate-Term Government
Securities Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of The U.S. Government Securities
Fund by Evergreen Intermediate-Term Government
Securities Fund
Ladies and Gentlemen:
You have asked for our opinion as to certain Federal income tax
consequences of the transactions described below:
Parties to the Transaction. The U.S. Government Securities Fund ("Target
Fund") is a series of The Virtus Funds, a Massachusetts business trust.
Evergreen Intermediate-Term Government Securities Fund ("Acquiring Fund")
is a series of Evergreen Fixed Income Trust, a Delaware business trust.
Description of Proposed Transaction. Acquiring Fund will issue its
shares to Target Fund and assume certain stated liabilities of Target Fund, in
exchange for all of the assets of Target Fund. Target Fund will then immediately
dissolve and distribute all of the Acquiring Fund shares which it holds to its
shareholders pro rata in proportion to their shareholdings in Target Fund, in
complete redemption of all outstanding shares of Target Fund.
Scope of Review and Assumptions. In rendering our opinion, we have
reviewed and relied upon the form of Agreement and Plan of Reorganization (the
"Reorganization Agreement") between Acquiring Fund and Target Fund dated as of
November 26, 1997 which is enclosed in a draft prospectus/proxy statement to be
dated January 5, 1998 which describes the proposed transaction, and on the
information provided in such prospectus/proxy statement. We have relied, without
independent verification, upon the factual statements made therein, and assume
that there will be no change in material facts disclosed therein between the
date of this letter and the date of the closing of the
<PAGE>
transaction. We further assume that the transaction will be carried out in
accordance with the Reorganization Agreement.
Representations. Written representations, copies of which are attached
hereto, have been made to us by the appropriate officers of Target Fund and of
Acquiring Fund, and we have without independent verification relied upon such
representations in rendering our opinions.
Opinions
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, we have the following opinions:
1. The acquisition by Acquiring Fund of all of the assets of Target
Fund solely in exchange for voting shares of Acquiring Fund and assumption of
certain specified liabilities of Target Fund followed by the distribution by
Target Fund of said Acquiring Fund shares to the shareholders of Target Fund in
exchange for their Target Fund shares will constitute a reorganization within
the meaning of ss. 368(a)(1)(D) of the Code, and Acquiring Fund and Target Fund
will each be "a party to a reorganization" within the meaning of ss. 368(b) of
the Code.
2. No gain or loss will be recognized to Target Fund upon the transfer
of all of its assets to Acquiring Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of certain specified liabilities
of Target Fund, or upon the distribution of such Acquiring Fund voting shares to
the shareholders of Target Fund in exchange for all of their Target Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of any liabilities of Target
Fund.
4. The basis of the assets of Target Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund
immediately prior to the transfer, and the holding period of the assets of
Target Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Target Fund.
5. The shareholders of Target Fund will recognize no gain or loss upon
the exchange of all of their Target Fund shares solely for Acquiring Fund voting
shares.
<PAGE>
6. The basis of the Acquiring Fund voting shares to be received by the
Target Fund shareholders will be the same as the basis of the Target Fund shares
surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Target Fund shareholders will include the period during which
the Target Fund shares surrendered in exchange therefor were held, provided the
Target Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in such
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Fixed Income Trust
We consent to the use of our report dated August 8, 1997 for Evergreen
Intermediate-Term Government Securities Fund incorporated by reference herein
and to the reference to our firm under the caption "FINANCIAL STATEMENTS AND
EXPERTS" in the
prospectus/proxy statement.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
December 30, 1997
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Evergreen Fixed Income Trust on Form N-14 of our report on The U.S. Government
Securities Fund dated November 7, 1997, appearing in the Annual Report of The
Virtus Funds for the year ended September 30, 1997, and to the reference to us
under the heading "Financial Statements and Experts" in the Prospectus/Proxy
Statement, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 30, 1997
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THE U.S. GOVERNMENT SECURITIES FUND,
a series of The Virtus Funds
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
C. Grant Anderson, Carol B. Kayworth, Patricia F. Conner, Ann M. Scanlon and
Catherine C. Ryan or any of them as Proxies of the undersigned, with full power
of substitution, to vote on behalf of the undersigned all shares of The U.S.
Government Securities Fund, a series of The Virtus Funds ("Virtus Government")
that the undersigned is entitled to vote at the special meeting of shareholders
of Virtus Government to be held at 2:00 p.m. on Friday, February 20, 1998 at the
offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts 02116
and at any adjournments thereof, as fully as the undersigned would be entitled
to vote if personally present.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON
THIS PROXY. If joint owners, EITHER may sign this
Proxy. When signing as attorney, executor,
administrator, trustee, guardian, or custodian for a
minor, please give your full title. When signing on
behalf of a corporation or as a partner for a
partnership, please give the full corporate or
partnership name and your title, if any.
Date , 199
----------------------------------------
----------------------------------------
Signature(s) and Title(s), if applicable
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE VIRTUS
FUNDS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTION TO
BE TAKEN ON THE FOLLOWING PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED
AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF
TRUSTEES OF THE VIRTUS FUNDS RECOMMENDS A VOTE FOR THE PROPOSALS. PLEASE MARK
YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK. EXAMPLE: X
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Intermediate-Term Government Securities Fund, a series of Evergreen Fixed Income
Trust, will (i) acquire all of the assets of Virtus Government in exchange for
shares of Evergreen Intermediate-Term Government Securities Fund; and (ii)
assume certain identified liabilities of Virtus Government, as substantially
described in the accompanying Prospectus/Proxy Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To approve the proposed Interim Investment Advisory Agreement with
Virtus Capital Management, Inc.
- ---- FOR ---- AGAINST ---- ABSTAIN
3. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
<PAGE>
