<PAGE>
Evergreen
Long Term Bond
Funds
October 31, 1998
Semiannual Report
[PICTURE APPEARS HERE]
[LOGO OF EVERGREEN FUNDS(SM) APPEARS HERE]
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Table of Contents
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Letter to Shareholders ................................................... 1
For Your Information ..................................................... 2
Evergreen Diversified Bond Fund
Fund at a Glance ...................................................... 3
Portfolio Manager Interview ........................................... 4
Evergreen High Yield Bond Fund
Fund at a Glance ...................................................... 7
Portfolio Manager Interview ........................................... 8
Evergreen Strategic Income Fund
Fund at a Glance ...................................................... 10
Portfolio Manager Interview ........................................... 11
Evergreen U.S. Government Fund
Fund at a Glance ...................................................... 14
Portfolio Manager Interview ........................................... 15
Financial Highlights
Evergreen Diversified Bond Fund........................................ 17
Evergreen High Yield Bond Fund......................................... 19
Evergreen Strategic Income Fund........................................ 21
Evergreen U.S. Government Fund......................................... 24
Schedule of Investments
Evergreen Diversified Bond Fund........................................ 26
Evergreen High Yield Bond Fund......................................... 31
Evergreen Strategic Income Fund........................................ 36
Evergreen U.S. Government Fund......................................... 41
Statements of Assets and Liabilities...................................... 42
Statements of Operations ................................................. 43
Statements of Changes in Net Assets....................................... 44
Combined Notes to Financial
Statements ............................................................... 47
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Evergreen Funds
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Evergreen Funds is one of the nation's fastest growing investment companies with
approximately $50 billion in assets under management.
With over 70 mutual funds to choose among and acclaimed service and operations
capabilities, investors enjoy a broad range of quality investment products and
services designed to meet their needs.
The Evergreen Funds employ intensive, research-driven investment strategies
executed by over 90 research analysts and portfolio managers. The fund company
remains dedicated to meeting the needs of investors and their advisors in a
global economy. Look to the Evergreen Funds to provide a distinctive level of
service and excellence in investment management.
This semiannual report 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.
------------------------------------------------------------------
Mutual Funds: ARE NOT FDIC INSURED May lose value . Are not bank guaranteed
------------------------------------------------------------------
Evergreen Distributor, Inc.
Evergreen(SM) is a Service Mark of Evergreen Investment Services, Inc.
<PAGE>
Letter to Shareholders
----------------------
December 1998
[PHOTO OF WILLIAM M. ENNIS APPEARS HERE]
William M. Ennis
Managing Director
Dear Shareholders:
We are pleased to provide you the Evergreen Long Term Bonds Funds semiannual
report covering the period ended October 31, 1998.
Market Volatility
The financial markets have certainly experienced volatility in the past several
months. Concerns of foreign currency devaluation, political turbulence and
instability abroad have produced an uncertain market. Through September, the
market all but lost its year-to-date gains, and then in November was on the
rise, reaching new highs. We encourage you to take this opportunity to talk to
your financial representative and review your investment time horizon and ensure
you are on track with your goals.
Introduction of the Euro
On January 1, 1999, eleven European countries will adopt the euro as their
currency. On this date, the wholesale markets and government and financial
sectors will convert to the euro, and new securities will be issued in euro
denomination only. Full conversion to the new currency will not be completed
until 2002. The Evergreen Strategic Income Fund, which is in this report, owns
securities in one or more of the European Union countries.
At this point it is still unclear how the euro conversion will affect foreign
exchange rates, interest rates and the value of European securities, but we
believe the potential benefits to globally oriented investors are significant.
They include changes in currency risk, increased competition, and a central
bank. Foreign exchange risk may decrease for the countries participating in the
European Union; however, currency risk associated with rises and declines of the
value of the euro versus the dollar will still exist. Most noticeable for
investors will be the ability to compare the value of companies across the
European Union member countries without having to factor in the effect of
fluctuating currencies. Increased competition resulting from deregulation and
economic unification may produce a wave of merger and acquisition activity,
which could present attractive investment opportunities for those able to
identify the companies most inclined to benefit from restructuring. Finally, the
European Central Bank, comparable to the U.S. Federal Reserve, will provide
European Union countries with a unified monetary policy for the first time.
If you have any questions about the funds in this report or any other Evergreen
Funds, please contact your financial representative or call us at 800.343.2898,
and we will be happy to assist you.
Thank you for your continued investment with Evergreen Funds.
Sincerely,
/s/ William M. Ennis
William M. Ennis
Managing Director
Evergreen Funds
1
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For Your Information
--------------------
Good News!
Effective for the 1998 Tax Year, long-term capital gains taxes are reduced to
20%.
Year 2000/1/
We have been addressing the Year 2000 issue since February 1996 and have adopted
an industry best practices methodology for the project. Our team is on schedule
to complete the following milestones: Inventory and Assessment, Remediation,
Testing and Contingency. Although Evergreen Funds is striving to identify and
correct every issue under our control related to the Year 2000, it would be
impossible to guarantee a problem-free transition into the next millennium. Our
goal, however, is that our shareholders experience virtually no impact on the
products and services we deliver.
Cost Savings
In an effort to achieve efficiencies and cost savings, we are combining your
funds' required mailings so you only receive one per household, based on the
registration last name and exact address./2/ This reduces the mailing costs, not
to mention the amount of paper needed to print, which in turn benefits your
funds by reducing the overall expenses. If you prefer to receive separate copies
of reports and prospectuses for each registered holder in your household, please
notify us by calling the number on your statement and we will adjust our records
accordingly.
New Evergreen Funds
Evergreen introduces three new funds:
Evergreen Tax Strategic Equity Fund: seeks to maximize the after-tax total
return on its portfolio of investments by using a combination of stock selection
strategies and trading techniques.
Evergreen Select Equity Index Fund: seeks investment results that achieve price
and yield performance similar to the S&P 500 Index.
Evergreen Masters Fund: blends growth and value, large- and mid-cap stocks into
one convenient portfolio. Diversification is taken one step further by employing
four management teams, Evergreen, MFS, Oppenheimer, and Putnam.
Talk to your financial representative or call us at 800.343.2898 for a
prospectus and more information.
/1/ The information above constitutes Year 2000 readiness disclosure.
/2/ If you purchased your shares through a financial representative, we may not
be able to consolidate your mailings by last name and address, because that
institution controls the mailings.
2
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EVERGREEN
Diversified Bond Fund
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Fund at a Glance as of October 30, 1998
We maintained our long-term investment approach, focusing on individual
industries and companies.
Portfolio
Management
------------------------
[PHOTO OF CHRISTOPHER CONKEY APPEARS HERE]
Christopher Conkey, CFA
Tenure: January 1994
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CURRENT INVESTMENT STYLE/1/
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[GRAPHIC APPEARS HERE]
Morningstar's Style Box is based on a portfolio date as of 10/31/98.
The Fixed-Income Style Box placement is based on a fund's average effective
maturity or duration and the average credit rating of the bond portfolio.
/1/Source: 1998 Morningstar, Inc.
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads, fees and expenses paid by the
shareholders investing in each class. The investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than original cost. The LBABI is an unmanaged index and does not include
transaction costs associated with buying and selling securities or any
management fees. The CPI is a commonly used measure of inflation and does not
represent an investment return. It is not possible to invest directly in an
index.
- --------------------------------------------------------------------------------
PERFORMANCE AND RETURNS*
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Class A Class B Class C Class Y
Inception Date 1/20/98 9/11/35 4/7/98 2/11/98
................................................................................
Average Annual Returns
................................................................................
6 months with sales charge -2.56% -3.04% 0.94% n/a
................................................................................
6 months w/o sales charge 2.30% 1.92% 1.93% 1.46%
................................................................................
1 year with sales charge -- 1.04% -- n/a
................................................................................
1 year w/o sales charge -- 6.04% -- --
................................................................................
5 years -- 5.63% -- --
................................................................................
10 years -- 7.12% -- --
................................................................................
Since Inception** -1.73% 6.97% 0.33% 2.28%
................................................................................
Maximum Sales Charge 4.75% 5.00% 1.00% n/a
Front End CDSC CDSC
................................................................................
30-day SEC Yield 5.88% 5.11% 5.13% 6.13%
................................................................................
6-month distributions per share $0.50 $0.44 $0.44 $0.41
................................................................................
* Adjusted for maximum sales charge.
** Represents cumulative returns for Class A, C, and Y shares; these classes
opened in 1998 and do not have annual returns yet.
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LONG TERM GROWTH
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[LINE GRAPH APPEARS HERE]
Class B Shares LBABI CPI
10/31/88 10000 10000 10000
10/31/89 10504 11190 10449
10/31/90 9916 11896 11107
10/31/91 11761 13777 11431
10/31/92 13149 15132 11797
10/31/93 15133 16928 12122
10/31/94 14181 16307 12438
10/31/95 15887 18859 12787
10/31/96 16942 19962 13170
10/31/97 18768 21742 13444
10/31/98 19901 23765 13627
Comparison of a $10,000 investment in Evergreen Diversified Bond Fund Class B,
versus a similar investment in the Lehman Brothers Aggregate Bond Index (LBABI)
and the Consumer Price Index (CPI).
The Lehman Brothers Aggregate Bond Index is a broad-based unmanaged fixed-income
index of U.S. government, corporate and mortgage-backed securities. It
represents the price change and coupon income of several thousand securities of
various credit qualities and maturities.
3
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EVERGREEN
Diversified Bond Fund
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Portfolio Manager Interview
How did the Fund perform
during the six months ended October 31, 1998?
Evergreen Diversified Bond Fund's Class B shares generated a total return of
1.9% for the six-month period, unadjusted for sales charges. The newly opened
classes, A, C and Y, returned 2.3%, 1.9% and 1.5%, respectively, unadjusted for
any sales charges, for the same six months. In comparison, the Lehman Brothers
Aggregate Bond Index produced a 5.5% return during that same time.
Portfolio
Characteristics
---------------
(as of 10/31/98)
Total Net Assets $535,323,929
................................................................................
Average Credit Quality A+
................................................................................
Average Maturity 12.1 years
................................................................................
Average Duration 5.2 years
................................................................................
We attribute the Fund's underperformance to its emphasis on investments other
than U.S. government securities. Historically, a diverse mix of fixed-income
securities has produced higher returns than a portfolio that relies solely on
U.S. Treasuries. For the last three months of the reporting period, however,
U.S. Treasuries with longer maturities experienced greater price appreciation
than many other securities because of a "flight-to-quality" that took place in
the global financial markets. We believe this was a temporary phenomenon. Longer
term, we expect the market to return to conditions that are more characteristic
of historical standards, where diversification provides shareholders with more
generous total returns.
What was the investment environment like during the reporting period?
There were two distinct environments. The first half of the period was a
continuation of what had been recent trends with relatively stable interest
rates, rising U.S. stock prices and corporate bonds outperforming U.S.
Treasuries. The investment environment, however, changed dramatically in the
second half of the period. During that time, investors experienced a
"flight-to-quality" that drove long-term U.S. Treasury bond yields to historic
lows and their prices significantly higher. The 30-year U.S. Treasury reached a
low yield of 4.72% on October 5, 1998.
What caused this "flight-to-quality"?
Investors became increasingly concerned about the fragility of the world's
financial markets, ultimately fearing a severe worldwide economic slowdown.
These concerns were prompted by several events, in addition to ongoing problems
in Asia and developing countries.
On July 17, 1998, the U.S. equity market, as measured by the Dow Jones
Industrial Average Index, reached a peak and then began to fall. The following
month, Russia effectively defaulted on its debt. Investors sought safety and
liquidity with increasing intensity. Prices of the highest quality bonds,
particularly U.S. Treasuries, rose dramatically. Many bonds other than U.S.
Treasuries, such as high quality corporate bonds, were perceived by many
investors to have too much credit risk and not enough liquidity for the yield
advantage they provided over U.S. Treasuries. As a result, the prices of
non-U.S. Treasuries did not move up as much as their U.S. government
counterparts. The more limited price movement caused the yield advantages
provided by investment grade and high yield bonds, relative to U.S. Treasuries,
to double, and the yield advantage provided by developing countries
4
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EVERGREEN
Diversified Bond Fund
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Portfolio Manager Interview
compared to U.S. Treasuries, to triple. The relative value of corporate bonds
had improved significantly by the end of the period. At that time, the yield
advantage they offered over U.S. Treasuries was greater than it had been since
1991.
In the midst of these concerns, the largest U.S. hedge fund--a private
investment account that uses leveraged, high-risk trading strategies--sought
financial assistance to avoid insolvency. Hedge funds are not subject to the
same regulations as mutual funds. The strategies of this fund were believed to
have far-reaching international effects and involved the capital of many Wall
Street firms that typically could help provide needed liquidity. The situation
fueled investor concerns about the fragility of the global financial markets and
strengthened demand for only the safest, most liquid investments.
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PORTFOLIO COMPOSITION
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(based on 10/31/98 net assets)
[PIE CHART APPEARS HERE]
Corporate Bonds -- 51.6%
Collateralized Mortgage Obligations -- 14.1%
U.S. Treasury Obligations -- 10.6%
Foreign Corporate Bonds -- 9.3%
Asset-backed Securities -- 5.8%
Repurchase Agreements -- 4.6%
Mortgage-backed Securities -- 3.5%
Other Investments and Other Assets & Liabilities (net) -- 0.5%
How did you manage the Fund over the past six months?
We maintained our long-term investment approach, focusing on individual
industries and companies. We continued to thoroughly analyze and understand the
financial operations of the companies we followed, particularly studying how
they would function at various points in the economic cycle. Companies that are
selected to be in the portfolio are subject to ongoing credit reviews. If we
believed in the long-term creditworthiness and relative value of a company, we
held the position, rather than letting external--and perhaps sometimes
irrational--market factors dictate our decision-making process.
For the Fund's high yield portion, we emphasized defensive industries; those
industries whose profits are less dependent on economic cycles. The Fund's
heaviest weightings were in the cable, food, gaming and publishing industries,
as of October 31, 1998. In contrast, we minimized the Fund's holdings in high
risk industries, such as telecommunications, and in cyclical industries; those
businesses whose profits are closely tied to the ups and downs of the economy.
During the reporting period, we made several adjustments to the Fund's structure
which, we believe, should enhance future potential for total return. We upgraded
average credit quality from A to A+. We accomplished this primarily by reducing
holdings in high yield bonds from 23% on April 30, 1998 to 19% on October 31,
1998. The Fund's high yield investments centered on BB- rated bonds, which are
considered to be the strongest credit tier in the high yield bond sector. We
also decreased the Fund's international holdings from 16% to 9% at the end of
the
5
<PAGE>
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EVERGREEN
Diversified Bond Fund
- --------------------------------------------------------------------------------
Portfolio Manager Interview
period. The Fund's foreign position--primarily Danish securities--was hedged
to U.S. dollars. Further, in recognition of the historically low levels to which
interest rates had fallen and, in our opinion, the limited potential for a
further decline in interest rates, we modestly shortened the Fund's average
maturity. As of October 31, 1998, the Fund's average maturity stood at 12.1
years.
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PORTFOLIO QUALITY
- --------------------------------------------------------------------------------
(based on 10/31/98 portfolio assets)
[PIE CHART APPEARS HERE]
AAA -- 30.5%
A -- 19.8%
AA -- 14.4%
BBB -- 13.8%
BB -- 12.4%
B -- 9.1%
What is your outlook for the bond market over the next six months?
We believe the bond market offers attractive potential for total return over the
next six months. Global economies and financial markets appear to be regaining
some stability, which has had a positive effect on investor confidence. Further,
we think that the greatly increased yield advantages have created attractive
relative value in several sectors of the bond market. The combination of these
factors has improved the possibility for price appreciation, in our opinion.
We attribute much of the improvement in the market's stability to policy
decisions that have been made at both the international and national levels. In
an effort to stem a global slowdown, the Federal Reserve Board cut interest
rates twice during the reporting period and once more in November 1998, as this
report was being written. Further, Japanese lawmakers have passed legislation to
strengthen their banking system and the International Monetary Fund has
developed what we believe is a credible rescue package for Brazil.
Although we still anticipate slower economic growth, we believe these policies
have reduced--and continue to reduce--the chances of a worldwide recession.
Further, we are optimistic that these trends could be ongoing. With minimal
inflationary pressures and more stable market conditions, we anticipate
long-term interest rates, based on the 30-year U.S. Treasury, to moderate,
trending around 5%.
6
<PAGE>
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EVERGREEN
High Yield Bond Fund
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Fund at a Glance as of October 31, 1998
We believe the Fund's underperformance primarily stemmed from the price declines
of its premium yielding bonds, which typically carry higher credit risk during
unusually difficult market conditions.
Portfolio
Management
------------
[PHOTO OF PRESCOTT B. CROCKER, CFA APPEARS HERE]
Prescott B. Crocker, CFA
Tenure: February 1997
- --------------------------------------------------------------------------------
CURRENT INVESTMENT STYLE/1/
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
Morningstar's Style Box is based on a portfolio date as of 10/31/98.
The Fixed-Income Style Box placement is based on a fund's average effective
maturity or duration and the average credit rating of the bond portfolio.
/1/ Source: 1998 Morningstar, Inc.
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads, fees and expenses paid by the
shareholders investing in each class. The investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than original cost. The LBABI and the MLHYMI are unmanaged indices and do
not include transaction costs associated with buying and selling securities or
any management fees. The CPI is a commonly used measure of inflation and does
not represent an investment return. It is not possible to invest directly in an
index.
- --------------------------------------------------------------------------------
PERFORMANCE AND RETURNS*
- --------------------------------------------------------------------------------
Class A Class B Class C Class Y
Inception Date 1/20/98 9/11/35 1/21/98 4/14/98
................................................................................
Average Annual Returns
................................................................................
6 months with sales charge -15.43% -15.80% -12.41% n/a
................................................................................
6 months w/o sales charge -11.21% -11.55% -11.56% -11.10%
................................................................................
1 year with sales charge -- -9.50% -- n/a
................................................................................
1 year w/o sales charge -- -5.10% -- --
................................................................................
5 years -- 2.51% -- --
................................................................................
10 years -- 5.77% -- --
................................................................................
Since Inception** -13.26% 8.24% -10.33% -11.33%
................................................................................
Maximum Sales Charge 4.75% 5.00% 1.00% n/a
Front End CDSC CDSC
................................................................................
30-day SEC Yield 10.02% 9.25% 9.24% 10.27%
................................................................................
6-month distributions per share $0.18 $0.17 $0.17 $0.19
................................................................................
* Adjusted for maximum sales charge.
** Represents cumulative returns for Class A, C, and Y shares; these classes
opened in 1998 and do not have annual returns yet.
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Long Term Growth
- --------------------------------------------------------------------------------
Class B Shares LBABI CPI MLHYMI
10/31/88 10000 10000 10000 10000
10/31/89 9768 11190 10449 10490
10/31/90 7903 11896 11107 9822
10/31/91 10479 13777 11431 13213
10/31/92 12086 15132 11797 15556
10/31/93 15283 16928 12122 18437
10/31/94 14212 16307 12438 18455
10/31/95 15331 18859 12787 21620
10/31/96 16274 19962 13170 23968
10/31/97 18469 21742 13444 27284
10/31/98 17527 23765 13627 27558
Comparison of a $10,000 investment in Evergreen High Yield Bond Fund Class B,
versus a similar investment in the Lehman Brothers Aggregate Bond Index (LBABI),
the Merrill Lynch High Yield Master Index (MLHYMI) and the Consumer Price Index
(CPI).
The Lehman Brothers Aggregate Bond Index is a broad-based, unmanaged,
fixed-income index of U.S. government, corporate and mortgage-backed securities.
It represents the price change and coupon income of several thousand securities
of various credit qualities and maturities.
The Merrill Lynch High Yield Master Index is a broad-based measure of the
performance of the non-investment grade U.S. domestic bond market. The index
currently captures close to $200 billion of the outstanding debt of domestic
market issuers rated below investment grade but not in default.
7
<PAGE>
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EVERGREEN
High Yield Bond Fund
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Portfolio Manager Interview
How was the Fund's performance over the past 6-months?
The total return for the Fund's Class B shares was -11.6%, unadjusted for any
sales charge, for the six months ended October 31, 1998. In comparison, the
Chase High Yield Index returned -2.1% and the Lehman Aggregate Bond Index
returned -5.9% during the same six months. Unlike a mutual fund, these indices
incur no operating expenses, which would further reduce their total returns.
As you are aware, financial markets can be subject to temporary, wide price
swings, which can dramatically alter a fund's short-term performance. These
conditions can be unsettling for even the most seasoned investor; however, they
serve as reminders of the importance of maintaining a longer-term perspective.
For the 12-months ending November 30, 1998, the Fund's Class B shares generated
a return of -0.52%, unadjusted for sales charges, compared to the median return
of 2.4%, produced by the Chase High Yield Index and 9.45% returned by the Lehman
Aggregate Bond Index.
Portfolio
Characteristics
---------------
(as of 10/31/98)
Total Net Assets $403,331,554
...............................................................................
Average Credit Quality B
...............................................................................
Average Maturity 9.0 years
...............................................................................
Average Duration 4.5 years
...............................................................................
We believe the Fund's underperformance primarily stemmed from the price declines
of its premium yielding bonds, which typically carry higher credit risk during
unusually difficult market conditions. During the period, several unexpected
market events occurred which ignited a swift and dramatic "flight-to-quality",
causing prices in the high yield bond sector to fall sharply. Historically,
price distortions of these magnitudes often have presented attractive long-term
investment opportunities. We are closely monitoring the Fund's holdings and
believe that longer term, conditions in the credit markets will return to more
normal relationships, based on historical standards.
- --------------------------------------------------------------------------------
PORTFOLIO CREDIT QUALITY
- --------------------------------------------------------------------------------
(based on 10/31/98 portfolio assets)
[PIE CHART APPEARS HERE]
B -- 70.3%
Not rated -- 17.9%
BB -- 6.9%
CCC -- 4.3%
CC -- 0.6%
What caused this "flight-to-quality"?
Three events--currency devaluations in Russia, currency controls in Malaysia and
the insolvency of the largest U.S. hedge fund--triggered a massive "flight-to-
quality", which took place in August 1998. The first half of the reporting
period was characterized by relatively stable interest rates and a high degree
of investor confidence--an environment in which premium yielding bonds typically
thrive. When these unexpected events unfolded, however, market sentiment shifted
abruptly as investors became increasingly concerned about the fragility of
global financial systems.
In the middle of August, the Russian government devalued the country's currency
and then defaulted on its domestic debt. Investors were particularly surprised
because this occurred approximately two weeks after Russia had successfully
issued a $200 million Eurobond offering. A Eurobond is the bond offering of a
foreign issuer, denominated in U.S. dollars. Shortly thereafter, the government
of Malaysia imposed currency controls, just as Asian regional currencies had
begun to exhibit strength. This action again surprised investors because it
violated previously held beliefs
8
<PAGE>
- --------------------------------------------------------------------------------
EVERGREEN
High Yield Bond Fund
- --------------------------------------------------------------------------------
Portfolio Manager Interview
about the international practice of open currency conversion. Finally, in the
midst of these international problems, the largest hedge fund in the United
States declared insolvency. A hedge fund is a private investment account that
often engages in complex, leveraged trading strategies. Hedge funds are not
subject to the same regulations as mutual funds. The strategies were believed to
have far-reaching international effects and involved the capital of many Wall
Street firms that otherwise could help provide needed liquidity. The combination
of these three events caused investors to seek securities carrying the highest
degree of safety and liquidity, specifically U.S. Treasuries. Demand for U.S.
Treasuries soared and demand for high yield bonds declined sharply, when
investors required greater yield advantages as compensation for undertaking
credit risk. As the yields of high yield bonds rose, their prices fell.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
(based on 10/31/98 portfolio assets)
[PIE CHART APPEARS HERE]
Corporate Bonds -- 77.3%
Foreign Corporate Bonds -- 9.1%
Repurchase Agreements -- 7.0%
Preferred Stocks -- 5.8%
Common Stocks and Warrants -- 0.8%
How did you manage the Fund during this difficult investment environment?
We prepared for market conditions that might penalize risk further, specifically
employing three strategies. First, as the market rallied, we reduced holdings in
CCC-rated securities from 10% to 4%, as of October 31, 1998. Second, with
expectations of a resumption of a weaker environment for equities, we also sold
the bonds of issuers whose financial soundness was dependent on raising capital
in the stock market. Our third strategy was based on our outlook for the
economy. We lowered our positions in industries whose profits were tied to the
ups-and-downs of the economy, in anticipation of slower economic growth. In
contrast, we increased the Fund's position in industries whose profits were less
dependent on economic cycles, such as food distribution and healthcare.
What is your outlook for high yield bonds over the next six months?
We remain cautious about the stability of the global financial markets and
continuing deflationary price pressures in the world's economies. As we head
into the final months of 1998, market sentiment has turned positive and has been
expressed by a significant rally in the stock market, in response to the Federal
Reserve Board cutting interest rates. Shortly after the close of this reporting
period, the Federal Reserve Board cut interest rates for the third time this
fall. While the stock market has rallied to new highs, however, U.S. Treasuries
have experienced substantial price declines. At least for the time being, the
"flight-to-quality" has dissipated and investors appear to have greater
confidence in the future of the financial markets. Over the near term, we intend
to prepare our funds for the possibility of a less exuberant stock market
environment. We will continue to exercise prudence in this environment, watching
for developments that could indicate the longer-term direction of the world's
economies and financial markets.
9
<PAGE>
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EVERGREEN
Strategic Income Fund
- --------------------------------------------------------------------------------
Fund at a Glance as of October 31, 1998
We attribute the Fund's negative return to the unusually challenging investment
environment that occurred in the last three months of the reporting period.
Portfolio
Management
--------------------------------
[PHOTO OF PRESCOTT B. CROCKER APPEARS HERE]
Prescott B. Crocker, CFA
Tenure: February 1997
- --------------------------------------------------------------------------------
CURRENT INVESTMENT STYLE/1/
- --------------------------------------------------------------------------------
Morningstar's Style Box is based on a portfolio date as of
10/31/98.
[GRAPHIC APPEARS
HERE] The Fixed-Income Style Box placement is based on a fund's
average effective maturity or duration and the average credit
rating of the bond portfolio.
/1/Source: 1998 Morningstar, Inc.
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads, fees and expenses paid by the
shareholders investing in each class. The investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than original cost. The LBABI is an unmanaged index and does not include
transaction costs associated with buying and selling securities or any
management fees. The CPI is a commonly used measure of inflation and does not
represent an investment return. It is not possible to invest directly in an
index.
- --------------------------------------------------------------------------------
PERFORMANCE AND RETURNS*
- --------------------------------------------------------------------------------
Class A Class B Class C Class Y
Inception Date 4/14/87 2/1/93 2/1/93 1/13/97
................................................................................
Average Annual Returns
................................................................................
6 months with sales charge -8.24% -8.64% -4.93% n/a
................................................................................
6 months w/o sales charge -3.66% -3.99% -4.00% -3.57%
................................................................................
1 year with sales charge -3.22% -3.73% 0.06% n/a
................................................................................
1 year w/o sales charge 1.61% 1.02% 1.01% 1.88%
................................................................................
5 years 3.32% 3.28% 3.57% --
................................................................................
10 years 6.96% -- -- --
................................................................................
Since Inception 6.75% 6.76% 6.96% 3.44%
................................................................................
Maximum Sales Charge 4.75% 5.00% 1.00% n/a
Front End CDSC CDSC
................................................................................
30-day SEC Yield 7.86% 7.09% 7.09% 8.12%
................................................................................
6-month distributions per share $0.25 $0.22 $0.22 $0.25
................................................................................
* Adjusted for maximum sales charge.
- --------------------------------------------------------------------------------
LONG TERM GROWTH
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Class A Shares LBABI CPI
10/31/88 9525 10000 10000
10/31/89 9828 11190 10449
10/31/90 7572 11896 11107
10/31/91 10234 13777 11431
10/31/92 11957 15132 11797
10/31/93 15848 16928 12122
10/31/94 15165 16307 12438
10/31/95 16085 18859 12787
10/31/96 17586 19962 13170
10/31/97 19282 21742 13444
10/31/98 19592 23765 13627
Comparison of a $10,000 investment in Evergreen Strategic Income Fund Class A,
versus a similar investment in the Lehman Brothers Aggregate Bond Index (LBABI)
and the Consumer Price Index (CPI).
The Lehman Brothers Aggregate Bond Index is a broad-based, unmanaged,
fixed-income index of U.S. government, corporate and mortgage-backed securities.
It represents the price change and coupon income of several thousand securities
of various credit qualities and maturities.
10
<PAGE>
- --------------------------------------------------------------------------------
EVERGREEN
Strategic Income Fund
- --------------------------------------------------------------------------------
Portfolio Manager Interview
How did the Fund perform during the reporting period?
The Fund's Class A shares experienced a total return of -3.7% for the six months
ended October 31, 1998, unadjusted for any sales charges. While we never like to
see negative returns, these results compare favorably to the median return of
- -4.6% generated by the multi-sector funds followed by Lipper Analytical Services
for the same period. Lipper Analytical Services is an independent monitor of
mutual fund performance. As you are aware, financial markets can be subject to
temporary wide price swings which can dramatically alter a Fund's short-term
performance. These conditions can be unsettling for even the most seasoned
investor; however, they serve as reminders of the importance of maintaining a
long-term perspective. Over the long run, the Fund has produced solid--and very
competitive--investment results. For the 12-months ending November 30, 1998, the
Fund's Class A shares generated a return of 4.57%, unadjusted for sales charges,
compared to the average return of 2.10%, produced by the multi-sector income
funds followed by Lipper Inc.
Portfolio
Characteristics
---------------
(as of 10/31/98)
Total Net Assets $285,504,659
...............................................................................
Average Credit Quality A
...............................................................................
Average Maturity 9.0 years
...............................................................................
Average Duration 5.2 years
...............................................................................
We attribute the Fund's negative return to the unusually challenging investment
environment that occurred in the last three months of the reporting period.
During this time, two of the sectors in which the Fund invests--the emerging
market component of the foreign sector and high yield bonds--experienced sudden
and significant price declines. This price movement offset the positive returns
produced by the Fund's investments in U.S. government securities. We believe
this was a temporary phenomenon and that longer term, more conventional price
relationships will be restored.
How was the Fund structured at the end of the reporting period?
As of October 31, 1998, the Fund was invested as follows: High yield bonds--34%,
U.S. Treasury and agency securities--33% and foreign bonds--29%. Foreign
government bond holdings represented 20% of net assets and included the
governments of the United Kingdom and Greece, the government of Quebec and
Danish mortgage-backed securities. Approximately 9% of the Fund's net assets
were invested in foreign corporate bond holdings, which included Latin America
and multi-national debt obligations.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
(based on 10/31/98 net assets)
[PIE CHART APPEARS HERE]
Corporate Bonds--34.2%
Foreign Corporate Bonds--29.0%
Mortgage-backed Securities--28.4%
U.S. Treasury Obligations--4.9%
Repurchase agreements--1.4%
Other Assets and Liabilities, net--0.9%
Asset-backed Securities--0.7%
Common stocks and warrants--0.5%
11
<PAGE>
- --------------------------------------------------------------------------------
EVERGREEN
Strategic Income Fund
- --------------------------------------------------------------------------------
Portfolio Manager Interview
What caused the investment environment to be so challenging?
Three unexpected events--currency devaluations in Russia, currency controls in
Malaysia and the insolvency of the largest U.S. hedge fund/1/--triggered a
massive "flight-to-quality" in August 1998. This environment stood in stark
contrast to the one that existed earlier in the period. For the first three
months of the reporting period, a continuation of what had been recent trends
characterized market conditions: stable interest rates, a high degree of
investor confidence and price relationships that reflected historical market
standards.
In the middle of August, the Russian government devalued the country's currency
and then defaulted on its domestic debt. Investors were particularly surprised
because this occurred approximately two weeks after Russia had successfully
issued a $200 million Eurobond/2/ offering. Shortly thereafter, the government
of Malaysia imposed currency controls, just as Asian regional currencies had
begun to exhibit strength. This action surprised investors because it violated
previously held beliefs about the international practice of open currency
conversion. Finally, in the midst of these international problems, the largest
hedge fund in the United States declared insolvency. The investment strategies
used by its traders had been extremely complex and were believed to have far-
reaching international effects. The hedge fund's investments also involved the
capital of several Wall Street firms and banks. This both severely limited Wall
Street's ability to help restore some of the needed liquidity and contributed to
investor concerns about the global financial markets. Ultimately, in a highly
unusual move, the Federal Reserve Bank arranged a rescue package for the hedge
fund, which restored some stability to the credit markets.
The combination of these events caused investors to avoid risk and seek
securities that carried the highest degree of safety and liquidity, specifically
U.S. Treasuries and high quality foreign bonds that were believed to have
minimal sovereign risk. At the same time, investors began to require greater
yield advantages for securities carrying credit risk, sovereign risk and limited
liquidity. These market conditions drove the prices of U.S. Treasuries and high
quality foreign government bonds higher and put increasing downward pressure on
the prices of other securities, particularly high yield and emerging market
bonds.
- --------------------------------------------------------------------------------
PORTFOLIO QUALITY
- --------------------------------------------------------------------------------
(based on 10/31/98 portfolio assets)
[PIE CHART APPEARS HERE]
AAA--38.2%
B--30.9%
BB--9.7%
CCC--6.8%
AA--5.9%
A--4.6%
BBB--2.7%
Not Rated--1.2%
What strategies did you use in managing the Fund?
We emphasized quality and flexibility. We maintained the Fund's exposure to U.S.
government securities and high quality foreign bonds, and limited investment in
high yield and emerging market bonds. We selected U.S. Treasuries in the 10 to
15-year maturity range, keeping the Fund's duration between four and six years.
Expressed in years, duration measures a Fund's sensitivity to interest rate
changes. The longer a fund's duration,
/1/A hedge fund is a private investment account that often engages in complex,
leveraged trading strategies. Hedge funds are not subject to the same
regulations as mutual funds.
/2/A Eurobond is the bond offering of a foreign issuer, denominated in U.S.
dollars.
12
<PAGE>
- --------------------------------------------------------------------------------
EVERGREEN
Strategic Income Fund
- --------------------------------------------------------------------------------
Portfolio Manager Interview
the more sensitive it is to interest rate changes. In contrast, a shorter
duration decreases a fund's sensitivity to changes in interest rates. The Fund's
shorter duration improved price stability when market conditions were unsettled,
and bonds experienced unusually wide price fluctuations. As of October 31, 1998,
the average quality of the Fund was A, its duration was 5.2 years and its
average maturity stood at 9 years. We also believe the Fund's currency hedges
contributed to total return by being well-positioned to take advantage of
short-term price opportunities in the foreign exchange markets.
What is your outlook over the next 6-months?
We remain cautious about the stability of global financial markets and
continuing deflationary price pressures in the world's economies. As we head
into the final months of 1998, market sentiment has turned positive and been
expressed by a significant rally in the stock market in response to the Federal
Reserve Board cutting interest rates. Shortly after the close of this reporting
period, the Federal Reserve Board cut interest rates for the third time this
fall. While the stock market has rallied to new highs, U.S. Treasuries have
experienced substantial price declines. At least for the time being, the
"flight-to-quality" has dissipated and investors appear to have greater
confidence in the future of the financial markets. Over the near term, we intend
to prepare our funds for the possibility of a less exuberant stock market
environment. We will continue to exercise prudence in this environment, watching
for developments that could indicate the longer-term direction of the world's
economies and financial markets.
13
<PAGE>
- --------------------------------------------------------------------------------
EVERGREEN
U.S. Government Fund
- --------------------------------------------------------------------------------
Fund at a Glance as of October 31, 1998
We took a more aggressive stance and increased the portfolio's duration from 4.4
years to 4.8 years during the six months. Performance was favorably impacted by
this strategy as interest rates fell markedly during the period.
Portfolio
Management
------------------------------
[PHOTO OF ROLLIN C. WILLIAMS APPEARS HERE]
Rollin C. Williams, CFA
Tenure: January 1993
- --------------------------------------------------------------------------------
CURRENT INVESTMENT STYLE/1/
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
Morningstar's Style Box is based on a portfolio date as of 10/31/98.
The Fixed-Income Style Box placement is based on a fund's average effective
maturity or duration and the average credit rating of the bond portfolio.
/1/Source: 1998 Morningstar, Inc.
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads, fees and expenses paid by the
shareholders investing in each class. The investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than original cost. The LBITGBI is an unmanaged index and does not include
transaction costs associated with buying and selling securities or any
management fees. The CPI is a commonly used measure of inflation and does not
represent an investment return. It is not possible to invest directly in an
index.
- --------------------------------------------------------------------------------
PERFORMANCE AND RETURNS*
- --------------------------------------------------------------------------------
Class A Class B Class C Class Y
Inception Date 1/11/93 1/11/93 9/2/94 9/2/93
................................................................................
Average Annual Returns
................................................................................
6 months with sales charge 0.45% 0.07% 4.06% n/a
................................................................................
6 months w/o sales charge 5.46% 5.07% 5.06% 5.60%
................................................................................
1 year with sales charge 3.75% 3.12% 7.12% n/a
................................................................................
1 year w/o sales charge 8.93% 8.12% 8.12% 9.20%
................................................................................
3 years 5.51% 5.55% 6.44% 7.50%
................................................................................
5 years 5.20% 5.16% -- 6.49%
................................................................................
Since Inception 5.80% 5.84% 7.34% 6.42%
................................................................................
Maximum Sales Charge 4.75% 5.00% 1.00% n/a
Front End CDSC CDSC
................................................................................
30-day SEC yield 4.98% 4.24% 4.24% 5.25%
................................................................................
6- month distribution per share $0.29 $0.26 $0.26 $0.30
................................................................................
* Adjusted for maximum sales charge
- --------------------------------------------------------------------------------
LONG TERM GROWTH
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Class A Shares LBITGBI CPI
1/31/93 9525 10000 10000
10/31/93 10178 10628 10217
10/31/94 9775 10447 10484
10/31/95 11164 11679 10778
10/31/96 11716 12341 11101
10/31/97 12638 13246 11332
10/31/98 13766 14506 11487
Comparison of a $10,000 investment in Evergreen U.S. Government Fund Class A,
versus a similar investment in the Lehman Brothers Intermediate Term Government
Bond Index (LBITGBI) and the Consumer Price Index (CPI).
The Lehman Brothers Intermediate Term Government Bond Index is an unmanaged
fixed-income index of U.S. government securities with maturities of less than 10
years.
14
<PAGE>
- --------------------------------------------------------------------------------
EVERGREEN
U.S. Government Fund
- --------------------------------------------------------------------------------
Portfolio Manager Interview
How did the Fund perform during the past six months?
For the six months ended October 31, the Evergreen U.S. Government Fund's Class
A, B and C shares returned 5.5%, 5.1%, and 5.1%, respectively, unadjusted for
any sales charges. Class Y shares returned 5.6% for the six-month period. This
compares to the Fund's benchmark, the Lehman Brothers Intermediate Term
Government Bond Index, return of 6.3% and the 5.7% average return of general
U.S. government funds tracked by Lipper Inc., an independent monitor of mutual
fund performance. The Fund's solid six-month return can be attributed to our
favorable duration strategy during a period of declining rates as well as an
exceptional period for U.S. Treasuries.
Portfolio
Characteristics
---------------
(as of 10/31/98)
Total Net Assets $373,451,637
...............................................................................
Average Credit Quality AAA
...............................................................................
Average Maturity 8.7 years
...............................................................................
Average Duration 4.8 years
...............................................................................
What was the environment like for fixed income investors during the period?
Over the past six months fixed income investors witnessed a continuation of
themes from earlier in the year: low inflation, a spreading global economic
crisis, a flight to quality bonds and widening spreads between Treasuries and
all other fixed income securities. Against this backdrop, U.S. Treasuries proved
to be the overwhelming asset class of choice, enjoying strong performance as
global investors sought a safe haven from volatile global markets. Consequently,
the Fund's nearly 50% weighting of Treasuries fueled strong relative
performance. In addition, interest rates continued to trend lower which, in
turn, boosted bond prices across the board. The yield on the bellwether 30-year
Treasury Bond fell from 5.95% to 5.16% during the six months. Underscoring this
decline were two interest rate cuts by the Federal Reserve Board undertaken to
insulate the U.S. from the global turmoil, with a third cut which took place
after the semiannual fiscal period in mid-November.
- --------------------------------------------------------------------------------
MATURITY BREAKDOWN
- --------------------------------------------------------------------------------
(based on 10/31/98 portfolio assets)
[PIE CHART APPEARS HERE]
1-5 years -- 51.5%
0-1 years -- 15.4%
5-10 years -- 12.7%
10-20 years -- 9.4%
20-30 years -- 8.5%
30+ years -- 2.5%
What particular strategies did you use during the period?
At the beginning of the fiscal period, we felt there was a strong possibility
the U.S. economy would slow and, in response, the Fed would ease interest rates
to stimulate the economic growth. Consequently, we took a more aggressive stance
and increased the portfolio's duration from 4.4 years to 4.8 years during the
six months. Performance was favorably impacted by this strategy as interest
rates fell markedly during the period.
15
<PAGE>
- --------------------------------------------------------------------------------
EVERGREEN
U.S. Government Fund
- --------------------------------------------------------------------------------
Portfolio Manager Interview
During the final half of the period, we purchased additional lower coupon
mortgages to maintain the yield component of the Fund. We also selectively added
corporate bonds because we felt their recent underperformance presented some
attractive opportunities. As of October 31, the portfolio consisted of 44.2%
Treasuries/Agencies, 48.6% mortgages, 6.3% corporate bonds and 0.9% short-term
cash.
Were there any noteworthy adjustments to the Fund?
The CoreFund Government Income Fund merged into the Evergreen U.S. Government
Fund in mid-July. As a result, net assets increased by approximately $25
million, and as of October 31 stood at $373 million. Due to the CoreFund's
similarity in asset mix, the transition was seamless.
What is your outlook for the final half of the fiscal year?
Looking to the final months of 1998 and beyond, we maintain a very cautious
outlook and recognize that global volatility will likely continue to filter back
to the U.S. financial markets in the near term. We have begun looking to
increase exposure to sectors that have recently been out-of-favor and represent
attractive opportunities; namely corporate bonds and mortgages. In addition, we
anticipate maintaining a modestly long duration as interest rates stay in their
trading range and possibly trend lower.
16
<PAGE>
[LOGO OF DIVERSIFIED BOND FUND APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended
October 31, 1998 Period Ended
(unaudited) April 30, 1998 (a)
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.92 $ 16.08
-------- --------
................................................................................
INCOME FROM INVESTMENT OPERATIONS
................................................................................
Net investment income 0.50 0.30+++
................................................................................
Net realized and unrealized gains or
losses on securities and foreign currency
related transactions (0.13) (0.16)#
-------- --------
................................................................................
Total from investment operations 0.37 0.14
-------- --------
................................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME (0.50) (0.30)
-------- --------
................................................................................
NET ASSET VALUE, END OF PERIOD $ 15.79 $ 15.92
-------- --------
................................................................................
TOTAL RETURN+ 2.30% 0.85%
................................................................................
RATIOS/SUPPLEMENTAL DATA
................................................................................
NET ASSETS, END OF PERIOD (THOUSANDS) $464,829 $501,547
................................................................................
RATIOS TO AVERAGE NET ASSETS
Expenses 1.21%++ 1.08%++
................................................................................
Expenses, after fee credits 1.21%++ 1.07%++
................................................................................
Net investment income 6.13%++ 6.68%++
................................................................................
PORTFOLIO TURNOVER RATE 44% 109%
................................................................................
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended Year Ended August 31,
October 31, 1998 Period Ended --------------------------------------
(unaudited) April 30, 1998 (b) 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
CLASS B SHARES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 15.92 $ 15.42 $ 14.65 $ 15.09 $ 15.28 $ 17.06
------- ------- -------- -------- -------- --------
......................................................................................................
INCOME FROM INVESTMENT
OPERATIONS
......................................................................................................
Net investment income 0.44 0.61+++ 0.91 0.95 1.06 1.06
......................................................................................................
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.13) 0.50 0.84 (0.35) 0.11 (1.62)
------- ------- -------- -------- -------- --------
......................................................................................................
Total from investment
operations 0.31 1.11 1.75 0.60 1.17 (0.56)
------- ------- -------- -------- -------- --------
......................................................................................................
LESS DISTRIBUTIONS
......................................................................................................
From net investment
income (0.44) (0.61) (0.98) (0.96) (1.28) (1.22)
......................................................................................................
Returns of Capital 0 0 0 (0.08) (0.08) 0
------- ------- -------- -------- -------- --------
......................................................................................................
Total distributions (0.44) (0.61) (0.98) (1.04) (1.36) (1.22)
------- ------- -------- -------- -------- --------
......................................................................................................
NET ASSET VALUE, END OF
PERIOD $ 15.79 $ 15.92 $ 15.42 $ 14.65 $ 15.09 $ 15.28
------- ------- -------- -------- -------- --------
......................................................................................................
TOTAL RETURN+ 1.92% 7.26% 12.25% 4.03% 8.13% (3.53%)
......................................................................................................
RATIOS/SUPPLEMENTAL DATA
......................................................................................................
NET ASSETS, END OF
PERIOD (THOUSANDS) $70,245 $70,113 $457,701 $559,792 $734,837 $814,245
......................................................................................................
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.96%++ 1.93%++ 1.88% 1.84% 1.81% 1.75%
......................................................................................................
Expenses, after fee
credits 1.96%++ 1.92%++ 1.87% 1.83% -- --
......................................................................................................
Net investment income 5.38%++ 5.74%++ 6.07% 6.42% 7.05% 6.48%
......................................................................................................
PORTFOLIO TURNOVER RATE 44% 109% 138% 246% 178% 200%
......................................................................................................
</TABLE>
+ Excluding applicable sales charges.
++ Annualized.
+++ Calculation based on average shares outstanding.
# The per share amount is not in accord with the net realized and unrealized
gains or losses for the period due to the timing of the sales of Fund
shares and the amount of per share realized and unrealized gains or losses
at such time.
(a) For the period from January 20, 1998 (commencement of class operations) to
April 30, 1998.
(b) For the eight months ended April 30, 1998. The Fund changed its fiscal
year end from August 31 to April 30, effective April 30, 1998.
See Combined Notes to Financial Statements.
17
<PAGE>
[LOGO OF DIVERSIFIED BOND FUND APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended
October 31, 1998 Period Ended
(unaudited) April 30, 1998 (a)
- --------------------------------------------------------------------------------
CLASS C SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.92 $16.06
------ ------
................................................................................
INCOME FROM INVESTMENT OPERATIONS
................................................................................
Net investment income 0.44 0.04+++
................................................................................
Net realized and unrealized gains or
losses on securities and foreign
currency related transactions (0.13) (0.14)#
------ ------
................................................................................
Total from investment operations 0.31 (0.10)
------ ------
................................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME (0.44) (0.04)
------ ------
................................................................................
NET ASSET VALUE, END OF PERIOD $15.79 $15.92
------ ------
................................................................................
TOTAL RETURN+ 1.93% (0.60%)
................................................................................
RATIOS/SUPPLEMENTAL DATA
................................................................................
NET ASSETS, END OF PERIOD (THOUSANDS) $ 202 $ 23
................................................................................
RATIOS TO AVERAGE NET ASSETS
Expenses 1.97%++ 1.88%++
................................................................................
Expenses, after fee credits 1.97%++ 1.88%++
................................................................................
Net investment income 5.44%++ 6.11%++
................................................................................
PORTFOLIO TURNOVER RATE 44% 109%
................................................................................
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended
October 31, 1998 Period Ended
(unaudited) April 30, 1998 (b)
- --------------------------------------------------------------------------------
CLASS Y SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.92 $16.03
------ ------
................................................................................
INCOME FROM INVESTMENT OPERATIONS
................................................................................
Net investment income 0.41 0.24+++
................................................................................
Net realized and unrealized gains or
losses on securities and foreign
currency related transactions (0.13) (0.11)#
------ ------
................................................................................
Total from investment operations 0.28 0.13
------ ------
................................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME (0.41) (0.24)
------ ------
................................................................................
NET ASSET VALUE, END OF PERIOD $15.79 $15.92
------ ------
................................................................................
TOTAL RETURN 1.46% 0.80%
................................................................................
RATIOS/SUPPLEMENTAL DATA
................................................................................
NET ASSETS, END OF PERIOD (THOUSANDS) $ 48 $ 7
................................................................................
RATIOS TO AVERAGE NET ASSETS
Expenses 0.96%++ 0.83%++
................................................................................
Expenses, after fee credits 0.96%++ 0.82%++
................................................................................
Net investment income 6.59%++ 6.89%++
................................................................................
PORTFOLIO TURNOVER RATE 44% 109%
................................................................................
</TABLE>
+ Excluding applicable sales charges.
++ Annualized.
+++ Calculation based on average shares outstanding.
# The per share amount is not in accord with the net realized and unrealized
gains or losses for the period due to the timing of the sales of Fund shares
and the amount of per share realized and unrealized gains or losses at such
time.
(a) For the period from April 7, 1998 (commencement of class operations) to
April 30, 1998.
(b) For the period from February 11, 1998 (commencement of class operations) to
April 30, 1998.
See Combined Notes to Financial Statements.
18
<PAGE>
[LOGO OF HIGH YIELD BOND FUND APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended
October 31, 1998 Period Ended
(unaudited) April 30, 1998 (a)
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 4.53 $ 4.52
-------- --------
................................................................................
INCOME FROM INVESTMENT OPERATIONS
................................................................................
Net investment income 0.18 0.11+++
................................................................................
Net realized and unrealized gains or
losses on securities and foreign
currency related transactions (0.68) 0.01
-------- --------
................................................................................
Total from investment operations (0.50) 0.12
-------- --------
................................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME (0.18) (0.11)
-------- --------
................................................................................
NET ASSET VALUE, END OF PERIOD $ 3.85 $ 4.53
-------- --------
................................................................................
TOTAL RETURN+ (11.21%) 2.57%
................................................................................
RATIOS/SUPPLEMENTAL DATA
................................................................................
NET ASSETS, END OF PERIOD (THOUSANDS) $324,331 $420,778
................................................................................
RATIOS TO AVERAGE NET ASSETS
Expenses 1.25%++ 1.24%++
................................................................................
Expenses, after fee credits 1.24%++ 1.23%++
................................................................................
Expenses, excluding fee waivers and
expense reimbursement 1.33%++ --
................................................................................
Net investment income 8.46%++ 8.48%++
................................................................................
PORTFOLIO TURNOVER RATE 72% 155%
................................................................................
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended Year Ended July 31,
October 31, 1998 Period ended --------------------------------------
(unaudited) April 30, 1998 (b) 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 4.53 $ 4.37 $ 4.10 $ 4.42 $ 4.68 $ 5.13
------- ------- -------- -------- -------- --------
.......................................................................................................
INCOME FROM INVESTMENT
OPERATIONS
.......................................................................................................
Net investment income 0.16 0.25+++ 0.32 0.32 0.38 0.38
.......................................................................................................
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.67) 0.16 0.28 (0.27) (0.15) (0.38)
------- ------- -------- -------- -------- --------
.......................................................................................................
Total from investment
operations (0.51) 0.41 0.60 0.05 0.23 0
------- ------- -------- -------- -------- --------
.......................................................................................................
LESS DISTRIBUTIONS
.......................................................................................................
From net investment
income (0.17) (0.25) (0.33) (0.37) (0.39) (0.45)
.......................................................................................................
From capital gains 0 0 0 0 (0.10) 0
------- ------- -------- -------- -------- --------
.......................................................................................................
Total distributions (0.17) (0.25) (0.33) (0.37) (0.49) (0.45)
------- ------- -------- -------- -------- --------
.......................................................................................................
NET ASSET VALUE, END OF
PERIOD $ 3.85 $ 4.53 $ 4.37 $ 4.10 $ 4.42 $ 4.68
------- ------- -------- -------- -------- --------
.......................................................................................................
TOTAL RETURN+ (11.55%) 9.57% 15.32% 1.38% 5.66% (0.41%)
.......................................................................................................
RATIOS/SUPPLEMENTAL DATA
.......................................................................................................
NET ASSETS, END OF
PERIOD (THOUSANDS) $70,596 $96,535 $547,390 $593,681 $764,965 $766,283
.......................................................................................................
RATIOS TO AVERAGE NET
ASSETS
Expenses 2.00%++ 1.94%++ 1.96% 1.94% 2.03% 1.84%
.......................................................................................................
Expenses, after fee
credits 1.99%++ 1.93%++ 1.95% 1.93% -- --
.......................................................................................................
Expenses, excluding fee
waivers and expense
reimbursement 2.08%++ -- -- -- -- --
.......................................................................................................
Net investment income 7.70%++ 7.27%++ 7.63% 7.92% 8.64% 7.57%
.......................................................................................................
PORTFOLIO TURNOVER RATE 72% 155% 138% 116% 82% 110%
.......................................................................................................
</TABLE>
+ Excluding applicable sales charges.
++ Annualized.
+++ Calculation based on average shares outstanding.
(a) For the period from January 20, 1998 (commencement of class operations) to
April 30, 1998.
(b) For the nine months ended April 30, 1998. The Fund changed its fiscal year
end from July 31 to April 30, effective April 30, 1998.
See Combined Notes to Financial Statements.
19
<PAGE>
[LOGO OF HIGH YIELD BOND FUND APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended
October 31, 1998 Period Ended
(unaudited) April 30, 1998 (a)
- --------------------------------------------------------------------------------
CLASS C SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 4.53 $ 4.52
------ ------
................................................................................
INCOME FROM INVESTMENT OPERATIONS
................................................................................
Net investment income 0.17 0.10+++
................................................................................
Net realized and unrealized gains or
losses on securities and foreign
currency related transactions (0.68) 0.01
------ ------
................................................................................
Total from investment operations (0.51) 0.11
------ ------
................................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME (0.17) (0.10)
------ ------
................................................................................
NET ASSET VALUE END OF PERIOD $ 3.85 $ 4.53
------ ------
................................................................................
TOTAL RETURN+ (11.56%) 2.35%
................................................................................
RATIOS/SUPPLEMENTAL DATA
................................................................................
NET ASSETS, END OF PERIOD (THOUSANDS) $ 971 $1,155
................................................................................
RATIOS TO AVERAGE NET ASSETS
Expenses 1.99%++ 2.04%++
................................................................................
Expenses, after fee credits 1.97%++ 2.01%++
................................................................................
Expenses, excluding fee waivers and
expense reimbursement 2.07%++ --
................................................................................
Net investment income 7.69%++ 7.51%++
................................................................................
PORTFOLIO TURNOVER RATE 72% 155%
................................................................................
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended
October 31, 1998 Period Ended
(unaudited) April 30, 1998 (b)
- --------------------------------------------------------------------------------
CLASS Y SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 4.53 $4.56
------ -----
................................................................................
INCOME FROM INVESTMENT OPERATIONS
................................................................................
Net investment income 0.19 0.02+++
................................................................................
Net realized and unrealized gains or
losses on securities and foreign
currency related transactions (0.68) (0.03)#
------ -----
................................................................................
Total from investment operations (0.49) (0.01)
------ -----
................................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME (0.19) (0.02)
------ -----
................................................................................
NET ASSET VALUE, END OF PERIOD $ 3.85 $4.53
------ -----
................................................................................
TOTAL RETURN (11.10%) (0.27%)
................................................................................
RATIOS/SUPPLEMENTAL DATA
................................................................................
NET ASSETS, END OF PERIOD (THOUSANDS) $7,434 $ 20
................................................................................
RATIOS TO AVERAGE NET ASSETS
Expenses 0.93%++ 1.09%++
................................................................................
Expenses, after fee credits 0.91%++ 1.09%++
................................................................................
Expenses, excluding fee waivers and
expense reimbursement 1.07%++ --
................................................................................
Net investment income 9.11%++ 8.21%++
................................................................................
PORTFOLIO TURNOVER RATE 72% 155%
................................................................................
</TABLE>
+ Excluding applicable sales charges.
++ Annualized.
+++ Calculation based on average shares outstanding.
# The per share amount is not in accord with the net realized and unrealized
gains or losses for the period due to the timing of the sales of Fund
shares and the amount of per share realized and unrealized gains or losses
at such time.
(a) For the period from January 22, 1998 (commencement of class operations) to
April 30, 1998.
(b) For the period from April 14, 1998 (commencement of class operations) to
April 30, 1998.
See Combined Notes to Financial Statements.
20
<PAGE>
[LOGO OF STRATEGIC INCOME FUND APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Year Ended April
Ended 30, Year Ended July 31,
October 31, 1998 ------------------- --------------------------
(unaudited) 1998 1997(a) 1996 1995 1994
- -----------------------------------------------------------------------------------------------
CLASS A SHARES
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.21 $ 6.82 $ 6.77 $ 6.89 $ 7.35 $ 7.86
-------- -------- ------- ------- ------- --------
...............................................................................................
INCOME FROM INVESTMENT
OPERATIONS
...............................................................................................
Net investment income 0.25 0.50+++ 0.37 0.54 0.64 0.61+++
...............................................................................................
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.51) 0.38 0.09 (0.09) (0.45) (0.44)
-------- -------- ------- ------- ------- --------
...............................................................................................
Total from investment
operations (0.26) 0.88 0.46 0.45 0.19 0.17
-------- -------- ------- ------- ------- --------
...............................................................................................
LESS DISTRIBUTIONS
...............................................................................................
From net investment
income (0.25) (0.49) (0.41) (0.52) (0.63) (0.64)
...............................................................................................
Returns of capital 0 0 0 (0.05) (0.02) (0.04)
...............................................................................................
Total distributions (0.25) (0.49) (0.41) (0.57) (0.65) (0.68)
-------- -------- ------- ------- ------- --------
...............................................................................................
NET ASSET VALUE, END OF
PERIOD $ 6.70 $ 7.21 $ 6.82 $ 6.77 $ 6.89 $ 7.35
-------- -------- ------- ------- ------- --------
...............................................................................................
TOTAL RETURN+ (3.66%) 13.20% 6.80% 6.84% 3.00% 1.86%
...............................................................................................
RATIOS/SUPPLEMENTAL DATA
...............................................................................................
NET ASSETS, END OF
PERIOD (THOUSANDS) $164,213 $193,618 $58,725 $68,118 $85,970 $105,181
...............................................................................................
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.14%++ 1.27% 1.28%++ 1.30% 1.33% 1.32%
...............................................................................................
Expenses, after fee
credits 1.13%++ 1.26% 1.26%++ 1.28% -- --
...............................................................................................
Expenses, excluding fee
waivers and expense
reimbursement 1.29%++ 1.27% 1.28%++ 1.30% 1.33% 1.32%
...............................................................................................
Net investment income 7.01%++ 6.80% 7.28%++ 8.05% 9.31% 7.79%
...............................................................................................
PORTFOLIO TURNOVER RATE 112% 237% 86% 101% 95% 92%
...............................................................................................
</TABLE>
+ Excluding applicable sales charges.
++ Annualized.
+++ Calculation based on average shares outstanding.
(a) For the nine months ended April 30, 1997. The Fund changed its fiscal year
end from July 31 to April 30, effective April 30, 1997.
See Combined Notes to Financial Statements.
21
<PAGE>
[LOGO OF STRATEGIC INCOME FUND APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Year Ended April
Ended 30, Year Ended July 31,
October 31, 1998 -------------------- ----------------------------
(unaudited) 1998 1997 (a) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.25 $ 6.85 $ 6.81 $ 6.92 $ 7.38 $ 7.89
-------- -------- -------- -------- -------- --------
..................................................................................................
INCOME FROM INVESTMENT
OPERATIONS
..................................................................................................
Net investment income 0.22 0.44+++ 0.34 0.50 0.60 0.55+++
..................................................................................................
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.51) 0.39 0.07 (0.09) (0.47) (0.44)
-------- -------- -------- -------- -------- --------
..................................................................................................
Total from investment
operations (0.29) 0.83 0.41 0.41 0.13 0.11
-------- -------- -------- -------- -------- --------
..................................................................................................
LESS DISTRIBUTIONS
..................................................................................................
From net investment
income (0.22) (0.43) (0.37) (0.47) (0.58) (0.58)
..................................................................................................
Returns of capital 0 0 0 (0.05) (0.01) (0.04)
..................................................................................................
Total distributions (0.22) (0.43) (0.37) (0.52) (0.59) (0.62)
-------- -------- -------- -------- -------- --------
..................................................................................................
NET ASSET VALUE, END OF
PERIOD $ 6.74 $ 7.25 $ 6.85 $ 6.81 $ 6.92 $ 7.38
-------- -------- -------- -------- -------- --------
..................................................................................................
TOTAL RETURN+ (3.99%) 12.47% 6.06% 6.21% 2.12% 1.10%
..................................................................................................
RATIOS/SUPPLEMENTAL DATA
..................................................................................................
NET ASSETS, END OF
PERIOD (THOUSANDS) $102,862 $113,136 $110,082 $123,389 $149,091 $162,866
..................................................................................................
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.89%++ 2.05% 2.04%++ 2.07% 2.06% 2.07%
..................................................................................................
Expenses, after fee
credits 1.88%++ 2.04% 2.02%++ 2.05% -- --
..................................................................................................
Expenses, excluding fee
waivers and expense
reimbursement 2.04%++ -- -- -- -- --
..................................................................................................
Net investment income 6.26%++ 6.08% 6.52%++ 7.28% 8.58% 7.11%
..................................................................................................
PORTFOLIO TURNOVER RATE 112% 237% 86% 101% 95% 92%
..................................................................................................
</TABLE>
+ Excluding applicable sales charges.
++ Annualized.
+++ Calculation based on average shares outstanding.
(a) For the nine months ended April 30, 1997. The Fund changed its fiscal year
end from July 31 to April 30, effective April 30, 1997.
See Combined Notes to Financial Statements.
22
<PAGE>
[LOGO OF STRATEGIC INCOME FUND APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Year Ended April
Ended 30, Year Ended July 31,
October 31, 1998 ------------------- -------------------------
(unaudited) 1998 1997 (a) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
CLASS C SHARES
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.24 $ 6.84 $ 6.80 $ 6.92 $ 7.37 $ 7.88
------- ------- ------- ------- ------- -------
..............................................................................................
INCOME FROM INVESTMENT
OPERATIONS
..............................................................................................
Net investment income 0.22 0.44+++ 0.33 0.49 0.59 0.55+++
..............................................................................................
Net realized and
unrealized gains or
losses on securities
and foreign currency
related transactions (0.51) 0.39 0.08 (0.09) (0.45) (0.44)
------- ------- ------- ------- ------- -------
..............................................................................................
Total from investment
operations (0.29) 0.83 0.41 0.40 0.14 0.11
------- ------- ------- ------- ------- -------
..............................................................................................
LESS DISTRIBUTIONS FROM
..............................................................................................
From net investment
income (0.22) (0.43) (0.37) (0.47) (0.58) (0.58)
..............................................................................................
Returns of capital 0 0 0 (0.05) (0.01) (0.04)
------- ------- ------- ------- ------- -------
..............................................................................................
Total distributions (0.22) (0.43) (0.37) (0.52) (0.59) (0.62)
------- ------- ------- ------- ------- -------
..............................................................................................
NET ASSET VALUE, END OF
PERIOD $ 6.73 $ 7.24 $ 6.84 $ 6.80 $ 6.92 $ 7.37
------- ------- ------- ------- ------- -------
..............................................................................................
TOTAL RETURN+ (4.00%) 12.48% 6.07% 6.07% 2.27% 1.09%
..............................................................................................
RATIOS/SUPPLEMENTAL DATA
..............................................................................................
NET ASSETS, END OF
PERIOD (THOUSANDS) $16,601 $19,639 $24,304 $31,816 $46,221 $59,228
..............................................................................................
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.89%++ 2.05% 2.04%++ 2.07% 2.08% 2.07%
..............................................................................................
Expenses, after fee
credits 1.88%++ 2.05% 2.03%++ 2.05% -- --
..............................................................................................
Expenses, excluding fee
waivers and expense
reimbursement 2.04%++ -- -- -- -- --
..............................................................................................
Net investment income 6.25%++ 6.10% 6.52%++ 7.29% 8.56% 7.09%
..............................................................................................
PORTFOLIO TURNOVER RATE 112% 237% 86% 101% 95% 92%
..............................................................................................
</TABLE>
<TABLE>
<CAPTION>
Six Months Year Ended
Ended April 30,
October 31, 1998 ------------------
(unaudited) 1998 1997 (b)
- ------------------------------------------------------------------------------
CLASS Y SHARES
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.04 $ 6.65 $7.03
------ ------ -----
..............................................................................
INCOME FROM INVESTMENT OPERATIONS
..............................................................................
Net investment income 0.25 0.46+++ 0
..............................................................................
Net realized and unrealized gains or
losses on securities and foreign
currency related transactions (0.50) 0.41 (0.20)
------ ------ -----
..............................................................................
Total from investment operations (0.25) 0.87 (0.20)
------ ------ -----
..............................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT
INCOME (0.25) (0.48) (0.18)
------ ------ -----
..............................................................................
NET ASSET VALUE, END OF PERIOD $ 6.54 $ 7.04 $6.65
------ ------ -----
..............................................................................
TOTAL RETURN (3.57%) 13.46% (2.87%)
..............................................................................
RATIOS/SUPPLEMENTAL DATA
..............................................................................
NET ASSETS, END OF PERIOD (THOUSANDS) $1,829 $1,442 $ 0
..............................................................................
RATIOS TO AVERAGE NET ASSETS
Expenses 0.85%++ 1.01% 0.00%++
..............................................................................
Expenses, after fee credits 0.84%++ 1.00% 0.00%++
..............................................................................
Expenses, excluding fee waivers and
expense reimbursement 1.00%++ -- --
..............................................................................
Net investment income 7.20%++ 6.83% 0.00%++
..............................................................................
PORTFOLIO TURNOVER RATE 112% 237% 86%
..............................................................................
</TABLE>
+ Excluding applicable sales charges.
++ Annualized.
+++ Calculation based on average shares outstanding.
(a) For the nine months ended April 30, 1997, the Fund changed its fiscal year
end from July 31 to April 30, effective April 30, 1997.
(b) For the period from January 13, 1997 (commencement of class operations) to
April 30, 1997.
See Combined Notes to Financial Statements.
23
<PAGE>
[LOGO OF U.S. GOVERNMENT FUND APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended Year ended April 30, Year ended June 30, Year ended December 31,
October 31, 1998 ------------------------ ---------------------- ---------------------------
(Unaudited) 1998 1997 (c) 1996 1995 (b) 1994 1993 (a)
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.68 $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 10.05 $ 10.00
------- ---------- ---------- --------- --------- ----------- -----------
.............................................................................................................................
INCOME FROM INVESTMENT
OPERATIONS
.............................................................................................................................
Net investment income 0.29 0.61 0.52 0.63 0.33 0.66 0.68
.............................................................................................................................
Net realized and
unrealized gains or
losses on securities 0.23 0.29 (0.03) (0.23) 0.58 (0.98) 0.05
------- ---------- ---------- --------- --------- ----------- -----------
.............................................................................................................................
Total from investment
operations 0.52 0.90 0.49 0.40 0.91 (0.32) 0.73
------- ---------- ---------- --------- --------- ----------- -----------
.............................................................................................................................
LESS DISTRIBUTIONS FROM
NET INVESTMENT INCOME (0.29) (0.61) (0.52) (0.63) (0.33) (0.66) (0.68)
------- ---------- ---------- --------- --------- ----------- -----------
.............................................................................................................................
NET ASSET VALUE, END OF
PERIOD $ 9.91 $ 9.68 $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 10.05
------- ---------- ---------- --------- --------- ----------- -----------
.............................................................................................................................
TOTAL RETURN+ 5.46% 9.78% 5.30% 4.28% 10.17% (3.18%) 7.43%
.............................................................................................................................
RATIOS/SUPPLEMENTAL DATA
.............................................................................................................................
NET ASSETS, END OF
PERIOD (THOUSANDS) $48,945 $ 40,136 $ 17,913 $ 20,345 $ 22,445 $ 23,706 $ 38,851
.............................................................................................................................
RATIOS TO AVERAGE NET
ASSETS
Expenses 0.98%++ 1.03% 0.98%++ 0.99% 1.04%++ 0.96% 0.68%++
.............................................................................................................................
Expenses, after fee
credits 0.98%++ 1.03% 0.98%++ -- -- -- --
.............................................................................................................................
Expenses, excluding fee
waivers and expense
reimbursement 0.98%++ 1.03% 0.98%++ 0.99% 1.05%++ 1.00% 0.99%++
.............................................................................................................................
Net investment income 5.83%++ 6.25% 6.60%++ 6.61% 7.07%++ 6.97% 6.93%++
.............................................................................................................................
PORTFOLIO TURNOVER RATE 41% 21% 12% 23% 0% 19% 39%
.............................................................................................................................
</TABLE>
<TABLE>
<CAPTION>
Six Months Year ended April Year ended June Year ended December
Ended 30, 30, 31,
October 31, 1998 ------------------ ------------------ -----------------------
(Unaudited) 1998 1997 (c) 1996 1995 (b) 1994 1993 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.68 $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 10.05 $ 10.00
-------- -------- -------- -------- -------- -------- --------
....................................................................................................................................
INCOME FROM INVESTMENT OPERATIONS
....................................................................................................................................
Net investment income 0.26 0.53 0.46 0.56 0.29 0.61 0.63
....................................................................................................................................
Net realized and unrealized gains or losses
on securities 0.23 0.29 (0.03) (0.23) 0.58 (0.98) 0.05
-------- -------- -------- -------- -------- -------- --------
....................................................................................................................................
Total from investment operations 0.49 0.82 0.43 0.33 0.87 (0.37) 0.68
-------- -------- -------- -------- -------- -------- --------
....................................................................................................................................
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME (0.26) (0.53) (0.46) (0.56) (0.29) (0.61) (0.63)
-------- -------- -------- -------- -------- -------- --------
....................................................................................................................................
NET ASSET VALUE, END OF PERIOD $ 9.91 $ 9.68 $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 10.05
-------- -------- -------- -------- -------- -------- --------
....................................................................................................................................
TOTAL RETURN+ 5.07% 8.96% 4.65% 3.50% 9.76% (3.75) 6.91%
....................................................................................................................................
RATIOS/SUPPLEMENTAL DATA
....................................................................................................................................
NET ASSETS, END OF PERIOD (THOUSANDS) $132,259 $130,576 $142,371 $165,988 $192,490 $195,571 $236,696
....................................................................................................................................
RATIOS TO AVERAGE NET ASSETS
Expenses 1.74%++ 1.78% 1.73%++ 1.74% 1.79%++ 1.54% 1.19%++
....................................................................................................................................
Expenses, after fee credits 1.74%++ 1.78% 1.73%++ -- -- -- --
....................................................................................................................................
Expenses, excluding fee waivers and expense
reimbursement 1.74%++ 1.78% 1.73%++ 1.74% 1.80%++ 1.58% 1.50%++
....................................................................................................................................
Net investment income 5.14%++ 5.56% 5.85%++ 5.85% 6.32%++ 6.42% 6.44%++
....................................................................................................................................
PORTFOLIO TURNOVER RATE 41% 21% 12% 23% 0% 19% 39%
....................................................................................................................................
</TABLE>
+ Excluding applicable sales charges.
++ Annualized.
(a) For the period from January 11, 1993 (commencement of class operations) to
December 31, 1993.
(b) For the six months ended June 30, 1995. The Fund changed its fiscal year
end from December 31 to June 30, effective June 30, 1995.
(c) For the ten months ended April 30, 1997. The Fund changed its fiscal year
end from June 30 to April 30, effective April 30, 1997.
See Combined Notes to Financial Statements.
24
<PAGE>
[LOGO OF U.S. GOVERNMENT FUND APPEARS HERE]
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended Year ended April 30, Year ended June 30,
October 31, 1998 ------------------------ ------------------- Period ended
(Unaudited) 1998 1997 (c) 1996 1995 (d) December 31, 1994 (d)
- -----------------------------------------------------------------------------------------------------------------------
CLASS C SHARES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.68 $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 9.39
------ ---------- ---------- --------- --------- ------
.......................................................................................................................
INCOME FROM INVESTMENT
OPERATIONS
.......................................................................................................................
Net investment income 0.26 0.53 0.46 0.56 0.29 0.20
.......................................................................................................................
Net realized and
unrealized gains or
losses on securities 0.23 0.29 (0.03) (0.23) 0.58 (0.32)
------ ---------- ---------- --------- --------- ------
.......................................................................................................................
Total from investment
operations 0.49 0.82 0.43 0.33 0.87 (0.12)
------ ---------- ---------- --------- --------- ------
.......................................................................................................................
LESS DISTRIBUTIONS FROM
NET INVESTMENT INCOME (0.26) (0.53) (0.46) (0.56) (0.29) (0.20)
------ ---------- ---------- --------- --------- ------
.......................................................................................................................
NET ASSET VALUE, END OF
PERIOD $ 9.91 $ 9.68 $ 9.39 $ 9.42 $ 9.65 $ 9.07
------ ---------- ---------- --------- --------- ------
.......................................................................................................................
TOTAL RETURN+ 5.06% 8.96% 4.65% 3.50% 9.76% (1.30%)
.......................................................................................................................
RATIOS/SUPPLEMENTAL DATA
.......................................................................................................................
NET ASSETS, END OF
PERIOD (THOUSANDS) $5,833 $ 5,697 $ 455 $ 649 $ 350 $ 266
.......................................................................................................................
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.74%++ 1.78% 1.73%++ 1.74% 1.79%++ 1.71%++
.......................................................................................................................
Expenses, after fee
credits 1.74%++ 1.78% 1.73%++ -- -- --
.......................................................................................................................
Expenses, excluding fee
waivers and expense
reimbursement 1.74%++ 1.78% 1.73%++ 1.74% 1.80%++ 1.75%++
.......................................................................................................................
Net investment income 5.13%++ 5.49% 5.85%++ 5.87% 6.36%++ 6.70%++
.......................................................................................................................
PORTFOLIO TURNOVER RATE 41% 21% 12% 23% 0% 19%
.......................................................................................................................
</TABLE>
<TABLE>
<CAPTION>
Six Months Year ended April Year ended June
Ended 30, 30, Year ended December 31,
October 31, 1998 ------------------ ------------------ -----------------------
(Unaudited) 1998 1997 (c) 1996 1995 (b) 1994 1993 (a)
- ----------------------------------------------------------------------------------------------------------------------
CLASS Y SHARES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.68 $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 10.05 $ 10.25
-------- -------- -------- -------- ------- ----------- -----------
......................................................................................................................
INCOME FROM INVESTMENT
OPERATIONS
......................................................................................................................
Net investment income 0.30 0.63 0.54 0.66 0.34 0.69 0.25
......................................................................................................................
Net realized and
unrealized gains or
losses on securities 0.23 0.29 (0.03) (0.23) 0.58 (0.98) (0.20)
-------- -------- -------- -------- ------- ----------- -----------
......................................................................................................................
Total from investment
operations 0.53 0.92 0.51 0.43 0.92 (0.29) 0.05
-------- -------- -------- -------- ------- ----------- -----------
......................................................................................................................
LESS DISTRIBUTIONS FROM
NET INVESTMENT INCOME (0.30) (0.63) (0.54) (0.66) (0.34) (0.69) (0.25)
-------- -------- -------- -------- ------- ----------- -----------
......................................................................................................................
NET ASSET VALUE, END OF
PERIOD $ 9.91 $ 9.68 $ 9.39 $ 9.42 $ 9.65 $ 9.07 $ 10.05
-------- -------- -------- -------- ------- ----------- -----------
......................................................................................................................
TOTAL RETURN 5.60% 10.05% 5.52% 4.54% 10.30% (2.94%) 0.49%
......................................................................................................................
RATIOS/SUPPLEMENTAL DATA
......................................................................................................................
NET ASSETS, END OF
PERIOD (THOUSANDS) $186,414 $155,836 $127,099 $121,569 $16,934 $ 15,595 $ 14,486
......................................................................................................................
RATIOS TO AVERAGE NET
ASSETS
Expenses 0.74%++ 0.78% 0.73%++ 0.74% 0.79%++ 0.71% 0.48%++
......................................................................................................................
Expenses, after fee
credits 0.74%++ 0.78% 0.73%++ -- -- -- --
......................................................................................................................
Expenses, excluding fee
waivers and expense
reimbursement 0.74%++ 0.78% 0.73%++ 0.74% 0.80%++ 0.75%++ 0.79%++
......................................................................................................................
Net investment income 6.13%++ 6.55% 6.85%++ 6.86% 7.31%++ 7.27% 7.20%++
......................................................................................................................
PORTFOLIO TURNOVER RATE 41% 21% 12% 23% 0% 19% 39%
......................................................................................................................
</TABLE>
+ Excluding applicable sales charges.
++ Annualized.
(a) For the period from January 11, 1993 (commencement of class operations) to
December 31, 1993.
(b) For the six months ended June 30, 1995. The Fund changed its fiscal year
end from December 31 to June 30, effective June 30, 1995.
(c) For the ten months ended April 30, 1997. The Fund changed its fiscal year
end from June 30 to April 30, effective April 30, 1997.
(d) For the period from September 2, 1994 (commencement of class operations)
to December 31, 1994.
See Combined Notes to Financial Statements.
25
<PAGE>
[LOGO OF DIVERSIFIED BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
ASSET-BACKED SECURITIES - 5.8% (A)
$ 3,500,000 Carco Auto Loan Master Trust, Series 1997-1, Class
A,
(Est. Maturity 2000), 6.689%, 8/15/04............. $ 3,584,630
3,100,000 Corestates Home Equity Trust, Series 1996-1, Class
A4,
(Est. Maturity 2000), 7.00%, 6/15/12.............. 3,286,000
Merrill Lynch Mortgage Investors, Inc.:
59 Series 1991-D, Class A,
(Est. Maturity 1999), 9.00%, 7/15/11............... 59
3,113,236 Series 1991-G, Class B,
(Est. Maturity 2000), 9.15%, 10/15/11.............. 3,140,477
1,552,402 Series 1992-B, Class B,
(Est. Maturity 1999), 8.50%, 4/15/12............... 1,579,569
3,514,691 Series 1992-D, Class B,
(Est. Maturity 2001), 8.50%, 6/15/17............... 3,883,207
318,980 Mississippi Auto Grantor Trust, Series 1995-1,
(Est. Maturity 1998),
6.20%, 7/15/01 (c)................................ 324,977
3,300,000 Southern Pacific Secured Assets Corp.,
Series 1996-3, Class A4,
(Est. Maturity 2002), 7.60%, 10/25/27............. 3,522,821
505,000 University Support Services, Inc., Series 1992-CD,
Class D,
(Est. Maturity 1999), 9.00%, 11/1/07.............. 503,422
4,000,000 Western Financial Owner Trust, Series 1997-C, Class
CTFS,
(Est. Maturity 2001), 6.30%, 3/20/05.............. 4,088,750
2,093,915 World Omni Automobile Lease, Securitization Trust,
Series 1997-A, Class A4,
(Est. Maturity 2001), 6.90%, 6/25/03.............. 2,150,178
5,000,000 Zale Funding Trust,
Series 94-1, Class A2,
(Est. Maturity 1999), 7.325%, 3/15/03............. 5,071,875
------------
Total Asset-Backed Securities (cost $29,951,525)... 31,135,965
------------
CORPORATE BONDS - 51.6%
ADVERTISING & RELATED
SERVICES - 0.9%
2,800,000 Hollinger International,
Sr. Notes (Subord.),
9.25%, 2/1/06..................................... 2,898,000
2,000,000 K-III Communications Corp.,
Sr. Notes,
8.50%, 2/1/06..................................... 2,040,000
------------
4,938,000
------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
AEROSPACE & DEFENSE - 2.8%
$ 250,000 BE Aerospace, Inc.,
Sr. Notes (Subord.),
9.50%, 11/1/08 (c)................................. $ 250,000
5,000,000 Lockheed Martin Corp.,
Notes,
7.25%, 5/15/06..................................... 5,388,150
5,000,000 Northrop Grumman Corp.,
Deb.,
9.375%, 10/15/24................................... 5,769,600
3,000,000 Raytheon Co.,
Deb.,
6.75%, 3/15/18..................................... 3,060,810
500,000 Sequa Corp.,
Sr. Notes,
8.75%, 12/15/01.................................... 505,000
------------
14,973,560
------------
AUTOMOTIVE EQUIPMENT &
MANUFACTURING - 1.3%
3,000,000 Ford Motor Co.,
Deb.,
6.625%, 10/1/28.................................... 2,872,860
2,000,000 Hayes Wheels International,
Series B, Sr. Notes (Subord.),
9.125%, 7/15/07.................................... 2,020,000
2,000,000 Walbro Corp.,
Series B, Sr. Notes,
10.125%, 12/15/07 (c)(e)........................... 1,820,000
------------
6,712,860
------------
BANKS - 3.5%
4,750,000 Amsouth Bancorporation,
Deb. (Subord.),
6.75%, 11/1/25..................................... 4,937,292
4,000,000 BankBoston NA,
Trust 00008,
6.375%, 4/15/08.................................... 3,979,000
9,000,000 Barnett Capital I,
Capital Securities,
8.06%, 12/1/26..................................... 9,676,260
------------
18,592,552
------------
BUILDING, CONSTRUCTION &
FURNISHINGS - 1.1%
3,000,000 Glenborough Realty Trust, REIT,
Sr. Notes,
7.625%, 3/15/05 (c)................................ 3,042,540
2,000,000 HMH Properties, Inc.,
Series B, Sr. Notes,
7.875%, 8/1/08..................................... 1,935,000
750,000 MDC Holdings, Inc.,
Sr. Notes,
8.375%, 2/1/08..................................... 714,375
------------
5,691,915
------------
CABLE/OTHER VIDEO
DISTRIBUTION - 0.8%
Comcast Corp.:
1,000,000 Sr. Deb. (Subord.)
9.50%, 1/15/08...................................... 1,051,540
2,000,000 Sr. Deb. (Subord.),
9.38%, 5/15/05...................................... 2,149,200
</TABLE>
26
<PAGE>
[LOGO OF DIVERSIFIED BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
CABLE/OTHER VIDEO
DISTRIBUTION - CONTINUED
$ 1,000,000 Lenfest Communications, Inc.,
Sr. Secd. Notes,
8.375%, 11/1/05................................... $ 1,040,000
------------
4,240,740
------------
CHEMICAL & AGRICULTURAL
PRODUCTS - 1.2%
2,000,000 ISP Holdings, Inc.,
Series B, Sr. Notes,
9.75%, 2/15/02.................................... 2,020,000
1,250,000 Polymer Group, Inc.,
Series B, Sr. Notes (Subord.),
9.00%, 7/1/07..................................... 1,162,500
3,000,000 Scotts & Sons Co.,
Sr. Notes (Subord.),
9.875%, 8/1/04.................................... 3,060,000
------------
6,242,500
------------
COMMUNICATION SYSTEMS & SERVICES - 0.6%
2,000,000 Century Communications Corp.,
Sr. Notes,
9.75%, 2/15/02.................................... 2,130,000
950,000 TCI Communications, Inc.,
Sr. Notes,
8.75%, 8/1/15..................................... 1,152,778
------------
3,282,778
------------
CONSUMER PRODUCTS &
SERVICES - 2.6%
4,200,000 American Greetings Corp.,
Sr. Deb.,
6.10%, 8/1/28..................................... 4,245,780
2,500,000 Great Atlantic & Pacific Tea Inc.,
Sr. Notes,
7.70%, 1/15/04.................................... 2,610,550
5,000,000 Mattel Inc.,
Notes,
6.125%, 7/15/05................................... 5,061,200
2,000,000 Westpoint Stevens Inc.,
Sr. Notes,
7.875%, 6/15/05................................... 2,025,000
------------
13,942,530
------------
DIVERSIFIED COMPANIES - 1.1%
5,000,000 Grand Metropolitan Investment Corp.,
Gtd. Sr. Notes,
7.45%, 4/15/35.................................... 5,688,800
------------
ENVIRONMENTAL SERVICES - 0.2%
1,000,000 USA Waste Services, Inc.,
Notes,
6.125%, 7/15/01................................... 1,003,950
------------
FINANCE & INSURANCE - 16.3%
3,000,000 CB Richards Ellis Services, Inc.,
Sr. Notes (Subord.),
8.875%, 6/1/06.................................... 2,880,000
5,000,000 Commercial Credit Group, Inc.,
Notes,
10.00%, 5/15/09................................... 6,387,000
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
FINANCE & INSURANCE - CONTINUED
$ 2,500,000 General Electric Capital Corp.,
Deb.,
8.75%, 5/21/07..................................... $ 3,048,175
7,850,000 GS Escrow Corp.,
Sr. Notes,
6.75%, 8/1/01 (c).................................. 7,853,689
9,000,000 John Hancock Mutual Life Insurance Co.,
Notes,
7.375%, 2/15/24 (c)................................ 9,549,090
4,000,000 Liberty Mutual Insurance Co.,
Surplus Notes,
7.697%, 10/15/2097 (c)............................. 3,965,200
10,500,000 MBIA, Inc.,
Deb.,
9.375%, 2/15/11.................................... 13,379,835
10,000,000 Nationwide CSN Trust,
Sr. Notes,
9.875%, 2/15/25 (c)................................ 12,278,200
Paine Webber Group, Inc.:
3,000,000 Sr. Notes,
8.25%, 5/1/02....................................... 3,162,120
5,000,000 Sr. Notes (Subord.),
7.75%, 9/1/02....................................... 5,208,150
6,300,000 Prudential Life Insurance Corp.,
Notes,
7.125%, 7/1/07 (c)................................. 6,656,958
2,000,000 Reliance Group Holdings, Inc.,
Sr. Deb. (Subord.),
9.75%, 11/15/03.................................... 2,096,120
10,000,000 SunLife Canada US Capital Trust I,
Capital Securities,
8.526%, 5/29/49 (c)................................ 10,619,200
------------
87,083,737
------------
FOOD & BEVERAGE PRODUCTS - 1.2%
Aurora Foods, Inc.:
2,000,000 Series B, Sr. Notes (Subord.), 9.88%, 2/15/07....... 2,135,000
1,000,000 Series D, Sr. Notes (Subord.), 9.88%, 2/15/07....... 1,067,500
1,250,000 Chiquita Brands International, Inc.,
Sr. Notes,
9.625%, 1/15/04.................................... 1,212,500
2,000,000 Coca Cola Enterprises, Inc.,
Notes,
5.75%, 11/1/08..................................... 1,986,660
------------
6,401,660
------------
GAMING - 1.3%
3,300,000 Boyd Gaming Corp.,
Sr. Notes (Subord.),
9.50%, 7/15/07..................................... 3,135,000
1,000,000 Grand Casino, Inc.,
Gtd. 1st Mtge. Notes,
10.125%, 12/1/03................................... 1,055,000
1,500,000 Players International, Inc.,
Sr. Notes,
10.875%, 4/15/05................................... 1,582,500
1,000,000 Station Casinos, Inc.,
Sr. Notes (Subord.),
9.75%, 4/15/07..................................... 970,000
------------
6,742,500
------------
</TABLE>
27
<PAGE>
[LOGO OF DIVERSIFIED BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
HEALTHCARE PRODUCTS &
SERVICES - 0.7%
$ 2,550,000 Mariner Post Acute Network, Inc.,
Sr. Notes (Subord.),
9.50%, 11/1/07..................................... $ 2,365,125
1,650,000 Tenet Healthcare Corp.,
Sr. Notes,
7.875%, 1/15/03.................................... 1,670,625
------------
4,035,750
------------
INFORMATION SERVICES &
TECHNOLOGY - 0.9%
3,500,000 Comdisco, Inc.,
Notes,
6.125%, 1/15/03.................................... 3,498,145
1,000,000 Unisys Corp.,
Series B, Sr. Notes,
12.00%, 4/15/03.................................... 1,110,000
------------
4,608,145
------------
METALS & MINING - 0.2%
1,500,000 WHX Corp.,
Sr. Notes,
10.50%, 4/15/05 (c)................................ 1,357,500
------------
MACHINERY - DIVERSIFIED - 2.0%
800,000 Eagle Picher Industries, Inc.,
Sr. Notes (Subord.),
9.375%, 3/1/08 (c)................................. 704,000
8,850,000 John Deere Capital Corp.,
Deb.,
8.625%, 8/1/19..................................... 10,066,875
------------
10,770,875
------------
MANUFACTURING - DISTRIBUTING - 0.3%
2,000,000 Mark IV Industries, Inc.,
Sr. Notes (Subord.),
7.50%, 9/1/07...................................... 1,855,000
------------
OIL/ENERGY - 3.2%
2,500,000 ANR Pipeline Corp.,
Deb.,
9.625%, 11/1/21.................................... 3,160,025
2,250,000 Cross Timbers Oil Co.,
Series B, Sr. Notes (Subord.),
8.75%, 11/1/09..................................... 1,912,500
1,050,000 HS Resources, Inc.,
Sr. Notes (Subord.),
9.25%, 11/15/06.................................... 976,500
3,850,000 Occidental Petroleum Corp.,
Deb.,
9.25%, 8/1/19...................................... 4,282,933
Transocean Offshore, Inc.:
2,500,000 Deb.,
8.00%, 4/15/27...................................... 2,565,125
4,000,000 Notes,
7.45%, 4/15/27...................................... 4,215,880
------------
17,112,963
------------
PAPER & PACKAGING - 0.2%
1,000,000 Printpack, Inc.,
Series B, Sr. Notes,
9.875%, 8/15/04.................................... 1,000,000
------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
PUBLISHING, BROADCASTING & ENTERTAINMENT - 0.4%
$ 2,300,000 Sinclair Broadcast Group, Inc.,
Sr. Notes (Subord.),
10.00%, 9/30/05.................................... $ 2,311,500
------------
RETAILING & WHOLESALE - 0.4%
1,800,000 Sears Roebuck & Co.,
Notes,
10.00%, 2/3/12..................................... 2,411,172
------------
TELECOMMUNICATION SERVICES & EQUIPMENT - 4.9%
10,250,000 Bellsouth Capital Funding Corp.,
Deb.,
7.12%, 7/15/2097................................... 10,940,850
2,000,000 GTE Corp.,
Deb.,
6.46%, 4/15/08..................................... 2,163,280
2,500,000 GTE Florida, Inc.,
Deb.,
6.86%, 2/1/28...................................... 2,619,450
4,800,000 MCI Worldcom, Inc.,
Sr. Notes,
7.75%, 4/1/07...................................... 5,363,040
2,000,000 Price Communications Wireless,
Sr. Secd. Notes,
9.125%, 12/15/06 (c)............................... 2,000,000
1,450,000 Rural Cellular Corp.,
Series B, Sr. Notes (Subord.),
9.625%, 5/15/08.................................... 1,388,375
2,000,000 Talton Holdings, Inc.,
Series B, Sr. Notes,
11.00%, 6/30/07.................................... 1,900,000
------------
26,374,995
------------
TRANSPORTATION - 2.7%
2,000,000 Airplanes Pass Through Trust,
Series 1, Class D,
10.875%, 3/15/19................................... 2,125,980
7,000,000 Golden State Petroleum Transportation Corp.,
1st Mtge. Notes,
8.04%, 2/1/19...................................... 6,770,582
5,250,000 Norfolk Southern Corp.,
Notes,
7.05%, 5/1/37...................................... 5,640,600
------------
14,537,162
------------
UTILITIES - ELECTRIC - 0.8%
2,000,000 Alabama Power Co.,
Series G, Sr. Notes,
5.375%, 10/1/08.................................... 1,945,500
2,000,000 American Radio Systems Corp.,
Sr. Notes (Subord.),
9.00%, 2/1/06...................................... 2,140,000
------------
4,085,500
------------
Total Corporate Bonds (cost $272,110,857)........... 275,998,644
------------
</TABLE>
28
<PAGE>
[LOGO OF DIVERSIFIED BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COLLATERALLIZED MORTGAGED OBLIGATIONS - 14.1% (A)
$ 1,000,000 Criimi Mae Commercial Mortgage Trust,
Series 1998-C1, Class A2,
(Est. Maturity 2008),
7.00%, 3/2/11 (c)................................... $ 960,625
5,563,608 Criimi Mae Financial Corp.,
Series 1, Class A,
(Est. Maturity 2004),
7.00%, 1/1/33....................................... 5,344,541
1,000,000 Federal Farm Credit Assn.
Secured Lending Corp.,
Series 1997-1, Class B1,
(Est. Maturity 2009),
7.74%, 6/18/13 (c).................................. 1,071,875
5,000,000 Federal Home Loan Mortgage Corp.,
Series 47, Class A,
(Est. Maturity 2004),
5.00%, 2/25/22...................................... 4,895,695
2,696,412 Financial Asset Securitization Inc., Series 1997-
NAM2, Class B2,
(Est. Maturity 2008),
7.881%, 7/25/27..................................... 2,784,846
12,510,527 Financial National Mortgage Assn., Series 1993-248,
Class SA,
(Est. Maturity 2004),
5.004%, 8/25/23..................................... 11,968,946
3,745,000 GE Capital Mortgage Services, Inc., Series 1994-27,
Class A6,
(Est. Maturity 2014),
6.50%, 7/25/24...................................... 3,645,495
9,754,096 Independent National Mortgage Corp.,
Series 1997-A, Class A,
(Est. Maturity 2002),
7.81%, 12/26/26 (c)................................. 9,757,144
391,595 KS Mortgage Capital LP,
Series 1995-1, Class A1,
(Est. Maturity 1999),
7.227%, 4/20/02 (c)................................. 400,406
1,369,270 Marine Midland Bank,
Series 1991-3, Class B1,
(Est. Maturity 1999),
8.00%, 12/25/22..................................... 1,362,423
Merrill Lynch Mortgage Investors, Inc.:
5,000,000 Series 1996-C1, Class B,
(Est. Maturity 2005),
7.42%, 4/25/28....................................... 5,282,275
3,000,000 Series 1997-C2, Class B,
(Est. Maturity 2008),
6.70%, 12/10/29...................................... 3,075,000
2,700,000 Merrill Lynch Trust,
Series 35, Class G,
(Est. Maturity 2001),
8.45%, 11/1/18...................................... 2,826,549
866,398 Mid State Trust,
Series 6, Class A3,
(Est. Maturity 2005),
7.54%, 7/1/35....................................... 876,951
3,300,000 Morgan Stanley Capital I, Inc., Commercial Mtge.
Certificate,
Series 1997-C1, Class B,
(Est. Maturity 2007),
7.69%, 2/15/20...................................... 3,547,781
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COLLATERALLIZED MORTGAGED OBLIGATIONS - CONTINUED
$ 2,672,757 Paine Webber Mortgage Acceptance Corp. IV,
Series 1993-4, Class M1,
(Est. Maturity 2003),
7.50%, 5/25/23.................................... $ 2,738,741
PNC Mortgage Securities Corp.:
5,922,533 Series 1997-4,Class 2PP1,
(Est. Maturity 2002),
7.50%, 7/25/27..................................... 5,996,989
2,470,437 Series 1997-4, Class 2PP3,
(Est. Maturity 2007),
7.25%, 7/25/27..................................... 2,530,906
5,000,000 Residential Asset Securitization Trust,
Series 1996-A3, Class A9,
(Est. Maturity 2004),
7.50%, 7/25/26.................................... 5,097,656
1,500,000 Resolution Trust Corp.,
Series 1995-1, Class A2C,
(Est. Maturity 1999),
7.50%, 10/25/28................................... 1,506,893
------------
Total Collaterallized Mortgaged Obligations
(cost $70,874,431)................................. 75,671,737
------------
FOREIGN BONDS (U.S. DOLLARS) - 5.2%
2,650,000 Aztec Holdings SA DE CV,
Sr. Secd. Notes,
11.00%, 6/15/02................................... 1,855,000
1,000,000 Cenargo International Ltd.,
1st Mtge. Notes,
9.75%, 6/15/08 (c)................................ 872,500
2,000,000 Colombia (Republic of),
Deb.,
8.625%, 4/1/08 (e)................................ 1,550,000
1,000,000 Great Central Mines Ltd.,
Sr. Notes,
8.875%, 4/1/08 (c)................................ 955,000
3,500,000 Grupo Televisa SA DE CV,
Series B, Sr. Notes,
11.875%, 5/15/06 (e).............................. 3,412,500
1,500,000 National Westminster Bancorp,
Gtd. Capital Notes (Subord.),
9.375%, 11/15/03.................................. 1,727,310
3,000,000 Petroleum Geo-Services,
Notes,
7.50%, 3/31/07.................................... 3,149,910
1,000,000 Rogers Cablesystems Ltd.,
Notes
9.625%, 8/1/02.................................... 1,050,000
60,000,000 Skandinaviska Enskilda,
(Eff. Yield 7.14%),
0.00%, 5/26/33 (b)................................ 5,850,000
2,750,000 Stena AB,
Sr. Notes,
10.50%, 12/15/05.................................. 2,787,813
5,000,000 YPF Sociedad Anonima,
Sr. Notes,
7.25%, 3/15/03.................................... 4,569,500
------------
Total Foreign Bonds (U.S. Dollars) (cost
$29,449,644)...................................... 27,779,533
------------
</TABLE>
29
<PAGE>
[LOGO OF DIVERSIFIED BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS (NON-U.S. DOLLARS) - 4.1%
$ 2,750,000 Canada (Government of),
CAD 5.25%, 11/5/08.................................... $ 2,749,367
100,436,000 Nykredit,
DKK 6.00%, 10/1/26.................................... 15,672,992
21,086,000 Realkredit Danmark,
DKK 6.00%, 10/1/26.................................... 3,301,174
------------
Total Foreign Bonds (Non U.S. Dollars) (cost
$19,837,280)..................................... 21,723,533
------------
MORTGAGE-BACKED SECURITIES - 3.5%
Federal Housing Assn., Charles River Mortgage:
6,705,622 9.13%, 8/1/34..................................... 7,220,949
4,982,085 10.25%, 8/1/34.................................... 5,277,921
6,009,500 Financial National Mortgage Assn.,
6.50%, 10/1/28................................... 6,056,434
------------
Total Mortgage-Backed Securities (cost
$18,580,535)..................................... 18,555,304
------------
MUNICIPAL BONDS - 1.2%
2,500,000 Cook County, IL,
GO, Refunding,
Series A,
5.00%, 11/15/22.................................. 2,465,825
3,918,445 Los Angeles, CA,
Improvement Bond Act,
Assessment District No. 1,
Notes,
8.48%, 9/2/15 (c)................................ 4,131,178
------------
Total Municipal Bonds (cost $6,373,669)........... $ 6,597,003
------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS - 10.6%
$33,050,000 U.S. Treasury Bond STRIPS
(Eff. Yield 8.71%),
0.00%, 11/15/21 (b) (c) .......................... $ 9,106,266
27,150,000 U.S. Treasury Bonds,
6.375%, 8/15/27 (c) .............................. 31,286,031
U.S. Treasury Notes:
11,250,000 5.38%, 6/30/03..................................... 11,747,475
3,955,000 6.63%, 5/15/07..................................... 4,490,784
------------
Total U.S. Treasury Obligations
(cost $53,765,449)................................ $ 56,630,556
------------
MONEY MARKET SHARES - 0.7% (COST $4,074,790)
4,074,790 Navigator Prime Portfolio (f)...................... 4,074,790
------------
REPURCHASE AGREEMENT - 4.6%
24,821,000 Keystone Joint Repurchase Agreement, (Investments
in repurchase agreements, in a joint trading
account, dated 10/30/98, (cost $24,821,000)
maturity value $24,835,961), 5.50%, 11/2/98 (d)... 24,821,000
------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS - (COST $529,839,180)..... 101.4% 542,988,065
OTHER ASSETS AND LIABILITIES - NET.......... (1.4) (7,664,136)
----- ------------
NET ASSETS - ............................... 100.0% $535,323,929
===== ============
</TABLE>
(a) The estimated maturity of a Collateralized Mortgage Obligation
("CMO"), an adjustable rate mortgage security or an asset-backed se-
curity is based on currrent and projected prepayment rates. Changes
in interest rates can cause the estimated maturity to differ from the
listed date.
(b) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(c) Securities that may be resold to "qualified institutional buyers" un-
der Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been deter-
mined to be liquid under guidelines established by the Board of
Trustees.
(d) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at October 31, 1998.
(e) All or a portion of this security is currently on loan. (See Note 5)
(f) Represents investment of cash collateral received for securities on
loan.
SUMMARY OF ABBREVIATIONS
CAD Canadian Dollar
DKK Danish Krone
GO General Obligation
REIT Real Estate Investment Trust
STRIPS Separate Trading of Registered Interest and Principal Securities
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
EXCHANGE U.S. $ VALUE AT IN EXCHANGE NET UNREALIZED
DATE CONTRACTS TO DELIVER OCTOBER 31, 1998 FOR U.S. $ GAIN OR LOSS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forward foreign currency exchange contract to buy:
1/19/99 72,712,500 Danish Krone $11,565,251 $11,812,799 $(247,548)
==========
Forward foreign currency exchange contract to sell:
1/19/99 188,866,000 Danish Krone $30,039,988 $30,313,137 $ 273,149
==========
</TABLE>
See Combined Notes to Financial Statements.
30
<PAGE>
[LOGO OF HIGH YIELD BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - 77.5%
AEROSPACE & DEFENSE - 0.5%
$ 2,000,000 BE Aerospace, Inc.,
Sr. Notes (Subord.),
9.50%, 11/1/08 (d)................................ $ 2,000,000
------------
AUTOMOTIVE EQUIPMENT & MANUFACTURING - 2.6%
Exide Corp.:
1,600,000 Sr. Notes,
10.00%, 4/15/05.................................... 1,336,000
5,833,000 Sr. Notes (Subord.),
2.90%, 12/15/05 (d)................................ 2,675,889
7,000,000 Walbro Corp.,
Series B, Sr. Notes,
10.125%, 12/15/07................................. 6,370,000
------------
10,381,889
------------
BUILDING, CONSTRUCTION &
FURNISHINGS - 1.0%
4,500,000 Del Webb Corp.,
Sr. Debs. (Subord.),
9.375%, 5/1/09.................................... 4,185,000
------------
CABLE/OTHER VIDEO
DISTRIBUTION - 8.8%
4,300,000 Acme Television LLC,
Series B, Sr. Disc. Notes,
Step Bond,
(Eff. Yield 10.49%),
0.00%, 9/30/04 (c) ............................... 3,268,000
750,000 Adelphia Communications Corp.,
Series B, Sr. Notes,
10.50%, 7/15/04................................... 804,375
5,000,000 Charter Communications,
South Eastern Capital LLP,
Series B, Sr. Notes,
11.25%, 3/15/06................................... 5,400,000
5,000,000 Frontiervision LP,
Sr. Notes (Subord.),
11.00%, 10/15/06.................................. 5,525,000
5,250,000 Galaxy Telecom LP,
Sr. Notes (Subord.),
12.375%, 10/1/05.................................. 5,617,500
5,500,000 Lodgenet Entertainment Corp.,
Sr. Notes,
10.25%, 12/15/06.................................. 5,451,875
5,000,000 Pegasus Communications Corp.,
Series B, Sr. Notes,
9.625%, 10/15/05.................................. 4,650,000
10,500,000 United International Holdings, Inc., Series B, Sr.
Disc. Notes,
Step Bond,
(Eff. Yield 9.77%),
0.00%, 2/15/08 (c) ............................... 4,725,000
------------
35,441,750
------------
CHEMICAL & AGRICULTURAL
PRODUCTS - 0.7%
1,000,000 Polymer Group, Inc.,
Series B, Sr. Notes (Subord.),
9.00%, 7/1/07..................................... 930,000
2,000,000 Texas Petrochemical Corp.,
Series B, Sr. Notes (Subord.),
11.125%, 7/1/06................................... 1,860,000
------------
2,790,000
------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
CONSUMER PRODUCTS &
SERVICES - 2.9%
Affinity Group, Inc.:
$ 4,000,000 Sr. Notes,
11.00%, 4/1/07...................................... $ 4,115,000
1,000,000 Sr. Notes (Subord.),
11.50%, 10/15/03.................................... 1,010,000
4,000,000 Loewen Group International, Inc.,
Series 4, Sr. Notes,
8.25%, 10/15/03.................................... 3,170,000
5,935,000 Revlon Worldwide Corp.,
Series B, Sr. Secd. Disc. Notes,
Step Bond,
(Eff. Yield 9.82%),
0.00%, 3/15/01 (c) ................................ 3,471,975
------------
11,766,975
------------
ENVIRONMENTAL SERVICES - 0.7%
3,500,000 Allied Waste Industries, Inc.,
Sr. Disc. Notes,
Step Bond,
(Eff. Yield 9.85%),
0.00%, 6/1/07 (c) ................................. 2,625,000
------------
FINANCE & INSURANCE - 1.1%
5,000,000 Unicco Service Co.,
Series B, Sr. Notes (Subord.),
9.875%, 10/15/07................................... 4,387,500
------------
FOOD & BEVERAGE PRODUCTS - 3.4%
5,000,000 Aurora Foods, Inc.,
Series D, Sr. Notes (Subord.),
9.875%, 2/15/07.................................... 5,337,500
3,500,000 RAB Enterprises, Inc.,
Sr. Notes,
10.50%, 5/1/05 (d)................................. 3,250,625
5,000,000 Sun World International, Inc.,
Series B, 1st Mtge. Notes,
11.25%, 4/15/04.................................... 5,125,000
------------
13,713,125
------------
GAMING - 3.0%
3,000,000 Ameristar Casinos, Inc.,
Series B, Sr. Notes (Subord.),
10.50%, 8/1/04..................................... 2,685,000
1,750,000 Boyd Gaming Corp.,
Sr. Notes (Subord.),
9.50%, 7/15/07..................................... 1,662,500
1,300,000 Casino America, Inc.,
Sr. Secd. Notes,
12.50%, 8/1/03..................................... 1,397,500
Station Casinos, Inc.,
Sr. Notes (Subord.):
2,000,000 9.63%, 6/1/03....................................... 1,960,000
1,000,000 9.75%, 4/15/07...................................... 970,000
3,800,000 Trump Atlantic City Associates,
1st Mtge. Notes,
11.25%, 5/1/06..................................... 3,306,000
------------
11,981,000
------------
</TABLE>
31
<PAGE>
[LOGO OF HIGH YIELD BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
HEALTHCARE PRODUCTS &
SERVICES - 1.9%
$ 3,500,000 Integrated Health Services, Inc.,
Sr. Notes (Subord.),
9.25%, 1/15/08.................................... $ 3,202,500
4,000,000 Quorum Health Group, Inc.,
Sr. Notes (Subord.),
8.75%, 11/1/05.................................... 3,800,000
1,000,000 Tenet Healthcare Corp.,
Sr. Notes (Subord.),
6.00%, 12/1/05.................................... 833,750
------------
7,836,250
------------
INFORMATION SERVICES &
TECHNOLOGY - 0.8%
3,000,000 Unisys Corp.,
Series B, Sr. Notes,
12.00%, 4/15/03................................... 3,330,000
------------
LEISURE & TOURISM - 2.4%
5,000,000 Cinemark USA, Inc.,
Series B, Sr. Notes (Subord.),
9.625%, 8/1/08.................................... 5,050,000
5,000,000 Premier Cruise Ltd.,
Sr. Notes,
11.00%, 3/15/08 (d)............................... 2,500,000
2,150,000 Six Flags Theme Parks, Inc.,
Series A, Sr. Notes (Subord.),
Step Bond,
(Eff. Yield 10.70%),
12.25%, 6/15/05 (c) .............................. 2,300,500
------------
9,850,500
------------
METALS & MINING - 1.8%
5,000,000 Acme Metals, Inc.,
Sr. Notes,
10.875%, 12/15/07 (f)............................. 875,000
5,050,000 Anker Coal Group, Inc.,
Series B, Sr. Notes,
9.75%, 10/1/07.................................... 1,717,000
5,000,000 NSM Steel, Inc.,
Sr. Mtge. Notes,
12.00%, 2/1/06 (d)................................ 1,337,500
3,500,000 P & L Coal Holdings Corp.,
Sr. Notes (Subord.),
9.625%, 5/15/08 (d)............................... 3,491,250
------------
7,420,750
------------
MACHINERY - DIVERSIFIED - 1.8%
3,750,000 Eagle Picher Industries, Inc.,
Sr. Notes (Subord.),
9.375%, 3/1/08 (d)................................ 3,300,000
4,000,000 Motors and Gears, Inc.,
Series D, Sr. Notes,
10.75%, 11/15/06.................................. 3,940,000
------------
7,240,000
------------
OIL/ENERGY - 8.9%
5,000,000 Benton Oil & Gas Co.,
Sr. Notes,
9.375%, 11/1/07................................... 3,500,000
4,000,000 Chiles Offshore LLC,
Sr. Notes,
10.00%, 5/1/08.................................... 3,220,000
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
OIL/ENERGY - CONTINUED
$ 4,700,000 Cross Timbers Oil Co.,
Series B, Sr. Notes (Subord.),
8.75%, 11/1/09..................................... $ 3,995,000
4,750,000 Energy Corp. of America,
Series A, Sr. Notes (Subord.),
9.50%, 5/15/07..................................... 4,227,500
4,850,000 Giant Industries, Inc.,
Sr. Notes (Subord.),
9.00%, 9/1/07...................................... 4,534,750
3,000,000 Houston Exploration Co.,
Series B, Sr. Notes (Subord.),
8.625%, 1/1/08..................................... 2,820,000
7,700,000 HS Resources, Inc.,
Sr. Notes (Subord.),
9.25%, 11/15/06.................................... 7,161,000
4,725,000 Parker Drilling Co.,
Series D, Sr. Notes,
9.75%, 11/15/06.................................... 4,406,063
2,350,000 Petsec Energy, Inc.,
Series B, Sr. Notes (Subord.),
9.50%, 6/15/07..................................... 1,880,000
------------
35,744,313
------------
PAPER & PACKAGING - 3.7%
5,150,000 Printpack, Inc.,
Series B, Sr. Notes (Subord.),
10.625%, 8/15/06................................... 5,150,000
5,000,000 Riverwood International Corp.,
Sr. Notes,
10.25%, 4/1/06..................................... 4,625,000
Stone Container Corp.:
3,750,000 1st Mtge. Notes,
10.75%, 10/1/02..................................... 3,740,625
1,250,000 Sr. Notes,
9.88%, 2/1/01....................................... 1,231,250
------------
14,746,875
------------
PUBLISHING, BROADCASTING & ENTERTAINMENT - 2.5%
5,000,000 American Lawyer Media, Inc.,
Series B, Sr. Notes (Subord.),
9.75%, 12/15/07.................................... 4,975,000
6,925,000 Capstar Broadcasting Partners,
Sr. Disc. Notes,
12.75%, 2/1/09..................................... 5,055,250
------------
10,030,250
------------
RETAILING & WHOLESALE - 5.8%
4,350,000 AFC Enterprises, Inc.,
Sr. Notes (Subord.),
10.25%, 5/15/07.................................... 4,176,000
3,500,000 FRD Acquisition Co.,
Series B, Sr. Notes,
12.50%, 7/15/04.................................... 3,430,000
4,000,000 Jitney Jungle Stores America, Inc.,
Sr. Notes (Subord.),
10.375%, 9/15/07................................... 3,840,000
2,000,000 NE Restaurant, Inc.,
Sr. Notes,
10.75%, 7/15/08 (d)................................ 1,895,000
</TABLE>
32
<PAGE>
[LOGO OF HIGH YIELD BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
RETAIL & WHOLESALE - CONTINUED
$ 5,150,000 Pamida, Inc.,
Sr. Notes (Subord.),
11.75%, 3/15/03.................................... $ 4,892,500
5,000,000 Perkins Family Restaurant,
Series B, Sr. Notes,
10.125%, 12/15/07.................................. 5,150,000
------------
23,383,500
------------
TELECOMMUNICATION SERVICES & EQUIPMENT - 14.7%
4,000,000 Echostar Communications Corp.,
Sr. Secd. Disc. Notes,
Step Bond,
(Eff. Yield 9.49%),
0.00%, 6/1/04 (c).................................. 3,860,000
3,000,000 Global Crossing Holdings Ltd.,
Sr. Notes,
9.625%, 5/15/08 (d)................................ 2,925,000
2,500,000 ICO Global Commerce,
Sr. Notes,
15.00%, 8/1/05..................................... 1,550,000
5,000,000 Intermedia Capital Partners,
Sr. Notes,
11.25%, 8/1/06..................................... 5,462,500
2,500,000 Jordan Telecommunication Products,
Series B, Sr. Notes,
9.875%, 8/1/07..................................... 2,250,000
4,000,000 Level 3 Communications, Inc.,
Sr. Notes,
9.125%, 5/1/08..................................... 3,710,153
5,000,000 MJD Communications, Inc.,
Sr. Notes (Subord.),
9.50%, 5/1/08 (d).................................. 4,875,000
4,500,000 Mobile Telecommunication Technology,
Sr. Disc. Notes (Subord.),
13.50%, 12/15/02................................... 4,837,500
8,000,000 Nextel International, Inc.,
Sr. Disc. Notes,
Step Bond,
(Eff. Yield 10.00%),
0.00%, 4/15/08 (c)................................. 2,940,000
4,000,000 Paging Network, Inc.,
Sr. Notes (Subord.),
10.00%, 10/15/08................................... 3,880,000
Price Communications Cellular Holding:
1,000,000 Sr. Notes, PIK,
11.25%, 8/15/08..................................... 865,000
5,000,000 Sr. Secd. Notes,
9.13%, 12/15/06 (d)................................. 5,000,000
4,200,000 Qwest Communications
International, Inc.,
Sr. Notes,
7.50%, 11/1/08 (d)................................. 4,171,608
5,000,000 Rural Cellular Corp.,
Series B, Sr. Notes (Subord.),
9.625%, 5/15/08.................................... 4,787,500
6,025,000 Talton Holdings, Inc.,
Series B, Sr. Notes,
11.00%, 6/30/07.................................... 5,723,750
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
TELECOMMUNICATION SERVICES & EQUIPMENT - CONTINUED
$ 1,000,000 Telewest Communications PLC,
Sr. Notes,
11.25%, 11/1/08 (d)................................ $ 1,045,000
5,000,000 USN Communications, Inc.,
Series B, Sr. Disc. Notes,
Step Bond,
(Eff. Yield 10.23%),
0.00%, 8/15/04 (c)................................. 1,500,000
------------
59,383,011
------------
TEXTILE & APPAREL - 1.2%
5,460,000 Delta Mills, Inc.,
Series B, Sr. Notes,
9.625%, 9/1/07..................................... 5,023,200
------------
TRANSPORTATION - 7.3%
5,000,000 American Commercial Lines
LLC,
Sr. Notes,
10.25%, 6/30/08 (d)................................ 4,875,000
5,000,000 Global Ocean Carriers Limited,
Sr. Notes,
10.25%, 7/15/07.................................... 2,900,000
5,000,000 Greyhound Lines, Inc.,
Series B, Sr. Notes,
11.50%, 4/15/07.................................... 5,500,000
3,500,000 Outboard Marine Corp.,
Sr. Notes (d),
10.75%, 6/1/08..................................... 3,272,500
4,250,000 Pegasus Shipping Hellas Limited,
Series A, 1st Preferred Mtge. Notes,
11.875%, 11/15/04.................................. 4,037,500
Trans World Airlines, Inc.:
3,000,000 Sr. Notes,
11.38%, 3/1/06...................................... 2,580,000
5,000,000 Sr. Secd. Notes,
11.50%, 12/15/04.................................... 4,600,000
2,536,000 Valujet, Inc.,
Sr. Notes,
10.25%, 4/15/01.................................... 1,521,600
------------
29,286,600
------------
Total Corporate Bonds
(cost $353,089,094)................................ 312,547,488
------------
FOREIGN BONDS (U.S. DOLLARS) - 8.4%
Applied International Finance Co.:
2,000,000 8.68%, 6/28/99...................................... 1,560,000
3,000,000 Secd. Notes,
10.25%, 10/1/00..................................... 1,950,000
1,675,000 Aztec Holdings SA DE CV,
Sr. Secd. Notes,
11.00%, 6/15/02.................................... 1,172,500
3,000,000 Cenargo International Ltd.,
1st Mtge. Notes,
9.75%, 6/15/08 (d)................................. 2,617,500
6,000,000 Clearnet Communications, Inc.,
Sr. Disc. Notes,
Step Bond,
(Eff. Yield 9.71%),
0.00%, 12/15/05 (c)................................ 4,740,000
</TABLE>
33
<PAGE>
[LOGO OF HIGH YIELD BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS (U.S. DOLLARS) - CONTINUED
$ 5,000,000 Great Central Mines Ltd.,
Sr. Notes,
8.875%, 4/1/08 (d)................................ $ 4,775,000
5,000,000 Grupo Televisa SA DE CV,
Sr. Disc. Notes,
Step Bond,
(Eff. Yield 9.90%),
0.00%, 5/15/08 (c)................................ 3,375,000
3,500,000 Microcell Telecommunications,
Series B, Sr. Disc. Notes,
Step Bond,
(Eff. Yield 9.68%),
0.00%, 6/1/06 (c)................................. 2,170,000
3,000,000 Norampac, Inc.,
Sr. Notes,
9.50%, 2/1/08..................................... 2,820,000
5,000,000 Star Choice Communications,
Sr. Secd. Notes,
13.00%, 12/15/05.................................. 4,550,000
1,750,000 Stena Line AB,
Sr. Notes,
10.625%, 6/1/08................................... 1,561,875
3,500,000 TV Azteca SA DE CV,
Series B, Sr. Notes,
10.50%, 2/15/07................................... 2,450,000
------------
Total Foreign Bonds (U.S. Dollars)
(cost $39,445,692)................................ 33,741,875
------------
FOREIGN BONDS (NON-U.S. DOLLARS) - 0.7%
9,500,000 Microcell Telecommunications,
CAD Series B, Sr. Disc. Notes,
Step Bond,
(Eff. Yield 10.23%),
0.00%, 10/15/07
(cost $4,411,743) (c).............................. 2,955,282
------------
<CAPTION>
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS AND WARRANTS - 0.9%
AEROSPACE & DEFENSE - 0.1%
76,000 CHC Helicopter Corp.,
Warrants (a)...................................... 228,000
------------
AUTOMOTIVE EQUIPMENT & MANUFACTURING - 0.0% (G)
9,500 Chatwins Group, Inc.,
Warrants (a) (d).................................. 9,500
------------
CABLE/OTHER VIDEO
DISTRIBUTION - 0.0% (G)
115,800 Star Choice Communications, Warrants (a)........... 180,117
------------
FINANCE & INSURANCE - 0.3%
1,053,108 Ampex Corp.,
Common Stock (a).................................. 1,053,108
------------
FOOD & BEVERAGE PRODUCTS - 0.0% (G)
131,250 Specialty Foods Acquisition Corp.,
Common Stock (a).................................. 6,562
------------
GAMING - 0.2%
10,775,000 Gold River Hotel and Casino Corp.,
Common Stock (a) (b) (h).......................... 107,750
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS AND WARRANTS - CONTINUED
GAMING - CONTINUED
Isle of Capri Casinos, Inc.:
47,778 Warrants (a) (h)................................... $ 478
254,790 Common Stock (a)................................... 684,748
------------
792,976
------------
TELECOMMUNICATION SERVICES &
EQUIPMENT - 0.3%
4,000 Econophone, Inc.,
Warrants (a) (d).................................. 72,000
750 Metronet Communications Corp.,
Class B, Warrants (a) (d)......................... 22,969
Nextel Communications, Inc.:
9,510 Warrants (a) (d)................................... 285
10,843 Common Stock, Class A (a) (d)...................... 196,190
25,800 Price Communications Cellular,
Warrants (a)...................................... 855,270
------------
1,146,714
------------
Total Common Stocks and Warrants (cost
$6,197,970)....................................... 3,416,977
------------
PREFERRED STOCKS - 5.8%
CABLE/OTHER VIDEO
DISTRIBUTION - 0.8%
28,500 Adelphia Communications Corp.,
Series B.......................................... 3,249,000
------------
ENGINEERING - 1.7%
60,582 CSC Holdings, Inc.,
Series M (a)...................................... 6,633,729
------------
FINANCE & INSURANCE - 2.8%
Ampex Corp.:
7,671 Redeemable Preferred Stock (a) (h)................. 7,311,997
3,510 Convertible Preferred Stock (a) (h)................ 2,868,372
12,800 Sinclair Capital................................... 1,280,000
------------
11,460,369
------------
PUBLISHING, BROADCASTING & ENTERTAINMENT - 0.5%
20,000 Primedia, Inc.,
Series F.......................................... 1,980,000
------------
Total Preferred Stocks
(cost $22,285,403)................................ 23,323,098
------------
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount
- --------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT - 7.0%
$28,406,000 Keystone Joint Repurchase Agreement (Investments in
repurchase agreements, in a joint trading account,
dated 10/30/98, maturity value $28,419,019),
5.50%, 11/2/98
(cost $28,406,000) (e)........................... $ 28,406,000
------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS -
(COST $453,835,902)........................ 100.3% 404,390,720
OTHER ASSETS AND
LIABILITIES - NET.......................... (0.3) (1,059,166)
----- ------------
NET ASSETS - ............................... 100.0% $403,331,554
===== ============
</TABLE>
34
<PAGE>
[LOGO OF HIGH YIELD BOND FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
(a) Non-income producing.
(b) All or a portion of these securities are either (1) restricted secu-
rities (i.e., securities which may not be publicly sold without reg-
istration under the Federal Securities Act of 1933) or (2) illiquid
securities, and are valued using market quotations where readily
available. In the absence of market quotations, the securities are
valued based upon their fair value determined under procedures ap-
proved by the Board of Trustees. The Fund may make investments in an
amount up to 15% of the value of the Fund's net assets in such secu-
rities.
(c) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(d) Securities that may be resold to "qualified institutional buyers" un-
der Rule 144A or securities offered pursant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been deter-
mined to be liquid under guidelines established by the Board of
Trustees.
(e) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at October 31, 1998.
(f) This obligation has filed Chapter 11 bankruptcy and has discontinued
accrual of interest income.
(g) Less than 1/10th of one percent of net assets.
(h) Security has been fair valued in accord with procedures established
by the Board of Trustees.
SUMMARY OF ABBREVIATIONS:
CAD Canadian Dollar
PIK Paid in Kind Security
See Combined Notes to Financial Statements.
35
<PAGE>
[LOGO OF STRATEGIC INCOME FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
ASSET-BACKED SECURITIES - 0.7%
$ 1,850,000 PNC Student Loan Trust,
Series 97-2, Class A7,
6.728%, 1/25/07 (cost $1,850,000).................. $ 2,042,881
------------
CORPORATE BONDS - 34.2%
AEROSPACE & DEFENSE - 0.6%
1,700,000 Sequa Corp.,
Sr. Notes,
8.75%, 12/15/01.................................... 1,717,000
------------
AUTOMOTIVE EQUIPMENT & MANUFACTURING - 1.3%
1,000,000 Exide Corp.,
Sr. Notes (Subord.),
2.90%, 12/15/05 (d)................................ 458,750
1,000,000 Oxford Automotive, Inc.,
Sr. Notes (Subord.),
10.125%, 6/15/07................................... 920,000
2,500,000 Walbro Corp.,
Series B, Sr. Notes,
10.125%, 12/15/07.................................. 2,275,000
------------
3,653,750
------------
BUILDING, CONSTRUCTION & FURNISHINGS - 0.6%
2,000,000 Del Webb Corp.,
Sr. Debs. (Subord.),
9.375%, 5/1/09..................................... 1,860,000
------------
CABLE/OTHER VIDEO
DISTRIBUTION - 2.8%
1,150,000 Acme Television LLC,
Series B, Sr. Disc. Notes,
Step Bond,
(Eff. Yield 10.39%),
0.00%, 9/30/04 (c) ................................ 874,000
Adelphia Communications Corp.,
Series B, Sr. Notes:
2,000,000 9.875%, 3/1/07...................................... 2,150,000
250,000 10.50%, 7/15/04..................................... 268,125
1,500,000 Galaxy Telecom LP,
Sr. Notes (Subord.),
12.375%, 10/1/05................................... 1,605,000
1,000,000 Lenfest Communications, Inc.,
Sr. Notes,
8.375%, 11/1/05.................................... 1,040,000
1,000,000 Lodgenet Entertainment Corp.,
Sr. Notes,
10.25%, 12/15/06................................... 991,250
1,000,000 Pegasus Communications Corp.,
Series B, Sr. Notes,
9.625%, 10/15/05................................... 930,000
------------
7,858,375
------------
CHEMICAL & AGRICULTURAL
PRODUCTS - 0.2%
500,000 Texas Petrochemical Corp.,
Series B, Sr. Notes (Subord.),
11.125%, 7/1/06.................................... 450,000
------------
CONSUMER PRODUCTS &
SERVICES - 1.8%
2,000,000 Loewen Group International, Inc.,
Series 4, Sr. Notes,
8.25%, 10/15/03.................................... 1,585,000
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
CONSUMER PRODUCTS &
SERVICES - CONTINUED
$ 1,000,000 MTS, Inc.,
Sr. Notes (Subord.),
9.375%, 5/1/05.................................... $ 905,000
3,000,000 Revlon Consumer Products Corp.,
Sr. Notes (Subord.),
8.625%, 2/1/08.................................... 2,700,000
------------
5,190,000
------------
FINANCE & INSURANCE - 1.5%
1,500,000 Americo Life, Inc.,
Sr. Notes (Subord.),
9.25%, 6/1/05..................................... 1,486,875
1,500,000 Presidential Life Corp.,
Sr. Notes,
9.50%, 12/15/00................................... 1,535,625
1,250,000 Reliance Group Holdings, Inc.,
Sr. Notes,
9.00%, 11/15/00................................... 1,288,963
------------
4,311,463
------------
FOOD & BEVERAGE PRODUCTS - 0.5%
500,000 Chiquita Brands International, Inc.,
Sr. Notes,
9.625%, 1/15/04................................... 485,000
1,000,000 Sun World International, Inc.,
Series B, 1st Mtge. Notes,
11.25%, 4/15/04................................... 1,025,000
------------
1,510,000
------------
GAMING - 0.5%
1,500,000 Boyd Gaming Corp.,
Sr. Notes (Subord.),
9.50%, 7/15/07.................................... 1,425,000
------------
INFORMATION SERVICES &
TECHNOLOGY - 0.4%
1,000,000 Unisys Corp.,
Sr. Notes,
11.75%, 10/15/04.................................. 1,130,000
------------
LEISURE & TOURISM - 1.4%
500,000 Cinemark USA, Inc.,
Series B, Sr. Notes (Subord.),
9.625%, 8/1/08.................................... 505,000
2,000,000 Loews Cineplex Entertainment Corp.,
Sr. Notes (Subord.),
8.875%, 8/1/08.................................... 1,960,000
1,000,000 Premier Cruise Ltd.,
Sr. Notes,
11.00%, 3/15/08 (d)............................... 500,000
1,000,000 Prime Hospitality Corp.,
Series B, Sr. Notes (Subord.),
9.75%, 4/1/07..................................... 947,500
------------
3,912,500
------------
METALS & MINING - 2.5%
2,000,000 Acme Metals, Inc.,
Sr. Notes,
10.875%, 12/15/07 (f)............................. 350,000
500,000 Anker Coal Group, Inc.,
Series B, Sr. Notes,
9.75%, 10/1/07.................................... 170,000
</TABLE>
36
<PAGE>
[LOGO OF STRATEGIC INCOME FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
METALS & MINING - CONTINUED
$ 1,500,000 Armco, Inc.,
Sr. Notes,
9.375%, 11/1/00................................... $ 1,507,500
1,000,000 Bethlehem Steel Corp.,
Sr. Notes,
10.375%, 9/1/03................................... 1,020,000
1,000,000 Envirosource, Inc.,
Sr. Notes,
9.75%, 6/15/03.................................... 960,000
2,000,000 NSM Steel, Inc.,
Sr. Mtge. Notes,
12.00%, 2/1/06 (d)................................ 535,000
3,000,000 WHX Corp.,
Sr. Notes,
10.50%, 4/15/05 (d)............................... 2,715,000
------------
7,257,500
------------
OIL/ENERGY - 3.2%
1,500,000 Benton Oil & Gas Co.,
Sr. Notes,
9.375%, 11/1/07................................... 1,050,000
1,000,000 Energy Corp. of America,
Series A, Sr. Notes (Subord.),
9.50%, 5/15/07.................................... 890,000
1,500,000 Houston Exploration Co.,
Series B, Sr. Notes (Subord.),
8.625%, 1/1/08.................................... 1,410,000
2,150,000 HS Resources, Inc.,
Sr. Notes (Subord.),
9.25%, 11/15/06................................... 1,999,500
1,875,000 Parker Drilling Co.,
Series D, Sr. Notes,
9.75%, 11/15/06................................... 1,748,437
2,500,000 Petsec Energy, Inc.,
Series B, Sr. Notes (Subord.),
9.50%, 6/15/07.................................... 2,000,000
------------
9,097,937
------------
PAPER & PACKAGING - 0.8%
350,000 Printpack, Inc.,
Series B, Sr. Notes (Subord.),
10.625%, 8/15/06.................................. 350,000
2,000,000 Stone Container Finance Co.,
Sr. Notes,
11.50%, 8/15/06 (d)............................... 1,860,000
------------
2,210,000
------------
PUBLISHING, BROADCASTING & ENTERTAINMENT - 1.8%
1,500,000 American Lawyer Media, Inc.,
Series B, Sr. Notes (Subord.),
9.75%, 12/15/07................................... 1,492,500
1,000,000 Big Flower Press Holdings, Inc.,
Sr. Notes (Subord.),
8.875%, 7/1/07.................................... 975,000
1,625,000 Capstar Broadcasting Partners,
Sr. Disc. Notes,
12.75%, 2/1/09.................................... 1,186,250
564,000 SFX Broadcasting, Inc.,
Series B, Sr. Notes (Subord.),
10.75%, 5/15/06................................... 604,890
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
PUBLISHING, BROADCASTING &
ENTERTAINMENT - CONTINUED
$ 1,000,000 Sinclair Broadcast Group, Inc.,
Sr. Notes (Subord.),
10.00%, 9/30/05................................... $ 1,005,000
------------
5,263,640
------------
RETAILING & WHOLESALE - 2.8%
2,000,000 Advance Stores Co.,
Sr. Notes (Subord.),
10.25%, 4/15/08 (d)............................... 1,900,000
825,000 AFC Enterprises, Inc.,
Sr. Notes (Subord.),
10.25%, 5/15/07................................... 792,000
1,500,000 FRD Acquisition Co.,
Series B, Sr. Notes,
12.50%, 7/15/04................................... 1,470,000
2,000,000 Jitney Jungle Stores America, Inc.,
Sr. Notes (Subord.),
10.375%, 9/15/07.................................. 1,920,000
1,000,000 Pathmark Stores, Inc.,
Sr. Notes (Subord.),
9.625%, 5/1/03.................................... 975,000
1,000,000 Perkins Family Restaurant,
Series B, Sr. Notes,
10.125%, 12/15/07................................. 1,030,000
------------
8,087,000
------------
TELECOMMUNICATION SERVICES &
EQUIPMENT - 5.5%
1,000,000 Centennial Cellular Corp.,
Sr. Notes,
8.875%, 11/1/01................................... 1,050,000
1,450,000 Echostar Communications Corp.,
Sr. Secd. Disc. Notes,
Step Bond,
(Eff. Yield 10.05%),
0.00%, 6/1/04 (c)................................. 1,399,250
500,000 Intermedia Capital Partners,
Sr. Notes,
11.25%, 8/1/06.................................... 546,250
2,400,000 Nextel Communications, Inc.,
Sr. Disc. Notes,
Step Bond,
(Eff. Yield 7.29%),
0.00%, 8/15/04 (c)................................ 2,238,000
3,000,000 Price Communication Cellular Holding,
Sr. Notes, PIK,
11.25%, 8/15/08................................... 2,595,000
500,000 Price Communications Wireless,
Sr. Secd. Notes,
9.125%, 12/15/06 (d).............................. 500,000
2,500,000 Rural Cellular Corp.,
Series B, Sr. Notes (Subord.),
9.625%, 5/15/08................................... 2,393,750
3,000,000 Talton Holdings, Inc.,
Series B, Sr. Notes,
11.00%, 6/30/07................................... 2,850,000
3,050,000 Winstar Communications, Inc.,
Sr. Disc. Notes,
Step Bond,
(Eff. Yield 9.76%),
0.00%, 10/15/05 (c)............................... 2,135,000
------------
15,707,250
------------
</TABLE>
37
<PAGE>
[LOGO OF STRATEGIC INCOME FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - CONTINUED
TEXTILE & APPAREL - 0.5%
$ 1,500,000 Delta Mills, Inc.,
Series B, Sr. Notes,
9.625%, 9/1/07.................................... $ 1,380,000
------------
TRANSPORTATION - 3.9%
2,000,000 American Commercial Lines LLC,
Sr. Notes,
10.25%, 6/30/08 (d)............................... 1,950,000
1,500,000 Hvide Marine, Inc.,
8.375%, 2/15/08................................... 1,110,000
1,750,000 Pegasus Shipping Hellas Limited,
Series A, 1st Preferred Mtge. Notes,
11.875%, 11/15/04................................. 1,662,500
Piedmont Aviation, Inc.:
852,000 Series A,
9.90%, 1/15/01..................................... 877,151
1,389,000 Series F,
10.15%, 3/28/03.................................... 1,478,215
1,500,000 Sea Containers Limited,
Series B, Sr. Notes,
7.875%, 2/15/08................................... 1,415,625
2,000,000 Trans World Airlines, Inc.,
Sr. Notes,
11.375%, 3/1/06................................... 1,720,000
896,000 U.S. Air, Inc.,
Series 88-B,
9.90%, 1/15/01.................................... 922,262
------------
11,135,753
------------
UTILITIES - 1.6%
1,000,000 Calpine Corp.,
Sr. Notes,
8.75%, 7/15/07.................................... 1,012,500
1,000,000 Cleveland Electric Illuminating Co.,
Series B, 1st Mtge. Notes,
9.50%, 5/15/05.................................... 1,096,570
2,218,808 Tucson Electric,
Series B,
10.211%, 1/1/09................................... 2,329,749
------------
4,438,819
------------
Total Corporate Bonds
(cost $106,226,705)............................... 97,595,987
------------
COLLATERALLIZED MORTGAGED OBLIGATIONS - 0.7%
1,950,819 Independent National Mortgage Corp.,
Series 1997-A, Class A,
(Est. Maturity 2002) 7.79%, 12/26/26, (cost,
$1,947,822) (d) (e)............................... 1,951,429
------------
FOREIGN BONDS (U.S. DOLLARS) - 4.8%
1,750,000 Applied International Finance Co.,
8.68%, 6/28/99.................................... 1,365,000
500,000 Aztec Holdings SA DE CV,
Sr. Secd. Notes,
11.00%, 6/15/02................................... 350,000
1,000,000 Doman Industries Limited,
Sr. Notes,
8.75%, 3/15/04.................................... 700,000
2,000,000 Globo Communicacoes E Participacoes,
Sr. Notes,
10.625%, 12/5/08 (d).............................. 1,080,000
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS (U.S. DOLLARS) - CONTINUED
$ 325,000 Globo Participacoes,
10.625%, 12/5/08................................ $ 175,500
1,250,000 Great Central Mines Ltd.,
Sr. Notes,
8.875%, 4/1/08 (d).............................. 1,193,750
1,000,000 Grupo Industrial Durango S.A.,
Notes,
12.625%, 8/1/03................................. 775,000
4,000,000 Jamaica (Government of),
10.875%, 6/10/05................................ 3,080,000
2,000,000 Mastellone Hermanos S A,
Sr. Notes,
11.75%, 4/1/08.................................. 1,252,260
800,000 PTC International Finance BV,
Sr. Disc. Notes (Subord.),
Step Bond,
(Eff. Yield 10.14%),
0.00%, 7/1/07 (c)............................... 340,000
1,000,000 Supercanal Holdings S.A.,
Sr. Notes,
11.50%, 5/15/05 (d)............................. 472,500
1,425,000 TV Azteca SA DE CV,
Series B, Sr. Notes,
10.50%, 2/15/07................................. 997,500
4,000,000 TV Bandeirantes,
Sr. Notes,
12.875%, 5/15/06 (d)............................ 1,910,000
------------
Total Foreign Bonds (U.S. Dollars)
(cost $20,525,862).............................. 13,691,510
------------
FOREIGN BONDS (NON-U.S. DOLLARS) - 24.2%
2,250,000 Australia (Commonwealth of), Deb.,
AUD 10.00%, 2/15/06.................................. 1,849,354
3,000,000 CEI Citicorp Holdings,
ARS 11.25%, 2/14/07.................................. 1,695,560
400,000 European Investment Bank,
GBP Bonds,
7.625%, 12/7/06.................................. 754,001
1,868,000,000 Greece (Republic of),
GRD 8.80%, 6/19/07................................... 6,888,072
3,000,000 ICO Global Communications,
XEU 15.25%, 8/1/05................................... 2,241,730
Italy (Republic of), Deb.:
6,595,000,000 6.75%, 2/1/07.................................... 4,651,153
ITL
1,105,000,000 9.50%, 2/1/06.................................... 888,826
ITL
1,500,000 Microcell Telecommunications,
CAD Series B, Sr. Disc. Notes,
Step Bond,
(Eff. Yield 10.28%)
0.00%, 10/15/07 (c).............................. 466,623
7,220,000 New Zealand (Government of),
NZD 7.00%, 7/15/09................................... 4,312,740
3,500,000 NTL, Inc.,
GBP Sr. Notes, Step Bond,
(Eff. Yield 9.82%),
0.00%, 4/1/08 (c)................................ 2,811,814
</TABLE>
38
<PAGE>
[LOGO OF STRATEGIC INCOME FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS (NON U.S. DOLLARS) - CONTINUED
6,000,000 Quebec (Province of), Deb.,
CAD 9.375%, 1/16/23................................... $ 5,409,916
76,766,000 Realkredit Danmark,
DKK 6.00%, 10/1/29.................................... 11,677,013
25,840,000 Spain (Government of), Deb.,
ESP 5.00%, 1/31/01.................................... 189,406
12,910,000 United Kingdom Treasury, Deb.,
GBP 7.25%, 12/7/07.................................... 25,129,469
------------
Total Foreign Bonds (Non U.S. Dollars) (cost
$71,181,341)..................................... 68,965,677
------------
MORTGAGE-BACKED SECURITIES - 27.7%
Federal Home Loan Mortgage Corp.
$ 14,357,759 7.00%, 5/1/11 - 8/1/28............................ 14,643,318
2,319,550 Federal Home Loan Mortgage Corp.,Participation
Certificate,
7.614%, 4/1/22................................... 2,385,518
Federal National Mortgage Assn.:
7,928,633 6.00%, 8/1/28..................................... 7,834,441
29,962,417 6.50%, 8/1/28 - 9/1/28............................ 30,196,423
17,100,182 7.00%, 9/1/27 - 2/1/28............................ 17,468,861
1,538,453 7.39%, 9/1/21..................................... 1,574,514
1,536,595 7.48%, 12/1/23.................................... 1,552,976
3,414,627 Government National Mortgage Assn., 6.50%,
7/15/09.......................................... 3,483,978
------------
Total Mortgage-Backed Securities
(cost $78,380,172)............................... 79,140,029
------------
U.S. TREASURY OBLIGATIONS - 4.9%
10,300,000 U.S. Treasury Bond STRIPS,
(Eff. Yield 8.71%),
, 0.00%, 11/15/21 (c)............................ 2,837,959
5,000,000 U.S. Treasury Bonds,
6.375%, 8/15/27.................................. 5,761,700
5,225,000 U.S. Treasury Notes,
5.50%, 5/31/03................................... 5,471,568
------------
Total U.S. Treasury Obligations
(cost $13,863,927)............................... 14,071,227
------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS AND WARRANTS - 0.2%
FINANCE & INSURANCE - 0.1%
92,440 Ampex Corp.,
Common Stock (a)................................... $ 92,440
------------
GAMING - 0.1%
Isle Capri Casinos, Inc.:
104,514 Common Stock (a)................................... 280,881
19,582 Warrants (a) (h).................................... 196
------------
281,077
------------
TELECOMMUNICATION SERVICES &
EQUIPMENT - 0.0%
Nextel Communications, Inc.:
3,718 Common Stock, Class A (a) (g)...................... 67,272
4,820 Warrants (a)........................................ 145
------------
67,417
------------
Total Common Stocks and Warrants
(cost $1,582,039).................................. 440,934
------------
PREFERRED STOCKS - 0.3%
FINANCE & INSURANCE - 0.3%
Ampex Corporation:
308 Convertable Preferred Stock (a) (h)................ 251,697
674 Redeemable Preferred Stock (a) (h).................. 642,457
------------
Total Preferred Stocks
(cost $894,154).................................... 894,154
------------
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount
- --------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT - 1.4%
$4,094,000 Keystone Joint Repurchase Agreement (Investments in
repurchase agreements, in a joint trading, account,
dated 10/30/98, maturity value $4,095,876),
5.50%, 11/2/98
(cost $4,094,000) (b).............................. 4,094,000
------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS -
(COST $300,548,864).......................... 99.1% 282,887,828
OTHER ASSETS AND LIABILITIES - NET............ 0.9 2,616,831
----- ------------
NET ASSETS - ................................. 100.0% $285,504,659
===== ============
</TABLE>
(a) Non-income producing.
(b) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at October 31, 1998.
(c) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(d) Securities that may be resold to "qualified institutional buyers" un-
der Rule 144A or securities offered pursant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been deter-
mined to be liquid under guide-lines established by the Board of
Trustees.
(e) The estimated maturity of a Collateralized Mortgage Obligation
("CMO"), an adjustable rate mortgage security or an asset-backed se-
curity is based on currrent and projected prepayment rates. Changes
in interest rates can cause the estimated maturity to differ from the
listed date.
(f) This obligation has filed Chapter 11 bankruptcy and has discontinued
accrual of interest income.
(g) Less than 1/10th of one percent of net assets.
(h) Security has been fair valued in accord with procedures established
by the Board of Trustees.
See Combined Notes to Financial Statements.
39
<PAGE>
[LOGO OF STRATEGIC INCOME FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS(continued)
October 31, 1998 (Unaudited)
SUMMARY OF ABBREVIATIONS:
ARS Argentine Peso
AUD Australian Dollar
CAD Canadian Dollar
DKK Danish Krone
ESP Spanish Peseta
GBP Pound Sterling
GRD Greek Drachma
ITL Italian Lira
JPY Japenese Yen
PIK Paid in Kind Security
STRIPS Separate Trading of Registered Interest and Principal Securities
XEU European Currency Unit
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
EXCHANGE U.S. $ VALUE AT IN EXCHANGE NET UNREALIZED
DATE CONTRACTS TO DELIVER OCTOBER 31, 1998 FOR U.S. $ GAIN OR LOSS
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forward foreign currency exchange contracts to sell:
1/14/99 39,200,000 Deutsche Mark $23,747,515 $23,865,331 $117,816
1/5/99 12,000,000 Pound Sterling 20,017,916 20,326,200 308,284
1/13/99 3,600,000 New Zealand Dollar 1,909,620 1,869,300 (40,320)
--------
$385,780
========
</TABLE>
See Combined Notes to Financial Statements.
40
<PAGE>
[LOGO OF U.S. GOVERNMENT FUND APPEARS HERE]
SCHEDULE OF INVESTMENTS
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS - 6.3%
CABLE/OTHER VIDEO DISTRIBUTION - 0.6%
$ 2,000,000 Time Warner Entertainment Co., L.P., Sr. Debs.,
7.25%, 9/1/08.................................... $ 2,176,694
------------
RETAILING & WHOLESALE - 2.9%
7,000,000 Dayton Hudson Corp.,
Bonds,
5.95%, 12/15/98.................................. 7,090,608
4,000,000 Kroger Co.,
Notes,
6.00%, 1/1/99.................................... 4,040,396
------------
11,131,004
------------
TELECOMMUNICATION SERVICES & EQUIPMENT - 2.8%
10,000,000 Worldcom, Inc.,
Notes,
6.40%, 8/15/05................................... 10,408,600
------------
Total Corporate Bonds
(cost $23,122,819)............................... 23,716,298
------------
MORTGAGE-BACKED SECURITIES - 48.6%
Federal Home Loan Mortgage Corp.:
11,868,298 6.50%, 4/1/26..................................... 11,973,570
9,953,296 7.00%, 7/1/28..................................... 10,164,804
18,935,700 7.50%, 5/1/27 - 8/1/28............................ 19,422,522
3,424,765 8.00%, 7/1/17 - 4/1/22............................ 3,527,854
2,395,729 8.50%, 2/1/17 - 10/1/17........................... 2,499,304
2,309,051 9.00%, 11/1/19 - 4/1/21........................... 2,466,965
872,762 9.50%, 9/1/20..................................... 942,871
1,120,686 10.00%, 12/1/19 - 8/1/21.......................... 1,194,261
1,475,102 10.50%, 12/1/19................................... 1,564,906
Federal National Mortgage Assn.:
10,000,000 5.75%, 4/15/03.................................... 10,383,250
5,323,435 6.00%, 2/25/05.................................... 5,336,611
3,963,244 6.50%, 1/1/24..................................... 3,996,686
14,066,555 7.00%, 8/1/25 - 11/1/26........................... 14,390,849
8,988,685 7.50%, 7/1/23 - 5/1/27............................ 9,227,556
7,067,732 8.00%, 8/1/25..................................... 7,307,186
1,097,984 9.50%, 6/1/22..................................... 1,172,441
815,268 11.00%, 1/1/16.................................... 905,893
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
<C> <S> <C>
MORTGAGE-BACKED SECURITIES - CONTINUED
Government National Mortgage Assn.:
$ 8,491,875 6.00%, 2/20/28 - 12/15/99.......................... $ 8,445,435
6,025,232 6.50%, 10/15/25 - 5/20/28.......................... 6,084,803
16,733,052 7.00%, 12/15/22 - 5/15/26.......................... 17,134,422
9,326,046 7.50%, 2/15/22 - 8/15/23........................... 9,620,815
15,985,268 8.00%, 9/15/09 - 9/15/26........................... 16,582,803
7,950,836 8.50%, 12/15/21 - 7/15/24.......................... 8,417,528
3,701,911 9.00%, 1/15/20 - 6/15/21........................... 3,947,162
3,509,394 9.50%, 1/15/19 - 2/15/21........................... 3,790,145
847,097 10.00%, 12/15/18................................... 925,719
------------
Total Mortgage-Backed Securities
(cost $178,394,024)............................... 181,426,361
------------
U.S. TREASURY OBLIGATIONS - 44.2%
U.S. Treasury Bonds:
30,015,000 5.50%, 8/15/28..................................... 31,609,577
12,000,000 8.25%, 5/15/05..................................... 12,641,256
15,100,000 8.50%, 2/15/20..................................... 20,998,453
7,650,000 8.75%, 11/15/08 - 8/15/20.......................... 10,029,334
20,010,000 8.88%, 8/15/17 - 2/15/19........................... 28,392,285
9,300,000 9.25%, 2/15/16..................................... 13,426,884
U.S. Treasury Notes:
14,500,000 6.25%, 6/30/02..................................... 15,406,264
3,000,000 6.75%, 4/30/00..................................... 3,103,128
21,800,000 7.75%, 11/30/99 - 1/31/00.......................... 22,614,391
6,200,000 8.00%, 5/15/01..................................... 6,740,566
------------
Total U.S. Treasury Obligations
(cost $157,083,610)............................... 164,962,138
------------
REPURCHASE AGREEMENT - 0.9%
3,252,152 Donaldson, Lufkin & Jenrette Securities Corp.,
5.40% dated 10/30/98, due 11/2/98, maturity value,
$3,253,615
(cost $3,252,152) (a)............................. 3,252,152
------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS -
(COST $361,852,605)............................. 100.0% 373,356,949
OTHER ASSETS AND
LIABILITIES - NET............................... 0.0 94,688
------ ------------
NET ASSETS - .................................... 100.0% $373,451,637
====== ============
</TABLE>
(a) Collateralized by $3,076,000 U.S. Treasury Notes, 6.25%, due 8/31/02;
value, including accrued interest $3,318,017.
See Combined Notes to Financial Statements.
41
<PAGE>
[LOGO OF LONG TERM BOND FUND APPEARS HERE]
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
STRATEGIC U.S.
DIVERSIFIED HIGH YIELD INCOME GOVERNMENT
FUND FUND FUND FUND
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Identified cost of
securities............. $ 529,839,180 $ 453,835,902 $300,548,864 $361,852,605
Net unrealized gain or
loss on securities.... 13,148,885 (49,445,182) (17,661,036) 11,504,344
------------- ------------- ------------ ------------
Investments at market
value.................. $ 542,988,065 $ 404,390,720 $282,887,828 $373,356,949
Cash.................... 468 16,716 474 0
Receivable for
investments sold....... 1,811,382 5,656,372 1,289,451 52,523
Receivable for Fund
shares sold............ 885,981 194,537 341,753 3,465,846
Interest receivable..... 8,012,713 9,651,576 5,759,937 4,556,896
Unrealized appreciation
on forward foreign
currency exchange
contracts.............. 273,149 0 426,100 0
Prepaid expenses and
other assets........... 367,736 208,750 64,607 91,664
- ------------------------------------------------------------------------------------
Total assets.......... 554,339,494 420,118,671 290,770,150 381,523,878
- ------------------------------------------------------------------------------------
LIABILITIES
Distributions payable... 1,102,445 1,380,141 881,029 524,588
Payable for investments
purchased.............. 7,559,403 14,818,394 1,404,688 6,879,833
Payable for Fund shares
redeemed............... 494,500 266,903 1,891,077 345,428
Payable for closed
forward foreign
currency contracts..... 0 0 844,051 0
Payable for reverse
repurchase agreement... 5,112,736 0 0 0
Payable for securities
on loan................ 4,074,790 0 0 0
Unrealized depreciation
on forward foreign
currency exchange
contracts.............. 247,548 0 40,320 0
Advisory fees payable... 241,275 150,146 60,839 154,091
Distribution fees
payable................ 119,392 89,555 84,295 53,579
Due to other related
parties................ 7,000 5,505 4,201 6,383
Accrued expenses and
other liabilities...... 56,476 76,473 54,991 108,339
- ------------------------------------------------------------------------------------
Total liabilities..... 19,015,565 16,787,117 5,265,491 8,072,241
- ------------------------------------------------------------------------------------
NET ASSETS.............. $ 535,323,929 $ 403,331,554 $285,504,659 $373,451,637
- ------------------------------------------------------------------------------------
NET ASSETS REPRESENTED
BY
Paid-in capital......... $ 684,243,618 $ 848,246,842 $378,875,302 $386,576,585
Undistributed net
investment income...... 396,334 (1,538,518) (1,679,081) 0
Accumulated net
realized loss on
securities and foreign
currency related
transactions........... (162,489,555) (393,931,588) (74,421,790) (24,629,292)
Net unrealized gain or
loss on securities and
foreign currency
related transactions... 13,173,532 (49,445,182) (17,269,772) 11,504,344
- ------------------------------------------------------------------------------------
Total net assets...... $ 535,323,929 $ 403,331,554 $285,504,659 $373,451,637
- ------------------------------------------------------------------------------------
NET ASSETS CONSISTS OF
Class A................. $ 464,828,856 $ 324,330,730 $164,213,007 $ 48,945,226
Class B................. 70,245,132 70,596,077 102,861,621 132,259,387
Class C................. 202,417 970,665 16,601,223 5,832,818
Class Y................. 47,524 7,434,082 1,828,808 186,414,206
- ------------------------------------------------------------------------------------
$ 535,323,929 $ 403,331,554 $285,504,659 $373,451,637
- ------------------------------------------------------------------------------------
SHARES OUTSTANDING
Class A................. 29,438,762 84,170,021 24,495,701 4,937,457
Class B................. 4,448,804 18,321,338 15,272,557 13,341,442
Class C................. 12,820 251,907 2,467,874 588,378
Class Y................. 3,010 1,929,317 279,601 18,804,647
- ------------------------------------------------------------------------------------
NET ASSET VALUE PER
SHARE
Class A................. $ 15.79 $ 3.85 $ 6.70 $ 9.91
- ------------------------------------------------------------------------------------
Class A--Offering price
(based on sales charge
of 4.75%).............. $ 16.58 $ 4.04 $ 7.03 $ 10.40
- ------------------------------------------------------------------------------------
Class B................. $ 15.79 $ 3.85 $ 6.74 $ 9.91
- ------------------------------------------------------------------------------------
Class C................. $ 15.79 $ 3.85 $ 6.73 $ 9.91
- ------------------------------------------------------------------------------------
Class Y................. $ 15.79 $ 3.85 $ 6.54 $ 9.91
- ------------------------------------------------------------------------------------
</TABLE>
See Combined Notes to Financial Statements.
42
<PAGE>
[LOGO OF LONG TERM BOND FUND APPEARS HERE]
STATEMENTS OF OPERATIONS
Six Months Ended October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
STRATEGIC U.S.
DIVERSIFIED HIGH YIELD INCOME GOVERNMENT
FUND FUND FUND FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest income (net of
foreign withholding
taxes of $0, $0,
$9,354 and $0,
respectively)......... $20,429,891 $ 22,417,476 $ 12,614,788 $11,720,143
Dividend income........ 57,031 351,650 0 0
Security lending
income................ 34,512 0 0 0
- --------------------------------------------------------------------------------
TOTAL INVESTMENT
INCOME................ 20,521,434 22,769,126 12,614,788 11,720,143
- --------------------------------------------------------------------------------
EXPENSES
Advisory fee........... 1,483,801 1,408,826 943,462 853,244
Distribution Plan
expenses.............. 964,714 894,144 862,553 726,777
Transfer agent fees.... 806,659 738,540 407,694 228,023
Administrative services
fees.................. 42,226 30,927 24,314 46,570
Trustees' fees and
expenses.............. 13,355 5,106 2,266 2,876
Shareholder reports
expense............... 145,607 130,822 44,760 14,790
Custodian fees......... 116,393 92,708 94,215 60,502
Registration and filing
fees.................. 16,678 108,220 67,138 24,646
Professional fees...... 16,503 14,557 15,120 11,057
Other.................. 46,379 3,942 8,987 17,980
- --------------------------------------------------------------------------------
Total expenses........ 3,652,315 3,427,792 2,470,509 1,986,465
Less: Fee credits...... (711) (40,027) (11,525) (20)
Fee waivers and
expense
reimbursements...... 0 (176,977) (231,191) 0
- --------------------------------------------------------------------------------
Net expenses.......... 3,651,604 3,210,788 2,227,793 1,986,445
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME.. 16,869,830 19,558,338 10,386,995 9,733,698
- --------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN OR
LOSS ON SECURITIES AND
FOREIGN CURRENCY
RELATED TRANSACTIONS
Realized gain or loss
on:
Securities............ (1,588,691) (20,780,179) 3,016,029 (1,818,347)
Foreign currency
related
transactions......... (1,363,381) (210,644) (2,949,389) 0
- --------------------------------------------------------------------------------
Net realized gain or
loss on securities and
foreign currency
related transactions.. (2,952,072) (20,990,823) 66,640 (1,818,347)
- --------------------------------------------------------------------------------
Net change in
unrealized gain or
loss on securities and
foreign currency
related transactions.. (1,388,393) (51,854,634) (22,278,454) 10,087,943
- --------------------------------------------------------------------------------
Net realized and
unrealized gain or
loss on securities and
foreign currency
related transactions.. (4,340,465) (72,845,457) (22,211,814) 8,269,596
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS............ $12,529,365 $(53,287,119) $(11,824,819) $18,003,294
- --------------------------------------------------------------------------------
</TABLE>
See Combined Notes to Financial Statements.
43
<PAGE>
[LOGO OF LONG TERM BOND FUND APPEARS HERE]
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended October 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
STRATEGIC U.S.
DIVERSIFIED HIGH YIELD INCOME GOVERNMENT
FUND FUND FUND FUND
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income... $ 16,869,830 $ 19,558,338 $ 10,386,995 $ 9,733,698
Net realized gain or
loss on securities,
futures contracts and
foreign currency
related transactions... (2,952,072) (20,990,823) 66,640 (1,818,347)
Net change in unrealized
gain or loss on
securities and foreign
currency related
transactions........... (1,388,393) (51,854,634) (22,278,454) 10,087,943
- ------------------------------------------------------------------------------------
Net increase (decrease)
in net assets
resulting from
operations............ 12,529,365 (53,287,119) (11,824,819) 18,003,294
- ------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income
Class A................ (14,966,223) (16,207,895) (6,356,791) (1,223,221)
Class B................ (1,899,703) (3,187,313) (3,452,797) (3,326,972)
Class C................ (4,252) (34,956) (567,249) (141,589)
Class Y................ (441) (204,752) (84,816) (5,041,916)
- ------------------------------------------------------------------------------------
Total distributions to
shareholders.......... (16,870,619) (19,634,916) (10,461,653) (9,733,698)
- ------------------------------------------------------------------------------------
CAPITAL SHARE
TRANSACTIONS
Proceeds from shares
sold................... 18,220,077 37,718,782 29,396,743 78,194,533
Proceeds from
reinvestment of
distributions.......... 9,577,814 10,709,135 6,950,619 6,892,480
Payment for shares
redeemed............... (59,821,602) (90,662,902) (56,391,267) (77,644,701)
Proceeds from shares
issued in connection
with the acquisition of
CoreFund Government
Income Fund........... 0 0 0 25,494,452
- ------------------------------------------------------------------------------------
Net increase (decrease)
in net assets
resulting from capital
share transactions.... (32,023,711) (42,234,985) (20,043,905) 32,936,764
- ------------------------------------------------------------------------------------
Total increase
(decrease) in net
assets............... (36,364,965) (115,157,020) (42,330,377) 41,206,360
NET ASSETS
Beginning of period..... 571,688,894 518,488,574 327,835,036 332,245,277
- ------------------------------------------------------------------------------------
END OF PERIOD........... $535,323,929 $ 403,331,554 $285,504,659 $373,451,637
- ------------------------------------------------------------------------------------
Undistributed net
investment income...... $ 396,334 $ (1,538,518) $ (1,679,081) $ 0
- ------------------------------------------------------------------------------------
</TABLE>
See Combined Notes to Financial Statements.
44
<PAGE>
[LOGO OF LONG TERM BOND FUND APPEARS HERE]
STATEMENTS OF CHANGES IN NET ASSETS
For the Periods Indicated
<TABLE>
<CAPTION>
DIVERSIFIED FUND HIGH YIELD FUND
------------------------------- ------------------------------
EIGHT MONTHS YEAR NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
APRIL 30, 1998* AUGUST 31, 1997 APRIL 30, 1998** JULY 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income... $ 20,588,791 $ 31,196,362 $ 30,356,602 $ 43,434,059
Net realized gain or
loss on securities and
foreign currency
related transactions... 10,936,866 15,553,471 16,551,569 3,963,269
Net change in
unrealized gain or
loss on securities and
foreign currency
related transactions... 3,546,444 13,350,772 3,464,809 33,119,281
- ------------------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations............ 35,072,101 60,100,605 50,372,980 80,516,609
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income
Class A................ (9,491,102) 0 (9,975,169) 0
Class B................ (11,097,556) (32,942,625) (20,369,058) (44,757,060)
Class C................ (35) 0 (12,343) 0
Class Y................ (98) 0 (32) 0
- ------------------------------------------------------------------------------------------
Total distributions to
shareholders......... (20,588,791) (32,942,625) (30,356,602) (44,757,060)
- ------------------------------------------------------------------------------------------
CAPITAL SHARE
TRANSACTIONS
Proceeds from shares
sold................... 19,555,848 33,102,013 55,707,745 136,045,881
Proceeds from
reinvestment of
distributions.......... 11,421,930 18,107,160 17,078,485 25,311,702
Payment for shares
redeemed............... (104,305,708) (180,458,236) (121,704,035) (243,407,877)
Proceeds from shares
issued in acquisition
of
Evergreen Quality Bond
Fund.................. 172,832,659 0 0 0
- ------------------------------------------------------------------------------------------
Net increase
(decrease) in net
assets resulting from
capital share
transactions.......... 99,504,729 (129,249,063) (48,917,805) (82,050,294)
- ------------------------------------------------------------------------------------------
Total increase
(decrease) in net
assets............... 113,988,039 (102,091,083) (28,901,427) (46,290,745)
NET ASSETS
Beginning of period..... 457,700,855 559,791,938 547,390,001 593,680,746
- ------------------------------------------------------------------------------------------
END OF PERIOD........... $ 571,688,894 $ 457,700,855 $ 518,488,574 $ 547,390,001
- ------------------------------------------------------------------------------------------
Undistributed net
investment income...... $ 397,123 $ 2,801,682 $ (1,461,940) $ (1,468,219)
- ------------------------------------------------------------------------------------------
</TABLE>
*During the period, the Diversified Bond Fund changed its fiscal year end from
August 31 to April 30.
**During the period, the High Yield Bond Fund changed its fiscal year end from
July 31 to April 30.
See Combined Notes to Financial Statements.
45
<PAGE>
[LOGO OF LONG TERM BOND FUND APPEARS HERE]
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended April 30, 1998
<TABLE>
<CAPTION>
STRATEGIC INCOME U.S. GOVERNMENT
FUND FUND
- -------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income...................... $ 14,251,249 $ 19,431,162
Net realized gain or loss on securities
and foreign currency related
transactions.............................. 5,635,717 (764,906)
Net change in unrealized gain or loss on
securities and foreign currency related
transactions.............................. 5,413,523 9,555,419
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations............................... 25,300,489 28,221,675
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A................................... (5,750,571) (2,040,357)
Class B................................... (7,053,895) (7,875,544)
Class C................................... (1,374,051) (261,054)
Class Y................................... (62,982) (9,254,414)
- -------------------------------------------------------------------------------
Total distributions to shareholders...... (14,241,499) (19,431,369)
- -------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.................. 52,265,456 63,710,601
Proceeds from reinvestment of
distributions............................. 8,043,638 13,377,697
Payment for shares redeemed................ (89,713,499) (83,317,244)
Proceeds from shares issued in acquisition
of:
Blanchard Flexible Income Fund............ 139,705,470 0
Keystone World Bond Fund.................. 13,364,630 0
Keystone Government Securities Fund....... 0 41,845,369
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
capital share transactions............... 123,665,695 35,616,423
- -------------------------------------------------------------------------------
Total increase in net assets............. 134,724,685 44,406,729
NET ASSETS
Beginning of period........................ 193,110,351 287,838,548
- -------------------------------------------------------------------------------
END OF PERIOD.............................. $327,835,036 $332,245,277
- -------------------------------------------------------------------------------
Undistributed net income................... $ (1,604,423) $ 0
- -------------------------------------------------------------------------------
</TABLE>
See Combined Notes to Financial Statements.
46
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION
The Evergreen Long Term Bond Funds consist of Evergreen Diversified Bond Fund
("Diversified Bond Fund"), Evergreen High Yield Bond Fund ("High Yield Fund"),
Evergreen Strategic Income Fund ("Strategic Income Fund") and Evergreen U.S.
Government Fund ("U.S. Government Fund") (collectively the "Funds"). Each Fund
is a diversified series of Evergreen Fixed Income Trust (the "Trust"), a Dela-
ware business trust organized on September 17, 1997. The Trust is an open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act").
The Funds offer Class A, Class B, Class C and Class Y shares. Class A shares
are sold with a maximum front-end sales charge of 4.75%. Class B and Class C
shares are sold without a front-end sales charge, but pay a higher ongoing dis-
tribution fee than Class A. Class B shares are sold subject to a contingent de-
ferred sales charge that is payable upon redemption and decreases depending on
how long the shares have been held. Class B shares of the Funds purchased after
January 1, 1997 will automatically convert to Class A shares after seven years.
Class B shares of the Funds purchased prior to January 1, 1997 retain their ex-
isting conversion rights. Class C shares are sold subject to a contingent de-
ferred sales charge payable on shares redeemed within one year after the month
of purchase. 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 Corporation ("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.
Effective January 9, 1998, the Diversified Bond Fund and High Yield Fund added
two classes of shares designated as Class A and Class C and designated the ex-
isting class of shares as Class B. Shareholders of these Funds who, on January
16, 1998, held Class B shares purchased before January 1, 1995 and certain
other non-commissionable Class B shares had such shares converted to Class A
shares having an aggregate value equal to that of the shareholder's Class B
shares prior to the conversion.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently fol-
lowed by the Funds in the preparation of their financial statements. The poli-
cies are in conformity with generally accepted accounting principles, which re-
quire 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 a price for normal
institutional-size transactions, the pricing service uses methods based on mar-
ket transactions for comparable securities and analysis of various relation-
ships between similar securities which are generally recognized by institu-
tional traders.
Securities traded on a national securities exchange or included on the NASDAQ
National Market System ("NMS") at the last reported sales price on the exchange
where primarily traded. The Funds value securities traded on an exchange or NMS
for which there has been no sale and other securities traded in the over-the-
counter market at the mean between the last reported bid and asked price.
Securities for which market quotations are not readily available or valuations
are not readily available from an independent pricing service (including re-
stricted securities) are valued at fair value as determined in good faith ac-
cording to procedures approved by the Board of Trustees.
Securities with remaining maturities of 60 days or less are carried at amor-
tized cost, which approximates market value.
47
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(Unaudited) (continued)
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 securi-
ties pledged falls below the carrying value of the repurchase agreement, in-
cluding 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 Commis-
sion, each Fund, except for U.S. Government Fund, along with certain other
funds managed by Evergreen Investment Management Company (formerly known as
Keystone Investment Management Company)("EIMCO"), 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, each 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 agree-
ment, 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.) dol-
lars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, other 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 or loss resulting from changes in foreign cur-
rency exchange rates is a component of net unrealized gain or loss on securi-
ties and foreign currency related transactions. Net realized foreign currency
gains and losses resulting from changes in exchange rates include foreign cur-
rency gains and losses between trade date and settlement date on investment se-
curities transactions, foreign currency related transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amount actually received and are included in realized gain or loss on
foreign currency related transactions. The portion of foreign currency gains
and losses related to fluctuations in exchange rates between the initial pur-
chase trade date and subsequent sale trade date is included in realized gain or
loss on foreign currency related transactions.
E. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values,
each Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures trans-
action is subsequently adjusted by daily payments or receipts as the value of
the contract changes. Such changes are recorded as unrealized gains or losses.
Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an il-
liquid market for the contract, (ii) the possibility that a change in the value
of the contract may not correlate with changes in the value of the underlying
instrument or index, and (iii) the credit risk that the other party will not
fulfill their obligations under the contract. Futures contracts also involve
elements of market risk in excess of the amount reflected in the statement of
assets and liabilities.
F. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund, except for U.S. Government Fund, may enter into forward foreign cur-
rency exchange contracts ("forward contracts") to settle portfolio purchases
and sales of securities denominated in a foreign currency
48
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(Unaudited) (continued)
and to hedge certain foreign currency assets or liabilities. Forward contracts
are recorded at the forward rate and marked-to-market daily. Realized gains and
losses arising from such transactions are included in net realized gain (loss)
on foreign currency related transactions. The Fund bears the risk of an unfa-
vorable change in the foreign currency exchange rate underlying the forward
contract and is subject to the credit risk that the other party will not ful-
fill their obligations under the contract. Forward contracts involve elements
of market risk in excess of the amount reflected in the statement of assets and
liabilities.
G. SECURITIES LENDING
In order to generate income and to offset expenses, each Fund may lend portfo-
lio securities to brokers, dealers and other financial organizations. The
Funds' investment advisers will monitor the creditworthiness of such borrowers.
Loans of securities by a Fund may not exceed 33 1/3% of the value of the Fund's
total assets. Loans will be collateralized by cash, letters of credit or U.S.
Government securities that are maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities, including ac-
crued interest. While such securities are on loan, the borrower will pay a Fund
any income accruing thereon, and the Fund may invest the collateral in portfo-
lio securities, thereby increasing its return. A Fund will have the right to
call any such loan and obtain the securities loaned at any time on five days'
notice. Any gain or loss in the market price of the loaned securities, which
occurs during the term of the loan, would affect a Fund and its investors. A
Fund may pay reasonable fees in connection with such loans.
H. 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 premiums. Dividend income is recorded on
theex-dividend date or in the case of some foreign securities, on the date
thereafter when the Fund is made aware of the dividend. Foreign income may be
subject to foreign withholding taxes, which are accrued as applicable.
I. FEDERAL TAXES
The Funds have qualified and intend to continue to qualify as a regulated in-
vestment 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 in-
come and net capital gains, if any, to their shareholders. The Funds also in-
tend to avoid any excise tax liability by making the required distributions un-
der the Code. Accordingly, no provision for federal 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.
J. DISTRIBUTIONS
Distributions from net investment income for the Funds are declared daily and
paid monthly. Distributions from net realized capital gains, if any, are paid
at least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in accor-
dance with income tax regulations, which may differ from generally accepted ac-
counting principles. Certain distributions paid during previous years have been
reclassified to conform with current year presentation.
K. CLASS ALLOCATIONS
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the rela-
tive net assets of each class. Currently, class specific expenses are limited
to expenses incurred under the Distribution Plans for each class.
49
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(Unaudited) (continued)
3. ACQUISITIONS
Effective on the close of business on July 24, 1998, U.S. Government Fund ac-
quired all of the assets and assumed certain liabilities of CoreFund Government
Income Fund, in an exchange for Class A and Class Y shares of U.S. Government
Fund.
Effective on the close of business on February 28, 1998, Strategic Income Fund
acquired all of the assets and assumed certain liabilities of Blanchard Flexi-
ble Income Fund, in an exchange for Class A shares of Strategic Income Fund.
Effective on the close of business on January 23, 1998, Diversified Bond Fund
acquired substantially all the assets and assumed certain liabilities of Ever-
green Quality Bond Fund, in an exchange for Class A and Class B shares of Di-
versified Bond Fund.
Effective August 1, 1997 Strategic Income Fund acquired substantially all the
assets and assumed certain liabilities of Keystone World Bond Fund in exchange
for Class A, Class B and Class C shares of Strategic Income Fund. Also, the
U.S. Government Fund acquired substantially all the assets and assumed certain
liabilities of Keystone Government Securities Fund in exchange for Class A,
Class B and Class C shares of the U.S. Government Fund.
All of the above acquisitions were accomplished by a tax-free exchange of
shares of each respective fund. The value of assets acquired, number of shares
issued, unrealized gain or loss acquired and the aggregate net assets of each
Fund immediately after the acquisition are as follows:
<TABLE>
<CAPTION>
Value of Net Number of Unrealized Net Assets
Acquiring Fund Acquired Fund Assets Acquired Shares Issued Gain or Loss After Acquisition
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government Fund.... CoreFund Government Income Fund $ 25,494,452 2,618,772 $ 441,185 $333,331,520
Strategic Income Fund... Blanchard Flexible Income Fund 139,705,470 19,367,062 4,998,009 339,328,623
Diversified Fund........ Evergreen Quality Bond Fund 172,832,659 10,842,627 3,406,186 610,931,062
Strategic Income Fund... Keystone World Bond Fund 13,364,630 1,876,466 646,958 209,347,784
U.S. Government Fund.... Keystone Government Securities Fund 5,739,713 590,505 24,133 233,475,732
</TABLE>
50
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(Unaudited) (continued)
4. CAPITAL SHARE TRANSACTIONS
Each Fund has an unlimited number of shares of beneficial interest with a par
value of $0.001 authorized. Shares of beneficial interest of the Funds are cur-
rently divided into Class A, Class B, Class C and Class Y. Transactions in
shares of the Funds were as follows:
- --------------------------------------------------------------------------------
DIVERSIFIED BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Period Ended
October 31, 1998 April 30, 1998*
------------------------ ------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ............... 337,307 $ 5,354,851 136,952 $ 2,185,530
Shares issued in
reinvestment of
distributions............. 536,708 8,575,423 362,116 5,781,141
Shares redeemed............ (2,936,094) (46,888,020) (2,951,611) (47,145,413)
Shares issued in connection
with the acquisition of
Evergreen Quality Bond
Fund...................... 0 0 9,827,053 156,644,304
Automatic conversion of
Class B shares............ 0 0 24,126,331 387,832,940
- --------------------------------------------------------------------------------
Net increase (decrease).... (2,062,079) ($32,957,746) 31,500,841 $505,298,502
- --------------------------------------------------------------------------------
</TABLE>
* For the period from January 20, 1998 (commencement of class operations) to
April 30, 1998.
<TABLE>
<CAPTION>
Six Months Ended Period Ended Year Ended
October 31, 1998 April 30, 1998* August 31, 1997
---------------------- -------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Shares sold ............ 767,679 $ 12,239,687 1,090,412 $ 17,341,006 2,182,629 $ 33,102,013
Shares issued in
reinvestment of
distributions.......... 62,610 1,000,344 357,152 5,640,678 1,195,855 18,107,160
Shares redeemed......... (785,029) (12,535,992) (3,620,580) (57,160,295) (11,912,272) (180,458,236)
Shares issued in
connection with the
acquisition of
Evergreen Quality Bond
Fund................... 0 0 1,015,574 16,188,355 0 0
Automatic conversion of
shares to Class A...... 0 0 (24,126,331) (387,832,940) 0 0
- ---------------------------------------------------------------------------------------------------------
Net increase
(decrease)............. 45,260 $ 704,039 (25,283,773) ($405,823,196) (8,533,788) ($129,249,063)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* For the eight month period ended April 30, 1998. The Fund changed its fiscal
year end from August 31 to April 30, effective April 30, 1998.
<TABLE>
<CAPTION>
Period Ended
Six Months Ended April 30,
October 31, 1998 1998*
------------------ --------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C
Shares sold ............................... 36,002 $ 571,257 1,432 $22,837
Shares issued in reinvestment of
distributions............................. 95 1,527 1 13
Shares redeemed............................ (24,710) (390,919) 0 0
- -------------------------------------------------------------------------------
Net increase............................... 11,387 $ 181,865 1,433 $22,850
- -------------------------------------------------------------------------------
* For the period from April 7, 1998 (commencement of class operations) to April
30, 1998.
<CAPTION>
Period Ended
Six Months Ended April 30,
October 31, 1998 1998*
------------------ --------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Y
Shares sold ............................... 2,984 $ 54,282 407 $ 6,475
Shares issued in reinvestment of
distributions............................. 26 520 6 98
Shares redeemed............................ (413) (6,671) 0 0
- -------------------------------------------------------------------------------
Net increase............................... 2,597 $ 48,131 413 $ 6,573
- -------------------------------------------------------------------------------
</TABLE>
* For the period from April 7, 1998 (commencement of class operations) to April
30, 1998.
51
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(Unaudited) (continued)
- --------------------------------------------------------------------------------
High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Period Ended
October 31, 1998 April 30, 1998*
------------------------- ------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold.............. 3,502,481 $ 14,992,498 1,781,307 $ 8,100,467
Shares issued in
reinvestment of
distributions........... 2,153,074 9,083,236 1,396,499 6,343,412
Shares redeemed.......... (14,313,113) (61,643,286) (7,005,782) (31,868,872)
Automatic conversion of
Class B shares.......... 0 0 96,655,555 436,706,228
- -------------------------------------------------------------------------------
Net increase (decrease).. (8,657,558) ($37,567,552) 92,827,579 $419,281,235
- -------------------------------------------------------------------------------
</TABLE>
*For the period from January 20, 1998 (commencement of class operations) to
April 30, 1998.
<TABLE>
<CAPTION>
Six Months Ended Period Ended Year Ended
October 31,1998 April 30, 1998* July 31,1997
------------------------ --------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Shares sold............. 3,114,478 $ 13,358,045 10,409,185 $ 46,341,356 32,280,201 $ 136,045,881
Shares issued in
reinvestment of
distributions.......... 349,407 1,477,230 2,427,463 10,723,559 5,995,434 25,311,702
Shares redeemed......... (6,441,269) (28,005,412) (20,273,137) (89,733,998) (57,681,924) (243,407,877)
Automatic conversion of
shares to Class A...... 0 (96,655,555) (436,706,228) 0 0
- -----------------------------------------------------------------------------------------------------------
Net decrease............ (2,977,384) ($13,170,137) (104,092,044) ($469,375,311) (19,406,289) ($82,050,294)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*For the nine month period ended April 30, 1998. The Fund changed its fiscal
year end from July 31 to April 30, effective April 30, 1998.
<TABLE>
<CAPTION>
Six Months Ended Period Ended
October 31,1998 April 30, 1998*
--------------------- -------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C
Shares sold....................... 164,967 $ 708,392 273,398 $1,240,926
Shares issued in reinvestment of
distributions.................... 4,614 19,658 2,527 11,482
Shares redeemed................... (172,505) (765,563) (21,094) (96,165)
- ------------------------------------------------------------------------------
Net increase (decrease)........... (2,924) ($37,513) 254,831 $1,156,243
- ------------------------------------------------------------------------------
*For the period from January 22, 1998 (commencement of class operations) to
April 30, 1998.
<CAPTION>
Six Months Ended Period Ended
October 31,1998 April 30, 1998*
--------------------- -------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Y
Shares sold....................... 1,948,271 $8,659,847 5,506 $ 24,996
Shares issued in reinvestment of
distributions.................... 32,321 129,011 7 32
Shares redeemed................... (55,687) (248,641) (1,101) (5,000)
- ------------------------------------------------------------------------------
Net increase...................... 1,924,905 $8,540,217 4,412 $ 20,028
- ------------------------------------------------------------------------------
</TABLE>
*For the period from April 14, 1998 (commencement of class operations) to April
30, 1998.
52
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(Unaudited) (continued)
- --------------------------------------------------------------------------------
Strategic Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
October 31, 1998 April 30, 1998
------------------------ ------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold............... 1,719,999 $ 12,085,146 1,976,718 $ 14,098,759
Shares issued in
reinvestment of
distributions............ 659,073 4,575,492 483,710 3,454,392
Shares redeemed........... (4,729,308) (33,162,056) (4,673,022) (33,390,153)
Shares issued in
connection with the
acquisition of
Blanchard Flexible Income
Fund..................... 0 0 19,367,062 139,705,470
Keystone World Bond Fund.. 0 0 1,077,718 7,661,303
- ---------------------------------------------------------------------------------
Net increase (decrease)... (2,350,236) ($16,501,418) 18,232,186 $131,529,771
- ---------------------------------------------------------------------------------
CLASS B
Shares sold............... 2,160,673 $ 15,108,890 4,345,019 $ 30,951,849
Shares issued in
reinvestment of
distributions............ 283,802 1,978,590 515,938 3,680,766
Shares redeemed........... (2,786,098) (19,511,224) (5,964,560) (42,581,723)
Shares issued in
connection with the
acquisition of
Keystone World Bond Fund.. 0 0 645,853 4,612,694
- ---------------------------------------------------------------------------------
Net decrease.............. (341,623) ($2,423,744) (457,750) ($3,336,414)
- ---------------------------------------------------------------------------------
CLASS C
Shares sold............... 174,311 $ 1,196,099 261,961 $ 1,864,408
Shares issued in
reinvestment of
distributions............ 51,594 360,223 122,073 868,861
Shares redeemed........... (471,751) (3,329,062) (1,375,841) (9,783,791)
Shares issued in
connection with the
acquisition of
Keystone World Bond Fund.. 0 0 152,895 1,090,633
- ---------------------------------------------------------------------------------
Net decrease.............. (245,846) ($1,772,740) (838,912) ($5,959,889)
- ---------------------------------------------------------------------------------
CLASS Y
Shares sold............... 126,900 $ 1,006,608 761,672 $ 5,350,440
Shares issued in
reinvestment of
distributions............ 5,366 36,314 5,675 39,619
Shares redeemed........... (57,631) (388,925) (562,382) (3,957,832)
- ---------------------------------------------------------------------------------
Net increase.............. 74,635 $ 653,997 204,965 $ 1,432,227
- ---------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
U.S. Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
October 31, 1998 April 30, 1998
------------------------ ------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold............... 3,191,712 $ 31,286,779 1,510,987 $ 14,617,089
Shares issued in
reinvestment of
distributions............ 80,941 795,673 133,072 1,282,497
Shares redeemed........... (2,634,833) (25,712,114) (1,642,684) (15,825,689)
Shares issued in
connection with the
acquisition of
CoreFund Government Income
Fund..................... 151,299 1,472,982 0 0
Keystone Government
Securities Fund.......... 0 0 2,239,125 21,547,304
- ---------------------------------------------------------------------------------
Net increase.............. 789,119 $ 7,843,320 2,240,500 $ 21,621,201
- ---------------------------------------------------------------------------------
CLASS B
Shares sold............... 1,525,632 $ 15,057,643 716,498 $ 6,914,840
Shares issued in
reinvestment of
distributions............ 184,447 1,811,866 414,856 3,988,496
Shares redeemed........... (1,864,486) (18,270,500) (4,306,873) (41,415,996)
Shares issued in
connection with the
acquisition of
Keystone Government
Securities Fund.......... 0 0 1,507,183 14,503,355
- ---------------------------------------------------------------------------------
Net decrease.............. (154,407) ($1,400,991) (1,668,336) ($16,009,305)
- ---------------------------------------------------------------------------------
CLASS C
Shares sold............... 102,016 $ 1,004,787 94,591 $ 908,119
Shares issued in
reinvestment of
distributions............ 8,461 83,055 16,871 162,793
Shares redeemed........... (110,901) (1,085,404) (173,356) (1,672,822)
Shares issued in
connection with the
acquisition of
Keystone Government
Securities Fund.......... 0 0 602,218 5,794,710
- ---------------------------------------------------------------------------------
Net increase.............. (424) $ 2,438 540,324 $ 5,192,800
- ---------------------------------------------------------------------------------
CLASS Y
Shares sold............... 3,138,555 $ 30,845,324 4,285,039 $ 41,270,553
Shares issued in
reinvestment of
distributions............ 427,560 4,201,886 825,744 7,943,911
Shares redeemed........... (3,335,575) (32,576,683) (2,541,523) (24,402,737)
Shares issued in
connection with the
acquisition of
CoreFund Government Income
Fund..................... 2,467,473 24,021,470 0 0
- ---------------------------------------------------------------------------------
Net increase.............. 2,698,013 $ 26,491,997 2,569,260 $ 24,811,727
- ---------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(Unaudited) (continued)
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (excluding short-term
securities) were as follows for the six months ended October 31, 1998:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases from Sales
------------------------- -------------------------
U.S. Non-U.S. U.S. Non-U.S.
Government Government Government Government
------------------------------------------------------
<S> <C> <C> <C> <C>
Diversified Bond Fund... $ 68,842,900 $176,493,974 $ 52,978,931 $253,921,791
High Yield Fund......... 29,802,844 288,035,790 30,172,031 308,548,141
Strategic Income Fund... 148,171,799 188,711,650 172,195,503 187,332,489
U.S. Government Fund.... 130,838,753 23,122,300 118,523,826 0
</TABLE>
On July 27, 1998, U.S. Government Fund acquired U.S. Government securities, ex-
cluding short-term securities, with an aggregate cost $22,471,886 through the
Fund's acquisition of CoreFund Government Income Fund.
During the six months ended October 31, 1998, the Funds entered into reverse
repurchase agreements as follows:
<TABLE>
<CAPTION>
Average Daily
Balance Weighted Average Maximum Amount
Outstanding Interest Rate Outstanding*
----------------------------------------------
<S> <C> <C> <C>
Diversified Bond Fund.... $4,393,759 4.466% $9,387,055
Strategic Income Fund.... 2,980,770 5.520 9,876,542
</TABLE>
-------
*The Maximum Amount Outstanding under reverse repurchase agreements
includes accrued interest.
On October 31, 1998, the Diversified Bond Fund had reverse repurchase agree-
ments outstanding in the amount of $5,112,736 (including accrued interest) with
interest rates varying from 1.25% to 6.00%.
Diversified Bond Fund loaned securities during the six months ended October 31,
1998 to certain brokers who paid the Fund a negotiated lenders' fee. At October
31, 1998, the value of securities on loan and the value of collateral amounted
to $3,277,928, and $4,074,790, respectively. During the six months ended Octo-
ber 31, 1998, the Fund earned $34,512 in income from securities lending.
As of April 30, 1998, the Funds had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
Capital
Loss Expires Expires Expires Expires Expires Expires Expires Expires
Carryover 1999 2000 2001 2002 2003 2004 2005 2006
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Bond
Fund........... $159,339,000 $85,002,000 -- $19,436,000 $ 6,153,000 $ 28,736,000 $20,012,000 -- --
High Yield
Fund........... 364,062,000 91,150,000 $122,350,000 -- 44,605,000 105,957,000 -- -- --
Strategic Income
Fund........... 71,926,000 -- 14,074,000 15,390,000 -- 7,390,000 35,072,000 -- --
U.S. Government
Fund........... 22,367,000 -- -- 1,978,000 6,522,000 3,703,000 2,973,000 $3,820,000 $3,371,000
</TABLE>
In addition to capital loss carryovers, capital losses incurred after October
31 within a Fund's fiscal year are deemed to arise on the first business day of
the Fund's following fiscal year. For the fiscal year ended April 30, 1998,
U.S. Government Fund incurred and has elected to defer $444,321 of such capital
losses.
6. DISTRIBUTION PLANS
Evergreen Distributor, Inc. ("EDI"), a wholly-owned subsidiary of The BISYS
Group Inc. ("BISYS"), serves as principal underwriter to each of the Funds.
The Fund has adopted Distribution Plans for each class of shares as allowed by
Rule 12b-1 of the 1940 Act. Distribution plans permit a 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 the
fund through expenses called "Distribution Plan expenses". Each class, except
Class Y, currently pays a service fee equal to 0.25% (annualized) of the aver-
age daily net asset of the class. Class B and Class C also pay distribution
fees equal to 0.75% (annualized) of its average daily net assets of the class.
Distribution Plan expenses are calculated daily and paid monthly.
54
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(Unaudited) (continued)
During the six months ended October 31, 1998, amounts paid to EDI 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>
Diversified Bond Fund......................... $610,557 $353,379 $ 778
High Yield Fund............................... 477,347 412,268 4,529
Strategic Income Fund......................... 225,210 547,279 90,064
U.S. Government Fund.......................... 52,420 646,780 27,577
</TABLE>
With respect to Class B and Class C shares, the principal underwriter may pay
12b-1 fees 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%.
Each of the Distribution Plans may be terminated at any time by vote of the In-
dependent Trustees or by vote of a majority of the outstanding voting shares of
the respective class.
Contingent deferred sales charges paid by redeeming shareholders are paid to
EDI.
7. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED
TRANSACTIONS
EIMCO, a subsidiary of First Union, is the investment advisor for Diversified
Bond Fund, High Yield Fund and Strategic Income Fund. In return for providing
investment management and administrative services to the Funds, the Funds pay
EIMCO an Advisory fee that is calculated daily and paid monthly. The management
fee is computed at an annual rate of 2.00% of the Fund's gross investment in-
come 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 assets of the Funds. For the six months ended October 31, 1998, EIMCO
waived advisory fees of $176,977 and $231,191, respectively, for High Yield
Fund and Strategic Income Fund.
The Capital Management Group ("CMG") of First Union National Bank of North Car-
olina, a subsidiary of First Union, serves as the investment adviser to the
U.S. Government Fund and is paid an Advisory fee that is computed and paid
monthly at an annual rate of 0.50% of the Fund's average daily net assets.
Evergreen Investment Services ("EIS"), a subsidiary of First Union National
Bank, is the administrator and BISYS Fund Services is sub-administrator for
each Fund. As Administrator, EIS provides the Funds with facilities, equipment
and personnel. As Sub-Administrator BISYS provides the officers of the Funds.
As administrator for the U.S. Government Fund, EIS is entitled to an annual fee
based on the average daily net assets of the funds administered by EIS for
which First Union or its advisory subsidiaries are also the investment advis-
ers. The administration fee for the U.S. Government Fund is calculated by ap-
plying percentage rates, which start at 0.05% and decline to 0.01% per annum as
net assets increase, to the average daily net asset value of the Fund. For the
six months ended October 31, 1998, the U.S. Government Fund paid or accrued to
EIS $37,195. For Diversified Bond Fund, High Yield Bond Fund and Strategic In-
come Fund the expense for providing administration services are incurred by
EIMCO and are reimbursed by the Funds. For the six months ended October 31,
1998, Diversified Bond Fund, High Yield Fund and Strategic Income Fund reim-
bursed EIMCO for certain accounting and administration expenses of $42,226,
$30,927 and $24,314, respectively.
The sub-administration fee for each Fund is calculated by applying percentage
rates, which start at 0.01% and decline to 0.004% as net assets increase, to
the average daily net asset value of the Fund. For each Fund, except for U.S.
Government Fund, the sub-administration fee is paid by EIMCO and is not a fund
expense.
Evergreen Service Company ("ESC"), an indirect wholly-owned subsidiary of First
Union, serves as the transfer and dividend disbursing agent for the Funds. The
Funds have entered into an expense offset arrangement with ESC relating to cer-
tain cash balances held at First Union for the benefit of the Evergreen Funds.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
55
<PAGE>
[EVERGREEN LOGO APPEARS HERE]
COMBINED NOTES TO FINANCIAL STATEMENTS(Unaudited) (continued)
8. 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.
9. DEFERRED TRUSTEES' FEES
Each Independent Trustee of the Funds may defer any or all compensation related
to performance of their duties as Trustees. The Trustees 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 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 in-
stallments 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.
10. FINANCING AGREEMENT
On December 22, 1997, a financing agreement among all of the Evergreen Funds,
State Street and a group of Banks became effective. Under this agreement, the
Banks provide an unsecured credit facility in the aggregate amount of $400 mil-
lion ($275 million committed and $125 million uncommitted). The credit facility
is allocated, under the terms of the financing agreement, among the Banks. The
credit facility is to be accessed by the Funds for temporary or emergency pur-
poses only and is subject to each Fund's borrowing restrictions. Borrowings un-
der this facility bear interest at 0.50% per annum above the Federal Funds
rate. A commitment fee of 0.065% per annum will be incurred on the unused por-
tion of the committed facility, which will be allocated to all funds. For its
assistance in arranging this financing agreement, the Capital Market Group of
First Union was paid a one-time arrangement fee of $27,500. State Street serves
as administrative agent for the Banks, and as administrative agent is entitled
to a fee of $20,000 per annum which is allocated to all of the Funds.
During the six months ended October 31, 1998, the Funds had no borrowings under
this agreement.
11. YEAR 2000
Like other investment companies, the Funds could be adversely affected if the
computer systems used by the Funds' investment advisors and the Funds' other
service providers are not able to perform their intended functions effectively
after 1999 because of the inability of computer software to distinguish the
year 2000 from the year 1900. The Funds' investment advisors are taking steps
to address this potential year 2000 problem with respect to the computer sys-
tems that they use and to obtain satisfactory assurances that comparable steps
are being taken by the Funds' other major service providers. At this time, how-
ever, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Funds from this problem.
56
<PAGE>
Evergreen Funds
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Express Line
800.346.3858
Investor Services
800.343.2898
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800.247.4075
www.evergreen-funds.com
61533 541075 RV2 12/98
---------------
BULK RATE
U.S. POSTAGE
PAID
PERMIT NO. 19
HUDSON, MA
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[LOGO OF EVERGREEN FUNDS(SM) APPEARS HERE]
200 Berkeley Street
Boston, MA 02116
